UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-15784
NORTON DRILLING SERVICES, 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
Former name, former address and former fiscal year, if changed since last
report: No Change
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 3, 1998
Common stock, par value $.01 per share 24,671,601 shares
1 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets................................3
Unaudited Consolidated Statements of Operations......................4
Unaudited Consolidated Statements of Stockholders' Equity............6
Unaudited Consolidated Statements of Cash Flows......................7
Notes to Consolidated Financial Statements...........................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......17
Part II - Other Information ............................................17
Item 1. Legal Proceedings ..............................................17
Item 6. Exhibits and Reports on Form 8-K................................17
Signatures .............................................................18
2 of 18 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements include all adjustments which in
managements' opinion are necessary in order to make the financial statements not
misleading.
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 31, November 30,
1998 1997
----------- ------------
Current assets:
Cash and cash equivalents $ 1,226,723 $ 277,097
Accounts receivable, trade, less allowance for
doubtful accounts of $242,183 and $220,075,
respectively 3,889,441 6,153,958
Costs and estimated earnings in excess of
billings on uncompleted contracts 650,046 1,008,756
Prepaid expenses and other current assets 378,947 434,996
----------- -----------
Total current assets 6,145,157 7,874,807
Property and equipment, at cost, net of
accumulated depreciation 10,743,973 10,351,456
Goodwill, net of accumulated amortization 1,269,437 1,317,067
Note receivable, net of current maturities 68,387 75,764
Security deposits 143,991 143,991
----------- -----------
Total assets $18,370,945 $19,763,085
=========== ===========
Current liabilities:
Current maturities of notes payable $ 648,351 $ 2,403,986
Accounts payable 2,872,912 3,978,868
Billings is excess of costs of uncompleted contracts - - 12,228
Accrued expenses and other current liabilitie 1,289,217 1,885,352
Net liabilities of discontinued operations 96,257 104,953
---------- -----------
Total current liabilities 4,906,737 8,385,387
---------- -----------
Long-term liabilities
Notes payable, less current maturities 3,733,844 2,633,802
Deferred income taxes 1,173,446 942,267
---------- -----------
Total long-term liabilities 4,907,290 3,576,069
---------- -----------
Commitments and contingencies - - - -
Stockholders' equity:
Common stock-par value $.01;
authorized-100,000,000 shares;
issued-25,886,299 and 25,841,799 shares at May
31, 1998 and November 30, 1997,respectively;
outstanding-24,671,601 and 24,636,346 shares at
May 31, 1998 and November 30, 1997,respectively 258,863 258,418
Additional paid-in capital 10,535,754 10,518,132
Accumulated deficit ( 2,001,501) ( 2,750,294)
----------- -----------
8,793,116 8,026,256
Less treasury stock, at cost ( 236,198) ( 224,627)
----------- ----------
Total stockholders' equity 8,556,918 7,801,629
----------- -----------
Total liabilities and stockholders' equity $18,370,945 $19,763,085
=========== ===========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3 of 18 Pages
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<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Contract drilling revenues $16,084,866 $15,010,192 $6,576,979 $ 8,051,407
Other 12,850 3,238 10,728 1,892
----------- ---------- ---------- -----------
Total operating revenues 16,097,716 15,013,430 6,587,707 8,053,299
----------- ----------- ---------- -----------
Operating costs and expenses:
Direct drilling costs 12,680,067 13,739,528 5,613,583 7,411,929
General and administrative 749,899 535,449 295,019 219,139
Depreciation, depletion and
amortization 1,511,878 958,655 761,849 580,781
Other 4,077 3,352 1,234 1,933
----------- ----------- ---------- -----------
Total operating costs and expenses 14,945,921 15,236,984 6,671,685 8,213,782
----------- ----------- ---------- -----------
Operating income (loss) 1,151,795 ( 223,554) ( 83,978) ( 160,483)
----------- ----------- ----------- -----------
Other income (expense):
Net gain on sale of assets 211,856 209,795 - - 74,965
Interest income 8,502 - - 8,502 - -
Interest expense ( 221,560) ( 264,514) ( 98,228) ( 147,589)
----------- ----------- ---------- -----------
Total other income (expense),
net ( 1,202) ( 54,719) ( 89,726) ( 72,624)
----------- ----------- ---------- -----------
Income (loss) before provision for
income taxes and discontinued
operations 1,150,593 ( 278,273) ( 173,704) ( 233,107)
Income tax expense (benefit)
Current 170,621 - - ( 19,500) - -
Deferred 231,179 - - ( 78,600) - -
----------- ----------- ---------- -----------
401,800 - - ( 98,100) - -
----------- ----------- ---------- -----------
Income (loss) from continuing
operations 748,793 ( 278,273) ( 75,604) ( 233,107)
Adjustment to provision for loss on
disposal credited - - 25,000 - - 25,000
----------- ----------- --------- -----------
Net income (loss) $ 748,793 $( 253,273) $( 75,604) $( 208,107)
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
4 of 18 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Per share data:
Basic
Income (loss) from continuing
operations $0.03 $(0.01) $(0.00) $( 0.01)
Income from discontinued operations - - 0.00 - - 0.00
----- ----- ------ -------
Net income (loss) $0.03 $(0.01) $(0.00) $( 0.01)
===== ====== ====== =======
Diluted
Income (loss) from continuing
operations $0.03 $(0.01) $(0.00) $( 0.01)
Income from discontinued operations - - 0.00 - - 0.00
----- ----- ------ -------
Net income (loss) $0.03 $(0.01) $(0.00) $( 0.01)
===== ====== ====== =======
Weighted average number of
common shares outstanding
Basic 24,642,799 23,021,362 24,647,678 23,206,340
========== ========== ========== ==========
Diluted 25,142,137 23,021,362 24,647,678 23,206,340
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Treasury Stock
--------------------- -------------------
Shares Par Value Shares Cost
---------- --------- --------- ---------
Balance, November 30, 1996 23,893,365 $238,934 1,083,096 $( 86,648)
Shares issued in satisfaction of
liabilities 396,071 3,960 - - - -
Net loss for the six months
ended May 31, 1997 - - - - - - - -
---------- -------- --------- -------
Balance May 31, 1997 24,289,436 $242,894 1,083,096 $( 86,648)
========== ======== ========= =========
Balance November 30, 1997 25,841,799 $258,418 1,205,453 $(224,627)
Exercise of stock options 44,500 445 9,245 ( 11,571)
Net income for the six months
ended May 31, 1998 - - - - - - - -
---------- -------- --------- -------
Balance May 31, 1998 25,886,299 $258,863 1,214,698 $(236,198)
========== ======== ========= =========
Retained
Additional Earnings/ Total
Paid-in (Accumulated Stockholders'
Capital Deficit) Equity
----------- ----------- -------------
Balance, November 30, 1996 $ 9,716,928 $(5,212,226) $ 4,656,988
Shares issued in satisfaction of
liabilities 162,389 - - 166,349
Net loss for the six months
ended May 31, 1997 - - ( 253,273) ( 253,273)
----------- ---------- ----------
Balance May 31, 1997 $ 9,879,317 $(5,465,499) $ 4,570,064
=========== =========== ===========
Balance November 30, 1997 $10,518,132 $(2,750,294) $7,801,629
Exercise of stock options 17,622 - - 6,496
Net income for the six months
ended May 31, 1998 - - 748,793 748,793
---------- ----------- ----------
Balance May 31, 1998 $10,535,754 $(2,001,501) $8,556,918
=========== =========== ==========
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6 of 18 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 748,793 $( 253,273) $( 75,604) $( 208,107)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Adjustment to provision for loss
on disposal credited - - ( 25,000) - - ( 25,000)
Depreciation, depletion and
amortization 1,511,878 958,655 761,849 580,781
Gain on sale of assets ( 211,856) ( 209,795) - - ( 74,965)
Deferred income tax expense
(benefit) 231,179 - - ( 78,600)
Increase (decrease) in cash flows
as a result of changes in operating
asset and liability account balances:
(Increase) decrease in accounts
receivable-trade 2,264,517 ( 675,961) 2,889,158 (1,090,965)
Increase in insurance proceeds
recoverable - - ( 1,969) - - ( 48,296)
Decrease in net cost and estimated
earnings in excess of billings
on uncompleted contracts 346,482 17,807 30,064 43,887
(Increase) decrease in prepaid
expenses and other current assets 56,048 133,963 ( 55,023) 56,903
Increase (decrease) in accounts
payable (1,105,956) 319,349 (1,182,945) 667,180
Increase (decrease) in accrued
expenses and other current
liabilities ( 596,135) ( 30,132) ( 167,079) 150,793
---------- ---------- ---------- ----------
Net cash provided by continuing
operations 3,244,950 233,644 2,121,820 52,211
Net cash used in discontinued
operations ( 8,696) ( 35,492) - - ( 53)
---------- ---------- ---------- ----------
Net cash provided by operating
activities 3,236,254 198,152 2,121,820 52,158
---------- ---------- ---------- ----------
Cash flows from investing activities:
Collections on note receivable 7,377 - - 2,101 - -
Proceeds from sale of property
and equipment 246,707 240,741 - - 105,911
Acquisition of property and
equipment (1,840,069) (1,832,846) (1,175,848) ( 729,522)
---------- ---------- ---------- ---------
Net cash used in investing
activities (1,585,985) (1,592,105) (1,173,747) ( 623,611)
---------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
7 of 18 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable 4,500,000 500,000 385,246 - -
Proceeds from (repayments of)
revolving line of credit, net (1,465,000) 815,000 - - 650,000
Repayments of notes payable (3,742,139) ( 522,268) ( 373,362) ( 150,827)
Exercise of stock options 6,496 - - 5,278 - -
---------- ---------- ---------- ---------
Net cash provided by (used in)
financing activities ( 700,643) 792,732 17,162 499,173
---------- ---------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents 949,626 ( 601,221) 965,235 ( 72,280)
Cash and cash equivalents at
beginning of period 277,097 774,226 261,488 245,285
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period $1,226,723 $ 173,005 $1,226,723 $ 173,005
========== ========== ========== ==========
Supplemental disclosures of cash flows information: Cash paid during the period:
Interest $ 218,569 $ 238,945 $ 56,237 $ 132,191
========== ========= ========== ==========
Income taxes $ 622,232 $ 21,066 $ 142,775 $ 21,066
========== ========== ========= ==========
</TABLE>
Supplemental Schedule of Non-cash Investing
and Financing Activities:
During the periods ending May 31, 1998 and 1997, we acquired property and
equipment in connection with capital lease arrangements in the amount of
$51,546 and $83,887, respectively.
In March, 1997, 396,071 shares of common stock were issued in satisfaction
of outstanding liabilities of Norton in the amount of $166,349.
During the period ending May 31, 1998, stock options issued under our 1989
Employee Stock Option Plan were converted in which 44,500 shares of our
common stock were issued to option holders and 9,245 shares of common stock
were surrendered by option holders to us in lieu of cash payment of the
exercise price representing an increase in treasury stock of $11,571.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
8 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Norton
Drilling Services, Inc. ("NDSI") and its wholly-owned subsidiaries, Norton
Drilling Company ("Norton") and Lobell, Inc. ("Lobell"). All significant
intercompany accounts and transactions have been eliminated.
In our opinion, the accompanying consolidated balance sheet as of May 31,
1998 and the condensed consolidated statements of operations, stockholders'
equity, and cash flows for the three and six months ended May 31, 1998 and 1997
include all adjustments (consisting only of normal recurring adjustments and
accruals) considered necessary to present fairly the financial position as of
May 31, 1998, the results of operations and cash flows for the three and six
months ended May 31, 1998 and 1997. The accompanying consolidated balance sheet
as of November 30, 1997 is presented herein as unaudited, inasmuch as such
balance sheet was prepared from the balance sheet set forth in the audited
consolidated financial statements and does not reflect all disclosures and
footnotes contained in those audited consolidated financial statements.
The results of operations for the three and six months ended May 31, 1998
are not necessarily indicative of the results of operations for the entire year.
2. EARNINGS PER SHARE
We adopted the provision of Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share" during the quarter ended February 28,
1998. This standard amends Accounting Principles Board ("APB") Opinion No. 15
"Earnings per Share" and requires the presentation of basic and diluted earnings
per share versus primary and fully diluted earnings per share which had been
required by APB Opinion No. 15. Earnings per share for the three and six month
periods ended May 31, 1997 has been restated to conform with the requirements of
SFAS No. 128. The adoption of this new standard did not have a material effect
to us for the three and six month periods ended May 31, 1997 and 1998.
Basic earnings per share ("EPS") has been computed using the weighted
average number of common shares outstanding during the three and six month
periods ending May 31, 1998 and 1997.
Diluted EPS has been computed based on the weighted average number of
common shares outstanding during the three and six month periods ending May 31,
1998 and 1997 and on the net additional number of shares which would be issuable
upon the exercise of stock options, assuming that we used the proceeds received
to purchase additional shares at market value as well as the additional shares
issuable relative to convertible debt which was outstanding for the three and
six month periods ending May 31, 1997. Additional shares relative to stock
options and convertible debt have been excluded from the determination of
diluted EPS when their effect is anti-dilutive.
9 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. EARNINGS PER SHARE (Continued)
A reconciliation of the numerator and denominator of Basic EPS from
continuing operations calculation to that used to determine Diluted EPS from
continuing operations is as follows:
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
----------- ------------ ------------ ---------
Net income (loss) from
continuing operations
available to Common
Stockholders:
Basic $ 748,793 $(278,273) $( 75,604) $( 208,107)
Add interest on
convertible debt - - - - - - - -
--------- --------- --------- ---------
Diluted $ 748,793 $(278,273) $( 75,604) $( 208,107)
========= ========= ========= ==========
Weighted average shares
outstanding:
Basic 24,642,799 23,021,362 24,647,678 23,206,340
Add:
Additional shares
issuable upon
exercise of stock
options and warrants 499,338 - - - - - -
Additional shares
issuable upon
conversion of
convertible debt - - - - - - - -
---------- ---------- ---------- ---------
Diluted 25,142,137 23,021,362 24,647,678 23,206,340
========== ========== ========== ==========
3. RELATED PARTY TRANSACTIONS
On May 19, 1993 a former officer of Norton advanced $90,000 and a
director/former officer of NDSI advanced $410,000 to Norton in the form of
unsecured demand notes. These notes required interest equal to Norton's primary
lending institution's prime rate. The notes were convertible into our common
stock at $0.44 per share for a total 1,136,363 shares. The Conversion Price was
determined by our Board of Directors 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. On November 13, 1997, the two
individuals exercised their option to convert the notes into our common stock.
Interest charged to operations on the notes payable was approximately $20,000
for the six months ending May 31, 1997.
10 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMMON STOCK
Through November 30, 1996, four employees of Norton , three of which are
directors, had not been paid a total of $266,350 to which they were entitled
under their employment agreements with us. At a meeting of our Board of
Directors on February 23, 1997, the officers of NDSI were directed to take all
action necessary to issue to these four employees 396,071 shares of common stock
worth $166,349 in partial satisfaction of the unpaid amounts. The number of
shares that was issued was based upon a valuation of a recognized valuation
expert opining as to the fair market value of the price of the common stock to
be received.
5. OPTIONS AND WARRANTS
On February 23, 1997 our Board of Directors issued options to purchase
130,000 shares of our common stock to four of our directors in accordance with
our 1989 Stock Option Plan at an exercise price of $0.56 per share. At May 31,
1998, all of these options had been exercised.
On February 23, 1997, our Board of Directors authorized the issuance of
warrants to purchase our common stock to a director/former officer as
consideration for the individual personally guaranteeing certain obligations of
Norton. A warrant was issued for guarantees related to obligations entered into
through August 1996 and allows this person to purchase 640,000 shares of common
stock at the exercise price of $0.50 per share. A second warrant was issued for
guarantees related to obligations entered into in January 1997 and allows this
person to purchase 17,024 shares of common stock at $0.78 per share. A third
warrant was issued on April 1, 1997 for guarantees related to obligations
entered into on April 1, 1997 and allows the officer/director to purchase 32,000
shares of common stock at $0.625 per share. At May 31, 1998, none of these
warrants had been exercised and all remained outstanding.
On May 21, 1997, our Board of Directors issued options to purchase 20,000
shares of our common stock to two of our directors in accordance with our 1989
Stock Option Plan at an exercise price of $0.63 per share. At May 31, 1998, none
of these options had been exercised and all remained outstanding.
On February 6, 1998, the compensation committee of our board of directors
awarded options to purchase 752,000 shares of our common stock at $1.50 per
share under our 1997 Stock Option Plan. The Board of Directors approved these
awards at its meeting on February 24, 1998. These options were awarded to
various employees of Norton. No compensation cost was recorded in connection
with this award. At May 31, 1998, none of these options had been exercised and
all remained outstanding.
On April 14, 1998, our Board of Directors issued options to purchase 60,000
shares of our common stock to three of our directors in accordance with our 1997
Stock Option Plan at an exercise price of $1.20 per share. At May 31, 1998, none
of these options had been exercised and all remained outstanding.
11 of 18 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. NOTES PAYABLE
Norton Drilling Company entered into two borrowing arrangements with a bank
on February 17, 1998. The first was a demand note payable in the amount of
$4,500,000. This note bears interest at 2.0% above the Wall Street Journal prime
rate and calls for monthly payments of $53,750 plus accrued interest beginning
March 1, 1998 through maturity on February 1, 2005.
The second arrangement is a revolving line of credit with a borrowing
facility of $3,000,000. This line of credit requires monthly payments of
interest only at 1.0% above the Wall Street Journal prime rate with remaining
principal and interest due at maturity on April 1, 1999.
Both of the above notes are collateralized by accounts receivable and
general intangibles as well as thirteen drilling rigs and related equipment. In
addition a master loan agreement was entered into with this bank which contains
certain restrictive covenants. The most significant of which is that Norton
maintain a minimum net worth of $8,000,000.
7. COMMITMENTS AND CONTINGENCIES
On March 1, 1997, NDSI, through our subsidiary Norton Drilling Company,
entered into a five-year employment contract with Sherman H. Norton, Jr. which
effectively replaced a previous employment contract the Company had with Mr.
Norton. The new contract provides for an annual salary of $153,500. The
provisions of the new contract are the same as the prior contract except for
the amount of annual salary.
8. SUBSEQUENT EVENTS
On June 4, 1998, Norton established a new subsidiary, Norton Drilling
Company Mexico, Inc. This new subsidiary has signed a contract to drill 38 wells
in the northern border states of Nuevo Leon and Tamaulipas in Mexico. Norton
will move two rigs into Mexico in order to fulfill this contract.
12 of 18 Pages
<PAGE>
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of May 31, 1998, we had working capital of approximately $1,238,000 and
cash and cash equivalents of approximately $1,227,000 as compared to a working
capital deficiency of approximately $511,000 and cash and cash equivalents of
approximately $277,000 at November 30, 1997. For the six months ended May 31,
1998, operations provided approximately $3,236,000 in cash flows and we used
approximately $701,000 of cash flows in our financing activities. For the six
months ending May 31, 1997, operations provided approximately $198,000 in cash
flows and our financing activities provided approximately $793,000. Funds
provided in the six month period ending May 31, 1998 were approximately $950,000
and came mainly from operations. Funds used in the six month period ending May
31, 1997 were mainly attributable to the acquisition of property and equipment.
Significant expenditures of NDSI 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 six months
ending May 31, 1998 and 1997, approximate $1,840,000 and $1,833,000,
respectively. The Drilling Segment anticipates capital expenditures of
approximately $3,000,000 for fiscal 1998 to be funded from existing bank credit
lines and cash flows from operations. Due to numerous uncertainties regarding
the availability, price and delivery of certain drilling equipment, our
anticipated level of capital expenditures may fluctuate commensurate with the
volatility of the industry.
We believe that cash flows from operations and borrowings should be
sufficient to fund operations and adequately service our debt for the next
twelve months. The risks associated with the oil and gas industry, such as the
volatility of oil and gas prices, could adversely affect our operations.
Comparison of the six months ended May 31, 1998 and 1997
For the six months ended May 31, 1998 total operating revenues were
approximately $16,098,000 as compared to $15,013,000 for the six months ended
May 31, 1997, an increase of $1,085,000 or 7.2%. Average rig utilization was
77.9% in the six months ended May 31, 1998 compared to 89.4% in the six months
ended May 31, 1997. The increase in drilling revenues was due to higher rates
that Norton was able to get for its drilling rigs for the current year over what
they were in the prior year. Even though rig utilization was down, the higher
rates more than made up for the decrease in utilization.
Direct drilling costs for the six months ended May 31, 1998 were
approximately $12,680,000 or 78.8% of contract drilling revenues as compared to
$13,740,000 or 91.5% of contract drilling revenues for the six months ended May
31, 1997. The decrease in direct drilling costs as a percent of revenues for the
current year as compared to the prior year was because the rates Norton charged
for the use of its drilling rigs increased more than its costs associated with
those rigs. The decrease in the dollar amount of the costs was due to a decrease
in rig utilization.
General and administrative expenses were approximately $750,000 for the six
months ended May 31, 1998 as compared to approximately $535,000 for the six
months ended May 31, 1997. The increase in general and administrative
13 of 18 Pages
<PAGE>
expenses was due to an increase in the allowance for doubtful accounts,
increases in salaries due to the hiring of an additional sales representative,
increases in officers salaries in accordance with employment agreements, and an
increase in professional fees.
Depreciation, depletion and amortization for the six months ended May 31,
1998 and 1997 was approximately $1,512,000 and $959,000, respectively. The
increase was due to the large amount of capital expenditures made in the last
twelve months.
Interest expense was approximately $222,000 and $265,000 in the six months
ended May 31, 1998 and 1997, respectively. The decrease in interest expense was
due to a reduction in the interest rate on Norton's debt and the conversion of
subordinated debt in the prior year to common stock of NDSI.
In the six months ended May 31, 1998, net income from continuing operations
was approximately $749,000 as compared to a net loss of approximately $278,000
in the six months ended May 31, 1997. The increase in earnings was due mainly to
the reduction in direct drilling and job costs as a percentage of drilling
revenues.
In the six months ended May 31, 1997, we recognized a credit adjustment to
the provision for loss on disposal of discontinued operations of $25,000 as
compared to $-0- for the six months ended May 31, 1998.
Comparison of the three months ended May 31, 1998 and 1997
For the three months ended May 31, 1998 total operating revenues were
approximately $6,588,000 as compared to $8,053,000 for the three months ended
May 31, 1997, a decrease of approximately $1,465,000 or 18.2%. Average rig
utilization was 63.6% in the three months ended May 31, 1998 compared to 94.7%
in the three months ended May 31, 1997. The decrease in drilling revenues was
due to the decrease in drilling rig utilization. Drilling revenues did not
decrease comparatively to the decrease in rig utilization because the rates
Norton charged for the use of its drilling rigs were higher this year as
compared to last year.
Direct drilling costs for the three months ended May 31, 1998 were
approximately $5,614,000 or 85.2% of contract drilling revenues as compared to
$7,412,000 or 92.0% of contract drilling revenues for the three months ended May
31, 1997. The decrease in direct drilling costs as a percent of revenues for the
current year as compared to the prior year was because the rates Norton charged
for the use of its drilling rigs increased more than its costs associated with
those rigs. The decrease in the dollar amount of the costs was due to a decrease
in rig utilization.
General and administrative expenses were approximately $295,000 for the
three months ended May 31, 1998 as compared to approximately $219,000 for the
three months ended May 31, 1997. The increase in general and administrative
expenses was due to a reduction in the estimated amount of professional fees
owed of approximately $68,000 in the three months ended May 31, 1997.
Depreciation, depletion and amortization for the three months ended May 31,
1998 and 1997 was approximately $762,000 and $581,000, respectively. The
increase was due to the large amount of capital expenditures made in the last
twelve months.
14 of 18 Pages
<PAGE>
Interest expense was approximately $98,000 and $148,000 in the three months
ended May 31, 1998 and 1997, respectively. The decrease in interest expense was
due to a reduction in the interest rate on Norton's debt and the conversion of
subordinated debt in the prior year to common stock of NDSI.
In the three months ended May 31, 1998, net loss from continuing operations
was approximately $76,000 as compared to net loss of approximately $233,000 in
the three months ended May 31, 1997. The decrease in loss was due mainly to the
decrease in direct drilling costs as a percentage of drilling revenues.
In the three months ended May 31, 1997, we recognized a credit adjustment
to the provision for loss on disposal of discontinued operations of $25,000 as
compared to $-0- for the three months ended May 31, 1998.
Volatility of Oil and Natural Gas Prices
Our revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil and gas. In recent years, oil and gas
prices and markets have been extremely volatile. Prices are affected by market
supply and demand factors as well as actions of state and local agencies, the
United States and foreign governments and international cartels. All of these
factors are beyond our control. Any significant or extended decline in oil
and/or gas prices could have a material adverse effect on our financial
condition and results of operations.
The price of oil rose to a six-year high of $25.75 per barrel in January
1997, and fell to a ten-year low of $11.00 per barrel in March 1998. These low
oil prices have adversely impacted our operations. Should oil prices remain at
these levels or continue to decline or natural gas prices decline, our
operations could be further adversely affected.
As the result of lower crude oil prices, we have experienced a reduction in
drilling activity. This reduction adversely impacted our revenues and net income
for the quarter ended May 31, 1998 and is expected to similarly impact our
results of operations until crude oil prices increase to a level substantially
above the current prices and remain at such a level for an extended period of
time.
Market Conditions for Contract Drilling Services
Except for periods of time in 1991 and 1997, the market for onshore
contract drilling services has generally been depressed since mid-1982, when
crude oil and natural gas prices began to weaken. A particularly sharp decline
in demand for contract drilling services occurred in 1986 because of the
world-wide collapse in oil prices (to approximately $10.00 per Bbl in April
1986). Since 1986, and except during the occasional upturns, there have been
substantially more drilling rigs available than necessary to meet demand in most
operating and geographic segments of the domestic drilling industry. As a
result, drilling contractors have had difficulty sustaining profit margins.
Reactivation of onshore drilling rigs or new construction of drilling rigs could
also adversely affect rig utilization rates and pricing even in an environment
of higher oil and natural gas prices and increased drilling activity. We cannot
predict either the future level of demand for contract drilling services or
future conditions in the contract drilling industry.
15 of 18 Pages
<PAGE>
Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statment of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and the presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (1) classify items of other comprehensive income by
their nature in a financial statement (2) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997 and will
be adopted by us during the quarter ending February 28, 1999 in our 1999 fiscal
year.
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 establishes revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997 and will be adopted by us during the quarter
ending February 28, 1999 in our 1999 fiscal year.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" in February 1998. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement recognition of those plans. This statement is effective
for fiscal years beginning after December 15, 1997 and will be adopted by us in
our fiscal year ending November 30, 1999. The adoption of this new standard is
not expected to have a material impact to us.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999 and will be effective for us at the beginning of our fiscal
quarter ending February 29, 2000. The provisions of this new standard are not
expected to have a material impact to us.
Impact of Inflation
While subject to inflation, our business was not adversely impacted by
inflation during the three and six month periods ended May 31, 1998 and 1997 in
any material respect. We do not believe that inflation will have a material
impact on our business in the near future.
Year 2000
Many existing computer programs use two digits to identify a year in the
date field. These programs were designed and developed without considering the
upcoming change in century. If not corrected, many computer applications could
fail or create erroneous results by or at the year 2000.
We have conducted a comprehensive review of our computer systems to
16 of 18 Pages
<PAGE>
identify the systems which could be affected by the Year 2000 issue, and
are developing an implementation plan to resolve the issue.
Based on our review of our computer systems, we do not believe that the
cost of remediation will be material to our financial position and results of
operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 2 of this report contains forward-looking
statements which are made pursuant to the "safe harbor" provisions of The
Private Securities Litigation Reform Act of 1995. These statements include,
without limitation, statements relating to: liquidity; financing of operations;
continued volatility of oil and natural gas prices; estimates of, and budgets
for, capital expenditures for modifications and upgrades to certain of the
Company's drilling rigs and for maintenance of its contract drilling fleet
during fiscal year 1997; sources and sufficiency of funds required for immediate
capital needs; and such other matters. The words "believes," "plans," "intends,"
"expected" or "budgeted" and similar expressions identify forward-looking
statements. The forward-looking statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Factors that could cause actual results to differ materially from the Company's
expectations expressed in the forward-looking statements include, but are not
limited to, the following: intense competition in the contract drilling
industry; volatility of oil and natural gas prices; market conditions for
contract drilling services; continuation of severe drill-pipe shortage;
operational risks (such as blow outs, fires and loss of production); labor
shortage, primarily qualified drilling rig personnel; insurance coverage
limitations and requirements; potential liability imposed by government
regulation of the contract drilling industry (including environmental
regulation); and the substantial capital expenditures required to fund its
operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
On January 6, 1998, a judgment was rendered in favor of Norton against one
of its customers for non-payment on account. The judgment awarded Norton
approximately $464,000 plus pre-judgment interest of approximately $84,000.
Interest on the judgment will continue to accrue at the rate of 18% until paid.
The customer requested a new trial which was denied on March 22, 1998. The
judgment was then appealed by the customer in April, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
27. Financial Data Schedule
(b) Reports on Form 8-K
None
17 of 18 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTON DRILLING SERVICES, INC.
Dated: July 7, 1998 By:/S/ Sherman H. Norton, Jr.
Sherman H. Norton, Jr.
Chairman of the Board
Dated: July 7, 1998 By:/s/ David W. Ridley
David Ridley, Chief Financial Officer
(Principal Financial and Accounting Officer)
18 of 18 Pages
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from form
10-Q for the quarterly period ended May 31, 1998 (Balance Sheet and Statement of
Income) and is qualified in its entirety by reference to such form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 1,226,723
<SECURITIES> 4,607
<RECEIVABLES> 4,131,624
<ALLOWANCES> 242,183
<INVENTORY> 0
<CURRENT-ASSETS> 6,145,157
<PP&E> 18,710,502
<DEPRECIATION> 7,966,629
<TOTAL-ASSETS> 18,370,945
<CURRENT-LIABILITIES> 4,906,737
<BONDS> 0
0
0
<COMMON> 258,863
<OTHER-SE> 8,298,055
<TOTAL-LIABILITY-AND-EQUITY> 18,370,945
<SALES> 0
<TOTAL-REVENUES> 6,587,707
<CGS> 0
<TOTAL-COSTS> 5,613,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,228
<INCOME-PRETAX> (173,704)
<INCOME-TAX> (98,100)
<INCOME-CONTINUING> (75,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,604)
<EPS-PRIMARY> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
