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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
_X_ Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 2003; 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.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2904094
- -------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S employer
incorporation of organization) identification no.)
100 ROSECREST LANE, COLUMBUS, MISSISSIPPI 39701
-----------------------------------------------
(Address of principal executive offices, zip code)
(662) 329-1047
-----------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
------- -------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 14, 2003, 12,499,528 shares of the Registrant's Common
Stock, $.0005 par value, were outstanding.
BLACK WARRIOR WIRELINE CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 2003 (unaudited)
and December 31, 2002 3
Condensed Statements of Operations -
Three Months Ended June 30, 2003 (unaudited) and
June 30, 2002 (unaudited) 4
Condensed Statements of Operations -
Six Months Ended June 30, 2003 (unaudited) and
June 30, 2002 (unaudited) 5
Condensed Statements of Cash Flows -
Six Months Ended June 30, 2003 (unaudited) and
June 30, 2002 (unaudited) 6
Notes to Condensed Financial Statements -
Three and Six Months Ended June 30, 2003 (unaudited) and
June 30, 2002 (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK WARRIOR WIRELINE CORP.
- ----------------------------
CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 6,385,587 $ 2,388,866
Accounts receivable, less allowance of $396,388 and $845,635, respectively 13,251,697 12,801,228
Other receivables 124,438 130,540
Prepaid expenses 1,321,698 15,320
Other current assets 893,349 781,272
------------ ------------
Total current assets 21,976,769 16,117,226
Inventories of tool components and sub-assemblies, net 5,048,380 4,936,347
Property, plant and equipment, less accumulated depreciation 21,664,648 24,569,343
Other assets 662,772 888,411
Goodwill and other intangible assets 3,257,514 3,159,782
------------ ------------
Total assets $ 52,610,083 $ 49,671,109
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 6,952,253 $ 6,970,438
Accrued salaries and vacation 1,420,707 1,106,070
Accrued interest payable 71,880 122,660
Other accrued expenses 1,756,441 1,048,985
Current maturities of long-term debt and capital lease obligations 12,069,981 10,928,255
------------ ------------
Total current liabilities 22,271,262 20,176,408
Long-term debt, less current maturities 11,952,109 12,370,084
Notes payable to related parties, net of unamortized discount 24,320,417 24,238,263
Non current accrued interest payable to related parties 12,650,976 10,798,224
Deferred revenue 116,625 136,575
------------ ------------
Total liabilities 71,311,389 67,719,554
------------ ------------
Stockholders' deficit:
Preferred stock, $.0005 par value, 2,500,000 shares authorized,
none issued at June 30, 2003 or December 31, 2002 -- --
Common stock, $.0005 par value, 175,000,000 shares authorized,
12,504,148 shares issued and outstanding at
June 30, 2003 and December 31, 2002 6,252 6,252
Additional paid-in capital 20,275,963 20,275,963
Accumulated deficit (38,297,139) (37,603,083)
Treasury stock, at cost, 4,620 shares at June 30, 2003 and December 31, 2002 (583,393) (583,393)
Loan to shareholder (102,989) (144,184)
------------ ------------
Total stockholders' deficit (18,701,306) (18,048,445)
------------ ------------
Total liabilities and stockholders' deficit $ 52,610,083 $ 49,671,109
------------ ------------
See accompanying notes to the condensed financial statements
3
Black Warrior Wireline Corp.
- ----------------------------
CONDENSED STATEMENTS OF OPERATIONS
For the three months ended June 30, 2003 and June 30, 2002
JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
Revenues $ 19,023,013 $ 13,451,814
Operating costs 12,488,493 9,503,456
Selling, general and administrative expenses 2,687,674 2,514,861
Depreciation and amortization 1,921,992 2,023,907
------------ ------------
Income (loss) from operations 1,924,854 (590,410)
Interest expense and amortization of debt discount (1,366,992) (1,365,705)
Net gain on sale of fixed assets 15,428 154,278
Other income 29,939 6,895
------------ ------------
Income (loss) before provision for income taxes 603,229 (1,794,942)
Provision for income taxes -- --
------------ ------------
Net income (loss) $ 603,229 $ (1,794,942)
============ ============
Net income (loss) per share - basic and diluted: $ .05 $ (.14)
============ ============
See accompanying notes to the condensed financial statements.
4
Black Warrior Wireline Corp.
- ----------------------------
CONDENSED STATEMENTS OF OPERATIONS
For the six months ended June 30, 2003 and June 30, 2002
JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
Revenues $ 34,605,699 $ 26,101,417
Operating costs 23,645,216 18,647,070
Selling, general and administrative expenses 5,363,969 5,345,171
Depreciation and amortization 3,907,893 3,971,967
------------ ------------
Income (loss) from operations 1,688,621 (1,862,791)
Interest expense and amortization of debt discount (2,673,682) (2,661,147)
Net gain on sale of fixed assets 244,473 172,611
Other income 46,532 14,539
------------ ------------
Loss before provision for income taxes (694,056) (4,336,788)
Provision for income taxes -- --
------------ ------------
Net loss $ (694,056) $ (4,336,788)
============ ============
Net loss per share - basic and diluted: $ (.06) $ (.35)
============ ============
See accompanying notes to the condensed financial statements.
5
BLACK WARRIOR WIRELINE CORP.
- ----------------------------
CONDENSED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2003 and June 30, 2002
JUNE 30, 2003 JUNE 30, 2002
(Unaudited) (Unaudited)
Cash flows from operating activities: $ 4,018,691 $ 1,906,460
----------- -----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (1,400,769) (4,323,245)
Proceeds from sale/damage of property, plant and equipment 680,049 211,351
----------- -----------
Cash used in investing activities (720,720) (4,111,894)
----------- -----------
Cash flows from financing activities:
Debt issuance costs (25,000) (66,081)
Proceeds from bank and other borrowings 4,398,774 4,046,045
Principal payments on long-term debt, notes payable and
capital lease obligations (3,468,302) (3,091,659)
Proceeds on working revolver, net (206,722) (457,117)
Loan to shareholder -- (190,000)
----------- -----------
Cash provided by financing activities 698,750 241,188
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,996,721 (1,964,246)
Cash and cash equivalents, beginning of period 2,388,866 2,819,236
----------- -----------
Cash and cash equivalents, end of period $ 6,385,587 $ 854,990
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 871,710 $ 539,952
----------- -----------
Income taxes $ -- $ --
----------- -----------
See accompanying notes to the condensed financial statements.
6
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 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-K for the fiscal year
ended December 31, 2002 should be read in conjunction with this document.
Business of the Company. 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, and (b) directional oil and gas
well drilling and downhole surveying services. In July 2001, the Company sold
its workover and completion line of business.
Liquidity The Company reported net income (loss) for the six months
ended June 30, 2003 of approximately ($694,000) and for the years ended December
31, 2002, 2001, and 2000 of approximately ($7,600,000), $5,000,000 and
($4,000,000), respectively. Cash flows provided by (used in) operations were
approximately $4,000,000 for the six months ended June 30, 2003 and $5,400,000,
$16,350,000 and ($2,900,000) for the years ended December 31 2002, 2001, and
2000, respectively. The Company is highly leveraged. The Company's outstanding
indebtedness includes primarily senior indebtedness aggregating approximately
$21.8 million at June 30, 2003, other indebtedness of approximately $2.2 million
and approximately $36.9 million (including approximately $12.7 million of
accrued interest) owing to St. James Merchant Bankers, L.P. ("SJMB") and St.
James Capital Partners, L.P. ("SJCP") (collectively "St. James") and its
affiliates and directors, who are related parties. The Company's debt and
accrued interest owed to related parties is convertible into common stock and is
subordinate to its Senior Credit Facility with General Electric Capital
Corporation ("GECC"). In addition, no repayments of the related party debt or
accrued interest can be made until the Senior Credit Facility is completely
extinguished.
As discussed in Note 9 to the Company's financial statements for the
year ended December 31, 2002, prior to June 10, 2002, the Senior Credit Facility
was subject to affirmative and general covenants and certain financial
covenants. The Company was in violation of certain of these covenants as of
December 31, 2001, resulting in an event of default. These covenant violations
also resulted in violations and events of default of the subordinated debt under
the cross default provisions of the subordinated debt agreements. All covenant
violations and events of default were waived as of June 10, 2002 by the
respective debt-holders.
7
Through April 14, 2003, the Company has amended the terms of its Senior
Credit Facility with GECC on five occasions, the principal effects of which were
to relax certain of the terms of the financial covenants so as to be more
favorable to the Company. In connection with the April 2003 amendment to the
Credit Facility, the Company is required to maintain cumulative operating cash
flow commencing with the month ended March 31, 2003 of $800,0000 increasing
monthly thereafter to aggregate $9,500,000 for the twelve months ended February
28, 2004; limit capital expenditures to $8.0 million in 2003 and $5.0 million
during the six-months ended June 30, 2004; and comply with certain fixed
charges, interest coverage and senior funded debt to EBITDA ratios.
Strong and stable market conditions and the Company's ability to meet
intense competitive pressures are essential to the Company's maintaining a
positive liquidity position and meeting debt covenant requirements. Decreases in
market conditions or failure to mitigate competitive pressures could result in
non-compliance with its debt covenants and the triggering of the prepayment
clauses of the Company's debt. The Company believes that if market conditions
remain stable throughout 2003, the Company will be able to generate sufficient
cash flow to meet its working capital needs and comply with its debt covenants.
If market conditions decline significantly, the Company may be required to
obtain additional amendments to its Senior Credit Facility, or obtain capital
through equity contributions or financing, including a possible merger or sale
of assets, or other business combination. The Company can give no assurances
that adequate financing could be obtained or that a suitable business
combination or asset sale could be consummated.
Management may in the future seek to raise additional capital, which
may be either debt or equity capital or a combination thereof or enter into
another material transaction involving the Company, including a possible sale of
the Company. As of June 30, 2003, no specific plans or proposals have been made
with regard to any additional financing or any other transaction. The Company
may engage in other material corporate transactions.
In November 2001, the Company retained Simmons & Company International
("Simmons") as its financial advisor in connection with examining various
alternative means to maximize shareholder value including a possible merger,
sale of assets or other business combination involving the Company. At the
Company's request, Simmons intensified its efforts in this regard, during the
second quarter of 2003. At August 14, 2003, the Company had not entered into any
agreements or letters of intent regarding any such business combination and it
was not engaged in any substantive negotiations with any person in that regard.
Any such transaction will be dependent upon the ability of the Company to reach
an agreement on terms acceptable to its Board of Directors and principal
stockholders. There can be no assurance that the Company will enter into any
transaction and no representation is made as to the terms on which a transaction
may be entered into or that a transaction will occur.
In the event the Company should seek or be required to raise additional
equity capital, there can be no assurance that such a transaction can be
effected in the light of the Company's existing capital structure or that such a
transaction will not dilute the interests of the Company's existing security
holders. Fluctuations in interest rates may adversely affect the Company's
ability to raise capital.
8
2. STOCK-BASED COMPENSATION
The Company applies principles from SFAS No. 123 in accounting for its
stock option plan. In accordance with SFAS No. 123, the Company has elected not
to report the impact of the fair value of its stock options in the statements of
operations but, instead, to disclose the pro forma effect and to continue to
apply APB Opinion No. 25 and related interpretations in accounting for its stock
options. Accordingly, no compensation expense has been recognized for stock
options issued to employees with an exercise price at fair market value or
above. Compensation expense for options issued to non-employees of the Company
are excluded from the pro forma effect below, as compensation expense has been
recognized in the accompanying financial statements. Had compensation cost for
all of the Company's stock options issued been determined based on the fair
value at the grant dates for awards consistent with the method prescribed in
SFAS No. 123, the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) - as reported $ 603,229 $(1,794,942) $ (694,056) $(4,336,788)
Less: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (3,219) (50,322) (6,438) (100,644)
----------- ----------- ----------- -----------
Net income (loss) - pro forma $ 600,010 $(1,845,264) $ (700,494) $(4,437,432)
----------- ----------- ----------- -----------
Income (loss) per share - as reported (basic and diluted): $ .05 $ (.14) $ (.06) $ (.35)
----------- ----------- ----------- -----------
Income (loss) per share - pro forma (basic and diluted): $ .05 $ (.15) $ (.06) $ (.36)
----------- ----------- ----------- -----------
3. EARNINGS PER SHARE
The calculation of basic and diluted earning per share ("EPS") is as follows:
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2002
------------------- -------------------
Income Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net income (loss) $ 603,229 $(1,794,942)
========= ===========
BASIC AND DILUTED EPS
Income (loss) available
to common shareholders $ 603,229 12,499,528 $0.05 $(1,794,942) 12,491,788 $(0.14)
9
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2002
------------------- -------------------
Income Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------- ----------- ------ --------- ----------- ------
Net loss $(694,056) $(4,336,788)
========== ===========
BASIC AND DILUTED EPS
Loss available to common
shareholders $(694,056) 12,499,528 $(0.06) $(4,336,788) 12,491,788 $(0.35)
Options and warrants to purchase 90,810,464 and 81,480,519 shares of
common stock at prices ranging from $0.75 to $8.01 were outstanding during the
three and six months ended June 30, 2003 and 2002, respectively, but were not
included in the computation of diluted EPS because the effect would be
anti-dilutive.
Convertible debt instruments, including convertible interest, which
would result in the issuance of 49,250,416 and 44,502,607 shares of common
stock, if the conversion features were exercised, were outstanding during the
three and six months ended June 30, 2003 and 2002, respectively, 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 $0.75 per share as
of June 30, 2003.
4. INVENTORIES OF TOOL COMPONENTS AND SUB-ASSEMBLIES, NET
Inventories consist of tool components, subassemblies and expendable
parts used in directional oil and gas well drilling activities. Components,
subassemblies and expendable parts are capitalized as long-term inventory and
expensed based on a per hour of motor use calculation and then adjusted to
reflect physical inventory counts. The Company's classification and treatment is
consistent with industry practice.
5. COMMITMENTS AND CONTINGENCIES
The Company is 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 financial position, results
of operations or cash flows of the Company.
10
6. SEGMENT AND RELATED INFORMATION
At June 30, 2003, the Company is organized into, and manages its business
based on the performance of two 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 two reportable segments:
wireline and directional drilling, 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 ended June 30,
2003 included Burlington Resources, Chevron and Anadarko.
DIRECTIONAL DRILLING - This segment performs procedures to enter
hydrocarbon producing zones directionally, using specialized drilling equipment,
and expand the area of interface of hydrocarbons and thereby greatly enhancing
recoverability. It also 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 ended June 30, 2003 included Encore Operating, Cortez and Chesapeake.
The accounting policies of the reportable segments are the same as those
described in Note 3 of the Company's Annual Report of Form 10-K for the fiscal
year ended December 31, 2002. The Company evaluates the performance of its
operating segments based on earnings before interest, taxes, depreciation, and
amortization (EBITDA), which is derived from revenues less operating expenses
and selling, general, and administrative expenses. Segment information for the
three and six months ended June 30, 2003 and 2002 is as follows:
Three months ended June 30, 2003
DIRECTIONAL
WIRELINE DRILLING TOTAL
-------- -------- -----
Segment revenues $12,148,678 $6,874,335 $19,023,013
Segment EBITDA $ 2,792,823 $1,054,023 $ 3,846,846
Three months ended June 30, 2002
DIRECTIONAL
WIRELINE DRILLING TOTAL
-------- -------- -----
Segment revenues $8,131,321 $5,320,493 $13,451,814
Segment EBITDA $ 670,193 $ 763,304 $ 1,433,497
11
Six months ended June 30, 2003
DIRECTIONAL
WIRELINE DRILLING TOTAL
-------- -------- -----
Segment revenues $22,518,492 $12,087,207 $34,605,699
Segment EBITDA $ 4,073,804 $ 1,522,710 $ 5,596,514
Six months ended June 30, 2002
DIRECTIONAL
WIRELINE DRILLING TOTAL
-------- -------- -----
Segment revenues $15,729,374 $10,372,043 $26,101,417
Segment EBITDA $ 998,204 $ 1,110,972 $ 2,109,176
The Company has certain expenses that were not allocated to the individual
operating segments in 2002 but were restated in the tables below to conform to
the 2003 presentation. A reconciliation of total segment EBITDA to income (loss)
from operations for the three and six months ended June 30, 2003 and 2002 is
presented as follows:
Three months ended June 30:
2003 2002
Total segment EBITDA $ 3,846,846 $ 1,433,497
Depreciation and amortization (1,921,992) (2,023,907)
Unallocated corporate expense -- --
------------ -----------
Income (loss) from operations $ 1,924,854 $ (590,410)
=========== ============
Six months ended June 30:
2003 2002
Total segment EBITDA $ 5,596,514 $ 2,109,176
Depreciation and amortization (3,907,893) (3,971,967)
Unallocated corporate expense -- --
----------- ------------
Income (loss) from operations $ 1,688,621 $ (1,862,791)
=========== ============
7. RELATED PARTY TRANSACTIONS
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 former member of the
Company's Board of Directors, for $200,000. As of June 30, 2003, the Company has
collected $100,000 of the sale price and the remaining $100,000 is included in
deferred revenue.
12
During 2000, the Company entered into three capital leases totalling
$918,000 with MWD Technology Company ("MWD"). The principal owners of MWD
include employees of the Company. The outstanding balance of $136,000 of the
leases was paid in full in connection with the GECC refinancing in September
2001.
On November 20, 2000, the Company entered into a capital lease
agreement for approximately $539,000 with Big Foot Tool Rental Service, LLC,
which is partially owned by an officer and an employee of the Company. The
outstanding balance of $393,000 of the lease was paid in full in connection with
the GECC refinancing.
In February 2001, the Company issued to a Director of the Company and
SJCP five-year warrants to purchase 700,000 and 400,000 shares, respectively, of
the Company's Common Stock at exercise prices of $0.75 per share. The warrants
were issued in consideration of guarantees extended to Coast Business Credit by
the Director and SJCP in connection with the Company's borrowings from Coast
Business Credit in 2000.
The Company has executed notes payable to SJMB and SJCP, whose chairman
and chief financial officer both serve on the Company's Board of Directors, in
connection with acquisitions and to provide funding for operations. At June 30,
2003 and 2002, notes due to SJMB, SJCP, their principal partners and affiliates
totalled $24,566,882 and $24,566,882, respectively. The notes bear interest at
15% and permit conversion to equity under certain conditions, which would result
in substantial dilutions to existing shareholders.
In connection with the five year employment agreement effective January
1, 2002 entered into with Mr. Jenkins to remain as the Company's President and
Chief Executive Officer, the Company agreed to loan Mr. Jenkins $190,000,
bearing interest at the applicable federal rate, to be repaid at the rate of
one-third of the principal, plus accrued interest on October 1 of each of the
years 2002, 2003 and 2004. If Mr. Jenkins remains employed by the Company on
September 30 preceding the date annual principal and interest is due on the
loan, the sum due and owing the following day is forgiven. In the event of a
Change of Control, as defined, the death or permanent disability of Mr. Jenkins
or in the event his employment is terminated without cause, the entire amount
owing by Mr. Jenkins is forgiven. The Company is amortizing the loan balance
into compensation cost over the life of the loan. Compensation expense for the
three and six months ended June 30, 2003 was approximately $20,600 and $41,200,
respectively.
8. ISSUANCE OF COMMON STOCK
During the first quarter of 2000, the Company executed a Compromise
Agreement With Release with Bendover Company whereby Bendover agreed to return
to the Company promissory notes aggregating $3,200,000 principal amount and
receive in exchange 2,666,667 shares of the Company's common stock and a
promissory note in the principal amount of $1,182,890 due on January 15, 2001,
bearing interest at 10% per annum. The maturity of the promissory note was
subsequently extended to June 15, 2001 at an interest rate of 20% per annum with
10% per annum paid monthly and the balance deferred until maturity. In September
2001, the Company paid $1.1 million to Bendover out of the proceeds of the GECC
financing in full payment of all outstanding principal and interest obligations
owing to Bendover.
13
The Company has outstanding at June 30, 2003 common stock purchase
warrants, options and convertible debt securities entitled to purchase or to be
converted into an aggregate 140,060,880 shares of the Company's common stock at
exercise and conversion prices ranging from $0.75 to $6.63. Accordingly, if all
such securities were exercised or converted, the 12,499,528 shares of Common
Stock issued and outstanding on June 30, 2003, would represent 8.2% of the
shares outstanding on a fully diluted basis.
9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, FASB Interpretation 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company does not anticipate FIN 45 will have
a material effect on its 2003 financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The adoption of this
provision will not have a material effect on the financial condition or results
of operations of the Company.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
14
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The adoption of this provision will not have a material
effect on the financial position or results of operations of the Company.
In November 2002 the Emerging Issues Task Force reached a consensus opinion on
EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash payments,
credits, or equity instruments received as consideration by a customer from a
vendor should be presumed to be a reduction of cost of sales when recognized by
the customer in the income statement. In certain situations, the presumption
could be overcome and the consideration recognized either as revenue or a
reduction of a specific cost incurred. The consensus should be applied
prospectively to new or modified arrangements entered into after December 31,
2002. The adoption of this provision will not have a material effect on the
financial position or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are affected primarily by the
extent of utilization and rates paid for its services and equipment. The energy
services sector is completely dependent upon the upstream spending of the
exploration and production side of the industry. A recovery in the energy
industry began in the latter half of 1999 and continued throughout 2000 and into
early 2001 due mainly to strong oil and natural gas prices. These prices
declined throughout most of 2001. As a consequence, North American drilling
activity declined as well. The Company's strong revenues and income from
operations, experienced in the first three quarters of 2001, did not continue
into the fourth quarter of 2001 and into 2002. While oil and natural gas
commodity prices improved throughout much of 2002, the improved pricing did not
result in revenues and income to the Company in amounts as favorable as were
experienced in 2001. Revenues and income did, however, improve in the latter
half of 2002 and the first six months of 2003. There can be no assurance that
the Company will experience continued improvement in revenues and income from
operations in 2003 that were realized in the latter half of 2002 and the first
half of 2003. There can be no assurance that the Company will continue to
experience any material increase in the demand for and utilization of its
services and its revenues and return to profitability.
Management may in the future seek to raise additional capital, which
may be either debt or equity capital or a combination thereof or enter into
another material transaction involving the Company, including a possible sale of
the Company. As of June 30, 2003, no specific plans or proposals have been made
with regard to any additional financing or any other transaction. The Company
may engage in other material corporate transactions.
15
In November 2001, the Company retained Simmons & Company International
("Simmons") as its financial advisor in connection with examining various
alternative means to maximize shareholder value including a possible merger,
sale of assets or other business combination involving the Company. At the
Company's request, Simmons intensified its efforts in this regard, during the
second quarter of 2003. At August 14, 2003, the Company had not entered into any
agreements or letters of intent regarding any such business combination and it
was not engaged in any substantive negotiations with any person in that regard.
Any such transaction will be dependent upon the ability of the Company to reach
an agreement on terms acceptable to its Board of Directors and principal
stockholders. There can be no assurance that the Company will enter into any
transaction and no representation is made as to the terms on which a transaction
may be entered into or that a transaction will occur.
In the event the Company should seek or be required to raise additional
equity capital, there can be no assurance that such a transaction can be
effected in the light of the Company's existing capital structure or that such a
transaction will not dilute the interests of the Company's existing security
holders. Fluctuations in interest rates may adversely affect the Company's
ability to raise capital.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2002
The following table sets forth the Company's revenues from its two
principal lines of business for the three and six months ended June 30, 2003 and
2002, respectively:
Three Months Ended Six Months Ended
6/30/03 6/30/02 6/30/03 6/30/02
----------- ----------- ----------- -----------
Wireline $12,148,678 $ 8,131,321 $22,518,492 $15,729,374
Directional Drilling 6,874,335 5,320,493 12,087,207 10,372,043
----------- ----------- ----------- -----------
$19,023,013 $13,451,814 $34,605,699 $26,101,417
Total revenues increased by approximately $5.6 million to approximately
$19.0 million for the three months ended June 30, 2003 and increased
approximately $8.5 million to $34.6 million for the six months ended June 30,
2003 as compared to total revenues of approximately $13.5 million and $26.1
million, respectively, for the three and six months ended June 30, 2002.
Wireline services revenues increased by approximately $4.0 million and $6.8
million, respectively, for the three and six months ended June 30, 2003
primarily due to the increased demand for the Company's services. Directional
drilling revenues increased by approximately $1.6 million and $1.7 million,
respectively, for the three and six months ended June 30, 2003 as a consequence
of the general increased level of oil and natural gas well drilling activity.
Operating costs increased by approximately $2.9 million and $4.9
million, respectively, for the three and six months ended June 30, 2003, as
compared to the same period of 2002. Operating costs were 65.6% and 68.3% of
revenues for the three and six months ended June 30, 2003 as compared with 70.6%
and 71.4% of revenues in the same periods in 2002. The increase in operating
costs was primarily the result of the higher overall level of activities in the
16
three and six months ended June 30, 2003 compared with 2002 while the decrease
in operating costs as a percentage of revenues reflect the variable nature of
operating costs. Salaries and benefits increased by approximately $1.3 million
and $1.9 million, respectively, for the three and six months ended June 30,
2003, as compared to the same periods in 2002, with a corresponding increase in
the total number of employees from 343 at June 30, 2002 to 368 at June 30, 2003.
The increase in salaries and benefits is primarily due to the increase in
employee levels over 2002.
Selling, general and administrative expenses increased by approximately
$173,000 and $19,000, respectively, for the three and six months ended June 30,
2003. As a percentage of revenues, selling, general and administrative expenses
decreased to 14.1% and 15.5% in the three and six months ended June 30, 2003
from 18.7% and 20.5% in 2002, primarily as a result of the elimination of
outside sales consultants, lower accounting expenses and the increase in
revenues for the three and six months ended June 30, 2003.
..
Depreciation and amortization decreased to approximately $1.9 million
and $3.9 million in the three and six months ended June 30, 2003, or 10.1% and
11.3% of revenues, from approximately $2.0 million and $4.0 million or 15.0% and
15.2% of revenues for the same periods in 2002.
Interest expense and amortization of debt discount remained relatively
flat for the three and six months ended June 30, 2003 when compared to the same
periods in 2002. See "Note 9 of Notes to Financial Statements" in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
The Company's net income for the quarter ended June 30, 2003 was
approximately $603,000, compared with a net loss of $1.8 million for the quarter
ended June 30, 2002. The Company's net loss for the six months ended June 30,
2003 was approximately $694,000, compared to a net loss of $4.3 million for the
same period in 2002. The improvement in operating results for the quarter and
six months ended June 30, 2003 was the result of the general increase in demand
for the Company's services that commenced in the latter half of 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from the Company's operating activities was approximately
$4.0 million for the six months ended June 30, 2003 as compared to cash provided
of approximately $1.9 million for the same period in 2002. Investing activities
used cash of approximately $1.4 million during the six months ended June 30,
2003 for the acquisition of property, plant and equipment and was partially
offset by approximately $680,000 of proceeds from the sale of assets. During the
six months ended June 30, 2002, investing activities used cash of approximately
$4.3 million for the acquisition of property, plant and equipment. Financing
activities provided cash of approximately $4.4 million from proceeds from bank
and other borrowings offset by principal payments on debt and capital lease
obligations, net payments on working capital revolving loans and debt issuance
costs of approximately $3.7 million. For the same period in 2002, financing
activities provided cash of approximately $4.0 million from proceeds from bank
and other borrowings offset by principal payments on debt and capital lease
obligations, net payments on working capital revolving loans and debt issuance
costs of approximately $3.6 million.
17
The Company's outstanding indebtedness includes primarily senior
secured indebtedness aggregating approximately $21.8 million at June 30, 2003,
owed to GECC, other indebtedness of approximately $2.2 million, and $36.9
million (inclusive of accrued interest) owed to St. James and or its affiliates.
GECC LOAN DESCRIPTION
On September 14, 2001, the Company entered into the Credit Facility
with GECC providing for the extension of revolving, term and capex credit
facilities to the Company aggregating up to $40.0 million. The Company and GECC
entered into amendments to the Credit Facility in January 2002, June 2002,
October 2002, February 2003 and April 2003. As amended, the Credit Facility
includes a revolving loan of up to $15.0 million, but not exceeding 85% of
eligible accounts receivable, a term loan of $17.0 million, and a capex loan of
up to $8.0 million, but not exceeding a borrowing base of the lesser of 70% of
the hard costs of acquired eligible equipment, 100% of its forced liquidation
value and the Company's EBITDA for the month then ended, less certain principal,
interest and maintenance payments. Eligible accounts are defined to exclude,
among other items, accounts outstanding of debtors that are more than 60 days
overdue or 90 days following the original invoice date and of debtors that have
suspended business or commenced various insolvency proceedings and accounts with
reserves established against them to the extent of such reserves as GECC may set
from time to time in its reasonable credit judgment. Borrowings under the capex
loan are at the sole and exclusive discretion of GECC. The interest rate on
borrowings under the revolving loan is 1.75% above a base rate and on borrowings
under the term loan and capex loan is 2.5% above the base rate. The base rate is
the higher of (i) the rate publicly quoted from time to time by the Wall Street
Journal as the base rate on corporate loans posted by at least 75% of the
nation's thirty largest banks, or (ii) the average of the rates on overnight
Federal funds transactions by members of the Federal Reserve System, plus 0.5%.
Subject to the absence of an event of default and fulfillment of certain other
conditions, , the Company can elect to borrow or convert any loan and pay
interest at the LIBOR rate plus applicable margins of 3.25% on the revolving
loan and 4.0% on the term loan and capex loan. If an event of default has
occurred, the interest rate is increased by 2%. Advances under the Credit
Facility are collateralized by a senior lien against substantially all of the
Company's assets. The Credit Facility expires on September 14, 2004.
Initial borrowings under the Credit Facility advanced on September 14,
2001 aggregated $21.6 million. Proceeds of the initial borrowings were used to
repay outstanding indebtedness aggregating $21.4 million to Coast Business
Credit, Bendover Company and certain other indebtedness. At June 30, 2003,
borrowings outstanding under the Credit Facility aggregated $21.8 million, of
which $6.1 million was outstanding under the revolving loan, $11.0 million was
outstanding under the term loan and $4.7 was outstanding under the capex loan.
Borrowings under the revolving loan are able to be repaid and re-borrowed from
time to time for working capital and general corporate needs, subject to the
Company's continuing compliance with the terms of the agreement, with the
outstanding balance of the revolving loan to be paid in full at the expiration
of the Credit Facility on September 14, 2004. The term loan is to be repaid in
35 equal monthly installments of $283,333 with a final installment of $7,083,333
18
due and payable on September 14, 2004. The capex loan is available to be
borrowed through September 14, 2003, at the discretion of GECC, and is to be
repaid in equal monthly installments of 1/60th of each of the amounts borrowed
from time to time with the remaining outstanding balance of the entire capex
loan due and payable on September 14, 2004
Borrowings under the Credit Facility may be prepaid or the facility
terminated or reduced by the Company at any time subject to the payment of an
amount equal to 2% of the prepayment or reduction occurring before September 14,
2003, and 1% of the prepayment or reduction occurring thereafter but before
September 14, 2004. In the event all the stock or substantially all the assets
of the Company are sold prior to September 14, 2003, and in connection
therewith, the Company pre-pays the Credit Facility, the amount of such payment
is reduced to 1%. The Company is required to prepay borrowings out of the net
proceeds from the sale of any assets, subject to certain exceptions, or the
stock of any subsidiary, the net proceeds from the sale of any stock or debt
securities by the Company, and any borrowings in excess of the applicable
borrowing availability, including borrowings under the term loan and capex loan
in excess of 50% of the forced liquidation value of the eligible capex and term
loan equipment and borrowings under the term loan in excess of 70% of the forced
liquidation value of eligible term loan equipment. The value of the term loan
equipment is established by appraisal.
Initial borrowings under the Credit Facility were subject to the
fulfillment at or before the closing of a number of closing conditions,
including among others, the accuracy of the representations and warranties made
by the Company in the loan agreement, delivery of executed loan documents,
officers' certificates, an opinion of counsel, repayment of the Coast senior
secured loan, the extension of the maturity date of $24.6 million principal
amount of the Company's outstanding subordinated notes to December 31, 2004 with
no payments of principal or interest to be made prior to that date, and the
completion of due diligence. Future advances are subject to the continuing
accuracy of the Company's representations and warranties as of such date (other
than those relating expressly to an earlier date), the absence of any event or
circumstance constituting a "material adverse effect," as defined, the absence
of any default or event of default under the Credit Facility, and the borrowings
not exceeding the applicable borrowing availability under the Credit Facility,
after giving effect to such advance. A "material adverse effect" is defined to
include an event having a material adverse effect on the Company's business,
assets, operations, prospects or financial or other condition, on the Company's
ability to pay the loans, or on the collateral and also includes a decline in
the "Average Rig Count" (excluding Canada and international rigs) published by
Baker Hughes, Inc. falling below 675 for 12 consecutive weeks.
Under the Credit Facility, the Company is obligated to maintain
compliance with a number of affirmative and negative covenants. Affirmative
covenants the Company must comply with include requirements to maintain its
corporate existence and continue the conduct of its business substantially as
now conducted, promptly pay all taxes and governmental assessments and levies,
maintain its corporate records, maintain insurance, comply with applicable laws
and regulations, provide supplemental disclosure to the lenders, conduct its
affairs without violating the intellectual property of others, conduct its
operations in compliance with environmental laws and provide a mortgage or deed
of trust to the lenders granting a first lien on the Company's real estate upon
the request of the lenders, provide certificates of title on newly acquired
equipment with the lender's lien noted.
19
Negative covenants the Company may not violate include, among others,
(i) forming or acquiring a subsidiary, merging with, acquiring all or
substantially all the assets or stock of another person, (ii) making an
investment in or loan to another person, (iii) incurring any indebtedness other
than permitted indebtedness, (iv) entering into any transaction with an
affiliate except on fair and reasonable terms no less favorable than would be
obtained from a non-affiliated person, (v) making loans to employees in amounts
exceeding $50,000 to any employee and a maximum of $250,000 in the aggregate,
(vi) making any change in its business objectives or operations that would
adversely affect repayment of the loans or in its capital structure, including
the issuance of any stock, warrants or convertible securities other than (A) on
exercise of outstanding securities or rights, (B) the grant of stock in exchange
for extensions of subordinated debt, (C) options granted under an existing or
future incentive option plan, or (D) in its charter or by-laws that would
adversely affect the ability of the Company to repay the indebtedness, (vii)
creating or permitting to exist any liens on its properties or assets, with the
exception of those granted to the lenders or in existence on the date of making
the loan, (viii) selling any of its properties or other assets, including the
stock of any subsidiary, except inventory in the ordinary course of business and
equipment or fixtures with a value not exceeding $100,000 per transaction and
$250,000 per year, (ix) failing to comply with the various financial covenants
in the loan agreement, (x) making any restricted payment, including payment of
dividends, stock or warrant redemptions, repaying subordinated debt, rescission
of the sale of outstanding stock, (xi) making any payments to stockholders of
the Company other than compensation to employees and payments of management fees
to any stockholder or affiliate of the Company, or (xii) amending or changing
the terms of the Company's subordinated debt.
As amended through the latest amendment in April 2003, the financial
covenants the Company is required to comply with include (a) limitations on
capital expenditures to $7.7 million during the year 2002 with an exclusion on
the amount spent to replace and restore plug and abandonment equipment lost due
to weather in 2002, to $8.0 million during the year 2003 and to $5.0 million
during the six-months ended June 30, 2004, (b) having a fixed charge coverage
ratio at the end of each quarter, commencing with the quarter ended March 31,
2004, of not less than 1.3:1.0 for the preceding twelve-month period, (c) having
an interest coverage ratio at the end of each quarter, commencing with the
quarter ended March 31, 2004, of not less than 3.0:1.0 for the preceding
twelve-month period, and (d) commencing with the quarter ending March 31, 2004,
having a ratio of senior funded debt to EBITDA, minus capital expenditures paid
in cash, of not more than 2:0:1.0 for the four fiscal quarters then ended. The
Company is required to maintain a cumulative operating cash flow at the end of
each month, commencing with the month ended March 31, 2003, increasing as
follows:
FISCAL MONTH CUMULATIVE OPERATING CASH FLOW
------------ ------------------------------
For the 3 Months Ending March 31, 2003 $800,000
For the 4 Months Ending April 30, 2003 $1,350,000
For the 5 Months Ending May 31, 2003 $2,000,000
20
FISCAL MONTH CUMULATIVE OPERATING CASH FLOW
------------ ------------------------------
For the 6 Months Ending June 30, 2003 $2,700,000
For the 7 Months Ending July 31, 2003 $3,500,000
For the 8 Months Ending August 31, 2003 $4,200,000
For the 9 Months Ending September 30, 2003 $5,000,000
For the 10 Months Ending October 31, 2003 $6,000,000
For the 11 Months Ending November 30, 2003 $7,100,000
For the 12 Months Ending December 31, 2003 $8,200,000
For the 12 Months Ending January 31, 2004 $8,900,000
For the 12 Months Ending February 28, 2004 $9,500,000
Cumulative operating cash flow is defined, for the period March 1, 2003
through December 31, 2003, as the sum of EBITDA for such month minus capital
expenditures paid in cash for such month plus EBITDA for each preceding month
commencing on January 1, 2003 minus capital expenditures paid in cash for each
preceding month commencing January 1, 2003. Subsequent to December 31, 2003,
cumulative operating cash flow is defined to include the sum of EBITDA for such
month minus capital expenditures paid in cash for such month plus EBITDA for the
preceding eleven months minus capital expenditures paid in cash for the
preceding eleven months.
For the period ended June 30, 2003, the Company is in compliance with
all financial covenants.
Events of default under the Credit Facility include (a) the failure to
pay when due principal or interest or fees owing under the Credit Facility, (b)
the failure to perform the covenants under the Credit Facility relating to use
of proceeds, maintenance of a cash management system, maintenance of insurance,
delivery of certificates of title, delivery of required consents of holders of
outstanding subordinated notes, maintenance of compliance with the financial
covenants in the loan agreement and compliance with any of the loan agreement's
negative covenants, (c) the failure, within specified periods of 3 or 5 days of
when due, to deliver monthly unaudited and annual audited financial statements,
annual operating plans, and other reports, notices and information, (d) the
failure to perform any other provision of the loan agreement which remains
un-remedied for 20 days or more, (e) a default or breach under any other
agreement to which the Company is a party beyond any grace period that involves
the failure to pay in excess of $250,000 or causes or permits to cause in excess
of $250,000 of indebtedness to become due prior to its stated maturity, (f) any
21
representation or warranty or certificate delivered to the lenders being untrue
or incorrect in any material respect, (g) a change of control of the Company,
(h) the occurrence of an event having a material adverse effect, and (i) the
attachment, seizure or levy upon of assets of the Company which continues for 30
days or more and various other bankruptcy and other events. Upon the occurrence
of a default or event of default, the lenders may discontinue making loans to
the Company. Upon the occurrence of an event of default, the lenders may
terminate the Credit Facility, declare all indebtedness outstanding under the
Credit Facility due and payable, and exercise any of their rights under the
Credit Facility which includes the ability to foreclose on the Company's assets.
The Company has amended the terms of its Credit Facility with GECC on
five occasions the principal effects of which were to relax certain of the terms
of the financial covenants so as to be more favorable to the Company. There can
be no assurance that the Company will be able to obtain further amendments to
these financial covenants if required or that the failure to obtain such
amendments when requested may not result in the Company being placed in
violation of those financial covenants. Before reflecting amendments to the
Credit Facility made in June 2002, the Company was in violation of the financial
covenants relating to its fixed charge coverage ratio, minimum interest coverage
ratio, and ratio of senior funded debt to EBITDA. By amendment to the Credit
Facility entered into as of June 10, 2002, GECC waived these defaults as well as
violations relating to the Company's failure to timely deliver its financial
statements for the year ended December 31, 2001 as required by the Credit
Facility and selling certain assets in violation of the terms of the Credit
Facility. The Company agreed to pay GECC a fee of $100,000 in connection with
entering into the amendment.
In connection with the April 2003 amendment to the Credit Facility, the
Company is required to provide GECC with weekly reports setting forth an aging
of its accounts payable and weekly cash budgets for the immediately following
thirteen week period. Also in connection with entering into that amendment, the
Company agreed to pay GECC an amendment fee of $100,000, of which $50,000 is
payable in June 2003 and $50,000 is payable on December 31, 2003, and a fee of
$300,000 in the event of a sale of all the assets or stock of the Company or
other event that results in a change of control of the Company. GECC consented
to a capex loan of $1.0 million to the Company at the time of entering into the
amendment.
Reference is made to the Credit Agreement, filed as an Exhibit to the
Company's Current Report on Form 8-K for September 14, 2001, the First and
Second Amendments thereto, filed as exhibits to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, the Third Amendment thereto,
filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and the Fourth Amendment and Fifth Amendment,
filed as Exhibits to the Annual Report on Form 10-K for the year ended December
31, 2002, for a complete statement of the terms and conditions.
The Company continues to be highly leveraged and has an accumulated
deficit of $38.3 million. The Company is subject to certain debt covenants
requiring minimal operational and cash flow levels. Failure to comply with these
debt covenants and or generate sufficient cash flow from operations could
significantly impair the Company's liquidity position and could result in the
lender exercising prepayment options under the Company's credit facility. While
the Company believes that it will have adequate borrowing base and cash flows,
it can make no assurances that it will comply with its debt covenants or
generate sufficient cash flows to service its debt and fund operations. Should
the Company be unable to borrow funds under its current credit facility or if
prepayment of those borrowings were required, it can make no assurances that
alternative funding could be obtained.
22
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 and
six months ended June 30, 2003.
SIGNIFICANT ACCOUNTING POLICIES
The Company's Discussion and Analysis of Financial Condition and
Results of Operations is based upon its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to the allowance for bad debts,
inventory, long-lived assets, intangibles and goodwill. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
The Company's inventory consists of tool components, sub-assemblies and
expendable parts used in directional oil and gas well drilling activities.
Components, sub-assemblies and expendable parts are capitalized as long-term
inventory and expensed based on a per hour of motor use calculation and then
adjusted to reflect physical inventory counts. The Company's classification and
treatment is consistent with industry practice.
The Company assesses the impairment of identifiable intangibles,
long-lived assets and related goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. When the
Company determines that the carrying value of intangibles, long-lived assets and
related goodwill may not be recoverable, any impairment is measured based on a
projected net cash flows expected to result from that asset, including eventual
disposition.
23
Property and equipment are carried at original cost less applicable
depreciation. Depreciation is recognized on the straight line basis over lives
ranging from two to ten years. Major renewals and improvements are capitalized
and depreciated over each asset's estimated remaining useful life. Maintenance
and repair costs are charged to expense as incurred. When assets are sold or
retired, the remaining costs and related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in income. Property
and equipment held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amounts may not be
recoverable. The Company estimates the future undiscounted cash flows of the
affected assets to determine the recoverability of carrying amounts.
The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
At June 30, 2003, the Company has three stock-based employee
compensation plans. The Company accounts for those plans under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The Company utilizes the Black-Scholes option pricing model to
estimate the fair value of these options for disclosure purposes.
The Company derives revenues from performance of services and the sale
of equipment. Service revenues are recognized at the time services are
performed. The Company's sales are typically not subject to rights of return
and, historically, sales returns have not been significant. Revenue related to
equipment sales is recognized when the equipment has been shipped and title and
risk of loss have passed to the customer. Deferred revenue, net of related
deferred cost of sales, is recorded as unearned revenues in Deferred Revenue in
the accompanying Balance Sheet.
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 (the "Exchange Act"), that involve risks and
uncertainties. The Company intends that the forward-looking statements herein be
covered by the safe-harbor provisions for forward-looking statements contained
in the Exchange Act, and this statement is included for the purpose of complying
with these safe-harbor provisions. Forward-looking statements include, but are
not limited to, the matters described herein, including Management's Discussion
and Analysis of Financial Condition and Results of Operations. Such
forward-looking statements relate to the Company's ability, to generate revenues
and attain and maintain profitability and cash flow, the improvement in,
stability and level of prices for oil and natural gas, pricing in the oil and
gas services industry and the willingness of customers to commit for oil and
natural gas well services, the ability of the Company to implement any of the
possible alternative means to maximize shareholder value in conjunction with its
agreement retaining Simmons & Company International, including any possible
24
merger, sale of assets or other business combination transaction involving the
Company or raising additional debt or equity capital, to maintain, the Company's
ability to implement and, if appropriate, expand a cost-cutting program, the
ability of the Company to compete in the premium services market, the ability of
the Company to meet or refinance its debt obligations as they come due or to
obtain extensions of the maturity dates for the payment of principal, the
ability of the Company to re-deploy its equipment among regional operations as
required, the ability of the Company to provide services using state of the art
tooling, the ability of the Company to raise additional capital to meet its
requirements and to obtain additional financing when required, and its ability
to maintain compliance with the covenants of its various loan documents and
other agreements pursuant to which securities have been issued and obtain
waivers of violations that occur and consents to amendments as required. 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, declines and fluctuations in the
prices for oil and natural gas, and other factors could have a material adverse
effect on the Company. Material declines in the prices for oil and natural gas
would most likely have an adverse effect on the Company's revenues. The Company
cautions readers that the various risk factors referred to above could cause the
Company's operating results, and financial condition 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 and plans. The Company cautions readers that various risk
factors described in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 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-K and the risk factors discussed therein.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
From time to time, the Company holds financial instruments comprised of
debt securities and time deposits. All such instruments are classified as
securities available for sale. The Company does not invest in portfolio equity
securities, or commodities, or use financial derivatives for trading or hedging
purposes. The Company's debt security portfolio represents funds held
temporarily pending use in its business and operations. The Company manages
these funds accordingly. The Company seeks reasonable assuredness of the safety
of principal and market liquidity by investing in rated fixed income securities
while, at the same time, seeking to achieve a favorable rate of return. The
Company's market risk exposure consists of exposure to changes in interest rates
and to the risks of changes in the credit quality of issuers. The Company
typically invests in investment grade securities with a term of three years or
less. The Company believes that any exposure to interest rate risk is not
material.
Under the Credit Facility with GECC, the Company is subject to market
risk exposure related to changes in the prime interest rate. Assuming the
Company's level of borrowings from GECC at June 30, 2003 remained unchanged
throughout 2003, if a 100 basis point increase in interest rates under the
Credit Agreement from rates in existence at December 31, 2002 prevailed
throughout the year 2003, it would increase the Company's 2003 interest expense
by approximately $218,000.
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ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including William Jenkins, its President and Chief Executive
Officer, and Ronald Whitter, its Chief Financial Officer, the Company has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of the end of the period covered by this report, and, based on their
evaluation, Mr. Jenkins and Mr. Whitter have concluded that these controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by it in the reports that it files or submits under the Exchange Act are
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Company's management, including Mr. Jenkins and Mr. Whitter, as
appropriate to allow timely decisions regarding required disclosure.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of President and Chief Executive Officer
Pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)
32.1 Certification of President and Chief Executive Officer
Pursuant to Section 1350 (furnished, not filed)
32.2 Certification of Chief Financial Officer Pursuant to Section
1350 (furnished, not filed)
(b) Reports on Form 8-K
None
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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: August 14, 2003 /S/ William L. Jenkins
--------------------------------------
William L. Jenkins
President and Chief Executive Officer
/S/ Ronald Whitter
--------------------------------------
Ronald Whitter
Chief Financial Officer
27