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, 1997
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
NORTON DRILLING SERVICES, INC.
(formerly known as DSI Industries, 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 16, 1998: Common stock, par value $.01 per share,
$29,432,297. In making this computation, all shares known to be owned by
directors and executive officers of Norton Drilling Services, Inc. and all
shares known to be owned by other persons holding in excess of 5% of the
Registrant's common stock have been deemed held by "affiliates" of the
Registrant. Nothing herein shall prejudice the right of the Registrant or
any such person to deny that any such director, executive officer, or
stockholder is an "affiliate."
Common Stock outstanding as of February 16, 1998 was 25,844,799 shares.
Page 1
PART I
"NDSI", "we", "us" are used in this report to refer to Norton Drilling
Services, Inc. and its consolidated subsidiaries. We may from time to time
make written or oral forward-looking statements, including statements
contained in our filings with the Securities and Exchange Commission and our
reports to stockholders. Items 1 and 2 contain forward-looking statements and
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 the utilization rates of drilling rigs, business
strategies and other plans and objectives of our management for future
operations and actions and other such matters. The words "believes,"
"intends," "strategy," or "anticipates" and similar expressions identify
forward-looking statements. We do not undertake to update, revise or correct
the forward-looking information. Readers are cautioned that such
forward-looking statements should be read in conjunction with our disclosures
under the heading: "Cautionary Statement for Purposes of the Safe Harbor'
provisions of the Private Securities Litigation Reform Act of 1995" on page
16.
Item 1. Description of Business
Norton Drilling Services, Inc.
Norton Drilling Services, Inc., formerly known as DSI Industries, Inc., was
originally incorporated on December 21, 1983 under the laws of the State of
Delaware, as Diagnostic Sciences, Inc. On September 25, 1997 our stockholders
approved an amendment to our, certificate of incorporation changing our name
from DSI Industries, Inc. to Norton Drilling Services, Inc.
NDSI is a holding company whose 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
primarily in the Permian Basin of west Texas and eastern New Mexico
as well as in the Green River Basin and the Overthrust Belt in the
Rocky Mountains.
(ii) Lobell Corporation, a Delaware corporation ("Lobell" or the "MRI
Segment"), which was, until August 18, 1994 when the operations were
discontinued, engaged primarily in providing diagnostic imaging
services involving magnetic resonance imaging technology ("MRI"); and
(iii) until July 22, 1996 when this company was sold, Sunny's Plants, Inc.,
a Florida corporation ("Sunny's Plants" or the "Nursery Segment"),
which was, until April 6, 1995 when the operations were discontinued,
engaged primarily in the production and sale of indoor foliage
plants.
NDSI, in particular its Nursery and MRI Segments, sustained substantial
losses from operations in the year ended November 30, 1994. Our Board of
Directors on August 18, 1994 discontinued the MRI Segment due to the
Segment's recurring losses. On April 6, 1995, our Board also discontinued
the operations of the Nursery Segment due to the significant losses incurred
by it which started in the third quarter of 1994 and continued through April
6, 1995. The treatment of the Nursery Segment as discontinued was
Page 2
retroactively applied to the operations of the segment as of November 30,
1994. The consolidated financial statements reflect a net liability of
approximately $105,000 at November 30, 1997 and $538,000 at November 30,
1996 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.
As NDSI is a holding company it does not generate operating revenues.
Substantially all of the funding for our expenses as well as for the payment
of the liabilities of the discontinued segments comes from Norton Drilling
Company.
Norton's agreements with one of its secured creditors prohibit virtually
any loans, dividends, advances, guarantees of indebtedness or payments to us
or our subsidiaries.
Norton Drilling Company - On October 1, 1991, NDSI and its wholly-owned
subsidiary Norton Drilling Company, completed a merger provided for by an
Agreement and Plan of Merger, dated September 13, 1991. This agreement was
between NDSI, 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 Norton
Shareholders were holders of all of the capital stock of NDC (Texas). When
the transaction was completed, the Norton Shareholders surrendered all of
the shares of stock of NDC (Texas) and caused it to be merged into Norton.
We paid to these stockholders 5,160,000 shares of our common stock.
According to the agreement, we expanded our Board of Directors by three
positions and appointed the following three persons designated by the Norton
Shareholders to fill them: Sherman H. Norton, Jr., S. Howard Norton, III
and John W. Norton. We have covenanted to nominate and recommend for
election or reelection to our Board of Directors up to three people
designated by the Norton Shareholders so long as they maintain certain
percentage ownerships of the 5,160,000 shares paid to them at the closing of
this transaction. Also at the time the agreement was completed, four
members of NDC (Texas)'s management entered into five year employment and
non-competition agreements.
Lobell Corporation - Our subsidiary Lobell Corporation opened a magnetic
resonance imaging center in August 1986 in Huntington, New York. Thereafter
we entered into a capital lease agreement with General Electric ("GE") for a
GE MR Max (Magnetic Resonance Imaging )System at this location. On July 13,
1993, after rental payments to GE had become significantly delinquent, the
rental obligation under the lease was restructured according to a settlement
between us and GE. In December 1994, we stopped making payments in violation
of the settlement agreement. In March 1995, the MRI segment was evicted from
its facilities and the equipment held under the lease was abandoned. On
December 10, 1996 we executed another settlement agreement with GE whereupon
all amounts due and owing to GE under the lease were deemed satisfied and we
were released from any further liability.
NDSI and Lobell had become involved in litigation with the landlord of
the office space it leased because of the Segment not paying its rent. The
matter was settled in 1994 and the landlord was awarded net arrearage and
settlement costs of approximately $118,600. In December 1994, Lobell again
ceased making its rent 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,
Page 3
primarily cash and accounts receivable, as partial payment for the unpaid
rent. The premises were then vacated. We believe that we will be able to
negotiate an agreement with the landlord in full settlement for all amounts
owed. We believe that these anticipated settlement amounts will not be
material to NDSI.
On August 18, 1994, our Board of Directors discontinued the MRI Segment
due to its recurring losses. See Note 3 of Notes to Consolidated Financial
Statements included as part of Item 8 of this report.
We have included $40,000 in our reserve for loss on the discontinuance of
this segment as of November 30, 1997. We believe that this amount will be
enough to settle the amounts due to the landlord plus pay any other costs
we may incur in disposing of this segment. However, should we successfully
negotiate with the landlord for an amount less than is reserved, a possible
gain could result to us. See Note 3 of Notes to Consolidated Financial
Statements included as part of Item 8 of this report.
Sunny's Plants, Inc. - On February 28, 1991, NDSI through a newly formed
subsidiary, Sunny's Plants, Inc.("Sunny's Plants"), purchased:
(i) all of the assets and assumed certain obligations of Interior
Plant Supply Partnership;
(ii) all of the outstanding shares of Sunshine Botanicals, Inc.;
(iii)all of the outstanding capital stock of Interior Plant Supply
Inc.; and
(iv) certain real property from the sellers of the three above
mentioned entities according to an Agreement and Plan of
Reorganization.
The total purchase price was $3,643,125 of which $2,743,125 was paid by
the issuance of 2,310,000 shares of our common stock to each of the two
stockholders of the above mentioned companies.
The Nursery Segment was extensively damaged by Hurricane Andrew on August
24, 1992. As a result of the severe damage, the Nursery Segment temporarily
ceased operations from August to December of 1992 until the damage could be
repaired and the machinery and equipment rebuilt and restored and new
inventory acquired. In December 1992, the Nursery Segment resumed shipments
of its products.
On April 6, 1995, our Board of Directors discontinued the Nursery Segment
due to its significant losses which started in the third quarter of 1994 and
continued through April 6, 1995. We made certain revisions to our 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. The consolidated financial statements reflect these
revisions.
In August, 1995 the Nursery Segment and NDSI entered into agreements with
two of its secured creditors and an unrelated purchaser. According to this
agreement 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 also assumed a $330,000 note payable and agreed to indemnify
Page 4
the segment and NDSI for its liabilities to certain other creditors in an
amount not to exceed $404,000. We have received a release from our guarantee
of the obligation to the bank as well as our obligation for the $330,000
note payable.
The agreement with the other secured creditor requires the purchaser to
repay the outstanding balance of a mortgage note in the original amount of
$2,128,000 which was collateralized by the segment's real property. We 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 $1,891,000 at November 30, 1997.
On July 22, 1996, we completed a Stock Purchase Agreement with an
unrelated third party buyer. According to this agreement, the buyer
purchased all of the outstanding shares of common stock of Sunny's Plants,
Inc. from us. 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.
INDUSTRY SEGMENTS
We are a holding company with one remaining operating segment, Norton
Drilling Company. Norton owns sixteen oil and gas drilling rigs, fifteen of
which are operational, and provides contract drilling services to the oil
and gas industry. The MRI and Nursery Segments have been discontinued and
all activity relative to those segments is reflected as discontinued
operations herein.
CONTINUING OPERATIONS
General
NDSI, headquartered in Lubbock, Texas is a holding company and
accordingly does not generate operating revenues. We incur certain
administrative costs that are paid by charging our operating subsidiary
management fees. We incurred administrative costs of approximately $167,000
for the year ended November 30, 1997, approximately $228,000 for the year
ended November 30, 1996 and approximately $248,000 for the year ended
November 30, 1995. This resulted in pre-tax net income of approximately
$27,000 in 1997 and net losses of approximately $48,000 in 1996 and $148,000
in 1995.
Our remaining operating subsidiary, Norton Drilling Company, also
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.
The primary assets of the oil and gas contract drilling segment consist
of sixteen land-based drilling rigs, fifteen of which were fully operational
as of November 30, 1997. Norton's drilling rig fleet ranges from small
(7,500 ft. depth rating) self-propelled drilling rigs to larger (22,000 ft.
depth rating) diesel electric rigs. The book value of the rigs was
approximately $9,543,000 as of November 30, 1997 and approximately
Page 5
$7,767,000 as of November 30, 1996. 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.
Norton's drilling rigs are utilized for both exploration and development
drilling and can be used for either vertical or horizontal drilling.
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.
For the year ended November 30, 1997, Norton reported income from
operations before income taxes of approximately $3,671,000 from operating
revenues of approximately $35,833,000. For the year ended November 30, 1996,
Norton had income before income taxes of approximately $586,000 from
operating revenues of $26,677,000. Norton had stockholder's equity of
approximately $8,005,000 as of November 30, 1997 and $5,091,000 as of
November 30, 1996. 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 its 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.
Drilling Contracts
Most of Norton's drilling 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
Page 6
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 contracted
depth under specified conditions and provides most of the equipment and
services required. Norton bears the risk of drilling the well to the
contracted depth and is usually compensated substantially more than on wells
drilled on a daywork or footage basis because Norton assumes significantly
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 several 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.
Contract Drilling Activity
The following table sets forth certain information regarding Norton's
contract drilling activity for each of the years in the three-year period
ended November 30, 1997.
Page 7
Year Ended
November 30,
--------------------------
1997 1996 1995
----- ----- -----
Number of wells drilled (2) 285 304 197
Rigs available for service (1)(3) 15 14 13
Utilization rate of rigs
available for service (1)(3)(4) 92.4% 82.1% 68.6%
Number of days worked (3)(4) 5,057 4,195 3,254
(1) Average for the periods stated.
(2) Includes three wells drilled in 1995 in which Norton owned small
working interests.
(3) Rig 1 had been stacked since January 18, 1992 and rig 2 had been
stacked since May 9, 1991. 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.
During our fiscal year ended November 30, 1997 the price of oil has ranged
from approximately $17 to $23 per barrel. This has generated significant 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
its 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.
Page 8
Customers
Norton's customers are generally energy companies who repeatedly request
Norton's services. For the year ended November 30, 1997, Norton contract
drilled 285 wells for 44 customers. This compares with 304 wells drilled for
33 customers in the year ended November 30, 1996, and 197 wells drilled for
40 customers in the year ended November 30, 1995.
Over the past year, two customers accounted for a significant portion of
Norton's gross revenues. Those customers were Altura Energy Ltd. and Yates
Petroleum Corporation. These companies accounted for approximately 28% of
Norton's contract drilling revenues during 1997.
The Company's customers in the past twelve months have included, in
addition to the two mentioned above, McMurry Oil Company, Shell Western
Exploration and Production, Inc., Wiser Oil Company and Cross Timbers
Operating.
Drilling Equipment
The following table sets forth information about the drilling rigs
currently owned by Norton:
Depth
Rating
Rig No. Drawworks manufacturer (feet)
------ ---------------------- -------
1 Wilson 65........................ 9,500
2 Wilson 42........................ 7,500
3 Wilson 75........................ 10,500
4 Wilson 75........................ 11,500
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
17 Wilson 75........................ 13,000
In January 1997, rig 1 was reworked and upgraded and became rig 17. Rig
1, as shown above, consists of parts that were not used on the upgrading to
rig 17 plus additional parts we already owned and was not operational as of
November 30, 1997.
Rigs 1 and 2 were not operational during fiscal year 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 several
years.
All of the drilling rigs are pledged as collateral on notes payable of
Norton. See Note 6 of Notes to Consolidated Financial Statements included as
a part of Item 8 of this report.
Page 9
Norton owns 7 trucks with 6 trailers and two forklifts. This equipment is
used to transport, rig up and rig down Norton's drilling rigs. Norton also
hires third parties on occasion to assist in the moving of the rigs.
Most repair and overhaul work on Norton's drilling rigs and related
equipment is performed at Norton's yard facilities in Levelland, Texas on the
drilling rigs located in Texas and New Mexico. Norton usually contracts out
this work on the drilling rigs located in the Rocky Mountains area to third
parties. Norton believes that its drilling rigs and related equipment are in
good operating condition. In addition to repair and maintenance expenses,
Norton has historically spent funds for its ongoing program of modifying and
upgrading its equipment.
Competition
Demand for drilling rigs and utilization has improved from previous
years. However, the contract drilling industry is highly competitive. 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
critical. 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 two years 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
Page 10
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.
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 statutes 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.
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
Page 11
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 provides worker's compensation insurance for its Texas and New
Mexico resident employees through a fully-insured plan which was effective
July 1, 1997. This policy has a deductible of $1,000 per occurrence.
From November 1, 1992 to June 30, 1997, Norton carried worker's
compensation insurance for its Texas resident employees, with a deductible of
$100,000 per occurrence. Starting November 1, 1993, Norton purchased
reinsurance to provide coverage for the $100,000 deductible. The reinsurance
policy provided for a deductible of $5,000. From August 1, 1995 to June 30,
1997, the New Mexico resident employees were covered under this same policy.
Through 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.
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.
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.
Page 12
DISCONTINUED OPERATIONS
MRI Segment
The MRI Segment, prior to its discontinuation in 1994, rented its MRI
machine to a professional corporation, whose shareholders were physicians.
The MRI Segment was operational from July, 1986 to March, 1995.
During this time we entered into a capital lease agreement with General
Electric ("GE") for a GE MR Max System at this location. On July 13, 1993,
after rental payments to GE had become significantly delinquent, the rental
obligation under the lease was restructured according to a settlement between
us and GE. In December 1994, we stopped making payments in violation of the
settlement agreement. In March 1995, the MRI segment was evicted from its
facilities and the equipment held under the lease was abandoned. On December
10, 1996 we executed another settlement agreement with GE whereupon all
amounts due and owing to GE under the lease were deemed satisfied and we were
released from any further liability.
NDSI and Lobell had become involved in litigation with the landlord of
the office space it leased because of the Segment not paying its rent. The
matter was settled in 1994 and the landlord was awarded net arrearage and
settlement costs of approximately $118,600. In December 1994, Lobell again
ceased making its rent 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 non-paid rent. The
premises were then vacated. We believe that we will be able to negotiate an
agreement with the landlord in full settlement for all amounts owed. We
believe that these anticipated settlement amounts will not be material to
NDSI. If we should successfully settle these amounts with the landlord for
less than we have reserved, a possible gain could result. We estimate that
the gain could be in the range of $5,000 to $40,000.
On August 18, 1994, our Board of Directors discontinued the MRI Segment
due to its recurring losses. See Note 3 of Notes to Consolidated Financial
Statements included as part of Item 8 of this report.
Nursery Segment
On February 28, 1991, Sunny's Plants, a wholly-owned subsidiary of ours
until July 22, 1996, acquired (i) all of the assets and assumed certain
obligations of Interior Plant Supply Partnership, (ii) all of the outstanding
shares of Sunshine Botanicals, Inc. (iii) all of the outstanding capital stock
of Interior Plant Supply, Inc., and (iv) certain real property located in
Florida.
Prior to its discontinuance in 1995 as discussed below, the Nursery
Segment had been involved in the production of foliage plants. They were
engaged primarily in planting, growing and preparing plants for distribution
and sale in the wholesale and retail market.
On April 6, 1995, our Board of Directors discontinued the Nursery Segment
due to its significant losses which started in the third quarter of 1994 and
continued through April 6, 1995. We recorded a charge to operations of
$3,000,000 in 1994 for the estimated loss to be incurred in disposing of the
Segment. This included the estimated losses incurred from November 30, 1994
through April 6, 1995.
Page 13
In August, 1995 the Nursery Segment and NDSI entered into agreements with
two of its secured creditors and an unrelated purchaser. According to this
agreement 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 also assumed a $330,000 note payable and agreed to indemnify the
segment and NDSI for its liabilities to certain other creditors in an amount
not to exceed $404,000. We have received a release from our guarantee of the
obligation to the bank as well as our obligation for the $330,000 note
payable.
The agreement with the other secured creditor requires the purchaser to
repay the outstanding balance of a mortgage note in the original amount of
$2,128,000 which was collateralized by the segment's real property. We 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 $1,891,000 at November 30, 1997. 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.
As a result of this disposition being less favorable than was originally
estimated, an additional $2,194,000 was charged to operations during 1995. We
believe that the estimate of remaining future costs to be incurred in
disposing of this Segment of approximately $65,000 is adequate to provide for
future liabilities. If the amount actually paid to settle these liabilities
is less than the amount included in the current reserve, then we could record
a gain. Our best estimate of the potential gain is between approximately
$5,000 and $60,000. See Note 3 of the Notes to Consolidated Financial
Statements included as a part of Item 8 of this report.
On July 22, 1996, we sold the stock of Sunny's Plants, Inc. to another
unrelated purchaser.
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 final
realization is dependent on a number of factors. These may include, among
other things, extinguishment of existing liabilities under Federal bankruptcy
laws. While we believe that filing of bankruptcy for the segments or
settlement of the liabilities 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
problems which could arise under either course of action, the outcome is
subject to many issues which are outside our control. 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 net liabilities of the discontinued segments are approximately
$105,000 at November 30, 1997 and $538,000 at November 30, 1996.
Page 14
Item 2. Description of Properties
Headquarters and Other Offices
Our current principal facilities, their primary functions, respective
locations and square footage are as follows:
Square Feet
-------------------
Location Function Owned Leased
------------ -------- ------- ------
Lubbock, Tx. Executive office - - 4,642
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 - -
Employees
Norton had a total of 373 full-time employees (13 as office personnel and
360 as field personnel) as of November 30, 1997. The number of field
personnel will fluctuate depending on the demand for Norton's contract
drilling services. Norton considers its employee relations to be
satisfactory.
Item 3. 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.
On November 15, 1995, Colonial Pacific Leasing Corporation ("Colonial")
obtained a judgment against Sunny's Plants, Inc. and us, as guarantor, in the
amount of $360,230.40 plus attorney's fees, cost and interest. The judgment
arose from the breach of an equipment lease by the Nursery Segment. According
to a complete settlement and release agreement entered into on August 29,
1997, between us and Colonial, we paid to Colonial $275,000 on that date.
Colonial accepted the $275,000 in full and final settlement of the judgment,
caused a bill of sale to be made to us for the equipment made subject of the
judgment and released and discharged us of all liabilities arising out of the
judgment. In connection with the settlement of this judgment, we will be
indemnified by the buyer of the assets of the Nursery Segment in the amount
of $138,000.
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 us, 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.
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.
Page 15
We are from time to time subject to routine litigation incidental to our
business. Other than as set forth above, as of November 30, 1997, there were
no pending material proceedings to which we or our management 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
Our annual meeting of stockholders was held on September 25, 1997. The
following table sets forth a summary of how the 23,359,714 shares voted at
the annual meeting on the various proposals voted upon and adopted at the
annual meeting. For the election of directors, the following individuals were
elected as directors to serve until the next annual meeting of stockholders
and until their successors were duly elected and qualified.
Matters Voted Upon For Withheld
------------------ ---------- --------
1. To elect directors.
Larry Adkins 20,059,771 11,640
Carl Beach 20,059,771 11,640
Kevin Lewis 20,059,771 11,640
S. Howard Norton, III 19,102,771 968,640
John W. Norton 19,104,771 966,640
Sherman H. Norton, Jr. 19,432,771 638,640
For Against Abstain
---------- ------- -------
2.To approve a proposed amendment
to our Certificate of Incorporation to
change the name of our company from DSI
Industries, Inc. to Norton Drilling
Services, Inc. 19,981,911 49,750 89,750
3.To adopt the DSI Industries,
Inc. 1997 Stock Option Plan. 18,211,764 1,667,897 241,750
4.To ratify the selection of
Robinson Burdette Martin and Cowan, L.L.P.
as independent auditors of the Company
for the fiscal year commencing December
1, 1996. 20,023,211 27,000 71,200
---------------------------------------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
We are including the following cautionary statement to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 for any forward-looking statement made by, or
on behalf of NDSI. The factors identified in this cautionary statement are
important factors (but not necessarily all of the important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, NDSI. Where any such
forward-looking statement includes a statement of the assumptions or bases
Page 16
underlying such forward-looking statement, we caution that, while we believe
such assumptions or bases to be reasonable and make them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we express an expectation or belief as to the future results, such
expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished. Taking
into account the foregoing, the following are identified as important risk
factors that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, NDSI:
VOLATILITY OF OIL AND NATURAL GAS PRICES. Norton's revenue,
profitability and future rate of growth are substantially dependent upon
prevailing prices for oil and natural gas. In recent years, oil and natural
gas prices and, therefore, the level of drilling, exploration and
development, have been extremely volatile. Prices are affected by market
supply and demand factors as well as actions of state and local agencies, the
U.S. and foreign governments and international cartels. All of these factors
are beyond our control. Any significant or extended decline in oil and/or
natural gas prices will have a material adverse effect on our financial
condition and operations and could impair access to sources of capital.
MARKET CONDITIONS FOR CONTRACT DRILLING SERVICES. The contract drilling
business has experienced increased demand for drilling services due to higher
oil and gas prices. However, 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 in the
U.S.). Since this time 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. In addition to the adverse effects that future declines in demand
could have on us, ongoing movement or reactivation of onshore drilling rigs
or new construction of drilling rigs could 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.
SHORTAGE OF DRILL PIPE IN THE CONTRACT DRILLING INDUSTRY. There is a
growing shortage of drill pipe in the contract drilling industry in the U.S.
This shortage has caused the price of drill pipe to increase significantly
and has required orders for new drill pipe to be placed significantly in
advance of expected use. The price increase and the delay in delivery has
caused Norton to substantially increase capital expenditures over the past
two years with respect to new drill pipe purchases. In the event the shortage
continues we may be unable to obtain the drill pipe required for our contract
drilling operations.
LABOR SHORTAGES. Increases in domestic drilling demand since mid 1995
and recent increases in contract drilling activity have resulted in a
shortage of qualified drilling rig personnel in the industry. If Norton is
unable to attract and retain sufficient qualified personnel, its ability to
market and operate its drilling rigs will be restricted. Further, labor
shortages result in wage increases, which could reduce Norton's operating
margins.
Page 17
COMPETITION. Norton encounters intense competition in its operations
from other drilling contractors. The competitive environment for contract
drilling services involves such factors as drilling rates, availability and
condition of drilling rigs and equipment, reputation and customer relations.
Many of Norton's competitors have substantially greater financial and other
resources than Norton.
OPERATING HAZARDS AND UNINSURED RISKS. Contract drilling activities are
subject to a number of risks and hazards which could cause serious injury or
death to persons, suspension of drilling operations and serious damage to
equipment or property of others and, in addition to the environmental damage,
could cause substantial damage to producing formations and surrounding areas.
Damages to the environment could result from the Norton's operations,
particularly through oil spills, gas leaks, discharges of toxic gases or
extensive uncontrolled fires. In addition, Norton could become subject to
liability for reservoir damages. The occurrence of a significant event,
including pollution or environmental damage, could materially affect Norton's
operations and financial condition. Although Norton believes that it is
adequately insured against normal and foreseeable risks in its operations in
accordance with industry standards, such insurance may not be adequate to
protect Norton against liability from all consequences of well disasters,
extensive fire damage or damage to the environment. No assurance can be given
that Norton will be able to maintain adequate insurance in the future at
rates it considers reasonable or that any particular types of coverage will
be available. Furthermore, a portion of Norton's contract drilling is done on
a turnkey basis, which involves substantial economic risks.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION MATTERS. Norton's
operations are subject to numerous domestic laws and regulations that relate
directly or indirectly to the drilling of oil and natural gas wells,
including laws and regulations controlling the discharge of materials into
the environment, requiring removal and cleanup under certain circumstances
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have generally become more stringent in recent
years and may in certain circumstances impose strict liability, rendering
Norton liable for environmental damage without regard to negligence or fault
on their part. To date, Norton has not been required to expend significant
resources in order to comply with applicable environmental laws and
regulations nor has it incurred any fines or penalties for noncompliance.
However, compliance costs under existing legal requirements and under any new
requirements could become material, and Norton could incur liability in the
future for noncompliance. Additional matters subject to governmental
regulation include discharge permits for drilling operations and performance
bonds concerning operations.
Page 18
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
NDSI's common stock, $.01 par value per share, is traded on the NASDAQ
National Market under the symbol "NORT". The table below sets forth the high
and low selling prices for our common stock for the periods indicated on the
NASDAQ National Market.
Fiscal 1996 High Low
- ----------- ---- ----
First quarter $.09 $.03
Second quarter .47 .06
Third quarter .30 .13
Fourth quarter .75 .13
Fiscal 1997
- -----------
First quarter $.75 $.39
Second quarter .63 .42
Third quarter 1.56 .63
Fourth quarter 4.94 1.27
On February 13, 1998 the number of holders of record of our common stock
was approximately 283.
DIVIDEND POLICY
We have not paid dividends on our common stock in the past and do not
expect to pay any dividends on it in the foreseeable future. Instead we
intend to retain the earnings to support the operations and anticipated
growth of our business. Any future cash dividends would depend on future
earnings, capital requirements, our financial condition and other factors
deemed relevant by the Board of Directors. In addition, the terms of existing
bank indebtedness of our operating subsidiary prohibits payment of dividends
to us without prior written consent of their lenders. See Note 6 of Notes to
Consolidated Financial Statements included as a part of Item 8 of this report
for discussion regarding certain restrictive covenants included in our debt
agreements.
The following subparagraph sets forth information concerning equity
securities issued by us during 1997 but not registered under the Securities
Act of 1933, as amended (the "Act"):
(a) On February 23, 1997, 396,071 shares of our common stock were issued
to certain employees of Norton in partial satisfaction of amounts
due them on employment contracts. We believe that the issuance of
the shares was exempt form the registration requirements of Section
5 of the Act by virtue of Section 4(2), as a transaction not
involving a public offering. More specifically, we believe the
officers were able to fend for themselves with access to information
upon which an investment decision can be made.
Page 19
Item 6. Selected Financial Data
The operations of the MRI Segment were discontinued in August 1995 and
the operations of the Nursery Segment in April 1995. The financial
information below is shown as restated in the prior years for the
discontinuance of those operations. This financial data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Consolidated Financial Statements" and the related
notes, included as Items 7 and 8, relating to this report.
Years ended November 30,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
Continuing operations:
Operating revenue $35,840,945 $26,731,874 $20,645,757
=========== =========== ===========
Operating costs and expenses 31,919,575 26,169,591 21,244,818
=========== =========== ===========
Income (loss) from continuing
operations 2,208,858 537,895 ( 868,319)
Income (loss) from discontinued
operations 253,074 2,893,047 ( 1,526,060)
Extraordinary gain, net of tax - - - - - -
----------- ----------- -----------
Net income (loss) $ 2,461,932 $ 3,430,942 $(2,394,379)
=========== =========== ===========
Earnings (loss) per common share:
Primary:
Income (loss) from continuing
operations, $.10 $.02 $(.04)
Income (loss) from discontinued,
operations .01 .12 (.07)
Extraordinary gain - - - - - -
---- ---- -----
Net income (loss) $.11 $.14 $(.11)
==== ==== =====
Fully diluted:
Income (loss) from continuing
operations $.09 $ .02 $(.04)
Income (loss) from discontinued
operations .01 .12 (.07)
Extraordinary gain - - - - - -
---- ----- -----
Net income (loss) $.10 $ .14 $(.11)
==== ===== =====
Total assets $19,763,085 $16,472,973 $13,004,461
=========== =========== ===========
Notes payable, net of current
maturities $ 2,633,802 $ 3,362,755 $ 763,738
=========== =========== ===========
Stockholders' equity $ 7,801,629 $ 4,656,988 $ 1,312,694
=========== =========== ===========
Page 20
Item 6. Selected Financial Data (Continued)
Years ended November 30,
--------------------------
1994 1993
----------- -----------
Continuing operations:
Operating revenue $21,121,885 $21,563,415
=========== ===========
Operating costs and expenses 20,928,871 21,320,169
=========== ===========
Income (loss) from continuing
operations ( 178,508) ( 5,397)
Income (loss) from discontinued
operations ( 6,320,829) 167,976
Extraordinary gain, net of tax - - 985,098
----------- -----------
Net income (loss) $(6,499,337) $ 1,147,677
=========== ===========
Earnings (loss) per common share:
Primary:
Income (loss) from continuing
operations $(.01) $- -
Income (loss) from discontinued
operations (.28) .01
Extraordinary gain - - .04
----- ----
Net income (loss) $(.29) $.05
===== ====
Fully diluted:
Income (loss) from continuing
operations $(.01) $- -
Income (loss) from discontinued
operations (.28) .01
Extraordinary gain - - .04
----- ----
Net income (loss) $(.29) $.05
===== ====
Total assets $13,007,196 $26,692,953
=========== ===========
Notes payable, net of current
maturities $ 1,587,248 $ 5,962,426
=========== ===========
Stockholders' equity $ 3,571,686 $ 9,887,052
=========== ===========
Page 21
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
This Item 7 contains forward-looking statements which are made pursuant
to the "safe harbor" provision 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 gas prices, estimates of, and budgets for, capital expenditures in the
Drilling Segment, source and sufficiency of funds required for operations,
impact of inflation on our financial position and impact of Statement of
Financial Accounting Standards No. 128 on our earnings per share, and other
such items. The words "believes", "estimates", "expects" or "anticipates"
and similar expressions identify forward-looking statements. We do not
undertake to update, revise or correct any of the forward-looking
information. Readers are cautioned that such forward-looking statements
should be read in conjunction with our disclosures under the heading:
"Cautionary Statement for Purposes of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 on page 16.
Liquidity and Capital Resources
As of November 30, 1997, we had a working capital deficiency of
approximately $511,000 and cash and cash equivalents of approximately
$277,000. This compares to a working capital deficiency of approximately
$2,030,000 and cash and cash equivalents of approximately $774,000 at
November 30, 1996.
For the year ended November 30, 1997, our operations provided
approximately $2,435,000 in cash flows and our financing activities provided
approximately $387,000. The provision of funds is largely attributable to
our increased net income for the year and somewhat by additional borrowings
in the Drilling Segment. For the year ended November 30, 1996, our
operations provided approximately $896,000 in cash flows and our financing
activities provided approximately $952,000. The provision of funds was
largely attributable to our 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 which we incurred primarily consisted 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. These
expenditures were approximately $3,757,000 for the year ended November 30,
1997, $1,878,000 for the year ended November 30, 1996 and $1,012,000 for the
year ended November 30, 1995. The Drilling Segment anticipates capital
expenditures of approximately $2,750,000 for fiscal 1998 to be funded from
existing bank credit lines and cash flow from operations. See Note 6 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, Norton's 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 continuing operations and adequately service our debt for
the next twelve months. The risks associated with the oil and gas industry,
Page 22
such as the volatility of oil and gas prices, could adversely affect our
operations. See Notes 1 and 3 of Notes to Consolidated Financial Statements
included as part of Item 8 of this report.
Results of Continuing Operations
Comparison of the years ended November 30, 1997 and 1996
For the year ended November 30, 1997 contract drilling revenues were
approximately $35,833,000 as compared to $26,677,000 for the year ended
November 30, 1996, an increase of $9,156,000 or 34.3%. Average rig
utilization was 92.4% in 1997 compared to 82.1% in 1996. The increase in
drilling revenues was due to an increase in rig utilization and an increase
in rates charged for the use of these drilling rigs.
Direct job and rig costs for 1997 were approximately $28,504,000 or
79.5% of contract drilling revenues as compared to approximately $23,496,000
or 88.1% of contract drilling revenues in 1996. The increase in costs was
primarily attributable to the increase in the number of rigs which Norton
was operating. Direct rig and jobs costs decreased as a percentage of
revenues because the rates Norton charged for the use of its drilling rigs
increased more than its costs associated with those rigs.
General and administrative expenses for the drilling segment were
approximately $1,159,000 in 1997 as compared to approximately $1,243,000 in
1996. Included in general and administrative expenses for 1997 was a
decrease in the allowance for doubtful accounts receivable in the
approximate amount of $59,000. Conversely, in 1996 there was an increase in
the allowance for doubtful accounts receivable of approximately $187,000.
Interest expense was approximately $561,000 in 1997 compared to
approximately $394,000 in 1996 representing an increase of $167,000. The
increase was due to an increase in the amount of debt outstanding during the
year.
In 1997 income before income taxes and discontinued operations was
approximately $3,698,000 as compared to income before income taxes and
discontinued operations of approximately $538,000 in 1996. This increase in
income was due to the increase in rig revenues, a higher gross profit margin
and an increase in rig utilization.
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 fiscal 1996.
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 fiscal 1996.
This in turn resulted in fewer direct job and rig costs, as wells drilled on
Page 23
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 office personnel and an increase in the allowance for doubtful
accounts receivable in the approximate amount of $187,000.
Interest expense was approximately $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
$538,000 as compared to a loss of approximately $868,000 in 1995. This
increase was due to increased rig revenues, a decrease in direct job and rig
costs as a percent of gross revenues and an increase in rig utilization.
Income Taxes
For the year ended November 30, 1995, we recorded no income tax expense
due to the fact that no taxable income was generated in that year. For the
year ended November 30, 1996, no income tax expense was recorded due to the
utilization of net operating loss ("NOL") carryforwards which had been
generated in prior years. At November 30, 1996, we had approximately
$2,216,000 of remaining NOL carryforwards which could be applied to future
tax years. During the year ended November 30, 1997, all of these remaining
NOL's were utilized and charges to operations of approximately $1,283,000
for federal income taxes and approximately $206,000 for state income taxes
were recorded. See Note 9 of Notes to Consolidated Financial Statements
included as part of Item 8 of this report.
Volatility of Oil and Gas Prices
The Drilling Segment's revenue and profitability are substantially
dependent upon prevailing prices for oil and gas. Historically, oil and gas
prices 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 are beyond the control of the Drilling Segment. Any significant or
extended decline in oil and/or gas prices could have a material adverse
effect on NDSI's financial condition and results of operations.
Impact of Inflation
While subject to inflation, our business was not impacted by inflation
during the past three fiscal years in any material respect. We do no 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.
Page 24
We have conducted a comprehensive review of our computer systems to
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.
Results of Discontinued Operations
MRI Segment
During fiscal 1994, our Board of Directors 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.
The results of operations of this segment was income of $25,000 before
income taxes for the year ended November 30, 1997 as compared to income
before income taxes of approximately $396,000 for the year ended November
30, 1996. The decrease in the segment's results of operations was
attributable to our revision of the initial estimate made in 1994 to reserve
for the ultimate loss to be incurred in the disposal of the segment. This
revision resulted in a credit to operations of approximately $25,000 for the
year ended November 30, 1997 and $396,000 for the year ended November 30,
1996.
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 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. This revision resulted in a credit
to operations of approximately $396,000 for the year ended November 30, 1996
and $668,000 for the year ended November 30, 1995. See also PART 1,
Item 1-Description of Business; "Industry Segments-Discontinued Operations" for
additional discussion.
Nursery Segment
As of November 30, 1994, our Board of Directors chose to discontinue the
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 in fiscal 1997 was income
before income taxes of approximately $228,000 compared to income before
income taxes of approximately $2,497,000 in 1996. The decrease in the
segment's results of operations for the year ended November 30, 1997
compared to 1996 is attributable to two events. First, in July 1996 the
Nursery Segment was sold. This sale relieved the segment of liabilities to
its unsecured creditors. Second, a transaction occurred in which we were
indemnified for certain liabilities of the Nursery segment and in which a
third party paid a secured creditor of all amounts due on another liability.
The results of operations of this segment in fiscal 1996 was income of
approximately $2,497,000. This compares to a loss of approximately
$2,194,000 in fiscal 1995 (approximately eight and one-half months of
Page 25
operations). The increase in the segment's results of operations was
attributable to the same two events mentioned in the preceding paragraph.
Recent Accounting Standards
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" effective for periods ending after December 15, 1997.
SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS"). Some of the changes made to
current EPS standards include: (1) eliminating the presentation of Primary
EPS and replacing it with Basic EPS, with the primary difference being that
common stock equivalents are not considered in computing Basic EPS, (2)
eliminating the modified treasury stock method and the three percent
materiality provisions, and (3) revising the contingent share provisions and
the supplemental EPS data requirements. SFAS No. 128 requires dual
presentation of Basic and Diluted EPS on the face of the income statement,
as well as a reconciliation of the numerator and denominator used in the two
computations of EPS. Basic EPS is defined as net income from continuing
operations divided by the weighted average number of common shares
outstanding without the consideration of common stock equivalents which may
be dilutive to EPS. SFAS No. 128 will be adopted by us during the quarter
ending February 28, 1998 in our 1998 fiscal year.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 129 establishes certain
standards for disclosing information about an entity's capital structure.
SFAS No. 129 will be adopted by us during our fiscal year ending November
30, 1998. We do not anticipate a change in our disclosures as a result of
the adoption of SFAS No. 129.
The FASB issued 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.
Page 26
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
Our Board of Directors consists of six 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 NDSI and was elected to such office at the
last Annual Meeting of Stockholders.
The following biographical information is provided with respect to each
director:
John W. Norton, age 37, has been a Director of NDSI since October 1991. Mr.
Norton was appointed as Vice-President in charge of operations in November
1997. Mr. Norton has been 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 67, has been a Director of NDSI since October
1991 and Chairman of the Board of NDSI since August 1993. He was Chief
Executive Officer and President of NDSI from May 1995 to November 1997. He
has also been President of 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 40, has been a Director of NDSI since October
1991. Mr. Norton was appointed President and Chief Executive Officer of
NDSI in November 1997. Mr. Norton has been a sales representative with
Norton Drilling Company since 1982. S. Howard Norton, III received his
Bachelor of Business Administration degree from Texas A&M University.
H. Larry Adkins, age 50, has been a Director of NDSI since June 1996. Mr.
Adkins is a senior vice president and Chief Operating Officer with Marine
Drilling Companies, Inc., a position he has held since 1997. Prior to that Mr.
Adkins was senior vice president and operations manager with Marine Drilling
Companies, Inc.. Mr. Adkins received his Bachelor of Science degree in
Broad Field Sciences from Texas Tech University.
Carl C. Beach, age 45, has been a Director of NDSI since April 1997. Mr.
Beach worked as a landman and served as Vice President and Chief Executive
Officer for Beach Exploration, Inc. from 1974 to 1989. In 1989, Mr. Beach
formed his own oil and gas exploration company in Corpus Christi, Texas. In
1993 his company was merged with an electric utility for which Mr. Beach
then served as President. Mr. Beach currently works for Southstar
Page 27
Corporation, a corporation which he formed. Mr. Beach has served as
President of the Permian Basin Landman's Association and Chairman of the
American Association of Professional Landman's (AAPL)Issue Management
Council. Mr. Beach graduated from West Texas State University in 1974.
Kevin E. Lewis, age 32, has been a Director of NDSI since April 1997. Mr.
Lewis has served as Chairman of the Board of Furr's/Bishop's, Inc. since 1993
and served as President and Chief Executive Officer of Furr's/Bishop's, Inc.
from 1994 to 1996. Prior to serving as Chairman of the Board of
Furr's/Bishop's, Inc., Mr. Lewis was a Managing Director in the New York
office of Houlihan, Lokey, Howard and Zukin, Inc., a specialty investment
banking firm. Mr. Lewis was a director of The LVI Group, Inc. from 1991 to
1993 and has been a director of Robertson-Ceco Corporation since 1993.
In addition to the persons listed above, the only other executive officer
of NDSI is David W. Ridley. Mr. Ridley, age 41, became our Chief Financial
Officer, Vice President and Treasurer on October 16, 1993 and performs
similar duties for our subsidiaries, Norton Drilling Company and Lobell
Corporation.
Under the securities laws of the United States, our directors, executive
officers, and any persons holding more than ten percent of our common stock
are required to report their initial ownership of our 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
we are required to disclose any failure to file by these dates.
The failures to file for the last fiscal year are detailed as follows:
Reporting Due Date
Reporting Person Form Period Date Filed
---------------- ------ ------------- -------- --------
Kevin E. Lewis Form 3 April 1997 05-10-97 05-13-97
Larry Adkins Form 4 February 1997 03-10-97 03-11-97
Brian McDonald Form 4 February 1997 03-10-97 03-11-97
Brian McDonald Form 4 July 1997 08-10-97 09-15-97
Brian McDonald Form 4 August 1997 09-10-97 09-15-97
Harvey Bayard Form 4 April 1997 05-10-97 05-11-97
Kenneth Levy Form 4 July 1997 08-10-97 09-10-97
Kenneth Levy Form 4 February 1997 03-10-97 05-12-97
David W. Ridley Form 4 July 1997 08-10-97 09-08-97
In making these disclosures, we have relied solely on written
representations of our 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
which we paid to our executive officers whose compensation exceeded
$100,000.
Page 28
Highly Compensated Executive Officers
Long-Term
Compensation
Awards
Name of Executive and --------------
Principal Positions Year Salary Bonus Stock Warrants
- ------------------- ---- -------- ----- --------------
Sherman H. Norton, Jr.,
Chairman of the Board of
NDSI and Past President 1997 $141,250 $ - - 689,024
of Norton Drilling 1996 104,500 - - - -
Company 1995 90,958 12,500 - -
S. Howard Norton, III,
President, CEO and Secre-
tary of NDSI and a Director 1997 104,500 - - - -
of NDSI 1996 104,500 - - - -
John W. Norton, Vice-President
and Assistant Secretary of
NDSI and a Director of 1997 104,500 - - - -
NDSI 1996 104,500 - - - -
Warrant grants in 1997
Individual Grants
--------------------------------------------
Number of % of Total
Securities Options/ Grant
Underlying Warrants Exercise Date
Warrants Granted Price Expiration Present
Name Granted to Employees per Share Date Value (1)
- --------------------- ---------- ------------ --------- ---------- ---------
Sherman H. Norton, Jr.
Chairman of the Board
of NDSI and past 640,000 92.9% $0.500 02/23/04 $309,891
President of Norton 17,024 2.5% 0.780 02/23/04 7,888
Drilling Company 32,000 4.6% 0.625 04/01/02 12,861
(1) Options were valued on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
Expected Dividend Yield - 0.00%
Risk Free Interest Rate - 6.26%
Expected Lives - 6.91 years
Expected Volatility - 99.99%
No options were exercised during 1997 by any of the executive officers named
in the Summary Compensation Table above.
Director Compensation for Last Fiscal Year
Annual retainer Consulting fees/
Name fees other fees
- -------------------- --------------- ----------------
Harvey Bayard $ 7,000 - -
Kenneth Levy $ 7,000 - -
Brian J. McDonald $ 7,000 - -
Larry Adkins $ 4,000 - -
Carl C. Beach $ 2,000 - -
Kevin E. Lewis $ 2,000 - -
Page 29
Harvey Bayard, Kenneth Levy and Brian J. McDonald resigned from our
Board of Directors effective April 23, 1997.
Employment Arrangements
On October 1, 1991, NDSI, 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.
The contracts set a base salary for each person. In addition, the four
employees could allocate among themselves a total of $50,000 in additional
compensation each year over the total compensation paid to such employees as
a group during the prior year. According to these employment agreements, the
employees agreed not to compete with Norton Drilling Company for a five-year
period.
On December 1, 1995, NDSI, through its subsidiary, Norton Drilling
Company, entered into new five-year employment contracts with the four
individuals mentioned above. The new contracts 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 March 1, 1997, NDSI, through its subsidiary, Norton Drilling Company,
entered into a new five-year employment contract with Sherman H. Norton, Jr,
which replaced the above-mentioned agreement for him. The new contract
provides for an annual salary of $153,500. The provisions of this new
contract are the same as the prior contract for Mr. Norton except for the
amount of salary.
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, or John W. Norton during the fiscal year ended
November 30, 1996 or 1997.
On February 23, 1997 the 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.
On February 23, 1997, our Board also issued two warrants to a
director/former officer of ours as consideration for the individual
personally guaranteeing certain obligations of Norton. The first warrant was
issued for guarantees related to obligations entered into through August
1996 and allows this individual to purchase 640,000 shares of common stock
at an exercise price of $0.50 per share. The second warrant was issued for
guarantees related to obligations entered into in January 1997 and allows
this individual 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 this individual to
purchase 32,000 shares of common stock at $0.625 per share.
Page 30
On May 21, 1997, our Board of Directors issued options to purchase 20,000
shares of our common stock to two directors in accordance with our 1989
Stock Option Plan at an exercise price of $0.63 per share.
During the year ended November 30, 1997, options for 416,000 shares of
our common stock were exercised. The options were part of those issued under
our 1989 Stock Option Plan. The option prices ranged from $0.125 to $0.56
per share. As part of our 1989 Stock Option Plan, the person who holds the
option can pay the option price by giving us back common stock which has a
fair market value on the date of exercise equal to the option price. During
fiscal year 1997, we had 122,357 shares returned to us as payment for the
416,000 options that were exercised. See Note 12 of Notes to Consolidated
Financial Statements included as part of Item 8 of this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information, as of January 31, 1998, with
respect to those persons or groups known to us who beneficially own more
than 5% of our common stock, for all of our directors, for David W. Ridley
who is an executive officer of NDSI, and for all directors and officers as a
group.
Amount and Nature of Percent
Name of Beneficial Owner Beneficial Ownership(1) of Class(6)
- ------------------------ ----------------------- -----------
Sherman H. Norton, Jr. 2,763,359 10.7%
5211 Brownfield Highway, Suite 230
Lubbock, Texas 79407-3501
S. Howard Norton, III . . . . . . . . . 1,025,696(2) 3.9
John W. Norton. . . . . . . . . . . . 1,043,096(2) 4.0
David W. Ridley. . . . . . . . . . . . . . 35,490(3) *
Carl C. Beach . . . . . . . . . . . . . . 10,000(4) *
Kevin E. Lewis . . . . . . . . . . . . . . 10,000(4) *
Hugh L. Adkins . . . . . . . . . . . . . . 10,000 *
All directors and executive officers
as a group (7 persons). . . . . . . . .4,897,641(5) 18.6
* Less than 1%.
(1) All information is as of January 31, 1998 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 us. 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 W. Norton, who
are all directors of NDSI.
(2) Includes warrants to purchase 229,074 of common stock for S. Howard
Norton, III and 229,075 shares of common stock John W. Norton at
Page 31
exercise prices ranging from $0.50 to $0.78125 per share which expire
at various times from April 1, 2002 to February 24, 2004.
(3) Includes 4,000 shares of Common Stock owned by Mr. Ridley's wife and
6,000 shares of Common Stock owned by Mr. Ridley's daughter. Mr. Ridley
disclaims all beneficial ownership of these shares.
(4) Includes an option to purchase 10,000 shares of common stock at $0.63
per share which expires March 31, 2007.
(5) Includes the securities described above listed in footnotes (2) thru (4)
above.
(6) 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
On May 19, 1993 a former officer of Norton advanced $90,000 and a
director/former officer of ours advanced $410,000 to Norton in the form of
unsecured demand notes. These notes bore 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 these
two individuals exercised their option to convert the notes into our stock.
See Notes 6 and 12 of Notes to Consolidated Financial Statements included as
a part of Item 8 of this report.
Two of our directors, a corporation owned by one of our directors, and
a former officer of Norton have ownership interests in an entity from which
Norton purchased drilling rig machinery at a cost of $168,155 in 1997.
In the year ended November 30, 1995, the three individuals and the
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 of
approximately $58,000 in the year ending November 30, 1997, $83,000 in the
year ending November 30, 1996 and $716,000 in the year ending November 30,
1995.
In April, 1996, Norton sold substantially all of its interest in the
joint venture to a corporation in which the two directors of NDSI, the
corporation owned by a director of NDSI 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, 1997 were approximately $30,000 of which approximately
$740 was outstanding at November 30, 1997.
Each joint venture participant was liable for their pro rata share of
the costs incurred. Norton's share was approximately $1,000 in the year
ending November 30, 1997, $17,000 in the year ending November 30, 1996 and
$200,000 for the year ending November 30, 1995. The aggregate costs to the
Page 32
five related parties mentioned above was approximately $24,000 for the year
ending November 30, 1997, $19,000 for the year ending November 30, 1996 and
$79,000 for the year ending November 30, 1995. The amounts due from related
parties at November 30, 1997 and 1996 were approximately $1,000 both years.
On October 3, 1995, we issued 1,083,096 shares of our common stock at
$0.125 per share to a corporation owned by two former directors/officers of
NDSI and their spouses in satisfaction of an indebtedness of the Nursery
Segment of $135,387.
On June 6, 1996, we repurchased the 1,083,096 shares of our common
stock mentioned above at $0.08 per share from the corporation owned by the
two former directors/officers of NDSI and their spouses as part of a stock
purchase and settlement agreement.
In February 1997, the Board of Directors directed the officers of NDSI
to issue 396,071 shares of common stock to four individuals, three of whom
are directors of NDSI, as payment for unpaid salaries that were due these
individuals according to employment agreements Norton had with them. The
number of shares issued was based upon a valuation provided by an
independent valuation consultant. These share have not been registered under
the Securities Act of 1933, as amended.
See Note 11 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) Report of Independent 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 this report starting on page F-1.
(b) Reports on Form 8-K:
-------------------
None
(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 NDSI, as amended, filed as
Exhibit 3.1 to NDSI'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 NDSI, as amended, filed as Exhibit 3(ii) to NDSI's
Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1993 and incorporated herein by reference.
Page 33
3.3 By Laws of NDSI, as amended.
3.4 Certificate of Amendment to Certificate of Incorporation of
Norton Drilling Services, Inc.(f/k/a DSI Industries, Inc.)
Inc. filed as an Exhibit to the Form 10-Q dated August 31,
1997 and incorporated herein by reference.
(10) Material Contracts
------------------
10.1 Agreement between Diagnostic Sciences, Inc. and First Capital
Partners, effective January 6, 1989, filed as Exhibit (10)A to
the Annual Report on Form 10-K for the year ended November 30,
1990 (the "1990 10-K"), and incorporated herein by reference.
10.2 Incentive Stock Option Plan of Diagnostic Science, Inc., filed
as Exhibit (10)A to the 1990 Form 10-K, and incorporated
herein by reference.
10.3 Amendment, dated December 11, 1991, to the Agreement between
Diagnostic Sciences, Inc. and First Capital Advisers, Inc.
dated January 6, 1989, filed as the Exhibit to the Current
Report on Form 8-K dated December 16, 1991, and incorporated
herein by reference.
10.4 Agreement and Plan of Reorganization (the "Agreement and Plan
of Reorganization") made and entered into October 3, 1990, by
and between Diagnostic Sciences, Inc. and Sunshine Botanicals,
Inc., Interior Plant Supply, Inc., David Brian Hew and
Christopher Paul Carvalho, filed as Exhibit (10)A to the March
15, 1991 Form 8-K and incorporated herein by reference.
10.5 Amendment, dated as of October 3, 1990, to the Agreement and
Plan of Reorganization, filed as Exhibit (10)C to the March
15, 1991 Form 8-K, and incorporated herein by reference.
10.6 IPS Agreement, dated February 28, 1991, filed as Exhibit (10)P
to the Current Report on March 15, 1991 Form 8-K, and
incorporated herein by reference.
10.7 Assignment and Assumption Agreement pursuant to Section 3.1
of the IPS Agreement, filed as Exhibit (10)Q to the March 15,
1991 Form 8-K, and incorporated herein by reference.
10.8 Employment Agreement by and among Sunshine and Carvalho, D.
Brian Hew, and FCA, dated February 28, 1991, filed as Exhibit
(10)AD to the March 15, 1991 Form 8-K, and incorporated herein
by reference.
10.10 Agreement and Plan of Merger, dated September 13, 1991, by and
among Diagnostic Sciences, Inc., Norton Drilling Company,
Sherman H. Norton, Jr., S. Howard Norton, III, J.P. Rose, John
W. Norton and Barbara L. Norton, filed as an Exhibit to the
Form 8, dated October 23, 1991, amending Current Report on
Form 8-K filed on October 7, 1991 (the "October 7, 1991 Form
8-K Amendment), and incorporated herein by reference.
Page 34
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 1992 Form 10K, and incorporated herein by
reference.
10.13 Consulting Agreement dated September 17, 1991 between the
Equity Group Inc., and NDSI, filed as an Exhibit to the 1992
Form 10K, and incorporated herein by reference.
10.14 Letter Agreement dated October 26, 1992 between Raphael S.
Grunfeld and NDSI, filed as in Exhibit to the 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 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 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 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 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 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
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.,
Page 35
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 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 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 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 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
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 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 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
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
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 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
Page 36
("Peter Hew") and Everbloom Growers, Inc., a Florida
corporation whose sole stockholders are Brian Hew and Peter
Hew and NDSI 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 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 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 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 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 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 Form 8-K dated
August 7, 1996 and incorporated herein by reference.
10.37 Form of Employment Agreement entered into as of March 1,
1997 between Norton Drilling Company and Sherman H. Norton,
Jr. filed as an Exhibit to the Form 10-Q dated February 28,
1997 and incorporated herein by reference.
10.38 Form of Warrant from DSI Industries, Inc. to Sherman H.
Norton, Jr. dated as of February 24, 1997 filed as an Exhibit
to the Form 10-Q dated February 28, 1997 and incorporated
herein by reference.
10.39 Commercial Security Agreement dated as of April 1, 1997, by
and between The Plains National Bank of West Texas and DSI
Industries, Inc. filed as an Exhibit to the Form 10-Q dated
February 28, 1997 and incorporated herein by reference.
Page 37
10.40 Commercial Continuing Guaranty, dated as of April 1, 1997, by
and between the Plains National Bank of West Texas and DSI
Industries, Inc. filed as an Exhibit to the Form 10-Q dated
February 28, 1997 and incorporated herein by reference.
10.41 Form of Warrant from DSI Industries, Inc. to Sherman H.
Norton, Jr. dated as of April 1,1997 Inc. filed as an Exhibit
to the Form 10-Q dated May 31, 1997 and incorporated herein by
reference.
10.42 DSI Industries, Inc. 1997 Stock Option Plan Inc. filed as an
Exhibit to the Form 10-Q dated August 31, 1997 and
incorporated herein by reference.
10.43 Commercial Security Agreement dated as of February 17, 1998,
by and between The Plains National Bank of West Texas and
Norton Drilling Company,
10.44 Commercial Continuing Guaranty, dated as of February 17, 1998,
by and between the Plains National Bank of West Texas and
Norton Drilling Services, Inc.
11.1 Statement re Computation of Per-Share Earnings
(22) The subsidiaries of NDSI are: Norton Drilling Company, a
Delaware corporation, and Lobell Corp., a Delaware
corporation.
27 Financial data schedule
Page 38
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.
NORTON DRILLING SERVICES, INC.
Dated:February 23, 1998 By:/s/Sherman H. Norton, Jr.
Sherman H. Norton, Jr.
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated:February 23, 1998 By:/s/David W. Ridley
David W. Ridley, Vice-President and Chief Financial
Officer (Principal Financial and Accounting Officer)
Dated:February 23, 1998 By:/s/Carl C. Beach
Carl C. Beach, Director
Dated:February 23, 1998 By:/s/Kevin E. Lewis
Kevin E. Lewis, Director
Dated:February 23, 1998 By:/s/S. Howard Norton, III
S. Howard Norton, III, Director
Chief Executive Officer, President and Secretary
Dated:February 23, 1998 By:/s/Sherman H. Norton, Jr.
Sherman H. Norton, Jr., Director
Dated:February 23, 1998 By:/s/John W. Norton
John William Norton, Director, Vice President
and Assistant Secretary
Dated:February 23, 1998 By:/s/Larry Adkins
Larry Adkins, Director
Page 39
NORTON DRILLING SERVICES, INC.
(Formerly DSI INDUSTRIES, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Accountants
Robinson Burdette Martin & Cowan, L.L.P.................................F-2
Financial Statements:
Consolidated Balance Sheets.............................................F-3
Consolidated Statements of Operations...................................F-4
Consolidated Statements of Stockholders' Equity.........................F-6
Consolidated Statements of Cash Flows...................................F-7
Notes to Consolidated Financial Statements..............................F-9
F-1
Page 40
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Norton Drilling Services, Inc.
Lubbock, Texas
We have audited the accompanying consolidated balance sheets of Norton
Drilling Services, Inc.(formerly DSI Industries, Inc.) and Subsidiaries
as of November 30, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended November 30, 1997. 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 audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our 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 Norton
Drilling Services Inc. and Subsidiaries as of November 30, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended November 30, 1997 in
conformity with generally accepted accounting principles.
Robinson Burdette Martin & Cowan, L.L.P.
Lubbock, Texas
January 29, 1998, except as to
the information presented in
the first three paragraphs of
Note 17, for which the date
is February 17, 1998 and the
information presented in the
last paragraph of Note 17 for
which the date is February
24, 1998
F-2
Page 41
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED BALANCE SHEETS
A S S E T S
November 30,
-----------------------
1997 1996
----------- -----------
Current assets:
Cash and cash equivalents $ 277,097 $ 774,226
Accounts receivable trade, net of allowance for
doubtful accounts of $220,075 and $278,053 as
of November 30, 1997 and 1996, respectively 6,153,958 4,571,323
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,008,756 711,355
Insurance proceeds recoverable - - 153,586
Prepaid expenses and other current assets 434,996 212,625
----------- -----------
Total current assets 7,874,807 6,423,115
Property and equipment, at cost, net of accumulated
depreciation and depletion 10,351,456 8,508,540
Goodwill, net of accumulated amortization of $587,430
and $492,170 as of November 30, 1997 and 1996,
respectively 1,317,067 1,412,327
Note receivable, net of current maturities 75,764 - -
Security deposits 143,991 128,991
----------- -----------
Total assets $19,763,085 $16,472,973
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable $ 2,403,986 $ 1,520,964
Accounts payable 3,978,868 4,986,701
Billings in excess of costs of uncompleted contracts 12,228 15,293
Accrued expenses and other current liabilities 1,885,352 1,391,915
Net liabilities of discontinued operations 104,953 538,357
----------- -----------
Total current liabilities 8,385,387 8,453,230
----------- -----------
Long-term liabilities
Notes payable, less current maturities 2,633,802 3,362,755
Deferred income taxes 942,267 - -
----------- -----------
Total long-term liabilities 3,576,069 3,362,755
----------- -----------
Commitments and contingencies (Notes 3, 14 and 15) - - - -
Stockholders' equity:
Common stock-par value $.01;
authorized-100,000,000 shares,
issued - 25,841,799 and 23,893,365 shares at November
30, 1997 and 1996, respectively
outstanding - 24,636,346 and 22,810,269 shares at
November 30, 1997 and 1996, respectively 258,418 238,934
Additional paid-in capital 10,518,132 9,716,928
Accumulated deficit ( 2,750,294) ( 5,212,226)
----------- -----------
8,026,256 4,743,636
Less treasury stock, at cost ( 224,627) ( 86,648)
----------- -----------
Total stockholders' equity 7,801,629 4,656,988
----------- -----------
Total liabilities and stockholders' equity $19,763,085 $16,472,973
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Page 42
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended November 30,
------------------------------------
1997 1996 1995
----------- ----------- -----------
Operating revenues:
Contract drilling revenues $35,833,361 $26,676,573 $20,613,287
Other 7,584 55,301 32,470
----------- ----------- -----------
Total operating revenues 35,840,945 26,731,874 20,645,757
----------- ----------- -----------
Operating costs and expenses:
Direct drilling costs 28,503,955 23,495,747 18,860,006
General and administrative 1,326,010 1,471,118 978,080
Depreciation, depletion and amortization 2,083,671 1,187,218 1,223,384
Other 5,939 15,508 183,348
----------- ---------- -----------
Total operating costs and expenses 31,919,575 26,169,591 21,244,818
----------- ---------- -----------
Operating income (loss) 3,921,370 562,283 ( 599,061)
----------- ---------- -----------
Other income (expense):
Net gain on sale of assets 243,729 369,398 111,165
Interest expense ( 561,442) ( 393,786) ( 398,896)
Interest income 94,597 - - - -
Other - - - - 18,473
----------- ----------- -----------
Total other expenses, net ( 223,116) ( 24,388) ( 269,258)
------------ ----------- -----------
Income (loss) before provision for income
taxes and discontinued operations 3,698,254 537,895 ( 868,319)
----------- ----------- -----------
Income tax expense:
Current 547,129 - - - -
Deferred 942,267 - - - -
----------- ----------- -----------
1,489,396 - - - -
----------- ----------- -----------
Income (loss) from continuing operations 2,208,858 537,895 ( 868,319)
Discontinued operations:
Adjustment to provision for loss on
disposal (charged) credited 253,074 2,893,047 ( 1,526,060)
----------- ----------- -----------
Net income (loss) $ 2,461,932 $ 3,430,942 $( 2,394,379)
=========== =========== ============
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Page 43
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Continued)
Year ended November 30,
--------------------------
1997 1996 1995
---- ---- -----
Net income per common share
Primary:
Income (loss) from continuing operations $.10 $.02 $(.04)
Income (loss) from discontinued operations .01 .12 (.07)
---- ---- -----
Net income (loss) $.11 $.14 $(.11)
==== ==== =====
Assuming full dilution:
Income (loss) from continuing operations $.09 $.02 $(.04)
Income (loss) from discontinued operations .01 .12 (.07)
---- ---- -----
Net income (loss) $.10 $.14 $(.11)
==== ==== =====
Weighted average number of common shares
outstanding
Primary 23,256,247 23,365,170 22,961,606
========== ========== ==========
Assuming full dilution 24,979,879 24,674,279 22,961,606
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Page 44
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Treasury Stock
---------------------- ------------------
Shares Par Value Shares Amount
---------- --------- --------- -------
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)
Shares issued in satisfaction
of liabilities 396,071 3,960 - - - -
Exercise of stock options 416,000 4,160 122,357 (137,979)
Conversion of subordinated notes
payable 1,136,363 11,364 - - - -
Net income - - - - - - - -
---------- --------- --------- ---------
Balance, November 30, 1997 25,841,799 $ 258,418 1,205,453 $(224,627)
========== ========= ========= =========
Retained
Additional Earnings/ Total
Paid in (Accumulated) Stockholders'
Capital Deficit Equity
----------- ----------- -----------
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
Shares issued in satisfaction
of liabilities 162,389 - - 166,349
Exercise of stock options 150,179 - - 16,360
Conversion of subordinated notes
payable 488,636 - - 500,000
Net income - - 2,461,932 2,461,932
----------- ----------- -----------
Balance, November 30, 1997 $10,518,132 $(2,750,294) $ 7,801,629
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Page 45
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended November 30,
----------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,461,932 $ 3,430,942 $(2,394,379)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities of
continuing operations:
Discontinued operations ( 253,074) (2,893,047) 1,526,060
Depreciation, depletion and
amortization 2,083,671 1,187,218 1,223,384
Non-cash workers compensation expense - - 25,000 - -
Gain on sale of assets ( 243,729) ( 369,398) ( 111,165)
Deferred income tax expense 942,267 - - - -
Increase (decrease) in cash flows as a
result of changes in operating asset
and liability account balances:
(Increase) decrease in accounts
receivable -trade (1,582,635) (2,400,136) 773,396
(Increase) decrease in insurance
proceeds recoverable 153,586 529,075 ( 682,661)
Decrease in litigation proceeds
receivable - - - - 233,479
Increase in net costs and estimated
earnings in excess of billings on
uncompleted contracts ( 300,466) ( 177,533) ( 347,547)
(Increase) decrease in prepaid
expenses and other current assets ( 160,135) 20,382 44,852
Increase (decrease) in accounts
payable (1,007,833) 1,029,187 ( 164,821)
Increase (decrease) in accrued expenses
and other current liabilities 659,786 597,832 ( 79,338)
---------- ---------- ----------
Net cash provided by continuing
operations 2,753,370 979,522 21,260
Net cash used in discontinued
operations ( 318,330) ( 83,637) ( 116,050)
---------- ---------- -----------
Net cash provided by (used in)
operating activities 2,435,040 895,885 ( 94,790)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of property and
equipment 452,271 452,418 182,530
Acquisition of property and equipment (3,756,560) (1,878,096) (1,012,254)
Other ( 15,000) 68,832 29,819
---------- ---------- ----------
Net cash used in investing
activities (3,319,289) (1,356,846) ( 799,905)
---------- ---------- ----------
(Continued)
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Page 46
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year ended November 30,
--------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 1,077,117 1,686,718 1,259,171
Proceeds from revolving line of
credit, net 365,000 100,000 545,000
Repayments of notes payable (1,071,357)( 747,938)( 702,763)
Purchase of treasury stock - - ( 86,648) - -
Exercise of stock options 16,360 - - - -
---------- ---------- ----------
Net cash provided by financing
activities 387,120 952,132 1,101,408
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents ( 497,129) 491,171 206,713
Cash and cash equivalents at beginning of year 774,226 283,055 76,342
---------- ---------- ----------
Cash and cash equivalents at end of year $ 277,097 $ 774,226 $ 283,055
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 549,679 $ 384,161 $ 358,280
========== ========== ==========
Income taxes $ 37,452 $ - - $ 22,315
========== ========== ==========
Supplemental schedule of non-cash investing
and financing activities:
During 1997, 1996 and 1995, the Company acquired property and equipment in
connection with borrowings in the amounts of $283,309, $394,810 and $142,371,
respectively.
In November 1997, $500,000 of subordinated convertible debt was converted into
1,136,363 shares of NDSI common stock.
During 1997, stock options issued under NDSI's 1989 Employee Stock Option Plan
were converted in which 416,000 shares of NDSI's common stock were issued to
option holders and 122,357 shares of common stock were surrendered by option
holders to NDSI in lieu of cash payment of the exercise price representing an
increase in treasury stock of $137,979.
In February 1997, 396,071 shares of common stock were issued in satisfaction of
outstanding liabilities of the Drilling Segment in the amount of $166,349.
During 1997, 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.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
Page 47
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
(Formerly DSI INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. HISTORICAL OVERVIEW
Norton Drilling Services, Inc., ("NDSI") (formerly known as DSI
Industries, Inc.) was incorporated on December 21, 1983 under the laws of the
State of Delaware.
Norton Drilling Company ("Norton") a Delaware corporation which is our
only remaining operating segment, currently operates fifteen (15) oil and gas
drilling rigs and provides contract drilling services to the oil and gas
industry primarily in the Permian Basin of west Texas and eastern New Mexico
as well as in the Green River Basin and the Overthrust Belt in the Rocky
Mountains.
Prior to the incorporation of Norton and the acquisition of NDC, we
operated two other subsidiaries, Sunny's Plants, Inc.("Sunny's" or the
"Nursery Segment") and Lobell Corporation ("Lobell" or the "MRI Segment").
Sunny's, which was acquired on February 28, 1991, was engaged primarily
in planting, growing and preparing interior foliage plants for distribution
and sale. Lobell was engaged primarily in providing diagnostic imaging
services involving MRI technology.
NDSI, in particular the Nursery and MRI Segments, sustained substantial
losses from operations in the past. On August 18, 1994 we discontinued the
MRI segment due to their recurring losses. We 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 our Board of
Directors voted to discontinue the segment. The accompanying consolidated
financial statements reflect these segments as discontinued operations.
On July 22, 1996, we effected the closing of a Stock Purchase Agreement
between a third party purchaser ("Buyer") and us. In accordance with the
agreement the Buyer purchased all of the outstanding shares of common stock
of Sunny's Plants, Inc., in consideration of certain releases and the payment
by us to the Buyer of $10,000. Furthermore, certain Directors and Officers of
NDSI resigned from their respective positions as Directors and Officers of
Sunny's Plants, Inc. and it's subsidiaries and we received certain releases.
As NDSI is a holding company it does not generate operating revenues.
Substantially all of the funding for our expenses as well as for the payment
of the liabilities of the discontinued segments comes from Norton Drilling
Company.
During fiscal 1996 and 1997, a substantial amount of liabilities of the
discontinued segments were reduced either through the aforementioned sale of
Sunny's or through favorable negotiations with the respective creditors of
those segments.
F-9
Page 48
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of NDSI and
our wholly-owned subsidiary, Norton 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
We follow the percentage-of-completion method for recognizing contract
drilling revenues. Under this method all drilling revenues, costs and
appropriate portions of indirect costs, related to the work in progress, are
recognized as contract drilling services are performed. Contract costs
include all direct material and labor costs and any indirect costs related to
contract performance. General and administrative costs are charged to expense
as incurred. Provision for losses on incomplete contracts are recognized when
the loss can be determined.
Property and equipment
(a) Property and equipment (other than oil and gas)-Depreciation is
computed using the straight-line method over the 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-We follow the successful efforts method of
accounting for our 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
F-10
Page 49
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
acquisition costs, development costs and lease and well equipment, are
depreciated on the straight line method over lives of 5 to 7 years which is
considered by us to approximate the units-of-production method. Oil and gas
reserve estimates have not been 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-Maintenance and repairs expenses are charged
to operations as incurred. Renewals and betterments which extend the life or
improve properties are capitalized. Labor costs incurred in constructing or
improving assets are capitalized.
(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.
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 the financial statement and tax basis of
certain assets and liabilities using enacted rates in effect for the year in
which the differences are expected to reverse.
We file a consolidated Federal income tax return. Under a tax sharing
agreement, the subsidiaries are charged an amount equal to the Federal income
taxes they would pay if a separate return were filed. If a subsidiary has a
taxable loss, it receives credit for its pro-rata share of the tax savings to
the consolidated group. The subsidiaries also provide deferred Federal income
taxes on a separate return basis on temporary differences between tax and
financial reporting to the extent that taxes which would otherwise have been
payable are reduced.
Stock based compensation
We grant stock options under stock-based incentive compensation plans to
our employees and directors. Compensation costs in connection with the
granting of stock options to employees and directors is measured under the
provisions of Accounting Principles Board ("APB") Opinion No. 25 which allows
compensation costs to be measured based on an intrinsic value method. In
1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No.123 "Accounting for Stock-Based
F-11
Page 50
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Compensation" which, if fully adopted by us, would change the method we apply
in recognizing compensation costs relative to options granted under our
plans. Adoption of the cost recognition provisions of SFAS No. 123 is
optional and we have decided not to elect those provisions. However,
pro-forma disclosures as if we had adopted the costs recognition provisions of
SFAS No. 123 are required and are presented in Note 13.
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.
Impairment of Long-Lived Assets
Impairment of long-lived assets such as property and equipment and goodwill
is evaluated upon the occurrence of events which would call into question the
recoverability of the carrying amount of those assets. Impairment, if any,
is measured as the difference between the carrying value of the asset and the
undiscounted sum of the expected future net cash flows.
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 we used the proceeds received to purchase additional shares at market
value. Common stock equivalents are not included in the outstanding shares
computation for 1995, 1996 and 1997 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
F-12
Page 51
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 our stock on November 30, 1996 and 1997 because those prices
were higher than the average market prices during those years. Net income
for fiscal 1996 and 1997 has been adjusted for interest expense (net of
income tax effect) on the convertible debt.
Environmental Costs
NDSI and Norton expense on a current basis, recurring costs associated
with managing hazardous substances in ongoing operations. We also accrue for
costs associated with the remediation of environmental contamination when it
becomes probable that a liability has been incurred and the amount can be
reasonably estimated. Management is aware of no such liability that has been
incurred at November 30, 1997.
Recent Accounting Standards
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share"
effective for periods ending after December 15, 1997. SFAS No. 128 specifies
the computation, presentation and disclosure requirements for earnings per
share ("EPS"). Some of the changes made to current EPS standards include:
(1) eliminating the presentation of Primary EPS and replacing it with Basic
EPS, with the primary difference being that common stock equivalents are
not considered in computing Basic EPS, (2) eliminating the modified treasury
stock method and the three percent materiality provisions, and (3) revising
the contingent share provisions and the supplemental EPS data requirements.
SFAS No. 128 requires dual presentation of Basic and Diluted EPS on the face
of the income statement, as well as a reconciliation of the numerator and
denominator used in the two computations of EPS. Basic EPS is defined as
net income from continuing operations divided by the weighted average number of
common shares outstanding without the consideration of common stock
equivalents which may be dilutive to EPS. SFAS No. 128 will be adopted by us
during the quarter ending February 28, 1998 in our 1998 fiscal year.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129 establishes certain standards for
disclosing information about an entity's capital structure. SFAS No. 129 will
be adopted by us during our fiscal year ending November 30, 1998. We do not
anticipate a change in our disclosures as a result of the adoption of SFAS
No. 129.
The FASB issued 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
F-13
Page 52
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 consolidated
financial statements in order for them to conform with the 1997 presentation.
The reclassifications had no effect on net loss or stockholders' equity for
those years.
3. DISCONTINUED OPERATIONS
On August 18, 1994, we discontinued the MRI Segment due to losses
experienced by the segment. We estimated future costs and expenses to dispose
of the segment to be $750,000, which we charged to operations in fiscal 1994.
During 1995, some assets and liabilities of the segment were either
foreclosed, garnished or confiscated. This resulted in full or partial
extinguishment of the liabilities that were associated with those assets.
Therefore, we revised our estimate to take into consideration final
settlement of remaining liabilities of the segment. This revision resulted in
a credit to the provision for loss for the discontinued segment in 1995 of
approximately $668,000. In fiscal 1996, we further revised our initial
estimate which resulted in a credit of approximately $396,000 to the
provision for loss on discontinued segments. Our initial estimate was further
revised during 1997 which resulted in a credit to the provision for loss on
discontinued segments of approximately $25,000. The remaining liabilities of
the segment primarily relate to claims filed by the segment's former landlord
for past due rent. We are of the opinion that if negotiations with the former
landlord are not successful in settling these obligations, we will cause the
segment to seek protection from the landlord under bankruptcy proceedings. It
is possible that final settlement and dissolution of the segment will result
F-14
Page 53
in the payment of less than amounts which are currently recorded as
liabilities. This could result in a gain realized in the reversing of these
recorded liabilities. Our estimate of the potential gain is between
approximately $5,000 and $40,000.
Effective November 30, 1994, we discontinued the Nursery Segment due to
significant operating losses incurred by that segment beginning in 1994.
In August 1995, the Nursery Segment and NDSI entered into agreements with
two of its secured creditors, both of whom are banks, and an unrelated third
party (purchaser) in which the purchaser acquired the collateralized debt of
one bank and immediately foreclosed on the debt. The segment surrendered to
the purchaser all of the assets collateralizing this indebtedness on
September 6, 1995. The purchaser took title to the assets 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 us for our liabilities to certain other creditors
in an amount not to exceed $404,000. We have received a release from our
guarantee of the obligation to the bank as well as our 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. We 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 $1,891,000 at November 30, 1997.
Upon completion of those transactions, a 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, we effected the closing of a Stock Purchase Agreement
between a third party purchaser ("Buyer") and us. In accordance with the
agreement, the Buyer purchased all of the outstanding shares of common stock
of Sunny's Plants, Inc., from us, in consideration of certain releases and
the payment by us to the Buyer of $10,000. Furthermore, certain Directors and
Officers of NDSI resigned from their respective positions as Directors and
Officers of Sunny's Plants, Inc. and it's subsidiaries and we received
certain releases.
F-15
Page 54
3. DISCONTINUED OPERATIONS (Continued)
On August 29, 1997 we settled a claim against the Nursery Segment and us
as guarantor. This claim was included in the net liabilities of discontinued
operations at November 30, 1996 in the amount of $365,074. In settlement of
this claim we paid $275,000 to the creditor and have recorded a receivable
from the purchaser of the Nursery Segment in the amount of $138,000 in
connection with indemnification due us by the purchaser under an
indemnification agreement entered into in connection with the sale of the
assets of the Nursery Segment.
The net liabilities of the discontinued operations at November 30, 1997
and 1996 are as follows:
1997 1996
-------- ---------
Notes payable and capital lease obligations $ - - $ 395,074
Accounts payable and other liabilities 25,000 50,000
Estimated loss on disposal of segments 79,953 93,283
-------- ---------
Net liabilities of discontinued segments $104,953 $ 538,357
======== =========
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information relating to uncompleted contracts at November 30, 1997 and
1996 is as follows:
1997 1996
---------- ---------
Costs incurred on uncompleted contracts $1,373,363 $ 631,102
Estimated earnings on uncompleted contracts 1,775,768 451,540
---------- ----------
3,149,131 1,082,642
Less billings to date on uncompleted contracts 2,152,603 386,580
---------- ---------
$ 996,528 $ 696,062
========== =========
Included in the accompanying balance sheets at November 30, 1997 and
1996 are the following captions:
1997 1996
---------- ---------
Costs and estimated earnings in excess of billings
on uncompleted contracts $1,008,756 $ 711,355
Billings in excess of costs and estimated earnings
on uncompleted contracts 12,228 15,293
---------- ---------
$ 996,528 $ 696,062
========== =========
F-16
Page 55
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at November 30, 1997
and 1996:
1997 1996
----------- ----------
Land $ 109,421 $ 109,421
Building 209,724 185,784
Drilling equipment 15,488,222 12,071,857
Transportation equipment 965,186 904,407
Office furniture and equipment 49,097 46,506
Miscellaneous equipment 88,264 161,492
----------- -----------
16,909,914 13,479,467
Less accumulated depreciation and depletion 6,558,458 4,970,927
----------- -----------
$10,351,456 $ 8,508,540
=========== ===========
6. NOTES PAYABLE
Notes payable consisted of the following at November 30, 1997 and 1996:
1997 1996
--------- ---------
Demand note payable entered into August 7, 1996,
in the original amount of $3,000,000 with a bank;
82 monthly installments of $35,715 plus accrued
interest at 2.5% over the Wall Street Journal
prime rate(11.00% and 10.75% at November 30, 1997,
and 1996, respectively) 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. $2,464,275 $2,892,855
Line of credit with a bank which was renewed in
August 1996 with a facility of $750,000. The
line of credit was further renewed and increased
to $1,000,000 in April 1997; monthly payments of
interest only at the Wall Street Journal prime
rate plus 2.5% (11.00% and 10.75% at November 30,
1997 and 1996, respectively), with unpaid
principal and interest due at maturity, April 1,
1998; collateralized by virtually all assets of
Norton. 600,000 750,000
F-17
Page 56
6. NOTES PAYABLE (Continued) 1997 1996
-------- ---------
Line of credit with a bank which was entered into
January 23, 1997 with a facility of $665,000. The
line of credit was renewed September 1, 1997;
monthly payments of interest only at the Wall
Street Journal prime rate plus 2.5% (11.00% at
November 30, 1997), with unpaid principal and
interest due at maturity, April 1, 1998;
collateralized by virtually all assets of
Norton. 515,000 - -
Demand note payable entered into October 7, 1997
in the original amount of $350,000 with a bank;
interest at the Wall Street Journal prime rate
plus 2.5% (11.00% at November 30, 1997), with unpaid
principal and interest due at maturity, December 8,
1997; collateralized by virtually all assets of
Norton. 350,000 - -
Note payable entered into October, 1993, in the
original amount of $300,000 with a bank; 60
monthly installments of $6,083 including interest
at 2% above New York prime (10.25% at November
30, 1996), 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. This note was paid prior to
maturity on February 25, 1997. - - 145,111
Note payable entered into on February 25, 1997,
in the original amount of $500,000 with a bank;
60 monthly installments of $8,334 plus interest
at 2% above New York prime (10.50% at November
30, 1997); matures February 27, 2002
collateralized by a first lien on a single
drilling rig including all equipment, revenues
and accounts receivable derived therefrom and a
second lien on all other accounts receivable,
inventory and drilling equipment. 423,302 - -
Uncollateralized financing agreement entered
into with Transamerica Insurance Finance
during July 1997 and July 1996, respectively,
providing financing for a portion of Norton's
insurance premiums totaling $227,117 and
$183,420, respectively; 9 monthly payments of
$25,692 and $23,580 including interest at 7.33%
and 7.53%, respectively; matures April, 1998. 126,137 92,855
F-18
Page 57
6. NOTES PAYABLE (Continued) 1997 1996
-------- --------
Note payable entered into June 12, 1995 in the
original amount of $54,900 with a bank;
151 monthly payments of $657 (adjusted to $632
on June 12, 1996) plus interest at 9.75% at
November 30, 1997 and 1996. 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. 48,778 51,719
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 Wall Street Journal prime rate (8.50%
and 8.25% at November 30,1997, and 1996,
respectively); principal and any unpaid interest
due at maturity, May 18, 1998. The notes contained
certain redemption and conversion features. The
notes were converted to common stock of NDSI on
November 13,1997. See notes 11 and 12 to the
consolidated financial statements. - - 500,000
Other notes and capital leases payable 510,296 451,179
---------- ----------
5,037,788 4,883,719
Less current maturities 2,403,986 1,520,964
---------- ----------
$2,633,802 $3,362,755
========== ==========
In addition to the specific collateralization discussed above, certain
indebtedness is collateralized by a personal guaranty of the Chairman of the
Board of NDSI and a corporate guaranty of NDSI.
The weighted average interest rate on short term indebtedness during
fiscal 1997 and 1996 was 10.9% and 12.1%, 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 $5,000,000,
-Maintenance by Norton of a maximum leverage ratio of 2.75:1 and a
minimum current maturity coverage ratio of 1.25:1;
-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.
F-19
Page 58
6. NOTES PAYABLE (Continued)
Norton was in violation of certain of these covenants at November 30,
1997 for which the Bank has agreed to waive their right to accelerate the
maturity of the respective notes through December 1, 1998.
A bank has issued a letter of credit to Norton's former Workers'
Compensation Insurance carrier on behalf of Norton in the amount of $331,376.
No advances had been made against this letter of credit at November 30, 1997.
Aggregate amounts of annual maturities of notes payable outstanding at
November 30, 1997 are as follows:
Years Ending
November 30,
------------
1998 $2,403,986
1999 676,481
2000 600,912
2001 560,393
2002 456,195
Thereafter 339,821
----------
$5,037,788
==========
7. EMPLOYEE BENEFIT PLANS
Retirement plans
Norton has a defined contribution profit sharing plan which covers all
qualified employees. Contributions to the profit sharing plan are at the
discretion of Norton's Board of Directors. In November 1997, the board of
directors approved a contribution to the profit sharing plan of $50,000,
which was paid on December 30, 1997. This amount was included in accounts
payable at November 30, 1997. No contributions were made by Norton during
the years ended Novembe 30, 1996 and 1995.
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 $332,013
per year. Liabilities in excess of these amounts are the responsibility of the
co-insurance carrier. Included in accrued expenses at November 30, 1997 and
1996 are the estimated liabilities owed under this self-insurance program in
the amounts of $86,272 and $71,144, respectively.
F-20
Page 59
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the
following at November 30, 1997 and 1996:
1997 1996
---------- -----------
Payroll payable $ 696,102 $ 848,064
Income taxes payable:
Federal 378,971 - -
State 132,521 - -
Payroll and other taxes payable 222,360 230,288
Accrued interest 56,931 45,167
Estimated workers' compensation
co-insurance payable 251,365 197,252
Estimated employee medical benefits
co-insurance payable 86,272 71,144
Insurance premium payable 60,830 - -
---------- ----------
$1,885,352 $1,391,915
========== ==========
9. INCOME TAXES
The provision for income taxes for the years ended November 30, 1997,
1996 and 1995 consists of the following:
1997 1996 1995
---------- ---------- ---------
Federal:
Current $ 393,372 $ - - $ - -
Deferred 889,967 - - - -
---------- ---------- ---------
1,283,339 - - - -
---------- ---------- ---------
State:
Current 153,757 - - - -
Deferred 52,300 - - - -
---------- ---------- ---------
206,057 - - - -
---------- ---------- ---------
Total income tax expense $1,489,396 $ - - $ - -
========== ========== =========
The effective income tax rate varies from the Federal statutory rate for
the years ended November 30, 1997, 1996 and 1995 as follows:
1997 1996 1995
----- ------ ------
Statutory tax rate 34.0% 34.0 % (34.0)%
Net operating loss carryforward
(primarily attributable to
reduction of valuation allowance) (0.8) (56.3) 16.9
State and local taxes 4.0 - - 3.0
Amortization of goodwill 2.6 17.7 11.0
Officer life insurance premium - - 2.5 2.4
Other 0.5 2.1 0.7
---- ---- ----
Effective tax rate 40.3% - - % - - %
==== ==== ====
F-21
Page 60
9. INCOME TAXES (Continued)
The tax effect of significant temporary differences representing
deferred tax assets and liabilities and changes therein for continuing
operations were as follows:
December 1, November 30,
1995 Net Change 1996
---------- ----------- ----------
Deferred tax assets:
Net operating loss carryforward $3,056,226 $(2,302,947) $ 753,279
Accruals related to
self-insurance 30,983 66,461 97,444
State and local tax benefit 16,320 381 16,701
---------- ----------- ----------
3,103,529 (2,236,105) 867,424
Valuation allowance (2,414,299) 2,385,272 ( 29,027)
---------- ----------- ----------
Deferred tax asset 689,230 149,167 838,397
Deferred tax liabilities:
Property and equipment basis
difference ( 689,230) ( 149,167) ( 838,397)
---------- ----------- ----------
Net deferred tax liability $ - - $ - - $ - -
=========== =========== ==========
November 30, November 30,
1996 Net Change 1997
----------- ------------ -----------
Deferred tax assets:
Net operating loss carryforward $ 753,279 $( 753,279) $ - -
Accruals related to
self-insurance 97,444 30,723 128,167
State and local tax benefit 16,701 16,809 33,510
----------- ----------- ----------
867,424 ( 705,747) 161,677
Valuation allowance ( 29,027) 29,027 ( - -)
----------- ----------- ----------
Deferred tax asset 838,397 ( 676,720) 161,677
Deferred tax liabilities:
Property and equipment basis
difference ( 838,397) ( 265,547) (1,103,944)
----------- ----------- -----------
Net deferred tax liability $ - - $( 942,267) $( 942,267)
=========== =========== ===========
10. MAJOR CUSTOMERS
Norton had two customers each year who accounted for approximately 28%,
42% and 44% of consolidated operating revenues for the years ended November
30, 1997, 1996 and 1995, respectively.
F-22
Page 61
11. 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. Interest charged to
operations on the notes payable was $40,241, $41,651 and $49,116 in 1997,
1996 and 1995, respectively. On November 13, 1997, the two individuals
exercised their option to convert the notes into our common stock.
Two of our directors, a corporation owned by one of our directors, and
a former officer of Norton have ownership interests in an entity from which
Norton purchased drilling rig machinery at a cost of $168,155 in 1997.
In the year ended November 30, 1995, the three individuals and the
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 of approximately
$58,000 in the year ending November 30, 1997, $83,000 in the year ending
November 30, 1996 and $716,000 for the year ending November 30, 1995.
In April, 1996, Norton sold substantially all of its interest in the
joint venture to a corporation in which the two directors of NDSI, the
corporation owned by a director of NDSI 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, 1997 were approximately $30,000 of which approximately $740 was
outstanding at November 30, 1997.
Each joint venture participant was liable for their pro rata share of
the costs incurred. Norton's share was approximately $1,000 in the year ended
November 30, 1997, $17,000 in the year ended November 30, 1996 and $200,000
for the year ended November 30, 1995. The aggregate costs to the five related
parties mentioned above was approximately $24,000 for the year ending
November 30, 1997, $19,000 for the year ending November 30, 1996 and $79,000
for the year ending November 30, 1995. The amounts due from related parties
at November 30, 1997 and 1996 were approximately $1,000 both years.
On October 3, 1995, we issued 1,083,096 shares of our common stock at
$0.125 per share to a corporation owned by two former directors/officers of
NDSI and their spouses in satisfaction of an indebtedness of the Nursery
Segment of $135,387.
F-23
Page 62
11. RELATED PARTY TRANSACTIONS (Continued)
On June 6, 1996, we repurchased the 1,083,096 shares of our common stock
mentioned above at $0.08 per share as part of a stock purchase and settlement
agreement for a total of $86,648. The two individuals resigned from our Board
of Directors and all offices held by them with us and with any of our
affiliates. In addition a third director resigned from our Board of
Directors. As a part of the agreement, we also delivered $30,000 to be used
to assist in the resolution of certain pending tax claims against the Nursery
Segment, and to the former directors. In return, we were indemnified with
respect to certain liabilities of the Nursery Segment.
12. COMMON STOCK
Stock issuance
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 of our common stock. On
November 13, 1997, the two individuals exercised their option to convert the
notes into our common stock.
On October 3, 1995, NDSI issued 1,083,096 shares of its common stock at
$0.125 per share to a corporation owned by two former directors/officers of
NDSI and their spouses in satisfaction of an indebtedness of the Nursery
Segment of $135,387.
Through November 30, 1996, four employees of Norton , three of which are
our 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.
During the year ended November 30, 1997, options to purchase 416,000
shares of our commons stock granted under the 1989 Stock Option Plan were
exercised. 122,357 shares of our stock was surrendered to us by the option
holders in lieu of paying the exercise price in cash. These shares have been
recorded as treasury stock with cost equal to the aggregate amount of the
respective exercise prices of $137,979.
F-24
Page 63
12. COMMON STOCK (Continued)
Purchase of treasury stock
On June 6, 1996, NDSI 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 NDSI and their spouses as part of a stock
purchase and settlement agreement.
13. STOCK OPTIONS AND WARRANTS
1989 stock option plan
In June 1989, the stockholders approved our 1989 stock option plan (the
"Plan"). The Plan provides for the granting of a total of 500,000 qualified
and non-qualified options to employees, officers, directors and consultants
of NDSI.
The first options were granted under the plan on May 19, 1993. The
number of shares under options granted on May 19, 1993 were 90,000 at $0.375
($33,750) and 100,000 at $0.406 per share ($40,600) which was at or above
fair market value on the date granted. The options were granted to employees
of NDSI and our subsidiaries (150,000 shares) and to two non-employee
directors (20,000 shares each).
On August 27, 1993 four non-employee directors received options to
acquire 10,000 shares each under the plan at $0.391 per share ($15,640) which
was the fair market value at that date.
On May 19, 1994 four non-employee directors received options to acquire
10,000 shares each under the plan at $0.34 per share ($13,600) which was the
fair market value at that date.
On August 8, 1994 one non-employee director received an option to
acquire 25,000 shares under the plan at $0.3125 ($7,813) which was the fair
market value at that date.
On October 15, 1994 one non-employee director received an option to
acquire 100,000 shares under the plan at $0.125 ($12,500) which was the fair
market value at that date.
On February 23, 1997 three non-employee directors received options to
acquire 40,000 shares each and one non-employee director received an option
to acquire 10,000 shares under the plan at $0.56 per share ($72,800) which
was the fair market value at that date.
On May 21, 1997 two non-employee directors received options to acquire
10,000 shares each under the plan at $0.63 per share ($12,600) which was the
fair market value at that date.
F-25
Page 64
13. STOCK OPTIONS AND WARRANTS (Continued)
During the year ended November 30, 1997, options to purchase 416,000
shares of our stock were exercised at prices from $0.125 to $0.56 per share.
All options under the Plan expire five years from the date the options were
granted.
1997 Stock Option Plan
On September 25,1997, our stockholders approved the 1997 Stock Option
Plan (the "97 Plan"). The 97 Plan allows for the awarding of stock options,
stock appreciation rights or restricted stock. These awards can be
made to our officers, employees, directors or consultants at the
discretion of the compensation committee of our board of directors. The maximum
number of shares of our common stock reserved for the grant of awards under
this plan is 1,150,000 shares. As of November 30, 1997 no awards had been
made under the 97 Plan.
A summary of the status of options awarded under the above-mentioned
plans as of November 30, 1997 and 1996 and the changes during each of the two
years then ended is presented below:
Year ended November 30,
---------------------------------------------
1997 1996
--------------------- ---------------------
Number of Weighted Number of Weighted
shares of Average shares of Average
Underlying Exercise Underlying Exercise
Options Price Options Price
---------- -------- ---------- --------
Outstanding at beginning
of the year 333,500 $0.302 353,500 $0.306
Granted 150,000 0.569 - - - -
Exercised (416,000) 0.371 - - - -
Forfeited ( 3,000) 0.406 ( 20,000) 0.366
Expired - - - - - - - -
-------- ------ -------- ------
Outstanding at end of
year 64,500 $0.475 333,500 $0.302
======== ========
Weighted average fair
value of options
granted $0.443 $ - -
====== ======
The following table summarizes information about stock options
outstanding as of November 30, 1997:
Options Outstanding and Exercisable
---------------------------------------------
Number Weighted Weighted
Range of Outstanding Average Average
Exercise and Remaining Contractual Exercise
Prices Exercisable Life (in years) Price
- ----------------- ----------- --------------------- --------
$0.406 to $0.630 64,500 3.24 $0.475
F-26
Page 65
13. STOCK OPTIONS AND WARRANTS (Continued)
Warrants
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.
Our Board of Directors authorized the issuance of an additional warrant
to the director/former officer discussed above on April 1, 1997. This warrant
allows this person to purchase 32,000 shares of common stock at an exercise
price of $0.625 per share.
None of the above-mentioned warrants were exercised during the year and
all remained outstanding at November 30, 1997.
A summary of the status of warrants outstanding as of November 30, 1997
and 1996 and the changes during each of the two years then ended is presented
below:
Year ended November 30,
------------------------------------------------
1997 1996
----------------------- ----------------------
Number of Weighted Number of Weighted
shares of Average shares of Average
Underlying Exercise Underlying Exercise
Warrants Price Warrants Price
---------- --------- ---------- --------
Outstanding at beginning
of the year - - $ - - - - $ - -
Granted 689,024 0.513 - - - -
Exercised - - - - - - - -
Forfeited - - - - - - - -
Expired - - - - - - - -
------- ------ ------ ------
Outstanding at end of
year 689,024 $0.513 - - $ - -
======= ======
Weighted average fair
value of warrants
granted $0.480 $ - -
====== ======
F-27
Page 66
13. STOCK OPTIONS AND WARRANTS (Continued)
The following table summarizes information about warrants outstanding as of
November 30, 1997:
Warrants Outstanding and Exercisable
----------------------------------------
Number Weighted Weighted
Range of Outstanding Average Remaining Average
Exercise and Contractual Exercise
Prices Exercisable Life (in years) Price
---------------- ------------ ----------------- ---------
$0.500 to $0.780 689,024 6.15 $0.513
The fair value of each stock option and/or warrant granted was estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for grants during the year ended
November 30, 1997:
Dividend yield - 0.00%
Risk free interest rate - 6.25%
Expected life - 6.57 years
Expected volatility - 99.99%
No options/warrants were granted during the year ended November 30, 1996.
Had the compensation costs for our stock-based compensation been determined
consistent with SFAS 123, our net income and net income per common share for
the years ended November 30, 1997 and 1996 would approximate the pro-forma
amounts shown below:
Year ended November 30,
-------------------------
1997 1996
---------- ----------
Net income:
As reported $2,461,932 $3,430,942
Pro-forma 2,199,887 3,430,942
Net income per common share-Primary:
As reported $0.11 $0.14
Pro-forma 0.09 0.14
Net income per common share-assuming
full dilution:
As reported $0.10 $0.14
Pro-forma 0.09 0.14
SFAS No. 123 does not apply to awards prior to December 15, 1995.
F-28
Page 67
14. COMMITMENTS AND CONTINGENCIES
Leases
Norton entered into a five year noncancellable operating lease for its
general office space in May 1994. In September 1997 Norton executed an
addendum to this lease for additional space. The addendum period is for 20
months and expires at the same time as the original lease agreement. Norton
also leases storage space in Texas and Wyoming on month to month leases.
Rent expense charged to operations under operating leases amounted to
$48,584, $57,140 and $46,727 in 1997, 1996 and 1995, respectively.
Minimum future lease payments under operating leases are as follows:
Years Ending Operating
November 30, Leases
------------ ---------
1998 $ 55,704
1999 23,210
--------
$ 78,914
========
Letters of credit
As of November 30, 1997, Norton is contingently liable under an
irrevocable letter of credit in the amount of $331,376.
Guarantee of indebtedness
In February 1997, Norton executed a corporate guarantee of debt of a
supplier in the original amount of $81,000. As of November 30, 1997 the
balance of the debt was approximately $71,000 and the borrower was not in
default on the obligation.
Employment contracts
On December 1, 1995, NDSI, through its subsidiary, Norton Drilling
Company, entered into five-year employment contracts with each of Sherman H.
Norton, Jr., S. Howard Norton, III, John W. Norton and Johnie P. Rose. The
contracts provide for annual salaries of $104,500 to each of these employees
with no provision for annual bonuses.
On March 1, 1997, NDSI, through its subsidiary, Norton Drilling Company,
entered into a new five-year employment contract with Sherman H. Norton, Jr,
which replaced the above-mentioned agreement for him. The new contract
provides for an annual salary of $153,500. The provisions of this new
contract are the same as the prior contract for Mr. Norton except for the
amount of salary.
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 68
14. COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
The Company is involved in various routine litigation incident to its
business. In the Company's opinion, none of these proceedings will have a
material adverse effect on the Company in management's opinion.
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.
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
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.
15. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject us to concentrations of
credit risk consist primarily of demand deposits, temporary cash investments
and trade receivables.
F-30
Page 69
15. CONCENTRATIONS OF CREDIT RISK (Continued)
We believe that we place our demand deposits and temporary cash investments
with high credit quality financial institutions. Our demand deposits and
temporary cash investments consisted of the following at November 30, 1997 and
1996:
1997 1996
--------- ---------
Deposit in FDIC insured institutions
under $100,000 $ 102,889 $ 102,266
Deposit in FDIC insured institutions
over $100,000 325,252 704,864
--------- ---------
428,141 807,130
Less outstanding checks and other
reconciling items (151,044) ( 32,904)
--------- ---------
Cash and cash equivalents $ 277,097 $ 774,226
========= =========
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 Norton provides
drilling services. No significant losses from individual contracts were
experienced during the years ended November 30, 1997 and 1996. Included in
general and administrative expense for the year ended November 30, 1997 is a
credit to the provision for doubtful receivables of approximately $59,000 and
a charge to the provision for doubtful receivables of approximately $187,000
for the year ended November 30,1996.
During the years ended November 30, 1997 and 1996, two customers accounted
for approximately 28% and 42%, respectively, of Norton's contract drilling
revenues.
16. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
At November 30, 1997 and 1996, the carrying value of our financial
instruments, which primarily include notes payable, approximates fair value in
management's opinion because of the frequency of their repricing.
17. SUBSEQUENT EVENTS
Norton entered into two new 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 was 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 new master loan agreement was entered into with this bank which
F-31
Page 70
17. SUBSEQUENT EVENTS (Continued)
modified certain restrictive covenants. The most significant modification
was an increase in the required net worth of Norton from $5,000,000 to
$8,000,000.
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 recognized in
connection with this award.
F-32
Page 71
Exhibit 11.1 Statement Re Computation of Per-Share Earnings
NORTON DRILLING SERVICES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Fiscal Year Ended November 30,
------------------------------------
1997 1996 1995
---------- ---------- -----------
PRIMARY EARNINGS PER SHARE
Income (Loss) from Continuing Operations $2,208,858 $ 537,895 $( 868,319)
Income (Loss) from Discontinued Operations 253,074 2,893,047 (1,526,060)
---------- ---------- -----------
Net Income (Loss) $2,461,932 $3,430,942 $(2,394,379)
========== ========== ===========
Shares
Weighted average number of shares
outstanding 23,256,247 23,365,170 22,961,606
Add-Dilutive effect of outstanding
stock options (as determined by the
application of the treasury stock
method) 491,339 27,746 - -
---------- ---------- ----------
Weighted average number of shares
outstanding as adjusted 23,747,586 23,392,916 22,961,606
========== ========== ==========
Income (Loss) from Continuing Operations:
Primary $0.093014(a)$0.022994(a)$(0.037816)(b)
Income (Loss) from Discontinued Operations:
Primary 0.010657(a) 0.123672(a) (0.066461)(b)
--------- --------- ----------
Net Income (Loss) per share: Primary $0.103671(a)$0.146666(a)$(0.104277)(b)
========= ========= ==========
ASSUMING FULL DILUTION
Income (Loss) from Continuing Operations $2,208,858 $ 537,895 $( 868,319)
Add-Interest on convertible debt 26,559 41,651 49,116
--------- ---------- -----------
2,235,471 579,546 ( 819,203)
Income (Loss) from Discontinued Operations 253,074 2,893,047 (1,526,060)
---------- ---------- -----------
Net Income (Loss) $2,488,491 $3,472,593 $(2,345,263)
========== ========== ===========
Shares:
Weighted average number of shares
outstanding 23,256,247 23,365,170 22,961,606
Add-Dilutive effect of outstanding
stock options (as determined by the
application of the treasury stock
method) 637,081 172,746 - -
Add-Dilutive effect of convertible debt 1,086,550 1,136,364 1,136,364
---------- ---------- ----------
1,723,631 1,309,110 1,136,364
Weighted average number of shares
outstanding as adjusted 24,979,879 24,674,280 24,097,970
========== ========== ==========
Income (Loss) from continuing operations:
Assuming full dilution $0.089489 $0.023488 $(0.033995)(b)
Income (Loss) from discontinued operations:
Assuming full dilution 0.010131 0.117250 (0.063327)(b)
--------- --------- ----------
Net Income (Loss) per share: Assuming
full dilution $0.099620 $0.140737 $(0.097322)(b)
========= ========= ==========
(a)This calculation 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 calculation 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.
F-72
Exhibit 10.43
OWNER OF COLLATERAL
NORTON DRILLING COMPANY
THE PLAINS NATIONAL BANK PNB
5010 University COMMERCIAL
Lubbock, Texas 79413 SECURITY
(806) 795-7131 "LENDER" AGREEMENT
Lubbock County
ADDRESS
5211 BROWNFIELD HWY, SUITE 230
LUBBOCK, TX 79407
Telephone Identification No.
BORROWER LOCATION OF COLLATERAL
NORTON DRILLING COMPANY
ADDRESS
5211 BROWNFIELD HWY, SUITE 230
LUBBOCK, TX 79407
Telephone Identification No.
1. SECURITY INTEREST. Owner of Collateral ("Owner") grants to Lender
identified above a continuing security interest in the Collateral described
below to secure the obligations described in this Agreement.
2. OBLIGATIONS. The Collateral shall secure the payment and performance of
all of Borrower's and Owner's present and future, joint and/or several, direct
and indirect, absolute and contingent, express and implied, indebtedness,
(including costs of collection, legal expenses and attorneys' fees, incurred
by Lender upon the occurrence of a default under this Agreement, in collecting
or enforcing payment of such indebtedness or preserving, protecting or
realizing on the Collateral), liabilities, obligations and covenants
(cumulatively "Obligations") to Lender; pursuant to:
a. this Agreement and the following promissory notes and agreements:
INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
RATE CREDIT LIMIT AGREEMENT DATE NUMBER NUMBER
VARIABLE $4,500,000.00 02/17/98 02/01/05 1111285
VARIABLE $3,000,000.00 02/17/98 04/01/99 1099514
b. all other present or future, written or oral, agreements between
Borrower or Owner to Lender (whether executed for the same or
different purposes than the preceding documents)
c. all amendments, modifications, replacements or substitutions to any of
the foregoing; and
d. applicable law.
3. COLLATERAL. The Collateral shall consist of all of the following
described property and Owner's rights, title and interest in such property
whether now owned or hereafter acquired by Owner and wheresoever located:
X All accounts and contract rights including, but not limited to, the
accounts and contract rights described on Schedule A attached hereto
and incorporated herein by this reference;
All chattel paper including, but not limited to, the chattel paper
described on Schedule A attached hereto and incorporated herein by this
reference;
Page 73
All documents including, but not limited to, the documents described on
Schedule A attached hereto and incorporated herein by this reference;
All equipment, including, but not limited to, the equipment described
on Schedule A attached hereto and incorporated herein by this
reference;
All fixtures, including, but not limited to, the fixtures located or to
be located on the real property described on Schedule B attached hereto
and incorporated herein by this reference;
X All general intangibles including, but not limited to, the general
intangibles described on Schedule A attached hereto and incorporated
herein by this reference;
All instruments including, but not limited to, the instruments
described on Schedule A attached hereto and incorporated herein by this
reference;
All inventory including, but not limited to, the inventory described on
Schedule A attached hereto and incorporated herein by this reference;
All minerals or the like located on or related to the real property
described on Schedule B attached hereto and incorporated herein by this
reference;
All standing timber located on the real property described on Schedule
B attached hereto and incorporated herein by this reference;
X OIL AND GAS DRILLING RIGS
The property described in Schedule A;
All monies, instruments, and savings, checking or other deposit accounts
within Lender's custody or control (excluding IRA, Keogh, trust accounts, and
deposits subject to tax penalties if so assigned)
All accessions, accessories, additions, amendments, attachments,
modifications, replacements and substitutions to any of the above;
All proceeds and products of any of the above
All policies of insurance pertaining to any of the above as well as any
proceeds and unearned premiums pertaining to such policies; and
All books and records pertaining to any of the above.
4. OWNER'S TAXPAYER IDENTIFICATION. Owner's social security number or
federal taxpayer identification number is: 75-2394846
5. RESIDENCY/LEGAL STATUS. Owner is a resident of the state of: n/a
Owner is a: X Corporation; Partnership; Non-Profit Association;
Limited Liability Company; duly organized, validly existing and in good
standing under the laws of the state of: Delaware
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents, warrants
and covenants to Lender that:
(a) Owner is and shall remain the sole owner of the Collateral;
(b)
(c) Owner's chief executive office, chief place of business, office where
its business records are located, or residence is the address
identified above. Owner's other executive offices, places of business,
locations of its business records, or domiciles are described
on Schedule C attached hereto and incorporated herein by this
reference. Owner shall immediately advise Lender in writing of any
change in or addition to the foregoing addresses;
(d)Owner shall not become a party to any restructuring of its form of
Page 74
business or participate in any consolidation, merger, liquidation or
dissolution without providing Lender with thirty (30) or more days'
prior written notice of such change
(e) Owner shall notify Lender of the nature of any intended change of
Owner's name, or the use of any trade name, and the effective
date of such change
(f) The Collateral is and shall at all times remain free of all tax and
other liens, security interests, encumbrances and claims of any kind
except for those belonging to Lender and those described on Schedule D
attached hereto and incorporated herein by this reference. Without
waiving the event of default as a result thereof, Owner shall take any
action and execute any document needed to discharge the foregoing liens,
security interests, encumbrances and claims;
(g) Owner shall defend the Collateral against all claims and demands of all
persons at any time claiming any interest therein;
(h) All of the goods, fixtures, minerals or the like, and standing timber
constituting the Collateral is and shall be located at Owner's
executive offices, places of business, residence and domiciles
specifically described in this Agreement.
(i) Owner shall provide Lender with possession of all chattel paper and
instruments constituting the Collateral
(j) All of Owners accounts or contract rights; chattel paper; documents;
general intangibles; instruments; and federal, state, county,
and municipal government and other permits and licenses; trusts, liens,
contracts, leases, and agreements constituting the Collateral are and
shall be valid, genuine and legally enforceable obligations and rights
belonging to Owner against one or more third parties and not subject to
any claim, defense, set-off or counterclaim of any kind
(k) Owner shall not amend, modify, replace, or substitute any account or
contract right; chattel paper; document, general intangible; or
instrument constituting the Collateral without the prior written consent
of Lender;
(l) Owner has the right and is duly authorized to enter into and perform
its obligations under this Agreement. Owner's execution and
performance of these obligations do not and shall not conflict with the
provisions of any statute, regulation, ordinance, rule of law
contract or other agreement which may now or hereafter be binding on
Owner;
(m) No action or proceeding is pending against Owner which might result in
any material or adverse change in its business operations or
financial condition or materially affect the Collateral; other than
what has previously been disclosed.
(n)Owner has not violated and shall not violate any applicable federal,
state, county or municipal statute, regulation or ordinance
(including, but not limited to, those governing Hazardous Materials)
which may materially and adversely affect its business
operations or financial condition or the Collateral; and
(o)This Agreement and the obligations described in this Agreement are
executed and incurred for business and not consumer
purposes .
7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or
transfer any of the Collateral to any third party without the prior written
consent of Lender except for sales of inventory to buyers in the ordinary
course of business.
8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all actions
and execute all documents required by Lender to attach, perfect and maintain
its security interest in the Collateral and establish and maintain its right
to receive the payment of the proceeds of the Collateral including but not
limited to, executing any financing statements, fixture filings, continuation
statements, notices of security interest and other documents required by the
Uniform Commercial Code and other applicable law. Owner shall pay the costs of
filing such documents in all offices wherever filing or recording is deemed by
Lender to be necessary or desirable. In lieu of filing security agreements
financing statements, and effective financing statements, Lender shall be
Page 75
entitled to perfect its security interest in the Collateral by filing carbon,
photographic or other reproductions of the aforementioned documents with any
authority required by the Uniform Commercial Code or other applicable law.
9. INQUIRIES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes
Lender to contact any third party and make any inquiry pertaining to Owner's
financial condition or the Collateral. In addition, Lender is authorized to
provide oral or written notice of its security interest in the Collateral to
any third party.
10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be entitled
to notify, and upon the request of Lender, Owner shall notify any account
debtor or other third party (including, but not limited to, insurance
companies) to pay any indebtedness or obligation owing to Owner and
constituting the Collateral (cumulatively "Indebtedness") to Lender whether or
not a default exists under this Agreement. Owner shall diligently collect the
Indebtedness owing to Owner from its account debtors and other third parties
until the giving of such notification. In the event that Owner possesses or
receives possession of any instruments or other remittances with respect to
the Indebtedness following the giving of such notification or if the
instruments or other remittances constitute the prepayment of any Indebtedness
or the payment of any insurance proceeds, Owner shall hold such instruments
and other remittances in trust for Lender apart from its other property,
endorse the instruments and other remittances to Lender, and immediately
provide Lender with possession of the instruments and other remittances.
Lender shall be entitled, but not required, to collect (by legal proceedings
or otherwise), extend the time for payment, compromise exchange or release any
obligor or collateral upon, or otherwise settle any of the Indebtedness
whether or not an event of default exists under this Agreement. Lender shall
not be liable to Owner for any action, error, mistake, omission or delay
pertaining to the actions described in this paragraph or any damages resulting
therefrom.
11. POWER OF ATTORNEY. Owner hereby appoints Lender as its attorney-in-fact
to endorse Owner's name on all instruments and other remittances payable to
Owner with respect to the Indebtedness or other documents pertaining to
Lender's actions in connection with the Indebtedness. In addition, Lender
shall be entitled, but not required, to perform any action or execute any
document required to be taken or executed by Owner under this Agreement.
Lender's performance of such action or execution of such documents shall not
relieve Owner from any obligation or cure any default under this Agreement.
The powers of attorney described in this paragraph are coupled with an
interest and are irrevocable.
12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral
solely in the ordinary course of its business, for the usual purposes intended
by the manufacturer (if applicable), with due care, and in compliance with the
laws, ordinances, regulations requirements and rules of all federal, state,
county and municipal authorities including environmental laws and regulations
and insurance policies. Owner shall not make any alterations, additions or
improvements to the Collateral without the prior written consent of Lender.
Without limiting the foregoing, all alterations, additions and improvements
made to the Collateral shall be subject to the security interest belonging to
Lender, shall not be removed without the prior written consent of Lender, and
shall be made at Owner's sole expense. Owner shall take all actions and make
any repairs or replacements needed to maintain the Collateral in good
condition and working order.
13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft,
destruction or damage (cumulatively "Loss or Damage") to all or any part of
the Collateral. In the event of any Loss or Damage, Owner will either restore
the Collateral to its previous condition, replace the Collateral with similar
property acceptable to Lender in its sole discretion, or pay or cause to be
paid to Lender the decrease in the fair market value of the affected
Collateral.
14. INSURANCE. The Collateral will be kept insured for its full value
against all hazards including loss or damage caused by fire, collision, theft
Page 76
or other casualty. If the Collateral consists of a motor vehicle, Owner will
obtain comprehensive and collision coverage in amounts at least equal to the
actual cash value of the vehicle with deductibles not to exceed $ n/a
OWNER MAY FURNISH REQUIRED INSURANCE EITHER THROUGH EXISTING POLICIES OWNED OR
CONTROLLED BY OWNER OR THROUGH ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT
BUSINESS IN TEXAS, BUT LENDER MAY REFUSE ANY INSURER FOR REASONABLE CAUSE. The
insurance policies shall require the insurance company to provide Lender with
at least thirty (30) days' written notice before such policies are altered or
canceled in any manner. The insurance policies shall name Lender as a loss
payee and provide that no act or omission of Owner or any other person shall
affect the right of Lender to be paid the insurance proceeds pertaining to the
loss or damage of the Collateral. In the event Owner fails to acquire or
maintain insurance, Lender (after providing notice as may be required by law)
may in its discretion procure appropriate insurance coverage upon the
Collateral and charge the insurance cost as an advance of principal under the
promissory note. Owner shall furnish Lender with evidence of insurance
indicating the required coverage. Lender may act as attorney-in-fact for Owner
in making and settling claims under insurance policies, canceling any policy
or endorsing Owner's name on any draft or negotiable instrument drawn by any
insurer.
15. INDEMNIFICATION. Lender shall not assume or be responsible for the
performance of any of Owner's obligations with respect to the Collateral under
any circumstances. Owner shall immediately provide Lender with written notice
of and indemnify and hold Lender and its shareholders, directors, officers,
employees and agents harmless from all claims, damages, liabilities (including
attorneys' fees and legal expenses), causes of action, actions, suits and
other legal proceedings (cumulatively "Claims") pertaining to its business
operations or the Collateral including, but not limited to, those arising from
Lender's performance of Owner's obligations with respect to the Collateral. It
is the express intention of the parties hereto that the indemnity provided for
herein is intended to and shall indemnify and protect Lender from the
consequences of Lender's own negligence, whether or not that negligence is the
sole or concurring cause of any claim, damage, liability, loss, deficiency,
penalty, cost or expense. Owner, upon the request of Lender, shall hire legal
counsel to defend Lender from such Claims/ and pay the attorneys' fees, legal
expenses and other costs incurred in connection therewith. In the alternative,
Lender shall be entitled to employ its own legal counsel to defend such Claims
at Owner's cost.
16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns and
pay all taxes, licenses, fees and assessments relating to its business
operations and the Collateral (including, but not limited to, income taxes,
personal property taxes, withholding taxes, sales taxes, use taxes, excise
taxes and workers' compensation premiums) in a timely manner.
17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. Owner shall allow
Lender or its agents to examine, inspect and make abstracts and copies of the
Collateral and Owner's books and records pertaining to Owner's business
operations and financial condition or the Collateral during normal business
hours. Owner shall provide any assistance required by Lender for these
purposes. All of the signatures and information pertaining to the Collateral
or contained in the books and records shall be genuine, true, accurate and
complete in all respects. Owner shall note the existence of Lender's security
interest in its books and records pertaining to the Collateral.
18. DEFAULT. Owner shall be in default under this Agreement in the event
that Owner, Borrower or any guarantor:
(a)fails to make any payment under this Agreement or any other
indebtedness to Lender when due
(b)fails to perform any obligation or breaches any warranty or covenant to
Lender contained in this Agreement or any other present or future
written agreement regarding this or any other indebtedness to Lender
(c)provides or causes any false or misleading signature or representation
to be provided to Lender;
(d)allows any loss, diminution, or impairment of the physical condition,
value, title, priority, possession, or control of any Collateral or
Page 77
Owner's or Lender's rights therein, including, but not limited to,
allowing any part of the Collateral to be placed into receivership,
removed, impaired, lost, stolen, destroyed, damaged, seized, confiscated
or affected in any material way;
(e)seeks to revoke, terminate or otherwise limit its liability under any
continuing guaranty;
(f)permits the entry or service of any garnishment, judgment, tax levy,
attachment or lien against Owner, any guarantor, or any of their
property
(g)becomes legally incompetent, is dissolved or terminated, ceases to
operate its business, becomes insolvent, makes an assignment for the
benefit of creditors, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding
(h)allows the Collateral to be used by anyone to transport or store goods,
the possession, transportation, or use of which, is illegal;
(i)causes Lender in good faith to deem itself insecure for any reason. and
Borrower has been unable to provide assurances or restore the Bank's
security.
19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this
Agreement, Lender shall be entitled to exercise one or more of the following
remedies without notice or demand (except as required by law):
(a)to declare the Obligations immediately due and payable in full
(b)to collect the outstanding Obligations with or without resorting to
judicial process
(c)to change Owner's mailing address, open Owner's mail, and retain any
instruments or other remittances constituting the Collateral contained
therein
(d)to lawfully and peaceably take possession of any Collateral in any
manner permitted by law;
(e)to apply for and obtain, without notice and upon ex parte application,
the appointment of a receiver for the Collateral without regard to
Owner's financial condition or solvency, the adequacy of the Collateral
to secure the payment or performance of the obligations, or the
existence of any waste to the Collateral
(f)to require Owner to deliver and make available to Lender any Collateral
at a place reasonably convenient to Owner and Lender;
(g)to sell, lease or otherwise dispose of any Collateral and collect any
deficiency balance with or without resorting to legal process
(h)to set-off Owner's obligations against any amounts due to Owner
including, but not limited to, monies, instruments, and deposit
accounts maintained with Lender, and
(i) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and
in any order. If notice to Owner of intended disposition of Collateral is
required by law, Lender will provide reasonable notification of the time and
place of any sale or intended disposition as required under the Uniform
Commercial Code. In the event that Lender institutes an action to recover any
Collateral or seeks recovery of any Collateral by way of a prejudgment remedy
in an action against Owner, Owner waives the posting of any bond which might
otherwise be required. Owner waives and consents to any release or other
impairment of any Collateral because of any failure of Lender to perfect its
security interest, any damage to any Collateral, or any other reason
whatsoever, even if caused by Lender's negligence.
20. APPLICATION OF PAYMENTS. Whether or not a default has occurred under
this Agreement, all payments made by or on behalf of Owner and all credits due
to Owner from the disposition of the Collateral or otherwise may be applied
against the amounts paid by Lender (including attorneys' fees and legal
expenses) in connection with the exercise of its rights or remedies described
in this Agreement and any interest thereon and then to the payment of the
remaining Obligations in whatever order Lender chooses.
21. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse
Lender for all amounts (including attorneys' fees and legal expenses) expended
by Lender in the performance of any action required to be taken by Owner or
Page 78
the exercise of any right or remedy belonging to Lender under this Agreement,
together with interest thereon at the lower of the highest rate described in
any promissory note or credit agreement executed by Borrower or Owner or the
highest rate allowed by law from the date of payment until the date of
reimbursement. These sums shall be Included in the definition of Obligations,
shall be secured by the Collateral identified in this Agreement and shall be
payable upon demand.
22. ASSIGNMENT. Owner shall not be entitled to assign any of its rights,
remedies or obligations described in this Agreement without the prior written
consent of Lender. Consent may be withheld by Lender in its sole discretion.
Lender shall be entitled to assign some or all of its rights and remedies
described in this Agreement without notice to or the prior consent of Owner in
any manner.
23. MODIFICATION AND WAIVER. The modification or waiver of any of Owner's
Obligations or Lender's rights under this Agreement must be contained in a
writing signed by Lender. Lender may perform any of Owner's Obligations or
delay or fail to exercise any of its rights without causing a waiver of those
Obligations or rights. A waiver on one occasion shall not constitute a waiver
on any other occasion. Owner's Obligations under this Agreement shall not be
affected if Lender amends, compromises, exchanges, fails to exercise, impairs
or releases any of the obligations belonging to any Owner or third party or
any of its rights against any Owner, third party or collateral.
24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of Owner and Lender and their respective successors, assigns,
trustees, receivers, administrators, personal representatives, legatees, and
devisees.
25. NOTICES. Any notice or other communication to be provided under this
Agreement shall be in writing and sent to the parties at the addresses
described In this Agreement or such other address as the parties may designate
in writing from time to time.
26. SEVERABILITY. If any provision of this Agreement violates the law or is
unenforceable, the rest of the Agreement shall remain valid.
27. COLLECTION EXPENSES. If Lender hires an attorney (who is not a salaried
employee of Lender) to assist in collecting amounts owed or enforcing Lender's
rights or remedies, Owner agrees to pay Lender's reasonable attorneys' fees,
court costs and related expenses to the extent permitted by law, subject to
court award.
28. MISCELLANEOUS. This Agreement is executed for commercial purposes.
Owner shall supply information regarding Owner's business operations and
financial condition or the Collateral in the form and manner as requested by
Lender. All information furnished by Owner to Lender shall be true, accurate
and complete in all respects. Owner and Lender agree that time is of the
essence. All references to Owner in this Agreement shall include all parties
signing below. If there is more than one Owner, their obligations shall be
joint and several. This Agreement shall remain in full force and effect until
Lender provides Owner with written notice of termination. This Agreement and
any related documents represent the complete and integrated understanding
between Owner and Lender pertaining to the terms and conditions of those
documents.
29. ADDITIONAL TERMS:
Borrower will have no more than thirty (30) days to cure any default from the
date of written notice by the Bank.
Page 79
Owner acknowledges that Owner has read, understands, and agrees to the terms
and conditions of this Agreement.
This Agreement and related documents have been signed in the county of
Lender's address unless otherwise specified: LUBBOCK
Dated: February 17, 1998
LENDER: PLAINS NATIONAL BANK OF WEST TEXAS
P.O. Box 271
DARRELL W ADAMS
SENIOR VICE PRESIDENT
OWNER: NORTON DRILLING COMPANY OWNER: NORTON DRILLING COMPANY
/s/ S. Howard Norton /s/ Sherman Norton
S. Howard Norton Sherman Norton
President Chairman
OWNER: OWNER:
OWNER: OWNER:
OWNER: OWNER:
SCHEDULE A
ALL ACCOUNTS AND GENERAL INTANGIBLES NOW OWNED OR HEREAFTER ACQUIRED AND
THIRTEEN (13) OIL AND GAS DRILLING RIGS AND RELATED EQUIPMENT LOCATED IN
LEVELLAND, TEXAS.
SCHEDULE B
SCHEDULE C
SCHEDULE D
Page 80
Exhibit 10.44
The Plains National Bank PNB
5010 University
Lubbock, Texas 79413
(806-795-7131 "LENDER" Lubbock County
COMMERCIAL CONTINUING GUARANTY
GUARANTOR BORROWER
NORTON DRILLING SERVICES, INC. NORTON DRILLING COMPANY
ADDRESS ADDRESS
5211 BROWNFIELD HWY, SUITE 230
LUBBOCK, TX 79407 LUBBOCK, TX. 79407
Telephone Identification No. Telephone Identification No.
1. CONSIDERATION. This Guaranty is being executed to induce Lender
indicated above to enter into one or more loans or other financial
accommodations with or on behalf of Borrower.
2. GUARANTY. Guarantor hereby unconditionally guarantees the prompt and
full payment and performance of Borrower'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
(cumulatively "Obligations"):
X UNLIMITED: Guarantor's Obligations under this Guaranty shall be unlimited
and shall include all present or future Obligations between Borrower and
Lender (whether executed for the same or different purposes), together
with all interest and all of Lender's expenses and costs, incurred in
connection with the Obligations.
LIMITED TO: Guarantor's Obligations under this Guaranty shall include all
present and future written agreements between Borrower and Lender
(whether executed for the same or different purposes), but shall be
limited to the principal amount of________________Dollars, together with
all interest and all of Lender 's expenses and costs incurred in connection
with the Obligations.
LIMITED TO THE FOLLOWING DESCRIBED NOTES/AGREEMENTS: Guarantor's
Obligations under this Guaranty shall be limited to the obligations
described in the following notes and agreements together with all
interest and all of Lender's expenses and costs, incurred in connection
with the Obligations:
Interest Principal Amount/ Funding/Maturity Customer Loan
Rate Credit Limit Agreement Date Date Number Number
3. ABSOLUTE AND CONTINUING NATURE OF GUARANTY. Guarantor's obligations
under this Guaranty are absolute and continuing and shall not be affected or
impaired if Lender amends, renews, extends, compromises, exchanges, fails to
exercise, impairs or releases any of the obligations belonging to any
Borrower, Co-guarantor or third party or any of Lender's rights against any
Borrower, Co-guarantor, third party, or collateral. In addition, Guarantor's
Obligations under this Guaranty shall not be affected or impaired by the
death, incompetency, termination, dissolution, insolvency, business cessation,
or other financial deterioration of any Borrower, Guarantor, or third party.
4. DIRECT AND UNCONDITIONAL NATURE OF GUARANTY. Guarantor's Obligations
under this Guaranty are direct and unconditional and may be enforced without
Page 81
requiring Lender to exercise, enforce, or exhaust any right or remedy against
any Borrower, Co-guarantor, third party, or collateral.
5. WAIVER OF NOTICE. Guarantor hereby waives notice of the acceptance of
this Guaranty; notice of present and future extensions of credit and other ,
financial accommodations by Lender to any Borrower;
THIS GUARANTY HAS BEEN SIGNED IN THE COUNTY OF THE LENDER'S ADDRESS UNLESS
OTHERWISE SPECIFIED: LUBBOCK
GUARANTOR ACKNOWLEDGES GUARANTOR HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS AGREEMENT INCLUDING THE TERMS AND CONDITIONS ON
THE REVERSE SIDE. GUARANTOR ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS
AGREEMENT.
DATED: February 17, 1998
GUARANTOR: NORTON DRILLING SERVICES, INC. GUARANTOR:
/S/ Sherman H. Norton
SHERMAN H. NORTON- CHAIRMAN OF
THE BOARD
GUARANTOR: GUARANTOR:
6. DEFAULT. Guarantor shall be in default under this Guaranty in the
event that any Borrower or Guarantor:
(a) fails to pay any amount under this Guaranty or any other
indebtedness to Lender when due (whether such amount is due by
acceleration or otherwise);
(b) fails to perform any obligation or breaches any warranty or covenant
to Lender contained in this Guaranty or any other present or future
written agreement;
(c)provides or causes any false or misleading signature or representation
to be provided to Lender;
(d) allows any collateral for the Obligations or this Guaranty to be
destroyed, lost or stolen, or damaged in any material respect
(e) permits the entry or service of any garnishment, judgment, tax levy,
attachment or lien against Borrower, Guarantor, or any of their property;
(f) becomes legally incompetent, is dissolved or terminated, ceases to
operate its business, becomes insolvent, makes an assignment for the
benefit of creditors, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding; or
(g) causes Lender to deem itself insecure in good faith for any reason.
and Borrower has been unable to provide assurances or
or restore the Bank's security.
7. RIGHTS OF LENDER ON DEFAULT. If there is a default under this Guaranty,
Lender shall be entitled to exercise one or more of the following remedies
without notice or demand (except as required by law):
(a) to declare Guarantor's Obligations under this Guaranty immediately
Page 82
due and payable in full;
(b) to collect the outstanding obligations under this Guaranty with or
without resorting to judicial process;
(c) to set-off Guarantor's Obligations under this Guaranty against any
amounts due to Guarantor including, but not limited to, monies,
instruments, and deposit accounts maintained with Lender; and
(d) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and
in any order. Guarantor waives and consents to any release or other impairment
of any collateral securing the Obligations because of any failure of Lender to
perfect a security interest in any such collateral or any other reason
whatsoever even if caused by Lender's negligence.
8. SUBORDINATION. Any indebtedness of Borrower now or hereafter owed to or
held by Guarantor is hereby subordinated to the payment in full of the
Obligations of Borrower to Lender during the term of this Agreement. Guarantor
agrees that Lender shall be preferred to Guarantor in any assignment for the
benefit of Borrower's creditors in any bankruptcy, insolvency, liquidation, or
reorganization proceeding commenced by or against Borrower in any federal or
state court.
9. INDEPENDENT INVESTIGATION. Guarantor's execution and delivery to Lender
of this Guaranty is based solely upon Guarantor's independent investigation of
Borrower's financial condition and not upon any written or oral representation
of Lender in any manner. Guarantor assumes full responsibility for obtaining
any additional information regarding Borrower's financial condition and Lender
shall not be required to furnish Guarantor with any information of any kind
regarding Borrower's financial condition.
10. ACCEPTANCE OF RISKS. Guarantor acknowledges the absolute and continuing
nature of this Guaranty and voluntarily accepts the full range of risks
associated herewith including, but not limited to, the risk that Borrower's
financial condition shall deteriorate or, if this Guaranty is unlimited, the
risk that Borrower shall incur additional Obligations to Lender in the future.
11. SUBROGATION. Guarantor, after performing under this Guaranty, shall not
be subrogated to any of Lender's rights against any Borrower which presently
is or may become the subject of any bankruptcy proceedings. Under these
circumstances, Guarantor specifically waives any rights and claims as a
creditor of such Borrower's bankruptcy estate. Other than as mentioned above,
Guarantor, after fully performing under this Guaranty, will be subrogated to
any of Lender's rights against any Borrower, any other guarantor, any third
party or any collateral which may secure the obligations of any of these
parties.
12. APPLICATION OF PAYMENTS. Lender will be entitled to apply any payments
or other monies received from Borrower, any third party, or any collateral
against Borrower s present and future obligations to Lender in any order.
13. ESSENCE OF TIME. Guarantor and Lender agree that time is of the
essence.
14. TERMINATION. This Guaranty shall remain in full force and effect until
Lender executes and delivers to Guarantor a written release thereof.
Notwithstanding the foregoing, Guarantor shall be entitled to terminate any
unlimited guaranty of Borrower's future Obligations to Lender following any
anniversary of this Guaranty by providing Lender with sixty (60) or more days'
written notice of such termination by hand-delivery or certified mail. Notice
shall be deemed given when received by Lender. Such notice of termination
shall not effect or impair any of the agreements and obligations of the
Guarantor under this Agreement with respect to any of the obligations
(including legal, binding obligations to lend additional funds in the future)
existing prior to the time of actual receipt of such notice by Lender, any
extensions or renewals thereof, and any interest on any of the foregoing.
Page 83
15. ASSIGNMENT. Guarantor shall not be entitled to assign any of its rights
or obligations described in this Guaranty without Lender's prior written
consent which may be withheld by Lender in its sole discretion. Lender shall
be entitled to assign some or all of its rights and remedies described in this
Guaranty without notice to or the prior consent of Guarantor in any manner.
Unless the Lender shall otherwise consent in writing, the Lender shall have an
unimpaired right prior and superior to that of any assignee, to enforce this
Guaranty for the benefit of the Lender, as to those Obligations that the
Lender has not assigned
16. MODIFICATION AND WAIVER. The modification or waiver of any of
Guarantor's obligations or Lender's rights under this Guaranty must be
contained in a writing signed by Lender. Lender may delay in exercising or
fail to exercise any of its rights without causing a waiver of those rights. A
waiver on one occasion shall not constitute a waiver on any other occasion.
17. SUCCESSORS AND ASSIGNS. This Guaranty shall be binding upon and inure
to the benefit of Guarantor and Lender and their respective successors,
assigns, trustees, receivers, administrators, personal representatives,
legatees, and devisees.
18. NOTICE. Any notice or other communication to be provided under this
Guaranty shall be in writing and sent to the parties at the addresses
described in this Guaranty or such other addresses as the parties may
designate in writing from time to time.
19. SEVERABILITY. If any provision of this Guaranty violates the law or is
unenforceable, the rest of the Guaranty shall remain valid.
20. APPLICABLE LAW. THIS GUARANTY SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF TEXAS AND APPLICABLE FEDERAL LAWS.
21. COLLECTION COSTS. If Lender hires an attorney to assist in collecting
any amount due or enforcing any right or remedy under this Guaranty, Guarantor
agrees to pay Lender's reasonable attorneys' fees, legal expenses and other
costs as permitted by law.
22. MISCELLANEOUS. This Guaranty is executed in connection with a
commercial or agricultural loan. Guarantor will provide Lender with a current
financial statement upon request. All references to Guarantor in this Guaranty
shall include all entities or persons signing on reverse. If there is more
than one Guarantor, their obligations shall be joint and several. This
Guaranty and any related documents represent the complete and integrated
understanding between Guarantor and Lender pertaining to the terms and
conditions of those documents.
23. ADDITIONAL TERMS:
Borrower will have no more than thirty (30) days to cure any default from the
date of written notice by the bank.
Page 84
THE PLAINS NATIONAL BANK PNB GUARANTOR
5010 University NORTON DRILLING SERVICES, INC.
Lubbock, Texas 79413 DISCLAIMER OF
(806)-795-7131 "LENDER" ORAL AGREEMENTS
Lubbock County
ADDRESS
LUBBOCK, TX
Telephone No. Identification No.
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
INITIALS RATE CREDIT LIMIT AGREEMENT DATE NUMBER NUMBER
DWA VARIABLE $3,000,000.00 02/17/98 04/01/99 1099514
Guarantor and Lender (the "Parties") incorporate by reference into each of the
documents executed in connection with the transaction described above, the
following provision:
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES .
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Date: FEBRUARY 17, 1998
Lender: Plains National Bank of West Texas
P.O. Box 271
DARRELL W ADAMS
SENIOR VICE PRESIDENT
GUARANTOR: NORTON DRILLING SERVICES, INC. GUARANTOR:
/S/ Sherman H. Norton
SHERMAN H. NORTON- CHAIRMAN OF
THE BOARD
GUARANTOR: GUARANTOR:
Page 85
THE PLAINS NATIONAL BANK PNB GUARANTOR
5010 University NORTON DRILLING SERVICES, INC.
Lubbock, Texas 79413
(806)-795-7131 "LENDER" DISCLAIMER OF
Lubbock County ORAL AGREEMENTS
ADDRESS
LUBBOCK, TX
Telephone No. Identification No.
OFFICER INTEREST PRINCIPAL AMOUNT/ FUNDING/ MATURITY CUSTOMER LOAN
INITIALS RATE CREDIT LIMIT AGREEMENT DATE NUMBER NUMBER
DWA VARIABLE $4,500,000.00 02/17/98 02/01/05 1099514
Guarantor and Lender (the "Parties") incorporate by reference into each of the
documents executed in connection with the transaction described above, the
following provision:
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES .
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Date: FEBRUARY 17, 1998
Lender: Plains National Bank of West Texas
P.O. Box 271
DARRELL W ADAMS
SENIOR VICE PRESIDENT
GUARANTOR: NORTON DRILLING SERVICES, INC. GUARANTOR:
/S/ Sherman H. Norton
SHERMAN H. NORTON- CHAIRMAN OF
THE BOARD
GUARANTOR: GUARANTOR:
Page 86
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from Form 10-K
for the fiscal year ended November 30, 1997 (Balance Sheet and Statement of
Operations) and is qualified in its entirety by reference to such Form 10-K.
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] NOV-30-1997
[PERIOD-END] NOV-30-1997
[CASH] 277,097
[SECURITIES] 4,607
[RECEIVABLES] 6,374,033
[ALLOWANCES] 220,075
[INVENTORY] 0
[CURRENT-ASSETS] 7,874,807
[PP&E] 16,909,914
[DEPRECIATION] 6,558,458
[TOTAL-ASSETS] 19,763,085
[CURRENT-LIABILITIES] 8,385,387
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 258,418
[OTHER-SE] 7,767,838
[TOTAL-LIABILITY-AND-EQUITY] 19,763,085
[SALES] 0
[TOTAL-REVENUES] 35,840,945
[CGS] 0
[TOTAL-COSTS] 28,503,955
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 561,442
[INCOME-PRETAX] 3,698,254
[INCOME-TAX] 1,489,396
[INCOME-CONTINUING] 2,208,858
[DISCONTINUED] 253,074
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 2,461,932
[EPS-PRIMARY] .11
[EPS-DILUTED] .10
</TABLE>
