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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Mark One:
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the fiscal year ended December 31, 1997; 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 NO. 0-18754
BLACK WARRIOR WIRELINE CORP.
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(Name of Small Business Issuer in its Charter)
DELAWARE 11-2904094
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3748 HIGHWAY #45 NORTH, COLUMBUS, MISSISSIPPI 39701
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(Address of Principal Executive Offices) (Zip Code)
(601) 329-1047
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
(Title of Each Class)
COMMON STOCK, PAR VALUE $.0005 PER SHARE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (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 ninety (90) days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $ 17,062,542
State the aggregate market value of the voting stock held by
non-affiliates as of April 2, 1998:
COMMON STOCK, PAR VALUE $.0005 PER SHARE, $ 26,270,582
(Non-affiliates have been determined on the basis of holdings set
forth under Item 11 of this Annual Report on Form 10-KSB.)
Indicate the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable date:
Class: COMMON STOCK, PAR VALUE $.0005 PER SHARE
Outstanding at April 2, 1998: 3,719,587 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this
Annual Report on Form 10-KSB
Transitional Small Business Issuer Format: [ ] Yes [X] No
================================================================================
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Black Warrior Wireline Corp. (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, 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. At March 16, 1998, the Company owned 41 operational motor vehicle
mounted wireline units, of which 23 are equipped with a state-of-the-art
computer system, nine are equipped with an earlier generation computer system,
four are analog equipped and five are devoted exclusively to steering tool work.
Also as of March 16, 1998, it owned seven workover rigs.
The Company's recent growth and increased revenues has been principally
the result of five 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, Montana and New Mexico. 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"). The purchase price was
approximately $19.0 million payable in cash at the closing. The operations of
the business acquired are conducted throughout the primary oil and gas producing
areas of the continental United States and employ approximately 100 persons.
Financing for the transaction was obtained through secured borrowings of $9.0
million and the sale of convertible notes and warrants to St. James Capital
Partners, L.P. ("St. James") for $10.0 million. See "Item 11. Security Ownership
of Certain Beneficial Owners and Management" and "Item 12. Certain Relationships
and Related Transactions."
The domestic oil and gas industry has experienced a significant
increase in drilling and workover activity since 1995 which has stimulated the
demand for oil and gas well services, including the services offered by the
Company. This increased activity has been the result of a combination of
improved oil and gas prices and advances in technology. The technological
advances in 3-D seismic and directional drilling in particular have had an
impact.
Through its recent acquisition of Diamondback and the completion of the
Phoenix Acquisition, the Company has expanded its activities to include
directional drilling as well as providing downhole steering tools. Directional
drilling entails entering a producing zone directionally, using specialized
drilling equipment, which expands the area of interface with hydrocarbons and
thereby greatly enhancing recoverability. The Company engages in directional
drilling activities as well as providing steering services to other drilling
contractors which do not have "in house" steering tools. The Phoenix Acquisition
also includes the multi-shot downhole well services survey division, which
provides survey services to the oil and gas industry.
<PAGE>
In February 1996, the Company began to assemble and install wireline
service equipment on motor vehicles. During the year ended December 31, 1997,
the Company completed four new and seven remanufactured vehicles and its current
plans call for the Company to continue its production at the rate of two
vehicles per month through the remainder of 1998. To date, except for one
vehicle to be delivered in 1998, all of the vehicles produced have been used by
the Company in its operations. The Company may in the future produce and sell
additional vehicles to others. The Company is equipping all new cased hole
wireline trucks with a state-of-the-art computer system.
The Company was incorporated under the laws of the State of Delaware in
1987 under the name Teletek, Ltd. and in June 1989 Teletek, Ltd. merged with a
predecessor of the Company incorporated under the laws of the State of Alabama
and concurrently changed its name to Black Warrior Wireline Corp. The Company
and its predecessors have been engaged in providing wireline and other oil and
gas well support services since 1984.
RECENT ACQUISITIONS AND ACQUISITION STRATEGY
The following table sets forth information regarding recent
acquisitions made by the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DATE (1) COMPANY ACQUIRED BUSINESS LOCATION PURCHASE PRICE
- -------------- ---------------- ----------------- --------------
March 16, 1998 Phoenix Continental United States $19.0 million
December 15, CAM Wireline Services, Inc. Texas $850,000 (3)
1997
October 9, 1997 Diamondback Directional, Inc. Texas and Louisiana $ 8.9 million (2)
June 9, 1997 PetroLog, Inc. Wyoming, Montana and South Dakota $ 2.1 million
June 6, 1997 Production Well Services, Inc. Southern Mississippi and Alabama $940,000 (4)
November 19, Dyna-Jet, Inc. Wyoming, South Dakota, Montana $758,000
1996 and New Mexico
</TABLE>
- ------------------------------
(1) Date the acquisition was closed.
(2) Includes 647,569 shares of the Company's Common Stock.
(3) Includes 24,969 shares of the Company's Common Stock.
(4) Includes 133,333 shares of the Company's Common Stock.
The Company intends to seek to expand its wireline and other oil and
gas service areas by completing 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
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<PAGE>
believes the terms are favorable. The Company currently has no definitive
agreements to acquire any additional wireline companies. There can be no
assurance that the Company will acquire any additional wireline 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.
ACQUISITION FINANCING
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.
GLOSSARY OF INDUSTRY TERMS
The following are definitions of certain technical terms used in this
Annual Report relating to the Company's business:
"3-D Seismic" Involves the acquisition of a dense grid of seismic data
over a precisely defined area. An energy source creates an acoustic impulse that
penetrates the subsurface and is reflected off underlying rock layers. This
reflected energy is recorded by sensitive receivers (geophones connected to
sophisticated computers). The resulting data is then analyzed and interpreted by
geophysicists and used by oil and natural gas producing companies in the
acquisition of new leases, the selection of drilling locations and for reservoir
management. The technology is particularly useful with directional drilling. 3-D
Seismic data provides greater precision and improved subsurface resolution than
is provided by 2-D seismic surveys.
"Casing" Steel pipe lowered into the drilled hole (borehole) to prevent
"caving in" and to provide isolation of zones and permit production of
hydrocarbons
"Cased Hole" The drilled hole after casing has been lowered and
cemented in place.
"Directional Drilling" Enables the drilling of computer guided
directional wellbores from existing or newly drilled wells intended to increase
the exposure of the well bore to producing hydrocarbon zones. Directional
drilling is facilitated through the use of 3-D Seismic technology.
"Downhole" Any part of the borehole below the ground surface.
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"Junk Basket" A mechanical device lowered into the borehole with
wireline to remove extraneous or unwanted debris. A gauge ring is run
simultaneously to check conformity of hole size.
"Cement Bond Log" A cement quality and bonding evaluation performed
with sonic transmitters and receivers lowered into the borehole with wireline.
This survey is recorded by surface computers.
"Hoisting and Steering Services" Services provided utilizing the
Company's wireline trucks and equipment for operating surveying equipment and
steering tools owned and operated by others.
"Logs" (a) Open Hole: The measurement of properties of formations
to determine hydrocarbon bearing characteristics. Open hole logs are mainly
radioactive (porosity) and electric (resistivity).
(b) Cased Hole: The measurement of gamma rays (different
formations have different levels), casing collars (joints in casing) for
correlation to open hole depths, and cement quality and bonding. Porosity logs
can be run in cased holes with Compensation Neutron Tools.
"Rigs" (a) A drilling rig is one which drills the borehole. This
rig normally is used for setting the casing in the borehole.
(b) A completion or workover rig is used to position tubing,
pumps and other production equipment in the cased hole. As the name plies, this
is used for subsequent "workover" or remedial service.
"Winch Unit" A powerful machine with one or more drums on which to coil
a cable or chain for hauling or hoisting.
"Workover" Operations pertaining to work on wells previously placed in
production but needing additional work in order to restore or increase
production.
WIRELINE SERVICES
The Company's wireline logging service activities contributed revenues
of $9.2 million (approximately 54.0% of revenues) in 1997, $5.6 million
(approximately 73.7% of revenues) in 1996, and $4.6 million (approximately 74.9%
of revenues) in 1995.
Wireline logging services are used to evaluate downhole conditions at
various stages of the process of drilling and completing oil and gas wells as
well as at various times thereafter until the well is depleted and abandoned.
Such services are provided using a truck-mounted wireline unit equipped with an
armored cable that is lowered by winch into an existing well. The cable, which
contains one or more electrical conductors, lowers instruments and tools into
the well to perform a variety of services and tests. The wireline unit's
truck-mounted instrument cab contains electronic equipment to supply power to
the downhole instruments, to receive and record data from those instruments in
order to produce the "logs" which define specific characteristics of each
formation and to display the data received from downhole. The Company's wireline
units are equipped with state-of-the-art computerized systems, DRS computerized
systems (which is an earlier generation computerized system) or analog
equipment.
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<PAGE>
Open hole wireline services are performed after the drilling of the
well but prior to its completion. Cased hole wireline services are performed
during and after the completion of the well, as well as from time to time
thereafter during the life of the well. The Company's services primarily relate
to providing cased hole wireline services. Cased hole services include
radioactive and acoustic logging used to evaluate downhole conditions such as
lithology, porosity, production patterns and the cement bonding effectiveness
between the casing and the formation. Other cased hole services include
perforating, which opens up the casing to allow production from the
formation(s), and free-point and back-off, which locates and frees pipe that has
become lodged in the well. Cased hole services are used in the initial
completion of the well and in virtually all subsequent workover and stimulation
projects throughout the life of the well. The Company performs these services on
a contract basis at the well site for operators and producers of the wells
primarily on a bid basis at prices related to Company standard prices
These services are routinely provided to the Company's customers and
are subject to the customers' time schedule, weather conditions, availability of
Company personnel and complexity of the drilling. These procedures generally
take approximately one to one-and-one-half days to perform.
The Company owns as of March 16, 1998, 41 wireline units. Of these, 23
are state-of-the-art computer equipped, nine are equipped with an earlier
generation computer system, four are analog equipped and five are devoted
exclusively to steering tool work. The Company anticipates placing 16 more
state-of-the-art computer equipped units into service during the last nine
months of 1998.
DIRECTIONAL DRILLING SERVICES
The Company's directional drilling services contributed revenues of
$5.9 million (approximately 34.8% of revenues) in 1997, substantially all of
which was realized during the four months ended December 31, 1997. These
revenues were primarily the result of the acquisition by the Company in October
1997 of Diamondback Directional, Inc. The Company had no revenues from
directional drilling services in 1996 and 1995.
Directional drilling entails entering a producing zone horizontally,
using specialized drilling equipment, which expands the area of interface of
hydrocarbons and thereby greatly enhancing recoverability.
On March 16, 1998, the Company completed the Phoenix Acquisition. This
acquisition is expected to contribute to further increases in the Company's
revenues from directional drilling services. In addition, the Phoenix
Acquisition will enable the Company to provide downhole survey services to the
oil and gas industry.
WORKOVER AND COMPLETION SERVICES
These activities contributed revenues of $1.6 million (approximately
9.5% of revenues) in 1997, $1.7 million (approximately 22.5% of revenues) in
1996, and $1.3 million (approximately 21.4% of revenues) in 1995.
These services are performed primarily on an hourly basis.
Workover services include those operations performed on wells when
originally completed and on wells previously placed in production and requiring
additional work to restore or increase production. A completion or workover rig
is used to position tubing, pumps and other production equipment in a cased
hole. The unit is used for the initial completion of the well and subsequent
workover and remedial service. A completion or workover rig is generally a four
to six axle truck-mounted hoist unit with a 60 to 90 foot derrick capable of
lowering and hoisting
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<PAGE>
up to 300,000 pound loads. The Company expects its workover equipment to be
fully utilized by existing customers in 1998 and is exploring opportunities to
expand this source of revenue.
OTHER ACTIVITIES
The Company also engages in other oil and gas well service activities
including, primarily, the sale rental and service of tools and equipment used in
the oil field services industry. These activities contributed revenues of
$290,000 (approximately 1.7% of revenues) in 1997, $288,000 (approximately 3.8%
of revenues) in 1996, and $229,000 (approximately 3.7% of revenues) in 1995.
The Company also conducts tool and equipment inspection, maintenance
and testing services. Rubber goods, gaskets, seats and seals are disassembled,
cleaned, inspected, replaced if necessary, reassembled and tested. Packers and
other equipment rented by the Company are reconditioned and returned to the
Company's rental inventory.
PRINCIPAL CUSTOMERS AND MARKETING
During the years ended December 31, 1997, December 31, 1996 and
December 31, 1995, three customers accounted for a total of approximately 22.7%,
63.8% and 61.6%, respectively, of the Company's net revenues. The Company's
principal customers and the percentage of the Company's net revenues received
from each of such customers during the three years ended December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Taurus Exploration, Inc. 10.3% 25.3% 31.1%
Pioneer Resources, Inc.
(Parker & Parsley Development L.P.) 12.4% 23.7% 12.5%
Becfield Drilling Company 3.0% 14.8% 18.0%
TOTALS 25.7% 63.8% 61.6%
===================================================
</TABLE>
The Company does not have any long-term agreements with its customers
and services are provided pursuant to short-term agreements negotiated by the
Company with the customer.
The Company's services are marketed by its executive officers and a
sales staff of approximately 20 persons working from its District Offices and a
sales office in Denver, Colorado. See "Item 2. Properties." The Company relies
extensively on its reputation in the industry to create customer awareness of
its services.
Generally, the Company experiences lower revenues during the first
calendar quarter of each year than it experiences in other quarters due to
adverse weather affecting working conditions.
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<PAGE>
OPERATING HAZARDS AND INSURANCE
The services of the Company are used in oil and gas well drilling,
workover and production operations that are subject to inherent risks such as
blow-outs, fires, poisonous gas and other oil and gas field hazards, many of
which can cause personal injury and loss of life, severely damage or destroy
equipment, suspend production operations and cause substantial damage to
property of others. Ordinarily, the operator of the well assumes the risk of
damage to the well, the producing reservoir and surrounding property and revenue
loss in the event of accident, except in the case of gross or willful negligence
on the part of the Company or its employees.
The Company has general liability, property damage and workers'
compensation insurance. Although, in the opinion of the Company's management,
the limits of its insurance coverage are consistent with industry practices,
such insurance may not be adequate to protect the Company against liability or
losses occurring from all the consequences of such risks or incidents. The
occurrence of an event not fully covered by insurance (and a determination of
the liability of Company for consequential losses or damages) could result in
substantial losses to the Company and have a materially adverse effect upon its
financial condition, results of operations, and cash flows.
The Company maintains two policies totaling $2.0 million on the life of
William L. Jenkins, its President and Chief Operating Officer, and maintains
$1.0 million policies on the lives of each of Danny Ray Thornton,
Vice-President, and Allen R. Neel, Executive Vice-President. See Item 9,
"Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act." The benefits under such policies are payable
to the Company.
BUSINESS ENVIRONMENT
The business of the Company is affected by the general demand in the
economy for petroleum products; availability of drilling rigs, casing and other
necessary goods and services; revision in governmental policies with respect to
oil and gas imports and other factors affecting potential competition from
foreign sources of oil and gas; and state conservation commission regulations
affecting allowable rates of production, well spacing and other factors. Oil and
gas prices continue to have moderate fluctuations increasing the overall
instability of the market.
Demand for the Company's services depends on the condition of the oil
and gas industry, and in particular, demand for oil and gas well services. These
activities traditionally have been cyclical and influenced by prevailing oil and
gas prices, expectations about future demand and prices, the cost of exploring
for, producing and developing oil and gas services, the discovery rate of new
oil and gas reserves, political and economic conditions, governmental
regulations and the availability and cost of capital. Historically, oil and gas
prices and the level of exploration and development activity have fluctuated
substantially resulting in significant fluctuations in demand for oil and gas
well services. The Company's results in recent periods have benefited from
improved market conditions for the Company's services as a result of increased
oil and gas exploration and development activity. There can be no assurance that
the current market conditions will continue. Recently, oil prices have decreased
primarily as a result of, among other things, decreased international demand and
economic uncertainty in the Far East. The Company is unable to predict whether
these industry conditions will continue and what impact they may have on the
Company's operations. However, any significant decline in worldwide demand for
oil and gas or a prolonged reduction in oil or gas prices in the future would
likely depress development activity and could have a material adverse effect on
the Company's revenues and profitably.
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<PAGE>
COMPETITION
Most of the Company's competitors are divisions of larger diversified
corporations which offer a wide range of oil field services. Its chief
competitors include Halliburton Company and Schlumberger, Ltd., as well as a
number of other companies active in the industry. These competitors have
substantially greater economic resources than the Company. Recent business
combinations involving oil and gas service companies may have the effect of
intensifying competition in the industry. Competition principally occurs in the
areas of technology, price, quality of products and field personnel, equipment
availability and facility locations. Although price competition has been in the
past a significant characteristic of the industry, the Company's ability to
offer more technologically advanced services is believed by management to have
reduced its exposure to severe price competition. The Company continues to make
a conscious effort to compete, not just on price, but on its ability to offer
advanced technology, experienced personnel, and a safe working environment.
The Company's growth is dependent upon its ability to attract and
retain skilled oil field and management personnel. The competition for such
qualified employees is intense and there can be no assurance that sufficient
qualified persons will be available at such times as the Company requires their
services.
REGULATION
The oil and gas business is a heavily regulated industry. The Company's
activities are subject to various licensing requirements and minimum safety
procedures and specifications, anti-pollution controls on equipment, waste
discharge and other environmental and conservation requirements imposed by
federal and state regulatory authorities. Serious penalties and fines are
imposed for violations from such directives and violations could result in the
loss of licenses and other penal proceedings.
The Company is not currently the subject of any, nor is it aware of
any, threatened investigations or actions under any federal or state
environmental, occupational safety or other regulatory laws. The Company
believes that it will be able to continue compliance with such laws and
regulations without a material adverse effect on its earnings and competitive
position. However, there can be no assurance that unknown future changes in such
laws and regulations would not have such an effect if and when such changes
occur.
EMPLOYEES
As of March 16, 1998, the Company employed approximately 280 persons on
a full-time basis. Of the Company's employees, 33 are management personnel, 19
are administrative personnel and 228 are operational personnel. The Company also
uses the services of 20 to 30 independent contract drillers. None of the
Company's employees is represented by a labor union, and the Company is not
aware of any current activities to unionize its employees. Management of the
Company considers the relationship between the Company and its employees to be
good.
The Company has a three-year employment agreement with William L.
Jenkins, its President, Chief Operating Officer and a Director and stockholder
of the Company. The Company also has employment agreements with Allen R. Neel,
Executive Vice-President, and Danny Ray Thornton, Vice-President of the Company.
The Company's success is currently dependent upon the efforts of these
individuals, and the loss of the services of any of these individuals could have
a material adverse effect on the Company's business, unless a qualified
replacement
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<PAGE>
can be obtained by the Company. See Item 9, "Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act." The Company relies substantially on their efforts to expand its services
and for its marketing and sales activities. If the Company is unable to continue
to contract for these services, or if these services are lost for any reason in
the future, the Company will be substantially and adversely affected.
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 below, as well
as "Item 1. Description of Business - General," "- Recent Acquisitions and
Acquisition Strategy," "- Acquisition Financing," "- Principal Customers and
Marketing," "Item 6. Management's Discussion and Analysis or Plan of Operations
- - General," "- Liquidity and Capital Resources." 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 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 below
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. Risk factors that could affect the Company's revenues,
profitability and future business operations include, among others, the
following:
Substantial Indebtedness. At December 31, 1997, the Company's total
indebtedness, including current maturities, was approximately $14.8 million. In
addition subsequent to December 31, 1997 through March 16, 1998, the Company
incurred additional indebtedness of approximately $19.0 million primarily in
connection with financing the Phoenix Acquisition and has an available borrowing
ability of an additional $10.0 million, substantially all of which is expected
to be borrowed during the current year. The Company expects that if it acquires
additional oil and gas well service companies that it may incur additional
indebtedness. The Company's level of indebtedness may pose substantial risks to
the Company and the holders of its securities, including the possibility that
the Company may not be able to refinance such indebtedness or generate
sufficient cash flow to pay the principal of and interest on the indebtedness
when due. During the years ended December 31, 1998 and December 31, 1999,
reflecting the indebtedness incurred through March 16, 1998 the Company is
obligated to repay approximately $2.2 million and $8.3 million, respectively,
principal amount of such indebtedness, plus interest payments. The Company
anticipates that such indebtedness will be repaid out of the public or private
sale of its debt or equity securities as well as from its cash flow from
operations. There can be no assurance that the Company will be able to
consummate a public or private sale of debt or equity securities or otherwise be
successful
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<PAGE>
in refinancing this indebtedness or that the terms of any such sale of
securities or refinancing may not dilute the interests of the Company's
stockholders.
Availability of Trained Personnel. The operation of the wireline,
directional drilling and other oil and gas well service equipment utilized by
the Company requires the services of employees having the technical training and
experience necessary to obtain the proper reports and operational results.
Currently, such personnel are in considerable demand. The number of employees of
the Company has increased from 197 at December 31, 1996 to approximately 280 as
of March 16, 1998, and the Company expects that its number of employees may
increase further to support its anticipated level of operations. The Company's
operations are to a considerable extent dependent upon the continuing
availability of personnel with the necessary level of training and experience to
adequately operate its equipment. The Company has historically experienced a
high rate of employee turnover. In the event the Company should suffer any
material loss of personnel to competitors or be unable to employ additional or
replacement personnel with the requisite level of training and experience to
adequately operate its equipment its operations could be adversely affected.
While the Company believes that its wage rates are competitive and that its
relationship with its workforce is good, a significant increase in the wages
paid by other employers could result in a reduction in the Company's workforce,
increases in wage rates, or both. If either of these events occurred for a
significant period of time, the Company's revenues could be impaired.
Dependence on Major Customers. Historically, a large portion of the
Company's revenues has been generated from a relatively small number of
companies. While the Company believes its relationship with its customers is
good, the loss of any of its principal customers, or a significant reduction in
business done with the Company by these customers, if not offset by revenues
from new or existing customers, could have a material adverse effect on the
Company's business, results of operations and prospects.
Substantial Control by Principal Investor. As of March 16, 1998, St.
James Capital Partners, L.P. ("St. James") held promissory notes of the Company
convertible into 2,781,827 shares of Common Stock and held warrants to purchase
an additional 3,391,000 shares of Common Stock. Upon conversion of the notes and
exercise of the warrants, St. James would hold an aggregate of 6,172,827 shares
representing 62.4% of the Company's shares of Common Stock then outstanding. In
addition, St. James has certain additional contractual rights which, among other
things, give to St. James the right to nominate one person for election to the
Company's Board of Directors, certain preferential rights to provide future
financings for the Company, subject to certain exceptions, prohibitions against
the Company consolidating, merging or entering into a share exchange with
another person, with certain exceptions, without the consent of St. James. St.
James has agreed to convert an aggregate of $4.9 million principal amount of its
notes into an aggregate of 1,353,257 shares of Common Stock (26.7% of the shares
then issued and outstanding) at such time as the Company files a registration
statement under the Securities Act of 1933, as amended, relating to the shares
of Common Stock issuable on conversion and exercise of all the notes and
warrants held by St. James, and such registration statement is declared
effective. The foregoing give St. James the ability to exert significant
influence over the business and affairs of the Company. The interests of St.
James may not always be the same as the interests of the Company's other
securityholders.
Dependence on Volatile Oil and Gas Industry. 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 level and 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,
-10-
<PAGE>
worldwide weather conditions, international political, military, regulatory and
economic conditions and the ability of oil and gas companies to raise capital.
Recently, oil prices have decreased primarily as a result of, among other
things, decreased international demand and economic uncertainty in the Far East.
Domestic exploration activity also has been particularly affected by an increase
in the exploration and demand for gas. The level of drilling activity in the
onshore oil and gas exploration and production industry in the United States has
been volatile and no assurance can be given that current levels of oil and gas
exploration activities in the areas where the Company offers its services will
continue or that demand for the Company's services will correspond to the level
of activity in the industry generally. 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.
Market Conditions Affecting Demand for the Company's Services. The oil
and gas well service industry is currently characterized by an increased level
of demand for wireline, directional drilling, recompletion and other oil and gas
well services and a limited supply of equipment available to perform these
services in a timely manner. The industry has been characterized by substantial
fluctuations in the demand for such services and the supply of equipment. The
Company's revenues in the future 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 operators 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.
Acquisition Activity Dependent Upon Availability of Capital. Since
November 1996, the Company's growth has been substantially impacted by the
acquisition of other oil and gas well service businesses. The Company intends to
continue to seek to expand its business through further acquisitions. In order
to complete additional acquisitions, the Company will need to have available to
it on acceptable terms the capital necessary to meet the purchase price for any
businesses acquired. Financing obtained to date has included borrowings secured
by substantially all of the Company's assets. Additionally, the Company's
acquisition activity will be substantially dependent upon stock market
conditions in general as well as the price for its common equity being such as
to enable its securities to be used in completing such transactions. In the
event the Company should be unable to raise additional capital or stock market
or other economic conditions become unfavorable, the Company may be unable to
pursue its business strategy of acquiring additional companies in the oil and
gas well service industry.
Availability and Assimilation of Acquisitions. The Company's growth has
been enhanced materially by strategic acquisitions that have substantially
increased the Company's operating activities and revenues. While the Company
believes that the oil and gas wireline service and drilling industry is highly
fragmented and that significant acquisition opportunities are available, there
can be no assurances that suitable acquisition candidates can be found, and the
Company faces increased competition from other companies for available
acquisition opportunities. If the prices paid by other buyers for the available
acquisition opportunities continue to rise, the Company may find fewer
acceptable acquisition opportunities. The Company may elect or be required to
incur substantial indebtedness to finance future acquisitions and also may issue
equity securities or convertible securities in connection with such
acquisitions. Additional debt service requirements could represent a significant
burden on the Company's results of operations and financial condition, and the
issuance of additional equity or convertible securities could result in dilution
to stockholders. In addition, there can be no assurance that the Company will
successfully integrate the operations and assets of its recent or any future
acquisition with its own, that the Company's management will be able to manage
effectively the growth and increased size of the Company or that the Company
will be successful in deploying wireline service and other equipment acquired by
it or in maintaining the crews and market share
-11-
<PAGE>
attributable to wireline service and other equipment acquired by the Company.
Any failure by the Company to successfully effect and implement its acquisition
strategy could have a material adverse effect on the Company's future results of
operations and financial condition.
Competition. The wireline, directional drilling, workover and well
servicing industry is a highly-fragmented, intensely competitive and cyclical
business. A number of large and small contractors provide competition in all
areas of the Company's business. The wireline service trucks and other equipment
used is mobile and can be moved from one region to another in response to
increased demand. Many of the Company's competitors have greater financial
resources than the Company, which may enable them to better withstand industry
downturns, to compete more effectively on the basis of price, and to acquire
existing or new equipment.
Labor Shortages. Increases in domestic drilling demand since mid-1995
and increases in oil and gas service activities have resulted in a shortage in
many areas of qualified personnel in the industry. These shortages make it more
difficult for the Company and other contractors to utilize available equipment
and to retain crews. If the Company is unable to attract and retain sufficient
qualified personnel, its ability to market and operate its equipment will be
restricted, which could have a material adverse effect on the Company's results
of operations. Further, wage rates of qualified crews have begun to rise in the
oil and gas service industry in response to the increasing competition, which
could ultimately have the effect of reducing the Company's operating margins and
results of operations.
Operating Hazards and Uninsured Risks. The Company's oil and gas well
service operations are subject to the many hazards inherent in the oil and gas
drilling and production industry. These hazards can result in personal injury
and loss of life, severe damage to or destruction of property and equipment,
pollution or environmental damage and suspension of operations. The Company
maintains insurance protection as it deems appropriate. Such insurance coverage,
however, may not in all situations provide sufficient funds to protect the
Company from all liabilities that could result from its operations.
Environmental Risks. The Company is subject to numerous domestic
governmental regulations that relate directly or indirectly to its operations,
including certain regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances impose "strict liability" and render a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Such laws and regulations may expose the Company to liability for the
conduct of, or conditions caused by, others, or for acts of the Company that
were in compliance with all applicable laws at the time such acts were
performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company.
Seasonality and Weather Risks. The Company's operations in the Rocky
Mountain area and certain other of its service areas are subject to seasonal
variations in weather conditions and daylight hours. Since the Company's
activities take place outdoors, the average number of hours worked per day, and
therefore the number of wells serviced per day, generally is less in winter
months than in summer months, due to an increase in snow, rain, fog and cold
conditions and a decrease in daylight hours. Furthermore, demand for the
Company's wireline services by oil and gas companies in the first quarter is
generally lower than at other times of the year. As a result, the Company's
revenue and gross profit during the first quarter of each year are typically low
as compared to the other quarters.
-12-
<PAGE>
Dependence on Key Personnel. The Company's success depends on, among
other things, the continued active participation of William L. Jenkins,
President, Allen R. Neel, Executive Vice-President, Danny Ray Thronton,
Vice-President, Operations, and certain of the Company's other officers and key
operating personnel. The loss of the services of any one of these persons could
have a material adverse effect on the Company. The Company has entered into
employment agreements with each of its executive officers, including Messrs.
Jenkins (through September 1999) and Thornton and Neel (throughApril 1, 2000),
and has purchased "key-man" life insurance with respect to Mr. Jenkins.
ITEM 2. PROPERTIES
The Company leases 6,500 square feet of office space in Columbus,
Mississippi for a five-year term expiring on September 30, 2001 for its
executive offices. The monthly rental is $1,900, plus electric and gas
utilities. In addition, the Company maintains District Offices at 21 locations
throughout its service area, a sales office in Denver, Colorado and a
manufacturing facility in Laurel, Mississippi. The aggregate annual rental for
these facilities is $222,000. Of such facilities three are owned by the Company
and the others are leased with rental periods of from a month-to-month basis to
five years. The Company believes that all of the facilities are adequate for its
current requirements.
On March 9, 1998, the Company entered into a Real Estate Sales
Agreement to purchase an approximately 13 acre parcel located in Montgomery
County, Texas for a purchase price of approximately $186,000. The Company
presently plans to construct an approximately 50,000 square foot building on the
property that it intends to use for office and other general corporate purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers and Directors are respondents
in an arbitration proceeding commenced by Monetary Advancement International,
Inc. before the American Arbitration Association in New York, New York. The
claimant seeks recompense against the Company and the 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 a 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.
The Company is a defendant in a number of other legal proceedings which
it considers to be routine litigation that is incidental to its business. The
Company does not expect to incur any material liability as a consequence of such
litigation.
-13-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1997, to a vote of security holders of the Company, through
the solicitation of proxies, or otherwise.
-14-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under
the trading symbol BWWL. The following table sets forth the bid prices for the
Company's Common Stock for the periods indicated as provided by the OTC Bulletin
Board:
<TABLE>
<CAPTION>
BID PRICES
----------------------------------------------------
1996 HIGH LOW
----------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter $6.50 $2.00
Second Quarter $6.50 $4.00
Third Quarter $6.50 $1.06
Fourth Quarter $4.55 $1.75
BID PRICES
----------------------------------------------------
1997 HIGH LOW
----------------------------------------------------------------------------------------
First Quarter $4.44 $2.75
Second Quarter $4.19 $2.56
Third Quarter $6.81 $3.13
Fourth Quarter $9.63 $6.00
BID PRICES
----------------------------------------------------
1998 HIGH LOW
----------------------------------------------------------------------------------------
First Quarter $8.00 $5.88
Second Quarter
(through April 9) $7.94 $7.50
</TABLE>
The foregoing amounts represent inter-dealer quotations without
adjustment for retail markups, markdowns or commissions, and do not represent
the prices of actual transactions. On April 9, 1998, the closing bid quotation
for the Common Stock, as reported by the OTC Bulletin Board, was $7.56.
As of March 16, 1998, the Company had approximately 345 shareholders of
record and believes it has in excess of 500 beneficial holders of its Common
Stock, including in excess of 350 holding 100 shares or more. The Company has
never paid a cash dividend on its Common Stock and management has no present
intention of commencing to pay dividends.
-15-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company's 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.
The following table sets forth the Company's revenues from its three
principal lines of business for each of the three years ended December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
------------------------------------------------------------------------------
<S> <C> <C> <C>
Wireline Services $ 9,223 $ 5,585 $ 4,626
Directional Drilling 5,932 -0- -0-
Workover and Completion 1,618 1,709 1,324
Other 290 289 229
-------------------------- ------------------------- -------------------------
$17,063 $7,582 $6,179
========================== ========================= =========================
</TABLE>
TWELVE-MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
The Company had income before extraordinary gain of approximately
$447,000 for the year ended December 31, 1997, as compared to income before
extraordinary gain of approximately $427,000 in 1996. The Company experienced
net income of $447,000 for the year ended December 31,1997 as compared to $2.0
million for the year ended December 31, 1996, after reflecting the extraordinary
gain on extinguishment of debt, net of income taxes, in 1996.
Revenues increased by $9.5 million or 125% to $17.1 million for the
year ended December 31, 1997 as compared to revenues of $7.6 million for the
year ended December 31, 1996. Of such increase, approximately $8.2 million was
the result of acquisitions completed during 1997 and approximately $1.3 million
was the result of the improved market and pricing for the Company's services. Of
the increase in wireline services revenue, $2.3 million
-16-
<PAGE>
was the result of the acquisition of Petrolog and PWS and $1.3 million was the
result of increases in the Company's other operations. The remaining increase of
$5.9 million was due to directional drilling revenues resulting primarily from
the Diamondback acquisition. Revenues from workover and completion activities
declined primarily because of the completion of a project undertaken in 1996.
Operating costs increased by $7.1 million for the year ended December
31, 1997, as compared to 1996. This increase was due primarily to the increase
in the level of activities primarily as a consequence of the acquisitions
completed in 1997. Salaries and benefits increased by $1.8 million for 1997, as
compared to 1996, while the total number of employees increased from 110 at
December 31, 1996 to 280 at December 31, 1997. This was due to salary increases
and hiring of additional personnel. Operating costs as a percentage of revenues
increased to 71.7% in 1997 from 67.5% in 1996 primarily because of costs
relating to commencing operations at newly acquired locations.
Selling, general and administrative expenses increased by approximately
$889,000 from $1.3 million in 1996 to $2.1 million in 1997. As a percentage of
revenues, selling, general and administrative expenses declined from 17.2% in
1996 to 12.8% in 1997, primarily as a result of increased revenues due to
acquisitions completed without a significant increase in executive and
administrative personnel.
Depreciation and amortization increased from $574,000 in 1996, 7.6% of
revenues, to $1.4 million in 1997, 8.2% of revenues, primarily because of the
higher asset base of depreciable properties in 1997 over 1996.
Interest expense and amortization of debt discount increased by
$267,000 for 1997 as compared to 1996. This was directly related to the
increased amounts of indebtedness outstanding in 1997 incurred to finance
acquisitions. See "Note 6 of Notes to Consolidated Financial Statements."
Net gain on sale of fixed assets decreased in 1997 to $26,000 from
$77,000 in 1996 because of the sale of smaller amounts of equipment in 1997 from
1996. Other income increased by $33,000 in 1997 because of interest income.
Income tax expense totaled approximately $222,000 for 1997 compared to
a benefit of $66,000 for 1996. These totals contain Federal and State deferred
as well as current amounts. See "Note 10 of Notes to Consolidated Financial
Statements." The federal and state tax benefits in 1996 results from the
elimination of the Company's valuation allowance associated with its deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by Company operating activities was $1.2 million for the
year ended December 31, 1997 as compared to $771,000 for the year ended December
31, 1996. Investing activities of the Company used cash of $3.8 million during
the year ended December 31, 1997 for the acquisition of property, plant and
equipment and other businesses offset by proceeds from the sale of fixed assets
of $74,000. During the year ended December 31, 1996, acquisitions of property,
plant and equipment and other businesses used cash of $725,000 offset by
proceeds of $95,000 from the sale of fixed assets. Financing activities provided
cash of $2.6 million from the net proceeds from the issuance of convertible
notes and warrants and the sale of common stock during the year ended December
31, 1997 offset by principal payments on long-term notes and capital lease
obligations of $347,000. During the year ended December 31, 1996, the sale of
shares of Common Stock resulted in proceeds of $643,000 offset by principal
payments on long-term debt and capital lease obligations of $342,000.
-17-
<PAGE>
Cash at December 31, 1997 was $436,000 as compared with cash at
December 31, 1996 of $727,000.
During the year ended December 31, 1997, the Company expended $1.5
million for the acquisition of property, plant and equipment financed under
capital leases and notes payable and incurred an additional $9.1 million of
notes payable in connection with the acquisition of businesses. During the year
ended December 31, 1996, the Company expended $797,000 for the acquisition of
property, plant and equipment.
The Company's recent growth and increased revenues has been principally
the result of the completion of five acquisitions 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, Montana and New Mexico. 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. which has been engaged in providing directional
drilling and other oil and gas well services in the Texas and Louisiana area,
and 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 its domestic oil
and gas well directional drilling and downhole survey service business including
the related operating assets and properties (such acquisition is herein referred
to as the "Phoenix Acquisition"). The purchase price was approximately $19.0
million payable in cash at the closing. The operations of the business acquired
are conducted throughout the primary oil and gas producing areas of the
continental United States and employ approximately 100 persons. Financing for
the transaction was obtained through secured borrowings of $9.0 million and the
sale of convertible notes and warrants to St. James Capital Partners, L.P. ("St.
James") for $10.0 million. See "Item 11. Security Ownership of Certain
Beneficial Owners and Management" and "Item 12. Certain Relationships and
Related Transactions."
Currently, 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 its acquisitions using cash flow from its
current operations as well as the possible proceeds from secured lending from
banks or other institutional lenders and the private or public sale of debt and
equity securities. Any such capital that is raised will be on terms yet to be
negotiated and may be on terms that dilute the interests of current stockholders
of the Company. Loans may be collateralized by all or a substantial portion of
the Company's assets. There can be no assurance that the Company will raise
additional capital when it is required or that the Company will have or be able
to raise sufficient capital to fund its acquisition strategy.
In March 1998, in connection with providing funding to complete the
Phoenix Acquisition, the Company completed the sale in a private placement of
596,000 shares of Common Stock at a price of $5.50 per share for gross proceeds
of approximately $3.3 million.
-18-
<PAGE>
Under the terms of its agreement to acquire Diamondback, the Company
agreed to commit to make approximately $4.0 million available to the Diamondback
business for capital improvements during the years 1998 and 1999.
The Company believes that cash flow generated from operations will be
sufficient to fund its normal working capital needs and capital expenditures for
at least the next 12 months.
Credit Facility. On March 16, 1998, the Company entered into a Loan and
Security Agreement (the "Credit Facility") with Fleet Capital Corporation
("Fleet") pursuant to which the Company is able to borrow, subject to meeting
certain lending conditions, a total of $19.0 million. Of such amount, $9.0 is a
term loan (the "Term Loan"), substantially all of which was borrowed to pay a
portion of the purchase price for the Phoenix acquisition, up to $2.0 million
(the "Equipment Line") is available to be borrowed to acquire additional
equipment, and up to $8.0 million (the "Revolving Line") is available to be
borrowed for general operating capital purposes. The Equipment Line is
available, subject to certain limitations, in amounts up to 80% the purchase
price or appraised value of new equipment and is repayable in equal monthly
installments over five years. The Revolving Line is available to be borrowed
from time to time, subject to no default under the Credit Facility, in amounts
up to 85% of the Company's eligible accounts receivable subject to the $8.0
million limitation. Interest on the Credit Facility is equal to Fleet's base
rate plus 0.5% on the Revolving Line and Fleet's base rate plus 0.75% on the
other borrowings under the Credit Facility. Amounts repaid under the Term Loan
and the Equipment Line cannot be reborrowed. The Credit Facility terminates and,
subject to all prepayment obligations, the outstanding balance is due and
payable on March 15, 2001. The Credit Facility can be terminated by the Company
prior thereto subject to a prepayment penalty, under certain circumstances,
declining from 3% during the first year after March 16, 1998 to 1% during the
last year the Credit Facility is outstanding. The Credit Facility is secured by
a senior and prior lien against substantially all the Company's real and
personal property, including the assets acquired in the Phoenix Acquisition,
subject to certain exceptions. The Credit Facility includes a number of
affirmative and negative covenants including requirements as to providing Fleet
with access to the Company's facilities, financial and other information, a
requirement that St. James convert not less than $4.9 million of indebtedness
owed by the Company to St. James into capital stock of the Company no later than
May 31, 1998, restrictions on mergers, consolidations, acquisitions, limitations
on total indebtedness, restrictions on liens, subject to certain exceptions, on
its properties, prohibitions against the payments of dividends and other
distributions to stockholders, restrictions on capital expenditures,
dispositions of assets and sales of subsidiary stock, among other covenants.
Such covenants also prohibit the Company from making payments on the promissory
note owing to Diamondback Drilling, Inc. in the amount of $3.0 million except on
terms approved by Fleet or (i) out of a minimum borrowing availability of $2.0
million, or (ii) a secondary offering of the Company's capital stock. The Credit
Facility contains a number of affirmative covenants requiring the Company to
maintain compliance with various financial ratios relating to fixed charges,
interest coverage ratios, tangible net worth, total indebtedness to tangible net
worth, among other things. Events of default under the Credit Facility include,
among other things, the failure to pay principal and interest when due, making
any misrepresentations to Fleet in any of the loan documents, breach of the
covenants contained in the Credit Facility or defaults under the security
documents under the Credit Facility, defaults on other indebtedness, adverse
changes in the Company's financial condition or prospects, insolvency and other
bankruptcy proceedings, the failure of St. James to own at 55% of the Company's
issued and outstanding capital stock of the Company (on a fully diluted basis)
prior to a secondary offering of the Company's securities, or, pursuant to a
secondary public offering of capital stock of the Company, at least 30% of the
Company's issued and outstanding capital stock, on a fully diluted basis. In the
event of a default under the Credit Facility, at the option of Fleet, all
amounts thereunder become immediately due and payable and Fleet would have the
right as a secured lender to foreclose against substantially all of the
Company's assets.
-19-
<PAGE>
YEAR 2000 COMPUTER ISSUES
The Company has reviewed its computer systems and hardware to locate
potential operational problems associated with the year 2000. Such review will
continue until all potential problems are located and resolved. 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. However, it is possible that the Company's cash flows
could be disrupted by year 2000 problems experienced by 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. Inflation did not have a
significant effect on the Company's operations in 1997.
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 non-owner 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,
earnings per share, or cash flows.
The Board has issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports.
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
The financial information required includes a measure of segment profit
or loss, certain specific revenue and expense items, segment assets and a
reconciliation of each category to the general financial statements. The
descriptive information required includes the way that the operating segments
were determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment
-20-
<PAGE>
information and those used in the general purpose financial statements, and
changes in the measurement of segment amounts from period to period.
This Statement is effective for financial statements for periods
beginning after December 15, 1997 with restatement of earlier periods required
in the initial year of application. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. The Company is currently determining if these disclosure
requirements will be applicable and, therefore, required in future periods.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements of the Company meeting the
requirements of Regulation S-B are filed on the succeeding pages of this Item 7
of this Annual Report on Form 10-KSB, as listed below:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Report of Independent Accountants for the Years Ended
December 31, 1997, 1996 and 1995.................................................... F-1
Consolidated Balance Sheets as of
December 31, 1997 and 1996.......................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995.................................................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995........................................ F-4
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1997, 1996 and 1995.................................................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
During the two fiscal years ended December 31, 1997, the Company has
not filed any Current Report on Form 8-K reporting any change in accountants in
which there was a reported disagreement on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
-21-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table contains information concerning the current
Directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William L. Jenkins 44 President, Chief Operating Officer
and Director
Allen R. Neel 40 Executive Vice-President
Danny Ray Thornton 46 Vice-President - Operations
John A. McNiff, Sr. 70 Secretary and Director
Michael Brod 52 Director
John L. Thompson 39 Director
Charles Underbrink 44 Director
</TABLE>
William L. Jenkins has been President, Chief Operating Officer and a
Director of the Company since March 1989. From 1973 until 1980, Mr. Jenkins held
a variety of field engineering and training positions with Welex A Halliburton
Company, in the South and Southwest. From 1980 until March 1989, Mr. Jenkins
worked with Triad Oil & Gas, Inc., as a consultant, providing services to a
number of oil and gas companies. During that time, Mr. Jenkins was involved in
the organization of a number of drilling and oil field service companies,
including a predecessor of the Company, of which he served as
Secretary/Treasurer until 1988. Mr. Jenkins has over twenty years' experience in
the oil field service business. Mr. Jenkins is Mr. Thornton's brother-in-law.
Allen R. Neel, is the Executive Vice-President of the Company and has
been employed by the Company since August 1990. He is currently in charge of the
Company's directional drilling activities. In 1981, Mr. Neel received his BS
Degree in Petroleum Engineering from the University of Alabama. From 1981 to
1987, Mr. Neel worked in engineering and sales for Halliburton Services. From
1987 to 1989, he worked as a District Manager for Graves Well Drilling Co. When
the Company acquired the assets of Graves in 1990, Mr. Neel assumed a position
with the Company.
Danny Ray Thornton is a Vice-President of the Company and has been
employed by the Company since March 1989. From 1982 to March 1989, Mr. Thornton
was the president and a principal stockholder of Black Warrior Mississippi, the
Company's operational predecessor. Mr. Thornton has been engaged in the oil and
gas
-22-
<PAGE>
services industry in various capacities since 1978. His principal duties with
the Company include supervising and consulting on wireline and workover
operations. Mr. Thornton is Mr. Jenkins' brother-in-law,
John A. McNiff, Sr., a Director and Secretary of the Company since
1991, has served as President and Chief Executive Officer, and is a Director of
Pangaea Investment Consultants, Ltd., a Bermuda-based company engaged in
providing financial consulting services and raising capital for emerging United
States, Canadian and Mexican companies, since its inception in 1990. From 1981
to 1989, Mr. McNiff was chairman and chief executive officer of Wycombe, Ltd.,
and its subsidiaries, a broker/dealer firm, a syndicator and general partner of
cable television investments and a syndicator and general partner of oil and gas
investments. From 1970 to 1980, Mr. McNiff was a senior partner of the New York
City law firm of Wagner, McNiff and Dimaio and therefter "of counsel" to the
firm.
Michael Brod was elected a Director of the Company in January 1997. Mr.
Brod is a former Allied member of the New York Stock Exchange and former
President of a member firm. He was employed in the corporate finance department
of Dickinson & Company, Inc. from November 1995 to February 1997 and is
currently engaged as a financial consultant to Swartwood, Hesse Inc., a
registered broker/dealer.
John L. Thompson is a director and President of St. James Capital
Corp., a Houston-based merchant banking firm. St. James Capital Corp. also
serves as the General Partner of St. James Capital Partners, L.P., an investment
limited partnership specializing in merchant banking related investments.
Additionally, he is Chairman of the Board of Herlin Industries, Inc., a
publicly-held holding company engaged in energy services and is a Director of
Industrial Holdings, Inc., a publicly-held company. Prior to co-founding St.
James, Mr. Thompson served as a Managing Director of Corporate Finance at Harris
Webb & Garrison, a regional investment banking firm with a focus on mergers and
acquisitions, financial restructuring and private placements of debt and equity
issues. Mr. Thompson was elected to the Company's Board of Directors pursuant to
the terms of agreements between the Company and St. James Capital Partners, L.P.
See "Certain Transactions" for a description of the transaction.
Charles Underbrink is was elected a Director on April 1, 1998. He is
the Chief Executive Officer and Chairman of St. James Capital Corp., the general
partner of St. James Capital Partners, L.P., a position he has held since July
1995.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and beneficial owners of more than ten percent
(10%) of the Company's Common Stock are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms that they file. To the best
of the Company's knowledge, based solely on a review of such reports as filed
with the Securities and Exchange Commission, all such persons have complied with
such reporting requirements.
-23-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION - GENERAL
The following table sets forth compensation paid or awarded to the
President and Chief Executive Officer of the Company for all services rendered
to the Company in each of the years 1997, 1996 and 1995. No other executive
officer received compensation exceeding $100,000 in any of those years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------------------------------------
BONUS/ANNUAL SECURITIES LONG-TERM
NAME AND INCENTIVE UNDERLYING INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY AWARD OPTIONS PAYOUTS COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William L. Jenkins, 1997 $110,000 -0- -0- -0- $1,216
President 1996 $95,000 -0- -0- -0- $1,216(1)
1995 $63,000 -0- -0- -0- -0-
</TABLE>
- ---------------------------------
(1) Includes the premiums paid by the Company on a $1,000,000 insurance
policy on the life of Mr. Jenkins which names his wife as beneficiary
and owner of the policy.
No options were granted to or exercised by Mr. Jenkins during the year
ended December 31, 1997 and Mr. Jenkins held no options at that date.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement, dated September
18, 1996, with William L. Jenkins, to serve as its President, Chief Executive
Officer and a Director of the Company. The Employment Agreement, which
terminates on September 30, 1999, provides for an annual base salary of
$110,000, adjusted annually for inflation. With certain exceptions, the
agreement restricts Mr. Jenkins from engaging in activities in competition with
the Company during the term of his employment and, in the event Mr. Jenkins
terminates the agreement prior to its termination date, for a period of 18
months thereafter and also in the event he terminates the agreement, from
soliciting for employment any employee of the Company for a period of two years
after termination.
The Company has entered into two-year employment agreements terminating
on April 1, 2000 with each of Allen R. Neel, Executive Vice-President and Danny
Ray Thornton, Vice-President, Operations, of the Company, pursuant to which they
receive base compensation of $75,000 per year. On each anniversary date of the
agreements, the Company and the employee agree to renegotiate the base salary
taking into account the rate of inflation, overall profitability and the cash
position of the Company, the performance and profitability of the areas for
which the employee is responsible and other factors. The agreements contain
restrictions on such persons engaging in activities in competition with the
Company during the term of their employment and for a period of two
-24-
<PAGE>
years thereafter. In addition, the agreements provide for the grant to such
employees of options to purchase 50,000 shares of the Company's Common Stock on
execution of the agreements and 10,000 shares on each of the first three
anniversary dates of the agreements, provided such persons continue to be
employed by the Company, exercisable at a price of $2.625 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 16, 1998 (a) by each person
who is known by the Company to own beneficially more than five percent (5%) of
the Company's Common Stock, (b) by each of the Company's Directors and officers,
and (c) by all Directors and officers as a group. As of April 2, 1998, the
Company had 3,719,587 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS (1)(2) OWNED SHARES(3)
------------------------------------------- -------------------------- -----------------------
<S> <C> <C> <C>
William L. Jenkins 210,000 5.6%
John A. McNiff, Sr. 20,000(4) 0.1%
Trallers Modernos
Varsovia #44, Piso 11
Col Juarez, Mexico, D.F. 06600
Michael Brod 30,000(4) 0.1%
180 East 88th Street - #8
New York, New York 10128
International Trust Company of 260,032(5) 6.9%
Bermuda Ltd.
Bermuda Commercial Bank Building
44 Church Street
Hamilton, HM12, Bermuda
Danny Ray Thornton 80,666(6) 2.1%
Allen R. Neel 80,000(6) 2.1%
St. James Capital Partners, L.P. (7) 6,172,827 62.4%
1980 Post Oak Boulevard - Suite 2030
Houston, Texas 77056
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING
NAME AND ADDRESS (1)(2) OWNED SHARES(3)
------------------------------------------- -------------------------- -----------------------
<S> <C> <C>
Bendover Corp.(8) 647,569 17.4%
Alan W. Mann (9)
M. Dale Jowers
13843 Highway 105 West - Suite 212
Conroe, Texas 77304
All Directors and Officers as a Group 6,393,493(7)(10) 63.1%
(5 persons including the above)
</TABLE>
- -----------------------------------
* Less than 1%.
(1) This tabular information is intended to conform with Rule 13d-3
promulgated under the Securities Exchange Act of 1934 relating to the
determination of beneficial ownership of securities. The tabular
information gives effect to the exercise of warrants or options
exercisable within 60 days of the date of this table owned in each case
by the person or group whose percentage ownership is set forth opposite
the respective percentage and is based on the assumption that no other
person or group exercise their option.
(2) Unless otherwise indicated, the address for each of the above is c/o
Black Warrior Wireline Corp., 3748 Highway #45 North, Columbus,
Mississippi 39701.
(3) The percentage of outstanding shares calculation is based upon
3,806,420 shares outstanding as of March 16, 1998, except as otherwise
noted.
(4) Includes an option to purchase 20,000 share of Common Stock, of which
5,000 shares are immediately exercisable and an additional 5,000 shares
become exercisable on May 1, 1998 and each anniversary thereafter,
provided such person remains a Director of the Company, at an exercise
price of $2.63 per share.
(5) Includes 39,375 shares issuable on exercise of warrants at $2.00 per
share.
(6) Includes 80,000 shares issuable on exercise of an option at a price of
$2.625 per share, of which 50,000 shares are immediately exercisable
and an additional 10,000 shares will become exercisable on April 1,
1998 and each anniversary thereafter, provided, the employee remains
employed by the Company.
(7) Includes shares issuable to St. James Capital Partners, LP on
conversion of notes and exercise of warrants. See "Item 12. Certain
Relationships and Related Transactions."
(8) Based on information contained in the Schedule 13D dated October 9,
1997. On October 9, 1997, the Company issued 647,569 shares and paid
$586,000 in cash to purchase substantially all the assets of
Diamondback Directional, Inc. (which corporation subsequently changed
its name to Bendover Corp.). Messrs. Mann and Jowers each own
approximately 42.5% of the outstanding capital stock of Bendover Corp.
(9) Mr. Mann also holds directly 784 shares of Common Stock in addition to
the 647,569 shares held by Bendover Corp. in which he has an indirect
beneficial interest.
(10) Also includes the shares issuable on exercise of the vested portion of
the options held by Messrs. McNiff, Brod, Thornton and Neel.
-26-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company executed Reorganization Agreements with the holders of
certain debentures of the Company on November 30, 1995 (the "1995 Reorganization
Agreements"), including Pangaea Investment Consultants, Ltd., Morgan Devin
Everett & Co. Ltd., International Trust Company of Bermuda Ltd. and Mansfield
Soderberg & Co. Ltd. (the "Shareholder Group"), principal stockholders of the
Company, pursuant to which such persons agreed to exchange the debentures held
by them for shares of the Company's Common Stock In accordance with the terms of
the agreements, through December 31, 1995, the Shareholder Group exchanged an
aggregate of $656,250 principal amount of debentures for an aggregate of 299,586
shares of Common Stock. Morgan Devin Everett & Co. Ltd., International Trust
Company of Bermuda Ltd. and Mansfield Soderberg & Co. Ltd. continued to hold at
December 31, 1995 an aggregate of $393,750 principal amount of debentures which
were to be exchanged in the aggregate for an additional 225,414 shares of Common
Stock and two new classes of Common Stock Purchase Warrants. Pursuant to the
1995 Reorganization Agreements, the first series of warrants (the "Class A
Warrants") were to be exercisable at $3.00 per share for a period of four (4)
years and the second series of warrants (the "Class B Warrants") were to be
exercisable at prices increasing in annual increments over the first three (3)
years after issuance from $3.00 per share to $5.00 per share and were to expire
five (5) years after issuance. On September 20, 1996, the Company and the
Shareholder Group, as well as certain other debtholders, amended the terms of
the 1995 Reorganization Agreements to provide for the exchange of the $393,750
of debentures three members of the Shareholder Group continued to hold for an
aggregate of 225,414 shares of Common Stock and also so as to provide that in
lieu of the issuance of the Class A warrants to the Shareholder Group, an
aggregate of 52,500 shares of Common Stock would be issued to the Shareholder
Group and the exercise price of the Class B warrants would be reduced to $2.00
per share throughout the five-year term of such warrants.
In addition, pursuant to the 1995 Reorganization Agreements, two of the
Company's current executive officers and a third person who is currently
employed by the Company (herein such persons are collectively referred to as the
"Employee Group") agreed to convert secured loans to the Company aggregating
$297,131 into shares of the Company's Common Stock on the basis of one share of
Common Stock for each $2 of indebtedness exchanged and sell their shares in
accordance with the terms of the agreement. The Employee Group (listed below)
exchanged the following amounts of indebtedness for the number of shares of
Common Stock set forth:
<TABLE>
<CAPTION>
AMOUNT OF NUMBER OF SHARES
NAME INDEBTEDNESS OF COMMON STOCK
---- ------------ ---------------
<S> <C> <C> <C>
Danny Ray Thornton $127,342 63,671
Allen R. Neel $ 42,447 21,223
Reese James $127,342 63,671
</TABLE>
The 1995 Reorganization Agreements contained the agreement of the
members of the Employee Group to sell the shares they received through Monetary
Advancement International, Inc. ("MAII") at a price of $2 per share during the
twelve months following the closing under the 1995 Reorganization Agreements. In
addition, the Employee Group and the Company entered into a supplemental
agreement pursuant to which, among other things, the Company guaranteed that
MAII or another purchaser would purchase the shares issued to them at a price of
$2 per share during the twelve months following the closing. It was further
agreed in the supplemental agreement that
-27-
<PAGE>
if the shares were not purchased within such twelve month period, the Employee
Group would suffer damages which were stipulated to be $.71942 per share with
maximum liquidated damages of $100,000. The Company collateralized its guarantee
with a pledge of all its accounts receivable with the Company's liability
limited to the first $100,000 of receivables collected. Subsequently, the
Employee Group delivered certificates and stock powers for an aggregate of
148,565 shares to MAII to be sold in accordance with the terms of the 1995
Reorganization Agreements and the supplemental agreement. The Employee Group
received payment from MAII for an aggregate of 26,234 shares and an aggregate of
122,331 shares were transferred by MAII into its name (and subsequently
transferred into a street name) without paying for such shares. MAII has refused
to either return or pay for such shares.
On March 9, 1998, the Employee Group agreed to release its lien on the
Company's receivables in exchange for confirmation by the Company of its
obligations to the Employee Group, which consist of (i) reimbursement of the
Employee Group for their legal fees and expenses incurred in connection with
their efforts to recover from MAII, and (ii) the agreement to make the Employee
Group whole by issuing stock of the Company having a value of $240,000, based on
the bid price at the date of issuance, less any recover from MAII.
In October 1994, the Company entered into an agreement with William L.
Jenkins, President of the Company, to lease 6,500 square feet of office space in
a building owned by him. The Company leased these premises from Mr. Jenkins
through October 1996 when he sold the building to a non-affiliated person who
continues to lease the space to the Company at the same rental. Through October
1996, the Company made rental payments to Mr. Jenkins aggregating $19,000.
In March 1995, the Company received a letter from the District Director
of the Internal Revenue Service (the "IRS") in which he formally notified the
Company that the IRS had preliminarily calculated deficiencies of $35,057 and
$541,727 in federal taxes for the years ended December 31, 1989 and December 31,
1990, respectively. The adjustments proposed by the IRS included the valuation
of bonus stock compensation to William L. Jenkins, President of the Company, as
well as certain other items. The Company agreed to pay whatever personal tax
liability was determined to be owing by Mr. Jenkins related to the bonus stock
resulting from an unfavorable resolution of the IRS' proposed adjustment. In
June 1996, the Company settled this matter with the IRS on terms which, among
other things, resulted in an additional tax liability to Mr. Jenkins in the
amount of $98,524 for taxes, penalties and interest related to the bonus stock.
The Company reimbursed Mr. Jenkins for this sum on January 23, 1997 and has
agreed to further reimburse Mr. Jenkins for the tax liability resulting from
this payment and any further tax reimbursement payments made to Mr. Jenkins in
future years.
During the year ended December 31, 1997, the Company issued 65,000
shares of Common Stock valued at $136,500 to Pangaea Investment Consultants,
Ltd. in exchange for consulting services to be rendered through May 1999.
During the year ended December 31, 1996, the Company issued 12,000
shares of Common Stock, valued at $15,000 to Pangaea Investment Consultants,
Ltd. in reimbursement of expenses.
-28-
<PAGE>
Commencing in June 1997 through March 31, 1998, the Company entered
into a series of transactions with St. James whereby the Company sold on the
following dates for an aggregate purchase price of $14.9 million, the following
securities:
<TABLE>
<CAPTION>
DATE SECURITY PRINCIPAL AMOUNT
- --------------------------------------- ------------------------------------ ------------------------------
<S> <C> <C>
June 6, 1997 9% Convertible Promissory Note $2.0 million(1)
October 9, 1997 7% Convertible Promissory Note $2.9 million(2)
January 23, 1998 8% Convertible Promissory Note $10.0 million(3)(4)
<CAPTION>
DATE NUMBER OF WARRANTS (5) EXERCISE PRICE EXPIRATION DATE
- --------------------------- ---------------------------- ------------------------ ------------------------
June 6, 1997 666,000 $2.75(4) June 5, 2002
October 9, 1997 725,000 $4.6327(4) October 10, 2002
January 23,1998 2,000,000 $6.75(4) January 23, 2003
</TABLE>
- ---------------------------
(1) Convertible at a current exercise price of $2.75 per share, subject to
anti-dilution adjustments, into an aggregate of 727,272 shares of
Common Stock. Effective June 5, 1998, the conversion price increases to
$3.75 per share.
(2) Convertible at an exercise price of $4.6327 per share, subject to
anti-dilution adjustments, into an aggregate of 625,985 shares of
Common Stock.
(3) Convertible at an exercise price of $7.00 per share, subject to
anti-dilution adjustments, into an aggregate of 1,428,571 shares of
Common Stock (assuming all $10.0 million is borrowed).
(4) Subject to anti-dilution adjustment.
(5) Each warrant represents the right to purchase one share of Common Stock
at the exercise price.
On each of June 6, 1997, October 9, 1997 and January 23, 1998, the
Company entered into Purchase Agreements, and related notes, warrants and
security documents (the "Agreements") with St. James regarding the purchase by
St. James of the securities referred to in the table above. Except for those
terms relating to the amounts of securities purchased, maturity and expiration
dates, interest rates, and conversion and exercise prices, each of such
Agreements contained substantially identical terms and conditions relating to
the purchase of the securities involved. Payment of principal and interest on
all the notes is collateralized by substantially all the assets of the Company,
subordinated, as of March 16,1998, to borrowings by the Company from Fleet
Capital Corporation in the maximum aggregate amount of $19.0 million. The notes
are convertible into shares of the Company's Common Stock at the conversion
prices set forth in the table above, subject to anti-dilution adjustments for
certain issuances of securities by the Company at prices per share of Common
Stock less than the conversion price then in effect. St.
-29-
<PAGE>
James agreed to subordinate its security interests and rights to the
indebtedness and security interests of the lenders providing up to $4.5 million
pursuant to a term loan and $3.0 million pursuant to a revolving credit
facility. Pursuant to the Agreements, the Company agreed to issue to St. James
for nominal consideration the warrants to purchase shares of Common Stock of the
Company exercisable at the prices set forth in the table above, subject to
anti-dilution adjustment for certain issuances of securities by the Company at
prices per share of Common Stock less than the exercise prices then in effect.
Under the January 23, 1998 agreement, St. James will be issued warrants to
purchase 20,000 shares of Common Stock for each $100,000 borrowed under the
agreement, or a maximum aggregate of warrants to purchase 2,000,000 shares, all
of which warrants were issued as of March 31, 1998. The shares issuable on
conversion of the notes and exercise of the warrants have demand and piggy-back
registration rights under the Securities Act of 1933. The Company agreed that
one person designated by St. James will be nominated for election to the
Company's Board of Directors. Mr. John L. Thompson, currently a Director of the
Company, serves in this capacity. The Agreements grant St. James certain
preferential rights to provide future financings to the Company, subject to
certain exceptions. The notes also contain various affirmative and negative
covenants, including a prohibition against the Company consolidating, merging or
entering into a share exchange with another person, with certain exceptions,
without the consent of St. James. Events of default under the notes include,
among other events, (i) a default in the payment of principal or interest; (ii)
a default under any of the notes and the failure to cure such default for five
days, which will constitute a cross default under each of the other notes; (iii)
a breach of the Company's covenants, representations and warranties under any of
the Agreements; (iv) a breach under any of the Agreements between the Company
and St. James, subject to certain exceptions; (v) any person or group of persons
acquiring 40% or more of the voting power of the Company's outstanding shares
who was not the owner thereof as of January 23, 1998, a merger of the Company
with another person, its dissolution or liquidation or a sale of all or
substantially all its assets; and (vi) certain events of bankruptcy. In the
event of a default under any of the notes, subject to the terms of an agreement
between St. James and Fleet Capital Corporation, St. James could seek to
foreclose against the collateral for the notes.
In the October 1997 and January 1998 agreements, St. James agreed to
convert its $2.0 million convertible note dated June 5, 1997 and its $2.9
million convertible note dated October 10, 1997 into shares of the Company's
Common Stock at such time as the Company has filed a registration statement
under the Securities Act of 1933 relating to the shares issuable on conversion
of such notes and on exercise of the warrants issued to St. James and such
registration statement has been declared effective. The Company intends to file
a registration statement under the Securities Act during the second quarter of
1998 to register these shares.
In March 1998, St. James agreed to certain amendments to its agreements
with the Company in connection with the Company's borrowings from Fleet Capital
Corporation to finance the Phoenix Acquisition. St. James has advised the
Company that it is seeking to be compensated for agreeing to the amendments to
the terms of its agreements with the Company. The Company and St. James are
currently engaged in negations regarding the terms of such compensation and the
terms of such amendment have not been finalized.
-30-
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits required by Regulation S-B are set forth in the
following list and are filed either by incorporation by reference from previous
filings with the Securities and Exchange Commission or by attachment to this
Annual Report on Form 10-KSB as so indicated in such list.
Exhibit Designation
------- -----------
3.2 Restated Certificate of Incorporation of the Company,
as filed with the Secretary of State of the State of
Delaware on June 21, 1989 (incorporated by reference
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1990).
3.3 By-Laws of the Company (incorporated by reference to
the Company's Registration Statement on Form S-18,
effective date December 6, 1988).
10.1 Employment Agreement, dated September 18, 1996,
between William L. Jenkins and the Company. (Filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.)
10.2 Employment Agreement, dated January 31, 1997, between
Danny Ray Thornton and the Company, and amendment
thereto.
10.3 Employment Agreement, dated January 31,1997, between
Allen R. Neel and the Company, and amendment thereto.
10.4 Purchase and Sale Agreement dated June 6, 1997
between Black Warrior Wireline Corp. and Vernon E.
Tew, Jr., Mark R. Roberts, E.J. Wooten, Chester
Whatley and William A. Tew. (Filed as an exhibit to
the Company's Current Report on Form 8-K for June 6,
1997)
10.5 Purchase and Sale Agreement dated June 9, 1997
between Black Warrior Wireline Corp. and John L.
Morton, Theodore W. Morton, and John D. Morton.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for June 6, 1997)
10.6 Agreement for Purchase and Sale dated June 6, 1997
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. (Filed as an exhibit to the
Company's Current Report on Form 8-K for June 6,
1997)
10.7 $2,000,000 Convertible Promissory Note dated June 6,
1997 issued to St. James Capital Partners, L.P.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for June 6, 1997)
-31-
<PAGE>
10.8 $3,000,000 Bridge Loan Promissory Note dated June 6,
1997 issued to St. James Capital Partners, L.P.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for June 6, 1997)
10.9 Warrant dated June 6, 1997 to purchase 546,000 shares
of Common Stock issued to St. James Capital Partners,
L.P. *
10.10 Warrant dated June 6, 1997 to purchase 120,000 shares
of Common Stock issued to St. James Capital Partners,
L.P. *
10.11 Registration Rights Agreement between Black Warrior
Wireline Corp. and St. James Capital Partners, L.P.
dated June 6, 1997. (Filed as an exhibit to the
Company's Current Report on Form 8-K for June 6,
1997)
10.12 Asset Purchase Agreement dated as of September 1,
1997 between Black Warrior Wireline Corp. and
Diamondback Directional, Inc., Alan Mann and Michael
Dale Jowers. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
10.13 Employment Agreement effective as of September 1,
1997 between the Company and Alan Mann. (Filed as an
exhibit to the Company's Current Report on Form 8-K
for October 9, 1997).
10.14 Employment Agreement effective as of September 1,
1997 between the Company and Michael Dale Jowers.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for October 9, 1997).
10.15 Registration Rights Agreement dated October 10, 1997
between the Company and DDI. (Filed as an exhibit to
the Company's Current Report on Form 8-K for October
9, 1997).
10.16 $3.0 million promissory note due August 31, 1999
issued to DDI. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
10.17 Agreement for Purchase and Sale dated October 9, 1997
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. (Filed as an exhibit to the
Company's Current Report on Form 8-K for October 9,
1997).
10.18 $2,900,000 Convertible Promissory Note dated October
10, 1997 issued to St. James Capital Partners, L.P.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for October 9, 1997).
10.19 Warrant dated October 10, 1997 to purchase 725,000
shares of Common Stock issued to St. James Capital
Partners, L.P. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
-32-
<PAGE>
10.20 Amendment No. 1 to Registration Rights Agreement
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. dated October 10, 1997. (Filed
as an exhibit to the Company's Current Report on Form
8-K for October 9, 1997).
10.21 Asset Purchase Agreement dated as of January 1, 1998
between Black Warrior Wireline Corp. and Phoenix
Drilling Services, Inc. (Filed as an exhibit to the
Company's Current Report on Form 8-K for January 23,
1998).
10.22 Agreement for Purchase and Sale dated January 23,
1998 between Black Warrior Wireline Corp. and St.
James Capital Partners, L.P. (Filed as an exhibit to
the Company's Current Report on Form 8-K for January
23, 1998).
10.23 $10,000,000 Convertible Promissory Note dated January
23, 1998 issued to St. James Capital Partners, L.P.
Filed as an exhibit to the Company's Current Report
on Form 8-K for January 23, 1998).
10.24 Warrant dated January 23, 1998 to purchase 200,000
shares of Common Stock issued to St. James Capital
Partners, L.P. (Filed as an exhibit to the Company's
Current Report on Form 8-K for January 23, 1998).
10.25 Amendment No. 2 to Registration Rights Agreement
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. dated January 23, 1998. (Filed
as an exhibit to the Company's Current Report on Form
8-K for January 23, 1998).
21 Subsidiaries.
NAME STATE OF INCORPORATION
Boone Wireline Co., Inc. Alabama
27 Financial Data Schedule.
- ------------------------
* Filed herewith
(b) Reports on Form 8-K.
During the fourth quarter of 1997, the Company filed a Current
Report on Form 8-K dated October 9, 1997 and filed an amendment thereto on
December 24, 1997.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 14, 1998
BLACK WARRIOR WIRELINE CORP.
By: /s/ William L. Jenkins
-------------------------------
William L. Jenkins, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ William L. Jenkins President (Principal Executive, April 14, 1998
- ---------------------------------- Financial and Accounting Officer
William L. Jenkins and Director
/s/ John A. McNiff, Sr. Director April 14, 1998
- ----------------------------------
John A. McNiff, Sr.
/s/ Michael Brod Director April 14, 1998
- ----------------------------------
Michael Brod
/s/ John L. Thomspon Director April 14, 1998
- ----------------------------------
John L. Thompson
/s/ Charles Underbrink Director April 14, 1998
- ----------------------------------
Charles Underbrink
</TABLE>
<PAGE>
BLACK WARRIOR WIRELINE CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Black Warrior Wireline Corp.
Columbus, Mississippi
We have audited the accompanying consolidated balance sheets of Black Warrior
Wireline Corp. and subsidiaries (the Company) as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the three years in the period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the consolidated 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
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Black
Warrior Wireline Corp. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 19, 1998, except Note 18, as to
which the date is April 2, 1998
1
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 435,845 $ 727,454
Short-term investments 50,000
Accounts receivable, less allowance for doubtful accounts of $143,559
and $136,959 5,459,689 1,369,306
Inventories 386,683 183,467
Prepaid expenses 390,144 53,424
Income tax receivable 14,636
Deferred tax asset 80,815 138,071
Other receivables 514,946
--------------- --------------
Total current assets 7,318,122 2,486,358
Land and building, held for sale 400,000
Property, plant, and equipment, less accumulated depreciation 9,347,685 2,194,591
Other assets 358,521 5,420
Goodwill, less accumulated amortization of $134,421 9,061,655 224,305
--------------- ---------------
Total assets $ 26,085,983 $ 5,310,674
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,619,466 $ 808,832
Accounts payable, related parties 6,090 89,733
Accrued salaries and vacation 124,376 25,085
Income taxes payable 599,877 52,548
Accrued interest payable 69,041 29,530
Other accrued expenses 289,445 381,396
Deferred revenue 100,000
Current maturities of notes payable to banks 7,624 18,272
Mortgage notes payable, related party 380,000 150,000
Current maturities of long-term debt and capital lease obligations 793,618 307,806
--------------- ---------------
Total current liabilities 5,989,537 1,863,202
Deferred tax liability 1,132,513 214,355
Long-term accrued interest payable 150,364
Notes payable to banks, less current maturities 22,212 31,486
Mortgage notes payable, related party 230,000
Notes payable to related parties 8,070,549
Long-term debt and capital lease obligations, less current maturities 5,123,535 713,873
--------------- ---------------
Total liabilities 20,488,710 3,052,916
--------------- ---------------
Commitments and contingencies (Notes 6, 7, 13, and 15)
Stockholders' equity:
Preferred stock, $.0005 par value, 2,500,000 shares authorized
none issued at December 1997
Common stock, $.0005 par value, 12,500,000 shares and 50,000,000 shares
authorized in 1997 and 1996, respectively; 2,990,254 and 2,185,216 shares
issued at December 31, 1997 and 1996, respectively 1,495 1,093
Additional paid-in capital 7,744,953 5,133,087
Common stock to be issued in connection with acquisition (133,333 shares) 280,000
Accumulated deficit (1,845,782) (2,293,029)
Treasury stock, at cost, 4,620 shares at 1997 and 1996 (583,393) (583,393)
--------------- ---------------
Total stockholders' equity 5,597,273 2,257,758
--------------- ---------------
Total liabilities and stockholders' equity $ 26,085,983 $ 5,310,674
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues $ 17,062,542 $ 7,582,021 $ 6,179,218
Operating costs 12,247,630 5,116,777 4,522,920
Selling, general, and administrative expenses 2,191,785 1,302,994 1,187,900
Depreciation and amortization 1,442,635 574,400 690,601
---------------- -------------- ---------------
Income (loss) from operations 1,180,492 587,850 (222,203)
Interest expense and amortization of debt discount (609,430) (342,197) (625,990)
Net gain on sale of fixed assets 25,584 76,645 65,450
Other income 72,642 39,425 10,627
---------------- -------------- ---------------
Income (loss) before provision (benefit) for income
taxes and extraordinary gain 669,288 361,723 (772,116)
Provision (benefit) for income taxes 222,041 (65,715) (226,554)
---------------- --------------- ---------------
Income (loss) before extraordinary gain 447,247 427,438 (545,562)
Extraordinary gain on extinguishment of debt, net of income
taxes of $-0- in 1996 and $226,554 in 1995 (Note 6) 1,608,501 387,413
---------------- -------------- ---------------
Net income (loss) $ 447,247 $ 2,035,939 $ (158,149)
================ ============== ===============
Income (loss) per common share - basic:
Income (loss) before extraordinary gain $ 0.18 $ 0.41 $ (6.14)
Extraordinary gain, net of income taxes 1.55 4.36
---------------- -------------- ---------------
Net income (loss) per common share - basic $ 0.18 $ 1.96 $ (1.78)
================ ============== ===============
Income (loss) per common share - diluted:
Income (loss) before extraordinary gain $ 0.14 $ 0.41 $ (6.14)
Extraordinary gain, net of income taxes 1.55 4.36
---------------- -------------- -----------------
Net income (loss) per common share - diluted $ 0.14 $ 1.96 $ (1.78)
================ ============== =================
Weighted average common shares outstanding 2,533,650 1,040,192 88,905
================ ============== =================
Weighted average common shares outstanding
with dilutive securities 3,759,756 1,040,192 88,905
================ ============== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
COMMON
COMMON STOCK STOCK TREASURY STOCK
------------------------ PAID-IN ACCUMULATED TO BE ----------------------
SHARES PAR VALUE CAPITAL DEFICIT ISSUED SHARES COST
------------ ----------- ----------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 14,169,252 $ 7,085 $ 1,992,695 $ (4,170,819) 815,173 $ (583,393)
Effect of 1 for 200 reverse
stock split (14,098,351) (7,049) 7,049 (810,553)
Conversion of notes payable and
subordinated debentures
to common stock 648,151 324 1,295,978
Shares issued in consideration
for consulting services 40,000 20 79,980
Net loss for the year ended
December 31, 1995 (158,149)
---------- ---------- ------------ ------------ -------- ----------
Balance, December 31, 1995 759,052 380 3,375,702 (4,328,968) 4,620 (583,393)
Shares issued in private
placement 600,000 300 643,080
Conversion of subordinated
debentures to common stock
and stock warrants 814,164 407 1,099,311
Shares issued to related party
in consideration for services
performed 12,000 6 14,994
Net income for the year ended
December 31, 1996 2,035,939
---------- ---------- ------------ ------------ -------- ----------
Balance, December 31, 1996 2,185,216 1,093 5,133,087 (2,293,029) 4,620 (583,393)
Shares issued in consideration
for consulting services 65,000 32 136,461
Shares issued for acquisitions 672,538 336 2,239,664
Shares to be issued in
connection with acquisition
(133,333 shares) $ 280,000
Issuance of warrants 69,550
Shares issued from exercise of 67,500 34 134,966
warrants
Stock option plan compensation
expense 31,225
Net income for the year ended
December 31, 1997 447,247
---------- ----------- ------------ ------------ ---------- -------- ----------
Balance, December 31, 1997 2,990,254 $ 1,495 $ 7,744,953 $ (1,845,782) $ 280,000 4,620 $ (583,393)
========== ========== ============ ============ ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 447,247 $ 2,035,939 $ (158,149)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 1,308,214 574,400 690,601
Amortization 134,421
Allowance for doubtful accounts 96,359 6,844 12,575
Net gain on disposition of assets (124,384) (76,645) (65,450)
Compensation, consulting, and management expenses paid
by issuance of common stock 167,725 15,000 80,000
Gain on extinguishment of debt (1,608,501) (613,967)
Deferred tax expense (benefit) 185,245 (118,262)
Change in:
Accounts receivable (1,843,476) (456,033) 32,052
Inventories (148,313) 3,556 42,381
Prepaid expenses (336,720) (18,284) 41,838
Other receivables (310) 65,974 20,257
Other assets (283,551) (15) (1,563)
Accounts payable and accrued liabilities 1,562,981 347,490 528,643
------------- --------------- --------------
Cash provided by operating activities 1,165,438 771,463 609,218
------------- --------------- --------------
Cash flows from investing activities:
Acquisitions of property, plant, and equipment (3,087,666) (468,354) (299,306)
Proceeds from sale of fixed assets 74,448 95,072 120,031
Purchase of short-term investments (50,000)
Acquisitions of businesses, net of cash acquired (697,224) (256,783)
------------- --------------- --------------
Cash used in investing activities (3,760,442) (630,065) (179,275)
------------- --------------- --------------
Cash flows from financing activities:
Proceeds from bank and other borrowings 2,515,303 41,959
Proceeds from issuance of common stock, net 135,000 643,380
Principal payments on long-term debt, notes payable, and
capital lease obligations (346,908) (342,149) (227,530)
------------- --------------- --------------
Cash provided by (used in) financing activities 2,303,395 301,231 (185,571)
------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (291,609) 442,629 244,372
Cash and cash equivalents, beginning of year 727,454 284,825 40,453
------------- --------------- --------------
Cash and cash equivalents, end of year $ 435,845 $ 727,454 $ 284,825
============= =============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 419,555 $ 74,746 $ 78,392
============= =============== ==============
Income taxes $ 132,649 $ 0 $ 0
============= =============== ==============
Supplemental schedule of noncash investing and financing activities:
Land and building with basis of $400,000 exchanged for a $500,000
note $ 500,000
Notes payable and subordinated debentures converted to common
stock and stock warrants (Note 6) $ 1,343,750 $ 1,296,302
Principal forgiven 57,078
Accrued interest forgiven (Note 6) 1,514,468 556,889
Accrued interest converted to notes payable 52,962
Acquisition of property, plant, and equipment financed under
capital leases and notes payable 1,528,347 796,930 371,846
Notes payable incurred in connection with acquisitions of
businesses 9,148,449 380,000
Borrowings to refinance existing debt 4,500,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Black Warrior Wireline Corp., a Delaware corporation, is an integrated
oil and gas well servicing company which provides wireline, drilling,
completion, and workover services primarily in the Black Warrior Basin of
Alabama and Mississippi, the Permian Basin of Texas and New Mexico, and
the Powder River Basin in the Rocky Mountain region.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Black Warrior Wireline Corp. and its wholly owned
subsidiary, Boone Wireline Co. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE - Included in accounts receivable are recoverable
costs and related profits not billed, which consist primarily of revenue
recognized on contracts for which billings had not been presented to the
contract owners because the amounts were not billable at the balance
sheet date. Unbilled amounts included in accounts receivable totaled
$554,000 and $0 at December 31, 1997 and 1996, respectively.
INVENTORIES - Inventories, which consist primarily of supplies used in
well servicing activities, have useful lives of less than one year and
are stated at the lower of cost (first-in, first-out method) or net
realizable value.
LAND AND BUILDING, HELD FOR SALE - Land and building, held for sale was
stated at the lower of cost or estimated net realizable value. During
1997, the land and building were sold in exchange for a $500,000 mortgage
promissory note bearing interest at 8% and due August 31, 1998. The
mortgage promissory note is included in other receivables on the
consolidated balance sheet at December 31, 1997. The gain of $100,000 on
the sale has been deferred until payments are received on the note
inasmuch as it is a nonrecourse mortgage promissory note.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated
at cost. The cost of maintenance and repairs is charged to expense when
incurred; the cost of betterments is capitalized. The cost of assets sold
or otherwise disposed of and the related accumulated depreciation are
removed from the accounts and the gain or loss on such disposition is
included in income. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets which range from two
to ten years. At December 31, 1997, significantly all of the property,
plant, and equipment has been pledged as collateral for the Company's
borrowings.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
GOODWILL - Goodwill is stated at cost and is being amortized on a
straight-line basis over ten to twenty-five years. The Company assesses
the recoverability and the amortization period of the goodwill by
determining whether the amount can be recovered through undiscounted cash
flows of the businesses acquired, excluding interest expense and
amortization, over the remaining amortization period. If impairment was
indicated by this analysis, measurement of the loss would be based on the
fair market value of the businesses acquired. The Company considers
external factors relating to the acquired businesses, including local
market developments, regional and national trends, regulatory
developments and other pertinent factors in making its assessment. The
Company does not believe there are currently any indicators that would
require an adjustment to the carrying value of goodwill or to its
remaining life as of December 31, 1997.
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. There were no such impairments at December 31, 1997 and
1996.
INCOME TAXES - The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, the Company generally
considers all expected future events other than enactments of changes in
the tax laws or rates.
STOCK-BASED COMPENSATION - In 1996, the Company adopted the provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, which defines a
fair value based method of accounting for stock-based employee
compensation plans. In accordance with the provisions of SFAS No. 123,
the Company has chosen to continue to apply the accounting provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, to its stock-based employee compensation
arrangements.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from these estimates.
REVENUE RECOGNITION - Revenues are recognized at the time of service
performance.
EARNINGS PER SHARE - In 1997, the Company adopted the provisions of SFAS
No. 128, Earnings per Share. SFAS No. 128 establishes standards for
computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
As required by this statement, all prior-period EPS data presented has
been restated.
3. ACQUISITIONS
On November 20, 1996, the Company acquired substantially all of the
assets of Dyna Jet, Inc. (Dyna Jet), a privately owned Wyoming
corporation. Dyna Jet is engaged in the wireline and oil and gas well
service business in Gillette, Wyoming.
For financial statement purposes, the acquisition was accounted for as a
purchase and, accordingly, Dyna Jet's results are included in the
consolidated financial statements since the date of acquisition. The
aggregate purchase price was approximately $758,000, consisting of
approximately $288,000 in cash, funded by a portion of the proceeds from
the issuance of common stock pursuant to a private placement (see Note 8)
and $470,000 in promissory notes and payables. The aggregate purchase
price has been allocated to the assets of the Company, based upon their
respective fair market values. The excess of the purchase price over net
assets acquired, goodwill, approximated $224,000 and is being amortized
over ten years.
Effective June 6, 1997, the Company completed the acquisition of
Production Well Services, Inc. (PWS). PWS is engaged in the wireline and
oil and gas well services business in southern Alabama and southern
Mississippi. The purchase price consisted of $540,000 in cash financed
with the proceeds of a $2,000,000, 9% convertible promissory note and the
issuance of 133,333 shares (issued on January 1, 1998) of the Company's
common stock. In addition to providing the funds to complete the PWS
acquisition, a portion of the funds was used to purchase and improve
equipment. For financial statement purposes, the acquisition was
accounted for as a purchase and, accordingly, PWS's results are included
in the consolidated financial statements since the date of acquisition.
The excess of the purchase price over net assets acquired, goodwill,
approximated $718,000 and is being amortized over twenty-five years.
During the fourth quarter of 1997, the Company finalized its allocation
of the purchase price of PWS which resulted in an increase to goodwill of
$108,000. The following is a summary of assets acquired, liabilities
assumed, and consideration paid in connection with the acquisition:
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired, including goodwill $ 1,254,055
Cash paid for assets acquired and transaction
costs incurred, net of cash received (16,850)
Common stock issued in connection with acquisition (280,000)
---------------
Liabilities assumed or incurred $ 957,205
===============
</TABLE>
Effective June 9, 1997, the Company completed the acquisition of
Petro-Log, Inc. (Petro-Log). Petro-Log is engaged in the wireline and oil
and gas well services business in Wyoming, Montana, and South Dakota. The
$2,137,500 cash purchase price was financed from the proceeds of a
$3,000,000, 10% bridge loan note (subsequently refinanced, see Note 6).
In addition to providing the funds to complete the Petro-Log acquisition,
the funds were used to purchase and improve equipment. For financial
statement purposes, the acquisition was accounted for as a purchase and,
accordingly, Petro-Log's results are included in the consolidated
financial statements since the date of acquisition. The acquisition
resulted in goodwill of approximately $286,000 which is being amortized
over 25 years. During the fourth quarter of 1997, the Company finalized
its allocation of the purchase price of Petro-Log which resulted in an
increase to fixed assets and goodwill of approximately $485,000 and
$286,000, respectively. The following is a summary of assets acquired,
liabilities assumed, and consideration paid in connection with the
acquisition:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired, including goodwill $ 3,438,613
Cash paid for assets acquired and transaction costs incurred (595,381)
---------------
Liabilities assumed or debt incurred $ 2,843,232
===============
</TABLE>
On October 9, 1997, the Company acquired substantially all of the assets
and certain of the liabilities, effective as of September 1, 1997, of
Diamondback Directional, Inc. (DDI). DDI is engaged in providing oil and
gas well drilling services, which consists of horizontal drilling as well
as conventional directional drilling. The purchase price consisted of
$2,750,000 in cash financed with the proceeds of a $2,900,000, 7%
convertible promissory note, $3,170,549 of the Company's promissory notes
and 647,569 shares of the Company's common stock. The purchase price is
subject to adjustment, by reduction of the principal amount of the notes,
to the extent the gross receipts, as defined in the purchase agreement,
from the DDI operations for the twelve month period ending August 31,
1998 and August 31, 1999 fail to meet a specified performance standard.
The acquisition resulted in goodwill of approximately $7,686,000, which
is being amortized over twenty-five years. During the fourth quarter of
1997, the Company finalized its allocation of the purchase price of DDI
which resulted in an increase to goodwill of approximately $126,000. The
following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with the acquisition:
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired, including goodwill $ 9,771,822
Cash paid for assets acquired and transaction
costs incurred, net of cash received (74,178)
Common stock issued in connection with acquisition (2,100,000)
----------------
Liabilities assumed or debt incurred $ 7,597,644
================
</TABLE>
On December 15, 1997, the Company acquired substantially all of the
assets and certain of the liabilities of C&M Wireline Services, Inc., a
Texas corporation, and C.A.M. Wireline Services, a Texas partnership
(collectively CAM). CAM is engaged in the wireline and oil and gas well
services business in Texas. The purchase price consisted of $650,000 in
cash, financed with the proceeds of a 8.75% note, and the issuance of
24,969 shares of the Company's common stock. For financial statement
purposes, the acquisition was accounted for as a purchase and,
accordingly, CAM's results are included in the consolidated financial
statements since the date of acquisition. Goodwill resulting from the
transaction approximated $270,000 and is being amortized over twenty-five
years. The following is a summary of assets acquired, liabilities
assumed, and consideration paid in connection with the acquisition:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired, including goodwill $ 800,815
Cash paid for assets acquired and transaction costs incurred (10,815)
Common stock issued in connection with acquisition (140,000)
----------------
Liabilities assumed or debt incurred $ 650,000
================
</TABLE>
The Company has agreed that in the event it files a registration
statement under the Securities Act of 1933 relating to an underwritten
public offering of its shares, the holder of the shares issued in the
above transactions will have certain rights to have the shares included
in the registration statement.
The following table presents unaudited pro forma consolidated results of
operations for the years ended December 31, 1997 and 1996, as if the
acquisitions and private placement of common stock (see Note 8) had
occurred at the beginning of the years presented. The pro forma summary
information does not necessarily reflect the consolidated results of
operations as they actually would have been if the acquisitions and
private placement had occurred at the beginning of the years presented.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
1997 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues $ 26,681,392 $ 18,353,362
============= =============
Income before extraordinary gain $ 1,192,033 $ 70,858
============= =============
Net income $ 1,192,033 $ 1,679,359
============= =============
Net income per common share - basic:
Income before extraordinary gain $ 0.39 $ 0.04
Extraordinary gain 0.87
------------- -------------
Net income per common share - basic $ 0.39 $ 0.91
============= =============
Net income per common share - diluted:
Net income before extraordinary gain $ 0.29 $ 0.09
Extraordinary gain 0.47
------------- -------------
Net income per common share - diluted $ 0.29 $ 0.56
============= =============
</TABLE>
The unaudited pro forma consolidated results include the historical
accounts of the Company and historical accounts of the acquired
businesses and pro forma adjustments, including the amortization of the
excess purchase price over the fair value of the net assets acquired, the
elimination of interest expense on a note payable to the former
stockholder of Dyna Jet which was repaid prior to closing, the increase
in interest expense resulting from borrowings used to finance the
acquisitions, the reduction of depreciation expense to reflect the sale
of certain nonoperating assets to the former owners of Dyna Jet and
Petro-Log, and the increase in depreciation expense as a result of
purchase price adjustments.
4. RELATED PARTY TRANSACTIONS
In connection with the DDI acquisition, the Company issued debt of
approximately $3,200,000 to the former owners of DDI. The two majority
stockholders (85%) of DDI are now employees of the Company. The note
bears interest at 6.5% and is due August 1999, with quarterly interest
payments due beginning in January 1998. Interest expense and accrued
interest payable on these borrowings totaled approximately $69,000 at
December 31, 1997.
In connection with the PWS and Petro-Log acquisitions, the Company
borrowed approximately $7,900,000 from St. James Capital Partners, L.P.,
whose president serves on the Company's Board of Directors. $3,000,000
was repaid in November 1997 with the proceeds from other borrowings. One
remaining note for $2,900,000 bears interest at 7% with the principal and
interest due October 1999. Accrued interest payable and interest expense
on this borrowing totaled approximately $46,000 as of and for the year
ending December 31, 1997. The other remaining note for $2,000,000 bears
interest at 9% with the principal and interest due June 2002. Accrued
interest payable and interest expense on this borrowing totaled
approximately $104,000 as of and for the year ending December 31, 1997.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 1997 and 1996, the Company has a mortgage note payable of
$380,000 and an accounts payable of $6,090 to the former owner of Dyna
Jet, now an employee of the Company (see Note 6).
During 1996, a member of the Company's Board of Directors served as a
consultant to the Company on various aspects of the Company's business
and strategic issues. The Company compensated the director by issuing
12,000 shares of common stock. This issuance resulted in the recognition
of $15,000 of expense for the year ended December 31, 1996, with a
corresponding increase in common stock and additional paid in capital.
The Company had an outstanding balance of $289,293 included in notes
payable, related parties, at December 31, 1994 and accrued interest
payable of $2,497 at December 31, 1994 relating to a financing agreement
with RABAD, a partnership comprised of officers and spouses of officers
of the Company, whereby RABAD advanced funds to the Company for
operations. These advances were collateralized by accounts receivable and
bore interest at a rate of prime plus 2%. Interest expense recognized on
these advances for 1995 was $20,954. On December 20, 1995, RABAD accepted
148,565 shares of common stock of the Company in full satisfaction of
advances totaling $297,131 (see Note 6).
The Company had an outstanding balance of $334,237 in notes payable and
$8,976 in accrued interest at December 31, 1994 to the president of the
Company and his spouse. Interest expense recognized on the notes payable
for 1995 was $28,611. On December 20, 1995, the president of the Company
and his spouse accepted 200,000 shares of the Company's common stock in
exchange for their notes and accrued interest.
At December 31, 1997 and 1996, the Company had a remaining accrual of
approximately $53,000 and $98,500, respectively, relating to the
Company's commitment to pay the president's tax liability resulting from
previously issued common stock as a bonus.
The Company leased office space from the president of the Company from
October 1994 to October 1996 when he sold the building to a
non-affiliated person who continues to lease the space to the Company at
the same rental. The total amount paid to the president during the years
ended December 31, 1996 and 1995 was $17,264 and $22,262, respectively.
See Note 8 for common stock transactions with related parties.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment includes the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Vehicles $ 6,016,315 $ 2,913,175
Drilling rigs and related equipment 438,155 322,109
Operating equipment 7,278,663 2,401,397
Office equipment 405,604 287,280
------------- --------------
14,138,737 5,923,961
Less accumulated depreciation 4,791,052 3,729,370
------------- --------------
Net property, plant, and equipment $ 9,347,685 $ 2,194,591
============= ==============
</TABLE>
The following is a summary of the equipment under capital leases (included
above) at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Drilling rigs and related equipment $ 158,909 $ 158,909
Vehicles 55,122
Operating equipment 4,814
------------- --------------
158,909 218,845
Less accumulated depreciation 31,782 34,432
------------- --------------
Net equipment under capital lease $ 127,127 $ 184,413
============= ==============
</TABLE>
6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
At December 31, 1997 and 1996, long-term debt and other financing arrangements
consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Note payable to Trustmark National Bank, monthly payments required in
varying amounts, interest rates ranging from 8% to 9.5%. $ 49,758
Note payable to Smith Bank, monthly payments of $704 required through
November 2001, including interest at 7.0%. $ 29,836
------------- -------------
29,836 49,758
Current portion of notes payable to banks (7,624) (18,272)
-------------- -------------
Notes payable to banks, less current maturities $ 22,212 $ 31,486
============= =============
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
Installment notes payable, monthly payments required in varying amounts
through November 2001, interest at rates ranging from 5.9% to 13.24%. $ 692,101 $ 834,380
Capitalized lease, monthly payments of $3,750 required through June
2000, including interest at 6.25%. 103,905 170,895
Note payable to Haskell, Slaughter, Young & Johnston, Professional
Association, monthly principal payments of $2,500 plus accrued interest
required through August 1997, interest at prime plus 1% as reported by
First Alabama Bank. Prime rate at December 31, 1996 was 8.25%. 16,404
Notes payable to General Electric Capital Corporation, monthly payments
required in varying amounts through January 2003, interest at 8.75%. A
portion of the proceeds were utilized to refinance the $3,000,000
Petro-Log bridge loan and $1,500,000 of existing equipment debt (see
Note 3). 5,121,147
------------ -------------
5,917,153 1,021,679
Current portion of long-term debt (793,618) (307,806)
------------ -------------
Long-term debt and capital lease obligations, less current
maturities $ 5,123,535 $ 713,873
============ =============
Note payable to former owner of Diamondback Directional, Inc., principal
due August 1999, interest due quarterly at 6.5%. $ 3,170,549
7% convertible note payable to St. James Capital Partners, L.P.,
principal and interest due October 1999. Convertible at $4.6327 per
share at any time up to 30 business days following maturity. 2,900,000
9% convertible note payable to St. James Capital Partners, L.P.,
principal and interest due June 2002. Convertible at $2.75 per share
through May 1998, $3.25 per share through May 1999, and $3.75 per share
thereafter and through maturity. 2,000,000
------------
8,070,549
Current portion of notes payable to related parties 0
------------
Total long-term notes payable to related parties $ 8,070,549
============
Mortgage note payable to former owner of Dyna Jet, Inc., due and payable
in April 1998, including interest at 8% per annum. $ 150,000 $ 150,000
Mortgage note payable to former owner of Dyna Jet, Inc. due and payable
in August 1998 with interest at the rate of the lesser of $1,500 per
month or 8% per annum on unpaid balance. 230,000 230,000
------------ -------------
Total mortgage notes payable, related party $ 380,000 $ 380,000
============ =============
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Substantially all of the Company's assets are pledged as collateral for the
various debt described above.
A certificate of deposit in the amount of $50,000 was pledged as collateral for
the Company's corporate credit card line of credit of approximately $100,000.
Borrowings under the corporate credit cards at December 31, 1997 totaled
approximately $25,000 and are included in current payables.
Interest on the notes payable to St. James Capital Partners, L.P. is due at
maturity in October 1999 and June 2002. Accordingly, the accrued interest at
December 31, 1997 of $150,364 has been classified as long-term.
Under the terms of the St. James Capital Partners notes payable, St. James,
among other things, has the right to nominate one person for election to the
Company's board of directors, certain preferential rights to provide future
financings and contains prohibitions against consolidating, merging, or entering
into a share exchange with another person without St. James' consent.
During 1997, the due dates of the mortgage note payable to the former owner of
Dyna Jet, Inc. were changed from November 1996 to April 1998 and from November
2002 to August 1998 for the $150,000 and $230,000 portions of the mortgage
notes, respectively.
During September and October 1996, the Company executed a Reorganization
Agreement with the holders of certain debt of the Company whereby the Company
converted the remaining portion of its 13% convertible subordinated debentures
and all of its 14% subordinated debentures to common stock and warrants to
purchase common stock. In conjunction with the conversion, accrued interest was
forgiven by the debt holders, resulting in recognition of an extraordinary gain
on extinguishment of debt of $1,608,501, net of income taxes of $-0- (see Note
10).
On November 30, 1995, the Company executed a Reorganization Agreement with the
holders of certain debt of the Company whereby the Company converted a portion
of its 13% convertible subordinated debentures and the notes payable to related
parties to common stock and warrants to purchase common stock. In conjunction
with the conversion, accrued interest and certain debt were forgiven by the debt
holders, resulting in the recognition of an extraordinary gain on extinguishment
of debt of $387,413, net of income taxes of $226,554.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a summary of the debt and accrued interest conversion and
extinguishment:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
WARRANTS TO
PURCHASE
SHARES OF SHARES OF ACCRUED
PRINCIPAL COMMON COMMON INTEREST
CONVERTED STOCK STOCK FORGIVEN
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
13% Convertible subordinated
debentures $ 443,750 305,414 165,000 $ 512,868
14% subordinated debentures 900,000 508,750 138,750 1,001,600
----------- ----------- ---------- -------------
$ 1,343,750 814,164 303,750 $ 1,514,468
=========== =========== ========== =============
<CAPTION>
1995
-----------------------------------------------------------------------------
SHARES OF ACCRUED
PRINCIPAL PRINCIPAL COMMON INTEREST
CONVERTED FORGIVEN TOTAL STOCK FORGIVEN
------------- ------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
13% Convertible subordinated
debentures $ 599,172 $ 57,078 $ 656,250 299,586 $ 535,344
14% subordinated debentures 400,000 400,000 200,000 21,545
Notes payable to RABAD 297,130 297,130 148,565
----------- ---------- ---------- --------- ------------
$ 1,296,302 $ 57,078 $ 1,353,380 648,151 $ 556,889
=========== ========== ============ ========= ===========
</TABLE>
The Company guaranteed that RABAD (see Note 4) would be able to sell its
common stock received in the 1995 conversion for $2 per share within one
year of this conversion. This agreement is collateralized by $100,000 of
the Company's accounts receivable. The collateral will be utilized to
cover any deficiencies between the actual selling price and the
guaranteed price of $2 per share, limited to a maximum deficiency
guaranteed of $100,000. RABAD engaged Monetary Advancement International,
Inc. (MAII) to sell the shares received in this conversion. Due to a
dispute with the Company that is more fully described in Note 15, MAII
has refused to pay RABAD or return any unsold shares. As stated in Note
15, the Company intends to vigorously defend itself against any claims
asserted by MAII and does not believe the aforementioned guarantee will
result in any liability to the Company as RABAD has meritorious claims
against MAII.
In connection with the above proceedings, the Company has paid $12,420 in
legal fees during 1997 on behalf of the president and two
vice-presidents.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 1997, aggregate maturities of notes payable and long-term
debt and future minimum lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OTHER
LEASES DEBT TOTAL
---------------- ----------------- ------------------
<S> <C> <C> <C>
1998 $ 41,807 $ 1,145,009 $ 1,186,816
1999 45,030 6,922,867 6,967,897
2000 26,250 892,294 918,544
2001 893,331 893,331
2002 4,426,785 4,426,785
Thereafter 13,347 13,347
------------ ----------------- ---------------
113,087 14,293,633 14,406,720
Less amounts representing interest 9,182 9,182
------------ ----------------- ---------------
$ 103,905 $ 14,293,633 $ 14,397,538
============ ================= ===============
</TABLE>
7. COMMITMENTS
The Company leases land, office space, and equipment under various
operating leases. The leases generally are for terms of five years and do
not contain purchase options. Rent expense was approximately $557,660,
$202,333, and $173,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
The future minimum lease payments required under noncancelable operating
leases with initial or remaining terms of one or more years at December
31, 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 242,600
1999 188,700
2000 152,230
2001 82,270
2002 11,790
------------
$ 677,590
============
</TABLE>
8. COMMON STOCK TRANSACTIONS
On September 18, 1996, the Company offered 800,000 shares of the
Company's common stock, in 20 units of 40,000 shares each, at an offering
price of $1.25 per share, pursuant to a private placement memorandum. Of
the 800,000 shares offered, 600,000 shares were sold by the Company's
placement agent, and the Company received net proceeds (after deducting
issuance costs) of $643,382. Approximately $288,000 in proceeds from the
offering was used to acquire Dyna Jet, Inc. and the remainder of the
proceeds was used for future acquisitions and other general corporate
purposes. Options to purchase 80,000 shares of the Company's common stock
at an exercise price of $1.50 per share were issued to the Company's
placement agent, as additional compensation for services rendered. The
options are exercisable for a period of five
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
years from the date of the private placement. None of the options had
been exercised as of December 31, 1997.
During 1995, the Company effectuated a 1-for-200 reverse stock split
effective for each share owned by stockholders of record at the close of
business on October 30, 1995. Par value remained at $.0005 per share. The
reverse stock split reduced the 14,169,252 shares of common stock to
70,901 shares of common stock outstanding. A total of $7,049 was
reclassified from the Company's common stock to the Company's additional
paid in capital.
Issuance of common stock for the settlement of liabilities of the Company
are set forth below. Since the market value of the Company's stock was
not readily available, the per share amounts for these transactions have
been determined by the Company's Board of Directors based on the
Company's consolidated financial results, business developments, common
stock transfer restrictions, number of shares issued and other factors
which would influence the fair value at the date of Board approval.
<TABLE>
<CAPTION>
AMOUNT
MONTH OF MONTH OF RECORDED TO
BOARD ISSUANCE/ NUMBER AMOUNT STOCKHOLDERS'
APPROVAL PURCHASE DESCRIPTION OF SHARES PER SHARE EQUITY
---------------- ---------------- ---------------------------- ------------ ----------- --------------
<S> <C> <C> <C>
November 1995 December 1995 Issued to debt holders in
satisfaction of notes
payable subordinated
debentures 648,151 $ 2.00 $ 1,296,302
November 1995 December 1995 Issued in satisfaction of
consulting fees 40,000 2.00 80,000
October 1996 October 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 689,375 1.25 861,719
October 1996 November 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 96,250 1.25 120,312
December 1996 December 1996 Issued to related party in
satisfaction of
consulting fees 12,000 1.25 15,000
October 1996 December 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 28,539 1.25 35,674
</TABLE>
9. STOCK WARRANTS
During 1997, the Company issued warrants to purchase shares of the
Company's common stock in connection with the issuance of certain debt
(see Note 6). The warrants give the holder the right to purchase up to
666,000 shares of the Company's stock at $2.75 per share through May
1998, $3.25 through May 1999 and $3.75 thereafter and through maturity of
the debt, and 725,000 shares at $4.63 per share. The 666,000 warrants
expire in June 2002 while the 725,000 warrants expire in October 2002.
During 1996, the Company issued warrants to purchase shares of the
Company's common stock in connection with the conversion of certain debt
(see Note 6). The warrants give holders the
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
right to purchase up to 303,750 shares of the Company's common stock at
$2 per share. The warrants expire on September 30, 2001 and may be
redeemed, at the option of the Company, at the price of $.50 per warrant,
provided that the bid price of common stock has exceeded $5 per share
ending on the trading day prior to the date on which the notice of
redemption is given. During 1997, 67,500 of these warrants were exercised
resulting in an increase to common stock and additional paid-in capital
of $135,000.
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following for
the years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal:
Current $ 13,962 $ 39,841 $ (205,065)
Deferred 161,163 (112,096) 0
--------------- --------------- ---------------
175,125 (72,255) (205,065)
--------------- --------------- --------------
State:
Current 22,834 12,706 (21,489)
Deferred 24,082 (6,166) 0
---------------- --------------- --------------
46,916 6,540 (21,489)
---------------- --------------- --------------
Total $ 222,041 $ (65,715) $ (226,554)
=============== =============== ==============
</TABLE>
In 1996 no provision or benefit has been allocated to the extraordinary
gain since the taxable income generated by it consumed a large portion of
the Company's net operating loss carryforwards. These carryforwards were
totally offset by a valuation allowance at December 31, 1995 and this
utilization in the 1996 reduced expense related to the extraordinary gain
to zero.
The current federal and state tax benefits in 1995 result from the
utilization of the net operating losses generated in 1995 to offset the
income tax expense associated with the extraordinary gain on
extinguishment of debt described in Note 6.
The provision (benefit) for federal income taxes differs from the amount
computed by applying the federal income tax statutory rate of 34% to
income (loss) before provision (benefit) for income taxes and
extraordinary gain, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Provision (benefit) at federal statutory rate $ 227,558 $ 122,986 $ (262,520)
State income taxes, net of federal benefit 29,238
Nondeductible tax penalties 27,669
(Decrease) increase in valuation allowance (230,828) 35,966
Other (34,755) 14,458
----------- ------------ ------------
Benefit for federal income taxes $ 222,041 $ (65,715) $ (226,554)
=========== ============= ============
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At December 31, 1997, the Company has available loss carryforwards of
approximately $507,000 for federal tax purposes that expire at various
dates through 2010. Additionally, the Company has state net operating
loss carryforwards of approximately $1,740,000 which expire at various
dates to 2010.
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities recorded for financial reporting
purposes and such amounts as measured in accordance with tax laws. The
items which comprise a significant portion of the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Gross deferred tax assets:
Allowance for doubtful accounts receivable $ 53,562 $ 51,086
Accrued bonuses and other 66,574 86,985
Operating loss carryforwards 189,103 402,753
Alternative minimum tax credit carryforwards 53,804 39,842
Goodwill 972
----------- -----------
Gross deferred tax asset 364,015 580,666
----------- -----------
Gross deferred tax liabilities:
Depreciation $(1,376,392 (656,950)
Other (39,321)
------------- -----------
Gross deferred tax liability (1,415,713) (656,950)
------------- -----------
Net deferred tax liability $ (1,051,698) $ (76,284)
============= ===========
</TABLE>
The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. At December 31, 1997 and 1996, the Company has recorded
in its consolidated balance sheet a net deferred tax liability as future
taxable amounts exceed future deductible amounts. Consequently, no
valuation allowance has been recorded at December 31, 1997 or 1996.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997 FOR THE YEAR ENDED 1996
--------------------------------------------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- ---------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item $ 447,247 $ 427,438
Extraordinary gain 1,608,501
----------- -----------
Net income (loss) $ 447,247 $ 2,035,939
=========== ===========
BASIC EPS
Income (loss) available to common
stockholders $ 447,247 2,533,650 $ 0.18 $ 2,035,939 1,040,192 $ 1.96
EFFECT OF DILUTIVE SECURITIES
Stock warrants 371,552
Stock options 228,883
Convertible debt debenture 93,377 625,671
----------- -------------- -------- ----------- --------- --------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed
conversions $ 540,624 3,759,756 $ 0.14 $ 2,035,939 1,040,192 $ 1.96
============= ============== ========= =========== ========= ========
<CAPTION>
FOR THE YEAR ENDED 1995
--------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------------------------------------
<S> <C> <C> <C>
Income (loss) before extraordinary
item $ (545,562)
Extraordinary gain 387,413
--------------
Net income (loss) $ (158,149)
==============
BASIC EPS
Income (loss) available to common
stockholders $ (158,149) 88,905 $ (1.78)
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt debenture
------------- --------- --------
DILUTED EPS
Income (loss) available to common
stockholders plus assumed
conversions $ (158,149) 88,905 $ (1.78)
============= ========= ========
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Options to purchase 12,500 shares of common stock at $8.01 per share were
outstanding during 1997 but are not included in the computation of the
1997 diluted EPS because the options' exercise price was greater than the
average market price of the common shares. The options, which expire
December 2002, were still outstanding at December 31, 1997.
Options to purchase 240,000 shares and warrants to purchase 303,750
shares of common stock were outstanding at December 31, 1996 but are not
included in the computation of the 1996 diluted EPS because the options'
and warrants' exercise price was greater than the average market value of
the common shares. There were also 7,500 options that were canceled
during 1996 that are not included in the computation of the 1996 diluted
EPS because the options' exercise price was greater than the average
market price of the common shares.
Options to purchase 7,500 shares of common stock at prices ranging from
$3.46 to $22.27 per share were outstanding during 1995 but are not
included in the computation of the 1995 diluted EPS because the options'
exercise price was greater than the average market price of the common
shares. These options were canceled during 1996.
12. MAJOR CUSTOMERS
Most of the Company's business activity is with customers engaged in
drilling and operating natural gas wells primarily in the Black Warrior
Basin in Alabama and Mississippi, the Permian Basin in Texas, and the
Powder River Basin in the Rocky Mountain region. Substantially all of the
Company's accounts receivable at December 31, 1997 and 1996 are from such
customers. Performance in accordance with the credit arrangements is in
part dependent upon the economic condition of the natural gas industry in
the respective geographic areas. The Company does not require its
customers to pledge collateral on their accounts receivable.
The Company earned revenues in excess of 10% of its total revenues from
the following customers for the years ended December 31, 1997, 1996, and
1995, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Taurus Exploration, Inc. $ 1,752,849 $ 1,916,074 $ 1,921,808
Pioneer Resources, Inc. (formerly Parker
and Parsley Development Company) $ 2,118,484 $ 1,793,411 $ 772,383
Becfield Drilling Company $ 1,120,898 $ 1,114,473
</TABLE>
13. EMPLOYMENT AGREEMENTS
During 1997, the Company entered into employment agreements with various
key employees and non-employee contract workers. The agreements provide
for annual compensation and also grant stock options with various
exercise prices and vesting provisions. See Note 14 for a description of
the options granted.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On September 30, 1996, the Company entered into an employment agreement
with its president, which expires on September 30, 1999, calling for a
base salary of $110,000 per annum, to be adjusted for inflation for each
of the two years ending September 30, 1998 and 1999. In addition, the
agreement gives the president the option to purchase 100,000 shares of
the Company's common stock at an exercise price of $2 per share. During
1997, these options were voluntarily canceled. Also, provided the
Company's operating results equal or exceed 85% of the benchmark agreed
to between the Company's Board of Directors and the president, the
president shall be granted, as of the last day of the fiscal year as to
which such benchmark operating results related, an option to purchase an
additional 50,000 shares of the Company's common stock. Such options
shall be exercisable for a period of ten years at a price equal to the
closing bid price of the Company's common stock on the last business day
of such fiscal year. No options have been issued under this provision as
of December 31, 1997.
14. STOCK OPTIONS
The 1997 Omnibus Incentive Plan (Omnibus Plan) provides for the granting
of either incentive stock options or nonqualified stock options to
purchase shares of the Company's common stock to key employees
responsible for the direction and management of the Company. The Omnibus
Plan authorizes the issuance of options to purchase up to an aggregate of
600,000 shares of common stock, with maximum option terms of ten years
from the date of grant. At December 31, 1997, 465,250 options had been
granted with 134,750 options available for issue.
The 1997 Non-Employee Stock Option Plan (Non-Employee Plan) provides for
the granting of nonqualified stock options to purchase shares of the
Company's common stock to non-employee directors and consultants. The
Non-Employee Plan authorizes the issuance of options to purchase up to an
aggregate of 100,000 shares of common stock, with maximum option terms of
ten years from the date of grant. At December 31, 1997, 172,000 options
had been granted. It is anticipated that, in 1998, the Company's Board of
Directors will amend the Non-Employee Plan to increase the number of
shares authorized for granting.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Additionally, of the 240,000 options outstanding at December 31, 1996,
options to purchase 160,000 shares of the Company's common stock were
canceled during 1997. Pertinent information regarding stock options are
as follows:
<TABLE>
<CAPTION>
WEIGHTED FAIR VALUE
RANGE OF AVERAGE OF STOCK
NUMBER OF EXERCISE EXERCISE AT VESTING
OPTIONS PRICES PRICE GRANT DATE PROVISIONS
---------- ------------- ----------- ----------- -----------------------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 31, 1994
and 1995 7,500 $3.46 - 22.27 $7.24
Options canceled (7,500) $3.46 - 22.27 $7.24
Options granted 60,000 50% of mean $1.66 $1.25 33.3% per year
share price for
3 months
prior to grant
Options granted 180,000 $1.50 - 2.00 $1.78 $1.25 immediate
--------
Options outstanding, December 31, 1996 240,000 $1.50 - 2.00 $1.75
--------
Options canceled (60,000) 50% of mean share
price for 3 months
prior to grant
(100,000) $2.00 $2.00
--------
(160,000)
--------
Options granted 160,000 $2.625 $2.625 62.5% immediate; 12.5% per year
Exercise price equals FMV of stock
at grant date 67,500 $2.625 $2.625 33.3% immediate; 22.22% per year
81,250 $2.625 $2.625 20% immediate; 20% per year
40,000 $2.625 $2.625 25% immediate; 25% per year
10,000 $3.38 $3.38 25% immediate; 25% per year
-------
358,750 $2.65
-------
Exercise price less than FMV of stock
at grant date 20,000 $3.00 $3.00 $3.50 25% immediate; 25% per year
-------
Exercise price greater than FMV of
stock at grant date 90,000 $4.63 $4.63 16.67% immediate; 16.67% per year
112,000 $4.63 $4.63 3 year pro rata
10,000 $4.63 $4.63 2 year pro rata
30,000 $4.63 $4.63 5 year pro rata
12,500 $8.01 $8.01 5 year pro rata
4,000 $4.63 $4.63 1 year cliff
-------
258,500 $4.43
-------
Options outstanding, December 31, 1997 717,250 $1.50 - $8.01 $3.30
=======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/97 LIFE PRICE 12/31/97 PRICE
-------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$1.50 80000 3.75 $1.50 80000 $1.50
$2.63 348750 8.69 $2.63 148525 $2.63
$3.00 20000 4.42 $3.00 5000 $3.00
$3.38 10000 4.50 $3.38 2500 $3.38
$4.63 246000 4.67 $4.63 15003 $4.63
$8.01 12500 4.96 $8.01
----------- ----------- ---------- ----------- ----------
717250 6.51 $3.30 251028 $2.40
=========== =========== ========== =========== ==========
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company applies principles from SFAS No. 123 in accounting for its
stock option plan. In accordance with SFAS No. 123, the Company has
elected to not report the impact of the fair value of its stock options
in the consolidated statements of operations, but instead, to disclose
the pro forma effect and to continue to apply APB Opinion No. 25 and
related interpretations in accounting for its stock options. Accordingly,
no compensation expense has been recognized for stock options issued to
employees at fair market value or above. Compensation expense of $27,267
has been recognized for 132,000 options granted during 1997 as
compensation to non-employees at the options' fair market value in
accordance with SFAS No. 123. Had compensation cost for all of the
Company's stock options issued been determined based on the fair value at
the grant dates for awards consistent with the method prescribed in SFAS
No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net income - as reported $ 447247 $ 2035939
Net income - pro forma $ 268327 $ 2006094
Earnings per share - as reported (basic) $ .18 $ 1.96
Earnings per share - pro forma (basic) $ .11 $ 1.93
Earnings per share - as reported (diluted) $ .14 $ 1.96
Earnings per share - pro forma (diluted) $ .10 $ 1.93
</TABLE>
The pro forma amounts reflected above are not representative of the
effects on reported net income in future years because, in general, the
options granted typically do not vest immediately and additional awards
are made each year.
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following
weighted-average assumptions.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Dividend yield 0% 0%
Expected life (years) 4 3
Expected volatility 60.6% 70.0%
Risk-free interest rate 6.11% 6.46%
</TABLE>
15. CONTINGENCIES
On November 1, 1995, the Company entered into a Business Consulting
Agreement with MAII pursuant to which MAII was to provide certain
services, including, among others, providing assistance in preparing and
distributing press releases for a period of six months with an option for
renewal and in equity raising transactions through the private placement
of common stock and the restructuring of the Company's indebtedness. The
Agreement stated that the compensation for these services was to be
200,000 shares of freely traded common stock of the Company with 40,000
shares due upon execution of the Agreement and the balance due during
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the term of the Agreement as needed by MAII. It was agreed that MAII's
services would not include any services that constituted the rendering of
legal opinions or that were within the ordinary purview of a certified
public accountant or a NASD registered broker/dealer. The Company issued
the 40,000 shares to MAII and has taken the position that the Agreement
has expired and no further compensation is due and owing, that MAII
failed to perform in accordance with the Agreement and that the intent of
the Agreement and understanding of the parties was that the 160,000
shares would only be issued in conjunction with a private sale of the
Company's securities. On September 24, 1996, MAII demanded that the
Company issue the 160,000 shares to it which the Company refuses to do.
Management of the Company believes that it has substantial and
meritorious defenses to the claim asserted by MAII, intends to defend
itself vigorously in any litigation instituted by MAII. In October 1997,
arbitration proceedings were commenced against the Company by MAII.
Management of the Company believes that it will not incur any material
liability to MAII in connection with this claim nor will the claim have a
material adverse effect on the consolidated financial position, results
of operations, or cash flows of the Company. In addition, the Company is
reviewing the advisability of it instituting litigation or an arbitration
proceeding against MAII. There can be no assurance that the Company will
be successful in an action instituted against the Company by MAII or that
the Company will be successful in any action it may institute against
MAII.
The Company also is the subject 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.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate fair value:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, ACCOUNTS RECEIVABLE,
CURRENT PORTION OF LONG-TERM DEBT, AND ACCOUNTS PAYABLE - The carrying
amount is a reasonable estimate of the fair value because of the short
maturity of these instruments.
LONG-TERM DEBT - The fair value is estimated by discounting the future
cash flows using rates currently available to the Company for debt with
similar terms and remaining maturities. The carrying amount and fair
value of long-term debt was $13,065,798 and $10,858,881, respectively, at
December 31, 1997, and $975,359 and $870,359, respectively, at December
31, 1996.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. 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, earnings per share, or cash flows.
The Board has issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes standards for the
way that public business enterprises report information about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial reports.
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Generally, financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
The financial information required includes a measure of segment profit
or loss, certain specific revenue and expense items, segment assets and a
reconciliation of each category to the general financial statements. The
descriptive information required includes the way that the operating
segments were determined, the products and services provided by the
operating segments, differences between the measurements used in
reporting segment information and those used in the general purpose
financial statements, and changes in the measurement of segment amounts
from period to period.
This Statement is effective for financial statements for periods
beginning after December 15, 1997 with restatement of earlier periods
required in the initial year of application. This Statement need not be
applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the
initial year of application is to be reported in financial statements for
interim periods in the second year of application. The Company is
currently determining if these disclosure requirements will be applicable
and, therefore, required in future periods.
27
<PAGE>
18. SUBSEQUENT EVENTS
On March 16, 1998, the Company completed the acquisition of the
outstanding stock of Phoenix Drilling Services, Inc. (Phoenix), a Texas
based oil and gas well servicing company. For financial statement
purposes, the acquisition will be accounted for as a purchase and
accordingly, Phoenix's results will be included in the consolidated
financial statements from the date of acquisition. The aggregate purchase
price of approximately $19 million was funded by the issuance of debt and
warrants. The aggregate purchase price will be allocated to the assets of
the Company, based upon their respective fair market values.
In connection with a private placement transaction completed on April 2,
1998, the Company issued 596,000 shares of common stock at $5.50 per
share. Net proceeds of the private placement to the Company were
approximately $3,049,000 after deducting issuance costs of approximately
$229,000.
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000839871
<NAME> BLACK WARRIOR
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 435,845
<SECURITIES> 50,000
<RECEIVABLES> 5,459,689
<ALLOWANCES> 143,559
<INVENTORY> 386,683
<CURRENT-ASSETS> 7,318,122
<PP&E> 14,138,737
<DEPRECIATION> 4,791,052
<TOTAL-ASSETS> 26,085,983
<CURRENT-LIABILITIES> 5,989,537
<BONDS> 0
0
0
<COMMON> 1,495
<OTHER-SE> (583,393)
<TOTAL-LIABILITY-AND-EQUITY> 28,085,983
<SALES> 0
<TOTAL-REVENUES> 17,062,542
<CGS> 0
<TOTAL-COSTS> 15,882,050
<OTHER-EXPENSES> (98,226)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 609,430
<INCOME-PRETAX> 669,288
<INCOME-TAX> 222,041
<INCOME-CONTINUING> 447,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447,247
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.14
</TABLE>
