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 June 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.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 11-2904094
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
3748 HIGHWAY 45 NORTH, COLUMBUS, MISSISSIPPI 39701
--------------------------------------------------
(Address of principal executive offices, zip code)
(601) 329-1047
------------------------------------------------
(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.
Class Outstanding at
August 18, 1998
----------------------- ----------------
COMMON STOCK, PAR VALUE 3,897,451 SHARES
$.0005 PER SHARE
Transitional Small Business Disclosure Format
YES NO X
--- ---
<PAGE>
BLACK WARRIOR WIRELINE CORP.
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1998 and
June 30, 1997 4
Consolidated Statements of Operations -
Six Months Ended June 30, 1998 and
June 30, 1997 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and
June 30, 1997 6
Notes to Consolidated Financial Statements -
Six Months Ended June 30, 1998 and
June 30, 1997 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Consolidated Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 1998 DECEMBER 31 1997
------------- ----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 714,511 $ 435,845
Short-term investments 50,000 50,000
Accounts receivable, less allowance for doubtful
accounts of $146,884 and $143,559 8,180,400 5,459,689
Prepaid expenses 266,333 390,144
Deferred tax asset 80,815 80,815
Other receivables 500,000 901,629
------------ ------------
Total current assets 9,792,059 7,318,122
Land and building 245,000
Property, plant, and equipment, less accumulated
depreciation of $6,465,338 and $4,791,052 26,288,221 9,347,685
Inventories 4,312,279 0
Other assets 537,470 358,521
Goodwill, less accumulated amortization of $354,966
and $134,421 11,430,903 9,061,655
------------ ------------
Total assets $ 52,605,932 $ 26,085,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,634,577 $ 3,619,466
Accounts payable, related parties 6,090 6,090
Accrued salaries and vacation 256,223 124,376
Income tax payable 0 599,877
Accrued interest payable 51,590 69,041
Other accrued expenses 430,003 289,445
Deferred revenue 100,000 100,000
Current maturites of notes payable to banks 0 7,624
Mortgage notes payable, related party 230,000 380,000
Current maturities of long-term debt and capital
lease obligations 13,972,351 793,618
------------ ------------
Total current liabilities 19,680,834 5,989,537
Deferred tax liability 405,935 1,132,513
Long-term accrued interest payable 580,700 150,364
Notes payable to related parties 18,080,890 8,070,549
Notes payable to banks, less current maturities 22,212
Long-term debt and capital lease obligations, less
current maturities 5,325,369 5,123,535
------------ ------------
Total liabilities 44,073,728 20,488,710
------------ ------------
Stockholder's equity:
Preferred stock, $.0005 par value, 2,500,000 shares authorized none issued
at June 30, 1998
Common stock, $.0005 par value, 12,500,000 shares authorized;
3,897,451 and 2,990,254 shares issued 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) 280,000
Accumulated deficit (2,951,518) (1,845,782)
Treasury stock, at cost, 4,620 shares (583,393) (583,393)
------------ ------------
Total stockholder's equity 8,532,204 5,597,273
------------ ------------
Total liabilities and stockholder's $ 52,605,932 $ 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 June 30, 1998 and June 30, 1997
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 10,247,430 $ 2,488,051
Operating costs 8,493,603 1,651,157
Selling, general, and administrative expenses 1,918,014 479,317
Depreciation and amortization 1,246,109 268,487
------------ ------------
Net income (loss) from operations (1,410,296) 89,090
Interest expense and amortization of debt discount (697,143) (95,735)
Net (loss) gain on sale of fixed assets (938) 4,258
Other income 18,950 12,206
------------ ------------
Net income (loss) before benefit for
income taxes (2,089,427) 9,819
Benefit for income taxes 833,017 0
------------ ------------
Net income (loss) $ (1,256,410) 9,819
============ ============
Net income(loss) per common share- basic $ (0.32) $ 0.00
============ ============
Net income(loss)per common share- diluted $ (0.32) $ 0.00
============ ============
Weighted average common shares outstanding-
basic 3,873,235 2,241,340
============ ============
Weighted average common shares outstanding
with dilutive securities 3,873,235 2,518,353
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 1998 and June 30, 1997
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 19,913,453 $ 4,653,069
Operating costs 15,759,491 3,143,334
Selling, general, and administrative expenses 2,758,693 915,506
Depreciation and amortization 2,055,799 464,514
------------ ------------
Net income (loss) from operations (660,530) 129,715
Interest expense and amortization of debt discount (1,131,903) (136,070)
Net gain on sale of fixed assets 1,006 16,318
Other income 36,296 33,798
------------ ------------
Net income (loss) before provision for
income taxes (1,755,131) 43,761
Benefit for income taxes 649,398 0
------------ ------------
Net income (loss) $ (1,105,733) $ 43,761
============ ============
Net income (loss) per common share - basic $ (0.32) $ 0.02
============ ============
Net income(loss) per common share - diluted $ (0.32) $ 0.02
============ ============
Weighted average common shares outstanding-
basic 3,466,634 2,210,968
============ ============
Weighted average common shares outstanding
with dilutive securities 3,466,634 2,423,880
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the six months ended:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash (used in) provided by operations: $ (1,130,129) $ 121,827
------------ ------------
Cash flows from investing activities:
Acquisitions of property, plant, and equipment (3,303,326) (622,642)
Proceeds from sale of property, plant & equipment 71,000 46,093
Acquisition of business, net of cash acquired (603,252) (264,403)
------------ ------------
Cash used in investing activities: (3,835,578) (840,952)
Cash flows from financing activities:
Debt issuance costs (467,521) (190,000)
Proceeds from bank and other borrowings 16,816,400 2,322,500
Principal payments on long-term debt, notes payable
and capital lease obligations (14,822,861) (225,601)
Proceeds from issuance of common stock, net
of offering costs 3,718,355
Cash provided by financing
activities: 5,244,373 1,906,899
------------ ------------
Net increase in cash and
cash equivalents 278,666 1,187,774
Cash and cash equivalents, beginning of period 435,845 727,454
------------ ------------
Cash and cash equivalents, end of period 714,511 1,915,228
============ ============
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 FINANCIAL STATEMENTS
1. GENERAL
The accompanying financial statements reflect all adjustments which, 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 consolidated results of
operations for the interim period are not necessarily indicative of the
consolidated 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
inconjuction 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 Black Warrior and
Mississippi Salt Dome Basins in Alabama and Mississippi, the Permian Basin in
West Texas and New Mexico, San Juan Basin in New Mexico, Colorado, and Utah, the
East Texas and Austin Chalk Basins in East Texas, the Anadarko Basin in
Oklahoma, the Powder River and Green River Basins in Wyoming and Montana, and
the Williston Basin in North Dakota. 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. On November 19,
1996, the Company acquired the outstanding stock of DynaJet, Inc., which has
been engaged in the wireline business in the Gillette, Wyoming area for more
than eighteen years. Its service area includes the states of Wyoming, South
Dakota, and Montana. On June 6, 1997, the Company completed the acquisition of
Production Well Services, Inc. which has been engaged in the wireline business
in southern Alabama and southern Mississippi. On June 9, 1997, the Company
completed the acquisition of Petro-Log, Inc. which has been engaged in the
wireline business in Wyoming, Montana and South Dakota. On October 9, 1997, the
Company completed the acquisition, effective September 1, 1997, of Diamondback
Directional, Inc. ("Diamondback") which has been engaged in providing
directional drilling and other oil and gas well drilling services in the Texas
and Louisiana areas. On December 15, 1997, the Company completed the acquisition
of the assets of Cam Wireline Services, Inc., which provides wireline services
in the Permian Basin.
On March 16, 1998, the Company acquired from Phoenix Drilling Services,
Inc., ("Phoenix") its domestic oil and gas well directional drilling and
downhole survey service business including the related operating assets (such
acquisition is herein referred to as the "Phoenix Acquisition"). On June 1,
1998, the Company acquired Petro Wireline which has been engaged in the wireline
business in the four corners region of New Mexico, Colorado, Utah and Arizona.
The following table presents unaudited pro forma consolidated results of
operations for the six months ended June 30, 1998 and 1997 as if the acquisition
above
7
<PAGE>
had occurred at the beginning of the period presented. The pro forma summary
information does not necessarily reflect the consolidated results of operations
as they actually would have been if the acquisition had occurred at the
beginning of the periods presented.
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
------------- -------------
(Unaudited) (Unaudited)
Revenues $ 23,893,839 $ 27,543,462
Loss before income tax $ (1,914,211) $ (33,918)
Net income $ (1,336,948) $ (21,368)
Net loss per common share - basic $ (0.35) $ (0.01)
Net loss per common share - diluted $ (0.35) $ (0.01)
============ ============
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.
8
<PAGE>
2. EARNINGS PER SHARE
The Calculation of Basic and Diluted EPS is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended June 30, 1998 Ended June 30, 1997
------------------- -------------------
Income (loss) Shares Per Share Income (loss) Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------------- -------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net income(loss) $(1,256,410) $9,819
============ ======
BASIC EPS
Income (loss) available to
common shareholders $(1,256,410) 3,874,735 $(0.32) $9,819 $2,241,340 $0.00
EFFECT OF DILUTIVE
SECURITIES
Stock warrants 233,249
Stock Options 43,764
Convertible debt
securities
DILUTED EPS
Income (loss) available to
common shareholders
plus assumed --------------- -------------- --------------- --------------- --------------- ---------------
conversion $(1,256,410) 3,874,735 $(0.32) $9,819 2,518,353 $0.00
=============== ============== =============== =============== =============== ===============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
The Six Months The Six Months
-------------- --------------
Ended June 30, 1998 Ended June 30, 1997
Income (loss) Shares Per Share Income (loss) Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
-------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(1,105,733) $43,761
============ =======
BASIC EPS
Income (loss) available to
common shareholders $(1,105,733) 3,466,634 $(0.32) $43,761 $2,277,468 $0.02
EFFECT OF DILUTIVE
SECURITIES
Stock warrants 166,820
Stock Options 46,092
Convertible debt
securities
DILUTED EPS
Income (loss) available to
common shareholders plus
assumed -------------- --------------- --------------- --------------- --------------- --------------
conversion $(1,105,733) 3,466,634 $(0.32) $43,761 2,490,380 $0.02
============== =============== =============== =============== =============== ==============
</TABLE>
Options and warrants to purchase 4,711,000 and 1,049,750 shares of common
stock at prices ranging from $1.50 to $8.01 were outstanding during the three
and six months ended June 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 615,385,
625,985, and 1,818,182 shares of common stock, if the conversion features were
exercised, were outstanding during the three months and six months ended June
30, 1998 but were not included in the computation of the diluted EPS because the
effect would be anti-dilutive. The instruments can be converted at $3.25, $4.63,
and $7.00 per share, respectively and remained outstanding at June 30, 1998.
10
<PAGE>
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 June 30, 1998 inventories were classified as a long-term 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.
The Company is a defendant in a number of 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.
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 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.
At June 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"). These covenants, as in effect at June 30, 1998,
require the Company to maintain a fixed charge ratio of 1.6 to 1.0, a senior
interest coverage ratio of at least 2.5 to 1.0, consolidated adjusted tangible
net worth of not less than $15.6 million, and a ratio of total indebtedness for
money borrowed to tangible net worth of 2.6 to 1.0. Under the terms of the Loan
and Security Agreement, the foregoing constitute events of default, as defined,
and at the option of Fleet, the obligations of the Company to Fleet may become
immediately due and payable. The Company has been orally advised by Fleet that
it will enter into a forbearance agreement with respect to making the Company's
obligations to Fleet immediately due and payable, however, at present, no
definitive agreement has been entered into. In the event a forbearance agreement
is not entered into and Fleet exercises its option to demand immediate payment
of the Company's obligations owing to it, an aggregate of approximately $12.9
million as of June 30, 1998 would be immediately due and payable to Fleet. If
Fleet should seek immediate payment of the obligations, Fleet could seek to
foreclose against substantially all of the Company's assets which are collateral
for the Company's obligations to Fleet.
11
<PAGE>
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. 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 wireline or directional
drilling companies. There can be no assurance that the Company will acquire any
additional wireline or directional drilling companies or that any such
acquisitions will be beneficial to the Company. The process of integrating
acquired properties 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 any future acquisitions. 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. 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 and 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
12
<PAGE>
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, and the ability of the Company to raise
additional capital to meet its requirements and to obtain additional financing,
its ability to successfully implement its business strategy, and its ability to
maintain compliance with the covenants of its various loan documents and other
agreements pursuant to which securities have been issued. 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 JUNE 30, 1998 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1997 AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
SIX MONTHS ENDED JUNE 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 both through the acquisition of
other oil and natural gas well service companies and by intensified marketing of
its services. 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.
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
13
<PAGE>
result of decreased international demand and economic uncertainty in the Far
East. These lower oil and gas prices have impacted the Company's revenues for
the six months ended June 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 the 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 and financial
condition.
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 substantial increase in the equipment available to other providers
of oil and gas well services to perform these services.
The following table sets forth the Company's revenues from its three
principal lines of business and other revenues for the six months and three
months ended June 30, 1998 and 1997 respectively:
<TABLE>
<CAPTION>
SIX MONTHS ENDED: THREE MONTHS ENDED:
------------------------------------ ------------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Wireline Services $ 5,245,920 $ 3,733,679 $ 2,372,089 $ 2,058,158
Directional Drilling 13,747,121 -0- 7,426,524 -0-
Workover
and Completion 781,970 774,758 353,739 378,883
Other 138,442 144,632 95,078 51,010
----------- ----------- ----------- -----------
$19,913,453 $ 4,653,069 $10,247,430 $ 2,488,051
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
The Company had a net loss of $1.3 million for the three months ended June
30, 1998, as compared to net income of approximately $10,000 in 1997. The
Company had a net loss of $1.1 million for the six months ended June 30, 1998,
as compared to income of approximately $44,000 in 1997.
Revenues increased by $7.7 million to $10.2 million for the three months
ended June 30, 1998 as compared to revenues of $2.5 million for the three months
ended June 30, 1997. Of such increase, approximately $8.8 million was the result
of acquisitions completed during 1997 and the first and second quarters of 1998
with an approximately $1.1 million decrease in revenues from existing
operations. Revenues from existing operations declined due to a reduced demand
for the Company's services. This decline was primarily caused by the recent
decline in oil and gas prices. Of the overall increase in wireline services
revenues, $1.4 million was the result of the acquisition of Petro-Log, Inc.,
Production Well Services, and CAM Wireline Services, Inc., with a $1.1 million
decrease in the Company's other operations. The remaining increase of $7.4
million was attributable to directional drilling revenues resulting primarily
from the Diamondback and Phoenix acquisitions. Revenues from workover and
completion activities decreased approximately $25,000 during the three months
ended June 30, 1998 as compared to the same period in 1997. This is a result of
decreased activity in workover services in the Alabama and Mississippi area.
Revenues increased by $15.2 million to $19.9 million for the six months
ended June 30, 1998 as compared to revenues of $4.7 million for the six months
ended June 30, 1997. Of such increase, approximately $15.8 million was the
result of acquisitions completed during 1997 and the first and second quarters
of 1998 with an approximately $0.5 million decrease in revenues from existing
operations. Revenues from existing operations declined due to a reduced demand
for the Company's services. This decline was primarily caused by the recent
decline in oil and gas prices. Of the overall increase in wireline services
revenues, $2.0 million was the result of the acquisition of Petro-Log, Inc.,
Production Well Services, and CAM Wireline Services, Inc., with a $0.5 million
decrease in the Company's other operations. The remaining increase of $13.7
million was attributable to directional drilling revenues resulting primarily
from the Diamondback and Phoenix acquisitions. Revenues from workover and
completion activities increased approximately $7,000 during the six months ended
June 30, 1998 as compared to the same period in 1997.
Operating costs increased by $6.8 million for the three months ended June
30, 1998, as compared to 1997. Operating costs were approximately 82.9% of
revenues in 1998 as compared with 66.4% of revenues in 1997. Operating costs
increased by $12.6 million for the six months ended June 30, 1998, as compared
to 1997. Operating costs were approximately 79.1% of revenues in 1998 as
compared with 67.6% of revenues 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 the first quarter in 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
15
<PAGE>
its various acquisitions. Salaries and benefits increased by $4.3 million for
the three months ended June 30, 1998, as compared to 1997, while the total
number of employees increased from 146 at June 30, 1997 to 323 at June 30, 1998.
Salaries and benefits increased by $6.6 million for the six months ended June
30, 1998, as compared to 1997. This was due to salary increases, hiring of
additional personnel, and employees hired in conjunction with the Phoenix
Acquisition.
Selling, general and administrative expenses increased by approximately
$1.4 million from $0.5 million in the three months ended June 30, 1997 to $1.9
in the three months ended June 30, 1998. As a percentage of revenues, selling,
general and administrative expenses declined from 19.2% in the three months
ended June 30, 1997 to 18.7% in 1998, primarily as a result of increased
revenues due to acquisitions completed without a significant increase in
executive and administrative personnel. Selling, general and administrative
expenses increased by approximately $1.9 million from $.9 million, or 19.7% of
revenues in the six months ended June 30, 1997, to $2.8 million, or 13.9% of
revenues, in the six months ended June 30, 1998.
Depreciation and amortization increased from $0.3 million in the three
months ended June 30, 1997, or 10.7% of revenues, to $1.2 million in 1998, 12.1%
of revenues, primarily because of the higher asset base of depreciable
properties in the three months ended June 30, 1998 over the same period in 1997
and higher goodwill amortization. Depreciation and amortization increased from
$0.5 million in the six months ended June 30, 1997, or 9.9% of revenues, to $2.1
million in 1998, or 10.3% of revenues.
Interest expense and amortization of debt discount increased by $0.6 for
the three months ended June 30, 1998 as compared to the same period in 1997 and
increased by $1.0 million for the six months ended June 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 loss on sale of fixed assets was approximately $1,000 for the three
months ended June 30, 1998 as compared to a net gain of $4,000 in the same
period in 1997, net gain of approximately $4,000. Other income increased by
approximately $7,000 in three months ended June 30, 1998 as compared to the same
period in 1997.
Income tax benefit totaled approximately $0.8 million for the three months
ended June 30, 1998 and $0.6 million for the six months ended June 30, 1998.
These totals contain Federal and State deferred taxes as well as current
amounts.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 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"). These covenants, as in effect at June 30, 1998,
require the Company to maintain a fixed charge ratio of 1.6 to 1.0, a senior
interest coverage ratio of at least 2.5 to 1.0, consolidated adjusted tangible
net worth of not less than $15.6 million, and a ratio of total indebtedness for
money borrowed to tangible net worth of 2.6 to 1.0. Under the terms of the Loan
and Security Agreement, the foregoing constitute events of default, as defined,
and at the option of Fleet, the obligations of the Company to Fleet may become
immediately due and payable. The Company has been orally advised by Fleet that
it will enter into a forbearance agreement with respect to making the Company's
obligations to Fleet immediately due and payable, however, at present, no
definitive agreement has been entered into. In the event a forbearance agreement
is not entered into and Fleet exercises its option to demand immediate payment
of the Company's obligations owing to it, an aggregate of approximately $12.9
million as of June 30, 1998 would be immediately due and payable to Fleet. If
Fleet should seek immediate payment of the obligations, Fleet could seek to
foreclose against substantially all of the Company's assets which are collateral
for the Company's obligations to Fleet.
Management expectd to be able to enter into a forebearance agreement with
Fleet. It also expects that it will restructure or refinance its indebtedness
with Fleet. However, there are no agreements or understandings with respect to
any such restructuring or refinancing , and the Company is unable to state the
terms on which such restructuring or refinancing would be undertaken and there
can be no assurance that it will be successful with respect thereto.
Cash used by Company operating activities was $1.1 million for the six
months ended June 30, 1998 as compared to cash provided of $0.1 million for the
sames period in 1997. Investing activities used cash of $3.8 million during the
six months ended June 30, 1998 for the acquisition of property, plant and
equipment and other businesses, net of cash acquired, offset by proceeds from
the sale of fixed assets of $71 thousand. During the six months ended June 30,
1997, investing activities used cash of $0.8 million for the acquisition of
property, plant and equipment and other businesses, net of cash acquired, offset
by proceeds of approximately $46,000 from the sale of fixed assets. Financing
activities provided cash of $5.2 million from the net proceeds from the issuance
of common stock of $3.7 million and $16.8 million from the proceeds from bank
and other borrowings during the six months ended June 30, 1998 offset by
principal payments on bank and other borrowings and capital lease obligations of
$14.8 million and $0.5 million of costs related to debt issuances. During the
six months ended June 30, 1997 principal payments on bank and other borrowings
and capital lease obligations totaled $0.3 million
Cash at June 30, 1998 was $0.7 million as compared with cash at June 30,
1997 of $1.9 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 Notes to 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 six months ended
June 30, 1998.
During the twelve months ending June 30, 1999 and the twelve months ending
June 30, 2000, the Company is obligated to make repayments of principal on
outstanding indebtedness of $2.5 million and $21 million, respectively. In
addition, interest payments during those periods on all of the Company's
outstanding indebtedness will amount to approximately $2.9 million and $1.7
million, respectively. 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. The foregoing does not include repayment of
principal under the Company's revolving loan facility with Fleet. The forgoing
also assumes Fleet will continue to enter into such forebearance agreements as
the Company may require, if any, in connection with any breaches of the Fleet
loan agreements that may occur in the future and that the Company will be
successful in restructuring or refinancing such indebtedness. On March 15, 2001
the revolving loan expires and the outstanding principal is due. The Company has
made no arrangements to raise additional capital facility 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. At June 30, 1998, inventories were reclassified
on the Company's balance sheet as a long-term rather than a current asset.
On June 1, 1998, the Company completed the Petro Wireline Services
Acquisition. The purchase price for the Petro Wireline Services Acquisition was
17
<PAGE>
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 Capital Corp. 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 Capital Corp.,
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 Capital Corp. 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 completed the acquisition from Phoenix
Drilling Services, Inc. ("Phoenix") of its domestic oil and gas well directional
drilling and domestic survey business. 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 Capital
Corp., 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
Report filed March 16, 1998 for a description of the Company's Loan and Security
Agreement with Fleet Capital Corp.
The Company has no definitive agreements to acquire any additional wireline
companies. However, there can be no assurance that the Company will not acquire
additional wireline 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.
The Company intends to fund it's 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 Capital Corp., loans may
18
<PAGE>
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
The Company has reviewed its computer systems and hardware to locate
potential operational problems associated with the year 2000. These computer
systems include those utilized for financial recordkeeping and on certain of its
oil and gas service equipment. Such review will continue until all potential
problems are located and resolved. However, on the basis of its review conducted
to the present time, the Company believes that all year 2000 problems in its
computer systems have been or will be resolved in a timely manner and have not
caused and will not cause disruption of its operations or have a material
adverse effect on its financial condition or results of operations. 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 suppliers, the
oil and gas production companies that utilize its services, financial
institutions or other persons. 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 six months ended June 30, 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board (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. This standard will be implemented in fiscal year 1998. In June
1998, the FASB issued No.133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 133 specifies accounting foe derivative and hedging
activities and will be effective for fiscal year 2000. The implementation of
there standards is not anticipated to have a material impact on the Company's
financial position, results of operations or cash flows.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 and believes that it has good and meritorious
defenses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 1998, the Company sold 176,364 shares of Common Stock at a
purchase price of $5.50 per share. The securities were sold in a transaction
exempt from the registration requirements of the Securities Act of 1933, as
amended, in reliance on Regulation D, thereunder. All of the purchasers were
accredited investors as defined under Regulation D. Balis, Lewittes & Coleman,
Inc., a registered broker dealer, acted as agent for the Company and received a
commission of $67,900. The net proceeds of $902,100 were used to fund expenses
and related fees of the Phoenix Acquisition.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At June 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"). These covenants, as in effect at June 30, 1998,
require the Company to maintain a fixed charge ratio of 1.6 to 1.0, a senior
interest coverage ratio of at least 2.5 to 1.0, consolidated adjusted tangible
net worth of not less than $15.6 million, and a ratio of total indebtedness for
money borrowed to tangible net worth of 2.6 to 1.0. Under the terms of the Loan
and Security Agreement, the foregoing constitute events of default, as defined,
and at the option of Fleet, the obligations of the Company to Fleet may become
immediately due and payable. The Company has been orally advised by Fleet that
it will enter into a forbearance agreement with respect to making the Company's
obligations to Fleet immediately due and payable, however, at present, no
definitive agreement has been entered into. In the event a forbearance agreement
is not entered into and Fleet exercises its option to demand immediate payment
of the Company's obligations owing to it, an aggregate of approximately $12.9
million as of June 30, 1998 would be immediately due and payable to Fleet. If
Fleet should seek immediate payment of the obligations, Fleet could seek to
foreclose against substantially all of the Company's assets which are collateral
for the Company's obligations to Fleet.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A on May 29, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK WARRIOR WIRELINE CORP.
----------------------------
(Registrant)
Date: August 18, 1998 /s/ William L. Jenkins
-------------------------------------
William L. Jenkins
President and Chief Operating Officer
(Principal Executive, Financial and
Accounting Officer)
21
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