SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997;
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________________
to _______________________.
Commission File 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 or Organization) Identification No.)
3748 HIGHWAY 45 NORTH, COLUMBUS, MISSISSIPPI 39701
--------------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
(601) 329-1047
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer (1) has filed all Reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
proceeding 12 months (or for such shorter period that the Issuer was required to
file such Reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Outstanding at
Class November 19, 1997
--------------------- ------------------------
COMMON STOCK, PAR VALUE
$.0005 PER SHARE
Transitional Small Business Disclosure Format
YES NO X
---- ----
BLACK WARRIOR WIRELINE CORP.
QUARTERLY REPORT ON FORM 10-QSB
INDEX
PART I -- FINANCIAL INFORMATION
Page
----
Item 1. Consolidated Financial Statements
Financial Information 2
Consolidated Balance Sheets -- September 30, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Operations --
Three Months Ended September 30, 1997 and
September 30,1996 4
Condensed Consolidated Statements of Operations--
Nine Months Ended September 30, 1997 and
September 30, 1996 5
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and
Period Ended September 30, 1996 6
Notes to Condensed Consolidated Financial Statements -- 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
1
PART I -- FINANCIAL INFORMATION
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITY LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this
Quarterly Report on Form 10-QSB are "forward-looking statements" as
defined under the Securities Exchange Act of 1394, as amended, that
involve risks and uncertainties. Forward-looking statements include,
but are not limited to, statements under the heading "Management's
Discussion and Analysis of Financial Condition ad Results of
Operations." Such forward-looking statements relate to the Company's
ability to attain and maintain profitability and cash flow, the
stability of and future prices for oil and gas, pricing in the oil and
gas services industry and the ability of the Company to compete in the
premium services market, the ability of the Company to expand through
acquisitions and to redeploy its equipment among regional operations,
the ability of the Company to upgrade, modernize and expand its
equipment, including its wireline fleet, the ability of the Company to
expand its tubing conveyed perforating services, the ability of the
Company to raise additional capital to meet its requirements and to
obtain additional financing, its ability to successfully implement its
business strategy, and its ability to maintain compliance with the
covenants of its various loan documents and other agreements pursuant
to which securities have been issued. The inability of the Company to
meet these objectives or the consequences on the Company from adverse
developments in general economic conditions, adversed 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 referred to herein 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.
2
ITEM 1. FINANCIAL STATEMENTS
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1997 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 1,016,632 $ 727,454
Accounts receivable, less allowance for
doubtful accounts of $230,038 at September
30,1997 and $136,959 at December 31,1996 4,511,686 1,369,306
Inventories 354,880 183,467
Prepaid expenses 285,070 53,424
Deferred tax asset 138,071 138,071
Federal income tax receivable 0 14,636
------------ -----------
Total current assets 6,306,339 2,486,358
Land and building, held for sale 400,000 400,000
Property, plant & equipment, less accumulated
depreciation of $4,334,286 and $3,729,370 at
September 30, 1997 and December 31, 1996 6,858,272 2,194,591
Goodwill, less amortization of $98,262 and $0 at September 30, 1997 8,192,475 224,305
and December 31, 1996
Other assets 160,471 5,420
------------- ---------------
Total assets $ 21,917,557 $ 5,310,674
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,161,696 $ 808,832
Accounts payable, related party 54,098 89,733
Accrued salaries and vacation pay 61,108 25,085
Income tax payable 558,943 52,548
Accrued interest payable 149,110 29,530
Other accrued expenses 750,275 381,396
Mortgage note payable, related party 550,549 150,000
Notes payable to bank 163,595 18,272
Bridge loan payable, related party 3,000,000
Current maturities of long-term debt and
capital lease obligations 538,868 307,806
-------------- ---------------
Total current liabilities 7,988,242 1,863,202
Deferred tax liability 214,355 214,355
Note payable to bank, less current maturities 99,027 31,486
Mortgage payable, related party 0 230,000
Long-term debt and capital lease obligations,
less current maturities 8,915,318 713,873
-------------- ---------------
Total liabilities 17,216,942 3,052,916
Common stock, par value $.0005 per share,
12,500,000 shares authorized, 2,250,216 and 2,185,216
shares issued at September 30, 1997 and December 31, 1996 1,516 1,093
Additional paid-in capital 7,369,162 5,133,087
Common stock to be issued in connection with acquisition 280,000
(133,333 shares)
Accumulated deficit (2,366,670) (2,293,029)
Treasury stock, at cost, 814,626 shares (583,393) (583,393)
------------- --------------
Total stockholders' equity 4,700,615 2,257,758
------------- --------------
Total liabilities and stockholders' equity $ 21,917,557 $ 5,310,674
============= ==============
See Notes to Condensed Consolidated financial Statements
3
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
Net revenues $ 4,565,840 $ 2,053,346
----------------------------------------------
Operating costs and expenses (4,093,563) (1,632,245)
Depreciation and amortization expense (467,455) (145,042)
----------------------------------------------
Operating income (loss) 4,822 276,059
Interest expense and amortization
of debt discount (154,476) (107,249)
Other income 32,258 7,280
----------------------------------------------
Income (loss) before provision
(benefit)for income taxes (117,396) 176,090
Provision(benefit) for income taxes 0 (595,713)
----------------------------------------------
Income before extraordinary 771,803
gain on extinguishment of debt
Extraordinary gain on extinguishment of
debt, net of taxes 0 1,014,758
----------------------------------------------
Net income (loss) $ (117,396) $ 1,786,561
====================== ==================
Net income (loss) per common share $ (.05) $ 1.23
Weighted average common
shares outstanding 2,466,072 1,448,427
See Notes to Condensed Consolidated Financial Statements
4
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
Net revenues $ 9,218,909 $ 5,200,094
-------------------------------------------------------
Operating costs and expenses (8,034,800) (4,611,439)
Depreciation and amortization expense (931,969) (420,313)
-------------------------------------------------------
Operating income (loss) 252,140 168,342
Interest expense and amortization
of debt discount (408,149) (312,364)
Other income 82,374 84,861
-------------------------------------------------------
Income (loss) before provision
(benefit)for income taxes (73,635) (59,161)
Provision (benefit)for income taxes 0 (595,713)
-------------------------------------------------------
Income before extraordinary
gain on extinguishment of debt 536,552
Extraordinary gain on extinguishment
of debt, net of taxes 0 1,014,758
-------------------------------------------------------
Net income (loss) $ (73,635) $ 1,551,310
===================== ==================
Net income (loss) per common share $ (.03) $ 1.07
Weighted average common
shares outstanding 2,313,324 1,448,427
See Notes to Condensed Consolidated Financial Statements
5
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED:
September 30, 1997 September 30, 1996
Cash flows from operating activities:
Net income(loss) $ (73,641) $ 1,551,310
Adjustments to reconcile net income(loss) to
cash provided by operations:
Depreciation 833,110 420,313
Amortization 88,756
Allowance for doubtful accounts 93,079
Net gain on disposal of plant, property
and equipment (26,570) (76,045)
Gain on extinguishment of debt (1,014,757)
Deferred tax benefit (595,713)
Change in:
Accounts receivable (1,079,489) (467,376)
Inventories (128,860) 8,314
Prepaid expenses (95,145) 87,870
Income/other receivable 14,636 (178)
Other assets 34,950 (366)
Accounts payable and other liabilities 96,980 266,091
------------- -----------------
Cash(used in)provided
by operations (242,194) 179,463
------------- -----------------
Cash flow from investing activities:
Acquisitions of plant,
property, and equipment (1,358,015) (154,416)
Proceeds from sale of plant, property
and equipment 68,548 94,463
Acquisition of business, net of cash acquired (98,427)
------------- -----------------
Cash used in
investing activities (1,387,894) (59,953)
------------- -----------------
Cash flow from financing activities:
Debt issuance costs (190,000)
Proceeds from debt 2,471,018
Principal payments on debt and
lease obligations (361,752) (241,190)
------------- -----------------
Cash(used in) provided by
financing activities 1,191,266 (241,190)
------------- -----------------
Net increase(decrease) 289,178 (121,680)
in cash and cash equivalents
Cash and cash equivalents, beginning of period 727,454 284,825
------------- -----------------
Cash and cash equivalents, end of period $ 1,016,632 $ 163,145
------------- -----------------
Supplemental disclosure of cash flow information:
Taxes paid $ 51,750 $ 0
Interest paid 90,907 57,582
Supplemental schedule of noncash investing and financing:
Acquisition of plant, property and equipment financed under
capital leases and notes payable 1,370,565
Common stock issued for consulting 136,500
Business acquisition, net of cash acquired:
Current assets 2,198,523
Current liabilities (4,901,126)
Property, plant, and equipment 2,810,189
Assets, noncurrent 7,958,499
Long term liabilities (5,686,086)
Equity (2,379,999)
6
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary for a
fair presentation of the consolidated financial position of Black
Warrior Wireline Corp. and subsidiaries (the "Company"). Such
adjustments are of a normal recurring nature. The consolidated results
of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year. The consolidated
financial statements and notes thereto should be read in conjunction
with the consolidated financial statements and notes as of December 31,
1996 and for the years ended December 31, 1996, 1995, and 1994 included
in the Company's 1996 Annual Report on form 10-KSB. Operating results
of the Company for the nine and three months ended September 30, 1997,
are not necessarily indicative of the result that may be expected for
the entire year ended December 31, 1997.
2. DEBT RESTRUCTURING
In November 1995, the Company executed Reorganization Agreements with
the holders of an aggregate of $1,922,130 principal amount of
outstanding debentures and indebtedness pursuant to which the
debentures and indebtedness were agreed to be exchanged for an
aggregate of 961,065 shares of the Company's Common Stock. In addition,
pursuant to such agreements, Common Stock Purchase Warrants of the
Company were to be exchanged with the debenture holders for two new
classes of Common Stock Purchase Warrants. Each class of new warrants
was to represent the right to purchase an aggregate of 183,750 shares
of Common Stock. The Class A warrants were to be exercisable at $3.00
per share for a period of four (4) years and the Class B warrants were
to be exercisable at prices increasing in annual increments over the
first three (3) years after issuance from $3.00 per share to $5.00 per
share and were to expire five (5) years after issuance. Through March
31, 1996, an aggregate of $1,353,380 principal amount of debentures and
indebtedness was exchanged for 648,151 shares of Common Stock and the
remaining $568,750 of debentures to be exchanged pursuant to the
agreements executed in November 1995 was subject to the fulfillment of
certain closing conditions. Issuance of the warrants was not completed
in 1995. In September and October, 1996 the holders of an additional
$800,000 principal amount of Debentures executed Reorganization
Agreements and the Reorganization Agreements entered into in November
1995 were amended so as to provide that in lieu of the issuance of the
Class A warrants, an aggregate of 101,250 shares of Common Stock would
be issued and the exercise price of the Class B warrants would be
reduced to $2.00 per share throughout the five-year term of such
warrants. During 1996, $1,368,750 principal amount of indebtedness was
exchanged for an aggregate of 712,914 shares of Common Stock and an
aggregate of 303,750 Class B warrants were issued. In addition, an
aggregate of 101,250 shares of Common Stock were issued in exchange for
the Company's obligation to issue the Class A warrants. Pursuant to all
such agreements, an aggregate of $2,071,357 of
7
accrued interest and penalties were waived by the debenture holders. In
connection with the foregoing restructuring, the Company effected a
1-for-200 reverse stock split on October 30,1995.
3. BUSINESS COMBINATIONS
Effective June 6, 1997, the Company completed the acquisition of
Production Well Services, Inc. (PWS). PWS is engaged in the wireline
and oil and gas well services business in southern Alabama and southern
Mississippi. The purchase price was financed with the proceeds of a
$2,000,000, 9% Convertible Promissory Note and the issuance of 133,333
shares of the Company's common stock. In addition to providing the
funds to complete the PWS acquisition, a portion of the funds were used
to purchase and improve equipment. For financial statement purposes,
the acquisition was accounted for as a purchase and accordingly, PWS's
results are included in the consolidated financial statements since the
date of acquisition. The acquisition resulted in excess of cost over
fair market value of net assets acquired of approximately $610,000,
which will be amortized over ten years. The following is a summary of
assets acquired, liabilities assumed, and consideration paid in
connection with the acquisition:
Fair value of assets acquired, including goodwill $ 1,146,478
Cash paid for assets acquired, net of cash received 836
Common stock issued in connection with acquisition (279,999)
-----------
Liabilities assumed or incurred $ 867,315
-----------
Effective June 9, 1997, the Company completed the acquisition of
Petro-Log, Inc. (Petro-Log). Petro-Log is engaged in the wireline and
oil and gas well services business in Wyoming, Montana, and South
Dakota. The purchase price was financed from the proceeds of the
$3,000,000, 10% Bridge Loan Note. In addition to providing the funds to
complete the Petro-Log acquisition, a portion of the funds were used to
purchases and improve equipment. For financial statement purposes, the
acquisition was accounted for as a purchase and accordingly,
Petro-Log's results are included in the consolidated financial
statements since the date of acquisition. The following is a summary of
assets acquired, liabilities assumed, and consideration paid in
connection with the acquisition:
Fair value of assets acquired $ 2,402,739
Cash paid for assets acquired (265,239)
-----------
Liabilities assumed or incurred $ 2,137,500
-----------
On October 9, 1997, the Company completed the acquisition, effective as
of September 1, 1997, of Diamondback Directional, Inc .(DDI). DDI is
engaged in providing oil and gas well drilling services, horizontal
drilling as well as conventional directional drilling. The business
will be operated as a division of the Company under the name "
Diamondback Directional". The purchase price for the business an assets
acquired was approximately $8,920,000, of which $2,750,000 was paid in
cash , $3,170,549 by issuance of the
8
Company's promissory notes bearing interest at 6.5% per annum, payable
quarterly, and due on August 31, 1999, and $3,000,000 by issuance of
647,569 shares of the Company's Common Stock. The purchase price is
subject to adjustment, by reduction of the principal amount of the
notes, to the extent the gross receipts from the Diamondback Division
operations for the twelve months ended August 31, 1998 and August 31,
1999 fail to meet a specified performance standard. The Company has
agreed that in the event it files a registration statement under the
Securities Act of 1933 relating to an underwritten public offering of
its shares, the holder of the shares issued in the transaction will
have certain rights to have the shares included in the registration
statement. The acquisition resulted in an excess of cost over fair
market value of net assets acquired of approximately $7,450,000, which
will be amortized over twenty-five years. The following is a summary of
assets acquired, liabilities assumed, and consideration paid in
connection with the acquisition:
Fair value of assets acquired, including goodwill $ 9,531,668
Cash paid for assets acquired, net of cash received 165,976
Common stock issued in connection with acquisition (2,100,000)
-----------
Liabilities assumed or incurred $ 7,597,644
-----------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INDUSTRY OVERVIEW AND ECONOMIC FACTORS IMPACTING COMPANY OPERATIONS
The overall level of activity and profitability experienced by the
Company and the oil and gas well service industry is directly related
to the demand for the Company's services by the domestic oil and gas
industry. The principal factors driving the demand for the Company's
services are market price of oil and natural gas and the continuing
technological advances in the industry. In recent years, there have
been some periods of relative price stability but only isolated areas
of real growth. In 1996, however, most of the industry experienced some
growth in demand and pricing. Management of the Company believes that
the continuing stability of domestic oil prices and relatively high gas
prices should help continue this trend through 1997 and beyond.
Advances in seismic technology and drilling practices have increased
success rates, lowered finding costs and increased production rates,
which in turn have allowed operators to conduct more stable and active
programs even in periods of lower energy prices.
Increased demand for the services provided by the Company and its
competitors coupled with a general consolidation in the service sector
has reduced downward pressure on pricing. This has led to a reduction
in "predatory" pricing used by some companies to increase market share.
The Company's continuing upgrading of technological capabilities has
enabled the Company to compete in the premium services market which has
better margins and lower discounts. The Company believes that continued
improvements will be seen in the remainder of 1997 and beyond as this
trend continues.
9
CORPORATE OPERATIONAL AND EXPANSION STRATEGY
The Company's strategy is to continue to aggressively expand through
acquisitions and to take advantage of improving market conditions and
the benefits of these acquisitions. The Company also intends to expand
its operations through the redeployment of equipment among the
Company's existing regional operations. The Company seeks acquisitions
of companies with existing operations, established reputations and
equipment that can be assimilated into the Company's operations.
During the year ended December 31, 1996 and through September 30, 1997,
the Company acquired the following companies. On November 19, 1996, the
acquisition of Dyna-Jet,Inc., a Wyoming corporation ("Dyna-Jet"), was
completed. Dyna-Jet is engaged in the wireline and oil and gas well
services business in the Gillette, Wyoming area. On June 6, 1997, the
Company acquired Production Well Services, Inc., a Mississippi
corporation ("PWS"). PWS is engaged in the wireline and oil and gas
services business southern Mississippi and southern Alabama area. On
June 9, 1997 the Company acquired Petro-Log, Incorporated, a Wyoming
corporation ("Petro-Log"). Petro-Log is engaged in the wireline and oil
and gas well services business in Wyoming, Montana and South Dakota.
The Company has consolidated the management of Dyna Jet and Petro Log
and is operating the combined business as Petro Log in the Rocky
Mountains. Effective September 1, 1997, the business and assets of
Diamondback Directional, Inc. were acquired by the Company. DDI, a
Texas corporation located in Conroe, was engaged in providing oil and
gas well drilling services, horizontal drilling as well as conventional
directional drilling. The Company will continue the operations of DDI
as Diamondback Directional, a division of the Company. The Company is
committed to expend $4,000,000.00 on new equipment for its Diamondback
Directional division during 1998 and 1999. The Company anticipates it
will fund these expenditures from its anticipated cash flow as well as
from the proceeds of public or private debt or equity from arrangements
that may be entered into. Herein, Dyna-Jet, PWS, Petro-Log, and DDI are
referred to as the "Acquired Companies".
The Company also intends to expand its tubing conveyed perforating
services. The Company is providing this service in Alabama and
Mississippi and plans to introduce this service throughout its
operational areas.
The Company has purchased state of the art downhole tools including
segmented bond tools, and magnetic and 40-arm casing inspection tools.
These tools were placed into service in the second quarter and third
quarters of 1997 and their impact should be felt during the remainder
of the year. These tools are expected to enable the Company to provide
services unavailable from smaller wireline competitors and thereby
enable the Company to provide services in a less price competitive
environment.
The ongoing modernization and expansion of the Company's wireline fleet
continued in the third quarter with new and refurbished trucks being
delivered to all regions. The
10
Company plans to accelerate its production of wireline units to two per
month by the second quarter of 1998. The Company expects to fund the
production of wireline units out of available cash flow and/or from the
proceeds of additional borrowing.
RESULTS OF OPERATIONS
Revenues by division for the quarters and nine months ended
September 30, 1997 and September 30, 1996 are summarized
below:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1997 30, 1996 30, 1997 30, 1996
--------------------------- ---------------------------
Wireline services
(logging, perforating) $ 6,548,856 $ 3,681,558 $ 2,815,176 $ 1,544,453
Directional drilling 1,282,086 0 1,282,086 0
services
Completion (workover
services) 1,180,922 1,294,715 406,164 449,000
Tools and Packers 207,045 223,821 62,414 59,893
(sales and rentals of
bridge plugs)
-----------------------------------------------------------------------------------
Total $ 9,218,909 5,200,094 $ 4,565,840 2,053,346
=================== ========= ================== =========
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
The Company had a loss, before provision for income taxes, of $117,396
for the third quarter of 1997 as compared with income, before provision
for income taxes, of $1,786,561 for the same period of 1996. The loss
before provision for income taxes of $117,396 can be attributed to
several factors. The costs of tools and supplies increased $156,000 as
compared with the same period ended September 30, 1996. Equipment
rental increased $116,000 as compared with the three months ended
September 30, 1996, primarily as a result of the rental of steering
tools used in conjunction with providing directional and horizontal
drilling services. Tools were rented on an interim basis in order to
determine the market of these services. Salaries increased $929,182 for
the three months ended September 30, 1997. This increase can be
attributed to the increased personnel of the Acquired Companies as well
as increased salary levels. Depreciation and amortization increased
$322,412 for the three month ended September 30, 1997,
11
primarily because of the larger asset base and amortization of
goodwill. Operating costs and expenses increased by $2,461,319 in the
third quarter of 1997 as compared with the same period in 1996. This
was primarily due to the Company's expanding volume of business
resulting from the various acquisitions and increased costs of
materials in the industry.
Interest expense increased by $47,227 in the third quarter of 1997 as
compared with the same period in 1996. Interest expense relating to the
issuance of the St. James Capital debt for the third quarter totaled
$117,377 and interest related to the DDI debt totaled $16,939.
Net revenues increased by $2,512,494 to $4,565,840 for the third
quarter of 1997 compared with net revenues of $2,053,346 in the same
period in 1996. While completion services and sales and rentals of
tools and packers declined, there was a substantial increase in
wireline service revenues. A substantial portion of this increase
resulted from revenues from the PWS and Petro Log acquisitions. The DDI
acquisition contributed $1,282,086 in revenues for September 1997. The
Company expects a continued increase in demand from most of the
Company's customers during 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
The Company had a loss, before provision for income taxes, of $73,635
for the nine months ended September 30, 1997 as compared with income,
before provision for income taxes, of $1,551,311 for the same period of
1996. The loss before provision for income taxes of $73,635 can be
attributed to several factors. The costs of tools and supplies
increased $294,392 as compared with the same nine month ended September
30, 1996. Equipment rental increased $226,125 as compared with the nine
month ended September 30, 1996, primarily as a result of the rental of
steering tools used in conjunction with providing directional and
horizontal drilling services. Tools were rented on an interim basis in
order to determine the market of these services. Salaries increased
$1,320,139 for the nine months ended September 30, 1997 with the total
number of employees increasing to 176 at September 30, 1997 from 98 at
September 30, 1996. This increase can be attributed to increased
personnel of the Acquired Companies as well as increased salary levels.
DDI increased the number of salaried employees and contract drillers by
40 persons during the nine month period. Depreciation and amortization
increased $511,655 for the nine months ended September 30, 1997,
primarily because of the larger asset base and amortization of
goodwill. Operating costs and expenses increased by $3,423,362 in the
nine month ended September 30, 1997 as compared with the same period in
1996. This was due to the Company's expanding volume of business with
the various acquisitions and increased costs of materials in the
industry.
12
Revenues contributed by the Acquired Companies for the nine month
period ended September 30, 1997, were $2,672,687. DDI had revenues of
$1,282,086, PWS had revenues of $480,058 and Petro-Log/Dyna-Jet
contributed $910,543 for the nine month period ended September 30,
1997. The Company's revenues also increased as a consequence of the
increased utilization of its previously owned oil and gas well service
operations as well as improved pricing for the Company's services.
In conjunction with the financing of the acquisitions, the Company
entered into an agreement with Southwick Investments and incurred fees
totaling $190,000 that will be expensed over the life of a 9%
Convertible Promissory Note and the 10% Bridge Loan issued in June
1997. The fee was paid from the proceeds of the two notes. In addition,
a total of 65,000 shares of the Company's common stock was issued to
Swartwood, Hesse Inc., and Pangaea Investment Consultants, LTD in
consideration of two year consulting agreements between such firms and
the Company. The total cost of $136,500 will be expensed over the term
of the consulting agreements. Interest expense related to the
Diamondback Purchase Promissory Note was $16,939.
Interest expense increased by $95,784 in the nine month ended September
30, 1997 as compared with the same period in 1996.
Notes with three to five year maturities were used to purchase new
vehicles and equipment during the first nine months of 1997. An
aggregate of $361,750 in principal payments was paid during the nine
months ended September 30, 1997. This amount reduced notes payable.
Additional note payables issued during the nine months totaled
$1,370,565. Other debt increased during the first nine months in the
amount of $7,900,000 from the St. James financing and $3,000,000 from
the DDI acquisition. Interest resulting from the debt ranged from prime
to 12.00%.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by the Company's operating activities was $590,712 for the
nine months ended September 30, 1997 as compared with cash provided of
$179,363 for the nine month period ended September 30, 1996. Investing
activities of the Company used cash of $1,358,015 during the nine month
period ended September 30, 1997 for the acquisitions of property,
plant, and equipment, and acquisition of new business offset by
proceeds from the sale of fixed assets of $68,548. Financing activities
provided cash of $361,750 to pay principal payments of long-term notes
and capital lease obligations.
The acquisitions of PWS and Petro-Log were financed with the proceeds
of borrowing from St. James Capital Partners, L.P. ("St. James").
Pursuant to an Agreement for Purchase and Sale dated June 6, 1997 (the
"June Agreement") between the Company and St. James, the Company agreed
to issue and sell and St. James agreed to purchase the Company's
promissory notes aggregating $5,000,000. Of such amount, $2,000,000 is
represented by the Company's 9% Convertible Promissory Note due June 6,
2002, and
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$3,000,000 is represented by the Company's 10% Bridge Loan Note
originally due September 4, 1997, which was extended November 30, 1997.
The $2,000,000 note is convertible into shares of the Company's Common
Stock at an initial conversion price of $2.75 per share, increasing one
year after issuance to $3.25 per share and further increasing two years
after issuance to $3.75 per share, subject to anti-dilution adjustment
for certain issuances of securities by the Company at prices per share
of Common Stock less than the conversion price then in effect. Payment
of principal and interest on both of the notes is collateralized by
substantially all the assets of the Company. The Company is seeking to
refinance the Bridge Note with the proceeds of a senior secured loan
not yet obtained. St. James has agreed to subordinate the indebtedness
owing to it to up to $4,000,000 of indebtedness of the Company to a
senior lender out of which, if borrowed prior to its maturity date, the
Bridge Note must be paid, and up to $2,000,000 of working capital
financing. St. James was also issued warrants to purchase an aggregate
of 666,000 shares of Common Stock at an initial exercise price of $2.75
per share, increasing one year after issuance to $3.25 per share and
further increasing two years after issuance to $3.75 per share, subject
to anti-dilution adjustment for certain issuances of securities by the
Company at prices per share of Common Stock less than the exercise
price then in effect. The shares issuable on conversion of the note and
exercise of the warrants have demand and piggy-back registration rights
under the Securities Act of 1933.
Of the $5,000,000 proceeds from the sale of the notes, $2,000,000 was
advanced concurrently with the acquisition of PWS and $3,000,000 was
advanced concurrently with the acquisition of Petro-Log. In addition to
providing the funds to complete the PWS and Petro-Log acquisitions, the
proceeds were used to purchase and improve equipment, including the
purchase of four additional wireline trucks, and for working capital.
On October 9, 1997, the Company entered into an Agreement for Purchase
and Sale (the "October Note Purchase Agreement") with St. James,
whereby St. James purchased and the Company sold its $2.9 million
convertible promissory note (the "October Note") bearing interest at 7%
per annum due on October 9, 1999. Payment of principal and interest on
the October Note is collateralized by substantially all the assets of
the Company. The October Note is convertible into shares of the
Company's Common Stock at a conversion price of $4.6327 per share,
subject to anti-dilution adjustment for certain issuances of securities
by the Company at prices per share of Common Stock less than the
conversion price then in effect. St. James has agreed to subordinate
its security interests and rights to the indebtedness and security
interests of the lenders providing up to $4.5 million pursuant to a
term loan and $3.0 million pursuant to a revolving credit facility,
neither of which financings have yet been arranged. St. James was also
issued in consideration of a payment of $36,250 a warrant to purchase
an aggregate of 725,000 shares of Common Stock exercisable at a price
of $4.6327 per share, subject to anti-dilution adjustment for certain
issuance of securities by the Company at prices per share of Common
Stock less than the conversion price then in effect. The shares
issuable on conversion of the October Note and exercise of the warrant
have demand and piggy-back registration rights under the securities Act
of 1933. The Company agreed that one person
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designated by St. James would be nominated for election to the
Company's Board of Directors. The October Agreement grants St. James
certain preferential rights to provide future financing to the Company,
subject to certain exceptions.
The notes issued to St. James contain various affirmative and negative
covenants, including a prohibition against the Company consolidating,
merging or entering into a share exchange with another person, with
certain exceptions, without the consent of St. James. Events of default
under the notes include, among other events, (i) a default in the
payment of principal or interest: (ii) a breach of the Company's
covenants, representations, and warranties under the October Agreement
or the June Agreement; (iii) a breach under the other agreements
between the Company and St. James, subject to certain exceptions; (iv)
any person or group of persons acquiring 40% or more of the voting
power of the Company's outstanding shares who was not the owner thereof
as of October 10, 1997, a merger of the Company with another person,
its dissolution or liquidation or a sale of all or substantially all
its assets; and (v) certain events of bankruptcy. In the event of a
default under any of the notes issued to St. James, it could seek to
foreclose against the collateral for the Notes. St. James received an
origination fee of $36,250 in connection with the October transaction.
Of the proceeds from the $2.9 million October Note , $2,750,000 was
applied to the purchase of the DDI assets and the balance was used to
purchase additional equipment and for transaction expenses.
The Company is engaged in negotiations with an institutional lender to
borrow $4.5 million. If consummated, the proceeds of the borrowing will
be used to repay the St. James Bridge Note as well as other
indebtedness and to provide working capital. The borrowing would bear
interest at a rate of equal to 2.75% over the yield on US Treasury
Notes having like term at the time of closing and would be amortized in
equal monthly installments over an 84-month period with a balloon
payment of the remaining outstanding principal due at the end of the
60th month. The borrowing would be collateralized by a senior security
interest in substantially all of the Company's wireline trucks and
other equipment. Such borrowing is expected to be completed in the
fourth quarter of 1997.
The Company may, if in the opinion of management market and other
conditions are favorable, seek to raise additional equity capital
by a public or private offering of its securities. The Company has
not entered into any agreements in principal or other agreements
relating thereto and there can be no assurance the Company will
raise addtional capital from any such sources. Management believs
that the Company's exisitng and anticipated cash flows will be
adequate to mmet the Comany's current requirments for funds.
St. James has agreed to convert the $2,000,000 Note into shares of the
Company's Common Stock at such time as the Company has filed a
registration statement under the Securities Act of 1933 relating to the
shares issuable on conversion of that note, and the
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October Note, and on exercise of the Warrants issued to St. James and
such registration statement has been declared effective.
By the end of 1998, the Company expects that its various administrative
and well servicing systems will have the capability to process
transactions dated beyond 1999. The costs to complete its efforts to
modify or replace such systems are not expected to be material.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). SFAS 128 supersedes existing generally accepted accounting
principles relative to the calculation of earnings per share, is
effective for years ending after December 15, 1997 and requires
restatement of all prior period earnings per share information upon
adoption. Generally, SFAS 128 requires a calculation of basic earnings
per share, which takes into consideration income (loss) available to
common shareholders and the weighted average of common shares
outstanding. SFAS 128 also requires the calculation of a diluted
earnings per share, which takes into effect the impact of all
additional common shares that would have been outstanding if all
dilutive potential common shares relating to options , warrants, and
convertible securities had been issued, as long as their effect is
dilutive, with a related adjustment of income available to common
shareholders, as appropriate. SFAS 128 requires dual presentation of
basic and diluted earnings per share on the face of the statement of
operation and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation. The Company
does not expect the effect of its adoption of SFAS 128 to be material.
The Board has issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in
the financial statements. Comprehensive income is defined as the change
in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. It includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners. This Statement does
not require a specific format for the presentation of comprehensive
income but requires an amount representing total comprehensive income
for the period. This Statement is effective for fiscal years beginning
after December 15, 1997 with reclassification of earlier periods
required. Other than the additional presentation requirements of this
Statement, the Company does not anticipate a material impact on the
financial position, results of operations, earnings per share or cash
flows.
The Board has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports.
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This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to
allocate resources to segments.
The financial information required includes a measure of segment profit
or loss, certain specific revenue and expense items, segment assets and
reconciliation of each category to the general financial statements.
The descriptive information required includes the way that the
operating segments were determined, the products and services provided
by the operating segments, differences between the measurements used in
reporting segment information and those used in the general purpose
financial statements, and changes in the measurement of segment amounts
from period to period.
This Statement is effective for financial statements for periods
beginning after December 15, 1997 with restatement of earlier periods
required in the initial year of application. This Statement need not be
applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the
initial year of application is to be reported in financial statements
for interim periods in the second year of application. The Company is
currently determining if these disclosures will be applicable and,
therefore, required in future periods.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 1, 1997 an arbitration proceeding was commenced before the
American Arbitration Association, New York, New York against the
Company by Monetary Advancement International ("MAI"). MAI alleges that
the dispute arises out of a breach of a consulting agreement allegedly
entered into in November 1995. MAI is seeking the issuance to it of
160,000 shares if the Company's Common Stock and compensatory and
punitive damages. Management of the Company believes that it has
substantial and meritorious defenses to the claim asserted by MAI,
intends to defend itself vigorously in the arbitration proceeding and
intends to assert counterclaims. Management of the Company believes
that it will not incur any material liability to MAI in connection with
the arbitration proceeding and that the claim will not have a material
adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting of stockholders on July 21, 1997. At
the meeting, the following persons were elected as Directors of the
Company to serve until the 1998
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annual meeting of stockholders and until the election and qualification
of their successors.
William L. Jenkins
John A. McNiff, Sr.
Michael Brod
John L. Thompson
In addition, the following matters were voted upon at the annual
meeting. The number of votes cast for, against or withheld, and the
number of abstentions or non-votes is stated.
Proposal to approval the adoption of the 1997 Omnibus Incentive Plan.
In Favor 1,034,168
Against 64,359
Abstained 23,054
Proposal to approve the adoption of the 1997 Non-Employee Stock
Option.
In Favor 1,069,093
Against 32,224
Abstained 20,009
Proposal to amend the Certificate of Incorporation to decease the
number of shares of Common Stock authorized from
50,000,000 to 12,500,000.
In Favor 1,702,043
Against 1,362
Abstained 20,209
Proposal to amend the Certificate of Incorporation to authorize the
issuance of up to 2,500,000 shares of Preferred Stock.
In Favor 1,115,620
Against 25,650
Abstained 20,016
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment filed July 22, 1997
3.2 Certificate of Amendment filed October 31, 1997
10.1 1997 Omnibus Incentive Plan
10.2 1997 Non-Employee Stock Option Plan
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27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K/A on August 21,
1997, with respect to Item 7 of Form 8-K.
No other Items of Part II are applicable to the Registrant for the
period covered by this Quarterly Report on Form 10-QSB.
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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 19th , 1997
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William L. Jenkins
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President and Chief Operating Officer
(Principal Executive, Financial and
Accounting Officer)
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