UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
MARCH 16, 1998
BLACK WARRIOR WIRELINE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-18754 11-2904094
(COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.)
3748 HIGHWAY 45 NORTH 39701
COLUMBUS, MISSISSIPPI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(601) 329-1047
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
THIS CURRENT REPORT ON FORM 8-K/A IS FILED PURSUANT TO RULE 103 OF REGULATION
S-T TO CORRECT AN ERROR WHICH RESULTED FROM AN ELECTRONIC TRANSMISSION IN THE
REPORT OF INDEPENDENT ACCOUNTANTS ON THE COMBINED FINANCIAL STATEMENTS OF
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY) AS OF DECEMBER 31,
1996 AND 1995 AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM JUNE
15, 1995 TO DECEMBER 31, 1995.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. The following financial
statements of the business acquired are filed as exhibits hereto:
CONSOLIDATED FINANCIAL STATEMENTS OF PHOENIX DRILLING SERVICES, INC.
(DOMESTIC OPERATIONS ONLY) AS OF DECEMBER 31, 1997 AND FOR THE YEAR ENDED
DECEMBER 31, 1997
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statement of Operations for the year ended December 31, 1997
Consolidated Statement of Changes in Shareholders' Equity for the year
ended December 31, 1997
Consolidated Statement of Cash Flows for the year ended December 31, 1997
Notes to Consolidated Financial Statements
COMBINED FINANCIAL STATEMENTS OF PHOENIX DRILLING SERVICES, INC. (DOMESTIC
OPERATIONS ONLY) AS OF DECEMBER 31, 1996 AND 1995 AND FOR THE YEAR ENDED
DECEMBER 31, 1996 AND THE PERIOD FROM JUNE 15, 1995 TO DECEMBER 31, 1995
Reports of Independent Accountants
Combined Balance Sheets as of December 31, 1996 and 1995
Combined Statements of Operations for the year ended December 31, 1996 and
the period from June 15, 1995 to December 31, 1995
Combined Statements of Changes in Division Equity for the year ended
December 31, 1996 and the period from June 15, 1995 to December 31, 1995
Combined Statements of Cash Flows for the year ended December 31, 1996 and
the period from June 15, 1995 to December 31, 1995
Notes to Combined Financial Statements
(B) PRO FORMA FINANCIAL INFORMATION. The following pro forma financial
statements of the registrant are filed as an exhibit hereto:
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BLACK
WARRIOR WIRELINE CORP. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31,
1997
Unaudited Pro Forma Condensed Consolidated Financial Statements
Introduction
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1997
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
period ended March 31, 1998
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS,
CONTINUED
(C) EXHIBITS.
NONE
SIGNATURES
Pursuant to the requirements of the Securities and 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. AND SUBSIDIARY
Date: June 4, 1998 By: /s/ William Jenkins
------------ ------------------------------------------------------
William Jenkins, President and Chief Operating Officer
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
DESCRIPTION
----------- SEQUENTIAL
PAGE NO.
----------
<S> <C>
Report of Independent Accountants ................................................................. F-1
Consolidated Financial Statements of Phoenix Drilling Services, Inc. (domestic operations
only) as of December 31, 1997 and for the year ended December 31, 1997 ............................ F-2 - F-12
Report of Independent Accountants ................................................................. F-13 - F-14
Combined Financial Statements of Phoenix Drilling Services, Inc. (domestic operations only)
as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and the period
from June 15, 1995 to December 31, 1995 ........................................................... F-15 - F-27
Unaudited Pro Forma Condensed Consolidated Statements of Operations of Black Warrior
Wireline Corp. and Subsidiaries for the three months ended March 31, 1998 and the year ended
December 31, 1997 ................................................................................. F-28 - F-32
</TABLE>
<PAGE>
PHOENIX DRILLING SERVICES, INC.
(DOMESTIC OPERATIONS ONLY)
(A WHOLLY OWNED SUBSIDIARY OF
PHOENIX ENERGY SERVICES, L.L.C.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Phoenix Drilling Services, Inc.
We have audited the accompanying consolidated balance sheet of Phoenix Drilling
Services, Inc. (domestic operations only) (the Company), a wholly owned
subsidiary of Phoenix Energy Services, L.L.C., as of December 31, 1997, and the
related consolidated statements of operations, shareholder's deficit, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in Note 1, the Company sold substantially all of its assets on
March 16, 1998.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Phoenix
Drilling Services, Inc. (domestic operations only) at December 31, 1997, and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 16, 1998
F-1
<PAGE>
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY)
(a wholly owned subsidiary of Phoenix Energy Services, L.L.C.)
CONSOLIDATED BALANCE SHEET
December 31, 1997
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and equivalents $ 425
Trade receivables, net of allowance of $686 7,004
Receivable from sale of equipment 2,134
Inventories 390
Prepaid expenses 199
---------
Total current assets 10,152
Property, plant, and equipment, less accumulated depreciation 18,610
Other 17
---------
Total assets $ 28,779
=========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 1,359
Payable to affiliates, net 20,732
Accrued liabilities 1,508
Current portion of long-term debt 1,007
Other 5
---------
Total current liabilities 24,611
Long-term debt 14,042
---------
Total liabilities 38,653
---------
Commitments and contingencies (Note 6)
Shareholder's deficit:
Preferred stock, $1 par value, 500 shares authorized
Common stock, $.01 par value, 1,500 shares authorized, 100 shares
issued and outstanding at December 31, 1997
Additional paid-in capital 24,517
Accumulated deficit (34,391)
---------
(9,874)
---------
Total liabilities and shareholder's deficit $ 28,779
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE>
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY)
(a wholly owned subsidiary of Phoenix Energy Services, L.L.C.)
CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Net sales $ 34,128
Cost of sales 15,783
---------
Gross profit 18,345
Selling, general, and administrative expenses 19,933
Loss from impairment of intangibles and fixed assets (Note 1) 22,263
---------
Loss from operations (23,851)
Interest expense, net 2,638
Other expense, net 2,329
---------
Loss before benefit for income taxes (28,818)
Benefit for income taxes 2,331
---------
Net loss $ (26,487)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE>
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY)
(a wholly owned subsidiary of Phoenix Energy Services, L.L.C.)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
for the year ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 24,517 $ (7,904) $ 16,613
Net loss (26,487) (26,487)
--------- -------- ---------
Balance, December 31, 1997 $ 24,517 $(34,391) $ (9,874)
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY)
(a wholly owned subsidiary of Phoenix Energy Services, L.L.C.)
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $ (26,487)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 4,438
Provision for doubtful accounts 437
Survey equipment reserve 500
Loss on sale of equipment 155
Loss on impairment of fixed assets 22,263
Changes in operating assets and liabilities:
Accounts receivable 1,069
Inventories 476
Prepaid expenses and other current assets (2,884)
Accounts payable and accrued expenses (4,005)
Payable to affiliates 9,003
Other current liabilities (256)
Deferred income tax (1,818)
----------
Net cash provided by operating activities 2,891
----------
Cash flows from investing activities:
Additions to property, plant, and equipment (7,911)
Dispositions of property, plant, and equipment 4,103
----------
Net cash used in investing activities (3,808)
----------
Cash flows from financing activities:
Repayment of borrowings (16,340)
Borrowings (17,650)
----------
Net cash provided by financing activities 1,310
----------
Net increase in cash and equivalents 393
Cash and equivalents:
Beginning of year 32
----------
End of year $ 425
==========
Supplemental cash flow information:
Income taxes paid $ 0
==========
Interest paid $ 2,858
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
PHOENIX DRILLING SERVICES, INC. (DOMESTIC OPERATIONS ONLY)
(a wholly owned subsidiary of Phoenix Energy Services, L.L.C.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Phoenix Drilling Services, Inc. (domestic operations only) (PDSI or the
Company), a Delaware corporation, was formed effective October 23, 1995 as
a subsidiary of Phoenix Energy Services, L.L.C. (the Parent). On January 1,
1996, the stock of PDSI was distributed from the Parent to Phoenix Drilling
Services Holdings, a wholly owned subsidiary of the Parent.
PDSI and its wholly owned domestic subsidiaries provide directional
drilling services throughout the domestic oil and gas markets with an
emphasis on horizontal drilling and well surveying.
During 1997, the Parent made the strategic decision to sell all of the
assets of the Company. Certain foreign operations were sold during 1997 and
the domestic operations were sold on March 16, 1998 to Black Warrior
Wireline Corp. (Black Warrior). These consolidated financial statements
have been prepared to reflect the domestic operation's consolidated
financial position, results of operations, and cash flows. Consequently,
financial information related to the Company's foreign operations, as well
as the Company's investment in foreign operations have not been reflected
herein.
CASH AND EQUIVALENTS - For purposes of the consolidated statement of cash
flows, investments with original maturities of three months or less when
purchased are included in cash and equivalents.
INVENTORIES - Inventories are stated at lower of cost or market. Cost is
determined using weighted averages which approximate the first-in,
first-out (FIFO) method.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is carried
at cost. Drilling motor components and guidance equipment are depreciated
over estimated useful lives of 10 years. The machinery and equipment are
depreciated over 5 years. Spare parts are charged to expense on a unit of
production method related to usage. Improvements and betterments which
extend the useful lives of the assets are capitalized, while repair and
maintenance costs are charged to operations as incurred. Upon disposal of
the assets, the cost and related accumulated depreciation are removed from
the accounts and the resulting gain or loss is included in the consolidated
statement of operations.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
LONG-LIVED ASSETS - In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, the Company recognizes
impairment losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the asset's carrying amount. During
1997 management determined that goodwill, patents, and fixed assets were
impaired based on the comparison of the respective carrying values to the
estimated undiscounted cash flows expected to be generated. Fair value of
the assets was then determined based on an asset purchase agreement signed
on March 16, 1998 between the Company and Black Warrior. Net goodwill of
$14,043 and net patents of $1,912 were written-down to zero while the
carrying value of property, plant, and equipment was written-down by
$6,308, resulting in a total charge to income from operations of $22,263.
In addition, amortization expense prior to the write-down for the year
ended December 31, 1997 was $751 related to goodwill and patents.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements of the Company includes the domestic operations of PDSI and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
INCOME TAXES - The Company accounts for income taxes based on an asset and
liability method. Deferred tax assets or liabilities are recorded based
upon temporary differences between tax basis of assets and liabilities and
their carrying values for financial reporting purposes.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
trade receivables from customers engaged in oil and gas exploration and
production. The Company performs periodic credit evaluations of the
customers' financial condition and generally does not require collateral.
The Company maintains reserves for potential losses.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial statements
consist primarily of cash and equivalents, receivables, payables and debt
instruments. The carrying value of these financial instruments approximate
their fair values.
REVENUE RECOGNITION - Revenues are recognized at the time of service
performance.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
2. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31,
1997:
Machinery and equipment $ 7,366
Guidance equipment 4,657
Drilling motors 5,348
Land 349
Building, building improvements, and furniture 639
Spare parts 5,493
---------
23,852
Less accumulated depreciation (5,242)
---------
$ 18,610
=========
Depreciation charged against earnings in 1997 was $3,706.
3. LONG-TERM DEBT
Indebtedness consists of the following at December 31, 1997:
Credit agreement:
Revolving credit facility $ 1,999
Term Loan A 8,700
Term Loan B 4,350
---------
15,049
Less current portion of long-term debt (1,007)
---------
Long-term debt $ 14,042
=========
CREDIT AGREEMENT - The credit agreement provides for revolving credit
facilities totaling $20,000 through April 30, 2003 and replaced the
Company's previous credit agreement. Borrowing availability is determined
based on a percentage of eligible accounts receivable and inventory. The
interest rate on the revolving credit facility is prime plus 0.25% or LIBOR
plus 1.75% (8.75% and 7.375% at December 31, 1997). A commitment fee of
0.375% is charged on the unused portion.
The credit agreement also provides for Term Loan A, payable quarterly
beginning June 30, 1998 through April 30, 2003, and Term Loan B, payable
beginning June 30, 1998 through April 30, 2003. Interest rates on the term
loans are at prime plus 0.25% and 0.75%, respectively, or at LIBOR plus
1.75% and 2.25%, respectively. The term loans require prepayments from
certain asset disposal proceeds and from up to 50% of excess cash flow (as
defined).
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
The credit agreement is collateralized by all of the assets of the Company
and all of the assets of Phoenix Energy Products, Inc. (PEPI, a wholly
owned subsidiary of Phoenix Energy Product Holdings, who in turn is a
wholly owned subsidiary of the Parent). In addition, Phoenix Energy
Products Holdings and Phoenix Drilling Services Holdings have guaranteed
all of the indebtedness and pledged the stock of PEPI and the Company,
respectively. In connection with the credit agreement, PEPI also borrowed a
total of $38,261 on terms and conditions essentially the same as those
described above. The Company has guaranteed the indebtedness of PEPI in
connection with the credit agreement. Subsequent to December 31, 1997, the
Company sold substantially all of its assets and was released from the
aforementioned guarantee.
Financial covenants contained in the credit agreement that are relevant to
the Company were waived by the creditor for the year ended December 31,
1997.
SUBORDINATED NOTES - PEPI entered into $10,000 of subordinated notes with
the primary shareholder of the Company which mature December 31, 2001. The
Company, as guarantor on the notes, is both jointly and severally liable
for the total debt outstanding under this agreement. Interest on the
subordinated notes accrues at 10%. Subsequent to December 31, 1997, the
Company sold substantially all of its assets and retired its obligations
under the previously mentioned credit agreement. In conjunction with this
transaction, the Company was released from its obligations under the
subordinated notes.
Scheduled maturities of long-term debt outstanding at December 31, 1997,
are as follows:
Years ending December 31:
1998 $ 1,007
1999 1,584
2000 1,908
2001 2,232
2002 2,554
Thereafter 5,764
-------------
$ 15,049
=============
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
4. INCOME TAXES
The Company's income tax benefit consists of the following for the year
ended December 31, 1997:
Current:
Federal $ 0
State 0
-----------
Total current 0
-----------
Deferred:
Federal (2,025,762)
State (305,379)
-----------
Total deferred (2,331,141)
-----------
Total income tax benefit $(2,331,141)
===========
An analysis of the Company's effective income tax rate follows for the year
ended December 31, 1997:
Benefit for federal income tax at statutory rate $ (10,950,840)
State income tax benefit, net of federal income tax effect (864,540)
Goodwill 2,480,036
Increase in valuation allowance 6,533,803
Other permanent differences 470,400
-------------
Benefit for income taxes $ (2,331,141)
=============
The tax effects of the principal temporary differences between financial
reporting and income tax reporting are as follows for December 31, 1997:
Deferred tax assets:
Accounts receivable $ 260,680
Goodwill and other intangibles 2,986,983
Net operating loss carryforwards 5,536,504
--------------
8,784,167
Less valuation allowance (6,533,802)
-------------
Net deferred tax assets 2,250,365
-------------
Deferred tax liabilities:
Book/tax depreciation differences 2,250,365
-------------
Net deferred tax asset $ 0
=============
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
At December 31, 1997, the Company has net operating loss carryforwards of
$12,847,740, principally expiring in 2017.
During the year, the Company recorded a full valuation allowance against
its net deferred tax asset as management has determined that it is more
likely than not that this amount will not be realized in the future.
5. RELATED PARTY TRANSACTIONS
Affiliated companies provide administration, supervision, and other
functions as well as provide facilities utilized in the conduct of certain
operational and administrative activities. The amount allocated to the
Company totaled $957 for the year ended December 31, 1997.
The Company has related party transactions that resulted in a net payable
to affiliates of $20,732 at December 31, 1997.
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space, transportation equipment, and other
property under noncancelable operating leases with third parties. Future
minimum lease commitments under noncancelable operating leases at December
31, 1997 are as follows:
1998 $ 167
1999 136
2000 84
------------
$ 387
============
Rental expense under operating leases charged to earnings totaled $227 in
1997.
The Company is involved in various legal proceedings in the ordinary course
of business. In management's opinion, none of these proceedings will have a
material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows.
The Company's business is affected both directly and indirectly by
governmental laws and regulations relating to the oil field service
industry in general, as well as by environmental and safety regulations
that specifically apply to the Company's business. Although the Company has
not incurred material costs in connection with its compliance with such
laws, future developments, such as stricter environmental laws or
regulations, could result in additional costs or liabilities for the
Company.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in thousands)
Stock options were granted in 1996 to the president of PDSI to acquire
.7614 shares of common stock at $245,000 per share. These options were
subsequently canceled in November 1997. No portion of the options had been
exercised and no compensation expense had been recorded because, in the
opinion of management, the exercise price of the options at the date of
grant approximated the fair value of the underlying security.
7. SUBSEQUENT EVENT
On March 16, 1998, the Company completed the sale of substantially all of
its operating assets to Black Warrior. Under the terms of the agreement,
the Company received approximately $19 million in proceeds.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the Board) has issued SFAS No.
130, Reporting Comprehensive Income, that establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in the financial statements. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. This
statement does not require a specific format for the presentation of
comprehensive income but requires an amount representing total
comprehensive income for the period. This statement is effective for fiscal
years beginning after December 15, 1997 with reclassification of earlier
periods required. Other than the additional presentation requirements of
this statement, the Company does not anticipate a material impact on the
consolidated financial position, results of operations, or cash flows.
F-12
<PAGE>
REPORT TO INDEPENDENT ACCOUNTANTS
March 10, 1998
To the Board of Directors and Shareholder of
Phoenix Drilling Services, Inc.
We have audited the accompanying combined balance sheet of the domestic
operations of Phoenix Drilling Services, Inc. and its subsidiary (the Company),
a wholly-owned subsidiary of Phoenix Energy Services, L.L.C., at December 31,
1996 and 1995, and the related combined statements of operations, changes in
division equity and cash flows of their domestic operations for the year ended
December 31, 1996 and for the period from June 15, 1995 (inception) through
December 31, 1995. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits.
We have not audited the combined financial statements of the domestic operations
of the Company for any period subsequent to December 31, 1996.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As explained in Note 1, the combined financial statements of the Company have
been carved out and represent the historical assets and liabilities and results
of operations of the domestic directional drilling and survey businesses of the
Company (domestic operations), after elimination of intercompany accounts. The
assets and liabilities and results of operations of the foreign directional
drilling and survey businesses (foreign operations) have not been included. As
part of the carve-out, all intercompany accounts related to the foreign
operations, as well as the investments in foreign operations, recorded in the
domestic operations' books have been eliminated. These eliminations reduced the
division equity of the Company by $8,218,000 and $4,644,000 at December 31, 1996
and 1995, respectively.
In our opinion, the accompanying combined financial statements audited by us
present fairly, in all material respects, the financial position of the domestic
operations of Phoenix Drilling Services, Inc. and its subsidiary at December 31,
1996 and 1995, and the results of their
F-13
<PAGE>
March 10, 1998
To the Board of Directors and Shareholder
Page 2
domestic operations and their cash flows of their domestic operations for the
year ended December 31, 1996 and for the period from June 15, 1995 (inception)
through December 31, 1995 pursuant to the basis of presentation described in
Note 1, in conformity with generally accepted accounting principles.
As described in Note 10 to the financial statements, in January 1998, the
Company signed a definitive agreement to sell the domestic business to Black
Warrior Wireline Company for $19,000,000. In connection with this transaction,
the Company recorded an impairment write-down in 1997 amounting to approximately
$22,260,000 to reflect the proceeds from the liquidation value for the assets
sold.
As described in Note 6 to the financial statements, the Company has extensive
transactions and relationships with Phoenix Energy Services, L.L.C., the parent
company, and Phoenix Energy Products, Inc., a wholly-owned subsidiary of Phoenix
Energy Services, L.L.C.
PRICE WATERHOUSE LLP
Houston, Texas
March 10, 1998
F-14
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
COMBINED BALANCE SHEET (NOTE 1)
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
(in thousands, except share amounts)
<TABLE>
<CAPTION>
1996 1995
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 32 $ 183
Trade receivables, net of allowance of $206 and $63 7,636 2,860
Inventories 2,252 332
Deferred income taxes 139 352
Restricted cash 56
Other current assets 718 291
-------- --------
Total current assets 10,777 4,074
Property, plant and equipment, net 24,437 9,297
Patents, net 2,203 2,494
Goodwill, net 13,215 2,743
Other 278 233
-------- --------
Total assets $ 50,910 $ 18,841
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable $ 4,721 $ 1,758
Payable to affiliates, net 11,729 913
Accrued liabilities 2,151 1,803
Income taxes payable 35
Current portion of long-term debt 263 707
------- --------
Total current liabilities 18,864 5,216
Long-term debt 13,476 2,090
Deferred income taxes 1,957 914
------- --------
Total liabilities 34,297 8,220
------- --------
Division equity:
Preferred stock, $1 par value, 500 shares authorized
Common stock, $.01 par value, 1,500 shares authorized,
100 shares issued and outstanding
Additional paid-in capital 24,517 14,637
Retained earnings (7,904) (4,016)
------- --------
Total division equity 16,613 10,621
------- --------
Commitment and contingencies (Note 9)
------- --------
Total liabilities and division equity $ 50,910 $ 18,841
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
COMBINED STATEMENT OF OPERATIONS (NOTE 1)
- --------------------------------------------------------------------------------
(in thousands) Period from
June 15, 1995
(inception)
Year ended through
December 31, December 31,
1996 1995
------------- -------------
Net sales $ 32,245 $ 4,051
Cost of sales 14,072 1,738
-------- -------
18,173 2,313
Operations expense 17,166 1,638
-------- -------
Income from operations 1,007 675
Interest expense (1,366) (17)
Other income, net 113 382
-------- -------
(Loss) income before income taxes (246) 1,040
Provision for income taxes 68 412
-------- -------
Net (loss) income $ (314) $ 628
======== =======
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
COMBINED STATEMENT OF CHANGES IN DIVISION EQUITY (NOTE 1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Additional
Number of paid-in Retained
shares Amount capital earnings Total
---------- -------- ---------- --------- -----
<S> <C> <C> <C> <C>
Issuance of common stock,
October 23, 1995 100 $ -
Capital contributions $ 14,637 $ 14,637
Effects of carve-out (Note 1) $ (4,644) (4,644)
Net income 628 628
--------- -------- --------- ---------- --------
Balance, December 31, 1995 100 - 14,637 (4,016) 10,621
Capital contributions 9,880 9,880
Effects of carve-out (Note 1) (3,574) (3,574)
Net loss (314) (314)
--------- -------- --------- ---------- --------
Balance, December 31, 1996 100 $ - $ 24,517 $ (7,904) $ 16,613
--------- -------- --------- ---------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
COMBINED STATEMENT OF CASH FLOWS (NOTE 1)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(in thousands) Period from
June 15, 1995
(inception)
Year ended through
December 31, December 31,
1996 1995
------------ --------------
<S> <C> <C>
Cash flows from operating activities:-
Net (loss) income $ (314) $ 628
----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,232 398
Provision for doubtful accounts 49 63
Deferred income taxes 59 175
Gain on sale of equipment (34) (159)
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Accounts receivable (1,315) (1,621)
Inventories (220)
Prepaid expenses and other current assets 871 (400)
Accounts payable and accrued expenses (987) (1,147)
Other, net 56 (56)
----------- -----------
Total adjustments 1,711 (2,747)
----------- -----------
Net cash provided (used) by operating activities 1,397 (2,119)
----------- -----------
Cash flows from investing activities:
Business acquisitions, net of cash acquired (18,786) (8,706)
Additions to property, plant and equipment (11,228) (457)
Dispositions of property, plant and equipment 320 580
Repayment of note receivable 23
Effects of carve out (3,574) (4,644)
----------- -----------
Net cash used by investing activities (33,268) (13,204)
----------- -----------
Cash flows from financing activities:
Repayment of borrowings (334) (44)
Other borrowings 11,276
Capital contributions 9,880 14,637
Payable to affiliates 10,898 913
----------- -----------
Net cash provided by financing activities 31,720 15,506
----------- -----------
Net (decrease) increase in cash and equivalents (151) 183
Cash and equivalents:
Beginning of year 183
----------- -----------
End of year $ 32 $ 183
=========== ===========
Supplemental cash flow information:
Income taxes paid $ 247 $ 202
Interest paid 980
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS, BASIS OF PREPARATION AND CARVE-OUT OF CERTAIN
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Phoenix Drilling Services, Inc. (PDSI or the Company), a Delaware
corporation, was effectively formed October 23, 1995 as a subsidiary of
Phoenix Energy Services, Inc. On January 1, 1996, the stock of Phoenix
Drilling Services, Inc. was distributed to Phoenix Energy Services L.L.C.
(the Parent).
Effective June 15, 1995, Phoenix Energy Services, Inc. acquired 100% of the
outstanding common shares of SlimDril International, Inc., a Texas
corporation, for consideration of $4,637 in cash and the assumption of
certain liabilities. On December 28, 1995, the shares of SlimDril
International, Inc. were merged with and into PDSI and PDSI established a
division, SlimDril International (SlimDril), under which the assets are
being operated. The change in ownership of PDSI and its combination with
SlimDril have been accounted for as a reorganization of companies under
common control. These financial statements have been retroactively restated
to reflect the reorganization of companies under common control, with the
historical basis of assets and liabilities being carried forward.
On November 29, 1995, PDSI acquired the assets of BecField Drilling
Services for consideration of $12,200 in cash and the assumption of certain
liabilities. In conjunction with the transaction, PDSI established a
division, BecField Drilling Services (BecField), under which the assets are
being operated. SlimDril and BecField provide full drilling services and
equipment rental to the horizontal drilling market and manufacture
specialized downhole drilling equipment. BecField Drilling Services GmbH
(BecField Germany) is a German subsidiary of BecField.
On February 28, 1996, the Company acquired 100% of the outstanding common
shares of Multi-Shot, Inc. (Multi-Shot), a Louisiana corporation, for
$6,650 cash. Multi-Shot manufactures, services and rents gyroscopes used in
directional drilling. On March 18, 1996, Multi-Shot was merged with and
into PDSI.
On April 15, 1996, the Company acquired 100% of the outstanding common
shares of Granstaff Directional Drilling Company, Inc., a Louisiana
corporation, and Granstaff Specialties, Inc., a Wyoming corporation
(collectively, Granstaff), for $5,500 cash. Granstaff provides directional
drilling services. On April 22, 1996, Granstaff was merged with and into
PDSI.
On April 15, 1996, the Company acquired substantially all of the assets of
RLS Inc., a U.K. company, as well as related assets from the controlling
shareholder of RLS Inc. for $1,650.
On May 30, 1996, the Company acquired 100% of the outstanding common shares
of Horizon Directional Systems, Inc., a Texas corporation, and Horizon
Steering Systems, Inc., a Texas corporation (collectively Horizon), for
$5,176 cash. Horizon provides directional and medium-radius horizontal
drilling services and guidance services required for directional drilling.
On December 3, 1996, Horizon was merged with and into PDSI.
F-19
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
On November 13, 1996, the Company acquired 100% of the outstanding ordinary
shares of Russell Sub-Surface Systems Ltd. (Russell), an England and Wales
corporation, for $3,500 cash. Russell is engaged in the business of
designing and manufacturing electronic sensors and instrumentation for
downhole drilling and survey applications.
These acquisitions were accounted for under the purchase method of
accounting, with the consideration being allocated to the acquired assets
and liabilities based upon their relative fair values. The accompanying
financial statements include results from these acquisitions from the date
which they were acquired.
BASIS OF PREPARATION AND CARVE-OUT OF CERTAIN OPERATIONS
The financial statements of the Company have been carved out and represent
the historical assets and liabilities and results of operations of the
domestic directional drilling and survey businesses of PDSI (domestic
operations) and include the accounts of Phoenix Drilling Services, Inc. and
the domestic operations of its wholly-owned subsidiary, BecField Drilling
Services GmbH, after elimination of intercompany accounts. The assets and
liabilities and results of operations of the foreign directional drilling
and survey businesses (foreign operations) have not been included herein.
The foreign operations include BecField Germany (including its wholly-owned
subsidiary BecField Drilling Services Romania S.R.L. and its 39% and 49%
interest in BecField Middle East L.L. and BecField Drilling Services, Ltd.,
respectively), Russell and other minor acquisitions made in 1996 (Note 8).
As part of the carve-out, all intercompany accounts related to the foreign
operations, as well as the investments in foreign operations recorded in
the domestic operations' books have been eliminated. The effects of these
eliminations are included as "Effects of carve-out" in retained earnings in
the balance sheet and statement of changes in division equity and are
summarized below:
PERIOD FROM
JUNE 15, 1995
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
Elimination of:
Investment in subsidiaries and unconsolidated
subsidiaries $ (3,815) $ (3,754)
Receivables from subsidiaries 446 (973)
Other (205) 83
--------- ---------
$ (3,574) $ (4,644)
========= =========
F-20
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents. For purposes of the statement of cash flows,
investments with original maturities of three months or less when purchased
are included in cash and equivalents.
Inventories. Inventories are stated at lower of cost or market. Cost is
determined using weighted averages which approximate the first-in,
first-out (FIFO) method.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost. Drilling motor components and guidance equipment are depreciated over
estimated useful lives of ten years. The machinery and equipment are
depreciated over five years. The spare parts inventory is charged to
expense on a unit-of-production method related to usage. Improvements and
betterments which extend the useful lives of the assets are capitalized,
while repair and maintenance costs are charged to operations as incurred.
Upon disposal of the assets, the cost and related accumulated depreciation
are removed from the accounts and the resulting gain or loss is included in
the statement of operations.
Goodwill and Other Intangibles. The excess purchase price over fair value
of net tangible assets and patents has been assigned to goodwill. Goodwill
is being amortized on a straight-line basis over 20 to 40 years. Patents
are being amortized on a straight-line basis over the remaining lives which
range from 5 to 14 years. The Company periodically reviews intangibles to
ascertain recoverability. Impairment would be recognized in operating
results if a permanent impairment were to occur. The intangible
amortization charged against earnings in 1996 and 1995 was $793 and $66,
respectively.
Income Taxes. The Company accounts for income taxes based on the liability
method. Deferred tax assets or liabilities are recorded based upon
temporary differences between tax basis of assets and liabilities and their
carrying values for financial reporting purposes.
Concentration of Credit Risk. Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of
trade receivables from customers engaged in oil and gas exploration and
production. The Company performs periodic credit evaluations of the
customers' financial condition and generally does not require collateral.
The Company maintains reserves for potential losses.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments. The Company's financial instruments
consist primarily of cash and equivalents, receivables, payables and debt
instruments. The carrying value of these financial instruments approximates
their fair values.
Reclassifications. Certain reclassifications have been made to 1995 amounts
to conform to 1996 presentation.
F-21
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
DECEMBER 31,
------------------
1996 1995
Machinery and equipment $ 3,939 $ 1,372
Guidance equipment 10,338 3,329
Drilling motors 6,109 2,120
Spare parts 6,816 2,551
--------- --------
27,202 9,372
Less-accumulated depreciation (2,765) (75)
--------- --------
$ 24,437 $ 9,297
========= ========
Depreciation charged against earnings in 1996 and 1995 was $2,439 and $255,
repectively.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
Patents conssts of the following:
DECEMBER 31,
------------------
1996 1995
Patents $ 2,515 $ 2,523
Less-accumulated amortization (312) (29)
--------- --------
Patents, net $ 2,203 $ 2,494
========= ========
Goodwill consists of the following:
DECEMBER 31,
------------------
1996 1995
Goodwill $ 13,605 $ 2,780
Less-acumulated amortization (390) (37)
--------- --------
Goodwill, net $ 13,215 $ 2,743
========= ========
F-22
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
4. LONG-TERM DEBT
Indebtedness consists of the following:
DECEMBER 31,
------------------
1996 1995
Bank term loan $ 13, 476 $ 2,200
Notes payable 263 597
--------- --------
13,739 2,797
Less-current portion of long-term debt (263) (707)
--------- --------
Long-term debt $ 13,476 $ 2,090
========= ========
Interest accrues at rates ranging from 6% to 10.75%.
On February 27, 1996, the Company, along with Phoenix Energy Products, Inc.
(PEPI, a wholly-owned subsidiary of Phoenix Energy Services, L.L.C.),
amended the term loan (First Term Loan). Concurrent with negotiating the
term loan, the Company and PEPI entered into a revolving credit facility
(First Revolver). In October 1996, the Company and PEPI renewed, modified
and increased the First Term Loan and First Revolver to $40,000 and
$15,000, respectively. At December 31, 1996, PEPI had an outstanding
balance of $7,600 from the First Revolver. The Company and PEPI are jointly
and severally liable for total debt outstanding under this agreement.
Interest on the term loan accrues at a quarterly adjusted prime rate (8.25%
and 8.00% at December 31, 1996 and 1995, respectively) and is due
quarterly. Interest on the revolving credit facility accrues at a quarterly
adjusted prime rate and is due monthly.
The term loan and revolving credit facility are collateralized by the
assets of the Company and PEPI and are guaranteed by the Company and PEPI.
The indebtedness also contains certain restrictive covenants which, among
other things, provide limitations on the incurrence of additional
indebtedness, the payment of dividends, capital expenditures and the sale
of assets, and require the Company and PEPI to maintain certain financial
ratios and minimum net worth. As of December 31, 1996, the Company is in
violation of certain covenants for which it has obtained waivers from the
applicable lenders.
On September 26, 1996, the Company, along with PEPI, entered into $10,000
of subordinated notes with one of the shareholders of the Company which
mature December 31, 2001. The Company and PEPI are both jointly and
severally liable for total debt outstanding under this agreement.
Scheduled maturities for the term loan are $6,000 in 1998 and $34,000 in
1999.
F-23
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
5. INCOME TAXES
The Company's income tax provision consists of the following:
PERIOD FROM
JUNE 15, 1995
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
--------- -----------
Current:
Federal $ 6 $ 237
State 3
--------- --------
9 237
Deferred-federal 59 175
--------- --------
Total provision $ 68 $ 412
========= ========
An analysis of the Company's effective income tax rate follows:
PERIOD FROM
JUNE 15, 1995
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995
----------- -----------
Provision for federal income tax at
statutory rate $ (86) $ 364
State income tax provision, net of
federal income tax effect 4 34
Effect of permanent differences 150 14
-------- --------
Total provision $ 68 $ 412
======== ========
F-24
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
The tax effects of the principal temporary differences between financial
reporting and income tax reporting are as follows:
DECEMBER 31,
------------------
1996 1995
Accounts receivable $ 78 $ 23
Accruals 61 329
-------- --------
Deferred taxes-current 139 352
-------- --------
Book/tax depreciation differences (1,957) (723)
Other (191)
-------- --------
Deferred taxes-long-term (1,957 (914)
-------- --------
$ (1,818) $ (562)
======== ========
The Company recorded $1,220 of net deferred tax credits related to
differences in book and tax basis applicable to 1996 acquisitions.
6. RELATED PARTY TRANSACTIONS
Affiliated companies provide administrative supervision and other functions
as well as provide facilities utilized in the conduct of certain
operational and administrative activities. These services amounted to $380
in the year ended December 31, 1996. Cash management and certain other
administrative functions are provided by PEPI and resulted in a net payable
of $11,839 and $726 at December 31, 1996 and 1995, respectively.
7. SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
As discussed in Note 1, in 1996, the Company acquired the common stock of
Multi-Shot, Granstaff, Horizon and Russell and assets of RLS, Inc. for an
aggregate of $22,476. The Company made additional acquisitions in 1996
totaling $300.
In 1995, the Company acquired the common stock of SlimDril and the assets
and certain liabilities of BecField for an aggregate of $16,837 ($14,637
cash and $2,200 debt). In conjunction with the BecField acquisition, $2,400
was placed in escrow. Part of this acquisition and the acquisition of
Russell have not been included in these financial statements as a
consequence of the carve-out (Note 1).
F-25
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Liabilities were assumed as follows for the acquisitions in 1996 and 1995:
1996 1995
------- ---------
Fair value of assets acquired $ 26,465 $ 18,936
Debt incurred in conjunction with acquisition (2,200)
Escrow payable to former owners (350)
Cash paid for acquisitions (19,488) (10,868)
------- -------
Liabilities assumed $ 6,627 $ 5,868
========= =========
8. PRO FORMA (UNAUDITED)
The following table summarizes certain unaudited pro forma condensed
results of operations giving effect to the acquisitions of SlimDril,
BecField (domestic operations), Multi-Shot, Granstaff and Horizon as if
they had occurred on January 1, 1995.
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
--------- ---------
Net sales $ 39,398 $ 38,159
========= =========
Net income (loss) $ (1,546) $ (92)
========= =========
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space, transportation equipment and other
property under noncancelable operating leases with third parties. Future
minimum lease commitments under noncancelable operating leases at December
31, 1996 are as follows:
1997 $ 479
1998 399
1999 223
2000 118
2001 26
---------
$ 1,245
=========
F-26
<PAGE>
DOMESTIC OPERATIONS OF PHOENIX DRILLING SERVICES, INC.
(A WHOLLY-OWNED SUBSIDIARY OF PHOENIX ENERGY SERVICES, L.L.C.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(AMOUNTS IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Rental expense under operating leases charged to earnings totaled $369 and
$87 in 1996 and 1995, respectively.
The Company is involved in various legal proceedings in the ordinary course
of business. In management's opinion, none of these proceedings will have a
material adverse effect on the Company's financial position.
The Company's business is affected both directly and indirectly by
governmental laws and regulations relating to the oilfield service industry
in general, as well as by environmental and safety regulations that
specifically apply to the Company's business. Although the Company has not
incurred material costs in connection with its compliance with such laws,
future developments, such as stricter environmental laws or regulations,
could result in additional costs or liabilities for the Company.
10. SUBSEQUENT EVENTS
In January 1998, the Company signed a definitive agreement to sell the
domestic business to Black Warrior Wireline Company for $19,000. In
connection with this transaction, the Company recorded an impairment
write-down in 1997 amounting to approximately $22,260 to reflect the
proceeds from the liquidation value for the assets sold.
F-27
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS INTRODUCTION
The accompanying unaudited pro forma condensed consolidated financial statements
reflect the consolidated results of operations of Black Warrior Wireline Corp.
(the Company) for the year ended December 31, 1997 and the three months ended
March 31, 1998 after giving pro forma effect to (i) the purchase of Petro - Log,
Inc. (Petro - Log), (ii) the purchase of Diamondback Directional, Inc. (DDI),
(iii) the purchase of Phoenix Drilling Services, Inc. (domestic operations only)
(PDSI), and (iv) incurrence of debt and issuance of common stock in connection
with the acquisitions. The purchases of Petro - Log, DDI, and PDSI were all
completed prior to March 31, 1998 and therefore are reflected in the Company's
March 31, 1998 condensed consolidated balance sheet, previously filed on Form
10-QSB. The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the Company's "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the respective
historical financial statements of the Company, Petro - Log, DDI, and PDSI and
the related notes thereto. The unaudited pro forma information does not purport
to be indicative of actual results that would have been achieved had the
acquisitions actually been completed or debt been issued as of the dates
indicated on the following pages nor which may be achieved in the future.
F-28
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1997
<TABLE>
<CAPTION>
PHOENIX
DRILLING
BLACK WARRIOR SERVICES, INC.
WIRELINE CORP. DIAMONDBACK (DOMESTIC PRO FORMA
AND PETRO-LOG DIRECTIONAL OPERATIONS PRO FORMA CONSOLIDATED
SUBSIDIARIES (A) INC.(B) INC.(C) ONLY)(D) ADJUSTMENTS AS ADJUSTED
---------------- --------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 17,062,542 $ 612,620 $ 6,597,491 $ 34,128,000 $ 58,400,653
Operating costs 14,439,415 493,313 5,172,753 32,777,000 52,882,481
Depreciation and amortization 1,442,635 27,541 19,852 2,939,000 $ (481,548)(e) 3,947,480
Loss from impairment 22,263,000 (22,263,000)(f) 0
------------- --------- ----------- ------------ ------------- ------------
Income (loss) from operations 1,180,492 91,766 1,404,886 (23,851,000) 22,744,548 1,570,692
Interest expense and amortization
of debt discount (609,430) (311) (2,638,000) (2,030,224)(g) (5,277,965)
Net gain on sale of fixed assets 25,584 25,584
Other income (expense) 72,642 675,000 1,018 (2,329,000) (1,580,340)
------------- --------- ----------- ------------ ------------- ------------
Income before (expense) benefit
for income taxes 669,288 766,455 1,405,904 (28,818,000) 20,714,324 (5,262,029)
(Expense) benefit for income taxes (222,041) (271,774) (63,516) 2,331,000 278,522(h) 2,052,191
------------- --------- ----------- ------------ ------------- ------------
Net income (loss) $ 447,247 $ 494,681 $ 1,342,388 $(26,487,000) $ 20,992,846 $ (3,209,838)
============= ========= =========== ============ ============= ============
Net income (loss) per common share -
basic $ 0.18 $ (1.06)
============= ============
Net income (loss) per common share -
diluted $ 0.14 $ (1.06)
============= ============
Weighted average number of common
shares outstanding - basic (i) 2,533,650 3,040,309
============= ============
Weighted average number of common
shares outstanding - diluted (i) 3,759,756 3,040,309
============= ============
</TABLE>
See notes to the unaudited pro forma condensed consolidated financial
statements.
F-29
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the three months ended March 31, 1998
<TABLE>
<CAPTION>
PHOENIX
DRILLING
BLACK WARRIOR SERVICES, INC.
WIRELINE CORP. (DOMESTIC PRO FORMA
AND OPERATIONS PRO FORMA CONSOLIDATED
SUBSIDIARIES (J) ONLY) (K) ADJUSTMENTS AS ADJUSTED
---------------- --------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 9,666,024 $ 3,980,386 $ 13,646,410
Operating costs 8,106,567 3,488,587 11,595,154
Depreciation and amortization 809,690 196,840 $ 18,594(l) 1,025,124
------------ ----------- --------- ------------
Income (loss) from operations 749,767 294,959 (18,594) 1,026,132
Interest expense and amortization of
debt discount (434,760) (100,000) (335,445)(m) (870,205)
Net gain on sale of fixed assets 1,944 1,944
Other income 17,345 17,345
------------ ----------- -------- ------------
Income before (expense) benefit
for income taxes 334,296 194,959 (354,039) 175,216
(Expense) benefit for income taxes (183,619) 115,285(n) (68,334)
------------ ----------- -------- ------------
Net income (loss) $ 150,677 $ 194,959 $ (238,754) $ 106,882
============ =========== ========== ============
Net income per common share - basic $ 0.05 $ 0.03
============ ============
Net income per common share - diluted $ 0.03 $ 0.02
============ ============
Weighted average number of common
shares outstanding - basic 3,211,678 3,211,678
============ ============
Weighted average number of common
shares outstanding - diluted 5,169,182 5,169,182
============ ============
</TABLE>
See notes to the unaudited pro forma condensed consolidated financial
statements.
F-30
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 ARE AS FOLLOWS:
(a) Represents the condensed consolidated results of operations of the
Company for the year ended December 31, 1997.
(b) Represents the condensed results of operations of Petro - Log for the
period January 1, 1997 through June 9, 1997, the date Petro - Log was
acquired by the Company.
(c) Represents the condensed results of operations of DDI for the period
January 1, 1997 through September 1, 1997, the date DDI was acquired
by the Company.
(d) Represents the condensed results of operations of PDSI for the year
ended December 31, 1997. Phoenix was acquired by the Company on March
16, 1998.
(e) Represents the net decrease in depreciation expense ($775,730) and the
increase to amortization $294,182 of the cost over fair value of net
assets acquired over 25 years as a result of the purchase price
allocation. Depreciation expense was reduced to reflect the effect of
the lower carrying value at which PDSI fixed assets were recorded in
the Company's financial statements.
(f) Reflects the elimination of the impairment loss $22,263,000 recognized
in 1997 by PDSI.
(g) Reflects the increase in interest costs resulting from additional debt
of $3,000,000 with interest of 10% (for five months) associated with
the financing of Petro - Log ($125,000), the increase in interest
costs resulting from additional debt of $5,070,549 with weighted
average interest of 6.7% (for eight months) associated with the
financing of DDI ($272,724), and the additional debt of $19,000,000
with weighted average interest of 8.6% (for twelve months) associated
with the financing of PDSI ($1,632,500).
(h) Reflects applicable income tax benefit of adjustments $278,522.
(i) Pro forma basic and diluted weighted average number of common shares
outstanding reflects an increase of 425,799 shares of common stock
issued to the former owners of DDI in connection with its acquisition
and 80,860 shares of common stock issued in connection with two
immaterial acquisitions not already included in the weighted average
shares outstanding.
PRO FORMA ADJUSTMENTS FOR THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 ARE AS
FOLLOWS:
(j) Represents the condensed consolidated results of operations of the
Company for the three months ended March 31, 1998.
(k) Represents the condensed consolidated results of operations of PDSI
for the period January 1, 1998 through March 16, 1998, the date PDSI
was purchased by the Company.
F-31
<PAGE>
(l) Reflects increase to amortization $18,594 of the cost over fair value
of net assets acquired over 25 years as a result of the preliminary
purchase price allocation.
(m) Reflects the increase to interest costs resulting from additional debt
of $19,000,000 with weighted average interest of 8.6% (for 75 days)
associated with the financing of PDSI ($335,445).
(n) Reflects applicable income tax benefits of adjustments $115,285.
F-32
