This just in:
October 14, 1997
DSI INDUSTRIES INC (NORT)
Quarterly Report (SEC form 10-Q)
Managements Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
As of August 31, 1997, the Company had a working capital deficiency of
approximately $648,000 and a book cash overdraft of approximately $8,000
as compared 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 nine months ended August 31, 1997, operations provided
approximately $938,000 in cash flows and the Company's financing
activities provided approximately $294,000. For the nine months ending
August 31, 1996, operations provided approximately $644,000 in cash flows
and the Company's financing activities provided approximately $225,000.
The use of funds in the nine month period ending August 31, 1997 was
mainly attributable to the acquisition of property and equipment. The
increase in funds for the nine month period ending August 31, 1996, was
mainly attributable to proceeds from notes payable.
Significant expenditures of the Company 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, 1997 and 1996, approximate $2,151,000
and $963,000, respectively. Capital expenditures increased in the current
nine month period as compared to the nine month period in the prior year
due to the upgrading of two rigs which occurred in the first few months of
this fiscal year. The Drilling Segment anticipates capital expenditures of
approximately $3,250,000 for fiscal 1997 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,
the Registrant's anticipated level of capital expenditures may fluctuate
commensurate with the volatility of the industry.
Management believes that cash flows from operations and borrowings
should be sufficient to fund operations and adequately service the
Registrant's debt for the next twelve months. The inherent macroeconomic
risks associated with the oil and gas industry, such as the volatility of oil
and gas prices, could adversely affect the Registrant's operations.
Results of Continuing Operations
Comparison of the nine months ended August 31, 1997 and 1996
For the nine months ended August 31, 1997 contract drilling revenues were
approximately $25,347,000 as compared to $18,536,000 for the nine months
ended August 31, 1996, an increase of $6,811,000 or 36.7%. Average rig
utilization was 90.9% in the nine months ended August 31, 1997 compared
to 71.2% in the nine months ended August 31, 1996. The increase in drilling
revenues was due to an increase in drilling rig utilization and an increase in
drilling rates brought on by an increase in demand for drilling services.
Direct job and rig costs for the nine months ended August 31, 1997 were
approximately $21,018,000 or 82.9% of contract drilling revenues as
compared to $16,242,000 or 87.6% of contract drilling revenues for the nine
months ended August 31, 1996. Direct job and rig costs increased due to the
increased amount of work performed, but decreased as a percentage of
revenues due to increased drilling rates.
General and administrative expenses were approximately $820,000 for the
nine months ended August 31, 1997 as compared to $806,000 for the nine
months ended August 31, 1996. The increase in general and administrative
expenses was due to the hiring of an additional office employee and an
increase in other salaries as provided for in employment contracts relative
to the Drilling Segment.
Depreciaton, depletion and amortization for the nine months ended August
1, 1997 and 1996 was approximately $1,520,000 and $962,000, respectively.
The increase was due to large capital expenditures made in the first four
months of the year.
Interest expense was approximately $421,000 in the nine month period
ending August 31, 1997 as compared to approximately $275,000 in the nine
month period ended August 31, 1996. The increase in interest expense was
due to an increase in borrowings in order to fund equipment acquisitions.
In the nine months ended August 31, 1997, income from continuing
operations was approximately $1,813,000 as compared to income of
approximately $410,000 in the nine months ended August 31, 1996. The
increase in income was due mainly to the increase in drilling revenues and
gross profit percentage.
In the nine months ended August 31, 1997, the Company reported income
from discontinued operations of approximately $253,000 as compared to
approximately $2,115,000 for the nine months ended August 31, 1996. This
income in the nine months ended August 31, 1997 was attributable to
management's revision of its initial estimates made to reserve for the
ultimate loss to be incurred in the disposal of the Nursery Segment. The
income in the prior year came from the sale of the Nursery Segment to a
third party which resulted in the Company being able to write off a large
number of unsecured liabilities relative to that segment.
Comparison of the three months ended August 31, 1997 and 1996
For the three months ended August 31, 1997 contract drilling revenues were
approximately $10,337,000 as compared to $7,294,000 for the three months
ended August 31, 1996, an increase of $3,043,000 or 41.7%. Average rig
utilization was 97.5% in the three months ended August 31, 1997 compared
to 87.1% in the three months ended August 31, 1996. The increase in drilling
revenues was due to an increase in rig utilization and an increase in drilling
rates brought on by an increase in demand for drilling services.
Direct job and rig costs for the three months ended August 31, 1997 were
approximately $7,278,000 or 70.4% of contract drilling revenues as
compared to $6,469,000 or 88.7% of contract drilling revenues for the three
months ended August 31, 1996. Drilling costs increased due to the increase
in rig utilization, but decreased as a percent of revenues due to an increase
in drilling rates.
General and administrative expenses were approximately $284,000 for the
three months ended August 31, 1997 as compared to $259,000 for the three
months ended August 31, 1996. The increase in general and administrative
expenses was due to the hiring of an additional office employee and an
increase in other salaries as provided for in employment contracts relative
to the drilling segment.
Interest expense was approximately $157,000 in the three month period
ended August 31, 1997 compared to $80,000 for the three months ended
August 31, 1996, an increase of $77,000. The increase in interest expense
was due to an increase in borrowings in order to fund equipment
acquisitions.
In the three months ended August 31, 1997, income from continuing
operations was approximately $2,091,000 as compared to $174,000 in the
three months ended August 31, 1996. The increase in income was due
mainly to the increase in drilling revenues and gross profit percentage.
In the three months ended August 31, 1997, the Company reported income
from discontinued operations of approximately $228,000 as compared to
approximately $2,115,000 for the three months ended August 31, 1996. This
income in the three months ended August 31, 1997 was attributable to
management's revision of its initial estimates made to reserve for the
ultimate loss to be incurred in the disposal of the Nursery Segment. The
income in the prior year came from the sale of the Nursery Segment to a
third party which resulted in the Company being able to write off a large
number of unsecured liabilities relative to that segment.
Volatility of Oil and Natural Gas Prices
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas. Historically,
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 the control of the
Company. Any significant or extended decline in oil and/or gas prices could
have a material adverse effect on the Company's financial condition and
results of operations.
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 the
Company during the quarter ending February 28, 1998 in its 1998 fiscal
year.
In February 1997, the FASB issues 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 the Company during its fiscal year ending
November 30, 1998. The Company does not anticipate a change in its
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 the Company
during the quarter ending February 28, 1999 in the Company's 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 the
Company during the quarter ending February 28, 1999 in the Company's
1999 fiscal year.
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. |
