SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 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 0-18754
BLACK WARRIOR WIRELINE CORP.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 11-2904094
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(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
3748 HIGHWAY 45 NORTH, COLUMBUS, MISSISSIPPI
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39701 (Address of principal executive offices, zip code)
(601) 329-1047
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Outstanding at
Class November 12 , 1998
------------------------ -----------------------
COMMON STOCK, PAR VALUE 3,892,831 SHARES
$.0005 PER SHARE
Transitional Small Business Disclosure Format
YES NO [X]
<PAGE>
BLACK WARRIOR WIRELINE COPR.
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and
September 30, 1997 4
Consolidated Statements of Operations -
Nine Months Ended September 30, 1998 and
September 30, 1997 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and
September 30, 1997 6
Notes to Consolidated Financial Statements -
Nine Months Ended September 30, 1998 and
September 30, 1997 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Consolidated Results of Operations 6
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 0 $435,845
Short-term investments 50,000 50,000
Accounts receivable, less allowance for doubtful
accounts of $ 200,359 and $143,559 5,549,349 5,459,689
Prepaid expenses 283,570 390,144
Deferred tax asset 730,213 80,815
Other receivables 639,083 901,629
------- -------
Total current assets 7,252,215 7,318,122
Land and building 245,000 0
Property, plant, and equipment, less accumulated
depreciation of $ 7,683,592 and $4,791,052 25,741,277 9,347,685
Inventories 5,651,565 0
Other assets 518,259 358,521
Other receivables 500,000
Goodwill, less accumulated amortization of $477,642
and $134,421 11,375,826 9,061,655
---------- ----------
Total assets $51,284,142 $26,085,983
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $115,135 $0
Accounts payable 6,135,624 3,619,466
Accounts payable, related parties 0 6,090
Accrued salaries and vacation 62,380 124,376
Income tax payable 599,877
Accrued interest payable 696,244 69,041
Other accrued expenses 1,043,215 289,445
Deferred revenue 182,000 100,000
Current maturites of notes payable to banks 0 7,624
Mortgage notes payable, related party 0 380,000
Note payable, related party 3,000,000
Current maturities of long-term debt and capital
lease obligations 3,474,631 793,618
--------- -------
Total current liabilities 14,709,229 5,989,537
Deferred tax liability 1,032,991 1,132,513
Long-term accrued interest payable 437,614 150,364
Notes payable to related parties 15,400,000 8,070,549
Notes payable to banks, less current maturities 0 22,212
Long-term debt and capital lease obligations, less
current maturities 14,752,698 5,123,535
---------- ---------
Total liabilities 46,332,532 20,488,710
---------- -----------
Stockholder's equity:
Preferred stock, $.0005 par value, 2,500,000
shares authorized none issued at September 30,
1998 and December 31, 1997, respectively 0 0
Common stock, $.0005 par value, 12,500,000 shares
authorized; 3,897,451 and 2,990,254 shares issued
and outstanding at September 30, 1998 and December
31, 1997, respectively 1,949 1,495
Additional paid-in capital 12,065,166 7,744,953
Common stock to be issued in connection with acquisition
(133,333 shares) 0 280,000
Accumulated deficit (6,532,112) (1,845,782)
Treasury stock, at cost, 4,620 shares (583,393) (583,393)
---------- ---------
Total stockholders' equity 4,951,610 5,597,273
--------- ---------
Total liabilities and stockholders' equity $51,284,142 $ 26,085,983
=========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended September 30, 1998 and September 30, 1997
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $8,048,018 $4,565,840
Operating costs 7,607,565 3,353,167
Selling, general and administrative expenses 1,524,085 740,396
Depreciation and amortization 1,651,343 467,455
---------- --------
Net (loss) income from operations (2,734,975) 4,822
Interest expense and amortization of debt discount 919,481 154,476
Net gain on sale of fixed assets 59,817 0
Other income 14,093 32,258
------- -------
Net loss before benefit for
income taxes (3,580,546) (117,396)
Income taxes 0 0
-- -
Net loss $(3,580,546) $(117,396)
============ ==========
Net loss per common share- basic $(0.92) $ (0.05)
======= =========
Net loss per common share- diluted $(0.92) $ (0.05)
======= ========
Weighted average common shares outstanding-
basic 3,892,831 2,378,596
========= =========
Weighted average common shares outstanding
with dilutive securities 3,892,831 2,378,596
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $27,961,471 $9,218,909
Operating costs 23,051,611 6,496,471
Selling, general and administrative expenses 4,671,160 1,538,329
Depreciation and amortization 3,707,192 931,969
--------- ---------
Net (loss) income from operations (3,468,492) 252,140
Interest expense and amortization of debt discount 1,978,448 408,149
Net gain on sale of fixed assets 60,823 0
Other income 50,389 82,374
------ -------
Net loss before benefit for
income taxes (5,335,728) (73,635)
Benefit for income taxes 649,398 0
------- -
Net loss $(4,686,330) $(73,635)
============ =========
Net loss per common share - basic $(1.32) $(0.03)
======= =======
Net loss per common share - diluted $ (1.32) $(0.03)
======== =======
Weighted average common shares outstanding-
basic 3,549,411 2,210,968
========= =========
Weighted average common shares outstanding
with dilutive securities 3,549,411 2,210,968
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1998 and September 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash used in operations: $(996,080) $(242,194)
Cash flows from investing activities:
Acquisitions of property, plant, and equipment (4,691,698) (1,358,015)
Proceeds from sale of property, plant and equipment 205,781 68,548
Acquisition of business, net of cash acquired (671,932) (98,427)
---------- ---------
Cash used in investing activities: (5,157,849) (1,387,894)
Cash flows from financing activities:
Debt issuance costs (437,164) (190,000)
Proceeds from bank and other borrowings 23,882,426 2,471,018
Principal payments on long-term debt, notes payable
and capital lease obligations (21,782,975) (361,752)
Proceeds from issuance of common stock, net
of offering costs 3,940,662 0
--
Increase in cash overdraft 115,135 0
------- -
Cash provided by financing activities: 5,718,084 1,919,266
Net (decrease) increase in cash and cash equivalents (435,845) 289,178
Cash and cash equivalents, beginning of period 435,845 727,454
------- -------
Cash and cash equivalents, end of period $0 $1,016,632
= ==========
Supplemental disclosure of noncash investing and financing activities:
Notes payable incurred in connection with
business acquisition $19,000,000
Capital lease obligations incurred to acquire
property, plant & equipment $111,562
</TABLE>
See accompanying notes to the consolidated financial statements.
6
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements reflect all
adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial position of Black Warrior Wireline Corp. and
subsidiaries (the "Company"). Such adjustments are of a normal recurring nature.
The results of operations for the interim period are not necessarily indicative
of the results to be expected for the full year. The Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997 should be read in
conjuction with this document.
The Company is an oil and gas service company currently providing
various services to oil and gas well operators primarily in the continental
United States and in the Gulf of Mexico. The Company's principal lines of
business include (a) wireline services, (b) directional oil and gas well
drilling activities, and (c) workover services. The Company's recent growth and
increased revenues has been principally the result of seven acquisitions
completed since November 1996, including two acquisitions in 1998.
On March 16, 1998, the Company acquired from Phoenix Drilling Services,
Inc., ("Phoenix") the assets of its domestic oil and gas well directional
drilling and downhole survey service business ("Phoenix Acquisition") for $19
million. For financial statement purposes, the Phoenix Acquisition was accounted
for as a purchase and, accordingly, Phoenix's results are included in the
consolidated financial statements since the date of acquisition. The excess of
the purchase price of Phoenix over net assets acquired, goodwill, approximated
$2.5 million and is being amortized over twenty-five years. On June 1, 1998, the
Company acquired Petro Wireline ("Petro Acquisition") which has been engaged in
the wireline business in the four corners region of New Mexico, Colorado, Utah
and Arizona for $875 thousand. For financial statement purposes, the Petro
Acquisition was accounted for as a purchase and, accordingly, Petro Wireline's
results are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price of Petro Wireline over net assets
acquired, goodwill, approximated $65 thousand and is being amortized over
twenty-five years.
The following table presents unaudited pro forma consolidated results
of operations for the nine months ended September 30, 1998 and 1997 as if the
acquisitions above had occurred at the beginning of the period presented. The
pro forma summary information does not necessarily reflect the results of
operations as they actually would have been if the acquisitions had occurred at
the beginning of the periods presented.
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $31,972,607 $42,522,509
Loss before benefit for income tax $(5,530,446) $ (2,851,108)
Net loss $(4,953,183) $ (1,844,846)
Net loss per common share - basic $ (1.40) $ (0.83)
Net loss per common share - diluted $ (1.40) $ (0.83)
</TABLE>
The unaudited pro forma consolidated results include historical
accounts of the Company and historical accounts of the acquired business and pro
forma adjustments, including the amortization of the excess purchase price over
fair value of net assets acquired, applicable tax effects, an increase in
interest expense, and the increase in depreciation expense as a result of
purchase price adjustments.
2. EARNINGS PER SHARE
The calculation of basic and diluted earning per share ("EPS") is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 ENDED SEPTEMBER 30, 1997
-------------------------------------------- -------------------------------------
LOSS SHARES PER SHARE LOSS SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(3,580,546) $(117,396)
BASIC EPS
Income (loss) available
to common --------------------------------------------------------------------------------------
shareholders $(3,580,546) 3,892,831 $(0.92) $(117,396) 2,378,596 $(0.05)
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt securities
DILUTED EPS
Income (loss) available
to common --------------------------------------------------------------------------------------
shareholders $(3,580,546) 3,892,831 $(0.92) $(117,396) 2,378,596 $(0.05)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 ENDED SEPTEMBER 30, 1997
-------------------------------------------- -------------------------------------
LOSS SHARES PER SHARE LOSS SHARES PER SHARE
NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(4,686,330) $(73,635)
BASIC EPS
Income (loss) available
to common ---------------------------------------------------------------------------------------
shareholders $(4,686,330) 3,549,411 $(1.32) $(73,635) 2,210,968 $(0.03)
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt securities
DILUTED EPS
Income (loss) available
to common ---------------------------------------------------------------------------------------
shareholders $(4,686,330) 3,549,411 $(1.32) $(73,635) 2,210,968 $(0.03)
</TABLE>
Options and warrants to purchase 4,918,000 and 1,674,500 shares of
common stock at prices ranging from $1.50 to $8.01 were outstanding during the
three and nine months ended September 30, 1998 and 1997 respectively but were
not included in the computation of diluted EPS because the effect would be
anti-dilutive.
Convertible debt instruments which would result in the issuance of
3,059,552 shares of common stock, if the conversion features were exercised,
were outstanding during the three months and nine months ended September 30,
1998 but were not included in the computation of the diluted EPS because the
effect would be anti-dilutive. The conversion price of these instruments ranges
from $3.25 to $7.00 per share and remained outstanding at September 30, 1998.
3. INVENTORY
Inventory consists of tool components, subassemblies, and expendable
parts. Tools manufactured and assembled are transferred to property, plant and
equipment as completed at the total cost of components, subassemblies, and
expendable parts of each tool. Components, subassemblies, and expendable parts
are capitalized as inventory and expensed as tools are repaired and maintained.
At September 30, 1998 inventories were classified as a long-term asset rather
than a current asset.
4. CONTINGENCIES
The Company and certain of its officers and directors are respondents
in an arbitration proceeding commenced by Monetary Advancements International,
Inc. before the American Arbitration Association in New York, New York. The
claimant seeks to recompense against the Company and other named respondents for
the alleged failure to pay compensation in the form of shares of stock of the
Company for services allegedly rendered. The respondents have submitted an
answer and counterclaims and have initiated a Court proceeding seeking partial
stay of the arbitration proceeding. The Company deems the allegations of the
claimant to be without merit and intends to vigorously contest the case.
Management does not believe the ultimate outcome of these actions will have a
materially adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
9
<PAGE>
On July 9, 1998, Southwick Investments Inc. ("Southwick") commenced a
lawsuit against the Company in the Superior Court of Fulton County, Georgia,
based on a Professional Services Agreement dated March 26, 1997, entered into
between Southwick and the Company pursuant to which Southwick was to develop and
implement a plan for raising additional capital and provide certain financial
advisory services. Southwick is seeking to be awarded damages in an unspecified
amount for breach of contract and the loss in value to Southwick of an option to
purchase 50,000 shares of the common stock of the Company at an exercise price
of $4.00 per share, together with court costs and attorney's fees. The Company
intends to defend this action vigorously and believes that it has good and
meritorious defenses. Management does not believe the ultimate outcome of these
actions will have a materially adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.
The Company is also a defendant in various legal actions in the
ordinary course of business. Management does not believe the ultimate outcome of
these actions will have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
At September 30, 1998, the Company was not in compliance with certain
financial covenants of its Loan and Security Agreement dated March 16, 1998 with
Fleet Capital Corporation ("Fleet"). On October 30, 1998, the Company entered
into an Amended and Restated Loan and Security Agreement ("the Amended Credit
Facility") with Fleet which amended and restated the Loan and Security Agreement
entered into with Fleet on March 16, 1998. Under the terms of the Amended Credit
Facility, any and all defaults or events of default occurring at September 30,
1998 or earlier under the prior Loan and Security Agreement were permanently
waived.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Company intends to continue to expand its wireline, directional
drilling and other oil and gas service business through further strategic
acquisitions of other companies engaged in such activities and through internal
growth. Currently the Company is primarily seeking to consolidate its management
of the operations acquired throughout 1997 and early 1998; however, it continues
to explore and evaluate additional acquisitions and may seek to pursue
additional acquisition opportunities if it believes the terms are favorable. The
Company currently has no definitive agreements to acquire any additional oil and
gas services companies. There can be no assurance that the Company will acquire
any additional oil and gas services companies or that any such acquisitions will
be beneficial to the Company. The process of integrating acquired companies into
the Company's operations can create unforeseen difficulties and may require a
disproportionate amount of management's attention and the Company's resources.
In connection with acquisitions, the Company could become subject to significant
contingent liabilities arising from the activities of the acquired companies to
the extent the Company assumes, or an acquired entity becomes liable for,
unknown or contingent liabilities or in the event that such liabilities are
imposed on the Company under theories of successor liability.
To date, the Company has funded its acquisition activities using the
proceeds from secured lending from banks and other institutional lenders, the
private or public sale of debt and equity securities and the cash flow from its
current operations. Financing obtained to date has included borrowings secured
by substantially all of the Company's assets. The Company intends to continue to
use these sources to finance future acquisitions. Any such capital that is
raised will be on terms
10
<PAGE>
yet to be negotiated and may be on terms that dilute the interests of current
stockholders of the Company. There can be no assurance that the Company will
raise additional capital when it is required to complete any proposed
acquisitions or that the Company will have or be able to raise sufficient
capital to fund its acquisition strategy.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
With the exception of historical matters, the matters discussed in this
Report are "forward-looking statements" as defined under the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, the matters described herein,
including Management's Discussion and Analysis or Plan of Operations. Such
forward-looking statements relate to the Company's ability to attain and
maintain profitability and cash flow, the stability of and future prices for oil
and gas, pricing in the oil and gas services industry, the ability of the
Company to compete in the premium services market, the ability of the Company to
expand through acquisitions and to redeploy its equipment among regional
operations, the ability of the Company to upgrade, modernize and expand its
equipment, including its wireline fleet, the ability of the Company to expand
its tubing conveyed perforating services, the ability of the Company to provide
services using the newly acquired state of the art tooling, the ability of the
Company to raise additional capital to meet its requirements and to obtain
additional financing, the ability of the Company to successfully implement its
business strategy, the ability of the Company to maintain compliance with the
covenants of its various loan documents and other agreements pursuant to which
securities have been issued and the ability of the Company to successfully
address Year 2000 issues. The inability of the Company to meet these objectives
or the consequences on the Company from adverse developments in general economic
conditions, adverse developments in the oil and gas industry, and other factors
could have a material adverse effect on the Company. The Company cautions
readers that various risk factors described in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 could cause the Company's
operating results to differ materially from those expressed in any
forward-looking statements made by the Company and could adversely affect the
Company's financial condition and its ability to pursue its business strategy.
Readers should refer to the Annual Report on Form 10-KSB and the risk factors
discussed therein.
RESULTS OF CONSOLIDATED OPERATIONS. THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company's consolidated results of operations are affected primarily
by the extent of utilization and rates paid for its services and equipment.
Revenues are also affected by the success of the Company's efforts to increase
its penetration of the market for its services through the acquisition of other
oil and natural gas well service companies, by intensified marketing of its
services and through internal growth. Incremental demand for the Company's
services is affected by the level of oil and natural gas well drilling activity
and efforts by oil and gas producers to improve well production and operating
efficiencies. Both short-term and long-term trends in oil and natural gas prices
affect the utilization of the Company's services. This effect has been offset in
recent years by a number of industry trends, including advances in technology
that have increased drilling success rates and efficiency and an general
upgrading in technology used on the Company's equipment.
11
<PAGE>
Demand and prices for the Company's services depend upon the level of
activity in the oil and gas exploration and production industry in those areas
of the United States where the Company offers its services. This activity
depends upon numerous factors over which the Company has no control, including
the level of oil and gas prices, expectations about future oil and gas prices,
the ability of the Organization of Petroleum Exporting Countries ("OPEC") to set
and maintain production levels and prices, the cost of exploring for, producing
and delivering oil and gas, the price of foreign imports of oil and natural gas,
the discovery rate of new oil and gas reserves, available pipeline and other oil
and gas transportation capacity, worldwide weather conditions, international
political, military, regulatory and economic conditions and the ability of oil
and gas companies to raise capital. Recently, oil and gas prices have decreased
primarily as a result of decreased international demand and economic uncertainty
in Asia. These lower oil and gas prices have negatively impacted the Company's
revenues for the nine months ended September 30, 1998. The level of drilling
activity in the onshore oil and gas exploration and production industry in the
United States has been volatile and no assurance can be given that current
levels of oil and gas exploration activities in the areas where the Company
offers its services will continue or that demand for the Company's services will
correspond to the level of activity in the industry. Further, any material
changes in the demand for or supply of natural gas could materially impact the
demand for the Company's services. Prices for oil and gas are expected to
continue to be volatile and to affect the demand for and pricing of the
Company's services. A material decline in oil or gas prices or industry activity
in the United States could have a material adverse effect on the Company's
results of operations, financial condition and cash flows.
The oil and gas well service industry has been recently characterized
by a decreased level of demand for wireline, directional drilling, recompletion
and other oil and gas well services. The industry has been characterized by
substantial fluctuations in the demand for such services and the supply of
equipment. Recent declines in prices for oil and gas can be expected to continue
to impact the Company's revenues. The Company's revenues in the future also can
be expected to be impacted to a material extent not only by the demand
throughout the industry but the supply of oil and gas well service equipment
available to perform these services. The Company's revenues could be adversely
affected by a shortage in the equipment available to the Company to perform its
services.
The following table sets forth the Company's revenues from its three
principal lines of business and other revenues for the nine months and three
months ended September 30, 1998 and 1997 respectively:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
--------------------------- ---------------------------
09/30/98 09/30/97 09/30/98 09/30/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wireline Services $8,215,653 $6,548,856 $2,831,291 $2,815,176
Directional Drilling 18,457,240 1,282,086 4,774,019 1,282,086
Workover and Completion 1,149,323 1,180,922 367,354 406,164
Other 139,255 207,045 75,354 62,414
-------------------------------------------------------------
$27,961,471 $9,218,909 $8,048,018 $4,565,840
=========== ========== ========== ==========
</TABLE>
The Company had a net loss of $3.6 million for the three months ended
September 30, 1998, as compared to net loss of $.1 million for the same period
in 1997. The Company had a net loss of $4.7 million for the nine months ended
September 30, 1998, as compared to loss of $.1 million for the same period in
1997.
12
<PAGE>
Revenues increased by $3.5 million to $8.1 million for the three months
ended September 30, 1998 as compared to revenues of $4.6 million for the three
months ended September 30, 1997. This increase was the result of acquisitions
completed during 1997 and 1998. Revenues from operations have declined by an
estimated $6.9 million on a pro forma basis during the same period, due to a
reduced demand for the Company's services that primarily resulted from the
recent decline in oil and gas prices.
Revenues increased by $18.8 million to $28 million for the nine months
ended September 30, 1998 as compared to revenues of $9.2 million for the nine
months ended September 30, 1997. Revenues from operations declined by an
estimated $10.5 million on a pro forma basis during the same period as seen in
Note 1 to the Consolidated Financial Statements, due to a reduced demand for the
Company's services that primarily resulted from the recent decline in oil and
gas prices.
Operating costs increased by $4.3 million for the three months ended
September 30, 1998, as compared to the same period of 1997. Operating costs were
95% of revenues for the three months ended September 30, 1998 as compared with
73.4% of revenues in the same period in 1997. Operating costs increased by $16.6
million for the nine months ended September 30, 1998, as compared to the same
period in 1997. Operating costs were 82.6% of revenues for the nine months ended
September 30, 1998 as compared with 70.5% of revenues in the same period in
1997. This increase was due primarily to the increase in the level of activities
primarily as a consequence of the acquisitions completed in 1997 and 1998. The
increase in operating costs as a percentage of revenues is a result of
competitive pressures on the prices the Company charges for its services and
costs associated with integrating its various acquisitions. Salaries and
benefits increased by $3.3 million for the three months ended September 30,
1998, as compared to the same period in 1997, while the total number of
employees increased from 176 at September 30, 1997 to 357 at September 30, 1998.
Salaries and benefits increased by $9.5 million for the nine months ended
September 30, 1998, as compared to the same period in 1997. This was due to
salary increases, hiring of additional personnel, and employees hired in
conjunction with acquisitions, partially offset by layoffs and cost controls
that the Company initiated in response to the reduced demand for the Company's
services that primarily resulted from the recent decline in oil and gas prices.
Selling, general and administrative expenses increased by $.8 million
from $.7 million in the three months ended September 30, 1997 to $1.5 million in
the three months ended September 30, 1998. As a percentage of revenues, selling,
general and administrative expenses increased from 16.2% in the three months
ended September 30, 1997 to 18.9% in 1998, primarily as a result of lower than
anticipated revenues due to adverse market conditions with an increased level of
executive and administrative activities associated with the recent acquisitions.
Selling, general and administrative expenses increased by $3.2 million from $1.5
million, or 16.7% of revenues in the nine months ended September 30, 1997, to
$4.7 million, or 16.7% of revenues in the nine months ended September 30, 1998,
primarily as a result of increased levels of executive and administrative
activities associated acquisitions.
Depreciation and amortization increased from $.5 million in the three
months ended September 30, 1997, or 10% of revenues, to $1.7 million in 1998, or
20% of revenues and from $.9 million in the nine months ended September 30,
1997, or 10.1% of revenues, to $3.7 million in 1998, or 13% of revenues,
primarily because of the higher asset base of depreciable properties in the
three month and nine month periods ended September 30, 1998 over the same
periods in 1997 and higher goodwill amortization.
13
<PAGE>
Interest expense and amortization of debt discount increased by $.8
million for the three months ended September 30, 1998 as compared to the same
period in 1997 and increased by $1.6 million for the nine months ended September
30, 1998 as compared to the same period in 1997. This was directly related to
the increased amounts of indebtedness outstanding in 1998 incurred to finance
acquisitions. See "Note 6 of Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997.
Net gain on sale of fixed assets was $60 thousand for the three months
ended September 30, 1998 as compared to no gain or loss in the same period in
1997. Other income decreased by $18 thousand in three months ended September 30,
1998 as compared to the same period in 1997.
Income tax benefit totaled $.7 million for the nine months ended
September 30, 1998 as compared to no income tax benefit or expense for the nine
months ended September 30, 1997. These totals contain Federal and State deferred
taxes as well as current amounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by Company operating activities was $1 million for the nine
months ended September 30, 1998 as compared to cash used of $.2 million for the
same period in 1997. Investing activities used cash of $5.2 million during the
nine months ended September 30, 1998 for the acquisition of property, plant and
equipment and businesses, net of cash acquired, offset by proceeds from the sale
of fixed assets of $.2 million. During the nine months ended September 30, 1997,
investing activities used cash of $1.5 million for the acquisition of property,
plant and equipment and businesses, net of cash acquired, offset by proceeds of
approximately $.1 million from the sale of fixed assets. Financing activities
provided cash of $5.7 million from the net proceeds from the issuance of common
stock of $3.9 million and $23.9 million from the proceeds from bank and other
borrowings during the nine months ended September 30, 1998 offset by principal
payments on bank and other borrowings and capital lease obligations of $21.8
million and $.4 million of costs related to debt issuances.
Cash at September 30, 1998 was zero as compared with cash at September
30, 1997 of $1.0 million.
The Company's recent growth and increased revenues has been principally
the result of the completion of seven acquisitions since November 1996. See Note
1 to the Consolidated Financial Statements.
Under the terms of its agreement to acquire Diamondback, the Company
has satisfied its capital expenditures obligations by expending $4 million for
capital improvements during the last quarter of 1997 and the nine months ended
September 30, 1998.
During the twelve months ending September 30, 1999 and the twelve
months ending September 30, 2000, the Company is obligated to make repayments of
principal on outstanding indebtedness of $4.3 million and $14.1 million,
respectively. The foregoing does not include repayment of the outstanding
indebtedness of $2.1 million at September 30, 1998 under the Company's revolving
loan facility with Fleet Capital Corp. ("Fleet"). The Company intends to make
these payments of principal and interest and to satisfy the excess of its
current liabilities over current assets out of its cash flow from operations,
the proceeds from the possible private or public sale of debt or equity
securities, other borrowings or refinancings of borrowings. On October 30, 1998,
the Company entered into an Amended and Restated Loan and Security Agreement
with
14
<PAGE>
Fleet which amended and restated the loan and security agreement entered into
with Fleet on March 16, 1998. Under the terms of the agreement, Fleet has agreed
to advance an additional $1.2 million and reduce principal payments. Fleet
funded $600 thousand upon closing and will fund the remaining $600 thousand once
certain conditions are met. Additionally, Black Warrior has received an
additional $2.0 million from St. James Merchant Bankers L.P. in the form of a
convertible promissiory note that has warrants attached. St. James has funded
$1.25 million, of which $500 thousand had been received by the Company as of
September 30, 1998 and will fund the remaining $750 thousand concurrently with
Fleet's second funding of $600 thousand. On March 15, 2001 the revolving loan
expires and the outstanding principal is due. The Company has made no
arrangements to raise additional capital for the purpose of making these
payments of principal and interest and is unable to state the terms on which
such capital could be raised. However, there can be no assurance that such
capital may be raised on terms that do not dilute the interests of the Company's
present stockholders.
On June 1, 1998, the Company completed the Petro Wireline Services
Acquisition. The purchase price for the Petro Wireline Services Acquisition was
approximately $943,632. Financing for the transaction, in the amount of
$525,000, was obtained under the Company's Loan and Security Agreement with
Fleet. The balance of the purchase price was paid by the issuance of a
three-year promissory note, in the amount of $350,000, with interest at a rate
of one and one/half percent above the prime rate of Fleet, payable in three
equal annual installments with all accrued interest thereon. The Note is secured
by a second lien on all the assets acquired, other than the inventory and other
expendables. The Note and security for the note shall be subordinated to the
first lien of Fleet. The Company has also agreed to pay the sellers $68,632 to
be paid in six equal installments of $11,438.68 bearing interest on the
outstanding balance at a rate of 9% per annum. Petro Wireline Services provides
wireline and other services to oil and gas operators in the four corners region
of New Mexico, Colorado, Utah and Arizona.
On March 16, 1998, the Company acquired from Phoenix Drilling Services,
Inc. ("Phoenix") the assets of its domestic oil and gas well directional
drilling and domestic survey business ("Phoenix Acquisition"). The purchase
price for the Phoenix Acquisition was approximately $19.0 million. Financing for
the transaction was obtained through the sale of convertible notes and warrants
to St. James Capital Partners, L.P. ("St. James") for $10.0 million. An
additional $9.0 million was borrowed under the Company's Loan and Security
Agreement with Fleet, and $3.3 million raised from the sale in a private
placement of 596,000 shares of common stock at a price of $5.50 per share. See
"Item 11. Security Ownership of Certain Beneficial Owners and Management" and
"Item 12. Certain Relationships and Related Transactions" in the Company's
Annual Report of Form 10-KSB for the fiscal year ended December 31, 1997. See
the Company's Current Reports on Form 8-K filed March 16, 1998 and November 16,
1998 for a description of the Company's Loan and Security Agreement with Fleet.
The Company has no definitive agreements to acquire any additional
companies. However, there can be no assurance that the Company will not acquire
additional companies in the future, or that any such acquisitions, if made, will
be beneficial to the Company. The process of integrating acquired properties
into the Company's operations may result in unforeseen difficulties and may
require a disproportionate amount of management's attention and the Company's
resources. In connection with acquisitions, the Company could become subject to
significant contingent liabilities arising from the activities of the acquired
companies to the extent the Company assumes, or an acquired entity becomes
liable for, unknown or contingent liabilities or in the event that such
liabilities are imposed on the Company under theories of successor liability.
15
<PAGE>
The Company intends to fund its acquisitions using cash flow from its
current operations as well as the possible proceeds from secured lending from
banks or other institutional lenders and the private or public sale of debt and
equity securities. Any such capital that is raised will be on terms yet to be
negotiated and may be on terms that dilute the interests of current stockholders
of the Company. Subject to the restrictions contained in the Company's existing
loan agreement with Fleet, loans may be collateralized by all or a substantial
portion of the Company's assets. There can be no assurance that the Company will
raise additional capital when it is required or that the Company will have or be
able to raise sufficient capital to fund its acquisition strategy.
YEAR 2000 COMPUTER ISSUES
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 is often denoted by such hardware
and software as "98." It is probable that such hardware and/or sofrware will
interpret "00" as representing the year 1900 rather than the year 2000. This
"Year 2000" issue potentially affects all individuals and companies. The Company
has and continues to evaluate its information technology systems, hardware and
non-information technology systems to assess modifications needed for the Year
2000. These systems include those utilized for financial recordkeeping and
certain oil and gas service equipment. A member of senior management was
selected to oversee the Year 2000 project. The project work plan involves the
following phases: inventory of critical and non-critical systems and hardware,
assessment and certification of third party systems. The Company has completed
its inventory of systems and hardware. All critical systems are supported by
third party vendors. The Company is currently in the process of certifying these
systems with the vendors. With respect to other third party relationships, the
Company is inquiring of certain vendors, customers, and other third parties that
supply critical services to determine their preparedness and ability to continue
normal operations.
To date, the Company has incurred minimal costs related to the Year
2000 project and does not anticipate any significant additional costs. Such
costs are expensed as incurred.
Management expects that Year 2000 issues will be addressed on a
schedule and in a manner that will prevent such issues from having a material
effect on the Company's results of operations, liquidity or financial condition.
While the Company has and will continue to pursue Year 2000 compliance, there
can be no assurance that the Company and its vendors, customers and other third
parties which supply critical services will be successful in identifying and
addressing all material Year 2000 issues. It is possible that the Company's
financial position, results of operations, or cash flows could be disrupted by
Year 2000 problems experienced by its vendors and customers, that utilize its
services, financial institutions or other parties. The Company is unable to
quantify the effect, if any, of Year 2000 computer problems that may be
experienced by these third parties.
INFLATION
The Company's revenues have been and are expected to continue to be
affected by fluctuations in the prices for oil and gas. Inflationary pressures
did not have a significant effect on the Company's operations in the three
months and nine months ended September 30, 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 specifies guidelines for
determining an entity's operating
16
<PAGE>
segments and the type and level of financial information required to be
disclosed. In February 1998, the FASB issued Statement of Financial Accounting
Standards No.132, "Employers Disclosure about Pension and Other Post Retirement
Benefits". SFAS No. 132 provided for new disclosure requirements about pension
and other postretirement benefit obligations. These standards will be
implemented in fiscal year 1998. The implementation of these standards is not
anticipated to have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 1998, the Company was not in compliance with certain
financial covenants of its Loan and Security Agreement dated March 16, 1998 with
Fleet Capital Corporation ("Fleet"). On October 30, 1998, the Company entered
into an Amended and Restated Loan and Security Agreement ("the Amended Credit
Facility") with Fleet which amended and restated the Loan and Security Agreement
entered into with Fleet on March 16, 1998. Under the terms of the Amended Credit
Facility, any and all defaults or events of default occurring at September 30,
1998 or earlier under the prior Loan and Security Agreement were permanently
waived.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
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.
BLACK WARRIOR WIRELINE CORP.
----------------------------
(Registrant)
Date: November 19, 1998 /S/ William L. Jenkins
-------------------------------------
William L. Jenkins
President and Chief Operating Officer
(Principal Executive, Financial and
Accounting Officer)
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