SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended September 30, 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
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BLACK WARRIOR WIRELINE CORP.
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(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
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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)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
-------- --------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Outstanding at
Class November 18 , 1999
------------------------ ------------------
COMMON STOCK, PAR VALUE 4,812,260 SHARES
$.0005 PER SHARE
Transitional Small Business Disclosure Format
YES NO X
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<PAGE>
BLACK WARRIOR WIRELINE CORP.
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1999
and December 31, 1998 3
Condensed Statements of Operations -
Three Months Ended September 30, 1999 and
September 30, 1998 4
Condensed Statements of Operations -
Nine Months Ended September 30, 1999 and
September 30, 1998 5
Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1999 and
September 30, 1998 6
Notes to Condensed Financial Statements -
Nine Months Ended September 30, 1999 and
September 30, 1998 7
Item 2. Management's Discussion and Analysis or Plan
of Operations 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 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.
- ----------------------------
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 376,419 $ 1,041,242
Short-term investments 50,000 50,000
Accounts receivable, less allowance for doubtful
accounts of $1,195,379 and $2,157,421, respectively 4,022,551 3,596,004
Prepaid expenses 224,782 110,579
Other receivables 102,338 236,273
Other current assets 543,283 498,812
------------ ------------
Total current assets 5,319,373 5,532,910
Land and building, held for sale 400,000 400,000
Inventories 4,405,339 4,278,601
Property, plant, and equipment, less accumulated
depreciation of $12,593,360 and $8,986,893, respectively 20,542,380 22,628,601
Other assets 770,179 539,537
Goodwill, less accumulated amortization of $286,351
and $215,678, respectively 3,364,528 3,435,201
------------ ------------
Total assets $ 34,801,799 $ 36,814,850
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 7,162,514 $ 5,964,266
Accrued salaries and vacation 224,921 91,275
Accrued interest payable 2,960,151 1,527,674
Other accrued expenses 679,738 826,366
Deferred revenue 100,000 155,016
Note payable to related party, net 23,042,140 20,662,890
Current maturities of long-term debt and capital
lease obligations 17,406,540 18,923,719
------------ ------------
Total current liabilities 51,576,004 48,151,206
Stockholders' deficit:
Preferred stock, $.0005 par value, 2,500,000 shares authorized;
none issued at September 30, 1999 and December 31, 1998,
respectively
Common stock, $.0005 par value, 12,500,000 shares authorized;
4,812,260 and 3,897,451 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 2,406 1,948
Additional paid-in capital 13,172,581 12,107,551
Accumulated deficit (29,365,799) (22,862,462)
Treasury stock, at cost, 4,620 shares (583,393) (583,393)
------------ ------------
Total stockholders' deficit (16,774,205) (11,336,356)
------------ ------------
Total liabilities and stockholders' deficit $34,801,799 $ 36,814,850
============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
3
<PAGE>
BLACK WARRIOR WIRELINE CORP.
- ----------------------------
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended September 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 7,379,236 $ 8,048,018
Operating costs 5,600,718 7,607,565
Selling, general and administrative expenses 1,150,576 1,524,085
Depreciation and amortization 1,244,405 1,651,343
----------- -----------
Net loss from operations (616,463) (2,734,975)
Interest expense and amortization of debt discount (844,596) (919,481)
Net gain (loss) on sale of fixed assets -0- 59,817
Other income 49,383 14,093
----------- -----------
Net loss before benefit for
income taxes (1,411,676) (3,580,546)
Benefit for income taxes -0- -0-
----------- -----------
Net loss (1,411,676) (3,580,546)
=========== ===========
Net loss per common share - basic $ (0.30) $ (0.92)
=========== ===========
Net loss per common share - diluted $ (0.30) $ (0.92)
=========== ===========
Weighted average common shares outstanding 4,758,319 3,892,831
=========== ===========
Weighted average common share outstanding
with dilutive securities 4,758,319 3,892,831
=========== ===========
</TABLE>
See accompanying notes to the condensed financial statements.
4
<PAGE>
BLACK WARRIOR WIRELINE CORP.
- ----------------------------
CONDENSED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 20,712,934 $ 27,961,471
Operating costs 16,564,643 23,051,611
Selling, general and administrative expenses 4,484,139 4,671,160
Depreciation and amortization 3,706,315 3,707,192
------------ ------------
Net loss from operations (4,042,163) (3,468,492)
Interest expense and amortization of debt discount (2,531,923) (1,978,448)
Net gain (loss) on sale of fixed assets (7,263) 60,823
Other income 78,012 50,389
------------ ------------
Net loss before benefit for
income taxes (6,503,337) (5,335,728)
Benefit for income taxes -0- 649,398
------------ ------------
Net loss $( 6,503,337) $ (4,686,330)
============ ============
Net loss per common share - basic $ (1.52) $ (1.32)
============ ============
Net loss per common share - diluted $ (1.52) $ (1.32)
============ ============
Weighted average common shares outstanding 4,290,682 3,549,411
============ ============
Weighted average common shares outstanding
with dilutive securities 4,290,682 3,549,411
============ ============
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
BLACK WARRIOR WIRELINE CORP.
- ----------------------------
CONDENSED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1999 and September 30, 1998
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash provided by (used in) operations: $ 515,329 $ (996,080)
Cash flows from investing activities:
Acquisitions of property, plant, and equipment (1,670,580) (4,691,698)
Proceeds from sale of property, plant, and equipment 34,820 205,781
Acquisition of business, net of cash acquired -0- (671,932)
------------ ------------
Cash used in investing activities: (1,635,760) (5,157,849)
------------ ------------
Cash flows from financing activities:
Debt issuance costs (319,687) (437,164)
Proceeds from bank and other borrowings 3,266,678 1,336,471
Principal payments on long-term debt, notes payable
and capital lease obligations (1,194,264) (1,379,733)
Net (payments) proceeds on working revolver (1,297,119) 2,142,713
Proceeds from issuance of common stock, net
of offering costs -0- 3,940,662
Increase in cash overdraft -0- 115,135
------------ ------------
Cash provided by financing activities: 455,608 5,718,084
------------ ------------
Net decrease in cash and cash equivalents (664,823) (435,845)
Cash and cash equivalents, beginning of period 1,041,242 435,845
------------ ------------
Cash and cash equivalents, end of period $ 376,419 $ -0-
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,099,446 $ 1,351,245
Income taxes paid $ 0 $ 0
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, and 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 $ 129,931
</TABLE>
See accompanying notes to the condensed financial statements.
6
<PAGE>
BLACK WARRIOR WIRELINE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed 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. (the "Company"). Such
adjustments are of a normal recurring nature. The accompanying condensed
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 doubt
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 of 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 surveying 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 condensed 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 included 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 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
7
<PAGE>
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 condensed 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 results of operations
for the nine months ended September 30, 1999 and 1998 as if the acquisitions
above had occurred at the beginning of the periods presented. The pro forma
summary information does not necessarily reflect the results of operations as
they actually would have been if the acquisitions had occurred at the beginning
of the periods presented. The unaudited results of operations for the nine
months ended September 30, 1999 are presented for comparative purposes as both
acquisitions are included in the operating results of this period.
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
(Unaudited) (Unaudited)
Revenues $ 20,712,934 $ 31,972,607
Loss before income tax effect $ ( 6,503,337) $ (5,530,446)
Net loss $ ( 6,503,337) $ (4,953,183)
Net loss per common share - basic $ (1.52) $ (1.40)
============= ============
Net loss per common share - diluted $ (1.52) $ (1.40)
============= ============
The unaudited pro forma 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.
During the third quarter 1999 the Company dissolved the its wholly owned
subsidiary, Boone Wireline Co. ("Boone") and merged the assets of Boone into
Black Warrior Wireline Corp. The dissolution had no effect on prior or current
year earnings or equity.
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 September 30, 1999 Ended September 30, 1998
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net loss $ (1,411,676) $ (3,580,546)
BASIC EPS
Loss available to common
shareholders $ (1,411,676) 4,758,319 $ (0.30) $ (3,580,546) 3,892,831 $(0.92)
------------ --------- ------- ------------ --------- ------
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt securities
DILUTED EPS
Loss available to common
shareholders $ (1,411,676) 4,758,319 $ (0.30) $ (3,580,546) 3,892,831 $(0.92)
------------ --------- ------- ------------ --------- ------
<CAPTION>
For the Nine Months For the Nine Months
Ended September 30, 1999 Ended September 30, 1998
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Loss Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net loss $ (6,503,337) $ (4,686,330)
BASIC EPS
Loss available to common
shareholders $ (6,503,337) 4,290,682 $(1.52) $ (4,686,330) 3,549,411 $(1.32)
------------- --------- ------ ------------ --------- ------
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt securities
DILUTED EPS
Loss available to common
shareholders $ (6,503,337) 4,290,682 $(1.52) $ (4,686,330) 3,549,41 $(1.32)
-------------- --------- ------ ------------ -------- ------
</TABLE>
Options and warrants to purchase 18,154,947 and 4,918,000 shares of
common stock at prices ranging from $1.50 to $8.01 were outstanding during the
three and nine months ended September 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 nine months ended September 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 September 30, 1999. Convertible debt instruments
which would result in the issuance of 615,385, 652,985 and 1,818,182 shares of
common stock, if the conversion features were exercised, were outstanding during
each of the three month and nine month periods ended September 30, 1998, but
were not included in the computation of the diluted
9
<PAGE>
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
September 30, 1998.
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. 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 MSI, and the technology of MSI. During the
term of the alliance, the Company rents equipment and MWD 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 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 September
30, 1999 are reflected in Other Assets. If the option is exercised, this amount
will be allocated to the purchase price of the assets. 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. While the agreement has not been
formally extended beyond September 30, 1999, both parties continue to operate
under the general terms of the agreement.
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.
The Company and Southwick Investments, Inc. were parties in an
arbitration proceeding before the American Arbitration Association arising out
of an agreement entered into by the parties. Southwick was engaged to develop
and implement a plan for raising additional capital and provide certain advisory
services. Southwick was seeking to be awarded damages in an unspecified amount
for breach of the contract and the loss in value to Southwick of an option to
purchase fifty thousand shares of the common stock of the Company at an exercise
price of $4 per share. In August, 1999, the arbitration panel issued its award
requiring that the Company pay Southwick $100,000, but dismissing all other
claims. This award was recognized as a charge to selling, general and
administrative expenses in the third quarter of 1999.
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
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.
Greenspan, Inc. has filed suit against the Company on April 5, 1999 in
Harris County, Texas, seeking to recover $168,205, plus interest, attorney's
fees, and court costs. The Company has filed an answer and a counter claim
against Greenspan for defective downhole wireline tools, seeking the return of
approximately $100,000 previously paid by the Company to Greenspan. This case is
pending. The Company is not able 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 in its counterclaims.
The Company is defendant in an action filed by Saxon Industries, Inc.
in Harris County, Texas, seeking to collect $84,684. The Company is seeking to
resolve this pending action, and is not able to state at this time whether or
not the plaintiff will be successful in its action.
The Company has received threats of litigation by seven other vendors
seeking to recover in the aggregate approximately $135,000. The Company is
seeking to resolve these claims. These amounts are included in amounts payable
at September 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.
11
<PAGE>
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.
5. SEGMENT AND RELATED INFORMATION
At September 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 quarter ending September
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 hydrocarbon producing zone directionally,
using specialized drilling equipment, and expand the area of interface of
hydrocarbons and thereby greatly enhancing recoverability. 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 quarter ending September
30, 1999 included Jones Energy, Coastal Oil and Gas and Shell E&P.
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 quarter ended
September 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
quarters ended September 30, 1999 and 1998 is as follows:
12
<PAGE>
Three months ended September 30, 1999
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
-------- -------- ---------- -----
Segment revenues $ 4,839,942 $2,228,014 $ 311,280 $7,379,236
Segment EBITDA $ 1,095,349 $ 59,547 $ 64,375 $1,219,271
Three months ended September 30, 1998
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
-------- -------- ---------- -----
Segment revenues $ 2,831,291 $4,774,019 $ 442,708 $8,048,018
Segment EBITDA $ (138,727) $ (589,647) $ (58,390) $ (786,764)
Nine months ended September 30, 1999
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
-------- -------- ---------- -----
Segment revenues $ 13,100,512 $6,666,625 $ 945,797 $20,712,934
Segment EBITDA $ 2,128,286 $ 36,855 $ 140,655 $ 2,305,796
Nine months ended September 30, 1998
WORKOVER
DIRECTIONAL AND
WIRELINE DRILLING COMPLETION TOTAL
-------- -------- ---------- -----
Segment revenues $8,215,653 $18,457,240 $1,288,578 $27,961,471
Segment EBITDA $ 85,144 $ 1,253,448 $ (81,441) $ 1,257,151
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 nine months ended September 30, 1999 and 1998 is
presented as follows:
Three months ended September 30:
1999 1998
---- ----
Total segment EBITDA $ 1,219,271 $ (786,764)
Depreciation and amortization (1,244,405) (1,651,343)
Unallocated corporate expense (591,329) (296,868)
----------- -----------
Loss from operations $ (616,463) $(2,734,975)
=========== ===========
13
<PAGE>
Nine months ended September 30:
1999 1998
---- ----
Total segment EBITDA $ 2,305,796 $ 1,257,151
Depreciation and amortization (3,706,315) (3,707,192)
Unallocated corporate expense (2,641,644) (1,018,451)
----------- -----------
Loss from operations $(4,042,163) $(3,468,492)
=========== ===========
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 nine months ended September 30, 1999, this customer
accounted for approximately 5.1% and 10.9% 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 September 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 September 30, 1999, the Company has issued 144,445
shares of Common Stock to Measurement Specialists, Inc. ("MSI"). The securities
have been 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.
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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.
9. DEFAULTS UPON SENIOR SECURITIES
At September 30, 1999, the Company was not in compliance with certain
general and financial covenants of its loan and security agreement with Fleet
Capital Corporation ("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 September 30, 1999 has been classified as current on
the condensed consolidated balance sheet.
At September 30, 1999, the Company was not in compliance with its loan
and security agreement with GECC and is working with GECC to resolve this
situation and to date GECC has not issued a notice of default.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 nine months ended September 30, 1999. In
the second and third 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.
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RESULTS OF OPERATIONS. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table sets forth the Company's revenues from its three
principal lines of business for the three and nine months ended September 30,
1999 and 1998 respectively:
Three Months Ended Nine Months Ended
------------------ -----------------
09/30/99 09/30/98 09/30/99 09/30/98
-------- -------- -------- --------
Wireline $ 4,839,942 $ 2,831,291 $13,100,512 $ 8,215,653
Directional Drilling 2,228,014 4,774,019 6,666,625 18,457,240
Workover and Completion 311,280 442,708 945,797 1,288,578
----------- ----------- ----------- -----------
$ 7,379,236 $ 8,048,018 $20,712,934 $27,961,471
Total revenues decreased by approximately $669,000 to approximately
$7.4 million for the three months ended September 30, 1999 as compared to
revenues of approximately $8.0 million for the three months ended September 30,
1998. Total revenues decreased by approximately $7.2 million to approximately
$20.7 million for the nine months ended September 30, 1999 as compared to
revenues of approximately $28.0 million for the nine months ended September 30,
1998. The Company's wireline 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 $2.0 million for the three
months ended September 30, 1999, as compared to the same period of 1998.
Operating costs were 75.9% of revenues for the three months ended September 30,
1999 as compared with 94.5% of revenues in the same period in 1998. Operating
costs decreased by approximately $6.5 million for the nine months ended
September 30, 1999, as compared to the same period of 1998. Operating costs were
79.9% of revenues for the nine months ended September 30, 1999 as compared with
82.4% 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 nine months
ended September 30, 1999 compared with 1998. The decrease in operating costs as
a percentage of revenues for the three and nine months ended September 30, 1999
compared to September 30, 1998 was primarily the result of the Company's cost
reduction program implemented in the first quarter of 1999. Salaries and
benefits decreased by approximately $765,000 for the three months ended
September 30, 1999, as compared to the same period in 1998, as the total number
of employees decreased from 357 at September 30, 1998 to 245
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at September 30, 1999. Salaries and benefits decreased by approximately $2.1
million for the nine months ended September 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 decline in oil and gas prices in 1998 and the first
quarter of 1999.
Selling, general and administrative expenses decreased by approximately
$374,000 from approximately $1.52 million in the three months ended September
30, 1998 to approximately $1.15 million in the three months ended September 30,
1999. As a percentage of revenues, selling, general and administrative expenses
decreased to 15.5% in the three months ended September 30, 1999 from 18.9% in
1998, primarily as a result of the Company's cost reduction measures initiated
in response to the reduced demand for the Company's services. Selling, general
and administrative expenses decreased by approximately $187,000 from
approximately $4.67 million in the nine months ended September 30, 1998 to
approximately $4.48 million in the nine months ended September 30, 1999. As a
percentage of revenues, selling, general and administrative expenses increased
from 16.7% in the nine months ended September 30, 1998 to 21.6% in 1999,
primarily as a result of the $914,807 settlement cost recognized in the second
quarter of 1999 relating to shares of common stock 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. Excluding the $914,807 settlement
costs, selling, general and administrative expenses would have decreased by $1.1
million for the nine months ended September 30, 1999 due to lower activity
levels and the implementation of a cost reduction program.
Depreciation and amortization decreased from approximately $1.7 million
in the three months ended September 30, 1998, or 20% of revenues, to
approximately $1.2 million in 1999 or 17% of revenues, primarily because of the
lower asset base of depreciable properties and lower goodwill balance in the
three month period ended September 30, 1999 over the same period in 1998.
Depreciation and amortization remained relatively flat at $3.7 million for the
nine months ended September 30, 1999 compared to the same period in 1998.
Depreciation and amortization as a percentage of revenues increased to 18% from
13% due to the reduced demand for the Company's services as described above.
Interest expense and amortization of debt discount decreased by
approximately $75,000 for the three months ended September 30, 1999 as compared
to the same period in 1998 due to a lower revolver balance with Fleet and
increased by approximately $553,000 for the nine months ended September 30, 1999
as compared to the same period in 1998. This increase 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 $0 compared to a net gain of
$59,817 for the three months ended September 30, 1999 and 1998, respectively,
Net loss on sale of fixed assets was $7,263 for the nine months ended September
30, 1999 as compared to a net gain of $60,823 for the same period in 1998. Other
income increased by approximately $35,000 in three months ended September 30,
1999 as compared to the same period in 1998. Other income increased by
approximately $28,000 in the nine months ended September 30, 1999 as compared to
the same period in 1998.
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The Company had a loss before provision for income taxes of
approximately $1.4 million and $6.5 million for the three and nine months ended
September 30, 1999, respectively, compared to a loss before provision for income
taxes of approximately $3.6 million and $4.7 million for the three and nine
months ended September 30, 1998, respectively.
Income tax benefit totaled $-0- for the three and nine months ended
September 30, 1999 as compared to income tax benefit of approximately $-0- and
$649,000 for the three and nine months ended September 30, 1998, respectively.
These totals contain Federal and State deferred taxes as well as current
amounts.
The Company had a net loss of approximately $1.4 million and $6.5
million for the three and nine months ended September 30, 1999, respectively,
compared to a net loss of $3.6 million and $4.7 million for the three and nine
months ended September 30, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated by Company operating activities was approximately
$515,000 for the nine months ended September 30, 1999 as compared to cash used
of approximately $1 million for the same period in 1998. Investing activities
used cash of approximately $1.6 million during the nine months ended September
30, 1999 for the acquisition of property, plant, and equipment, including
proceeds from the sale of fixed assets of approximately $35,000. During the nine
months ended September 30, 1998, investing activities used cash of approximately
$5.2 million for the acquisition of property, plants and equipment and
businesses, net of cash acquired, including proceeds of approximately $206,000
from the sale of fixed assets. Financing activities provided net cash of
approximately $456,000 from the proceeds from bank and other borrowings of
approximately $3.3 million during the nine months ended September 30, 1999
offset by principal payments on bank debt, other borrowings and capital leases
of approximately $1.2 million, net of payments on the working capital revolving
loan of approximately $1.3 million and approximately $320,000 of costs related
to debt issuance. For the same period in 1998 financing activities provided net
cash of approximately $5.7 million from the net proceeds from the issuance of
common stock of approximately $3.9 million and, approximately $1.3 million from
the proceeds from bank and other borrowings offset by principal payments on bank
debt, other borrowings and capital leases of approximately $1.4 million, net
payments on the working capital revolving loan of approximately $2.1 million and
approximately $437,000 of costs related to debt issuances.
Cash at September 30, 1999 was $376,419 as compared with cash overdraft at
September 30, 1998 of $115,135.
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 three quarters 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 and third quarters 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 and third quarters of 1999 and decisions by oil
and natural gas producers to make commitments to engage in oil and natural gas
well enhancements.
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The Company's outstanding indebtedness includes primarily senior
indebtedness aggregating approximately $15.5 million at September 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 September 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 October 1999, the Company entered into a forbearance agreement with its
primary secured lender, Fleet Capital Corporation, in which, Fleet agreed
to forebear through October 31, 1999 taking action on defaults under the
Company's loan agreement. This agreement has since expired and been
replaced by a forbearance agreement in which Fleet has agreed to forbear
through December 10, 1999 taking any action on defaults under the Company's
loan agreement. The Company anticipates that it will require a further
forbearance agreement with Fleet. There can be no assurance that Fleet will
enter into such an agreement.
o The Company has continued through the third quarter of 1999 to further
implement a cost reduction program first implemented in the last half of
1998 and intends to continue to focus on cost reduction opportunities.
These cost reductions have included, among other things, reduction in
personnel, reductions in compensation levels and curtailment of
expenditures. The Company continues to make personnel decisions and reduce
expenditures 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.
o The Company is currently in negotiations to restructure a note payable to a
former owner of Diamondback Directional, Inc.
Management also intends to seek 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 Partners, L.P. 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 third quarter of 1999, the
implementation of the foregoing plan together with the cost-reduction program
implemented in 1998, should enable the Company to operate without a further
deterioration of its liquidity condition and capitalize on current
opportunities.
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
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<PAGE>
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 its plan to complete its agreement with
Measurement Specialists, Inc., the Company has no agreements or plans 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
liabilities 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.
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 system failure or miscalculations
causing disruptions of 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 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 $6,000.
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 are now Year 2000 compliant.
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 both cases we have received no negative responses
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to date. 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 believe that all of our internal systems and equipment are Year 2000
compliant as of October 15, 1999. Nonetheless, notwithstanding our belief to the
contrary, 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 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
nine months ended September 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, the ability of the Company to
obtain and extend the forbearance of its secured lenders in seeking to foreclose
against the Company's assets, and the ability of the Company to successfully
assess and 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,
or the absence of the forbearance by the Company's secured lenders, and other
factors could have a
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material adverse effect on the Company. The Company is substantially dependent
upon its ability to implement its plans for addressing its financial situation,
as described above, for its ability to continue its operations as presently
constituted. 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 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 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 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 and Southwick Investments, Inc. were parties in an
arbitration proceeding before the American Arbitration Association arising out
of an agreement entered into by the parties. Southwick was engaged to develop
and implement a plan for raising additional capital and provide certain advisory
services. Southwick was seeking to be awarded damages in an unspecified amount
for breach of the contract and the loss in value to Southwick of an option to
purchase fifty thousand shares of the common stock of the Company at an exercise
price of $4 per share. In August, 1999, the arbitration panel issued its award
requiring that the Company pay Southwick $100,000, but dismissing all other
claims. This award was recognized as a charge to selling, general and
administrative expenses in the third quarter of 1999.
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Greenspan, Inc. filed suit against the Company on April 5, 1999 in
Harris County, Texas, seeking to recover $168,205, plus interest, attorney's
fees, and court cost. The Company has filed a counter claim against Greenspan
for defective downhole wireline tools, seeking the return of approximately
$100,000.00 previously paid by the Company to Greenspan. This case is pending.
The Company is not able 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
in its counterclaims.
The Company is a defendant in an action filed by Saxon Industries, Inc.
in Harris County, Texas, seeking to collect $84,684. The Company is seeking to
resolve this pending action, and is not able to state at this time whether or
not the plaintiff will be successful in its action.
The Company has received threats of litigation by seven other vendors
seeking to recover in the aggregate approximately $135,000. The Company is
seeking to resolve these claims. These amounts are included in amounts payable
at September 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 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 3. DEFAULTS UPON SENIOR SECURITIES
The Company has outstanding secured indebtedness aggregating
approximately $11.1 million as of September 30, 1999 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 September 1999, the Company and Fleet
entered into a Fourth Forbearance Agreement, Fourth Amendment and Waiver to Loan
and Security Agreement (the "Forbearance Agreement") whereby Fleet agreed to
forebear through October 31, 1999 taking action on defaults under the Company's
Loan Agreement. This agreement has since expired and been replaced by a
forbearance agreement in which Fleet agrees to forbear through December 10, 1999
in taking any action on defaults under the Company's loan agreement. 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. If no
extension of the forbearance term is reached with Fleet and 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
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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
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.
At September 30, 1999, the Company was not in compliance with its loan
and security agreement with GECC and is working with GECC to resolve this
situation and to date GECC has not issued a notice of default.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK WARRIOR WIRELINE CORP.
----------------------------
(Registrant)
Date: November 18, 1999 /S/ William L. Jenkins
----------------------------------------
William L. Jenkins
President and Chief Operating Officer
24
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