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, 1996
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 11, 1997: Common stock, par value $.01 per share,
$10,930,210. 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 11, 1997 was 22,810,269 shares.
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" or the "Drilling Segment"), operates
fifteen oil and gas drilling rigs and provides contract drilling services to
the oil and gas industry; (ii) 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"); and (iii) until July
22, 1996, 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 subsidiaries are
referred to collectively herein as the "Nursery Segment"). As mentioned above,
the Registrant's Board of Directors elected to discontinue the operations of
the MRI Segment on August 18, 1994, retroactively applied as of November 30,
1994, and the Nursery Segment on April 6, 1995, respectively.
On July 22, 1996, the Registrant effected the closing of a Stock Purchase
Agreement dated as of July 19, 1996, by and between a third party purchaser
("Buyer") and the Registrant. Pursuant to or in accordance with the Agreement,
effective upon the closing the Buyer purchased all the outstanding shares of
common stock of Sunny's Plants, Inc., the sole stockholder of all the capital
stock of Sunshine Botanicals, Inc., Interior Plant Supply, Inc., and Sunny's
Trucking, Inc., from the Registrant, in consideration of certain releases and
the payment by DSI to the Buyer of $10,000. Furthermore, certain Directors and
Officers of DSI resigned from their respective positions as Directors and
Officers of Sunny's Plants, Inc. and it's subsidiaries and the Registrant
received certain releases.
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 was 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
warrant was 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 at the time, and Paul Stache, the former Secretary and
a member of the Board of Directors of DSI at the time, 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 at which time the option
expired.
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, 1995, and November 30,
1996 the consolidated financial statements reflect a net liability of
approximately $3,515,000 and $538,000, 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's agreements with one of its secured creditors prohibit virtually any
loans, dividends, advances, guarantee of indebtedness or payments to DSI or its
subsidiaries.
During fiscal 1996, a substantial amount of liabilities of the discontinued
segments were reduced either through the aforementioned sale of Sunny's or
through negotiations with the creditors of those segments. In addition, Norton
secured a line of credit during fiscal 1996 which has improved Norton's capital
resources position. These events coupled with the improved operating results
of the Company's continuing operations have caused management to believe that
DSI will continue as a going concern.
Norton Drilling - On October 1, 1991, the Registrant and its wholly-owned
subsidiary Norton Drilling Company, 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 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 Drilling Segment, 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. The Performance Consideration was never earned. 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 paid an aggregate of $2,825,000 to the First
National Bank at Lubbock ("First National Bank") as payment of two loans
totaling $4,388,098 made by the First National Bank to Norton. The payment of
$2,825,000 was financed as follows: (i) $1,900,000 was provided by The Plains
National Bank of West Texas ("Plains Bank") pursuant to a Loan Agreement with
Norton 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 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 at an annual rate of interest equal
to the 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 above, provide for: (i) the redemption
of the Notes, at 100% of their principal amount at any time, at the option of
Norton, 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 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 pursuant to that certain loan agreement between Norton
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 August 7, 1996, Norton entered into an agreement with Plains Bank for the
refinancing of all amounts outstanding to Plains Bank at that date. Pursuant
to the refinancing, Norton signed a promissory note in the amount of $3,000,000
and a revolving or draw note with a borrowing facility of $750,000. This
indebtedness is collateralized by virtually all the assets of Norton and is
further collateralized by a personal guaranty of the Chairman of the
Board/President of DSI as well as a corporate guaranty of DSI and the common
stock of Norton. 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. On December 10, 1996
the Registrant and GE executed a settlement agreement whereupon all amounts due
and owing to GE were deemed satisfied and the Registrant was released from any
further liability.
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
165,019 shares of its common stock for which it received the aforementioned 10%
of Lobell, and cash and trade accounts receivable in the amount of $178,064.
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 believes that these anticipated settlement amounts will not be
material to DSI.
Management has included in its reserve for loss on the discontinuance of
this segment as of November 30, 1996, an amount estimated by management to
approximate its ultimate remaining obligation to the landlord. Management
believes that its estimate of remaining future losses to be incurred in
disposing of this Segment of $95,000 at November 30, 1996 is adequate to
mitigate any shortfall in the aforementioned lease payments. However, should
management successfully negotiate with the landlord for an amount less than
initially reserved, a possible gain could result 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. Pursuant to a stock purchase
agreement dated June 6, 1996, the other three individuals recommended by the
Sunshine Stockholders resigned from the Board of Directors.
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 was 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 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 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. DSI
has received a release from its guarantee of the obligation to the bank as well
as its obligation for the $330,000 note payable. See Note 3 of Notes to
Consolidated Financial Statements included as part of Item 8 of this report.
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. The unpaid balance of the purchaser's obligation was
approximately $1,980,000 at November 30, 1996.
On July 22, 1996, the Registrant effected the closing of a Stock Purchase
Agreement dated as of July 19, 1996, by and between a third party purchaser
("Buyer") and the Registrant. Pursuant to or in accordance with the Agreement,
effective upon the closing the Buyer purchased all the outstanding shares of
common stock of Sunny's Plants, Inc., the sole stockholder of all the capital
stock of Sunshine Botanicals, Inc., Interior Plant Supply, Inc., and Sunny's
Trucking, Inc., from the Registrant, in consideration of certain releases and
the payment by DSI to the Buyer of $10,000. Furthermore, certain Directors and
Officers of DSI resigned from their respective positions as Directors and
Officers of Sunny's Plants, Inc. and it's subsidiaries and the Registrant
received certain releases.
INDUSTRY SEGMENTS
DSI is a holding company formerly engaged in three business segments
through its wholly-owned subsidiaries; Norton, Sunny's Plants and Lobell.
Norton, the only remaining operating segment, operates fifteen oil and
gas drilling rigs and provides contract drilling services to the oil and gas
industry. Sunny's Plants, was engaged primarily in planting, growing and
preparing interior foliage plants for distribution and sale. Lobell 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, 1996, 1995 and 1994, DSI incurred administrative costs
of approximately $228,000, $248,000, and $373,000, respectively which resulted
in net losses of approximately $48,000, $148,000, and $273,000, respectively.
Norton Drilling Company, headquartered in Lubbock, Texas, provides contract
drilling services to major oil companies and independent oil and gas producers
primarily in Texas, New Mexico and the Rocky Mountains. Norton Drilling
provides its customers with rigs and crews to operate the rigs.
Norton's drilling rig fleet ranges from small (7,000 ft. depth rating)
self-propelled drilling rigs to larger (22,000 ft. depth rating) diesel
electric rigs. The primary assets of the oil and gas contract drilling segment
consist of fifteen land-based drilling rigs, all of which were fully
operational as of November 30, 1996, having a net book value as of November
30, 1996 and 1995 of approximately $7,767,000 and $7,001,000, respectively. The
rigs are equipped with drawworks or hoists, derricks or masts, engines, pumps
to circulate the drilling fluid, steel pits, blowout preventers, drill pipe and
drill collars and related equipment. The depth of the well and location for
drilling are the principal factors in determining the size and type of rig used
for a particular job. In order to continue to provide quality and timely
service to the Segment's customers, Norton constantly maintains two rigs in the
Rocky Mountain region and thirteen in its primary Texas and New Mexico areas.
Norton is active in the Permian Basin region of the Southwest, the Green River
Basin and the Overthrust Belt in the Rockies.
For the year ended November 30, 1996, Norton reported income from operations
before income taxes and discontinued operations of approximately $586,000 from
operating revenues of approximately $26,732,000. For the year ended November
30, 1995 and 1994, the Drilling Segment had a loss before income taxes,
discontinued operations and extraordinary items of $720,000 from operating
revenues of $20,646,000 and income before income taxes, discontinued operations
and extraordinary operations of $104,000 from operating revenues of
$21,122,000, respectively. As of November 30, 1996, 1995 and 1994 Norton had
shareholders' equity of approximately $5,091,000, $4,378,000 and $4,867,000,
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.
Business Strategy
Norton achieved its current position as a leading provider of contract
drilling services by providing high quality services to its customers with
quality equipment. Norton believes that the condition of the drilling rigs, the
reputation of the company and the quality and experience of the drilling
supervisors and crews are of significant importance to prospective customers.
The Company has and will continue to maintain it's drilling rigs in good
working condition. In addition to normal repair and maintenance expenses,
Norton spends significant funds each year on an ongoing program of improving
and replacing components of its drilling rigs. Norton also strives to employ
experienced drilling supervisors, toolpushers and crews for its rigs.
Norton intends to continue to provide the highest quality contract drilling
services with quality equipment and personnel.
Contract Drilling Activity
The following table sets forth certain information regarding the Company's
contract drilling activity for each of the years in the three-year period ended
November 30, 1996.
Year Ended
November 30,
---------------------------------------
1996 1995 1994
----- ----- ------
Number of wells drilled (2) 304 197 168
Rigs available for service (1)(3) 14 13 13
Utilization rate of rigs
available for service (1)(3)(4) 82.1% 68.6% 69.0%
Number of days worked (3)(4) 4,195 3,254 3,275
(1) Average for the periods stated.
(2) Includes three wells drilled in 1995 in which Norton owned small
working interests.
(3) Rigs 1 and 2 had been stacked since January 18, 1992 and May 9,
1991, respectively. Rig 1 was not available for service until
January 25, 1996 and Rig 2 was not available for service until
October 20, 1996 due to necessary repairs and reworking on these
rigs to get them in condition to operate again.
(4) Rig utilization is based on a 365 day year for rigs available for
service during the periods indicated. A rig is utilized when it is
operating or being moved, assembled or dismantled under contract.
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's sole service,
also competes for E&P dollars with offshore and foreign drilling.
In the past year there has been a consistent price for oil at or above
$20.00 per barrel. This increased price along with an increase in natural gas
prices has generated increased cash flows to the producing companies for which
Norton works. These companies in turn have increased their budgets for
exploration and production expenditures. This increase has caused a higher
demand for rigs to drill the various prospects that are profitable at these oil
prices. Therefore, there has been an increase in rig utilization. This in turn
has enabled Norton to raise its prices to levels higher than in previous years.
Another factor contributing to the increase in rig usage is the successful
application of 3-D seismic in west Texas and southeastern New Mexico. This
technique has resulted in higher success ratios of wells drilled and opened up
many new oil and gas fields. Again, this adds to the demand for rigs and wells
drilled. This has also made it necessary for Norton to modify it's rigs to
increase the depth capabilities in order to drill to the depths of these 3-D
prospects. These modifications involve taking a rig out of service for a short
time and require expenditures for additional or improved equipment.
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 or have been acquired by larger
drilling companies.
Customers
Norton's customers are generally energy companies who repeatedly request
Norton's services. For the year ended November 30, 1996, Norton contract
drilled 304 wells for 33 customers. This compares with 197 wells drilled in the
year ended November 30, 1995 for 40 customers and 168 wells drilled in the year
ended November 30, 1994 for 40 customers.
Over the past year, two customers accounted for a significant portion of
Norton's gross revenues. Those customers were Shell Western E&P Inc. and Wiser
Oil Company. These two companies accounted for approximately 42% of Norton's
contract drilling revenues during 1996.
The Company's customers in the past twelve months have included, in addition
to the two mentioned above, Texaco Exploration and Production, McMurry Oil
Company, Devon Energy, Cross Timbers Operating and Apache Corporation.
Competition
The contract drilling industry is highly competitive, and no one drilling
contractor is dominant. Depressed economic conditions in the oil and gas
industry prior to 1996 resulted in the supply of domestic drilling equipment
substantially exceeding demand. As a consequence, there was 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.
In the past, price has generally been the most important factor in securing
drilling contracts. As demand for rigs has increased, price has become less of
a factor and availability of rigs with crews has become more dominant. Norton
has experienced crews for all its rigs and so is able to provide experienced
personnel with its equipment. During the depressed times in prior years, many
workers left the drilling industry for jobs that were more dependable causing
a shortage of experienced rig workers, which has led to a shortage of rigs that
can be efficiently operated currently.
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 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, some of which have substantially greater resources and longer
operating histories than Norton. In the past year there has been considerable
consolidation in the drilling industry with larger drilling companies acquiring
smaller ones. This has resulted in there being several large drilling companies
and fewer small ones. At this time this does not appear to be a problem for
Norton as it is able to provide its customers with the personal attention they
desire, which is sometimes more difficult for the larger companies. Also, in
prior years, many drilling companies sought protection from creditors under
bankruptcy laws or undertook business combinations with other companies as a
result of the downturn in the domestic contract drilling industry. Although
these two factors have decreased the total number of competitors, management of
Norton believes that competition for drilling contracts will continue to be
intense for the foreseeable future.
Drilling Contracts
Most of Norton's contracts are with established customers. Norton obtains
most of its contracts through a competitive bidding process, although some are
obtained on a negotiated basis. 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.
Generally, the contracts are entered into for short-term periods and cover the
drilling of a single well with the terms and rates varying depending upon the
nature and duration of the work, the equipment and services supplied and other
matters. The contracts obligate Norton to pay certain operating expenses,
including wages of drilling personnel and maintenance expenses and to furnish
incidental rig supplies and equipment. The contracts are subject to termination
by the customer on short notice, usually upon payment of a fee. Norton generally
indemnifies its customers against claims by Norton's employees and claims
arising from surface pollution caused by spills of fuel, lubricants and other
solvents within the control of Norton. See subcaption "Risks and Insurance"
below in this Item. These customers generally indemnify Norton against claims
arising from other surface and subsurface pollution, except claims arising from
Norton's gross negligence.
Under daywork contracts, Norton provides the drilling rig, along with the
required personnel to the operator who supervises the drilling of the
contracted well. Compensation to Norton 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 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 to bear some of the drilling costs
in addition to providing the rig. Under a footage contract, Norton 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 contracts to drill a well to a contract
depth under specified conditions and provides most of the equipment and
services required. Norton 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 assumes substantially greater
economic risk associated with drilling operations. If severe drilling
problems are encountered in drilling wells under turnkey contracts, Norton
could sustain substantial losses.
Norton'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.
Contract drilling operations depend on the availability of drill pipe, bits,
fuel and qualified personnel, some of which have been in short supply from time
to time. Currently there is a substantial shortage of drill pipe in the onshore
contract drilling industry in the United States. This shortage has caused the
price of drill pipe to increase significantly over the past two years.
Norton's ability to drill wells for which it has contracts may be delayed
by inclement weather. Sustained periods of inclement weather could have a
material adverse effect on Norton's revenues and cash flows.
Risks and Insurance
Norton'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, in addition to environmental
damage, could cause substantial damage to producing formations and surrounding
areas. Damage to the environment, including property contamination in the form
of either soil or ground water contamination, could also result from Norton's
operations, particularly through oil spillage, gas leaks and extensive,
uncontrolled fires. In addition, Norton could become subject to liability for
reservoir damage. The occurrence of a significant event, including pollution or
environmental damage, could materially affect Norton's operations and financial
condition. As a protection against operating hazards, Norton maintains
insurance coverage considered by Norton to be adequate, including all-risk
physical damage, employer's liability, commercial general liability and
workers' compensation insurance. Norton currently has $1,000,000 of
general liability insurance per occurrence with an aggregate of $2,000,000
and excess liability and umbrella coverages of up to $5,000,000 per occurrence
with a $5,000,000 aggregate. Norton's customers generally require Norton 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 against liability for all
consequences of well disasters, extensive fire damage or damage to the
environment. Norton also carries insurance to cover physical damage to or loss
of its drilling rigs. However, it does not carry insurance against loss of
earnings resulting from such damage or loss. Norton'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 will be able to maintain the type and amount of coverage that it
considers adequate at reasonable rates or that any particular type of coverage
will be available.
Norton 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 $103,125. Under the terms
of the policy, the capital deposit was scheduled to be returned to Norton in
three equal installments of $34,375 commencing May 1, 1994 and ending May 1,
1996. All installments were timely paid to Norton. From December 1, 1992
through February 1, 1993, Norton 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. As of November 30, 1996, the balance in the trust account and the
amount required by the terms of the policy to be in the trust account was
approximately $460,000. The balance required to be in the trust account may
increase or decrease at any time, depending upon Norton'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 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, 1996, Norton had elected to provide the
letters of credit required by the insurance company and has had its bank
issue a letter of credit in the amount of $331,376 for such collateral on
its behalf. From November 1, 1992 through November 30, 1996, the Company
paid a total of approximately $942,000 on account of its liability under
the deductible portion of the policy. Starting November 1, 1993, Norton
purchased reinsurance to provide coverage for the $100,000 deductible. The
reinsurance policy provides for a deductible of $5,000. Norton currently
pays monthly premiums of approximately $23,000 and $16,000 for these
self-funded workers' compensation and reinsurance policies, respectively.
From November 11, 1994 to August 1, 1995, Norton 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'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 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 was
awarded $233,479 in full and final settlement which was received in 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 filed a countersuit. Amoco and Norton agreed to
a mutual dismissal of their respective actions on February 19, 1997. 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 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 numerous 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. Within the state of Texas
these regulations are principally enforced by the Texas Railroad Commission.
To date Norton has not been required to expend significant resources in order
to satisfy applicable environmental laws and regulations. Norton 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, and Norton could incur liabilities
for noncompliance. Norton has not been fined or incurred liabilities 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'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 reasons 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 which currently apply to Norton could become more stringent in
the future. The Federal Resource Conservation and Recovery Act ("RCRA"), and
comparable state statues govern the disposal of "hazardous wastes." Although
RCRA excludes certain classes of exploration and production wastes from
regulation, such exemptions by Congress under RCRA may be deleted or modified
in the future.
Employees
Norton Drilling had a total of 262 full-time employees (10 as office
personnel and 252 as field personnel) as of November 30, 1996. Management
estimates that the number of field personnel will fluctuate between
approximately 150 and 300 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. In March 1995, the MRI segment was evicted from its facilities and
the equipment held under the lease was abandoned. On December 10, 1996 the
Registrant and GE executed a settlement agreement whereupon all amounts due and
owing to GE were deemed satisfied and the Registrant was released from further
liability.
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, 1996 the amount remaining in the
reserve for loss on disposition of the MRI Segment is $95,000 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 may be paid resulting in a possible gain to the Registrant.
Management has estimated such gain to be in the range of $50,000 to $65,000.
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 for the year 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 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. DSI has received
a release from it's guarantee of the obligation to the bank as well as it's
obligation for the $330,000 note payable. See Note 3 of Notes to Consolidated
Financial Statements included as part of Item 8 of this report.
The agreement with the other bank required 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 Registrant will remain contingently liable under its
guarantee until the purchaser has fully extinguished the indebtedness. The
unpaid balance of the purchaser's obligation was approximately $1,980,000 at
November 30, 1996.
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 costs to be incurred in disposing of this Segment of approximately
$443,000 is adequate to provide for future liabilities.
On July 22, 1996, the Registrant effected the closing of a Stock Purchase
Agreement dated as of July 19, 1996, by and between a third party purchaser
("Buyer") and the Registrant. Pursuant to or in accordance with the Agreement,
effective upon the closing the Buyer purchased all the outstanding shares of
common stock of Sunny's Plants, Inc., the sole stockholder of all the capital
stock of Sunshine Botanicals, Inc., Interior Plant Supply, Inc., and Sunny's
Trucking, Inc., from the Registrant, in consideration of certain releases and
the payment by DSI to the Buyer of $10,000. Furthermore, certain Directors and
Officers of DSI resigned from their respective positions as Directors and
Officers of Sunny's Plants, Inc. and it's subsidiaries and the Registrant
received certain releases. See Notes 1 and 3 of Notes to the Consolidated
Financial Statements included as part of Item 8 of this report.
As of November 30, 1996 estimated liabilities totaling approximately
$443,000 relative to certain secured and unsecured claims against the Nursery
Segment are included in management's reserve for loss on disposal of the
Segment. If the amount actually paid to settle these claims is less than the
amount included in the current reserve, then a significant gain to the
Registrant could be possible. Management's best estimate of the potential gain
is between approximately $75,000 and $418,000. 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 which may include, among
other things, 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 financial
statements. Prior year consolidated financial statements have been restated to
present these Segments as discontinued operations.
Summarized results of operations for the years ended November 30, 1996, 1995
and 1994 are as follows:
1996 1995 1994
----------- ----------- -----------
Revenues $ - - $ - - $11,047,000
Costs and expenses - - - - 15,010,702
Adjustment to provision for loss
on disposal (charged) credited 2,893,047 (1,526,060) (3,750,000)
----------- ----------- -----------
Gain (loss) before income taxes 2,893,047 (1,526,060) ( 7,713,702)
----------- ----------- -----------
Credit for income taxes - - - - ( 1,392,873)
----------- ----------- -----------
Income/(loss) $ 2,893,047 $(1,526,060) $(6,320,829)
=========== =========== ===========
Additionally, as of November 30, 1996 and 1995, net liabilities of the
discontinued segments are approximately $538,000 and $3,515,000, 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
Midland, Tx. Executive office - - 220
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 (9 acres) 392,040 - -
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............. 22,000
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 and part
of 1996. Rig 1 was placed back into service on January 25, 1996 and rig 2 was
placed back into service on October 21, 1996 after the necessary capital
expenditures were made to make them operational after being idle for the last
several years.
All of the drilling rigs are pledged as collateral on notes payable of
Norton. 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 formerly 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.
In September, 1995, the Nursery Segment surrendered to their senior lender
real and personal property which constituted substantially all of the property
of that 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 filed a countersuit. Amoco and
Norton agreed to a mutual dismissal of their respective actions on February 19,
1997.
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, 1996, 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
The 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.
Fiscal 1995 High Low
- ----------- ---- ---
December 1, 1994 - February 28, 1995 .12 .06
March 1, 1995 - May 31, 1995 .09 .03
June 1, 1995 - August 31, 1995 .12 .03
September 1, 1995 - November 30, 1995 .12 .03
Fiscal 1996
- -----------
December 1, 1995 - February 28, 1996 .09 .03
March 1, 1996 - May 31, 1996 .47 .06
June 1, 1996 - August 31, 1996 .30 .13
September 1, 1996 - November 30, 1996 .75 .13
On February 12, 1997, the number of holders of record of the Registrant's
common stock was approximately 326.
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 business. 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
included in the Registrant's debt agreements.
Item 6. Selected Financial Data
The operations of the MRI Segment and Nursery Segment were discontinued in
August 1994 and April 1995, respectively. The financial information below is
being provided as restated in the prior years in accordance with the
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,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Continuing operations:
Operating revenue $26,731,874 $20,645,757 $21,121,885
=========== =========== ===========
Operating costs and expenses 26,169,591 21,244,818 20,928,871
=========== =========== ===========
Income (loss) from continuing
operations 537,895 ( 868,319) ( 178,508)
Income (loss) from discontinued
operations 2,893,047 ( 1,526,060) ( 6,320,829)
Extraordinary gain, net of tax - - - - - -
----------- ----------- -----------
Net income (loss) $ 3,430,942 $(2,394,379) $(6,499,337)
=========== =========== ===========
Earnings (loss) per common share:(1)
Primary:
Income (loss) from continuing
operations $.02 $(.04) $(.01)
Income (loss) from discontinued
operations .12 (.07) (.28)
Extraordinary gain - - - - - -
---- ----- -----
Net income (loss) $.14 $(.11) $(.29)
==== ===== =====
Fully diluted:
Income (loss) from continuing
operations $.02 $(.04) $(.01)
Income (loss) from discontinued
operations .12 (.07) (.28)
Extraordinary gain - - - - - -
---- ----- -----
Net income (loss) $.14 $(.11) $(.29)
==== ===== =====
Total assets $16,472,973 $13,004,461 $13,007,196
=========== =========== ===========
Notes payable, net of current
maturities $ 3,362,755 $ 763,738 $ 1,587,248
=========== =========== ===========
Stockholders' equity $ 4,656,988 $ 1,312,694 $ 3,571,686
=========== =========== ===========
Item 6. Selected Financial Data (Continued)
Years ended November 30,
----------------------------
1993 1992
----------- -----------
Continuing operations:
Operating revenue $21,563,415 $15,149,321
=========== ===========
Operating costs and expenses 21,320,169 15,381,734
=========== ===========
Income (loss) from continuing
operations ( 5,397) ( 232,413)
Income (loss) from discontinued
operations 167,976 252,049
Extraordinary gain, net of tax 985,098 - -
----------- -----------
Net income (loss) $ 1,147,677 $ 19,636
=========== ===========
Earnings (loss) per common share:(1)
Primary:
Income (loss) from continuing
operations $- - $(.01)
Income (loss) from discontinued
operations .01 .01
Extraordinary gain .04 - -
---- -----
Net income (loss) $.05 $ - -
==== =====
Fully diluted:
Income (loss) from continuing
operations $- - $(.01)
Income (loss) from discontinued
operations .01 .01
Extraordinary gain .04 - -
---- -----
Net income (loss) $.05 $ - -
==== =====
Total assets $26,692,953 $20,790,107
=========== ===========
Notes payable, net of current
maturities $ 5,962,426 $ 6,043,137
=========== ===========
Stockholders' equity $ 9,887,052 $ 8,739,375
=========== ===========
(1) Earnings (Loss) Per Common Share:
Primary net income (loss) per common and common equivalent shares for the
five years ended November 30, 1996 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,
1995, and 1996 as they were not dilutive.
Fully diluted earnings per share amounts 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, 1996, 1993, and 1991 because those prices were
higher than the average market prices during those years.
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of November 30, 1996, DSI had a working capital deficiency of
approximately $2,030,000 and cash and cash equivalents of approximately
$774,000 as compared to a working capital deficiency of approximately
$7,040,000 and cash and cash equivalents of approximately $283,000 at November
30, 1995. For the year ended November 30, 1996, operations provided
approximately $896,000 in cash flows and DSI's financing activities provided
approximately $952,000. For the year ended November 30, 1995, DSI used
approximately $95,000 of its cash flow in operations and its financing
activities provided approximately $1,101,000. The provision of funds is largely
attributable to the Registrant's increased net income for the year as well as
additional borrowings from the Drilling Segment's lenders. 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, 1996, 1995 and 1994 approximate $1,878,000, $1,012,000 and
$552,000, 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. For the year ending November 30, 1996, the Drilling Segment increased
it's purchases of drill pipe. The Drilling Segment anticipates capital
expenditures of approximately $1,500,000 for fiscal 1997 to be funded from
existing bank credit lines and cash flow from operations. 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
borrowings 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.
Subsequent to its fiscal year end, Norton entered into two new borrowing
arrangements. In January 1997, Norton obtained a $665,000 revolving line of
credit from its primary lender that matures in September 1997. In addition,
in February 1997 Norton paid off an existing note payable with a remaining
principal amount of approximately $131,000. The new note payable provided
proceeds of $500,000 and requires monthly principal and interest payments
through the date of its maturity in February in 2002.
Results of Continuing Operations
Comparison of the years ended November 30, 1996 and 1995
For the year ended November 30, 1996 contract drilling revenues were
approximately $26,677,000 as compared to $20,613,000 for the year ended
November 30, 1995, an increase of $6,064,000 or 29.4%. Average rig utilization
was 82.1% in 1996 compared to 68.6% in 1995. The increase in drilling revenues
was due to an increase in rig utilization in the current year. In fiscal 1996,
304 wells were drilled compared to 197 in fiscal 1995. Direct job and rig costs
for 1996 were approximately $23,496,000 or 88.1% of contract drilling revenues
as compared to $18,860,000 or 91.5% of contract drilling revenues in 1995. The
increase in costs was attributable to the increased rig utilization. The
decrease in direct job and rig costs as a percentage of contract drilling
revenues is due to a reduction in the costs associated with wells drilled on
a turnkey basis. Fewer wells were drilled on a turnkey contract basis for large
dollar amounts in the current year. This in turn resulted in fewer direct job
and rig costs, as wells drilled on a turnkey basis usually incur large amounts
of costs. As revenues increased, but direct job and rig costs decreased, this
led to a reduction in the percentage of direct job and rig costs to contract
drilling revenues. General and administrative expenses for the contract
drilling segment were approximately $1,243,000 in 1996 as compared to $978,000
in 1995. General and administrative expenses increased due to the hiring of
three additional personnel and an increase in the allowance for doubtful
accounts receivable in the approximate amount of $187,000. Net interest expense
was $394,000 in 1996 compared to $399,000 in 1995, a decrease of $5,000. The
current year decrease is attributable to a decrease in the interest rate paid
by the Drilling Segment to its primary creditor. In 1996 income before income
taxes and discontinued operations was $598,000 as compared to a loss of
$868,000 in 1995. This increase was due to increased rig revenues and a
decrease in direct job and rig costs as a percent of gross revenues.
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 69.0% 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 1995 under turnkey contracts,
but they were for smaller dollar amounts than in 1994. 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 1995
increased due to pay raises given in order to retain the work force necessary
to operate the rig fleet. Shortages of trained rig workers were 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 increase was 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.
Results of Discontinued Operations
MRI Segment
During fiscal 1994, the Board of Directors of DSI chose to discontinue
the MRI Segment due to its recurring losses. In fiscal 1995, all of the assets
of this segment were garnished, confiscated or abandoned.
In fiscal 1996, the results of operations of the MRI Segment was income of
approximately $396,000 as compared to income of approximately $668,000
(approximately four months of operations) in fiscal 1995. The change in the
segment's results of operations for the year ended November 30, 1996 as
compared to 1995 is attributable to management's 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 $396,000 and
$668,000 credit to operations for the years ended November 30, 1996 and 1995,
respectively.
The results of operations of this segment was income of $668,000 for the
year ended November 30, 1995 (approximately four months of operations), and
loss of $741,000 in 1994. The increase in the segment's results of operations
for the year ended November 30, 1995 compared to 1994 was attributable to
management's 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. 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.
The results of operations of this segment was income of approximately
$2,497,000 in fiscal 1996. This compares to a loss of approximately $2,194,000
in fiscal 1995 (approximately eight and one-half months of operations). The
increase in the segment's results of operations for the year ended November 30,
1996 as compared to 1995 is attributable to the sale of the Nursery Segment in
July, 1996 which relieved the segment of liabilities to its unsecured
creditors, as well as the signing of an agreement in June, 1996 in which the
Registrant was indemnified for certain liabilities of the Nursery segment and
the payment to a secured creditor by a third party of all amounts due and owing
on another liability pursuant to an agreement signed in August 1995.
The results of operations of this segment in fiscal 1995 was a loss of
$2,194,000 (approximately eight and one-half months of operations) compared
to loss of $6,453,000 in 1994. 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 years 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.
Forward-Looking Information
When used in this report, the words "believes", "anticipates", "expect",
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially, including, but not limited to, those
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Registrant undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Recent Accounting Standards
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 of
accounting as prescribed by Accounting Principles Board Opinion No. 25. The
Company plans to continue using the intrinsic value based method.
SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was issued in 1996 and is not effective until
fiscal year 1997. This statement provides standards for transfers and servicing
of financial assets and extinguishments of liabilities that are based on
consistent application of a "financial-components approach" that focuses on
control. Preliminary analysis of this new standard by management indicates that
it will not have a material adverse impact on the Company.
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
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's Board of Directors consists of seven 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 and Larry Adkins, 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. In June 1996, Larry
Adkins was appointed a Director by the remaining members of the Board of
Directors to fill a vacancy caused by the resignation of D. Brian Hew, Robert
C. Hew and Peter L. Hew.
The following biographical information is provided with respect to each
director:
Harvey Bayard, age 65, 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.
Presently he is an account executive with Securities and Investment Planning
Co., a member of the NASD. 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 from April 1991 through July 1996 was
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.
Kenneth M. Levy, age 50, 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 30, has been a Director of the Company since December
1992 and is currently 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 W. Norton, age 36, 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 W. Norton was self-employed as a drilling engineer consultant.
John W. Norton received his Bachelor of Science degree in Petroleum Engineering
from Texas A&M University.
Sherman H. Norton, Jr., age 66, 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 39, 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.
Larry Adkins, age 49, has been a Director of the Company since June 1996. Mr.
Adkins is a senior vice president and operations manager with Marine Drilling
Company, a position he has held since 1993. Prior to that Mr. Adkins was vice
president and operations manager with Marine Drilling Company. Mr. Adkins
received his Bachelor of Science degree in Broad Field Sciences from Texas Tech
University.
In addition to the persons listed above, the only other executive officer
of DSI is David W. Ridley. Mr. Ridley, age 40, 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 compensation paid
by the Registrant to executive officers of the Company whose compensation
exceeded $100,000.
Highly Compensated Executive Officers
Annual Compensation
---------------------------------------
Name of Executive and Other Annual All Other
Principal Positions Year Salary Bonus Compensation Compensation
- ------------------- ---- ------- ----- ------------ ------------
Sherman H. Norton, Jr., CEO,
President, and Chairman of
the Board of DSI, President
of Norton Drilling 1996 $104,500 $ - - $ - - $ - -
Company 1995 90,958 12,500 - - - -
S. Howard Norton, III, Secre-
tary of DSI and Director
of the Company 1996 104,500 - - - - - -
John W. Norton, Assistant
Secretary of DSI and
Director of the Company 1996 104,500 - - - - - -
D. Brian Hew, former Director
of the Company; former
President/Treasurer of Sunny's
Plants, Inc., Sunshine 1996 - - - - - - - -
Botanicals, Inc. and 1995 65,798(1) - - - - - -
Interior Plant Supply, Inc. 1994 132,009 - - - - - -
Peter L. Hew, former Director
of the Company; former Vice
President /Secretary of Sunny's
Plants, Inc., Sunshine 1996 - - - - - - - -
Botanicals, Inc. and 1995 52,616(1) - - - - - -
Interior Plant Supply, Inc. 1994 118,138 - - - - - -
(1) Includes Salary through August 11, 1995, the last date of employment by
the Nursery Segment.
Director Compensation for Last Fiscal Year
Annual retainer Consulting fees/
Name fees other fees
----- --------------- ----------------
Harvey Bayard $ 4,000 $ 1,046
Kenneth Levy $ 4,000 $ 15,750
Brian J. McDonald $ 4,000 $ - -
Larry Adkins $ 2,000 $ - -
Robert C. Hew $ 1,000 $ - -
Harvey Bayard was paid other fees for work performed on behalf of DSI in
prior years.
Kenneth Levy was paid $2,500 per month for work performed on behalf of DSI in
connection with services provided to DSI outside of his normal director duties.
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 could 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 which
effectively replaced the above-mentioned agreements. The new contracts
provide for annual salaries of $104,500 to each of these employees. The
provisions of the new contracts are the same as the prior contracts except
for the amount of salary and provision for annual bonuses.
On December 1, 1995, Norton entered into a three-year employment agreement
with one of it's employees which provides for a salary of $78,000 per year.
Stock Options
No stock options were granted to, or exercised by Sherman H. Norton, Jr., S.
Howard Norton III, John W. Norton, D. Brian Hew or Peter Hew during the
fiscal year ended November 30, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of January 31, 1997, 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 (8)
- ------------------------ ---------------------- -----------
Sherman H. Norton, Jr. . . . . . . . . .2,716,292(2) 11.4%
5211 Brownfield Highway, Suite 230
Lubbock, Texas 79407-3501
Harvey Bayard. . . . . . . . . . . . . . . 41,500(3) *
Kenneth M. Levy. . . . . . . . . . . . . .175,000(4) 0.1
Brian J. McDonald. . . . . . . . . . . . . 10,200(5) *
S. Howard Norton, III . . . . . . . . .. 771,805 3.4
John William Norton. . . . . . . . . . . ..771,805 3.4
David W. Ridley. . . . . . . . . . . . . . 22,000(6) *
All directors and executive officers
as a group (7 persons). . . . . . . . .4,508,602(7) 18.8
* Less than 1%.
(1) All information is as of January 31, 1997 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, who 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 May 19, 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 19, 1999.
(4) 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; (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 19, 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.
(5) Includes (i) options to purchase 10,000 shares of Common Stock at an
exercise price of $0.34 per share which expire on May 19, 1999.
(6) 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.
(7) Includes the securities described above listed in footnotes (2) through (6)
above.
(8) 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
During May, 1993 a former officer of Norton, and an officer/director of
DSI, advanced $500,000 ($90,000 and $410,000, respectively) to Norton in the
form of unsecured demand notes, bearing interest equal to the entity's primary
lending institution's prime rate. Interest charged to operations on the notes
payable was $41,651, $49,116 and $35,579 in 1996, 1995 and 1994, respectively.
The notes are convertible into DSI's common stock at $0.44 per share for an
aggregate 1,136,364 shares of DSI's common stock.
Two officers/directors of DSI, a corporation owned by an officer/director
of DSI, and one former officer of Norton have ownership interests in an entity
from which Norton acquired drilling rig machinery at a cost of $98,207 in
1994. 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.
In the year ended November 30, 1995, the three individuals and corporation
mentioned above, along with Norton, participated in a joint venture in three
wells. The joint venture contracted with Norton to drill, equip, and operate
the three wells and incurred costs totaling approximately $83,000 and
$716,000 for the years ending November 30, 1996 and 1995, respectively.
In April, 1996, Norton sold substantially all of its interest in the joint
venture to a corporation in which the two officers/directors of DSI, the
corporation owned by a director of DSI and the former officer of Norton, are
stockholders. The sales price of the interest sold was $200,000 and Norton
realized a gain on the sale of the interest of approximately $117,000. The
corporation's pro rata share of the costs from the date of sale to November
30, 1996 was approximately $11,000 of which approximately $700 was outstanding
at November 30, 1996.
Each joint venture participant was liable for their pro rata share of the
costs incurred. Norton's share was approximately $17,000 and $200,000 for the
years ending November 30, 1996 and 1995, respectively. The aggregate costs to
be borne by the five related parties mentioned above was approximately $19,000
and $79,000 for the years ending November 30, 1996 and 1995, respectively. The
amounts due from the related parties at November 30, 1996 and 1995 was
approximately $1,000 and $11,000, respectively.
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 former directors/officers of
DSI and their spouses in satisfaction of an indebtedness of the Nursery Segment
of $135,387.
On June 6, 1996, DSI repurchased the 1,083,096 shares of its common stock
mentioned above at $0.08 per share from the corporation owned by the two former
directors/officers of DSI and their spouses as part of a stock purchase and
settlement agreement.
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 June 6, 1996, the registrant effected the closing (the "Closing") of a
Stock Purchase and Settlement Agreement (the "Agreement"), dated as of May 30,
1996, by and between Brian Hew, Peter Hew and Everbloom Growers, Inc.,
a Florida corporation whose sole stockholders are Brian Hew and Peter Hew
and the Registrant and the following direct and indirect wholly owned
subsidiaries of the registrant (collectively, the "DSI Affiliates"):
Sunny's Plants, Inc., a Florida corporation, Sunshine Botanicals, Inc.,
a Florida corporation , Interior Plant Supply, Inc., a Florida corporation,
Sunny's Trucking, Inc., a Florida corporation ( the "Nursery Group"), Norton
Drilling Company, a Delaware corporation , and Lobell Corp., a Delaware
corporation.
Pursuant to or in accordance with the Agreement, effective upon the
Closing, the following occurred: (a) The Registrant purchased 1,083,096
shares of common stock, par value $.01 per share, of the Registrant from
Everbloom Growers, Inc. in consideration of the payment of $86,647.68; (b)
Each of Brian Hew, Peter Hew and Robert Hew resigned from the board of
directors of the Registrant and Brian Hew and Peter Hew resigned from all
offices held by them with the Registrant and the DSI Affiliates; (c) The
Registrant delivered $30,000 to be used to assist in the resolution of
certain pending tax claims against the Nursery Group; (d) The Registrant
received an indemnification agreement and; (e) The Registrant and Brian Hew,
Peter Hew and Robert Hew agreed to certain releases and indemnification.
On July 22, 1996, the Registrant effected the closing of a Stock Purchase
Agreement dated as of July 19, 1996, by and between a third party purchaser
("Buyer") and the Registrant.
Pursuant to or in accordance with the Stock Purchase Agreement, effective
upon the Closing, the following occurred: (a) Buyer purchased all the
outstanding shares of common stock of Sunny's Plants, Inc., the sole
tockholder of all the capital stock of Sunshine Botanicals, Inc., Interior
Plant Supply, Inc., and Sunny's Trucking, Inc., from the Registrant, in
consideration of certain releases and the payment by DSI to Buyer of $10,000;
(b) Each of Sherman Norton, Howard Norton, Jay Norton and David Ridley
resigned from their respective positions as Directors and Officers of Sunny's
Plants, Inc. and the Subsidiaries; and (c) The Registrant received the Release
Agreement.
On August 7, 1996, the Registrant executed a Security Agreement and a
Guaranty Agreement (the "Agreements") dated as of August 1, 1996 by and between
The Plains National Bank of West Texas (the "Lender") and the Registrant.
Pursuant to or in accordance with the Agreements, the Registrant granted to
the Lender a continuing security interest in all of the outstanding common
stock (1,000 shares) of its only operating subsidiary, Norton Drilling Company
("Norton"), evidenced by common stock certificate #1. Furthermore, the
Registrant unconditionally guaranteed the prompt and full payment and
performance of Norton's present and future, joint and/or several, direct and
indirect, absolute and contingent, express and implied, indebtedness,
liabilities, obligations and covenants to Lender, including any amendments,
extensions, modifications, renewals, or substitutions, thereto. The
Registrant's obligations under the Agreements are unlimited and shall include
all present or future obligations between Norton and the Lender, together with
all interest and all of Lender's expenses and costs, incurred in connection
with the obligations.
The Agreements were executed in consideration for the Lender's funding of a
promissory note in the amount of $3,000,000 and a revolving or draw note with a
borrowing facility of $750,000. Payment on the $3,000,000 note shall be made on
demand, but if no demand is made, then in 82 payments of principal in the
amount of $35,715.00 plus accrued interest beginning September 1, 1996 and
continuing at monthly time intervals thereafter. A final payment of the unpaid
principal balance plus accrued interest is due and payable on July 1, 2003. The
$750,000 note is due on demand, but if no demand is made, then interest only
payments beginning September 1, 1996 and continuing at monthly time intervals
thereafter. A final payment of the unpaid principal balance plus accrued
interest is due and payable on April 1, 1997. See Note 7 of Notes to
Consolidated Financial Statements included as Item 8 of this report.
(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
theIPS 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 filed as
an Exhibit to the Registrant's 1995 Form 10-K and incorporated
herein by reference.
10.31 Stock Purchase and Settlement Agreement, dated as of May 30, 1996,
by and between D. Brian Hew ("Brian Hew"), Peter Hew ("Peter Hew")
and Everbloom Growers, Inc., a Florida corporation whose sole
stockholders are Brian Hew and Peter Hew and the Registrant and
the following direct and indirect wholly owned subsidiaries of the
registrant: Sunny's Plants, Inc., a Florida corporation, Sunshine
Botanicals, Inc., a Florida corporation, Interior Plant Supply,
Inc., a Florida corporation, Sunny's Trucking, Inc., a Florida
corporation, Norton Drilling Company, a Delaware corporation, and
Lobell Corp., a Delaware corporation filed as an Exhibit to the
Registrant's Form 8-K dated June 6, 1996 and incorporated herein
by reference.
10.32 Indemnification Agreement, dated as of June 6, 1996 by Tuttle's
Design-Build, Inc. and Brian and Merja Tuttle in favor of the
Registrant filed as an Exhibit to the Registrant's Form 8-K dated
June 6, 1996 and incorporated herein by reference.
10.33 Stock Purchase Agreement dated as of July 19, 1996, by and between
Morgan Roark ("Buyer"), DSI Industries, Inc., a Delaware
corporation ("DSI") and, for purposes of Section 4.3 only, Sherman
Norton, Howard Norton, Jay Norton and David Ridley filed as an
Exhibit to the Registrant's Form 8-K dated July 22, 1996 and
incorporated herein by reference.
10.34 Release Agreement, dated as of July 22, 1996 by Sunny's Plants,
Inc., a Florida corporation ("Sunny's"), Sunshine Botanicals,
Inc., a Florida corporation and a wholly-owned subsidiary of
Sunny's ("Sunshine"), Interior Plant Supply, Inc., a Florida
corporation and a wholly-owned subsidiary of Sunny's
("Interior"), and Sunny's Trucking, Inc., a Florida corporation
and a wholly-owned subsidiary of Sunny's ("Trucking") and
together with Sunny's, Sunshine and Interior, the ("Releasors")
in favor of DSI and each affiliate of DSI and the officers,
directors, employees, principals and agents of each of them
filed as an Exhibit to the Registrant's Form 8-K
dated July 22, 1996 and incorporated herein by reference.
10.35 Commercial Security Agreement dated as of August 1, 1996, by and
between The Plains National Bank of West Texas and DSI
Industries, Inc. filed as an Exhibit to the Registrant's Form
8-K dated August 7, 1996 and incorporated herein by reference.
10.36 Commercial Continuing Guaranty, dated as of August 1, 1996 by and
between The Plains National Bank of West Texas and DSI Industries,
Inc. filed as an Exhibit to the Registrant's Form 8-K dated August
7, 1996 and incorporated herein by reference.
11.1 Statement re Computation of Per-Share Earnings
(22) The subsidiaries of the Registrant are: Norton Drilling 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: February 23, 1997 By: /s/ Sherman H. Norton, Jr.
Sherman H. Norton, Jr.
Chairman, Chief Executive Officer and President
Dated: February 23, 1997 By: /s/ David Ridley
David Ridley, Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: February 23, 1997 By: /s/ Harvey Bayard
Harvey Bayard, Director
Dated: February 23, 1997 By: /s/ Brian J. McDonald
Brian J. McDonald, Director
Dated: February 23, 1997 By: /s/ Kenneth Levy
Kenneth Levy, Director
Dated: February 23, 1997 By: /s/ S. Howard Norton
S. Howard Norton, III, Director
Dated: February 23, 1997 By: /s/ Sherman H. Norton
Sherman H. Norton, Jr., Director
Dated: February 23, 1997 By: /s/ John William Norton
John William Norton, Director
Dated: February 23, 1997 By: /s/ Larry Adkins
Larry Adkins, Director
<PAGE>
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-3
Financial Statements:
- --------------------
Consolidated Balance Sheets.............................................F-4
Consolidated Statements of Operations...................................F-6
Consolidated Statements of Stockholders' Equity.........................F-8
Consolidated Statements of Cash Flows...................................F-9
Notes to Consolidated Financial Statements..............................F-11
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 sheets of DSI
Industries, Inc. and Subsidiaries as of November 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for the years 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 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 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 audits
provide a reasonable basis for our opinion.
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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting
principles.
Robinson Burdette Martin & Cowan, L.L.P.
Lubbock, Texas
February 19, 1997, except as to the
information presented in the second
paragraph of Note 17, for which the
date is February 25, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
DSI Industries, Inc.
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of DSI Industries, Inc. and Subsidiaries for the
year ended November 30, 1994. 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 results of operations and
cash flows of DSI Industries, Inc. and Subsidiaries for the year ended
November 30, 1994 in conformity with generally accepted accounting
principles.
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-3
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
A S S E T S
November 30,
---------------------
1996 1995
---------- ----------
Current assets:
Cash and cash equivalents $ 774,226$ 283,055
Accounts receivable trade, less allowance
for doubtful accounts of $278,053 and $90,000 4,571,323 2,171,187
Costs and estimated earnings in excess of
billings on uncompleted contracts 711,355 518,529
Insurance proceeds recoverable 153,586 682,661
Prepaid expenses and other current assets 212,625 233,007
---------- ----------
Total current assets 6,423,115 3,888,439
Property and equipment, at cost, net of
accumulated depreciation and depletion 8,508,540 7,410,612
Goodwill, net of accumulated amortization
of $492,170 and $396,910 as of November 30,
1996 and 1995, respectively 1,412,327 1,507,587
Security deposits 128,991 197,745
Other assets - - 78
----------- ----------
Total assets $16,472,973$13,004,461
=========== ==========
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30,
----------------------
1996 1995
---------- ----------
Current liabilities:
Current maturities of notes payable $ 1,520,964 $ 2,661,391
Accounts payable 4,986,701 3,957,514
Billings in excess of costs of
uncompleted contracts 15,293 - -
Accrued expenses and other current
liabilities 1,391,915 794,084
Net liabilities of discontinued operations 538,357 3,515,040
---------- ----------
Total current liabilities 8,453,230 10,928,029
---------- ----------
Notes payable, less current maturities 3,362,755 763,738
---------- ----------
Total long-term obligations 3,362,755 763,738
---------- ----------
Commitments and contingencies - - - -
Stockholders' equity:
Common stock-par value $.01;
authorized-100,000,000 shares,
issued - 23,893,365 shares;
outstanding - 22,810,269 and 23,893,365
shares at November 30, 1996 and 1995,
respectively 238,934 238,934
Additional paid-in capital 9,716,928 9,716,928
Accumulated deficit (5,212,226)( 8,643,168)
---------- ----------
4,743,636 1,312,694
Less treasury stock, at cost ( 86,648) - -
---------- ----------
Total stockholders' equity 4,656,988 1,312,694
---------- ----------
Total liabilities and stockholders' equity $16,472,973 $13,004,461
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended November 30,
-------------------------------------
1996 1995 1994
---------- ---------- ----------
Operating revenues:
Contract drilling revenues $26,676,573 $20,613,287 $21,110,439
Other 55,301 32,470 11,446
---------- ---------- ----------
Total operating revenues 26,731,874 20,645,757 21,121,885
---------- ---------- ----------
Operating costs and expenses:
Direct drilling costs 23,495,747 18,860,006 18,787,362
General and administrative 1,471,118 978,080 948,185
Depreciation, depletion and amortization 1,187,218 1,223,384 1,141,658
Other 15,508 183,348 51,666
---------- ---------- ----------
Total operating costs and expenses 26,169,591 21,244,818 20,928,871
---------- ---------- ----------
Operating income (loss) 562,283 ( 599,061) 193,014
---------- ---------- ----------
Other income (expense):
Net gain on sale of assets 369,398 111,165 1,235
Interest expense ( 393,786) ( 398,896) ( 405,934)
Interest income - - - - 27,409
Estimated loss on idle equipment - - - - ( 189,968)
Other - - 18,473 205,736
---------- ---------- ----------
Total other expenses, net ( 24,388) ( 269,258) ( 361,522)
---------- ---------- ----------
Income (loss) before provision for income taxes
and discontinued operations 537,895 ( 868,319) ( 168,508)
---------- ---------- ----------
Income taxes:
Current - - - - 161,000
Deferred tax expense (benefit) - - - - ( 151,000)
---------- ---------- ----------
Income tax expense - - - - 10,000
---------- ---------- ----------
Income (loss) from continuing operations 537,895 ( 868,319) ( 178,508)
--------- ---------- ----------
Discontinued operations:
Loss from discontinued operations, net of
income tax effect of $-0-, $-0- and
$(1,392,873) - - - - ( 2,570,829)
Adjustment to provision for loss on
disposal (charged) credited 2,893,047 ( 1,526,060) ( 3,750,000)
---------- ---------- ----------
Income (loss) from discontinued operations 2,893,047 ( 1,526,060) ( 6,320,829)
---------- ---------- ----------
Net income (loss) $ 3,430,942 $( 2,394,379) $(6,499,337)
========== ========== ==========
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Year ended November 30,
----------------------------
1996 1995 1994
------ ------ -----
Net income per common share
Primary:
Income (loss) from continuing operations $.02 $(.04) $(.01)
Income (loss) from discontinued operations .12 (.07) (.28)
---- ----- -----
Net income (loss) $.14 $(.11) $(.29)
==== ===== =====
Assuming full dilution:
Income (loss) from continuing operations $.02 $(.04) $(.01)
Income (loss) from discontinued operations .12 (.07) (.28)
---- ----- -----
Net income (loss) $.14 $(.11) $(.29)
==== ===== =====
Weighted average number of common shares
outstanding
Primary 23,365,170 22,961,606 22,698,801
========== ========== ==========
Assuming full dilution 24,674,279 22,961,606 22,698,801
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
----------------------- ---------------------
Shares Par Value Shares Par Value
---------- --------- -------- ----------
Balance, November 30, 1993 22,618,250 $ 226,182 - - $ - -
Exercise of stock options 27,000 270 - - - -
Shares issued to purchase
minority interest in
subsidiary 165,019 1,651 - - - -
Net loss - - - - - - - -
---------- --------- -------- ---------
Balance, November 30, 1994 22,810,269 228,103 - - - -
Shares issued in satisfaction
of subsidiary obligation 1,083,096 10,831 - - - -
Net loss - - - - - - - -
---------- --------- --------- --------
Balance, November 30, 1995 23,893,365 238,934 - - - -
Purchase of treasury stock - - - - 1,083,096 ( 86,648)
Net income - - - - - - - -
---------- --------- --------- -------
Balance, November 30, 1996 23,893,365 $ 238,934 1,083,096 $(86,648)
========== ========= ========= =======
Retained
Additional Earnings/ Total
Paid in (Accumulated) Stockholders'
Capital Deficit Equity
---------- ----------- ------------
Balance, November 30, 1993 $9,410,322 $ 250,548 $ 9,887,052
Exercise of stock options 5,637 - - 5,907
Shares issued to purchase
minority interest in
subsidiary 176,413 - - 178,064
Net loss - - (6,499,337) (6,499,337)
---------- ---------- ----------
Balance, November 30, 1994 9,592,372 (6,248,789) 3,571,686
Shares issued in satisfaction
of subsidiary obligation 124,556 - - 135,387
Net loss - - (2,394,379) (2,394,379)
---------- ---------- ----------
Balance, November 30, 1995 9,716,928 (8,643,168) 1,312,694
Purchase of treasury stock - - - - ( 86,648)
Net income - - 3,430,942 3,430,942
---------- ---------- ----------
Balance, November 30, 1996 $9,716,928 $(5,212,226) $ 4,656,988
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8<PAGE>
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended November 30,
-----------------------------------
1996 1995 1994
----------- ----------- ----------
Cash flows from operating activities:
Net income (loss) $ 3,430,941 $(2,394,379)$(6,499,337)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities of continuing operations:
Discontinued operations (2,893,047) 1,526,060 3,750,000
Depreciation, depletion and amortization 1,187,218 1,223 384 1,141,658
Estimated loss on idle equipment - - - - 189,968
Non-cash workers compensation expense 25,000 - - - -
Gain on sale of assets ( 369,398) ( 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 (2,400,136) 773,396 740,620
Insurance proceeds recoverable 529,075 ( 682,661) - -
Litigation proceeds receivable - - 233,479 ( 233,479)
Net costs and estimated earnings in excess
of billings on uncompleted contracts ( 177,533) ( 347,547) 546,647
Prepaid and deferred income taxes - - - - 88,591
Prepaid expenses and other current assets 20,382 44,852 52,304
Other current assets - - - - ( 20,938)
Accounts payable 1,029,187 ( 164,821) 411,612
Accrued expenses and other current
liabilities 597,832 ( 79,338) 244,347
Deferred income taxes payable - - - - (1,540,802)
---------- ---------- ----------
Net cash provided by (used in) continuing
operations 979,521 21,260 ( 232,741)
Net cash used in discontinued operations( 83,636) ( 116,050) - -
---------- ---------- ----------
Net cash provided by (used in) operating
activities 895,885 ( 94,790) ( 232,741)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 452,418 182,530 14,727
Acquisition of property and equipment (1,878,096) (1,012,254) ( 551,616)
Investing activities of discontinued
operations - - - - 6,365,383
Other 68,832 29,819 - -
---------- ---------- ---------
Net cash provided by (used in) investing
activities (1,356,846) ( 799,905) 5,828,494
---------- ---------- ---------
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year ended November 30,
---------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes payable 1,686,718 1,259,171 35,144
Financing activities of discontinued
operations - - - - (5,128,476)
Proceeds from (repayments of) revolving
line of credit, net 100,000 545,000 ( 286,352)
Repayments of notes payable ( 747,938) ( 702,763) ( 334,634)
Purchase of treasury stock ( 86,648) - - - -
Proceeds from issuance of common stock - - - - 5,907
---------- --------- ----------
Net cash provided by (used in) financing
activities 952,132 1,101,408 (5,708,411)
---------- ---------- ----------
Net increase (decrease) in cash, cash
equivalents and cash overdrafts 491,171 206,713 ( 112,658)
Cash and cash equivalents at beginning of year 283,055 76,342 109,204
Cash overdraft of discontinued segments - - - - 79,796
---------- ----------- ----------
Cash and cash equivalents at end of year $ 774,226 $ 283,055 $ 76,342
========== =========== ==========
Supplemental disclosures of cash flows information:
Cash paid during the year:
Interest $ 384,161 $ 358,280 $ 313,233
========== =========== ==========
Income taxes $ - - $ 22,315 $ 346,140
========== =========== ==========
Supplemental Schedule of Non-cash Investing
and Financing Activities:
During 1996, 1995 and 1994, the Company acquired property and equipment in
connection with borrowings in the amounts of $394,810, $142,371 and
$43,060, respectively.
During 1996 and 1995 several noncash activities occurred with regard to
the Company's discontinuance of certain of its business segments. See
Note 3.
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.
In connection with the transfer and disposition of certain assets and
liabilities during 1995, a note payable in the amount of $330,000 was
assumed by the purchaser/transferee.
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-10
<PAGE>
DSI INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. HISTORICAL OVERVIEW
DSI Industries, Inc. ("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 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.
DSI incorporated a wholly-owned subsidiary, Norton Drilling Company
("Norton") 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 fifteen (15) oil and gas drilling rigs in Texas, New
Mexico, Utah, Colorado and Wyoming as an independent drilling contractor.
DSI, in particular its nursery and magnetic resonance imaging segments,
have sustained substantial losses from operations in the past. Management on
August 18, 1994 discontinued its magnetic resonance imaging segment due to the
segment's recurring losses. Management discontinued the nursery segment on
April 6, 1995 due to the significant losses incurred by it commencing in the
third quarter of 1994 through the date the Board of Directors voted to
discontinue the segment. The accompanying consolidated financial statements
reflect these segments as discontinued operations.
On July 22, 1996, DSI effected the closing of a Stock Purchase Agreement
dated as of July 19, 1996, by and between a third party purchaser ("Buyer") and
DSI. Pursuant to or in accordance with the Agreement, effective upon the
closing the Buyer purchased all the outstanding shares of common stock of
Sunny's Plants, Inc., the sole stockholder of all the capital stock of Sunshine
Botanicals, Inc., Interior Plant Supply, Inc., and Sunny's Trucking, Inc. from
DSI, in consideration of certain releases and the payment by DSI to the Buyer
of $10,000. Furthermore, certain Directors and Officers of DSI resigned from
their respective positions as Directors and Officers of Sunny's Plants, Inc.
and it's subsidiaries and DSI received certain releases.
The accompanying consolidated financial statements reflect a working
capital deficiency of approximately $2,030,000 at November 30, 1996 of which
approximately $1,492,000 is attributable to DSI and its remaining operating
subsidiary, Norton. The estimated liabilities of the discontinued segments
exceed the assets of these segments by approximately $538,000. 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.
F-11
<PAGE>
1. HISTORICAL OVERVIEW (Continued)
Norton's agreements with its secured creditors prohibit virtually any
loans, dividends, advances, guarantee of indebtedness or payments to DSI or its
subsidiaries.
During fiscal 1996, a substantial amount of liabilities of the discontinued
segments were reduced either through the aforementioned sale of Sunny's or
through negotiations with the creditors of those segments. In addition, Norton
secured a line of credit during fiscal 1996 which has improved Norton's capital
resources position. These events coupled with the improved operating results of
the Company's continuing operations have caused management to believe that DSI
will continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of DSI and its
wholly-owned subsidiary, Norton (sometimes collectively referred to as the
"Company") as continuing operations and the accounts of Sunny's Plants, Inc.
and Lobell Corporation, 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.
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 expense as incurred. Provision for losses on incomplete contracts are
recognized in the period the loss can reasonably be determined.
F-12
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
(a) Property and equipment (other than oil and gas)- 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 as follows:
Lives (years)
-------------
Drilling rigs and equipment 2-8
Automotive equipment 5
Office furniture 5
Buildings 20
Other 3
(b) Oil and gas properties-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 over lives of 5 to
7 years which is deemed by management to approximate the units-of-production
method. 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 using the units-of-production
method.
(c) Maintenance and repairs-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.
(d) Retirements-Upon disposition or retirement of property and equipment,
the cost and related accumulated depreciation are removed from the accounts and
the gain or loss thereon, if any, is credited or charged to income.
The Company and it's subsidiaries adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" effective December 1, 1995, the
beginning of it's 1996 fiscal year. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
this new standard did not have a material impact on the Company for the year
ended November 30, 1996.
F-13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 as well as items accounted for
differently for book purposes than for tax purposes such as depreciation and
accrued but unpaid insurance losses.
DSI files a consolidated Federal income tax return.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash on deposit and unrestricted certificates of deposit with
original maturities of less than 90 days.
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.
Income (loss) per common share
Net income (loss) per common share of stock has been computed using the
weighted average number of common shares outstanding during the year.
Primary net income (loss) per common and common equivalent share has been
computed based on the weighted average number of common shares outstanding
during that year 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. Common stock equivalents are not included in the outstanding shares
computation for 1994, 1995 and 1996 as they were not dilutive.
Fully diluted earnings per share amounts 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
F-14
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 1996 because those prices were higher than
the average market prices during that year. Net income for fiscal 1996 has
been adjusted for interest expense (net of income tax effect) on the
convertible debt.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 consolidated
financial statements in order for them to conform with the 1996 presentation.
The reclassifications had no effect on net 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 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 former landlord are not successful in
settling their obligations, DSI will cause the segment to seek protection from
the landlord 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 gain realized in the reversal
of such recorded liabilities. Management's estimate of the potential gain is
between approximately $50,000 and $65,000.
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,
F-15
<PAGE>
3. DISCONTINUED OPERATIONS (Continued)
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. DSI has received a release from its guarantee of the
obligation to the bank as well as its obligation for the $330,000 note payable.
The agreement with the other secured bank required 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 thisbligation. The unpaid balance of the purchaser's
obligation was approximately $1,980,000 at November 30, 1996.
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 aforementioned transactions.
On July 22, 1996, DSI effected the closing of a stock purchase agreement
("Purchase Agreement") dated as of July 19, 1996, by and between a third party
purchaser ("Buyer") and DSI. Pursuant to or in accordance with the Agreement,
effective upon the closing the Buyer purchased all the outstanding shares of
common stock of Sunny's Plants, Inc., the sole stockholder of all the capital
stock of Sunshine Botanicals, Inc., Interior Plant Supply, Inc., and Sunny's
Trucking, Inc. from DSI, in consideration of certain releases and the payment
by DSI to the Buyer of $10,000. Furthermore, certain Directors and Officers of
DSI resigned from their respective positions as Directors and Officers of
Sunny's and it's subsidiaries and DSI received certain releases
The consolidated results of operations of the discontinued segments for the
years ended November 30, 1996, 1995 and 1994 are as follows:
1996 1995 1994
------------ ----------- -----------
Revenues $ - - $ - - $11,047,000
Costs and expenses - - - - 15,010,702
Adjustment to provision for
loss on disposal (charged)
credited 2,893,047 (1,526,060) (3,750,000)
------------ ----------- ----------
Income(loss) before income taxes 2,893,047 (1,526,060) ( 7,713,702)
Credit for income taxes - - - - ( 1,392,873)
----------- ---------- -----------
Income/(loss) $ 2,893,047 $(1,526,060)$( 6,320,829)
=========== ========== ===========
F-16
<PAGE>
3. DISCONTINUED OPERATIONS (Continued)
The net liabilities of the discontinued operations at November 30, 1996
and 1995 are as follows:
1996 1995
-------- ----------
Notes payable and capital lease obligations $395,074 $1,106,207
Accounts payable and other liabilities 50,000 2,253,833
Estimated loss on disposal of segments 93,283 155,000
-------- ----------
Net liabilities of discontinued segments $538,357 $3,515,040
======== ==========
4.SIGNIFICANT OCCURRENCES
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, 1996 and 1995
is as follows:
1996 1995
---------- ---------
Costs incurred on uncompleted contracts $ 631,102 $ 427,008
Estimated earnings on uncompleted contracts 451,540 280,774
--------- ---------
1,082,642 707,782
Less billings to date on uncompleted contracts 386,580 189,253
--------- ---------
$ 696,062 $ 518,529
========= =========
Included in the accompanying balance sheets at November 30, 1996 and 1995
are the following captions:
1996 1995
--------- ---------
Costs and estimated earnings in excess of billings
on uncompleted contracts $ 711,355 $ 518,529
Billings in excess of costs and estimated earnings
on uncompleted contracts 15,293 - -
--------- ---------
$ 696,062 $ 518,529
========= =========
F-17
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at November 30, 1996 and
1995:
1996 1995
----------- ----------
Land $ 109,421$ 83,560
Building 185,784 182,250
Drilling equipment 12,071,857 10,283,530
Transportation equipment 904,407 728,109
Office furniture and equipment 46,506 46,506
Oil and gas properties, lease and well equipment 143,909 250,618
Miscellaneous equipment 17,583 17,583
---------- ----------
13,479,467 11,592,156
Less accumulated depreciation, depletion
and amortization 4,970,927 4,181,544
---------- ----------
$ 8,508,540$ 7,410,612
========== ==========
7. NOTES PAYABLE
Notes payable consisted of the following at November 30, 1996 and 1995:
1996 1995
-------- --------
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. In April
1996, the note was extended to August 1996 and
refinanced on August 7, 1996. $ - - $ 640,000
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. In April 1996,
the note was extended to August 1996 and
refinanced on August 7, 1996. - - 197,500
F-18
<PAGE>
7. NOTES PAYABLE (Continued)
1996 1995
-------- --------
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
at maturity, April 1, 1996; collateralized by
1,000 shares of Norton stock, accounts receivable
and certain drilling equipment. In April 1996,
the note was extended to August 1996 and
refinanced on August 7, 1996. - - 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;
collateralized by 1,000 shares of Norton stock,
accounts receivable and certain drilling
equipment. In April 1996, the note was extended
to August 1996 and refinanced on August 7, 1996. - - 588,000
Demand note payable entered into August 7, 1996,
in the original amount of $3,000,000 with The
Plains National Bank of West Texas; 82 monthly
installments of $35,715 plus accrued interest at
2.5% over the bank's prime rate (8.25% at
November 30, 1996) through June 2003 with remaining
unpaid principal and interest due at maturity,
July, 2003; collateralized by 1,000 shares of
Norton stock, all accounts receivable and general
intangibles and 14 drilling rigs and related
equipment 2,892,855 - -
F-19
<PAGE>
7. NOTES PAYABLE (Continued)
1996 1995
-------- --------
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 and again renewed in August 1996; monthly
payments of interest only at the Wall Street
Journal prime rate (8.25% and 8.75% at November 30,
1996 and 1995, respectively) plus 2.5% and 3.5% at
November 30, 1996 and 1995, respectively, with
unpaid principal and interest due at maturity,
April 1, 1997; collateralized by virtually all
assets of Norton. 750,000 650,000
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 (8.25% and 8.75% at November 30, 1996
and 1995, respectively), collateralized by 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; matures
November, 1998. 145,111 199,887
Uncollateralized financing agreement entered
into with Transamerica Insurance Finance
during July 1996 and July 1995, respectively,
providing financing for a portion of Norton's
insurance premiums totaling $183,420 and
$206,140, respectively; 9 monthly payments of
$23,580 and $23,616 including interest at 7.53%
and 7.40%, respectively; matures March, 1997. 92,855 115,937
Note payable entered into June 12, 1995 in the
original amount of $54,900 with Norwest Bank
(formerly First State Bank of Hubbard, Texas);
151 monthly payments of $657 (adjusted to $632
on June 12, 1996) plus interest at 9.75% and
10.5% at November 30, 1996 and 1995, respectively,
On June 12 of each year 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 maturity on June 12, 2008;
collateralized by a five acre tract in Hockley
County, Texas. 51,719 53,856
F-20
<PAGE>
7. NOTES PAYABLE (Continued)
1996 1995
-------- --------
Subordinated convertible notes payable dated May,
1993 to two 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 (8.25% and 8.75% at November 30,
1996, and 1995, respectively); 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 451,179 163,349
--------- ---------
4,883,719 3,425,129
Less current maturities 1,520,964 2,661,391
--------- ---------
$3,362,755 $ 763,738
========= =========
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 a corporate
guaranty of DSI.
The weighted average interest rate on short term indebtedness during fiscal
1996 and 1995 was 12.1% and 12.3%, 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 net worth of at least $4,378,000,
-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 sell, 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.
Norton was in violation of certain covenants of its debt agreements with
The Plains National Bank of West Texas during fiscal 1995 and 1994 for which
the Company had received waiver by the lender of such violations. These
violations were cured during fiscal 1996 and at November 30, 1996, Norton was
not in violation of such covenants.
F-21
<PAGE>
7. NOTES PAYABLE (Continued)
The Plains National Bank of West Texas has issued a letter of credit to the
Workers' Compensation Insurance carrier on behalf of Norton in the amount of
$331,376.
Aggregate amounts of annual maturities of notes payable outstanding at
November 30, 1996 are as follows:
Years Ending
November 30,
------------
1997 $1,520,964
1998 1,165,955
1999 507,545
2000 445,280
2001 457,523
Thereafter 786,452
---------
$4,883,719
=========
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 $167,665
per year. Liabilities in excess of these amounts are the responsibility of
the co-insurance carrier. Included in accrued expenses at November 30, 1996
and 1995 are the estimated liabilities owed under this self-insurance program
in the amounts of $71,144 and $15,652, respectively.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following
at November 30, 1996 and 1995:
1996 1995
--------- --------
Payroll payable $ 848,064 $ 530,145
Payroll and other taxes payable 230,288 137,268
Accrued interest 45,167 35,543
Estimated workers' compensation
co-insurance payable 197,252 75,476
Estimated employee medical benefits
co-insurance payable 71,144 15,652
--------- --------
$1,391,915 $ 794,084
========= ========
F-22
<PAGE>
10. INCOME TAXES
The provision for income taxes for the years ended November 30, 1996, 1995
and 1994 consists of the following:
1996 1995 1994
-------- --------- -------
Federal:
Current $ - - $ - - $ 75,000
Deferred - - - - ( 75,000)
-------- --------- -------
- - - - - -
-------- --------- -------
State:
Current - - - - 86,000
Deferred - - - - ( 76,000)
-------- --------- -------
- - - - 10,000
-------- --------- -------
Total income tax expense $ - - $ - - $ 10,000
======== ========= =======
The effective income tax rate varies from the Federal statutory rate for
the years ended November 30, 1996, 1995 and 1994 as follows:
1996 1995 1994
------ ------ ------
Statutory tax rate 34.0% (34.0)% (34.0)%
Net operating loss carryforward (56.3) 16.9 - -
State and local taxes - - 3.0 5.9
Amortization of goodwill 17.7 11.0 21.7
Officer life insurance premium 2.5 2.4 - -
Inability to utilize operating loss
carryforward for state income
tax purposes - - - - 12.3
Other 2.1 0.7 - -
---- ---- ----
Effective tax rate - -% - - % 5.9 %
==== ==== ====
As of November 30, 1996, the total deferred tax asset valuation
allowance of approximately $42,000 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.
F-23
<PAGE>
10. INCOME TAXES (Continued)
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 $1,318,208 $3,056,226
Accruals related to
self-insurance 6,288 24,695 30,983
State and local tax benefit 19,077 ( 2,757) 16,320
---------- ---------- ----------
1,763,383 1,340,146 3,103,529
Valuation allowance ( 981,216)(1,433,083) (2,414,299)
---------- ---------- ----------
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 $ - - $ - - $ - -
========== ========= ==========
November 30, November 30,
1995 Net Change 1996
----------- ---------- ------------
Deferred tax assets:
Net operating loss carryforward $ 3,056,226$(2,336,352) $ 719,874
Accruals related to
self-insurance 30,983 60,272 91,255
State and local tax benefit 16,320 ( 680) 15,640
----------- ---------- --------
3,103,529 (2,276,760) 826,769
Valuation allowance (2,414,299) 2,372,678 ( 41,621)
----------- ---------- --------
Deferred tax asset 689,230 95,918 785,148
Deferred tax liabilities:
Property and equipment basis
difference ( 689,230)( 95,918) ( 785,148)
---------- ---------- ---------
Net deferred tax asset $ - - $ - - $ - -
========== ========== =========
For tax return purposes, DSI had tax NOL carryforwards of approximately
$2,117,000 at November 30, 1996. If unused, the aforementioned tax NOL
carryforwards will expire in various amounts in years 1998 to 2011.
Deferred tax benefit in 1994 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:
Excess of tax over book depreciation and estimated loss
on idle equipment $ 51,400
Accruals related to self-insurance ( 7,700)
Excess tax deductible expenses over book expenses
utilizing cash method of reporting for tax purposes (1,239,100)
Estimated loss on disposal of segments (1,275,000)
Reserve for operating loss future tax benefit 1,087,500
----------
$(1,382,900)
==========
F-24
<PAGE>
11. MAJOR CUSTOMERS
Norton had two customers each year who accounted for approximately 42%, 44%
and 36% of consolidated operating revenues for the year ended November 30,
1996, 1995 and 1994, respectively.
12. RELATED PARTY TRANSACTIONS
During May, 1993 a former officer of Norton, and an officer/director of
DSI, advanced $500,000 ($90,000 and $410,000, respectively) to Norton in the
form of unsecured demand notes, bearing interest equal to the entity's primary
lending institution's prime rate. Interest charged to operations on the notes
payable was $41,651, $49,116 and $35,579 in 1996, 1995 and 1994, respectively.
The notes are convertible into DSI's common stock at $0.44 per share for an
aggregate 1,136,364 shares of DSI's common stock.
Two officers/directors of DSI, a corporation owned by an officer/director
of DSI, and one former officer of Norton have ownership interests in an entity
from which Norton acquired drilling rig machinery at a cost of $98,207 in 1994.
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.
In the year ended November 30, 1995, the three individuals and corporation
mentioned above, along with the Drilling Segment, participated in a joint
venture in three wells. The joint venture contracted with Norton to drill,
equip, and operate the three wells and incurred costs totaling approximately
$83,000 and $716,000 for the years ending November 30, 1996 and 1995,
respectively.
In April, 1996, Norton sold substantially all of its interest in the joint
venture to a corporation in which the two directors of DSI, the corporation
owned by a director of DSI and the former officer of Norton, are stockholders.
The sales price of the interest sold was $200,000 and Norton realized a gain on
the sale of the interest of approximately $117,000. The corporation's pro rata
share of the costs from the date of sale to November 30, 1996 were
approximately $11,000 of which approximately $700 was outstanding at November
30, 1996.
Each joint venture participant was liable for their pro rata share of the
costs incurred. Norton's share was approximately $17,000 and $200,000 for the
years ending November 30, 1996 and 1995, respectively. The aggregate costs to
be borne by the five related parties mentioned above was approximately $19,000
and $79,000 for the years ending November 30, 1996 and 1995, respectively. The
amounts due from related parties at November 30, 1996 and 1995 were
approximately $1,000 and $11,000, respectively.
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 former directors/officers of DSI
and their spouses in satisfaction of an indebtedness of the Nursery Segment of
$135,387.
F-25
<PAGE>
12. RELATED PARTY TRANSACTIONS(Continued)
On June 6, 1996, DSI effected the closing of a stock purchase and
settlement agreement dated as of May 30, 1996, by and between DSI, the MRI
Segment, the Drilling Segment, two former directors of DSI and a corporation
owned by these two former directors.
Pursuant to or in accordance with the agreement, effective upon the
closing, DSI purchased 1,083,096 shares of common stock of DSI from the
corporation owned by the two former directors of DSI for $86,648. The two
individuals resigned from the board of directors of DSI and from all offices
held by them with DSI and with any of the DSI affiliates. In addition a third
director resigned from the Board of Directors of DSI. As a part of the
agreement, DSI also delivered $30,000 to be used to assist in the resolution of
certain pending tax claims against the Nursery Segment, and such to former
directors. In return, DSI was indemnified with respect to certain liabilities
of the Nursery Segment.
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 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 and all options expired during the fiscal year 1995.
F-26
<PAGE>
13.COMMON STOCK (Continued)
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 on May 19, 1993 was 90,000 at $0.375 ($33,750
in the aggregate) and 100,000 at $0.406 per share ($40,600 in the aggregate)
which was at or above fair market value on the date granted. The options were
granted to employees of DSI and its subsidiaries (150,000 shares) and to two
non-employee directors (20,000 shares each).
On August 27, 1993 four non-employee directors each received options to
acquire 10,000 shares each under the plan at $0.391 per share ($15,640 in the
aggregate) which was the fair market value at that date.
On May 19, 1994 four non-employee directors each received options to
acquire 10,000 shares each under the plan at $0.34 per share ($13,600 in the
aggregate) which was the fair market value at that date.
On October 15, 1994 one non-employee director received options to acquire
100,000 shares under the plan at $0.125 ($12,500 in the aggregate).
None of the options were exercised under these grants through November 30,
1996. All the options expire five years from the date the options were granted.
The following table contains information on stock options for the years
ended November 30, 1996, 1995 and 1994.
1996 1995 1994
-------- -------- --------
Options outstanding at beginning
of year($.125 to $.406 per share 318,500 321,500 207,000
Options expired ($.34 to $.406 per share) ( 10,000) ( 3,000) ( 25,500)
Options granted ($.125 to $.34 per share) - - - - 140,000
-------- -------- --------
Options outstanding at end of year 308,500 318,500 321,500
======== ======== ========
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
F-27
<PAGE>
13.COMMON STOCK (Continued)
the intrinsic value (the amount by which the market price of the underlying
stock exceeds the underlying price of the option) based method of accounting as
proscribed 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 former directors/officers of DSI
and their spouses in satisfaction of an indebtedness of the Nursery Segment of
$135,387.
Purchase of treasury stock
On June 6, 1996, DSI repurchased the 1,083,096 shares of its common stock
mentioned above at $0.08 per share from the corporation owned by the two former
directors/officers of DSI and their spouses as part of a stock purchase and
settlement agreement.
Subordinated convertible notes payable
In May, 1993, a former officer of the Drilling Segment subsidiary and a
director of DSI (who is also DSI's Chairman, President and Chief Executive
Officer) purchased at par the subsidiary's subordinated convertible notes in
the aggregate amount of $500,000. The notes are convertible into DSI's common
stock at $.44 per share for a total of 1,136,363 shares. The individuals 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.
F-28
<PAGE>
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 $57,140, $46,727 and $40,522 in 1996, 1995 and 1994,
respectively.
Minimum future lease payments under operating leases are as follows:
Years Ending Operating
November 30, Leases
------------ --------
1997 $ 44,000
1998 44,000
1999 18,333
--------
$106,333
========
Letters of credit
As of November 30, 1996, Norton is contingently liable under an
irrevocable letter 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 was
$20,000 for the year ended November 30, 1994. The agreement terminated on
December 31, 1994 resulting in no related fees for the years ended November 30,
1995 or 1996.
In connection with the acquisition of Norton, DSI entered into employment
agreements with four employees of Norton who were still employed at November
30, 1996. In addition to the applicable base salaries payable under each
employment agreement, the four employees could 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 no
provision for bonuses. All other provisions of the previous agreements remained
the same.
On December 1, 1995, Norton entered into a three-year employment agreement
with one of it's employees which provides for a salary of $78,000 per year.
F-29
<PAGE>
14. COMMITMENTS AND CONTINGENCIES (Continued)
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 former 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 filed a countersuit. Amoco and Norton agreed to
a mutual dismissal of their respective actions on February 19, 1997.
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
Norton'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, in addition to
environmental damage, could cause substantial damage to producing formations
and surrounding areas. Damage to the environment, including property
contamination in the form of either soil or ground water contamination, could
also result from Norton's operations, particularly through oil spillage, gas
leaks and extensive, uncontrolled fires. In addition, Norton could become
subject to liability for reservoir damage. The occurrence of a significant
event, including pollution or environmental damage, could materially affect
Norton's operations and financial condition. As a protection against
operating hazards, Norton maintains insurance coverage considered by Norton
to be adequate, including all-risk physical damage, employer's liability,
commercial general liability and workers' compensation insurance. Norton
currently has $1,000,000 of general liability insurance per occurrence with
an aggregate of $2,000,000 and excess liability and umbrella coverages of up
to $5,000,000 per occurrence with a $5,000,000 aggregate. Norton's customers
generally require Norton to have at least $1,000,000 of third party liability
coverage.
F-30
<PAGE>
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's demand
deposits and temporary cash investments consisted of the following at November
30, 1996 and 1995.
1996 1995
--------- ---------
Deposit in FDIC insured institutions
under $100,000 $ 102,266 $ 110,970
Deposit in FDIC insured institutions
over $100,000 704,864 203,656
-------- ---------
807,130 314,626
Less outstanding checks and other
reconciling items ( 32,904) ( 31,571)
-------- --------
Cash and cash equivalents $774,226 $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, 1996 and 1995. Included in
general and administrative expense for the years ended November 30, 1996 and
1995 are provisions for doubtful receivables of $186,681 and $85,375,
respectively.
During the years ended November 30, 1996 and 1995, two customers accounted
for approximately 42% and 44%, respectively, of Norton's contract drilling
revenues.
16. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
At November 30, 1996 and 1995, the carrying value of the Company's
financial instruments, which primarily include notes payable, approximates
fair value in management's opinion because of the frequency of their repricing.
17. SUBSEQUENT EVENTS
In January 1997, Norton entered into a new revolving line of credit
agreement with The Plains National Bank of West Texas with a borrowing facility
of $665,000 at the bank's prime rate plus 2.5% with interest payable monthly.
The note matures on September 1, 1997 and is collateralized by virtually all
assets of Norton.
In February 1997, Norton paid off the note payable to South Plains National
Bank of Levelland with proceeds from a new note payable with City Bank in the
amount of $500,000. The new loan provides for monthly principal payments of
$8,334 plus interest at 2% over the bank's prime rate. The note matures in
February 2002 and is collateralized by a single drilling rig including all
equipment and revenues derived therefrom and a second lien on all other
accounts receivable, inventory and drilling equipment.
F-31
<PAGE>
Exhibit 11.1 Statement Re Computation of Per-Share Earnings
DSI INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Fiscal Year Ended November 30,
------------------------------------
1996 1995 1994
---------- ---------- -----------
PRIMARY EARNINGS PER SHARE
Income (Loss) from Continuing
Operations $ 537,895 $( 868,319) $( 178,508)
Income (Loss) from Discontinued
Operations 2,893,047 (1,526,060) (6,320,829)
---------- ----------- -----------
Net Income (Loss) $3,430,942 $(2,394,379) $(6,499,337)
========== =========== ===========
Shares
Weighted average number of shares
outstanding 23,365,170 22,961,606 22,698,801
Add-Dilutive effect of outstanding
stock options (as determined by the
application of the treasury stock
method) 27,746 - - - -
---------- ---------- ----------
Weighted average number of shares
outstanding as adjusted 23,392,916 22,961,606 22,698,801
========== ========== ==========
Income (Loss) from Continuing Operations:
Primary $0.022994(a) $(0.037816)(a) $(0.007864)(a)
Income (Loss) from Discontinued Operations:
Primary 0.123672(a) (0.066461)(a) (0.278465)(a)
--------- --------- ----------
Net Income (Loss) per share: Primary $0.146666(a) $(0.104277)(a) $(0.286329)(a)
========= ========= ==========
ASSUMING FULL DILUTION
Income (Loss) from Continuing
Operations $ 537,895 $( 868,319) $( 178,508)
Add-Interest on convertible debt 41,651 49,116 35,579
---------- ---------- ----------
579,546 ( 819,203) ( 142,929)
Income (Loss) from Discontinued
Operations 2,893,047 (1,526,060) (6,320,829)
---------- ---------- ----------
Net Income (Loss) $3,472,593 $(2,345,263) $(6,463,758)
========== ========== ==========
Shares:
Weighted average number of shares
outstanding 23,365,170 22,961,606 22,698,801
Add-Dilutive effect of outstanding
stock options (as determined by the
application of the treasury stock
method) 172,746 - - - -
Add-Dilutive effect of convertible
debt 1,136,364 1,136,364 1,136,364
---------- ---------- -----------
1,309,110 1,136,364 1,136,364
Weighted average number of shares
outstanding as adjusted 24,674,280 24,097,970 23,835,165
========== ========== ==========
Income (Loss) from continuing operations:
Assuming full dilution $0.023488 $(0.033995)(b)$(0.005997)(b)
Income (Loss) from discontinued operations:
Assuming full dilution 0.117250 (0.063327)(b) (0.265189)(b)
--------- ---------- ----------
Net Income (Loss) per share: Assuming
full dilution $0.140737 $(0.097322)(b)$(0.271186)(b)
========= ========== ==========
(a)This calculaton is submitted in accordance with Regulation S-K item 601(b)
(11) although not required by footnote 2 to paragraph 14 of APB Opinion No.
15 because it results in dilution of less than 3%.
(b)This calculaton is submitted in accordance with Regulation S-K item 601(b)
(11) although not required by paragraph 30 of APB Opinion No. 15 because its
effect is anti-dulitive.
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from Form 10-K
for the fiscal year ended November 30, 1996 (Balance Sheet and Statement of
Operations) and is qualified in its entirety by reference to such Form 10-K
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] NOV-30-1996
[PERIOD-END] NOV-30-1996
[CASH] 774,226
[SECURITIES] 0
[RECEIVABLES] 4,849,376
[ALLOWANCES] 278,053
[INVENTORY] 0
[CURRENT-ASSETS] 6,423,115
[PP&E] 13,479,467
[DEPRECIATION] 4,970,927
[TOTAL-ASSETS] 16,472,973
[CURRENT-LIABILITIES] 8,453,230
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 238,934
[OTHER-SE] 4,418,054
[TOTAL-LIABILITY-AND-EQUITY] 4,656,988
[SALES] 0
[TOTAL-REVENUES] 26,731,874
[CGS] 0
[TOTAL-COSTS] 23,495,747
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 393,786
[INCOME-PRETAX] 537,895
[INCOME-TAX] 0
[INCOME-CONTINUING] 537,895
[DISCONTINUED] 2,893,047
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 3,430,942
[EPS-PRIMARY] .14
[EPS-DILUTED] .14
</TABLE>
