UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-15784
NORTON DRILLING SERVICES, INC.
(Exact Name of Registrant as Specified in its charter)
Delaware 13-3273041
(State of Incorporation) (IRS Employer
Identification No.)
5211 Brownfield Highway
Suite 230 79407
Lubbock, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (806) 785-8400
Former name, former address and former fiscal year, if changed since last
report: No Change
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 5, 1998
Common stock, par value $.01 per share 24,671,601 shares
1 of 19 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
Page No.
PART I - Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Balance Sheets................................3
Unaudited Consolidated Statements of Operations......................4
Unaudited Consolidated Statements of Stockholders' Equity............6
Unaudited Consolidated Statements of Cash Flows......................7
Notes to Consolidated Financial Statements...........................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................13
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......18
Part II - Other Information ............................................18
Item 1. Legal Proceedings ..............................................18
Item 6. Exhibits and Reports on Form 8-K................................18
Signatures .............................................................19
2 of 19 Pages
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements include all adjustments which in
managements' opinion are necessary in order to make the financial statements not
misleading.
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
August 31, November 30,
1998 1997
---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,251,951 $ 277,097
Accounts receivable, trade, less allowance for
doubtful accounts of $242,183 and $220,075,
respectively 4,241,848 6,153,958
Costs and estimated earnings in excess of
billings on uncompleted contracts 592,104 1,008,756
Prepaid expenses and other current assets 783,275 434,996
----------- -----------
Total current assets 6,869,178 7,874,807
Property and equipment, at cost, net of
accumulated depreciation 11,415,555 10,351,456
Goodwill, net of accumulated amortization 1,245,622 1,317,067
Acquisition costs, net of accumulated amortization 42,677 - -
Note receivable, net of current maturities 50,623 75,764
Security deposits 141,495 143,991
----------- -----------
Total assets $19,765,150 $19,763,085
=========== ===========
Current liabilities:
Current maturities of notes payable $ 1,796,653 $ 2,403,986
Accounts payable 2,317,397 3,978,868
Billings in excess of costs of uncompleted contracts - - 12,228
Accrued expenses and other current liabilities 1,838,943 1,885,352
Net liabilities of discontinued operations 93,792 104,953
---------- -----------
Total current liabilities 6,046,785 8,385,387
---------- -----------
Long-term liabilities
Notes payable, less current maturities 3,572,594 2,633,802
Deferred income taxes 1,289,766 942,267
---------- -----------
Total long-term liabilities 4,862,360 3,576,069
---------- -----------
Commitments and contingencies - - - -
Stockholders' equity:
Common stock-par value $.01;
authorized-100,000,000 shares;
issued-25,886,299 and 25,841,799 shares at August
31, 1998 and November 30, 1997,respectively;
outstanding-24,671,601 and 24,636,346 shares at
August 31, 1998 and November 30, 1997,respectively 258,863 258,418
Additional paid-in capital 10,535,754 10,518,132
Accumulated deficit ( 1,702,414) ( 2,750,294)
9,092,203 8,026,256
Less treasury stock, at cost ( 236,198) ( 224,627)
----------- -----------
Total stockholders' equity 8,856,005 7,801,629
----------- -----------
Total liabilities and stockholders' equity $19,765,150 $19,763,085
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3 of 19 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the nine months ended For the three months ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Contract drilling revenues $22,602,152 $25,346,857 $6,517,286 $10,336,665
Other 15,457 6,159 2,607 2,921
----------- ---------- ---------- -----------
Total operating revenues 22,617,609 25,353,016 6,519,893 10,339,586
----------- ----------- ---------- -----------
Operating costs and expenses:
Direct drilling costs 17,541,311 21,017,510 4,861,244 7,277,982
General and administrative 1,168,572 819,822 418,673 284,373
Depreciation, depletion and
amortization 2,229,808 1,520,105 717,930 561,450
Other 4,834 4,915 757 1,563
----------- ----------- ---------- -----------
Total operating costs and expenses 20,944,525 23,362,352 5,998,604 8,125,368
----------- ----------- ---------- -----------
Operating income 1,673,084 1,990,664 521,289 2,214,218
----------- ----------- ---------- -----------
Other income (expense):
Net gain on sale of assets 220,362 243,304 8,506 33,509
Interest income 13,528 - - 5,026 - -
Interest expense ( 342,974) ( 421,213) ( 121,414) ( 156,699)
----------- ----------- ---------- -----------
Total other income (expense),
net ( 109,084) ( 177,909) ( 107,882) ( 123,190)
----------- ----------- ---------- -----------
Income before provision for
income taxes and discontinued
operations 1,564,000 1,812,755 413,407 2,091,028
Income tax expense
Current 168,621 - - ( 2,000) - -
Deferred 347,499 - - 116,320 - -
----------- ----------- ---------- -----------
516,120 - - 114,320 - -
----------- ----------- ---------- -----------
Income from continuing operations 1,047,880 1,812,755 299,087 2,091,028
Adjustment to provision for loss on
disposal credited - - 253,074 - - 228,074
----------- ----------- --------- -----------
Net income $ 1,047,880 $ 2,065,829 $ 299,087 $ 2,319,102
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
(Continued)
4 of 19 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
<CAPTION>
For the nine months ended For the three months ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Per share data:
Basic
Income from continuing operations $0.04 $0.08 $0.01 $ 0.09
Income from discontinued operations - - 0.01 - - 0.01
----- ----- ------ -------
Net income $0.04 $0.09 $0.01 $ 0.10
===== ===== ===== ======
Diluted
Income from continuing operations $0.04 $0.08 $0.01 $ 0.08
Income from discontinued operations - - 0.01 - - 0.01
----- ----- ------ -------
Net income $0.04 $0.09 $0.01 $ 0.09
===== ===== ===== ======
Weighted average number of common
shares outstanding
Basic 24,651,590 23,113,927 24,671,601 23,297,044
========== ========== ========== ==========
Diluted 25,094,148 24,548,678 24,923,965 24,911,044
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5 of 19 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<CAPTION>
Common Stock Treasury Stock
--------------------- ------------------
Shares Par Value Shares Cost
---------- --------- --------- -------
<S> <C> <C> <C> <C>
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 379,500 3,795 120,851 (132,295)
Net income for the nine months
ended August 31, 1997 - - - - - - - -
---------- -------- --------- -------
Balance August 31, 1997 24,668,936 $246,689 1,203,947 $(218,943)
========== ======== ========= =========
Balance November 30, 1997 25,841,799 $258,418 1,205,453 $(224,627)
Exercise of stock options 44,500 445 9,245 ( 11,571)
Net income for the nine months
ended August 31, 1998 - - - - - - - -
---------- -------- --------- -------
Balance August 31, 1998 25,886,299 $258,863 1,214,698 $(236,198)
========== ======== ========= =========
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
----------- ----------- -----------
<S> <C> <C> <C>
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 134,185 - - 5,685
Net income for the nine months
ended August 31, 1997 - - 2,065,829 2,065,829
----------- ---------- ----------
Balance August 31, 1997 $10,013,502 $(3,146,397) $ 6,894,851
=========== =========== ===========
Balance November 30, 1997 $10,518,132 $(2,750,294) $7,801,629
Exercise of stock options 17,622 - - 6,496
Net income for the nine months
ended August 31, 1998 - - 1,047,880 1,047,880
---------- ----------- ----------
Balance August 31, 1998 $10,535,754 $(1,702,414) $8,856,005
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6 of 19 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended For the three months ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,047,880 $ 2,065,829 $ 299,087 $ 2,319,102
Adjustments to reconcile net
income to net cash provided
by operating activities:
Adjustment to provision for loss
on disposal credited - - ( 253,074) - - ( 228,074)
Depreciation, depletion and
amortization 2,229,808 1,520,105 717,930 561,450
Gain on sale of assets ( 220,362) ( 243,304) ( 8,506) ( 33,509)
Increase in allowance for doubtful
accounts 102,108 - - 80,000 - -
Deferred income tax expense 347,499 - - 116,320 - -
Increase (decrease) in cash flows
as a result of changes in
operating asset and liability
account balances:
(Increase) decrease in accounts
receivable-trade 1,890,002 (1,683,455) ( 352,407) (1,007,494)
Decrease in insurance proceeds
recoverable - - 153,586 - - 155,555
(Increase) decrease in net cost and
estimated earnings in excess of
billings on uncompleted
contracts 404,424 2,709 57,942 ( 15,098)
Increase in prepaid expenses and
other current assets ( 428,279) ( 160,176) ( 484,327) ( 294,139)
(Increase) decrease in security
deposits 2,496 ( 15,000) 2,496 ( 15,000)
Decrease in accounts payable (1,661,471) ( 143,152) ( 555,515) ( 462,501)
Increase (decrease) in accrued
expenses and other current
liabilities ( 46,409) ( 126,283) 549,726 ( 96,151)
---------- ---------- ---------- ----------
Net cash provided by continuing
operations 3,667,696 1,117,785 422,746 884,141
Net cash used in discontinued
operations ( 11,161) ( 179,452) ( 2,465) ( 143,960)
---------- ---------- ---------- ----------
Net cash provided by operating
activities 3,656,535 938,333 420,281 740,181
---------- ---------- ---------- ----------
Cash flows from investing activities:
Collections on note receivable 7,377 - - - - - -
Increase in note receivable - - ( 138,000) - - ( 138,000)
Increase in acquisition costs ( 44,923) - - ( 44,923) - -
Proceeds from sale of property
and equipment 265,351 282,379 18,644 41,638
Acquisition of property and
equipment (3,247,441) (2,150,682) (1,407,372) ( 317,836)
---------- ---------- ---------- ----------
Net cash used in investing
activities (3,019,636) (2,006,303) (1,433,651) ( 414,198)
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
(Continued)
7 of 19 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<CAPTION>
For the nine months ended For the three months ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Increase in book cash overdraft - - 7,547 - - 7,547
Proceeds from notes payable 4,841,865 727,118 341,865 227,118
Proceeds from (repayments of)
revolving line of credit, net ( 565,000) 365,000 900,000 ( 450,000)
Repayments of notes payable (3,945,406) ( 811,606) ( 203,267) ( 289,338)
Exercise of stock options 6,496 5,685 - - 5,685
---------- ---------- --------- ----------
Net cash provided by (used in)
financing activities 337,955 293,744 1,038,598 ( 498,988)
---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 974,854 ( 774,226) 25,228 ( 173,005)
Cash and cash equivalents at
beginning of period 277,097 774,226 1,226,723 173,005
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period $1,251,951 $ - - $1,251,951 $ - -
========== ========== ========== ==========
Supplemental disclosures of cash flows information:
Cash paid during the period:
Interest $ 339,983 $ 411,213 $ 121,414 $ 172,268
========== ========= ========= ==========
Income taxes $ 689,607 $ 38,081 $ 67,375 $ 17,015
========== ========== ========= ==========
</TABLE>
Supplemental Schedule of Non-cash Investing
and Financing Activities:
During the nine months ending August 31, 1998 and 1997, we acquired property and
equipment in connection with capital lease arrangements in the amount of $51,546
and $158,346, respectively.
In March, 1997, 396,071 shares of common stock were issued in satisfaction of
outstanding liabilities of Norton in the amount of $166,349.
During the nine month period ending August 31, 1998, stock options issued under
our 1989 Employee Stock Option Plan were converted in which 44,500 shares of our
common stock were issued to option holders and 9,245 shares of common stock were
surrendered by option holders to us in lieu of cash payment of the exercise
price representing an increase in treasury stock of $11,571. During the nine
month period ending August 31, 1997, stock options issued under our 1989
Employee Stock Option Plan were converted in which 258,649 shares of our common
stock were issued to option holders in exchange for 120,851 shares of common
stock which were surrendered by option holders to us in lieu of cash payment of
the exercise price representing an increase in treasury stock of $132,295.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
8 of 19 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Norton Drilling
Services, Inc. ("NDSI") and its wholly-owned subsidiaries, Norton Drilling
Company ("Norton") and Lobell, Inc. ("Lobell"). All significant intercompany
accounts and transactions have been eliminated.
In our opinion, the accompanying consolidated balance sheet as of August 31,
1998 and the condensed consolidated statements of operations, stockholders'
equity, and cash flows for the three and nine months ended August 31, 1998 and
1997 include all adjustments (consisting only of normal recurring adjustments
and accruals) considered necessary to present fairly the financial position as
of August 31, 1998, the results of operations and cash flows for the three and
nine months ended August 31, 1998 and 1997. The accompanying consolidated
balance sheet as of November 30, 1997 is presented herein as unaudited, inasmuch
as such balance sheet was prepared from the balance sheet set forth in the
audited consolidated financial statements and does not reflect all disclosures
and footnotes contained in those audited consolidated financial statements.
The results of operations for the three and nine months ended August 31, 1998
are not necessarily indicative of the results of operations for the entire year.
2. EARNINGS PER SHARE
We adopted the provision of Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share" during the quarter ended February 28,
1998. This standard amends Accounting Principles Board ("APB") Opinion No. 15
"Earnings per Share" and requires the presentation of basic and diluted earnings
per share versus primary and fully diluted earnings per share which had been
required by APB Opinion No. 15. Earnings per share for the three and nine month
periods ended August 31, 1997 has been restated to conform with the requirements
of SFAS No. 128. The adoption of this new standard did not have a material
effect to us for the three and nine month periods ended August 31, 1997 and
1998.
Basic earnings per share ("EPS") has been computed using the weighted average
number of common shares outstanding during the three and nine month periods
ending August 31, 1998 and 1997.
Diluted EPS has been computed based on the weighted average number of common
shares outstanding during the three and nine month periods ending August 31,
1998 and 1997 and on the net additional number of shares which would be issuable
upon the exercise of stock options, assuming that we used the proceeds received
to purchase additional shares at market value as well as the additional shares
issuable relative to convertible debt which was outstanding for the three and
nine month periods ending August 31, 1997. Additional shares relative to stock
options and convertible debt have been excluded from the determination of
diluted EPS when their effect is anti-dilutive.
9 of 19 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. EARNINGS PER SHARE (Continued)
A reconciliation of the numerator and denominator of Basic EPS from
continuing operations calculation to that used to determine Diluted EPS from
continuing operations is as follows:
<TABLE>
<CAPTION>
For the nine months ended For the three months ended
------------------------- --------------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income from continuing
operations available to
Common Stockholders:
Basic $1,047,880 $1,812,755 $ 299,087 $2,091,028
Add interest on
convertible debt - - 32,000 - - 10,625
---------- ---------- --------- ----------
Diluted $1,047,880 $1,844,755 $ 299,087 $2,101,653
========== ========== ========= ==========
Weighted average shares
outstanding:
Basic 24,651,590 23,113,927 24,671,601 23,297,044
Add:
Additional shares
issuable upon
exercise of stock
options and warrants 442,558 298,387 252,364 477,636
Additional shares
issuable upon
conversion of
convertible debt - - 1,136,364 - - 1,136,364
---------- ---------- ---------- ----------
Diluted 25,094,148 24,548,678 24,923,965 24,911,044
========== ========== ========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
On May 19, 1993 a former officer of Norton advanced $90,000 and a
director/former officer of NDSI advanced $410,000 to Norton in the form of
unsecured demand notes. These notes required interest equal to Norton's primary
lending institution's prime rate. The notes were convertible into our common
stock at $0.44 per share for a total 1,136,363 shares. The Conversion Price was
determined by our Board of Directors at its meeting on May 19, 1993, at a
premium over the average of the bid and ask price of the shares of common stock
at the close of business on May 18, 1993. On November 13, 1997, the two
individuals exercised their option to convert the notes into our common stock.
Interest charged to operations on the notes payable was approximately $32,000
for the nine months ending August 31, 1997.
10 of 19 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. COMMON STOCK
Through November 30, 1996, four employees of Norton, three of which are
directors, had not been paid a total of $266,350 to which they were entitled
under their employment agreements with us. At a meeting of our Board of
Directors on February 23, 1997, the officers of NDSI were directed to take all
action necessary to issue to these four employees 396,071 shares of common stock
worth $166,349 in partial satisfaction of the unpaid amounts. The number of
shares that was issued was based upon a valuation of a recognized valuation
expert opining as to the fair market value of the price of the common stock to
be received.
5. OPTIONS AND WARRANTS
On February 23, 1997 our Board of Directors issued options to purchase
130,000 shares of our common stock to four of our directors in accordance with
our 1989 Stock Option Plan at an exercise price of $0.56 per share. At August
31, 1998, all of these options had been exercised.
On February 23, 1997, our Board of Directors authorized the issuance of
warrants to purchase our common stock to a director/former officer as
consideration for the individual personally guaranteeing certain obligations of
Norton. A warrant was issued for guarantees related to obligations entered into
through August 1996 and allows this person to purchase 640,000 shares of common
stock at the exercise price of $0.50 per share. A second warrant was issued for
guarantees related to obligations entered into in January 1997 and allows this
person to purchase 17,024 shares of common stock at $0.78 per share. A third
warrant was issued on April 1, 1997 for guarantees related to obligations
entered into on April 1, 1997 and allows the officer/director to purchase 32,000
shares of common stock at $0.625 per share. At August 31, 1998, none of these
warrants had been exercised and all remained outstanding.
On May 21, 1997, our Board of Directors issued options to purchase 20,000
shares of our common stock to two of our directors in accordance with our 1989
Stock Option Plan at an exercise price of $0.63 per share. At August 31, 1998,
none of these options had been exercised and all remained outstanding.
On February 6, 1998, the compensation committee of our Board of Directors
awarded options to purchase 752,000 shares of our common stock at $1.50 per
share under our 1997 Stock Option Plan. The Board of Directors approved these
awards at its meeting on February 24, 1998. These options were awarded to
various employees of Norton. No compensation cost was recorded in connection
with this award. At August 31, 1998, none of these options had been exercised
and all remained outstanding.
On April 14, 1998, our Board of Directors issued options to purchase 60,000
shares of our common stock to three of our directors in accordance with our 1997
Stock Option Plan at an exercise price of $1.20 per share. At August 31, 1998,
none of these options had been exercised and all remained outstanding.
11 of 19 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. NOTES PAYABLE
Norton entered into two borrowing arrangements with a bank on February 17,
1998. The first was a demand note payable in the amount of $4,500,000. This note
bears interest at 2.0% above the Wall Street Journal prime rate and calls for
monthly payments of $53,750 plus accrued interest beginning March 1, 1998
through maturity on February 1, 2005.
The second arrangement is a revolving line of credit with a borrowing
facility of $3,000,000. This line of credit requires monthly payments of
interest only at 1.0% above the Wall Street Journal prime rate with remaining
principal and interest due at maturity on April 1, 1999.
Both of the above notes are collateralized by accounts receivable and
general intangibles as well as thirteen drilling rigs and related equipment. In
addition a master loan agreement was entered into with this bank which contains
certain restrictive covenants. The most significant of which is that Norton
maintain a minimum net worth of $8,000,000. As of August 31, 1998, Norton was in
compliance with this minimum net worth requirement.
7. COMMITMENTS AND CONTINGENCIES
On March 1, 1997, NDSI, through our subsidiary Norton entered into a
five-year employment contract with Sherman H. Norton, Jr. which effectively
replaced a previous employment contract Norton had with Mr. Norton. The new
contract provides for an annual salary of $153,500. The provisions of the new
contract are the same as the prior contract except for the amount of annual
salary.
8. NEW SUBSIDIARY
On June 4, 1998, Norton established a new subsidiary, Norton Drilling
Company Mexico, Inc. This new subsidiary has signed a contract to drill 38 wells
in the northern border states of Nuevo Leon and Tamaulipas in Mexico. Norton has
moved two rigs into Mexico in order to fulfill this contract.
12 of 19 Pages
<PAGE>
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of August 31, 1998, we had working capital of approximately $822,000 and
cash and cash equivalents of approximately $1,252,000 as compared to a working
capital deficiency of approximately $511,000 and cash and cash equivalents of
approximately $277,000 at November 30, 1997. For the nine months ended August
31, 1998, continuing operations provided approximately $3,668,000 in cash flows
and our financing activities provided approximately $338,000 of cash flows. For
the nine months ended August 31, 1997, continuing operations provided
approximately $1,118,000 in cash flows and our financing activities provided
approximately $294,000. Funds provided in the nine month period ending August
31, 1998 were approximately $975,000 and came mainly from operations. Funds used
in the nine month period ending August 31, 1997 of approximately $775,000 were
mainly attributable to the acquisition of property
and equipment.
Significant expenditures of NDSI primarily consist of the Drilling Segment's
continual acquisition of replacement drilling equipment, such as drill collars,
drill pipe, engines and transportation equipment to adequately maintain the
operating status of the drilling fleet. Such expenditures for the nine months
ending August 31, 1998 and 1997, approximate $3,247,000 and $1,407,000,
respectively. The Drilling Segment anticipates capital expenditures of
approximately $4,000,000 for fiscal 1998 to be funded from existing bank credit
lines and cash flows from operations. Due to numerous uncertainties regarding
the availability, price and delivery of certain drilling equipment, our
anticipated level of capital expenditures may fluctuate commensurate with the
volatility of the industry.
We believe that cash flows from operations and borrowings should be
sufficient to fund operations and adequately service our debt for the next
twelve months. The risks associated with the oil and gas industry, such as the
volatility of oil and gas prices, could adversely affect our operations.
Comparison of the nine months ended August 31, 1998 and 1997
For the nine months ended August 31, 1998 contract drilling revenues were
approximately $22,602,000 as compared to $25,347,000 for the nine months ended
August 31, 1997, a decrease of approximately $2,745,000 or 10.8%. Average rig
utilization was 67.3% in the nine months ended August 31, 1998 compared to 90.9%
in the nine months ended August 31, 1997. The decrease in drilling revenues was
due to the decrease in rig utilization. The decrease, however, was not
proportionate to the decrease in utilization due to the higher rates that the
two rigs operating in Mexico are receiving under the terms of their contracts.
Direct drilling costs for the nine months ended August 31, 1998 were
approximately $17,541,000 or 77.6% of contract drilling revenues as compared to
approximately $21,018,000 or 82.9% of contract drilling revenues for the nine
months ended August 31, 1997. The decrease in the dollar amount of direct
drilling costs was due to the decrease in rig utilization. The decrease in
percentage of drilling costs to drilling revenues was due to the higher rates
that the two rigs operating in Mexico are receiving without corresponding
increases in costs.
General and administrative expenses were approximately $1,169,000 for the
nine months ended August 31, 1998 as compared to approximately $820,000 for the
nine months ended August 31, 1997. The increase in general and administrative
13 of 19 Pages
<PAGE>
expenses was due to an increase in the allowance for doubtful accounts,
increases in salaries due to the hiring of an additional sales representative,
increases in officers salaries in accordance with employment agreements, and an
increase in professional fees. Furthermore, these costs increased due to costs
incurred relative to our Mexico operations.
Depreciation, depletion and amortization for the nine months ended August 31,
1998 and 1997 was approximately $2,230,000 and $1,520,000, respectively. The
increase was due to the large amount of capital expenditures made in the last
twelve months.
Interest expense was approximately $343,000 and $421,000 in the nine months
ended August 31, 1998 and 1997, respectively. The decrease in interest expense
was due to a reduction in the interest rate on Norton's debt and the conversion
of subordinated debt in the prior year to common stock of NDSI.
Income tax expense for the nine months ended August 31, 1998 and 1997 were
approximately $516,000 and $-0-, respectively. The increase in income taxes was
due to the utilization of all available net operating loss carryovers in the
prior year.
In the nine months ended August 31, 1998, income from continuing operations
was approximately $1,048,000 as compared to income of approximately $1,813,000
in the nine months ended August 31, 1997. The decrease in earnings was due to a
reduction in revenues and increases in general and administrative costs,
depreciation and income taxes. Income was enhanced by a reduction in direct
drilling costs as a percentage of revenues.
In the nine months ended August 31, 1997, we recognized a credit adjustment
to the provision for loss on disposal of discontinued operations of
approximately $253,000 as compared to $-0- for the nine months ended August 31,
1998.
Comparison of the three months ended August 31, 1998 and 1997
For the three months ended August 31, 1998 contract drilling revenues were
approximately $6,517,000 as compared to approximately $10,337,000 for the three
months ended August 31, 1997, a decrease of approximately $3,820,000 or 37.0%.
Average rig utilization was 56.0% in the three months ended August 31, 1998
compared to 97.5% in the three months ended August 31, 1997. The decrease in
drilling revenues was due to the decrease in drilling rig utilization. Drilling
revenues did not decrease comparatively to the decrease in rig utilization
because of the higher rates we were receiving for the two rigs located in
Mexico.
Direct drilling costs for the three months ended August 31, 1998 were
approximately $4,861,000 or 74.6% of contract drilling revenues as compared to
approximately $7,278,000 or 70.4% of contract drilling revenues for the three
months ended August 31, 1997. The decrease in the dollar amount of the costs was
due to a decrease in rig utilization. The increase in direct drilling costs as a
percent of revenues was because of the lower rates that Norton was receiving for
the use of its drilling rigs, exclusive of the rigs located in Mexico.
General and administrative expenses were approximately $419,000 for the three
months ended August 31, 1998 as compared to approximately $284,000 for the three
months ended August 31, 1997. The increase in general and administrative
14 of 19 Pages
<PAGE>
expenses was due to an increase in the allowance for doubtful accounts of
approximately $80,000, increases in salaries due to the hiring of an additional
sales representative, and increases in officers salaries in accordance with
employment agreements. Furthermore, these costs increased due to costs incurred
relative to our Mexico operations.
Depreciation, depletion and amortization for the three months ended August
31, 1998 and 1997 was approximately $718,000 and $561,000, respectively. The
increase was due to the large amount of capital expenditures made in the last
twelve months.
Interest expense was approximately $121,000 and $157,000 in the three months
ended August 31, 1998 and 1997, respectively. The decrease in interest expense
was due to a reduction in the interest rate on Norton's debt and the conversion
of subordinated debt in the prior year to common stock of NDSI.
Income tax expense for the three months ended August 31, 1998 and 1997 were
approximately $114,000 and $-0-, respectively. The increase in income taxes was
due to the utilization of all available net operating loss carryovers in the
prior year.
In the three months ended August 31, 1998, income from continuing
operations was approximately $413,000 as compared to income of approximately
$2,091,000 in the three months ended August 31, 1997. The decrease in income was
due to the decrease in drilling revenues and increases in general and
administrative costs, depreciation and income taxes.
In the three months ended August 31, 1997, we recognized a credit adjustment
to the provision for loss on disposal of discontinued operations of
approximately $228,000 as compared to $-0- for the three months ended August 31,
1998.
Volatility of Oil and Natural Gas Prices
Our revenue, profitability and future rate of growth are substantially
dependent upon prevailing prices for oil and gas. In recent years, oil and gas
prices and markets have been extremely volatile. Prices are affected by market
supply and demand factors as well as actions of state and local agencies, the
United States and foreign governments and international cartels. All of these
factors are beyond our control. Any significant or extended decline in oil
and/or gas prices could have a material adverse effect on our financial
condition and results of operations.
The price of oil rose to a six-year high of $25.75 per barrel in January
1997, and fell to a ten-year low of $11.00 per barrel in March 1998. These low
oil prices have adversely impacted our operations. Should oil prices remain at
these levels or continue to decline or natural gas prices decline, our
operations could be further adversely affected.
As the result of lower crude oil prices, we have experienced a reduction in
drilling activity. This reduction adversely impacted our revenues and net income
for the nine and three months ended August 31, 1998 and is expected to similarly
impact our results of operations until crude oil prices increase to a level
substantially above the current prices and remain at such a level for an
extended period of time.
15 of 19 Pages
<PAGE>
Market Conditions for Contract Drilling Services
Except for periods of time in 1991 and 1997, the market for onshore contract
drilling services has generally been depressed since mid-1982, when crude oil
and natural gas prices began to weaken. A particularly sharp decline in demand
for contract drilling services occurred in 1986 because of the world-wide
collapse in oil prices (to approximately $10.00 per Bbl in April 1986). Since
1986, and except during the occasional upturns, there have been substantially
more drilling rigs available than necessary to meet demand in most operating and
geographic segments of the domestic drilling industry. As a result, drilling
contractors have had difficulty sustaining profit margins. Reactivation of
onshore drilling rigs or new construction of drilling rigs could also adversely
affect rig utilization rates and pricing even in an environment of higher oil
and natural gas prices and increased drilling activity. We cannot predict either
the future level of demand for contract drilling services or future conditions
in the contract drilling industry.
Recent Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statment of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and the presentation of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (1) classify items of other comprehensive income by
their nature in a financial statement (2) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997 and will
be adopted by us during the quarter ending February 28, 1999 in our 1999 fiscal
year.
The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 establishes revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997 and will be adopted by us during the quarter
ending February 28, 1999 in our 1999 fiscal year.
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" in February 1998. SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement recognition of those plans. This statement is effective
for fiscal years beginning after December 15, 1997 and will be adopted by us in
our fiscal year ending November 30, 1999. The adoption of this new standard is
not expected to have a material impact to us.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999
and will be effective for us at the beginning of our fiscal quarter ending
February 29, 2000. The provisions of this new standard are not expected to have
a material impact to us.
16 of 19 Pages
<PAGE>
Impact of Inflation
While subject to inflation, our business was not adversely impacted by
inflation during the three and nine month periods ended August 31, 1998 and 1997
in any material respect. We do not believe that inflation will have a material
impact on our business in the near future.
Year 2000
We have conducted a review of our computer systems to identify the systems
which could be affected by the Year 2000 issue. The "Year 2000 issue" is whether
our computer systems will properly recognize date sensitive information when the
year changes to 2000 or "00". Programs that were not designed to properly
recognize such dates could generate erroneous data or cause a system to fail. We
have reviewed our computer systems and have developed 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. Additionally, we do not anticipate an interruption of
our operations relative to Year 2000 concerns of our customers and vendors. We
believe that the Year 2000 issue will not pose significant operational problems
for our computer systems.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 2 of this report contains forward-looking
statements which are made pursuant to the "safe harbor" provisions of The
Private Securities Litigation Reform Act of 1995. These statements include,
without limitation, statements relating to: liquidity; financing of operations;
continued volatility of oil and natural gas prices; estimates of, and budgets
for, capital expenditures for modifications and upgrades to certain of the
Company's drilling rigs and for maintenance of its contract drilling fleet
during fiscal year 1997; sources and sufficiency of funds required for immediate
capital needs; and such other matters. The words "believes," "plans," "intends,"
"expected" or "budgeted" and similar expressions identify forward-looking
statements. The forward-looking statements are based on certain assumptions and
analyses made by the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. The Company does not
undertake to update, revise or correct any of the forward-looking information.
Factors that could cause actual results to differ materially from the Company's
expectations expressed in the forward-looking statements include, but are not
limited to, the following: intense competition in the contract drilling
industry; volatility of oil and natural gas prices; market conditions for
contract drilling services; continuation of severe drill-pipe shortage;
operational risks (such as blow outs, fires and loss of production); labor
shortage, primarily qualified drilling rig personnel; insurance coverage
limitations and requirements; potential liability imposed by government
regulation of the contract drilling industry (including environmental
regulation); and the substantial capital expenditures required to fund its
operations.
17 of 19 Pages
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
On January 6, 1998, a judgment was rendered in favor of Norton against one of
its customers for non-payment on account. The judgment awarded Norton
approximately $464,000 plus pre-judgment interest of approximately $84,000.
Interest on the judgment will continue to accrue at the rate of 18% until paid.
The customer requested a new trial which was denied on March 22, 1998. The
judgment was then appealed by the customer in April, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
27. Financial Data Schedule
(b) Reports on Form 8-K
None
18 of 19 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTON DRILLING SERVICES, INC.
Dated: October 15, 1998 By:/S/ Sherman H. Norton, Jr.
-----------------------------
Sherman H. Norton, Jr.
Chairman of the Board
Dated: October 15, 1998 By:/s/ David W. Ridley
----------------------
David Ridley, Chief Financial Officer
(Principal Financial and Accounting Officer)
19 of 19 Pages
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from form
10-Q for the quarterly period ended August 31, 1998 (Balance Sheet and Statement
of Income) and is qualified in its entirety by reference to such form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,251,951
<SECURITIES> 4,607
<RECEIVABLES> 4,241,848
<ALLOWANCES> 242,183
<INVENTORY> 0
<CURRENT-ASSETS> 6,869,179
<PP&E> 20,058,485
<DEPRECIATION> 8,642,930
<TOTAL-ASSETS> 19,765,150
<CURRENT-LIABILITIES> 6,046,786
<BONDS> 0
0
0
<COMMON> 258,863
<OTHER-SE> 8,597,142
<TOTAL-LIABILITY-AND-EQUITY> 19,765,150
<SALES> 0
<TOTAL-REVENUES> 6,519,893
<CGS> 0
<TOTAL-COSTS> 4,861,244
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,414
<INCOME-PRETAX> 413,407
<INCOME-TAX> 114,320
<INCOME-CONTINUING> 299,087
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 299,087
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
