UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-15784
NORTON DRILLING SERVICES, INC.
(Exact Name of Registrant as Specified in its charter)
Delaware 13-3273041
(State of Incorporation) (IRS Employer
Identification No.)
5211 Brownfield Highway
Suite 230 79407
Lubbock, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (806) 785-8400
Former name, former address and former fiscal year, if changed since last
report: No Change
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 12, 1999
Common stock, par value $.01 per share 4,934,321 shares
1 of 17 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...................................................12
Part II - Other Information ............................................16
Item 1. Legal Proceedings ..............................................16
Item 6. Exhibits and Reports on Form 8-K................................16
Signatures .............................................................17
2 of 17 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>
May 31, November 30,
1999 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 227,713 $ 172,321
Accounts receivable, trade, less allowance for
doubtful accounts $178,477 5,877,929 5,986,231
Costs and estimated earnings in excess of
billings on uncompleted contracts 155,353 534,557
Prepaid expenses and other current assets 600,258 352,677
---------- -----------
Total current assets 6,861,253 7,045,786
Property and equipment, at cost, net of
accumulated depreciation 10,113,031 11,581,332
Goodwill, net of accumulated amortization 1,174,177 1,221,807
Note receivable, net of current maturities 20,000 25,000
Security deposits 128,991 128,991
----------- -----------
Total assets $18,297,452 $20,002,916
=========== ===========
Current liabilities:
Current maturities of notes payable $ 3,556,585 $ 3,156,410
Accounts payable 2,058,954 1,890,752
Accrued expenses and other current liabilities 1,126,177 1,817,321
Net liabilities of discontinued operations 58,066 83,615
----------- -----------
Total current liabilities 6,799,782 6,948,098
----------- -----------
Long-term liabilities
Notes payable, less current maturities 3,189,495 3,404,495
Deferred income taxes 897,807 1,014,859
---------- ----------
Total long-term liabilities 4,087,302 4,419,354
---------- ----------
Commitments and contingencies - - - -
Stockholders' equity:
Common stock-par value $.01;
authorized-100,000,000 shares;
issued-5,177,260 shares
outstanding-4,934,321 shares 258,863 258,863
Additional paid-in capital 10,535,754 10,535,754
Accumulated deficit ( 3,148,051) ( 1,922,955)
----------- -----------
7,646,566 8,871,662
Less treasury stock, at cost ( 236,198) ( 236,198)
----------- -----------
Total stockholders' equity 7,410,368 8,635,464
----------- -----------
Total liabilities and stockholders' equity $18,297,452 $20,002,916
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3 of 17 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Contract drilling revenues $ 7,461,929 $16,084,866 $2,318,180 $ 6,576,979
Other - - 12,850 - - 10,728
----------- ----------- ---------- -----------
Total operating revenues 7,461,929 16,097,716 2,318,180 6,587,707
----------- ----------- ---------- -----------
Operating costs and expenses:
Direct drilling costs 6,410,921 12,680,067 2,399,348 5,613,583
General and administrative 1,041,310 749,899 597,354 295,019
Depreciation, depletion and
amortization 1,608,091 1,511,878 835,011 761,849
Other - - 4,077 - - 1,234
----------- ----------- ---------- -----------
Total operating costs and expenses 9,060,322 14,945,921 3,831,713 6,671,685
----------- ----------- ---------- -----------
Operating income (loss) ( 1,598,393) 1,151,795 (1,513,533) ( 83,978)
----------- ----------- ---------- -----------
Other income (expense):
Net gain on sale of assets 32,275 211,856 34,015 - -
Interest income 665 8,502 144 8,502
Interest expense ( 292,734) ( 221,560) ( 148,174) ( 98,228)
Other income 33,083 - - 8,679 - -
----------- ----------- ---------- -----------
Total other income (expense),
net ( 226,711) ( 1,202) ( 105,336) ( 89,726)
----------- ----------- ---------- -----------
Income (loss) before provision for
income taxes ( 1,825,104) 1,150,593 (1,618,869) ( 173,704)
----------- ----------- ---------- -----------
Income tax expense (benefit)
Current ( 482,956) 170,621 ( 430,256) ( 19,500)
Deferred ( 117,052) 231,179 ( 117,052) ( 78,600)
----------- ----------- ---------- -----------
( 600,008) 401,800 ( 547,308) ( 98,100)
----------- ----------- ---------- -----------
Net income (loss) $(1,225,096) $ 748,793 $(1,071,561) $( 75,604)
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4 of 17 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Continued)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Per share data:
Net income (loss)
Basic $(0.25) $0.15 $(0.22) $( 0.02)
====== ===== ====== =======
Diluted $(0.25) $0.15 $(0.22) $( 0.02)
====== ===== ====== =======
Weighted average number of
common shares outstanding
Basic 4,934,321 4,928,560 4,934,321 4,929,536
========= ========= ========= =========
Diluted 4,934,321 5,028,427 4,934,321 4,929,536
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
5 of 17 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, 1997 5,168,360 $258,418 241,090 $(224,627)
Exercise of stock options 8,900 445 1,849 ( 11,571)
Net income for the six months
ended May 31, 1998 - - - - - - - -
--------- -------- ------- ---------
Balance May 31, 1998 5,177,260 $258,863 242,939 $(236,198)
========= ======== ======= =========
Balance November 30, 1998 5,177,260 $258,863 242,939 $(236,198)
Net loss for the six months
ended May 31, 1999 - - - - - - - -
--------- -------- ------- ---------
Balance May 31, 1999 5,177,260 $258,863 242,939 $(236,198)
========= ======== ======= =========
<CAPTION>
Retained
Additional Earnings/ Total
Paid-in (Accumulated Stockholders'
Capital Deficit) Equity
----------- ----------- ----------
<S> <C> <C> <C>
Balance, November 30, 1997 $10,518,132 $(2,750,294) $7,801,629
Exercise of stock options 17,622 - - 6,496
Net income for the six months
ended May 31, 1998 - - 748,793 748,793
----------- ----------- ----------
Balance May 31, 1998 $10,535,754 $(2,001,501) $8,556,918
=========== =========== ==========
Balance November 30, 1998 $10,535,754 $(1,922,955) $8,635,464
Net loss for the six months
ended May 31, 1999 - - (1,225,096) (1,225,096)
----------- ----------- ----------
Balance May 31, 1999 $10,535,754 $(3,148,051) $7,410,368
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
6 of 17 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the six months ended For the three months ended
------------------------ --------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,225,096) $ 748,793 $(1,071,561) $( 75,604)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation, depletion and
amortization 1,608,091 1,511,878 835,011 761,849
Bad debt expense 5,000 - - 5,000 - -
Gain on sale of assets ( 32,275) ( 211,856) ( 34,015) - -
Deferred income tax expense
(benefit) ( 117,052) 231,179 ( 117,052) ( 78,600)
Increase (decrease) in cash flows
as a result of changes in operating
asset and liability account balances:
Decrease in accounts receivable
-trade 108,302 2,264,517 516,890 2,889,158
(Increase) decrease in net cost and
estimated earnings in excess
of billings on uncompleted
contracts 379,204 346,482 ( 16,397) 30,064
(Increase) decrease in prepaid
expenses and other current
assets ( 247,581) 56,048 ( 380,923) ( 55,023)
Increase (decrease) in accounts
payable 168,202 (1,105,956) 130,535 (1,182,945)
Decrease in accrued expenses
and other current liabilities ( 691,144) ( 596,135) ( 224,741) ( 167,079)
---------- ---------- ---------- ----------
Net cash provided by (used in)
continuing operations ( 44,349) 3,244,950 ( 357,253) 2,121,820
Net cash used in discontinued
operations ( 25,549) ( 8,696) ( 21,610) - -
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities ( 69,898) 3,236,254 ( 378,863) 2,121,820
---------- ---------- ---------- ----------
Cash flows from investing activities:
Collections on note receivable - - 7,377 - - 2,101
Proceeds from sale of property
and equipment 59,622 246,707 34,015 - -
Acquisition of property and
equipment ( 119,507) (1,840,069) ( 12,479) (1,175,848)
---------- ---------- ---------- ----------
Net cash used in investing
activities ( 59,885) (1,585,985) 21,536 (1,173,747)
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
7 of 17 Pages
<PAGE>
<TABLE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<CAPTION>
For the six months ended For the three months ended
------------------------- --------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from notes payable 13,685 4,500,000 13,685 385,246
Proceeds from (repayments of)
revolving line of credit, net 550,000 (1,465,000) 600,000 - -
Repayments of notes payable ( 378,510) (3,742,139) ( 128,399) ( 373,362)
Exercise of stock options - - 6,496 - - 5,278
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 185,175 ( 700,643) 485,286 17,162
---------- ---------- ---------- ----------
Net increase in cash and cash
equivalents 55,392 949,626 127,959 965,235
Cash and cash equivalents at
beginning of period 172,321 277,097 99,754 261,488
---------- ---------- ---------- ----------
Cash and cash equivalents at
end of period $ 227,713 $1,226,723 $ 227,713 $1,226,723
========== ========== ========== ==========
Supplemental disclosures of cash flows information: Cash paid during the period:
Interest $ 292,734 $ 238,945 $ 148,174 $ 56,237
========= ========= ========= ==========
Income taxes $ 11,395 $ 21,066 $ 11,395 $ 142,775
========= ========= ========= ==========
</TABLE>
Supplemental Schedule of Non-cash Investing
and Financing Activities:
During the periods ending May 31, 1999 and 1998, we acquired property and
equipment in connection with capital lease arrangements in the amount of $-0-
and $51,546, respectively.
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
8 of 17 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Norton Drilling
Services, Inc. ("NDSI") and its wholly-owned subsidiaries, Norton Drilling
Company ("Norton") and Lobell, Inc. ("Lobell"). All significant intercompany
accounts and transactions have been eliminated.
In our opinion, the accompanying consolidated balance sheet as of May 31,
1999 and the condensed consolidated statements of operations, stockholders'
equity, and cash flows for the three and six months ended May 31, 1999 and 1998
include all adjustments (consisting only of normal recurring adjustments and
accruals) considered necessary to present fairly the financial position as of
May 31, 1999, the results of operations and cash flows for the three and six
months ended May 31, 1999 and 1998. The accompanying consolidated balance sheet
as of November 30, 1998 is presented herein as unaudited, inasmuch as such
balance sheet was prepared from the balance sheet set forth in the audited
consolidated financial statements and does not reflect all disclosures and
footnotes contained in those audited consolidated financial statements.
The results of operations for the three and six months ended May 31, 1999 are
not necessarily indicative of the results of operations for the entire year.
2. EARNINGS PER SHARE
Earnings per share and the weighted average number of common shares
outstanding for all periods presented and as otherwise indicated herein, reflect
a one-for-five reverse split of our common stock effected in January 1999.
Basic earnings per share ("EPS") has been computed using the weighted average
number of common shares outstanding during the three and six month periods
ending May 31, 1999 and 1998.
Diluted EPS has been computed based on the weighted average number of common
shares outstanding during the three and six month periods ending May 31, 1999
and 1998, 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.
A reconciliation of the denominator of the Basic EPS calculation to that used
to determine Diluted EPS is as follows:
For the six months ended For the three months ended
------------------------- --------------------------
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
----------- ----------- ------------ -----------
Weighted average shares
outstanding:
Basic 4,934,321 4,928,560 4,934,321 4,929,536
Add:
Additional shares
issuable upon
exercise of stock
options and warrants - - 99,867 - - - -
--------- --------- --------- ---------
Diluted 4,934,321 5,028,427 4,934,321 4,929,536
========= ========= ========= =========
9 of 17 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
3. STOCK OPTIONS
On February 6, 1998, the compensation committee of our board of directors
issued options to purchase 152,440 shares of our common stock at $7.50 per share
under our 1997 Stock Option Plan. The board of directors approved these options
at its meeting on May 24, 1998. These options were awarded to various employees
of Norton.
On April 14, 1998, our board of directors issued options to purchase 12,000
shares of our common stock to three of our directors in accordance with our 1997
Stock Option Plan at an exercise price of $6.00 per share.
On September 11, 1998, our board of directors issued an option to purchase
2,000 shares of our common stock to an employee in accordance with our 1997
Stock Option Plan at an exercise price of $3.30 per share.
On April 26,1999, our board of directors issued options to purchase 30,000
shares of our common stock to three of our directors in accordance with our 1997
Stock Option Plan at an exercise price of $2.63 per share. At this same time
they issued options to purchase 228,000 shares of our common stock to two other
of our directors/officers at an exercise price of $2.63 per share. No
compensation costs were recorded in connection with any of these options.
4. NOTES PAYABLE
Norton Drilling Company entered into two borrowing arrangements with a bank
on February 17, 1998. The first was a demand note payable in the amount of
$4,500,000. This note bears interest at 2.0% above the Wall Street Journal prime
rate and calls for monthly payments of $53,750 plus accrued interest beginning
March 1, 1998 through maturity on February 1, 2005. On April 1, 1999, the bank
agreed to waive principal payments on this note for the months of April, May and
June 1999. In July the bank also waived the principal payment due on this
arrangement for the month of July and waived the covenant with which Norton was
not in compliance.
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. On April 1, 1999, the
maturity date on this revolving line of credit was extended to July 1, 1999. On
July 1, 1999, this arrangement was renewed and the maturity date was extended to
August 1, 1999.
On May 13, 1999, Norton Drilling Company entered into another borrowing
arrangement with a bank for an additional revolving line of credit with a
borrowing facility of $600,000. This line of credit requires monthly payments of
interest only at 1.5% above the Wall Street Journal prime rate with remaining
principal and interest due at maturity on July 1, 1999. On July 1, 1999, this
arrangement was renewed and increased to $1,100,000 with the maturity date
extended to August 1, 1999 and interest increased to 2.0% above the Wall Street
Journal prime rate.
All 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.
10 of 17 Pages
<PAGE>
NORTON DRILLING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(CONTINUED)
5. INCOME TAXES
The effective income tax rate varies from the Federal staturory rate for the
three and six month periods ended May 31, 1999 and 1998 due to differences in
the calculations of and deductibility of items for book purposes versus tax
purposes.
6. RECENT ACCOUNTING STANDARDS
We adopted Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" during the quarter ended February 28, 1999. We had no
components of other comprehensive income (loss) such that the comprehensive
income (loss) is the same as net income (loss) for the three and six month
periods ended May 31, 1999 and 1998.
7. MERGER AGREEMENT
On April 26, 1999, we signed an agreement with UTI Energy Corp. ("UTI")
relating to a proposed merger of a wholly-owned subsidiary of UTI with and into
Norton Drilling Services, Inc. Under the terms of the merger, UTI will issue to
our stockholders .2631579 of a share of UTI common stock in exchange for each
share of our common stock they own. A meeting of our stockholders will be held
on July 26, 1999 to vote on the proposed merger.
8. CONTINGENCIES
As part of an agreement entered into in August, 1995 between our
discontinued Nursery Segment, ourselves, a third party purchaser and a secured
creditor, the purchaser was required 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. In July 1998, the purchaser ceased making payments
on the obligation and filed for protection under the U.S. Bankruptcy code. In
February 1999, the secured creditor named us as a defendant in a legal
proceeding to collect payment for all amounts due. We had guaranteed the
indebtedness relation to the note executed by the discontiued Nursery Segment.
As of July 1, 1999, the full amount claimed to be due under the guaranty is
listed as approximately $1,900,000. This amount has not been recognized on our
books as of May 31, 1999, due to our belief that such amounts will not
ultimately be paid by us.
In the three month period ended May 31, 1999, certain amounts which were
billable under the terms of the contract in Mexico were not recognized as
revenues. These amounts relate to demobilization and contract termination fees
due to Norton upon cancellation of the contract by the customer. The amounts
were not recognized due to the uncertainty of the ultimate collectibility of the
amounts. The amount of these fees not recognized totaled approximately
$2,848,000.
11 of 17 Pages
<PAGE>
Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of May 31, 1999, we had working capital of approximately $61,000 and cash
and cash equivalents of approximately $228,000 as compared to working capital of
approximately $61,000 and cash and cash equivalents of approximately $172,000 at
November 30, 1998. For the six months ended May 31, 1999, operations used
approximately $70,000 in cash flows and our financing activities provided
approximately $185,000 of cash flows. For the six months ending May 31, 1998,
operations provided approximately $3,236,000 in cash flows and we used
approximately $701,000 of cash flows in our financing activities. Funds provided
in the six month period ending May 31, 1999 were approximately $55,000 and came
mainly from financing activities. Funds provided in the six month period ending
May 31, 1998 were approximately $950,000 and came mainly from operations.
Significant expenditures of NDSI primarily consist of Norton's continual
acquisition of replacement drilling equipment, such as drill collars, drill
pipe, engines and transportation equipment to adequately maintain the operating
status of the drilling fleet. Such expenditures for the six months ending May
31, 1999 and 1998, approximate $120,000 and $1,840,000, respectively. We
anticipate minimal capital expenditures for fiscal 1999 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 will not be
sufficient to fund operations and adequately service our debt for the next
twelve months. However, on April 26, 1999, we signed an agreement with UTI
Energy, Inc. which proposes the merger of a wholly-owned subsidiary of theirs
with and into Norton Drilling Services, Inc. We believe that subsequent to the
consummation of the proposed merger, all borrowings from our primary bank will
be paid off in full and we will thereafter have sufficient funds to allow us to
continue operating for the next twelve months.
The risks associated with the oil and gas industry, such as the volatility of
oil and gas prices, could adversely affect our operations.
Comparison of the Six Months Ended May 31, 1999 and 1998
For the six months ended May 31, 1999, total operating revenues were
approximately $7,462,000 as compared to approximately $16,098,000 for the six
months ended May 31, 1998, a decrease of $8,636,000 or 53.6%. Average rig
utilization was 35.4% in the six months ended May 31, 1999 compared to 77.9% in
the six months ended May 31, 1998. The decrease in drilling revenues was due to
the decrease in rig utilization.
Direct drilling costs for the six months ended May 31, 1999, were
approximately $6,411,000 or 85.9% of operating revenues as compared to
$12,680,000 or 78.8% of operating revenues for the six months ended May 31,
1998. The decrease in the dollar amount of the costs was due to a decrease in
rig utilization and the increase in the percentage was due to drilling rates
which have fallen more than our associated costs of drilling.
General and administrative expenses were approximately $1,041,000 for the six
months ended May 31, 1999 as compared to approximately $750,000 for the six
months ended May 31, 1998. The increase in general and
12 of 17 Pages
<PAGE>
administrative expenses was due to increases in legal and professional fees in
connection with our proposed merger with UTI and costs associated with our
Mexico operations which we did not have in the prior year.
Depreciation, depletion and amortization for the six months ended May 31,
1999 and 1998 was approximately $1,608,000 and $1,511,000, respectively. The
increase was due to the large amount of capital expenditures made in fiscal year
1998.
Interest expense was approximately $293,000 and $222,000 in the six months
ended May 31, 1999 and 1998, respectively. The increase in interest expense was
due to increases in short-term borrowings.
Income taxes for the six months ended May 31, 1999 were a credit of
approximately $600,000 as compared to a charge of approximately $402,000 in the
six months ended May 31, 1998. The change was due to us having net taxable
income in the prior year and a net taxable loss in the current year.
In the six months ended May 31, 1999, net loss was approximately $1,225,000
as compared to net income of approximately $749,000 in the six months ended May
31, 1998. The increase in loss was due to decreased revenues increases in
general and administrative costs.
Comparison of the three months ended May 31, 1999 and 1998
For the three months ended May 31, 1999 total operating revenues were
approximately $2,318,000 as compared to approximately $6,588,000 for the three
months ended May 31, 1998, a decrease of approximately $4,270,000 or 64.8%.
Average rig utilization was 24.8% in the three months ended May 31, 1999
compared to 63.6% in the three months ended May 31, 1998. The decrease in
drilling revenues was due to the decrease in drilling rig utilization and a
decrease in the rates we were getting for our rigs.
Direct drilling costs for the three months ended May 31, 1999 were
approximately $2,399,000 or 103.5% of operating revenues as compared to
approximately $5,614,000 or 85.2% of contract drilling revenues for the three
months ended May 31, 1998. The increase in direct drilling costs as a percent of
revenues was due to the rates which Norton was able to get for the use of its
drilling rigs falling more than the associated costs of operating the rigs. The
decrease in the dollar amount of the costs was due to a decrease in rig
utilization.
General and administrative expenses were approximately $597,000 for the three
months ended May 31, 1999 as compared to approximately $295,000 for the three
months ended May 31, 1998. The increase in general and administrative expenses
was due to increases in legal and professional fees in connection with our
proposed merger with UTI and costs associated with our Mexico operations which
we did not have in the prior year.
Depreciation, depletion and amortization for the three months ended May 31,
1999 and 1998 was approximately $835,000 and $762,000, respectively. The
increase was due to the large amount of capital expenditures made in fiscal year
1998.
Interest expense was approximately $148,000 and $98,000 in the three months
ended May 31, 1999 and 1998, respectively. The increase in interest expense was
due to increases in short-term borrowings.
In the three months ended May 31, 1998, net loss was approximately $1,072,000
as compared to net loss of approximately $76,000 in the three months ended May
31, 1998. The increase in loss was due to decreased revenues and increases in
general and administrative costs.
13 of 17 Pages
<PAGE>
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, and have
not recovered substantially since then. 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 and the cancellation of a drilling
contract in Mexico, we have experienced a reduction in drilling activity. This
reduction adversely impacted our revenues and net income for the quarter ended
May 31, 1999 and is expected to similarly impact our results of operations until
crude oil prices increase to a level substantially above the current prices and
remain at such a level for an extended period of time.
Market Conditions for Contract Drilling Services
Except for periods of time in 1991 and 1997, the market for onshore contract
drilling services has generally been depressed since mid-1982, when crude oil
and natural gas prices began to weaken. A particularly sharp decline in demand
for contract drilling services occurred in 1986 because of the world-wide
collapse in oil prices (to approximately $10.00 per Bbl in April 1986). Since
1986, and except during the occasional upturns, there have been substantially
more drilling rigs available than necessary to meet demand in most operating and
geographic segments of the domestic drilling industry. As a result, drilling
contractors have had difficulty sustaining profit margins. Reactivation of
onshore drilling rigs or new construction of drilling rigs could also adversely
affect rig utilization rates and pricing even in an environment of higher oil
and natural gas prices and increased drilling activity. We cannot predict either
the future level of demand for contract drilling services or future conditions
in the contract drilling industry.
Recent Accounting Standards
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 May 29, 2000. The provisions of this new standard are not
expected to have a material impact to us.
14 of 17 Pages
<PAGE>
Impact of Inflation
While subject to inflation, our business was not adversely impacted by
inflation during the three and six month periods ended May 31, 1999 and 1998 in
any material respect. We do not believe that inflation will have a material
impact on our business in the near future.
Year 2000
During 1997 we began evaluating computer systems to identify those 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
reviewed our computer systems and identified those systems that were not year
2000 compliant.
Those systems that were not year 2000 compliant were replaced in November
1998. The cost to replace the non-compliant systems were not material to our
financial position and results of operations.
Our ability to conduct our business efficiently and productively requires
that our customers and vendors be year 2000 compliant. We have not assessed the
readiness and effectiveness of our customers and vendors in regards to their
compliance with year 2000 problems. However, we plan to make inquiries,
solicitations and surveys of these customers and vendors in the current year on
an on-going basis to determine our level of vulnerability from our customers and
vendors. We do not anticipate an interruption of our operations relative to Year
2000 concerns of our customers and vendors. Therefore, we do not deem it
necessary to formally adopt a contingency plan.
The failure to correct a material year 2000 problem could result in
interruptions or failures of our normal business activities or operations. Such
failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the uncertainty inherent in the year
2000 problem, resulting in part from the uncertainty of the year 2000 readiness
of our customers and vendors, we are unable to determine at this time whether
the consequences of year 2000 failures will have a material impact on our
results of operations, liquidity or financial condition. We believe that with
the completion of upgrading our computer systems and the review of the status of
our customers and vendors year 2000 readiness, the possibility of significant
interruptions of normal operations should be reduced.
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
15 of 17 Pages
<PAGE>
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.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
As part of an agreement entered into in August, 1995 between our
discontinued Nursery Segment, ourselves, a third party purchaser and a secured
creditor, the purchaser was required 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. In July 1998, the purchaser ceased making payments
on the obligation and filed for protection under the U.S. Bankruptcy code. In
February 1999, the secured creditor named us as a defendant in a legal
proceeding to collect payment for all amounts due. We had guaranteed the
indebtedness relation to the note executed by the discontiued Nursery Segment.
As of July 1, 1999, the full amount claimed to be due under the guaranty is
listed as approximately $1,900,000. This amount has not been recognized on our
books as of May 31, 1999, due to our belief that such amounts will not
ultimately be paid by us.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Name
27 Financial Data Schedule for the period ending
May 31, 1999
(b) Reports on Form 8-K
None
16 of 17 Pages
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTON DRILLING SERVICES, INC.
Dated: July 15, 1999 By:/S/ Sherman H. Norton, Jr.
Sherman H. Norton, Jr.
Chairman of the Board
Dated: July 15, 1999 By:/s/ David W. Ridley
David Ridley, Chief Financial Officer
(Principal Financial and Accounting Officer)
17 of 17 Pages
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from form
10-Q for the quarterly period ended May 31, 1999 (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-30-1999
<PERIOD-START> Dec-01-1998
<PERIOD-END> May-31-1999
<CASH> 227,713
<SECURITIES> 4,607
<RECEIVABLES> 6,056,406
<ALLOWANCES> 178,477
<INVENTORY> 0
<CURRENT-ASSETS> 6,861,253
<PP&E> 20,902,454
<DEPRECIATION> 10,789,423
<TOTAL-ASSETS> 18,297,452
<CURRENT-LIABILITIES> 6,799,782
<BONDS> 0
0
0
<COMMON> 258,863
<OTHER-SE> 7,151,505
<TOTAL-LIABILITY-AND-EQUITY> 18,297,452
<SALES> 0
<TOTAL-REVENUES> 7,461,929
<CGS> 0
<TOTAL-COSTS> 6,410,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 292,734
<INCOME-PRETAX> (1,825,104)
<INCOME-TAX> (600,008)
<INCOME-CONTINUING> (1,225,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,225,096)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
