SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the
---- Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1999; or
---- Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from_______to_______.
Commission File Number 0-18754
---------
BLACK WARRIOR WIRELINE CORP.
-------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 11-2904094
------------------------------- -------------------
(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
3748 HIGHWAY 45 NORTH, COLUMBUS, MISSISSIPPI 39701
--------------------------------------------------------
(Address of principal executive offices, zip code)
(662) 329-1047
--------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding at
August 15, 1999
----------------------- ------------------
COMMON STOCK, PAR VALUE 4,717,815 SHARES
$.0005 PER SHARE
Transitional Small Business Disclosure Format
YES NO X
---- ----
<PAGE>
BLACK WARRIOR WIRELINE CORP.
AND SUBSIDIARY
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations -
Three Months Ended June 30, 1999 and
June 30, 1998 4
Condensed Consolidated Statements of Operations -
Six Months Ended June 30, 1999 and
June 30, 1998 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and
June 30, 1998 6
Notes to Condensed Consolidated Financial Statements -
Six Months Ended June 30, 1999 and
June 30, 1998 7
Item 2. Management's Discussion and Analysis or Plan
Of Operations 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 6. Exhibits and Reports on Form 8-K 24
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 210,412 $ 1,041,242
Short-term investments 50,000 50,000
Accounts receivable, less allowance for doubtful
accounts of $ 1,693,867 and $ 2,157,421, respectively 4,181,044 3,596,004
Prepaid expenses 92,894 110,579
Other receivables 138,846 236,273
Other current assets 561,140 498,812
------------ ------------
Total current assets 5,234,336 5,532,910
Land and building, held for sale 400,000 400,000
Inventories 4,254,760 4,278,601
Property, plant, and equipment, less accumulated
depreciation of $ 11,531,565 and $ 8,986,893 21,005,762 22,628,601
Other assets 568,373 539,537
Goodwill, less accumulated amortization of $ 263,383
and $ 215,678, respectively 3,387,496 3,435,201
------------ ------------
Total assets $ 34,850,727 $ 36,814,850
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,380,306 $ 5,964,266
Accrued salaries and vacation 236,243 91,275
Accrued interest payable 2,416,981 1,527,674
Other accrued expenses 632,924 826,366
Deferred revenue 100,000 155,016
Current maturities of notes payable to banks 78,501
Note payable to related party, net 23,117,140 20,662,890
Current maturities of long-term debt and capital
lease obligations 17,316,092 18,923,719
------------ ------------
Total current liabilities 50,278,187 48,151,206
Stockholders' deficit:
Preferred stock, $.0005 par value, 2,500,000
shares authorized none issued at June 30, 1999
and December 31, 1998, respectively
Common stock, $.0005 par value, 12,500,000
shares authorized; 4,717,815 and 3,897,451
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 2,359 1,948
Additional paid-in capital 13,107,697 12,107,551
Accumulated deficit (27,954,123) (22,862,462)
Treasury stock, at cost, 4,620 shares (583,393) (583,393)
------------ ------------
Total stockholders' deficit (15,427,460) (11,336,356)
------------ ------------
Total liabilities and stockholders' deficit $ 34,850,727 $ 36,814,850
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 7,261,416 $ 10,247,430
Operating costs 5,409,635 8,493,603
Selling, general and administrative expenses 2,503,561 1,918,014
Depreciation and amortization 1,138,553 1,246,109
------------ ------------
Net loss from operations (1,790,333) (1,410,296)
Interest expense and amortization of debt discount (842,987) (697,143)
Net gain (loss) on sale of fixed assets 1,737 (938)
Other income 7,868 18,950
------------ ------------
Net loss before benefit for
income taxes (2,623,715) (2,089,427)
Benefit for income taxes -0- 833,017
------------ ------------
Net loss $ (2,623,715) $ (1,256,410)
============= =============
Net loss per common share- basic $(0.62) $(0.32)
============= =============
Net loss per common share- diluted $(0.62) $(0.32)
============= =============
Weighted average common shares outstanding 4,199,619 3,873,235
============= =============
Weighted average common shares outstanding
with dilutive securities 4,199,619 3,873,235
============= =============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the six months ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 13,333,698 $ 19,913,453
Operating costs 10,963,925 15,759,491
Selling, general and administrative expenses 3,333,563 2,758,693
Depreciation and amortization 2,461,910 2,055,799
------------ ------------
Net loss from operations (3,425,700) (660,530)
Interest expense and amortization of debt discount (1,687,327) (1,131,903)
Net gain (loss) on sale of fixed assets (7,263) 1,006
Other income 28,629 36,296
------------ ------------
Net loss before benefit for
income taxes (5,091,661) (1,755,131)
Benefit for income taxes -0- 649,398
------------ ------------
Net loss $ (5,091,661) $ (1,105,733)
============ ============
Net loss per common share- basic $(1.26) $(0.32)
============ ============
Net loss per common share- diluted $(1.26) $(0.32)
============ ============
Weighted average common shares outstanding 4,056,864 3,466,634
============ ============
Weighted average common shares outstanding
with dilutive securities 4,056,864 3,466,634
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Cash used in operations: $ (663,514) $ (1,130,129)
Cash flows from investing activities:
Acquisitions of property, plant, and equipment (883,977) (5,520,789)
Proceeds from sale of property, plant and equipment 30,400 71,000
Acquisition of business, net of cash acquired (603,322)
---------- ----------
Cash used in investing activities: (853,577) (6,053,111)
Cash flows from financing activities:
Debt issuance costs (152,086) (467,521)
Proceeds from bank and other borrowings 3,149,371 1,941,947
Principal payments on long-term debt, notes payable
and capital lease obligations (694,984) (1,064,316)
Net (payments) proceeds on working revolver (1,616,040) 3,333,441
Proceeds from issuance of common stock, net
of offering costs 3,718,355
---------- ----------
Cash provided by financing activities: 686,261 7,461,906
Net (decrease) increase in cash and cash equivalents (830,830) 278,666
Cash and cash equivalents, beginning of period 1,041,242 435,845
---------- ----------
Cash and cash equivalents, end of period $ 210,412 $ 714,511
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 778,020 $ 718,208
========== ==========
Supplemental disclosure of noncash investing and financing activities:
Notes payable incurred in connection with
business acquisition $ 19,000,000
Notes payable and capital lease obligations incurred
to acquire property, plant & equipment $ 107,527 $ 111,562
Stock warrants issued in conjunction with notes payable $ 20,750
to related party
Stock issued as compensation $ 914,807
Stock issued as consideration for purchase of business $ 65,000
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
6
<PAGE>
BLACK WARRIOR WIRELINE CORP. AND SUBSIDARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed consolidated financial statements reflect
all adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial position of Black Warrior Wireline Corp. and
subsidiary (the "Company"). Such adjustments are of a normal recurring nature.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's violations of
various covenants in its loan agreements with its principal secured lender, its
working capital deficiency, operating losses and its lack of liquidity, raise
substantial doubts about the Company's ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. See Note 17 of the
Company's Annual Report on Form 10KSB for the year ended December 31, 1998, and
the related report of independent accountants dated March 19, 1999 which
contains a paragraph referring to these uncertainties. The results of operations
for the interim period are not necessarily indicative of the results to be
expected for the full year. The Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998 should be read in conjunction with this
document.
The Company is an oil and gas service company currently providing
various services to oil and gas well operators primarily in the continental
United States and in the Gulf of Mexico. The Company's principal lines of
business include (a) wireline services, (b) directional oil and gas well
drilling and downhole surveyor services, and (c) workover services. The
Company's recent growth has been principally the result of seven acquisitions
completed since November 1996, including two acquisitions in 1998.
On March 16, 1998, the Company acquired from Phoenix Drilling Services,
Inc., ("Phoenix") the assets of its domestic oil and gas well directional
drilling and downhole survey service business ("Phoenix Acquisition") for
approximately $19 million. For financial statement purposes, the Phoenix
Acquisition was accounted for as a purchase and, accordingly, Phoenix's results
are included in the consolidated financial statements since the date of
acquisition. The excess of the purchase price of the Phoenix Acquisition over
net assets acquired, goodwill, approximated $2.76 million and was being
amortized over twenty-five years.
During the fourth quarter of 1998, the Company assessed the
recoverability of long-lived assets, which includes assets purchased in the
Phoenix Acquisition. The Company concluded the goodwill and certain inventories
and property, plant and equipment related to its directional drilling business
were impaired. As a result of this impairment, the Company recorded an
impairment
<PAGE>
charge of approximately $11.1 million in the fourth quarter of 1998. This
impairment charge included reducing the goodwill associated with the Phoenix
Acquisition to $0, as well as the writedown of certain inventories and property,
plant and equipment. Of the $11.1 million writedown, $5.76 million was related
to the Phoenix Acquisition goodwill and fixed assets. See Note 19 in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.
On June 1, 1998, the Company acquired Petro Wireline ("Petro
Acquisition") which is engaged in the wireline business in the four corners
region of New Mexico, Colorado, Utah and Arizona for $875,000. For financial
statement purposes, the Petro Acquisition was accounted for as a purchase and,
accordingly, Petro Wireline's results are included in the consolidated financial
statements since the date of acquisition. The excess of the purchase price of
Petro Wireline over net assets acquired, goodwill, approximated $87,000 and is
being amortized over twenty-five years.
The following table presents unaudited pro forma consolidated results
of operations for the six months ended June 30, 1998 as if the acquisitions
above had occurred at the beginning of the period presented. The pro forma
summary information does not necessarily reflect the consolidated results of
operations as they actually would have been if the acquisitions had occurred at
the beginning of the period presented. The unaudited consolidated results of
operations for the six months ended June 30, 1999 are presented for comparative
purposes as both acquisitions are included in the consolidated operating results
of this period.
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
(Unaudited) (Unaudited)
Revenues $ 13,333,698 $ 23,893,839
Loss before income tax effect $ (5,091,661) $ (1,914,211)
Net loss $ (5,091,661) $ (1,336,948)
Net loss per common share - basic $ (1.26) $ (0.35)
============ =============
Net loss per common share - diluted $ (1.26) $ (0.35)
============ =============
The unaudited pro forma consolidated results include historical
accounts of the Company and historical accounts of the acquired business and pro
forma adjustments, including the amortization of the excess purchase price over
fair value of net assets acquired, applicable tax effects, an increase in
interest expense, and the increase in depreciation expense as a result of
purchase price adjustments. The unaudited pro forma consolidated results do not
include the impairment writedown that was recorded during the fourth quarter of
1998.
8
<PAGE>
2. EARNINGS PER SHARE
The calculation of basic and diluted earning per share ("EPS") is as follows:
<TABLE>
<CAPTION>
For the Three Months For the Three Months
Ended June 30, 1999 Ended June 30, 1998
-------------------------------------------- -------------------------------------
Loss Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(2,623,715) $(1,256,410)
============ ============
BASIC EPS
Loss available to common
shareholders $(2,623,715) 4,199,619 $ (0.62) $(1,256,410) 3,873,235 $(0.32)
--------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt securities
DILUTED EPS
--------------------------------------------------------------------------------------------
Loss available to common
shareholders $(2,623,715) 4,199,619 $ (0.62) $(1,256,410) 3,873,235 $(.032)
--------------------------------------------------------------------------------------------
For the Six Months For the Six Months
Ended June 30, 1999 Ended June 30, 1998
-------------------------------------------- -------------------------------------
Loss Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
------------- ----------- --------- --------- ----------- ---------
Net loss $(5,091,661) $(1,105,733)
============ ============
BASIC EPS
Loss available to common
shareholders $(5,091,661) 4,056,864 $ (1.26) $(1,105,733) 3,466,634 $(0.32)
-------------------------------------------------------------------------------------------
Effect of dilutive securities
Stock warrants
Stock options
Convertible debt securities
Diluted EPS
Loss available to common
shareholders $(5,091,661) 4,056,864 $ (1.26) $(1,105,733) 3,466,634 $(0.32)
--------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 19,559,474 and 4,711,000 shares of
common stock at prices ranging from $1.31 to $8.01 were outstanding during the
three and six months ended June 30, 1999 and 1998, respectively, but were not
included in the computation of diluted EPS because the effect would be
anti-dilutive.
Convertible debt instruments which would result in the issuance of
12,933,333 shares of common stock, if the conversion features were exercised,
were outstanding during the three and six months ended June 30, 1999, but were
not included in the computation of the diluted EPS because the effect would be
anti-dilutive. The conversion price of these instruments is $1.50 per share and
remained outstanding at June 30, 1999. Convertible debt instruments which would
result in the issuance of 615,385, 625,985 and 1,818,182 shares of common stock,
if the conversion features were exercised, were outstanding during each of the
three month and six month periods ended June 30, 1998, but were not included in
the computation of the diluted EPS because the effect would be anti-dilutive.
The conversion price of these instruments was $3.25, $4.63 and $7.00,
respectively and remained outstanding at June 30, 1998.
9
<PAGE>
3. INVENTORIES
Inventories consist of tool components, subassemblies, and expendable
parts and supplies used in all segments of the Company's operations. Inventories
are classified as a long-term asset rather than a current asset as is consistent
with industry practice.
4. COMMITMENTS AND CONTINGENCIES
On December 15, 1998, the Company entered into an agreement with
Measurement Specialists, Inc.(MSI) to create an alliance between the two
companies. This agreement contains an option for the Company to acquire MSI.
Both the alliance and the option to purchase were to expire on April 15, 1999.
The agreement was extended on April 15, 1999 through September 30, 1999. The
alliance between the Company and MSI was effective December 1, 1998 and was
created in order to pursue MSI, while the Company used the tools and equipment
owned or leased by MSI, employees of the MSI, and the technology of MSI. During
the term of the alliance, the Company rents equipment and survey components from
MSI, with a monthly rental payment of $12,206. The agreement grants the Company
the option to acquire substantially all of the assets of MSI. If the option is
exercised, the Company agreed to pay MSI $74,982 in cash, 144,445 shares of
common stock of the Company, all of which have been or will be issued to MSI as
consideration for the option, and payment of the notes payable not to exceed
$479,416. Under the original agreement, the owner of MSI would be employed by
the Company for four months. If the option to purchase MSI is not exercised,
then the employment agreement terminates. The shares issued through June 30,
1999 are reflected in Other Assets. If the option is exercised, this amount will
be allocated to the purchase price of the assets.
The Company and certain of its officers and directors are respondents
in an arbitration proceeding commenced by Monetary Advancements International,
Inc. before the American Arbitration Association in New York, New York. The
claimant seeks to recompense against the Company and other named respondents for
the alleged failure to pay compensation in the form of shares of stock of the
Company for services allegedly rendered. The respondents have submitted an
answer and counterclaims and have initiated a Court proceeding seeking partial
stay of the arbitration proceeding. Management does not believe the ultimate
outcome of these actions will have a materially adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
On July 9, 1998, Southwick Investments Inc. ("Southwick") commenced a
lawsuit against the Company in the Superior Court of Fulton County, Georgia,
based on a Professional Services Agreement dated March 26, 1997, entered into
between Southwick and the Company pursuant to which Southwick was to develop and
implement a plan for raising additional capital and provide certain financial
advisory services. Southwick is seeking to be awarded damages in an unspecified
amount for breach of contract and the loss in value to Southwick of an option to
purchase 50,000 shares of the common stock of the Company at an exercise price
of $4.00 per share, together with court costs and attorney's fees. The Company
moved to have this dispute resolved by arbitration under the rules of the
National Association of Securities Dealers, Inc. which motion was granted. A
hearing was held on August 4 and 5, 1999 before a panel of arbitrators; as of
August 17, 1999 no award has been entered.
10
<PAGE>
The Company is a defendant in a lawsuit served on the Company on May
10, 1999 instituted in the District Court, Montgomery County, Texas by Bendover
Company (formerly known as Diamondback Directional, Inc.). In the action, the
plaintiff is seeking to recover the sum of $3,070,301, plus interest,
post-default interest and attorney's fees, on a promissory note of the Company
dated September 1, 1997. The promissory note was executed by the Company in
connection with the purchase of the assets of the plaintiff and is included in
notes payable to related parties on the balance sheet. The Company has filed an
answer interposing defenses to the lawsuit and asserting counterclaims. The
Company is unable to state at this time whether or not the plaintiff is likely
to be successful in its action or, the likelihood that the counterclaims
intended to be asserted by the Company will be successful. The Company and the
plaintiff are currently engaged in negotiations to resolve this litigation.
There can be no assurance that these negotiations will be successful.
The Company is a defendant in a lawsuit served on the Company on May 7,
1999 instituted in the District Court of Fort Bend County, Texas by Dreco, Inc.
seeking to recover payment for goods and services allegedly provided by the
plaintiff to the defendant. The plaintiff is seeking to recover the sum of
$876,802 plus interest and attorney's fees. The Company has filed an answer in
this action interposing defenses and asserting counterclaims. The Company is
unable to state at this time whether or not the plaintiff is likely to be
successful in its action or whether the Company will be successful on its
counterclaims.
The Company is a defendant in a lawsuit served on the Company on May
17, 1999 instituted in the District Court of Montgomery County, Texas by Thomas
Tools, Inc. seeking to recover payment for tools allegedly provided by the
plaintiff to the defendant. The plaintiff is seeking to recover the sum of
$156,534 plus interest and consequential damages and attorney's fees. The
Company has filed an answer in this litigation. The Company is unable to state
at this time whether or not the plaintiff is likely to be successful in its
action.
The Company is a defendant in seven other lawsuits instituted by
vendors and others seeking to recover an aggregate of approximately $135,000.
Although the Company is seeking to resolve these claims, in the light nature of
the claims asserted, the Company considers it likely that judgements may be
entered against it in these actions. These amounts are included in accounts
payable at June 30, 1999.
The Company receives demands from creditors for payment of outstanding
payables, as well as other claims. These creditors may institute additional
lawsuits against the Company. There can be no assurance that judgments may not
be entered against the Company arising out of such lawsuits, if instituted.
The Company is also a defendant in various legal actions in the
ordinary course of business. Management does not believe the ultimate outcome of
these actions will have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
The anticipated liabilities relating to the foregoing claims are
believed to have been adequately recorded in the Company's financial statements.
11
<PAGE>
5. SEGMENT AND RELATED INFORMATION
At June 30, 1999, the Company is organized into, and manages its
business based on the performance of, five business units. The business units
have separate management teams and infrastructures that offer different oil and
gas well services. The business units have been aggregated into three reportable
segments: wireline, directional drilling, and workover and completion since the
long-term financial performance of these reportable segments is affected by
similar economic conditions.
WIRELINE - This segment consists of two business units that perform
various procedures to evaluate and modify downhole conditions at different
stages of the process of drilling and completing oil and gas wells as well as
various times thereafter until the well is depleted and abandoned. This segment
engages in onshore and offshore servicing, as well as other oil and gas well
service activities including renting and repairing equipment. The principal
markets for this segment include all major oil and gas producing regions of the
United States. Major customers of this segment for the three and six months
ended June 30, 1999 included Collins and Ware Inc., Burlington Resources and
Chevron USA.
DIRECTIONAL DRILLING - This segment consists of two business units. One
unit performs procedures to enter an oil producing zone directionally, using
specialised drilling equipment, and expand the area of interface of hydrocarbons
and thereby greatly enhance recoverability of oil. The second business unit
engages in oil and gas well downhole surveying activities. The principal markets
for this segment include all major oil and gas producing regions of the United
States. Major customers of this segment for the three and six months ended June
30, 1999 included Phillips Petroleum, Jones Energy, Arco Oil and Gas and
Chesapeake Energy Corporation.
WORKOVER AND COMPLETION - This segment consists of a business unit
which provides services performed on wells when originally completed or on wells
previously placed in production and requiring additional work to restore or
increase production. The principal market for this segment is the Black Warrior
Basin of Alabama. The major customer of this segment for the three and six
months ended June 30, 1999 was Energen Resources.
The accounting policies of the reportable segments are the same as those
described in Note 2 of the Company's Annual Report of Form 10-KSB for the fiscal
year ended December 31, 1998. The Company evaluates the performance of its
operating segments based on earnings before interest, taxes, depreciation, and
amortization (EBITDA), which is derived from revenues less operating expenses
and selling, general, and administrative expenses. Segment information for the
three and six months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, 1999
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment revenues $ 4,706,198 $ 2,246,731 $ 308,487 $ 7,261,416
Segment EBITDA $ 949,154 $ 12,360 $ 24,983 $ 986,497
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended June 30, 1998
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment revenues $ 2,467,167 $ 7,426,523 $ 353,740 $ 10,247,430
Segment EBITDA $ (342,352) $ 688,833 $ (31,060) $ 315,421
Six months ended June 30, 1999
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
--------------------------------------------------------------------------
Segment revenues $ 8,260,572 $ 4,438,609 $ 634,517 $ 13,333,698
Segment EBITDA $ 1,032,937 $ (22,692) $ 76,280 $ 1,086,525
Six months ended June 30, 1998
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
--------------------------------------------------------------------------
Segment revenues $ 5,384,362 $ 13,747,121 $ 781,970 $ 19,913,453
Segment EBITDA $ 223,871 $ 1,843,095 $ (23,051) $ 2,043,915
</TABLE>
The Company has certain expenses which are not allocated to the individual
operating segments. A reconciliation of total segment EBITDA to loss from
operations for the three and six months ended June 30, 1999 and 1998 is
presented as follows:
Three months ended June 30:
1999 1998
Total segment EBITDA $ 986,497 $ 315,421
Depreciation and amortization (1,138,553) (1,246,109)
Unallocated corporate expense (1,638,277) (479,608)
------------ ------------
Loss from operations $ (1,790,333) $(1,410,296)
============ ============
Six months ended June 30:
1999 1998
Total segment EBITDA $ 1,086,525 $ 2,043,915
Depreciation and amortization (2,461,910) (2,055,799)
Unallocated corporate expense (2,050,315) (648,646)
------------ ------------
Loss from operations $(3,425,700) $ (660,530)
============ ============
13
<PAGE>
6. RELATED PARTY TRANSACTIONS
The Company opened a wireline facility in South Texas in January 1999
primarily to service a customer who has some common ownership with the Company.
During the three and six months ended June 30, 1999, this customer accounted for
approximately 17.7% and 43.7% of total revenues, respectively.
On June 17, 1999, the Company sold approximately $329,000 of trade
accounts receivable, which was fully reserved due to the customer declaring
bankruptcy, to RJ Air, LLC, an entity affiliated with a member of the Company's
Board of Directors, for $200,000. As of June 30, 1999, the Company has collected
$100,000 of the sale price and the remaining $100,000 is included in deferred
revenue on the balance sheet.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 amounts to conform
to the 1999 presentation.
8. ISSUANCE OF COMMON STOCK
Pursuant to an agreement dated December 15, 1998, which was amended on
April 15, 1999, through June 30, 1999, the Company has issued or agreed to issue
144,445 shares of Common Stock to Measurement Specialists, Inc. ("MSI"). The
securities have been agreed to be issued in reliance upon Regulation D under the
Securities Act of 1933, as amended. The securities were issued in connection
with an option granted by MSI to the Company to acquire the assets of MSI.
Commencing in April 1999, the Company offered to the subscribers in
private sales of the Company's securities which occurred in March and April 1998
the right to receive one additional share of the Company's Common Stock for each
share purchased in the private sale. In exchange, the subscribers were asked to
release the Company from all claims arising out of subscribers' allegations that
the Company breached its agreement to register under the Securities Act of 1933,
as amended (the "Securities Act") the public offer and sale of the shares sold
to the subscribers in 1998. Subscribers alleged that they were unable to
liquidate their shares purchased as they had expected because of the breach of
this agreement. The Company disputed the claim on the basis that it had timely
filed a registration statement relating to the shares in accordance with the
terms of the agreement. The registration statement remains on file but has not
been declared effective under the Securities Act. The Company made the offer to
the subscribers in order to resolve the matter. The offering terminated on May
28, 1999.
Accordingly, during the quarter ended June 30, 1999, the Company issued
770,364 shares of Common Stock to the subscribers to its March and April 1998
private placements in consideration of their release of their claims based on
the allegation that the Company breached its agreement to register the shares.
Two subscribers who had purchased an aggregate of 2,000 shares in the 1998
private placements did not accept the offer. Management if of the opinion that
if claims are presented by these shareholders, there would be no material impact
on the company. No underwriter participated in the sale of the securities and no
compensation was paid to any person in connection with soliciting the issuance
of the shares. The shares of Common Stock were issued in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) and Regulation D thereunder.
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9. DEFAULTS UPON SENIOR SECURITIES
At June 30, 1999, the Company was not in compliance with certain
general and financial covenants of its loan and security agreement with Fleet.
Under the terms of the loan agreement, the breach of these covenants constitutes
events of default and, at the option of Fleet, the obligations of the Company to
Fleet are subject to being declared by Fleet to be immediately due and payable.
Due to the indebtedness being callable at the discretion of Fleet and normal
cross default provisions of all other debt, all of the Company's debt at June
30, 1999 has been classified as current on the consolidated balance sheet.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
The Company's consolidated results of operations are affected primarily
by the extent of utilization of and rates paid for its services and equipment.
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. Declines in 1998 and the first quarter of 1999 in the
prevailing prices for oil and natural gas adversely impacted the Company's
operations. These lower oil and gas prices have negatively impacted the
Company's revenues for the three and six months ended June 30, 1999. In the
second quarter of 1999, oil and gas prices have improved; however, management of
the Company expects that prices for oil and gas will continue to be volatile and
to affect the demand for and pricing of the Company's services. Future material
declines in oil and gas prices or industry activity in the United States could
have a material adverse effect on the Company's consolidated results of
operations, financial condition and cash flows.
RESULTS OF CONSOLIDATED OPERATIONS. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 1998 AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1998
The following table sets forth the Company's revenues from its three
principal lines of business for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ -----------------------------
6/30/99 06/30/98 6/30/99 6/30/98
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wireline $ 4,706,198 $ 2,467,167 $ 8,260,572 $ 5,384,362
Directional Drilling 2,246,731 7,426,523 4,438,609 13,747,121
Workover and Completion 308,487 353,740 634,517 781,970
---------------------------------------------------------------------
$ 7,261,416 $ 10,247,430 $13,333,698 $19,913,453
=========== ============ =========== ===========
</TABLE>
Total revenues decreased by approximately $2.9 million to approximately
$7.3 million for the three months ended June 30, 1999 as compared to revenues of
approximately $10.2 million for the three months ended June 30, 1998. Total
revenues decreased by approximately $6.6 million to approximately $13.3 million
for the six months ended June 30, 1999 as compared to revenues of approximately
$19.9 million for the six months ended June 30, 1998. The Company's wireline
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<PAGE>
revenues were adversely affected by reduced demand and downward pressure on
pricing, however, this was more than offset by increased activity from wireline
locations opened or acquired since July, 1998. The decrease in directional
drilling revenues was also the result of reduced demand for the Company's
services and downward pressure on pricing that primarily resulted from the
decline in oil and gas prices in 1998 and early 1999. Revenues for Workover and
Completion decreased due to decreased activity by the division's principle
customer.
Operating costs decreased by approximately $3.1 million for the three
months ended June 30, 1999, as compared to the same period of 1998. Operating
costs were 74.5% of revenues for the three months ended June 30, 1999 as
compared with 82.9% of revenues in the same period in 1998. Operating costs
decreased by approximately $4.8 million for the six months ended June 30, 1999,
as compared to the same period of 1998. Operating costs were 82.9% of revenues
for the six months ended June 30, 1999 as compared with 79.1% of revenues in the
same period in 1998. The decrease was primarily the result of the lower overall
level of activities in the three and six months ended June 30, 1999 compared
with 1998. The increase in operating costs as a percentage of revenues for the
six months ended June 30, 1999 compared to June 30, 1998 was primarily because
of declining billing rates and equipment utilization, partially offset by the
Companies cost reduction program, in the first quarter of 1999 compared to 1998.
This increase was partially offset by the Company's cost reduction program. The
decrease in operating costs as a percentage of revenues for the three months
ended June 30, 1999 as compared to June 30, 1998 was primarily due to reduced
operating costs pursuant to cost reduction measures the Company initiated in
response to the reduced demand for the Company's services that primarily
resulted from the decline in oil and gas prices in 1998 and the first quarter of
1999. Salaries and benefits decreased by approximately $2.3 million for the
three months ended June 30, 1999, as compared to the same period in 1998, as the
total number of employees decreased from 323 at June 30, 1998 to 226 at June 30,
1999. Salaries and benefits decreased by approximately $2.7 million for the six
months ended June 30, 1999, as compared to the same period in 1998. This was due
to layoffs and salary reductions that the Company initiated in response to the
reduced demand for the Company's services that primarily resulted from the
recent decline in oil and gas prices in 1998 and the first quarter of 1999.
Selling, general and administrative expenses increased by approximately
$586,000 from approximately $1.9 million in the three months ended June 30, 1998
to approximately $2.5 million in the three months ended June 30, 1999. As a
percentage of revenues, selling, general and administrative expenses increased
from 18.7% in the three months ended June 30, 1998 to 34.5% in 1999, primarily
as a result of an expense of $914,807 recognized in the second quarter of 1999
related to 770,364 common shares issued to certain persons who purchased shares
of the Company's common stock at a price of $5.50 per share in private sales of
the Company's securities which occurred in March and April 1998. These shares
were issued in consideration of the release of certain claims asserted by these
persons regarding alleged excessive delays in effecting the registration of
their shares under the Securities Act of 1933, as amended, which allegedly
prevented such persons from being able to liquidate their securities. Selling,
general and administrative expenses increased by approximately $575,000 from
approximately $2.8 million in the six months ended June 30, 1998 to
approximately $3.3 million in the six months ended June 30, 1999. As a
percentage of revenues, selling, general and administrative expenses increased
from 13.9% in the six months ended June 30, 1998 to 25.0% in 1999, primarily as
a result of the $914,807 settlement cost recognized in the second quarter of
1999 as discussed above. Excluding the $914,807 settlement costs from selling,
general and administrative expenses would have decreased selling, general and
administrative expenses by $329,260 and $339,937 for the three and six months
ended June 30, 1999 due to lower activity levels and the implementation of a
cost reduction program.
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<PAGE>
Depreciation and amortization decreased from approximately $1.2 million
in the three months ended June 30, 1998, or 12.2% of revenues, to approximately
$1.1 million in 1999 or 15.7% of revenues, primarily because of the lower asset
base of depreciable properties and lower goodwill balance in the three month
period ended June 30, 1999 over the same period in 1998. Depreciation and
amortization increased from approximately $2.1 in the six months ended June 30,
1998, or 10.3% of revenues, to approximately $2.5 million in 1999 or 18.5% of
revenues primarily due to the higher base of depreciable properties in the six
month period ended June 30, 1999 over the same period in 1998. The asset base
was higher during the six months ended June 30, 1999 primarily due to the
Phoenix Acquisition which occurred on March 16, 1998.
Interest expense and amortization of debt discount increased by
approximately $146,000 for the three months ended June 30, 1999 as compared to
the same period in 1998 and increased by approximately $555,000 for the six
months ended June 30, 1999 as compared to the same period in 1998. This was
directly related to the increased amounts of indebtedness outstanding in 1999,
primarily a result of the Phoenix Acquisition that occurred in the first quarter
of 1998. See "Note 6 of Notes to Consolidated Financial Statements" in the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
Net gain on sale of fixed assets was $1,737 compared to a net loss of
$938 for the three months ended June 30, 1999 and 1998, respectively. Net loss
on sale of fixed assets was $7,263 for the six months ended June 30, 1999 as
compared to a net gain of $1,006 for the same period in 1998. Other income
decreased by approximately $11,000 in three months ended June 30, 1999 as
compared to the same period in 1998. Other income decreased by approximately
$7,600 in the six months ended June 30, 1999 as compared to the same period in
1998.
The Company had a loss before provision for income taxes of
approximately $2.6 million and $5.1 million for the three and six months ended
June 30, 1999, respectively, compared to a loss before provision for income
taxes of approximately $2.1 million and $1.8 million for the three and six
months ended June 30, 1998, respectively.
Income tax benefit totaled $-0- for the three and six months ended June
30, 1999 as compared to income tax benefit of $833,017 and $649,398 for the
three and six months ended June 30, 1998, respectively. These totals contain
Federal and State deferred taxes as well as current amounts.
The Company had a net loss of approximately $2.6 million and $5.1
million for the three and six months ended June 30, 1999, respectively, compared
to a net loss of $1.3 million and $1.1 million for the three and six months
ended June 30, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by Company operating activities was approximately $664,000
for the six months ended June 30, 1999 as compared to cash used of approximately
$1.1 million for the same period in 1998. Investing activities used cash of
approximately $854,000 during the six months ended June 30, 1999 for the
acquisition of property, plant and equipment, including proceeds from the sale
of fixed assets of approximately $30,000. During the six months ended June 30,
1998, investing activities used cash of approximately $6.1 million for the
acquisition of property, plant and equipment and businesses, net of cash
acquired, including proceeds of $71,000 from the sale of fixed assets. Financing
activities provided net cash of approximately $686,000 from the proceeds from
bank and other borrowings of approximately $3.2 million during the six months
ended June
17
<PAGE>
30, 1999 offset by principal payments on bank debt, other borrowings and capital
leases of approximately $695,000, net payments on the working capital revolving
loan of approximately $1.6 million and approximately $152,000 of costs related
to debt issuance. For the same period in 1998 financing activities provided net
cash of approximately $7.5 million from the net proceeds from the issuance of
common stock of approximately $3.7 million, approximately $1.9 million from the
proceeds from bank and other borrowings and net proceeds from the working
capital revolving loan of approximately $3.3 million offset by principal
payments on bank debt, other borrowings and capital lease obligations of
approximately $1.1 million and approximately $467,000 of costs related to debt
issuances.
Cash at June 30, 1999 was $210,412 as compared with cash at June 30,
1998 of $714,511.
During 1998 and the first half of 1999, the Company experienced a
decline in the demand for its products and services as a result of a significant
decrease in the price of oil and natural gas. The decline in demand materially
impacted the Company's revenues, liquidity and its ability to remain in
compliance with covenants in its loan agreements and meet its obligations during
the last half of 1998 and first half of 1999. While these conditions continued
throughout much of the first quarter of 1999, prices for oil and natural gas
were improving significantly in the second quarter of 1999. Management of the
Company believes that an improvement in its revenues will be dependent upon a
continuing period of stabilized pricing at levels similar to those of the second
quarter of 1999 and decisions by oil and natural gas producers to make
commitments to engage in oil and natural gas well enhancements.
The Company's outstanding indebtedness includes primarily senior
secured indebtedness aggregating approximately $15.5 million at June 30, 1999
owed to Fleet Capital Corporation ("Fleet') and GE Capital Corporation ("GECC"),
other indebtedness of approximately $5.5 million, and $19.4 million owing to St.
James Capital Partners, L.P. ("SJCP") and its affiliates. All of this
indebtedness is shown as currently due and payable on the Company's consolidated
balance sheet at June 30, 1999.
Management's plans with respect to addressing its current financial
situation include primarily the following:
o The Company is engaged in efforts to refinance its senior secured
indebtedness which is intended to provide, among other things, more
favorable terms and thereby improve liquidity. Negotiations with respect to
refinancing this indebtedness are ongoing, however, no written commitments
have been received from any prospective lenders.
o In July 1999, the Company entered into a forbearance agreement with its
primary secured lender, Fleet Capital Corporation, which, among other
things, permitted the Company to make reduced payments of principal to
Fleet through August 31, 1999. In the event the Company is unsuccessful in
refinancing this indebtedness by August 31, 1999, the Company intends to
seek a further forbearance agreement with Fleet, however, there can be no
assurance that such further forbearance agreement will be forthcoming.
o The Company has continued through the second quarter of 1999 to further
implement a cost reduction program first implemented in the last half of
1998 and intends to focus on cost reduction opportunities through 1999.
These cost reductions have included, among other things, reductions in
personnel, reductions in compensation levels and curtailment of
expenditures. The Company continues to make personnel reductions and reduce
expenditures
18
<PAGE>
to meet its current levels of activities. There can be no assurance that
the Company will be successful in attracting new employees to replace
discharged personnel at such time as its operations may require.
0 The Company is currently in negotiations to restructure a note payable to a
former owner of Diamondback Directional, Inc.
Management also intends to raise additional capital in conjunction with
the foregoing plan, which may be either debt or equity capital or a combination
thereof, which, together with the renegotiations of certain outstanding
indebtedness, will be used to meet the Company's other current liquidity
requirements. Management expects that, upon conclusion of the plan, its
indebtedness owing to St. James Capital Corp. and its affiliates will be
long-term or converted into equity securities.
Management believes that, provided oil and natural gas prices remain
relatively stable with prices that existed in the second quarter of 1999, the
foregoing plan together with the cost-reduction program implemented in 1998,
which included reductions in personnel and salaries of existing personnel,
closing and consolidating certain district offices, together with other
cost-reduction activities, should enable the Company to operate without a
further deterioration of its liquidity condition.
Management of the Company is unable to assure that its efforts to
implement the plan described above will be successful or state the terms under
which or when the proposed transactions will be completed. In the event the
Company is unsuccessful in raising additional capital and refinancing its
currently due indebtedness, the Company believes that its operations will be
significantly affected, including, possibly, the foreclosure by the Company's
secured creditors against virtually all of the Company's assets. Under such
circumstances, the Company's equity investors may loose their entire investment.
Management expects that in order to complete such transactions substantial
amounts of equity securities may be required to be issued which may materially
dilute the Company's existing stockholders.
With the exception of the option to acquire Measurement Specialists,
L.L.C., the Company has no definitive agreements to acquire any additional
companies. However, there can be no assurance that the Company will not acquire
additional companies or assets 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 the Company assumes, or an acquired entity
becomes liable for, unknown or contingent liabilities or in the event 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. Subject to the restrictions contained in the Company's existing
loan agreement with Fleet or any successor lender, 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.
19
<PAGE>
YEAR 2000 COMPUTER ISSUES
The Year 2000 computer issue is the result of computer programs being
written to use two digits to define year dates. Computer programs running
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in systems failure or miscalculations
causing disruptions or operations.
We initiated a comprehensive assessment of our information technology
and non-information technology systems to ensure that our systems either will be
unaffected by the year 2000 issue or will be upgraded to enable compliance with
Year 2000 standards. In general, our information technology computer systems
consist of our office computer network and financial management software. Our
other computer systems, which are non-information technology, consist of certain
office equipment and other systems associated with our oil and gas well service
activities. We are also evaluating the Year 2000 compliance by our customers and
suppliers to ascertain the potential impact on us of the extent of our customers
and suppliers compliance with Year 2000 issues.
We began an in-house assessment of our Year 2000 problem with respect
to our information technology systems in the fall of 1998. Since that time, we
have upgraded all of our financial management software to newer versions which
are Year 2000 compliant. In addition, we have replaced nearly all of our
information technology hardware so that this hardware is now Year 2000
compliant. To date the cost of the upgrade and of this software and hardware has
been approximately $5,000.
Additionally, we have assessed our non-information technology systems
which consist primarily of embedded technology at our field offices and certain
of the equipment used at wellsites. We believe that our non-information
technology systems will be Year 2000 compliant by September 30, 1999 without any
material cost.
We are conducting an assessment of Year 2000 exposures related to our
suppliers and customers. We have identified our key customers and suppliers and
have requested information as to the Year 2000 compliance of such customers.
With key vendors we have requested written assurances as to their Year 2000
compliance. In the event any of these vendors should become unavailable to
provide goods or services to us, we believe there are alternate sources.
Although no contingency plans or alternative sources have been developed to
date, we will begin to formulate such plans as we ascertain the preparedness of
our customers and suppliers. In the event any of our vendors should be Year 2000
noncompliant, we believe it is likely that we have no legal remedies against
them.
We anticipate that all of our internal systems and equipment will be
Year 2000 compliant by the end of the third quarter of 1999. We believe that the
total costs associated with modifying our existing systems will not have a
material adverse effect on our results of operations or financial condition.
Nonetheless, if all Year 2000 issues are not adequately assessed or if the
necessary remedial efforts are not implemented on a timely basis, we may not be
Year 2000 compliant which, in turn, could have a material adverse effect on our
business, operating results of financial condition. In addition, our operations
may be disrupted in the event our suppliers or service providers are not Year
2000 compliant and such failure could have a material adverse effect on our
business, operating results or financial condition. We believe that the most
likely worst-case scenario arising out of any possible Year 2000 non-compliance
will relate to the operation of well
20
<PAGE>
site equipment. If this equipment should become inoperable for reasons related
to its inability to be Year 2000 compliant, which is not presently anticipated,
our operations and revenues could be materially adversely affected.
INFLATION
The Company's revenues have been and are expected to continue to be
affected by fluctuations in the prices for oil and gas. Inflationary pressures
did not have a significant effect on the Company's operations in the three or
six months ended June 30, 1999.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
Report are "forward-looking statements" as defined under the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, the matters described herein,
including Management's Discussion and Analysis or Plan of Operations. Such
forward-looking statements relate to the Company's ability to attain and
maintain profitability and cash flow, the stability of and future prices for oil
and gas, the maintenance of current price levels for oil and gas, pricing in the
oil and gas services industry, the ability of the Company to compete in the
premium services market, the decisions by oil and gas producers to make
commitments to engage in oil and natural gas well enhancements, the ability of
the Company to expand through acquisitions and to redeploy its equipment among
regional operations, the ability of the Company to upgrade, modernize and expand
its equipment, including its wireline fleet, the ability of the Company to
expand its tubing conveyed perforating services, the ability of the Company to
provide services using the newly acquired state of the art tooling, the ability
of the Company to raise additional capital to meet its requirements and to
obtain additional financing, the ability of the Company to successfully
implement its business strategy, the ability of the Company to maintain
compliance with the covenants of its various loan documents and other agreements
pursuant to which securities have been issued and the ability of the Company to
successfully address Year 2000 issues. The inability of the Company to meet
these objectives or the consequences on the Company from adverse developments in
general economic conditions, adverse developments in the oil and gas industry,
and other factors could have a material adverse effect on the Company. The
Company cautions readers that various risk factors described in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998 could cause
the Company's operating results to differ materially from those expressed in any
forward-looking statements made by the Company and could adversely affect the
Company's financial condition and its ability to pursue its business strategy.
Readers should refer to the Annual Report on Form 10-KSB and the risk factors
discussed therein.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit served on the Company on May
10, 1999 instituted in the District Court, Montgomery County, Texas by Bendover
Company (formerly known as Diamondback Directional, Inc.). In the action, the
plaintiff is seeking to recover the sum of $3,070,301, plus interest,
post-default interest and attorney's fees, on a promissory note of the
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<PAGE>
Company date September 1, 1997. The promissory note was executed by the Company
in connection with the purchase of the assets of the plaintiff. The Company has
filed an answer interposing defenses to the lawsuit and asserting counterclaims.
The Company is unable to state at this time whether or not the plaintiff is
likely to be successful in its action or the likelihood that the counterclaims
intended to be asserted by the Company will be successful. The Company and the
plaintiff are currently engaged in negotiations to resolve this litigation:
there can be no assurance that these negotiations will be successful.
The Company is a defendant in a lawsuit served on the Company on May 7,
1999 instituted in the District Court of Fort Bend County, Texas by Dreco, Inc.
seeking to recover payment for goods and services allegedly provided by the
plaintiff to the defendant. The plaintiff is seeking to recover the sum or
$876,802 plus interest and attorney's fees. The Company has filed an answer in
this action interposing defenses and asserting counterclaims. The Company is
unable to state at this time whether or not the plaintiff is likely to be
successful in this action or whether the Company will be successful on
counterclaims.
The Company is a defendant in a lawsuit served on the Company on May
17, 1999 instituted in the District Court of Montgomery County, Texas by Thomas
Tools, Inc. seeking to recover payment for tools allegedly provided by the
plaintiff to the defendant. The plaintiff is seeking to recover the sum of
$156,534 plus interest and consequential damages and attorney's fees. The
Company has filed an answer in this litigation. The Company is unable to state
at this time whether or not the plaintiff is likely to be successful in its
action.
The Company is a defendant in seven other lawsuits instituted by
vendors and others seeking to recover an aggregate of approximately $135,000.
Although the Company is seeking to resolve these claims asserted, the Company
considers it likely that judgments may be entered against it in these actions.
The Company receives demands from creditors for payment of outstanding
payables, as well as other claims. These creditors may institute additional
lawsuits against the Company. There can be no assurance that judgements may not
be entered against the Company arising out of such lawsuits, if instituted.
The anticipated liabilities relating to the foregoing claims are
believed to have been adequately recorded in the Company's financial statements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to an agreement dated December 15, 1998, which was amended on
April 15, 1999, through June 30, 1999, the Company has issued or agreed to issue
144,445 shares of Common Stock to Measurement Specialists, Inc. ("MSI"). The
securities have been agreed to be issued in reliance upon Regulation D under the
Securities Act of 1933, as amended. The securities were issued in connection
with an option granted by MSI to the Company to acquire the assets of MSI.
Commencing in April 1999, the Company offered to the subscribers in
private sales of the Company's securities which occurred in March and April 1998
the right to receive one additional share of the Company's Common Stock for each
share purchased in the private sale. In exchange, the subscribers were asked to
release the Company from all claims arising out of subscribers' allegations that
the Company breached its agreement to register under the Securities Act of 1933,
as
22
<PAGE>
amended (the "Securities Act") the public offer and sale of the shares sold to
the subscribers in 1998. Subscribers alleged that they were unable to liquidate
their shares purchased as they had expected because of the breach of this
agreement. The Company disputed the claim on the basis that it had timely filed
a registration statement relating to the shares in accordance with the terms of
the agreement. The registration statement remains on file but has not been
declared effective under the Securities Act. The Company made the offer to the
subscribers in order to resolve the matter. The offering terminated on May 28,
1999.
Accordingly, during the quarter ended June 30, 1999, the Company issued
770,364 shares of Common Stock to the subscribers to its March and April 1998
private placements in consideration of their release of their claims based on
the allegation that the Company breached its agreement to register the shares.
Two subscribers who had purchased an aggregate of 2,000 shares in the 1998
private placements did not accept the offer. Management is of the opinion that
if claims are presented by these shareholders, there would be no material impact
on the company. No underwriter participated in the sale of the securities and no
compensation was paid to any person in connection with soliciting the issuance
of the shares. The shares of Common Stock were issued in reliance upon the
exemption from the registration requirements of the Securities Act afforded by
Section 4(2) and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has outstanding secured indebtedness aggregating
approximately $11.5 million under an Amended and Restated Loan and Security
Agreement (the "Loan Agreement") with Fleet Capital Corporation ("Fleet") dated
October 30, 1998. From time to time, including various times in 1999, the
Company has not been in compliance with various covenants in the Loan Agreement.
In July 1999, the Company and Fleet entered into a Second Forbearance Agreement,
Second Amendment and Waiver to Loan and Security Agreement (the "Forbearance
Agreement") whereby Fleet agreed, among other things, to forebear through August
31, 1999 taking action on defaults under the Company's Loan Agreement. Subject
to the Company meeting certain conditions and complying with certain covenants,
Fleet agreed to reduced payments of principal due on its loan during the months
of July and August 1999. The instruments governing the Company's indebtedness to
Fleet impose significant operating and financial restrictions on the Company.
Such restrictions affect, and in many respects significantly limit or prohibit,
among other things, the ability of the Company to incur additional indebtedness,
pay dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. These restrictions also limit the ability of
the Company to effect future financing, make needed capital expenditures,
withstand a downturn in the Company's business or economy in general, or
otherwise conduct necessary corporate activities. The Loan Agreement places
restrictions on the Company's ability to borrow money under the revolving credit
provisions of the Loan Agreement. The Company's ability to borrow under this
revolving credit arrangement is necessary to fund the Company's ongoing
operations. Upon the end of the forbearance term (August 31, 1999), if the
Company is unable to refinance the Fleet debt or agree to modified terms with
Fleet, Fleet will have the right to elect to declare all of the funds borrowed
to be immediately due and payable together with accrued and unpaid interest and
to refuse to make additional advances under the revolving credit arrangement. In
such event, there can be no assurance that the Company would be able to make
such payment or borrow sufficient funds from alternative sources to make any
such payment. If the Company was unable to repay all amounts declared due and
payable under the Loan Agreement, Fleet could proceed against the collateral
granted to satisfy the indebtedness and other
23
<PAGE>
obligations due and payable. This collateral includes substantially all of the
Company's assets, not already pledged as collateral for other indebtedness of
the Company. If the indebtedness owing to Fleet was to be accelerated, there can
be no assurance that the assets of the Company would be sufficient to repay in
full such indebtedness and the Company's other liabilities. In addition, the
acceleration of the Company's indebtedness owing to Fleet would constitute a
default under other indebtedness of the Company which may result in such other
indebtedness also becoming immediately due and payable. Under such
circumstances, the holders of the Company's Common Stock may realize little or
nothing on their investment in the Company. Even if additional financing could
be obtained, there can be no assurance that it would be on terms that are
favorable or acceptable to the Company or its equity security holders. The
Company is seeking to refinance its indebtedness owing to Fleet with another
lender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK WARRIOR WIRELINE CORP.
(Registrant)
Date: August 19, 1999 /S/ William L. Jenkins
--------------------------------------------
William L. Jenkins
President and Chief Operating Officer
(Principal Executive, Financial and
Accounting Officer)
25
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