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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Mark One:
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 31, 1998; or
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
__________.
COMMISSION FILE NO. 0-18754
BLACK WARRIOR WIRELINE CORP.
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(Name of Small Business Issuer in its Charter)
DELAWARE 11-2904094
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3748 HIGHWAY #45 NORTH, COLUMBUS, MISSISSIPPI 39701
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(Address of Principal Executive Offices) (Zip Code)
(601) 329-1047
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
(Title of Each Class)
COMMON STOCK, PAR VALUE $.0005 PER SHARE
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past ninety (90) days.
[X] Yes [_] No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year: $34,436,553
State the aggregate market value of the voting stock held by
non-affiliates as of March 31, 1999:
COMMON STOCK, PAR VALUE $.0005 PER SHARE, $3,966,694
(Non-affiliates have been determined on the basis of holdings set forth
under Item 11 of this Annual Report on Form 10-KSB.)
Indicate the number of shares outstanding of each of the Issuer's
classes of common equity, as of the latest practicable
date:
Class: COMMON STOCK, PAR VALUE $.0005 PER SHARE
Outstanding at March 31, 1999: 3,942,831 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on
Form 10-KSB
Transitional Small Business Issuer Format: [_] Yes [X] No
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Black Warrior Wireline Corp. (the "Company") is an oil and gas service
company currently providing various services to oil and gas well operators
primarily in the Black Warrior and Mississippi Salt Dome Basins in Alabama and
Mississippi, the Permian Basin in West Texas and New Mexico, the San Juan Basin
in New Mexico, Colorado and Utah, the East Texas and Austin Chalk Basins in East
Texas, the Anadarko Basin in Oklahoma, the Powder River and Green River Basins
in Wyoming and Montana, the Williston Basin in North Dakota and areas of the
Gulf of Mexico offshore Louisanna and South Texas. The Company's principal lines
of business include (a) wireline services, (b) directional oil and gas well
drilling activities, and (c) workover services. The Company's recent growth and
increased revenues have been principally the result of seven acquisitions
completed since November 1996.
RECENT ACQUISITIONS
The following table sets forth information regarding recent
acquisitions made by the Company:
DATE (1) COMPANY ACQUIRED BUSINESS LOCATION PURCHASE PRICE
-------- ---------------- ----------------- --------------
June 1, 1998 Petro Wireline Four corners region of New Mexico, $875,000
Colorado, Utah and Arizona
March 16, 1998 Phoenix Drilling Services, Inc. Continental United States $19.0 million
assets
December 15, CAM Wireline Services, Inc. Texas $850,000 (3)
1997
October 9, 1997 Diamondback Directional, Inc. Texas and Louisiana $8.9 million (2)
June 9, 1997 PetroLog, Inc. Wyoming, Montana and South Dakota $2.1 million
June 6, 1997 Production Well Services, Inc. Southern Mississippi and Alabama $940,000 (4)
November 19, Dyna-Jet, Inc. Wyoming, South Dakota, Montana $758,000
1996 and New Mexico
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(1) Date the acquisition was closed.
(2) Includes 647,569 shares of the Company's Common Stock.
(3) Includes 24,969 shares of the Company's Common Stock.
(4) Includes 133,333 shares of the Company's Common Stock.
At present, the Company is primarily seeking to consolidate its
management of the operations acquired throughout 1997 and 1998 and implement its
cost cutting program and plan to restructure its outstanding indebtedness.
Additional acquisitions would be dependent upon favorable opportunities, the
strategic objectives to be achieved and the availability of financing. The
Company is not currently pursuing any material additional acquisition
opportunities.
With respect to the acquisitions completed in 1997 and the first half
of 1998, the Company funded those transactions using the proceeds from secured
borrowings from banks and other institutional lenders, the private or public
sale of debt and equity securities and the cash flow from its current
operations. Financing obtained included borrowings secured by substantially all
of the Company's assets.
WIRELINE SERVICES
The Company's wireline logging service activities contributed revenues
of $11.6 million (approximately 33.7% of revenues) in 1998, $9.5 million
(approximately 55.7% of revenues) in 1997, and $5.9 million (approximately 77.4%
of revenues) in 1996. At December 31, 1998, the Company owned 52 operational
motor vehicle mounted wireline units, of which 21 are equipped with a
state-of-the-art computer system, 7 are equipped with an earlier generation
computer system, 16 are analog equipped and 8 are devoted exclusively to
hoisting operations. In the third quarter of 1998, the Company commenced
providing wireline services off-shore to customers with operations in the Gulf
of Mexico. As of December 31, 1998, the Company owned six operational cased-hole
wireline units skid-mounted for offshore work, all of which are equipped with
state of the art computers.
Wireline logging services are used to evaluate downhole conditions at
various stages of the process of drilling and completing oil and gas wells as
well as at various times thereafter until the well is depleted and abandoned.
Such services are provided using a truck-mounted wireline unit equipped with an
armored cable that is lowered by winch into an existing well. The cable, which
contains one or more electrical conductors, lowers instruments and tools into
the well to perform a variety of services and tests. The wireline unit's
truck-mounted instrument cab contains electronic equipment to supply power to
the downhole instruments, to receive and record data from those instruments in
order to produce the "logs" which define specific characteristics of each
formation and to display the data received from downhole. The Company's wireline
units are equipped with state-of-the-art computerized systems, DRS computerized
systems (which is an earlier generation computerized system) or analog
equipment.
Open hole wireline services are performed after the drilling of the
well but prior to its completion. Cased hole wireline services are performed
during and after the completion of the well, as well as from time to time
thereafter during the life of the well. The Company's services primarily relate
to providing cased hole wireline services. Cased hole services include
radioactive
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and acoustic logging used to evaluate downhole conditions such as lithology,
porosity, production patterns and the cement bonding effectiveness between the
casing and the formation. Other cased hole services include perforating, which
opens up the casing to allow production from the formation(s), and free-point
and back-off, which locates and frees pipe that has become lodged in the well.
Cased hole services are used in the initial completion of the well and in
virtually all subsequent workover and stimulation projects throughout the life
of the well. The Company performs these services on a contract basis at the well
site for operators and producers of the wells primarily on a bid basis at prices
related to Company standard prices.
These services are routinely provided to the Company's customers and
are subject to the customers' time schedule, weather conditions, availability of
Company personnel and complexity of the operation. These procedures generally
take approximately one to one-and-one-half days to perform.
Manufacturing. Since 1996 the Company has operated a manufacturing
facility located in Laurel, Mississippi to assemble and install wireline service
equipment, both mounted on motor vehicles and on wireline skids, for internal
use and for sale to others. During the year ended December 31, 1998, the Company
manufactured for internal use six new wireline trucks and six new offshore
wireline skids. The manufacturing facility also totally refurbished for internal
use one wireline truck and refurbished to a lesser extent three wireline trucks.
The Company also manufactured and sold to a third-party customer one new
wireline truck and in November 1998 entered into a contract to manufacture and
sell four wireline skids for a customer, the first of which was delivered in
December 1998.
DIRECTIONAL DRILLING SERVICES
The Company's directional drilling services contributed revenues of
$21.3 million (approximately 61.9% of revenues) in 1998 and $5.9 million
(approximately 34.8% of revenues) in 1997, substantially all of which was
realized during the four months ended December 31, 1997. The revenues realized
in 1997 were primarily the result of the acquisition by the Company in October
1997 of Diamondback Directional, Inc. The Company had no revenues from
directional drilling services in 1996.
Directional drilling entails entering a producing zone horizontally,
using specialized drilling equipment, which expands the area of interface of
hydrocarbons and thereby greatly enhancing recoverability.
On March 16, 1998, the Company completed the acquisition of the
domestic oil and gas well directional drilling and downhole survey service
business, including the related operating assets, from Phoenix Drilling
Services, Inc. This acquisition contributed to further increases in the
Company's revenues from directional drilling services commenced in 1997. In
addition, the
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acquisition has enabled the Company to provide downhole survey services to the
oil and gas industry.
The Company's multi-shot division provides directional surveying
services and directional drilling equipment operators to the oil and gas
industry. The services include gyros, magnetic, single shot, high accuracy
magnetic probe, electric surface recording gyro, and measurement while drilling.
Management of the Company believes these services are state-of-the-art.
WORKOVER AND COMPLETION SERVICES
These activities contributed revenues of $1.5 million (approximately
4.4% of revenues) in 1998, $1.6 million (approximately 9.5% of revenues) in
1997, and $1.7 million (approximately 22.6% of revenues) in 1996. These services
are performed primarily on an hourly basis.
Workover services include those operations performed on wells when
originally completed and on wells previously placed in production and requiring
additional work to restore or increase production. A completion or workover rig
is used to position tubing, pumps and other production equipment in a cased
hole. The unit is used for the initial completion of the well and subsequent
workover and remedial service. A completion or workover rig is generally a four
to six axle truck-mounted hoist unit with a 60 to 90 foot derrick capable of
lowering and hoisting up to 300,000 pound loads.
The Company also engages in other oil and gas well service activities
including, primarily, the sale, rental and service of tools and equipment used
in the oil field services industry and conducts tool and equipment inspection,
maintenance and testing services. These activities are not deemed by management
to be material.
PRINCIPAL CUSTOMERS AND MARKETING
During the year ended December 31, 1998, no single customer accounted
for more than 10% of the Company's revenues. During the years ended December 31,
1997 and December 31, 1996, three customers accounted for a total of
approximately 25.7% and 63.8%, respectively, of the Company's net revenues. The
Company's principal customers and the percentage of the Company's net revenues
received from each of such customers during the two years ended
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December 31, 1997 are as follows:
1997 1996
----------------- ----------------
Taurus Exploration, Inc. 10.3% 25.3%
Pioneer Resources, Inc. (formerly Parker & Parsley
Development L.P.) 12.4% 23.7%
Becfield Drilling Company 3.0% 14.8%
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TOTALS 25.7% 63.8%
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The Company does not have any long-term agreements with its customers,
and services are provided pursuant to short-term agreements negotiated by the
Company with the customer.
The Company's services are marketed by its executive officers and a
sales staff of approximately 20 persons working from its district offices. The
Company relies extensively on its reputation in the industry to create customer
awareness of its services.
OPERATING HAZARDS AND INSURANCE
The services of the Company are used in oil and gas well drilling,
workover and production operations that are subject to inherent risks such as
blow-outs, fires, poisonous gas and other oil and gas field hazards, many of
which can cause personal injury and loss of life, severely damage or destroy
equipment, suspend production operations and cause substantial damage to
property of others. Ordinarily, the operator of the well assumes the risk of
damage to the well, the producing reservoir and surrounding property and revenue
loss in the event of accident, except in the case of gross or willful negligence
on the part of the Company or its employees.
The Company has general liability, property, casualty, officers' and
directors', and workers' compensation insurance. Although, in the opinion of the
Company's management, the limits of its insurance coverage are consistent with
industry practices, such insurance may not be adequate to protect the Company
against liability or losses occurring from all the consequences of such risks or
incidents. The occurrence of an event not fully covered by insurance (and a
determination of the liability of Company for consequential losses or damages)
could result in substantial losses to the Company and have a materially adverse
effect upon its financial condition, results of operations, and cash flows.
The Company maintains two policies totaling $2.0 million on the life of
William L. Jenkins, its President and Chief Operating Officer, and maintains
$1.0 million policies on the lives of each of Danny Ray Thornton,
Vice-President, and Allen R. Neel, Executive Vice-President. See Item 9,
"Directors, Executive Officers, Promoters and Control Persons;
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Compliance with Section 16(a) of the Exchange Act." The benefits under such
policies are payable to the Company.
COMPETITION
Most of the Company's competitors are divisions of larger diversified
corporations which offer a wide range of oil field services. Its chief
competitors include Halliburton Company, Schlumberger, Ltd. and Baker Hughes
Incorporated, as well as a number of other companies active in the industry.
These competitors have substantially greater economic resources than the
Company. Recent business combinations involving oil and gas service companies
may have the effect of intensifying competition in the industry. With the
decline in demand for oil and natural gas well services, competition has
intensified. Competition principally occurs in the areas of technology, price,
quality of products and field personnel, equipment availability and facility
locations. Although price competition has been in the past a significant
characteristic of the industry, the Company's ability to offer more
technologically advanced services is believed by management to have reduced its
exposure to severe price competition. The Company continues to make a conscious
effort to compete, not just on price, but on its ability to offer advanced
technology, experienced personnel, and a safe working environment.
The Company's growth is dependent upon its ability to attract and
retain skilled oilfield and management personnel. The competition for such
qualified employees is frequently intense and there can be no assurance that
sufficient qualified persons will be available at such times as the Company
requires their services.
REGULATION
The oil and gas business is a heavily regulated industry. The Company's
activities are subject to various licensing requirements and minimum safety
procedures and specifications, anti-pollution controls on equipment, waste
discharge and other environmental and conservation requirements imposed by
federal and state regulatory authorities. Serious penalties and fines are
imposed for violations from such directives and violations could result in the
loss of licenses and other penal proceedings.
The Company is not currently the subject of any, nor is it aware of
any, threatened investigations or actions under any federal or state
environmental, occupational safety or other regulatory laws. The Company
believes that it will be able to continue compliance with such laws and
regulations without a material adverse effect on its earnings and competitive
position. However, there can be no assurance that unknown future changes in such
laws and regulations would not have such an effect if and when such changes
occur.
-6-
EMPLOYEES
As of March 31, 1999, the Company employed approximately 221 persons on
a full-time basis. Of the Company's employees, 22 are management personnel, 28
are administrative personnel and 171 are operational personnel. The Company also
uses the services of approximately 30 to 35 independent contract drillers and
directional guidance personnel. None of the Company's employees is represented
by a labor union, and the Company is not aware of any current activities to
unionize its employees. Management of the Company considers the relationship
between the Company and its employees to be good.
INCORPORATION
The Company was incorporated under the laws of the State of Delaware in
1987 under the name Teletek, Ltd. and in June 1989 Teletek, Ltd. merged with a
predecessor of the Company incorporated under the laws of the State of Alabama
and concurrently changed its name to Black Warrior Wireline Corp. The Company
and its predecessors have been engaged in providing wireline and other oil and
gas well support services since 1984.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
With the exception of historical matters, the matters discussed in this
Report are "forward-looking statements" as defined under the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties. Forward-looking
statements include, but are not limited to, the matters described below, as well
as "Item 1. Description of Business - General," "- Recent Acquisitions," "-
Principal Customers and Marketing," "Item 6. Management's Discussion and
Analysis or Plan of Operations - General," "-Twelve-Month Periods Ended December
31, 1998 and 1997", "- Liquidity and Capital Resources" and "Year 2000 Computer
Issues." Such forward-looking statements relate to the Company's ability to
implement its plan for the restructuring and refinancing of its outstanding
indebtedness, to maintain, implement and, if appropriate, expand its
cost-cutting program instituted in 1998, to generate revenues and attain and
maintain profitability and cash flow, 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 compete in the premium services market, the
ability of the Company to redeploy its equipment among regional operations as
required, the ability of the Company to provide services using the recently
acquired state of the art tooling, the ability of the Company to raise
additional capital to meet its requirements and to obtain additional financing,
its ability to maintain compliance with the covenants of its various loan
documents and other agreements pursuant to which securities have been issued and
the ability of the Company to successfully address Year 2000 issues. The
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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, further declines in the prices for oil
and natural gas and the absence of any material improvement in those prices, and
other factors could have a material adverse effect on the Company. The Company
cautions readers that various risk factors described below could cause the
Company's operating results, financial condition and ability to fulfill its
restructuring plan 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. Risk factors that could affect the Company's revenues, profitability
and future business operations include, among others, the following:
Substantial Indebtedness; Existing Defaults. At December 31, 1998, the
Company's total indebtedness, all of which is classified with a current
maturity, and inclusive of accrued interest, was approximately $41.1 million. In
addition, subsequent to December 31, 1998 through March 31, 1999, the Company
incurred additional indebtedness of approximately $2.5 million. At March 31,
1999, the Company was not in compliance with various covenants of the loan
agreements relating to approximately $11.5 million of outstanding senior secured
indebtedness and an additional $3.2 million of unsecured purchase money
indebtedness was in default. As a consequence of cross-default provisions in its
various debt instruments, substantially all of the Company's outstanding
indebtedness is classified as currently due. The Company expects that it may
incur additional indebtedness to meet its current obligations. The Company's
level of indebtedness and the defaults thereunder pose substantial risks to the
Company and the holders of its securities, including the possibility that the
Company may not be able to generate sufficient cash flow to pay the principal of
and interest on the indebtedness when due or to refinance such indebtedness.
Restrictions Imposed by Lenders; Secured Borrowing. The Company has
outstanding secured indebtedness aggregating approximately $11.5 million under
an Amended and Restated Loan and Security Agreement (the "Loan Agreement") with
Fleet Capital Corporation ("Fleet") dated October 30, 1998. From time to time,
including in early 1999, the Company has not been in compliance with various
covenants in the Loan Agreement. In February 1999, the Company and Fleet entered
into a Forebearance Agreement and Amendment to Loan and Security Agreement (the
"Forebearance Agreement") whereby Fleet agreed, among other things, to forebear
through June 30, 1999 taking action on defaults under the Company's Loan
Agreement. Subject to the Company meeting certain conditions and complying with
certain covenants, Fleet agreed to defer the payments of principal due on its
loan during the months of March through June 1999. At April 13, 1999, the
Company was in default of certain of the terms of the Forebearance Agreement.
The instruments governing the Company's indebtedness to Fleet impose significant
operating and financial restrictions on the Company. Such restrictions affect,
and in many respects significantly limit or prohibit, among other things, the
ability of the Company to incur additional indebtedness, pay dividends, repay
indebtedness prior to its stated maturity, sell assets or engage in mergers or
acquisitions. These restrictions also limit the ability of the Company to effect
-8-
future financings, make needed capital expenditures, withstand a downturn in the
Company's business or economy in general, or otherwise conduct necessary
corporate activities. The Loan Agreement places restrictions on the Company's
ability to borrow money under the revolving credit provisions of the Loan
Agreement. The Company's ability to borrow under this revolving credit
arrangement is necessary to fund the Company's ongoing operations. The Company
is currently in default under a number of provisions of its Loan Agreement and
Forebearance Agreement with Fleet. Fleet has the right to elect to declare all
of the funds borrowed to be immediately due and payable together with accrued
and unpaid interest and to refuse to make additional advances under the
revolving credit arrangement. In such event, there can be no assurance that the
Company would be able to make such payment or borrow sufficient funds from
alternative sources to make any such payment. If the Company were unable to
repay all amounts declared due and payable under the Loan Agreement, Fleet could
proceed against the collateral granted to satisfy the indebtedness and other
obligations due and payable. This collateral includes substantially all of the
Company's assets. If the indebtedness owing to Fleet were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay in full such indebtedness and the Company's other liabilities. In
addition, the acceleration of the Company's indebtedness owing to Fleet would
constitute a default under other indebtedness of the Company which may result in
such other indebtedness also becoming immediately due and payable. Under such
circumstances, the holders of the Company's Common Stock may realize little or
nothing on their investment in the Company. Even if additional financing could
be obtained, there can be no assurance that it would be on terms that are
favorable or acceptable to the Company or its equity security holders. As part
of its proposed recapitalization plan described herein, the Company is seeking
to refinance its indebtedness owing to Fleet.
Other Current Liabilities. In addition to its outstanding indebtedness
to lenders and others, the Company had outstanding at December 31, 1998 accounts
payable of approximately $6.0 million. The Company is substantially dependent
upon the cooperation of its creditors in order to be successful in implementing
its restructuring plan described elsewhere herein. The Company's operations are
hindered by these large amounts of outstanding payables and certain vendors are
currently dealing with the Company on a cash only basis or otherwise refusing to
provide services and materials to the Company in view of the outstanding
accounts payable.
Recent Depressed Levels of Prices for Oil and Natural Gas; Recent
Business Environment. The business environment for the Company and its
corresponding operating results are affected significantly by petroleum industry
exploration and production expenditures. These expenditures are influenced
strongly by oil company expectations about the supply and demand for oil and
natural gas, energy prices, and finding and development costs. Petroleum supply
and demand, pricing, and finding and development costs, in turn, are influenced
by numerous factors including, but not limited to, those described herein in
"Cautionary Statement for the Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995."
-9-
Four key factors that currently influence the worldwide oil market and
therefore current and future expenditures for exploration and development by the
Company's customers are: the degree to which certain large producing countries,
in particular Saudi Arabia and Venezuela, are willing and able to restrict
production and exports of crude oil; the increasing rate of depletion of known
hydrocarbon reserves;. the level of economic growth in certain key areas of the
world, particularly developing Asia, where the correlation between energy demand
and economic growth is particularly strong; and the amount of crude oil in
storage relative to historic levels.
These factors, together with projections for future commodity price
movement, influence overall levels of expenditures for exploration and
development by the Company's customers. Crude oil prices experienced record low
levels in 1998, trading below $15/bbl for most of the year and averaging only
$14.41/bbl - the lowest yearly average recorded since 1983 and down over 30
percent from year-ago levels. Prices were lower due to increased supply from
renewed Iraqi exports, increased OPEC and non-OPEC production, higher
inventories (particularly in North America) and a simultaneous slowing of demand
growth due to the Asian economic downturn and a generally warmer than normal
winter. U.S. natural gas weakened in 1998 compared to the prior year periods,
also due to abnormally warm winter weather. In response to lower oil prices and
expectations for continued low oil prices in 1999, oil companies cut upstream
capital spending, particularly in the second half of 1998.
As a consequence of the current levels of oil and natural gas prices,
which remain depressed from levels experienced in 1997 and 1996, management of
the Company expects demand for the Company's services to remain depressed
throughout 1999, which may result in reduced revenues for 1999 as compared to
1998.
Auditors Report; Uncertainty as to Going Concern; Financial Statement
Presentation. The Company's financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's violations of
various covenants in its loan agreements with its principal secured lender, its
working capital deficiency, operating losses and its lack of liquidity, create
substantial uncertainties as to the Company's ability to continue as a going
concern. The report of PricewaterhouseCoopers LLP dated March 19, 1999 contains
a paragraph referring to these uncertainties. The Company's financial statements
at December 31, 1998 do not include any adjustments that might result from the
outcome of these uncertainties.
The Company's ability to continue as a going concern makes it dependent
on its ability to obtain additional financing and refinance its existing
indebtedness and to generate adequate revenues and cash flow to meet its
obligations. As is described under "Item 6. Management's Discussion and Analysis
or Plan of Operation-Liquidity and Capital Resources," management has
implemented a plan that it believes addresses the uncertainties referred to in
the report of its Independent Accountants. There can be no assurance however
that the Company will be successful in implementing its plan, including
refinancing its senior secured indebtedness, or that unforeseen events may not
prevent its
-10-
implementation. Management of the Company believes that the implementation of
its plan will be substantially dependent upon the continuing cooperation of its
lenders, vendors and customers.
Material Charge to Operations During 1998. In accordance with SFAS No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, the Company recognizes impairment losses on long-lived assets
used in operations when indicators of impairment are present and the projected
undiscounted cash flows over the life of the assets are less than the asset's
carrying amount. If an impairment exists, the amount of such impairment is
calculated based on projections of future discounted cash flows. These
projections are for a period of five years using a discount rate and terminal
value multiple that would be customary for evaluating current oil and gas
service company transactions.
The Company considers external factors in making its assessment.
Specifically, changes in oil prices and other economic conditions surrounding
the industry, consolidation within the industry, competition from other oil and
gas well service providers, the ability to employ and maintain a skilled
workforce, and other pertinent factors are among the factors that could lead
management to reassess the realizability and/or amortization periods of its
goodwill.
The Company experienced a large decline in demand for its services as a
result of a large decrease in the price of oil and natural gas, as well as the
loss of a major customer. Consequently, management evaluated the recoverability
of its long-lived assets in relation to its business segments. The analysis was
first performed on an undiscounted basis which indicated impairment in its
directional drilling segment. The impairment was then calculated using
projections of discounted cash flows over five years utilizing a discount rate
and terminal value multiple commensurate with current oil and gas services
company transactions. At December 31, 1998, the discount rate and the terminal
multiple used was 12% and 6.5, respectively. The assumptions used in this
analysis represent management's best estimate of future results.
The analysis resulted in a charge to operations for the year ended
December 31, 1998 of $11.1 million, which consisted of a write-down of
approximately $8.1 million, approximately $2.4 million, and approximately
$624,000, to goodwill, property, plant and equipment, and inventory,
respectively.
Substantial Dilution; Possible Defaults on Obligations. The Company has
outstanding as of March 31, 1999, common stock purchase warrants, options and
convertible securities entitled to purchase or be converted into an aggregate of
31,073,280 shares of the Company's Common Stock at exercise and conversion
prices ranging from $1.50 to $8.01. Accordingly, if all such securities were
exercised or converted, the 3,942,831 shares of Common Stock issued and
outstanding on March 31, 1999, would represent 11.3% of the shares outstanding
on a fully diluted basis.
-11-
As of March 31, 1999, the Company's Certificate of Incorporation
permits it to issue up to 12,500,000 shares of Common Stock. Accordingly, the
Company has an insufficient number of shares of Common Stock authorized for
issuance in the event all its outstanding warrants and options were exercised in
full and convertible securities fully converted. The Company's loan agreement
dated February 18, 1999 with SJMB, LP ("SJMB"), an affiliate of St. James,
provides that the Company shall, at or before its next annual meeting of
shareholders, secure an amendment to its Certificate of Incorporation to
increase the number of shares that the Company is authorized to issue to a
number sufficient to authorize the issuance of its current outstanding shares
and all shares that are issuable upon conversion of the Company's outstanding
shares and all shares that are issuable upon conversion of the Company's
outstanding convertible notes and exercise of any warrants or options to
purchase Common Stock. Pursuant to this provision, the Company intends to submit
to a vote of its shareholders at its next annual meeting a proposal to increase
the number of shares of Common Stock authorized to 50,000,000 shares. Approval
of this amendment will require the favorable vote of the holders of a majority
of the shares of Common Stock issued and outstanding.
The failure of the shareholders of the Company to approve the amendment
of the Certificate of Incorporation will constitute a breach of the Company's
agreement with SJMB and, if such default remains uncured for 45 days, constitute
an Event of Default under the Company's $2.5 million promissory note held by
SJMB. Under those circumstances, the principal of the note and all accrued
interest would become automatically immediately due and payable. Such default
would also constitute a default under all of the Company's other indebtedness
owing to St. James and its affiliates, aggregating $16.9 million as of March 31,
1999, as well as a default under the Company's borrowings from Fleet.
Accordingly, an aggregate of $29.7 of the Company's indebtedness would be in
default and would entitle the creditors to foreclose on substantially all of the
Company's assets
Availability of Trained Personnel. The operation of the wireline,
directional drilling and other oil and gas well service equipment utilized by
the Company requires the services of employees having the technical training and
experience necessary to obtain the proper operational results. The Company's
operations are to a considerable extent dependent upon the continuing
availability of personnel with the necessary level of training and experience to
adequately operate its equipment. The Company has historically experienced a
high rate of employee turnover. In the event the Company should suffer any
material loss of personnel to competitors or be unable to employ additional or
replacement personnel with the requisite level of training and experience to
adequately operate its equipment its operations could be adversely affected.
While the Company believes that its wage rates are competitive and that its
relationship with its workforce is good, a significant increase in the wages
paid by other employers could result in a reduction in the Company's workforce,
increases in wage rates, or both. If either of these events occurred for a
significant period of time, the Company's revenues could be impacted.
-12-
Dependence on Major Customers. Historically, a large portion of the
Company's revenues has been generated from a relatively small number of
companies. During the year ended December 31, 1998, no single customer accounted
for more than 10% of the Company's revenues. However, a significant reduction in
business done by the Company with its principal customers, if not offset by
revenues from new or existing customers, could have a material adverse effect on
the Company's business, results of operations and prospects.
Substantial Control by Principal Investor. As of March 31, 1999, St.
James Capital Partners, L.P., including certain of its affiliated entities and
partners, collectively referred to as ("St. James") held promissory notes of the
Company convertible into 12,933,333 shares of Common Stock and held warrants to
purchase an additional 16,535,138 shares of Common Stock. Upon conversion of the
notes and exercise of the warrants, St. James would hold an aggregate of
29,468,471 shares representing 88.2% of the Company's shares of Common Stock
then outstanding. In addition, St. James has certain additional contractual
rights which, among other things, give to St. James the right to nominate one
person for election to the Company's Board of Directors, certain preferential
rights to provide future financings for the Company, subject to certain
exceptions, prohibitions against the Company consolidating, merging or entering
into a share exchange with another person, with certain exceptions, without the
consent of St. James. St. James has agreed to convert an aggregate of $4.9
million principal amount of its notes into an aggregate of 3,266,666 shares of
Common Stock (45.3% of the shares then issued and outstanding). The foregoing
give St. James the ability to exert significant influence over the business and
affairs of the Company. The interests of St. James may not always be the same as
the interests of the Company's other securityholders.
Under the terms of the Company's Loan Agreement with Fleet, in the
event that St. James ceases to own and control beneficially and of record (a) at
least 55% of each class of issued and outstanding capital stock of the Company
(on a fully diluted basis) prior to a secondary public offering of stock or
other securities acceptable to Fleet, or (b) pursuant to a secondary public
offering of capital stock (or other securities acceptable to Fleet), at least
30% of each class of issued and outstanding capital stock of the Company (on a
fully diluted basis), the Company will be in breach of a covenant in the Loan
Agreement.
Competition. The wireline, directional drilling, workover and well
servicing industry is a highly-fragmented, intensely competitive and cyclical
business. A number of large and small contractors provide competition in all
areas of the Company's business. The wireline service trucks and other equipment
used is mobile and can be moved from one region to another in response to
increased demand. Many of the Company's competitors have greater financial
resources than the Company, which may enable them to better withstand industry
downturns, to compete more effectively on the basis of price, and to acquire
existing or new equipment.
-13-
Operating Hazards and Uninsured Risks. The Company's oil and gas well
service operations are subject to the many hazards inherent in the oil and gas
drilling and production industry. These hazards can result in personal injury
and loss of life, severe damage to or destruction of property and equipment,
pollution or environmental damage and suspension of operations. The Company
maintains insurance protection as it deems appropriate. Such insurance coverage,
however, may not in all situations provide sufficient funds to protect the
Company from all liabilities that could result from its operations.
Environmental Risks. The Company is subject to numerous domestic
governmental regulations that relate directly or indirectly to its operations,
including certain regulations controlling the discharge of materials into the
environment, requiring removal and cleanup under certain circumstances, or
otherwise relating to the protection of the environment. Laws and regulations
protecting the environment have become more stringent in recent years and may in
certain circumstances impose "strict liability" and render a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Such laws and regulations may expose the Company to liability for the
conduct of, or conditions caused by, others, or for acts of the Company that
were in compliance with all applicable laws at the time such acts were
performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company.
Seasonality and Weather Risks. The Company's operations are subject to
seasonal variations in weather conditions, daylight hours and favorable weather
conditions for its off-shore wireline operations. Since the Company's activities
take place outdoors, the average number of hours worked per day, and therefore
the number of wells serviced per day, generally is less in winter months than in
summer months, due to an increase in snow, rain, fog and cold conditions and a
decrease in daylight hours. Furthermore, demand for the Company's wireline
services by oil and gas companies in the first quarter is generally lower than
at other times of the year. As a result, the Company's revenue and gross profit
during the first quarter of each year are typically low as compared to the other
quarters.
Dependence on Key Personnel. The Company's success depends on, among
other things, the continued active participation of William L. Jenkins,
President, Allen R. Neel, Executive Vice-President, Danny Ray Thronton,
Vice-President, Operations, and certain of the Company's other officers and key
operating personnel. The loss of the services of any one of these persons could
have a material adverse effect on the Company. The Company has entered into
employment agreements with each of its executive officers, including Messrs.
Jenkins (through December 2001) and Thornton and Neel (through April 1, 2000),
and has purchased "key-man" life insurance with respect to each of such persons.
Absence of Dividends. The Company has not declared or paid any cash
dividends on the Common Stock and currently anticipates that, for the
foreseeable future, any earnings will be retained for the development of the
Company's business. Accordingly, no cash dividends are
-14-
contemplated to be declared or paid on the Common Stock. In addition, the
Company's existing loan agreements prohibit the payment of cash dividends. See
"Price Range of Common Stock; Dividend Policy."
ITEM 2. PROPERTIES
The Company leases 6,500 square feet of office space in Columbus,
Mississippi for a five-year term expiring on September 30, 2001 for its
executive offices. The monthly rental is $1,900, plus electric and gas
utilities. In addition, the Company maintains District Offices at 21 locations
throughout its service area and a manufacturing facility in Laurel, Mississippi.
The aggregate annual rental for these facilities is $522,000. Of such facilities
three are owned by the Company and the others are leased with rental periods of
from a month-to-month basis to five years. The Company believes that all of the
facilities are adequate for its current requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its officers and Directors are respondents
in an arbitration proceeding commenced by Monetary Advancement International,
Inc. before the American Arbitration Association in New York, New York. The
claimant seeks recompense against the Company and the other named respondents
for the alleged failure to pay compensation in the form of shares of stock of
the Company for services allegedly rendered. The respondents have submitted an
answer and counterclaims and have initiated a Court proceeding seeking a partial
stay of the arbitration proceeding. The Company deems the allegations of the
claimant to be without merit and intends to vigorously contest the case.
The Company and Southwick Investments, Inc. are parties in an
arbitration proceeding before the American Arbitration Association in Atlanta,
Georgia. Initially, Southwick filed a claim in the state courts of Georgia,
seeking to recover damages for failure to furnish an option to purchase 50,000
shares of the Company's stock and pay other fees allegedly due pursuant to a
Professional Services Agreement between the Company and Southwick. The Company
counterclaimed against Southwick, alleging failure of performance by Southwick.
The Company deems the allegation of Southwick to be without merit and intends to
vigorously contest the defense of this case and to pursue its counterclaim
against Southwick.
-15-
The Company is a defendant in a number of other legal proceedings which
it considers to be routine litigation that is incidental to its business. The
Company does not expect to incur any material liability as a consequence of such
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
ended December 31, 1998, to a vote of security holders of the Company, through
the solicitation of proxies, or otherwise.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted in the OTC Bulletin Board under
the trading symbol BWWL. The following table sets forth the bid prices for the
Company's Common Stock for the periods indicated as provided by the OTC Bulletin
Board:
BID PRICES
------------------------------------------
1997 HIGH LOW
- -------------------------------------------------------------------------------------------------
First Quarter $4.44 $2.75
Second Quarter $4.19 $2.56
Third Quarter $6.81 $3.13
Fourth Quarter $9.63 $6.00
BID PRICES
------------------------------------------
1998 HIGH LOW
- -------------------------------------------------------------------------------------------------
First Quarter $8.00 $5.88
Second Quarter $9.34 $5.00
Third Quarter $5.75 $2.38
Fourth Quarter $2.69 $0.88
BID PRICES
------------------------------------------
1999 HIGH LOW
- --- ---------------------------------------------------------------------------------------------
First Quarter $2.50 $1.00
The foregoing amounts represent inter-dealer quotations without
adjustment for retail markups, markdowns or commissions, and do not represent
the prices of actual transactions. On April 12, 1999, the closing bid quotation
for the Common Stock, as reported by the OTC Bulletin Board, was $1.19.
-17-
As of April 12, 1998, the Company had approximately 445 shareholders of
record and believes it has in excess of 500 beneficial holders of its Common
Stock, including in excess of 350 holding 100 shares or more. The Company has
never paid a cash dividend on its Common Stock and management has no present
intention of commencing to pay dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company's results of operations are affected primarily by the
extent of utilization and rates paid for its services and equipment. Revenues
are also affected by the success of the Company's efforts to increase its
penetration of the market for its services by intensified marketing of its
services. Incremental demand for the Company's services is affected by the level
of oil and natural gas well drilling activity and efforts by oil and gas
producers to improve well production and operating efficiencies. Both short-term
and long-term trends in oil and natural gas prices affect the utilization of the
Company's services. Declines in 1998 in the prevailing prices for oil and
natural gas adversely impacted the Company's operations.
The following table sets forth the Company's revenues from its three
principal lines of business for each of the three years ended December 31, 1998:
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Wireline Services $11,592 $ 9,513 $5,874
Directional Drilling 21,311 5,932 -0-
Workover and Completion 1,533 1,618 1,709
-------------------------------------------------------------------------
$34,437 $17,063 $7,582
=========================================================================
-18-
TWELVE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
Revenues increased by $17.3 million or 101% to $34.4 million for the
year ended December 31, 1998 as compared to revenues of $17.1 million for the
year ended December 31, 1997. Wireline services revenues increased by $2.1
million in 1998 primarily because of the acquisition of Petro Wireline, the
Company's establishment of an off-shore wireline operation and a new on-shore
wireline facility at Minden, Louisiana. Directional drilling revenues increased
as a consequence of the Diamondback activities operated for a full year and the
acquisition of the Phoenix assets in March 1998.
Operating costs increased by $18.2 million for the year ended December
31, 1998, as compared to 1997. This increase was due primarily to the increase
in the level of activities as a consequence of the acquisitions completed in
1998. Salaries and benefits increased by $6.7 million for 1998 as compared to
1997. This was due primarily to hiring of additional personnel as a consequence
of the acquisitions completed. Operating costs as a percentage of revenues
increased to 88.5% in 1998 from 71.8% in 1997 primarily because declining
billing rates and equipment utilization.
Selling, general and administrative expenses increased by approximately
$5.2 million from $2.1 million in 1997 to $7.5 million in 1998. As a percentage
of revenues, selling, general and administrative expenses increased from 12.8%
in 1997 to 21.6% in 1998, primarily as a result of increased fixed expenses
arising out of acquisitions and declining revenues in the last half of 1998. At
December 31, 1998, the Company's accounts receivable were $3.6 million, net of a
reserve of $2.2 million. The reserve arose out of liquidity shortages
experienced by the Company's customers because of declines in the prevailing
prices received for oil and natural gas production and contributed to the
increase in selling, general and administrative expenses.
Depreciation and amortization increased from $1.4 million in 1997, to
$4.8 million in 1998, primarily because of the higher asset base of depreciable
properties in 1998 over 1997.
In accordance with SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows over the
life of the assets are less than the asset's carrying amount. If an impairment
exists, the amount of such impairment is calculated based on projections of
future discounted cash flows. These projections are for a period of five years
using a discount rate and terminal value multiple that would be customary for
evaluating current oil and gas service company transactions.
The Company considers external factors in making its assessment.
Specifically, changes in oil prices and other economic conditions surrounding
the industry, consolidation within the
-19-
industry, competition from other oil and gas well service providers, the ability
to employ and maintain a skilled workforce, and other pertinent factors are
among the factors that could lead management to reassess the realizability
and/or amortization periods of its goodwill.
The Company experienced a large decline in demand for its services as a
result of a large decrease in the price of oil and natural gas, as well as the
loss of a major customer. Consequently, management evaluated the recoverability
of its long-lived assets in relation to its business segments. The analysis was
first performed on an undiscounted basis which indicated impairment in its
directional drilling segment. The impairment was then calculated using
projections of discounted cash flows over five years utilizing a discount rate
and terminal value multiple commensurate with current oil and gas services
company transactions. At December 31, 1998, the discount rate and the terminal
multiple used was 12% and 6.5, respectively. The assumptions used in this
analysis represent management's best estimate of future results.
The analysis resulted in a charge to operations for the year ended
December 31, 1998 of $11.1 million, which consisted of a write-down of
approximately $8.1 million, approximately $2.4 million, and approximately
$624,000, to goodwill, property, plant and equipment, and inventory,
respectively.
Interest expense and amortization of debt discount increased by $2.3
million for 1998 as compared to 1997. This was directly related to the increased
amounts of indebtedness outstanding in 1998 incurred to finance acquisitions.
Net gain on sale of fixed assets increased in 1998 to $155,000 from
$26,000 in 1997. Other income decreased by $10,694 in 1998 because of a decrease
in interest income.
Income tax benefit was $1.1 million in 1998 compared to an expense of
$222,000 for 1997. The income tax benefit arises out of the Company's net losses
for the year. See "Note 10 of Notes to Consolidated Financial Statements."
The Company's net loss for 1998 was $21.0 million, of which $11.1
million was the result of the loss from impairment of intangibles, inventories
and property, plant and equipment discussed above. The Company's loss was
primarily attributable to the foregoing impairment as well as the related
declines in demand for the Company's services and equipment utilization which
arose in 1998 out of the declines in prices for oil and natural gas.
-20-
LIQUIDITY AND CAPITAL RESOURCES
Cash used in Company operating activities was $826,000 for the year
ended December 31, 1998 as compared to cash provided by operating activities of
$1.2 million for the year ended December 31, 1997. Investing activities of the
Company used cash of $6.5 million during the year ended December 31, 1998 for
the acquisition of property, plant and equipment and other businesses offset by
proceeds from the sale of fixed assets of $300,000. During the year ended
December 31, 1997, acquisitions of property, plant and equipment and other
businesses used cash of $3.8 million offset by proceeds of $74,000 from the sale
of fixed assets. Financing activities provided cash of $10.4 million from the
net proceeds from the issuance of convertible notes and warrants, other
borrowings and the sale of common stock during the year ended December 31, 1998
offset by principal payments on long-term notes and capital lease obligations
and loan origination costs of $2.8 million. During the year ended December 31,
1997, the sale of convertible notes and warrants and the sale of common stock
resulted in proceeds of $2.6 million offset by principal payments on long-term
debt and capital lease obligations of $347,000.
During the year ended December 31, 1998, the Company expended $897,000
for the acquisition of property, plant and equipment financed under capital
leases and notes payable and incurred an additional $20.2 million of notes
payable in connection with the acquisition of businesses. During the year ended
December 31, 1997, the Company expended $1.5 million for the acquisition of
property, plant and equipment financed under capital leases and notes payable
and incurred an additional $9.1 million of notes payable in connection with the
acquisition of businesses.
During 1998, the Company experienced a decline in the demand for its
products and services as a result of a significant decrease in the price of oil
and natural gas. The decline in demand materially impacted the Company's
revenues, liquidity and its ability to remain in compliance with covenants in
its loan agreements and meet its obligations during the last half of 1998. While
these conditions continued throughout much of the first quarter of 1999, prices
for oil and natural gas had improved moderately by the beginning of the second
quarter. Management of the Company believes that an improvement in its revenues
will be dependent upon a continuing period of improved pricing and decisions by
oil and natural gas producers to make commitments to engage in oil and natural
gas well enhancements.
-21-
The Company's outstanding indebtedness includes primarily senior
indebtedness aggregating approximately $18.9 million at December 31, 1998, other
indebtedness of approximately $3.7 million, and $16.9 million owing to St. James
Capital Partners, L.P. ("SJCP") and its affiliates. All of this indebtedness is
shown as currently due and payable on the Company's consolidated balance sheet
at December 31, 1998.
Management's plans with respect to addressing its current financial
situation include primarily the following:
o In March 1999 the Company borrowed an additional $2.5 million
from an affiliate of SJCP, the Company's principal investor.
o The Company is engaged in efforts to refinance its senior
indebtedness which is intended to provide, among other things,
more favorable terms and thereby improve liquidity.
o In March 1999, the Company entered into a forbearance agreement
with Fleet Capital Corp. which, among other things, permitted
the Company to defer payments of principal to Fleet through
June 30, 1999.
o In April 1999, GE Capital Corp. agreed to defer payments of
interest on an aggregate of $3.9 million of secured
indebtedness through June 30, 1999.
o The Company has continued through the first quarter of 1999 to
further implement a cost reduction program first implemented in
the last half of 1998 and intends to focus on cost reduction
opportunities through 1999.
Management also intends to raise additional capital in conjunction with
the foregoing plan, which may be either debt or equity capital or a combination
thereof, which, together with the renegotiation of certain outstanding
indebtedness, will be used to meet the Company's other current liquidity
requirements. Management expects that, upon conclusion of the plan, its
indebtedness owing to SJCP will be long-term or converted into equity
securities.
Management believes that, provided oil and natural gas prices remain
relatively stable with prices that existed at the end of the first quarter of
1999, the foregoing plan together with the cost-cutting program implemented in
1998, which included reductions in personnel and salaries of existing personnel,
closing and consolidating certain district offices, together with other
cost-cutting activities, should enable the Company to operate, commencing with
the second quarter of 1999, without a further deterioration of its liquidity
condition.
Management of the Company is unable to assure that its efforts to
implement the plan described above will be successful or state the terms under
which or when the proposed
-22-
transactions will be completed. Management expects that in order to complete
such transactions substantial amounts of equity securities may be required to be
issued which may materially dilute the Company's existing stockholders.
YEAR 2000 COMPUTER ISSUES
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 is often denoted by such hardware
and software as "98." It is probable that such hardware and/or software will
interpret "00" as representing the year 1900 rather than the year 2000. This
"Year 2000" issue potentially affects all individuals and companies. The Company
has and continues to evaluate its information technology systems, hardware and
non-information technology systems to assess modifications needed for the Year
2000. These systems include those utilized for financial record keeping and
certain oil and gas service equipment. A member of senior management was
selected to oversee the Year 2000 project. The project work plan involves the
following phases: inventory of critical and non-critical systems and hardware,
assessment and certification of third party systems. The Company has completed
its inventory of systems and hardware. All critical systems are supported by
third party vendors. The Company is currently in the process of certifying these
systems with the vendors. With respect to other third party relationships, the
Company is inquiring of certain vendors, customers, and other third parties that
supply critical services to determine their preparedness and ability to continue
normal operations.
To date, the Company has incurred minimal costs related to the Year
2000 project and does not anticipate any significant additional costs. Such
costs are expensed as incurred.
Management expects that Year 2000 issues will be addressed on a
schedule and in a manner that will prevent such issues from having a material
effect on the Company's results of operations, liquidity or financial condition.
While the Company has and will continue to pursue Year 2000 compliance, there
can be no assurance that the Company and its vendors, customers and other third
parties which supply critical services will be successful in identifying and
addressing all material Year 2000 issues. It is possible that the Company's
financial position, results of operations, or cash flows could be disrupted by
Year 2000 problems experienced by its vendors and customers, that utilize its
services, financial institutions or other parties. The Company is unable to
quantify the effect, if any, of Year 2000 computer problems that may be
experienced by these third parties.
-23-
INFLATION
The Company's revenues have been and are expected to continue to be
affected by fluctuations in the prices for oil and gas. Inflation did not have a
significant effect on the Company's operations in 1998.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements of the Company meeting the
requirements of Regulation S-B are filed on the succeeding pages of this Item 7
of this Annual Report on Form 10-KSB, as listed below:
Report of Independent Accountants for the Years Ended
December 31, 1998, 1997 and 1996.................................................... F-1
Consolidated Balance Sheets as of
December 31, 1998 and 1997.......................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998, 1997 and 1996........................................ F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE:
During the two fiscal years ended December 31, 1998, the Company has
not filed any Current Report on Form 8-K reporting any change in accountants in
which there was a reported disagreement on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
-24-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table contains information concerning the current
Directors and executive officers of the Company:
NAME AGE POSITION
------------------------------------------------------------------------------------------
William L. Jenkins 46 President, Chief Operating Officer
and Director
Allen R. Neel 42 Executive Vice-President
Danny Ray Thornton 48 Vice-President - Operations
John L. Thompson 41 Director
Charles E. Underbrink 46 Director
William L. Jenkins has been President, Chief Operating Officer and a
Director of the Company since March 1989. From 1973 until 1980, Mr. Jenkins held
a variety of field engineering and training positions with Welex - A Halliburton
Company, in the South and Southwest. From 1980 until March 1989, Mr. Jenkins
worked with Triad Oil & Gas, Inc., as a consultant, providing services to a
number of oil and gas companies. During that time, Mr. Jenkins was involved in
the organization of a number of drilling and oil field service companies,
including a predecessor of the Company, of which he served as
Secretary/Treasurer until 1988. Mr. Jenkins has over twenty years' experience in
the oil field service business. Mr. Jenkins is Mr. Thornton's brother-in-law.
Allen R. Neel, is the Executive Vice-President of the Company and has
been employed by the Company since August 1990. He is currently in charge of the
Company's directional drilling activities. In 1981, Mr. Neel received his BS
Degree in Petroleum Engineering from the University of Alabama. From 1981 to
1987, Mr. Neel worked in engineering and sales for Halliburton Services. From
1987 to 1989, he worked as a District Manager for Graves Well Drilling Co. When
the Company acquired the assets of Graves in 1990, Mr. Neel assumed a position
with the Company.
Danny Ray Thornton is a Vice-President of the Company and has been
employed by the Company since March 1989. From 1982 to March 1989, Mr. Thornton
was the president and a
-25-
principal stockholder of Black Warrior Mississippi, the Company's operational
predecessor. Mr. Thornton has been engaged in the oil and gas services industry
in various capacities since 1978. His principal duties with the Company include
supervising and consulting on wireline and workover operations. Mr. Thornton is
Mr. Jenkins' brother-in-law,
John L. Thompson is a Director and President of St. James Capital
Corp., a Houston-based merchant banking firm. St. James Capital Corp. also
serves as the General Partner of St. James Capital Partners, L.P., an investment
limited partnership specializing in merchant banking related investments.
Additionally, he is Chairman of the Board of Herlin Industries, Inc., a
publicly-held holding company engaged in energy services and is a Director of
Industrial Holdings, Inc., a publicly-held company. Prior to co-founding St.
James, Mr. Thompson served as a Managing Director of Corporate Finance at Harris
Webb & Garrison, a regional investment banking firm with a focus on mergers and
acquisitions, financial restructuring and private placements of debt and equity
issues. Mr. Thompson was elected to the Company's Board of Directors pursuant to
the terms of agreements between the Company and St.James Capital Partners, L.P.
See "Certain Transactions" for a description of the transaction.
Charles E. Underbrink was elected a Director on April 1, 1998. He has
been, since July 1995, the Chief Executive Officer and Chairman of St. James
Capital Corp., a Houston based merchant banking firm and the general partner of
St. James Capital Partners, L.P. Mr. Underbrink has been, from August 1996 to
the present, a principal of HUB, Inc. a lender to small capitalization
businesses and the operator of mini-storage facilities located in Minnesota and
Wisconsin.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and beneficial owners of more than ten percent
(10%) of the Company's Common Stock are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms that they file. To the best
of the Company's knowledge, based solely on a review of such reports as filed
with the Securities and Exchange Commission, all such persons have complied with
such reporting requirements.
-26-
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION - GENERAL
The following table sets forth the compensation paid or awarded to the
President and Chief Executive Officer of the Company and each other executive
officer of the Company who received compensation exceeding $100,000 during 1998
for all services rendered to the Company in each of the years 1998, 1997 and
1996.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------------------------------------------------
BONUS/ANNUAL SECURITIES LONG-TERM
NAME AND INCENTIVE UNDERLYING INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY AWARD OPTIONS PAYOUTS COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------
William L. Jenkins 1998 $146,275 -0- 200,000 -0- $1,216(1)
President 1997 $110,000 -0- -0- -0- $1,216(1)
1996 $95,000 -0- -0- -0- $1,216(1)
Allen R. Neel 1998 $131,334 -0- -0- $8,400(2)
Executive Vice President 1997 $78,500 -0- 80,000 -0- -0-
1996 $60,500 -0- -0- -0- -0-
- ---------------------------------
(1) Includes the premiums paid by the Company on a $1,000,000 insurance
policy on the life of Mr. Jenkins which names his wife as beneficiary
and owner of the policy.
(2) Automobile allowance paid to Mr. Neel.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1998.
The following table provides information with respect to the above named
executive officers regarding options granted to such persons during the
Company's year ended December 31, 1998.
% OF TOTAL OPTIONS/ MARKET
NUMBER OF SECURITIES SARS GRANTED TO EXERCISE OR PRICE ON
UNDERLYING SARS/ EMPLOYEES IN BASE PRICE EXPIRATION DATE OF
NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SHARE) DATE GRANT
- --------------------- ----------------------------------------------------------------------------------------------
William Jenkins 200,000(1) 37% $6.69 1/1/03 $6.69
- --------------------------
(1) Of which, 100,000 shares are exercisable on grant of the option and the
remaining shares become exercisable on January 1, 2000 and January 1,
2001.
-27-
STOCK OPTION HOLDINGS AT DECEMBER 31, 1998.
The following table provides information with respect to the above
named executive officers regarding Company options held at the end of the
Company's year ended December 31, 1998 (such officers did not exercise any
options during the most recent fiscal year).
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31,1998 AT DECEMBER 31, 1998 (1)
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
William Jenkins 100,000 100,000 -0- -0-
Allen Neel 60,000 20,000 -0- -0-
- ----------------------------
(1) Based on the closing sales price on December 31,1998 of $1.00.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement, dated January 1,
1998, with William L. Jenkins, to serve as its President, Chief Executive
Officer and a Director of the Company. The Employment Agreement, which
terminates on December 31, 2001, provides for an annual base salary of $225,000.
Mr. Jenkins has agreed to a reduction in his salary to $85,000 as a consequence
of the decline in oil and gas prices and the impact on the Company's operations.
The Employment Agreement provides for certain increases in Mr. Jenkins base
compensation in the years 1999, 2000 and 2001 if the Company meets certain
performance objectives. Pursuant to the agreement, Mr. Jenkins was granted a
ten-year option to purchase 200,000 shares of the Company's common stock at an
exercise price of $6.6875 per share, the fair market value of the stock on
January 1, 1998, the date the option was granted. With certain exceptions, the
agreement restricts Mr. Jenkins from engaging in activities in competition with
the Company during the term of his employment and, in the event Mr. Jenkins
terminates the agreement prior to its termination date, for a period of eighteen
(18) months thereafter and also in the event he terminates the agreement, from
soliciting for employment any employee of the Company for a period of two years
after termination.
The Company has entered into two-year employment agreements terminating
on April 1, 2000 with each of Allen R. Neel, Executive Vice-President and Danny
Ray Thornton, Vice-President, Operations, of the Company. Mr. Neel is to receive
base compensation of $135,000 per year; however, he has agreed to a reduction to
$85,000 per year. Mr. Thornton receives base compensation of $75,000 per year.
On each anniversary date of the agreements, the Company and the employee agree
to renegotiate the base salary taking into account the rate of inflation,
overall profitability and the cash position of the Company, the performance and
profitability of the areas for which the employee is responsible and other
factors. The agreements contain
-28-
restrictions on such persons engaging in activities in competition with the
Company during the term of their employment and for a period of two years there
after. In addition, the agreements provide for the grant to such employees of
options to purchase 50,000 shares of the Company's Common Stock on execution
of the agreements and 10,000 shares on each of the first three anniversary dates
of the agreements, provided such persons continue to be employed by the Company,
exercisable at a price of $2.625 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1999 (a) by each person
who is known by the Company to own beneficially more than five percent (5%) of
the Company's Common Stock, (b) by each of the Company's Directors and officers,
and (c) by all Directors and officers as a group. As of March 31, 1999, the
Company had 3,942,831 shares of Common Stock outstanding.
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES(3)
NAME AND ADDRESS (1)(2) OWNED
------------------------------------------------------------------------------------------------
William L. Jenkins 410,000 (4) 5.1%
Danny Ray Thornton 80,666 (5) 2.1%
Allen R. Neel 80,000 (5) 2.1%
St. James Capital Partners, L.P.
and affiliates(6)
777 Post Oak Boulevard - Suite 950 29,468,471 88.2%
Houston, Texas 77056
Bendover Corp. (7)
Alan W. Mann (8)
M. Dale Jowers
13843 Highway 105 West - Suite 212 647,569 17.4%
Conroe, Texas 77304
All Directors and Officers as a Group
(5 persons including the above) 33,771,302 (4)(5)(6) 88.9%
- -----------------------------------
(1) This tabular information is intended to conform with Rule 13d-3
promulgated under the Securities Exchange Act of 1934 relating to the
determination of beneficial ownership of securities. The tabular
information gives effect to the exercise of warrants or options
exercisable within 60 days of the date of this table owned in each case
by the person or group whose percentage ownership is set forth opposite
the respective percentage and is based on the assumption that no other
person or group exercise their option.
(2) Unless otherwise indicated, the address for each of the above is c/o
Black Warrior Wireline Corp., 3748 Highway #45 North, Columbus,
Mississippi 39701.
-29-
(3) The percentage of outstanding shares calculation is based upon
3,942,831 shares outstanding as of March 31, 1999, except as otherwise
noted.
(4) Includes 200,000 shares issuable on exercise of an option, of which the
option is presently exercisable with respect to 100,000 shares.
(5) Includes 80,000 shares issuable on exercise of an option at a price of
$2.625 per share, of which 62,500 shares are immediately exercisable
and an additional 12,500 shares will become exercisable on April 1,
1999 and each anniversary thereafter, provided, the employee remains
employed by the Company.
(6) Includes shares issuable to St. James Capital Partners, LP and its
affiliates on conversion of notes and exercise of warrants. See "Item
12. Certain Relationships and Related Transactions."
(7) Based on information contained in the Schedule 13D dated October 9,
1997. On October 9, 1997, the Company issued 647,569 shares and paid
$586,000 in cash to purchase substantially all the assets of
Diamondback Directional, Inc. (which corporation subsequently changed
its name to Bendover Corp.). Messrs. Mann and Jowers each own
approximately 42.5% of the outstanding capital stock of Bendover Corp.
(8) Mr. Mann also holds directly 784 shares of Common Stock in addition to
the 647,569 shares held by Bendover Corp. in which he has an indirect
beneficial interest.
(9) Also includes the shares held by St. James and the shares issuable on
exercise of the vested portion of the options held by Messrs. Thornton
and Neel.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 9, 1998, the Messr. Danny Ray Thornton, Allen R. Neel and
Reese James, officers and employees of the Company, agreed to release their lien
on the Company's receivables in exchange for confirmation by the Company of
certain obligations to such persons which consist of (i) reimbursement of such
persons for their legal fees and expenses incurred in connection with their
efforts to recover from Monetary Advancement International Inc., and (ii) the
agreement to make such persons whole by issuing stock of the Company having a
value of $240,000, based on the bid price at the date of issuance, less any
recover from MAII.
In March 1995, the Company received a letter from the District Director
of the Internal Revenue Service (the "IRS") in which he formally notified the
Company that the IRS had preliminarily calculated deficiencies of $35,057 and
$541,727 in federal taxes for the years ended December 31, 1989 and December 31,
1990, respectively. The adjustments proposed by the IRS included the valuation
of bonus stock compensation to William L. Jenkins, President of the Company, as
well as certain other items. The Company agreed to pay whatever personal tax
liability was determined to be owing by Mr. Jenkins related to the bonus stock
resulting from an unfavorable resolution of the IRS' proposed adjustment. In
June 1996, the Company settled this matter with the IRS on terms which, among
other things, resulted in an additional tax liability to Mr. Jenkins in the
amount of $98,524 for taxes, penalties and interest related to the bonus stock.
The Company reimbursed Mr. Jenkins for this sum on January 23, 1997 and has
agreed to further reimburse Mr. Jenkins for the tax liability resulting from
this payment and any further tax reimbursement payments made to Mr. Jenkins in
future years.
-30-
Commencing in June 1997 through February18, 1999, the Company entered
into a series of transactions with St. James whereby the Company sold to St.
James on the following dates for an aggregate purchase price of $19.4 million,
the following securities:
DATE SECURITY PRINCIPAL AMOUNT
- ---------------------------------------------------------------------------------------------------------------
June 6, 1997 9% Convertible Promissory Note $2.0 million (1)
October 9, 1997 7% Convertible Promissory Note $2.9 million (2)
January 23, 1998 8% Convertible Promissory Note $10.0 million(3)
October 30, 1998 10% Convertible Promissory Note $2.0million (4)
February 18, 1999 10% Convertible Promissory Note $2.5 million (5)
DATE NUMBER OF WARRANTS (6)(7) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------
June 6, 1997 1,221,000 June 5, 2002
October 9, 1997 2,239,138 October 10, 2002
January 23,1998 9,000,000 January 23, 2003
October 30, 1998 2,000,000 October 30, 2003
February 18, 1999 2,075,000 February 18, 2004
- ---------------------------
(1) Convertible at a current conversion price of $1.50 per share, as
adjusted through February 18, 1999 pursuant to anti-dilution
adjustments, into an aggregate of 1,333,333 shares of Common Stock.
(2) Convertible at a current conversion price of $1.50 per share, as
adjusted through February 18, 1999 pursuant to anti-dilution
adjustments, into an aggregate of 1,933,333 shares of Common Stock.
(3) Convertible at an exercise price of $1.50 per share, as adjusted
through February 18, 1999 pursuant to anti-dilution adjustments, into
an aggregate of 6,666,667 shares of Common Stock.
(4) Convertible at a current conversion price of $1.50 per share, as
adjusted through February 18, 1999 pursuant to anti-dilution
adjustments, into an aggregate of 1,333,333 shares of Common Stock.
(5) Convertible at a current conversion price of $1.50 per share, subject
to anti-dilution adjustments, into an aggregate of 1,666,667 shares of
Common Stock.
(6) Each warrant represents the right to purchase one share of Common Stock
at $1.50 per share, subject to anti-dilution adjustments.
(7) As adjusted and subject to further anti-dilution adjustment.
On each of June 6 and October 9, 1997, January 23 and October 30, 1998,
and February 18, 1999 the Company entered into Purchase Agreements, and related
notes, warrants and security documents (the "Agreements") with St. James or
certain affiliated entities regarding the purchase of the securities described
in the tables above. Except for those terms relating to the amounts of
securities purchased, maturity and expiration dates, interest rates, and
conversion and exercise prices, each of such Agreements contained substantially
identical terms and conditions relating to the purchase of the securities
involved. Payment of principal and interest on all the notes is collateralized
by substantially all the assets of the Company, subordinated, as of March 31,
1999, to borrowings by the Company from Fleet in the maximum aggregate amount of
$11.5 million. The notes are convertible into shares of the Company's Common
Stock at the
-31-
conversion prices set forth in the tables above, subject to anti-dilution
adjustments for certain issuances of securities by the Company at prices per
share of Common Stock less than the conversion price then in effect in which
event the conversion price is reduced to the lower price at which such shares
were issued. Pursuant to the Agreements, the Company agreed to issue to St.
James for nominal consideration warrants to purchase shares of Common Stock of
the Company exercisable at the prices set forth in the tables above, subject to
anti-dilution adjustment for certain issuances of securities by the Company at
prices per share of Common Stock less than the exercise prices then in effect in
which event the exercise price is reduced to the lower price at which such
shares were issued. The shares issuable on conversion of the notes and exercise
of the warrants have demand and piggy-back registration rights under the
Securities Act of 1933. The Company agreed that one person designated by St.
James will be nominated for election to the Company's Board of Directors. Mr.
John L. Thompson, currently a Director of the Company, serves in this capacity.
The Agreements grant St. James certain preferential rights to provide future
financings to the Company, subject to certain exceptions. The notes also contain
various affirmative and negative covenants, including a prohibition against the
Company consolidating, merging or entering into a share exchange with another
person, with certain exceptions, without the consent of St. James. Events of
default under the notes include, among other events, (i) a default in the
payment of principal or interest; (ii) a default under any of the notes and the
failure to cure such default for five days, which will constitute a cross
default under each of the other notes; (iii) a breach of the Company's
covenants, representations and warranties under any of the Agreements; (iv) a
breach under any of the Agreements between the Company and St. James, subject to
certain exceptions; (v) any person or group of persons acquiring 40% or more of
the voting power of the Company's outstanding shares who was not the owner
thereof as of October 30, 1998, a merger of the Company with another person, its
dissolution or liquidation or a sale of all or substantially all its assets; and
(vi) certain events of bankruptcy. In the event of a default under any of the
notes, subject to the terms of an agreement between St. James and Fleet, St.
James could seek to foreclose against the collateral for the notes.
In the October 1997 and January 1998 agreements, St. James agreed to
convert its $2.0 million convertible note dated June 5, 1997 and its $2.9
million convertible note dated October 10, 1997 into shares of the Company's
Common Stock at such time as the Company has filed a registration statement
under the Securities Act of 1933 relating to the shares issuable on conversion
of such notes and on exercise of the warrants issued to St. James and such
registration statement has been declared effective.
In March 1998, St. James agreed to certain amendments to its agreements
with the Company in connection with the Company's borrowings from Fleet to
finance the completion of the acquisition of assets from Phoenix Drilling
Services, Inc.. Among other things, these amendments required St. James to
extend the maturity date of $10.0 million of indebtedness owing to it from
maturing in 18 months to maturing in 36 months, required St. James to fully
subordinate the payment of principal and interest on the indebtedness owing to
it to the prior payment in full of the Company's indebtedness to Fleet, and
required St. James and its affiliate
-32-
to refrain from selling shares of Common Stock of the Company below certain
percentage levels of the Company's shares outstanding so long as the
indebtedness remains owing to Fleet. In consideration for these amendments, the
Company agreed to reduce the exercise and conversion prices of the common stock
purchase warrants and note issued to St. James in January 1998 to $5.50 per
share and to provide that in the event shares are issued by the Company
thereafter at a price less than $5.50 per share such exercise and conversion
prices will be reduced to a price equal to the price at which the shares are
issued. The $5.50 price was based on a price at which the Company issued shares
of Common Stock in a private placement in March 1998, at the time St. James
agreed to the amendments to its agreements.
At June 30, 1998, the Company was not in compliance with certain
financial covenants of its Loan and Security Agreement with Fleet. Under the
terms of the loan agreement, the breach of these covenants constituted events of
default and at the option of Fleet, the obligations of the Company to Fleet were
subject to being declared by Fleet to be immediately due and payable.
On October 30, 1998, the Company entered into an Amended and Restated
Loan Agreement with Fleet pursuant to which, among other things, Fleet waived
any and all defaults which existed under the prior loan agreement. Under the
Amended and Restated Loan Agreement, Fleet agreed to loan to the Company up to
an additional $1.2 million, subject however to the Company borrowing an
additional $1.5 million subordinated to the Company's borrowings from Fleet and
an additional $500,000 borrowed by the Company from St. James in July 1998 being
converted into a loan subordinated to the Company's indebtedness owing to Fleet.
In order to obtain the additional $1.5 million of subordinated
borrowings necessary to complete the closing of the Company's Amended and
Restated Loan Agreement with Fleet, on October 30, 1998, the Company entered
into an agreement with SJMB, L.P. ("SJMB"), an affiliate of St. James, whereby
SJMB agreed to purchase up to $2.0 million principal amount of the Company's
convertible promissory note due on March 16, 2001. Such amount included a
refinancing of the $500,000 loaned in July 1998 and provided $750,000 to the
Company on October 30, 1998 to close the amended loan agreement with Fleet.
Subject to the Company meeting certain conditions, SJMB agreed to loan an
additional $750,000 to the Company, which funds were loaned on December 1, 1998.
The note issued to SJMB is convertible into shares of the Company's Common Stock
at an original conversion price of $2.25 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, in which
event the conversion price is reduced to the lower price at which such shares
are issued. The Company also agreed to issue to SJMB warrants to purchase shares
of Common Stock exercisable at a price of $2.25 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, in
which event the exercise price is reduced to the lower price at which such
shares are issued and the number of
-33-
shares issuable is adjusted upward. Under the agreement with SJMB, warrants to
purchase 1,333,333 shares of Common Stock were issued.
On February 18, 1999, in order to obtain the additional $2.5 million of
borrowings necessary to complete the closing under the Forebearance Agreement
with Fleet, the Company entered into an agreement with two affiliates of St.
James, to purchase up to $2.5 million principal amount of the Company's
convertible promissory note due on March 16, 2001. The note is convertible into
shares of the Company's Common Stock at an original conversion price of $1.50
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, in which event the conversion price is reduced
to the lower price at which such shares are issued. The Company also issued
warrants to purchase 2,075,000 shares of Common Stock exercisable at a price of
$1.50 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, in which event the exercise price is reduced to
the lower price at which such shares are issued and the number of shares
issuable is adjusted upward.
As a consequence of the issuance of the convertible note and warrant to
SJMB in October 1998 with conversion and exercise prices of $2.25, under the
terms of the anti-dilution provisions of the outstanding convertible notes and
warrants held by St. James, including certain of its affiliates and assignees,
the conversion prices and exercise prices of those securities were reduced to
$2.25 per share with the total number of shares issuable on conversion and
exercise being adjusted upward to 16,040,092 shares. As a consequence of the
issuance of the convertible note and warrant to SJMB in February 1999 with
conversion and exercise prices of $1.50, under the terms of the anti-dilution
provisions of the outstanding convertible notes and warrants held by St. James,
including certain of its affiliates and assignees, the conversion prices and
exercise prices of those securities were reduced to $1.50 per share with the
total number of shares issuable on conversion and exercise being adjusted upward
to 29,468,471 shares.
The ability of St. James and its affiliates to fully exercise or
convert their warrants and notes is dependent upon an amendment to the Company's
Certificate of Incorporation to increase the number of shares of Common Stock
the Company is authorized to issue from 12,500,000 shares to 50,000,000 shares
at the Company's forthcoming annual meeting of stockholders.
During the year ended December 31, 1998, the Company paid $902,012 to
St. James Capital Corp. for consulting fees.
-34-
GLOSSARY OF INDUSTRY TERMS
The following are definitions of certain technical terms used in this
Annual Report relating to the Company's business:
"3-D Seismic" Involves the acquisition of a dense grid of seismic data
over a precisely defined area. An energy source creates an acoustic impulse that
penetrates the subsurface and is reflected off underlying rock layers. This
reflected energy is recorded by sensitive receivers (geophones connected to
sophisticated computers). The resulting data is then analyzed and interpreted by
geophysicists and used by oil and natural gas producing companies in the
acquisition of new leases, the selection of drilling locations and for reservoir
management. The technology is particularly useful with directional drilling. 3-D
Seismic data provides greater precision and improved subsurface resolution than
is provided by 2-D seismic surveys.
"Casing" Steel pipe lowered into the drilled hole (borehole) to prevent
"caving in" and to provide isolation of zones and permit production of
hydrocarbons
"Cased Hole" The drilled hole after casing has been lowered and
cemented in place.
"Directional Drilling" Enables the drilling of computer guided
directional wellbores from existing or newly drilled wells intended to increase
the exposure of the well bore to producing hydrocarbon zones. Directional
drilling is facilitated through the use of 3-D Seismic technology.
"Downhole" Any part of the borehole below the ground surface.
"Junk Basket" A mechanical device lowered into the borehole with
wireline to remove extraneous or unwanted debris. A gauge ring is run
simultaneously to check conformity of hole size.
"Cement Bond Log" A cement quality and bonding evaluation performed
with sonic transmitters and receivers lowered into the borehole with wireline.
This survey is recorded by surface computers.
"Hoisting and Steering Services" Services provided utilizing the
Company's wireline trucks and equipment for operating surveying equipment and
steering tools owned and operated by others.
"Logs" (a) Open Hole: The measurement of properties of formations to
determine hydrocarbon bearing characteristics. Open hole logs are mainly
radioactive (porosity) and electric (resistivity).
-35-
(b) Cased Hole: The measurement of gamma rays (different
formations have different levels), casing collars (joints in casing) for
correlation to open hole depths, and cement quality and bonding. Porosity logs
can be run in cased holes with Compensation Neutron Tools.
"Rigs" (a) A drilling rig is one which drills the borehole. This rig
normally is used for setting the casing in the borehole.
(b) A completion or workover rig is used to position tubing,
pumps and other production equipment in he cased hole. As the name plies, this
is used for subsequent "workover" or remedial service.
"Winch Unit" A powerful machine with one or more drums on which to coil
a cable or chain for hauling or hoisting.
"Workover" Operations pertaining to work on wells previously placed in
production but needing additional work in order to restore or increase
production.
-36-
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits required by Regulation S-B are set forth in the
following list and are filed either by incorporation by reference from previous
filings with the Securities and Exchange Commission or by attachment to this
Annual Report on Form 10-KSB as so indicated in such list.
Exhibit Designation
------- -----------
3.2 Restated Certificate of Incorporation of the Company,
as filed with the Secretary of State of the State of
Delaware on June 21, 1989 (incorporated by reference
to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1990).
3.3 By-Laws of the Company (incorporated by reference to
the Company's Registration Statement on Form S-18,
effective date December 6, 1988).
10.1 Employment Agreement, dated September 18, 1996,
between William L. Jenkins and the Company. (Filed as
Exhibit 10.1 to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996.)
10.2 Employment Agreement, dated January 31, 1997, between
Danny Ray Thornton and the Company, and amendment
thereto.
10.3 Employment Agreement, dated January 31,1997, between
Allen R. Neel and the Company, and amendment thereto.
10.4 Purchase and Sale Agreement dated June 6, 1997
between Black Warrior Wireline Corp. and Vernon E.
Tew, Jr., Mark R. Roberts, E.J. Wooten, Chester
Whatley and William A. Tew. (Filed as an exhibit to
the Company's Current Report on Form 8-K for June 6,
1997)
10.5 Purchase and Sale Agreement dated June 9, 1997
between Black Warrior Wireline Corp. and John L.
Morton, Theodore W. Morton, and John D. Morton.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for June 6, 1997)
-37-
10.6 Agreement for Purchase and Sale dated June 6, 1997
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. (Filed as an exhibit to the
Company's Current Report on Form 8-K for June 6,
1997)
10.7 $2,000,000 Convertible Promissory Note dated June 6,
1997 issued to St. James Capital Partners, L.P.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for June 6, 1997) 10.8 $3,000,000 Bridge
Loan Promissory Note dated June 6, 1997 issued to St.
James Capital Partners, L.P. (Filed as an exhibit to
the Company's Current Report on Form 8-K for June 6,
1997)
10.9 Warrant dated June 6, 1997 to purchase 546,000 shares
of Common Stock issued to St. James Capital Partners,
L.P. (Filed as an exhibit to the Company's Annual
Report on Form 10-KSB for the year ended December 31,
1997).
10.10 Warrant dated June 6, 1997 to purchase 120,000 shares
of Common Stock issued to St. James Capital Partners,
L.P. (Filed as an exhibit to the Company's Annual
Report on Form 10-KSB for the year ended December 31,
1997).
10.11 Registration Rights Agreement between Black Warrior
Wireline Corp. and St. James Capital Partners, L.P.
dated June 6, 1997. (Filed as an exhibit to the
Company's Current Report on Form 8-K for June 6,
1997)
10.12 Asset Purchase Agreement dated as of September 1,
1997 between Black Warrior Wireline Corp. and
Diamondback Directional, Inc., Alan Mann and Michael
Dale Jowers. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
10.13 Employment Agreement effective as of September 1,
1997 between the Company and Alan Mann. (Filed as an
exhibit to the Company's Current Report on Form 8-K
for October 9, 1997).
10.14 Employment Agreement effective as of September 1,
1997 between the Company and Michael Dale Jowers.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for October 9, 1997).
10.15 Registration Rights Agreement dated October 10, 1997
between the Company and DDI. (Filed as an exhibit to
the Company's Current Report on Form 8-K for October
9, 1997).
10.16 $3.0 million promissory note due August 31, 1999
issued to DDI. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
-38-
10.17 Agreement for Purchase and Sale dated October 9, 1997
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. (Filed as an exhibit to the
Company's Current Report on Form 8-K for October 9,
1997).
10.18 $2,900,000 Convertible Promissory Note dated October
10, 1997 issued to St. James Capital Partners, L.P.
(Filed as an exhibit to the Company's Current Report
on Form 8-K for October 9, 1997).
10.19 Warrant dated October 10, 1997 to purchase 725,000
shares of Common Stock issued to St. James Capital
Partners, L.P. (Filed as an exhibit to the Company's
Current Report on Form 8-K for October 9, 1997).
10.20 Amendment No. 1 to Registration Rights Agreement
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. dated October 10, 1997. (Filed
as an exhibit to the Company's Current Report on Form
8-K for October 9, 1997).
10.21 Asset Purchase Agreement dated as of January 1, 1998
between Black Warrior Wireline Corp. and Phoenix
Drilling Services, Inc. (Filed as an exhibit to the
Company's Current Report on Form 8-K for January 23,
1998).
10.22 Agreement for Purchase and Sale dated January 23,
1998 between Black Warrior Wireline Corp. and St.
James Capital Partners, L.P. (Filed as an exhibit to
the Company's Current Report on Form 8-K for January
23, 1998).
10.23 $10,000,000 Convertible Promissory Note dated January
23, 1998 issued to St. James Capital Partners, L.P.
Filed as an exhibit to the Company's Current Report
on Form 8-K for January 23, 1998).
10.24 Warrant dated January 23, 1998 to purchase 200,000
shares of Common Stock issued to St. James Capital
Partners, L.P. (Filed as an exhibit to the Company's
Current Report on Form 8-K for January 23, 1998).
10.25 Amendment No. 2 to Registration Rights Agreement
between Black Warrior Wireline Corp. and St. James
Capital Partners, L.P. dated January 23, 1998. (Filed
as an exhibit to the Company's Current Report on Form
8-K for January 23, 1998).
-39-
21 Subsidiaries.
NAME STATE OF INCORPORATION
Boone Wireline Co., Inc. Alabama
27 Financial Data Schedule.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1998, the Company filed a Current
Report on Form 8-K for October 30, 1998 in response to Item 5. Other Events and
Item 7. Financial Statements and Exhibits
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 12, 1999
BLACK WARRIOR WIRELINE CORP.
By: /s/ William L. Jenkins
-------------------------------
William L. Jenkins, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ William L. Jenkins President (Principal Executive, April 12, 1999
- --------------------------- Financial and Accounting Officer)
William L. Jenkins and Director
/s/ John L. Thomspon Director April 12, 1999
- ---------------------------
John L. Thompson
/s/ Charles E. Underbrink Director April 12, 1999
- ---------------------------
Charles E. Underbrink
BLACK WARRIOR WIRELINE CORP.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Black Warrior Wireline Corp.
Columbus, Mississippi
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows present fairly, in all material respects, the financial position of Black
Warrior Wireline Corp. and its subsidiary (the Company) at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 17 to
the consolidated financial statements, the Company's violation of certain
debenture agreements, working capital deficiency, operating losses, and lack of
liquidity raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 17 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Birmingham, Alabama
March 19, 1999
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 1041242 $ 435845
Short-term investments 50000 50000
Accounts receivable, less allowance of $2,157,421 and $143,559, respectively 3596004 5459689
Prepaid expenses 110579 390144
Deferred tax asset 80815
Other receivables 236273 514946
Other current assets 498812 386683
Total current assets 5532910 7318122
Land and building, held for sale 400000
Inventories 4278601
Property, plant, and equipment, less accumulated depreciation 22628601 9347685
Other assets 539537 358521
Goodwill, less accumulated amortization of $215,678 and $134,421, respectively 3435201 9061655
Total assets $ 36814850 $ 26085983
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 5964266 $ 3619466
Accounts payable, related parties 6090
Accrued salaries and vacation 91275 124376
Income taxes payable 599877
Accrued interest payable 1527674 69041
Other accrued expenses 826366 289445
Deferred revenue 155016 100000
Current maturities of notes payable to banks 7624
Notes payable to related parties 20662890 380000
Current maturities of long-term debt and capital lease obligations 18923719 793618
Total current liabilities 48151206 5989537
Deferred tax liability 1132513
Long-term accrued interest payable 150364
Notes payable to banks, less current maturities 22212
Notes payable to related parties 8070549
Long-term debt and capital lease obligations, less current maturities 5123535
Total liabilities 48151206 20488710
Commitments and contingencies (Notes 6, 7, 13, 15, and 18)
Stockholders' equity (deficit):
Preferred stock, $.0005 par value, 2,500,000 shares authorized
none issued at December 1998
Common stock, $.0005 par value, 12,500,000 shares authorized
in 1998 and 1997, respectively; 3,897,451 and 2,990,254 shares
issued at December 31, 1998 and 1997, respectively 1948 1495
Additional paid-in capital 12107551 7744953
Common stock to be issued in connection with acquisition (133,333 shares) 280000
Accumulated deficit -22862462 -1845782
Treasury stock, at cost, 4,620 shares at 1998 and 1997 -583393 -583393
Total stockholders' equity (deficit) -11336356 5597273
Total liabilities and stockholders' equity (deficit) $ 36814850 $ 26085983
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
2
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Revenues $ 34436553 $ 17062542 $ 7582021
Operating costs 30484788 12247630 5116777
Selling, general, and administrative expenses 7453547 2191785 1302994
Depreciation and amortization 4815955 1442635 574400
Loss from impairment of goodwill, inventories,
and property, plant, and equipment (Notes 2 and 19) 11100000
Income (loss) from operations -19417737 1180492 587850
Interest expense and amortization of debt discount -2867575 -609430 -342197
Net gain on sale of fixed assets 154986 25584 76645
Other income 61948 72642 39425
Income (loss) before provision (benefit) for income
taxes and extraordinary gain -22068378 669288 361723
Provision (benefit) for income taxes -1051698 222041 -65715
Income (loss) before extraordinary gain -21016680 447247 427438
Extraordinary gain on extinguishment of debt, net of income
taxes of $-0- in 1996 (Note 6) 1608501
Net income (loss) $ -21016680 $ 447247 $ 2035939
================ ================ ===============
Income (loss) per common share - basic:
Income (loss) before extraordinary gain $ -5.86 $ 0.18 $ 0.41
Extraordinary gain, net of income taxes 1.55
Net income (loss) per common share - basic $ -5.86 $ 0.18 $ 1.96
================ ================ ===============
Income (loss) per common share - diluted:
Income (loss) before extraordinary gain $ -5.86 $ 0.14 $ 0.41
Extraordinary gain, net of income taxes 1.55
Net income (loss) per common share - diluted $ -5.86 $ 0.14 $ 1.96
================ ================ ===============
Weighted average common shares outstanding 3589235 2533650 1040192
================ ================ ===============
Weighted average common shares outstanding
with dilutive securities 3589235 3759756 1040192
================ ================ ===============
The accompanying notes are an integral part of these consolidated financial statements.
3
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1998, 1997, and 1996
COMMON
COMMON STOCK STOCK TREASURY STOCK
-------------------- PAID-IN ACCUMULATED TO BE -----------------
SHARES PAR VALUE CAPITAL DEFICIT ISSUED SHARES COST
------ --------- ------- ------- ------ ------ ----
Balance, December 31, 1995 759052 $ 380 $ 3375702 $ -4328968 4620 $ -583393
Shares issued in private placement 600000 300 643080
Conversion of subordinated debentures
to common stock and stock warrants 814164 407 1099311
Shares issued to related party in
consideration for services performed 12000 6 14994
Net income for the year ended
December 31, 1996 2035939
Balance, December 31, 1996 2185216 1093 5133087 -2293029 4620 -583393
Shares issued in consideration
for consulting services 65000 32 136461
Shares issued for acquisitions 672538 336 2239664
Shares to be issued in connection
with acquisition (133,333 shares) $ 280000
shares)
Issuance of warrants 69550
Shares issued from exercise of warrants 67500 34 134966
warrants
Stock option plan compensation 31225
expense
Net income for the year ended
December 31, 1997 447247
Balance, December 31, 1997 2990254 1495 7744953 -1845782 280000 4620 -583393
Shares issued in private placement 596000 298 3035268
Shares issued in private placement 176364 88 902012
Shares issued in connection with
prior year acquisition 133333 66 279934 -280000
Shares issued from exercise of
warrants 1500 1 2999
Issuance of warrants 142385
Net loss for the year ended
December 31, 1998 -21016680
Balance, December 31, 1998 3897451 $ 1948 $ 12107551 $ -22862462 $ 0 4620 $ -583393
The accompanying notes are an integral part of these consolidated financial
statements.
4
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ -21016680 $ 447247 $ 2035939
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation 4398762 1308214 574400
Amortization 417193 134421
Allowance for doubtful accounts 2279922 96359 6844
Net gain on disposition of property, plant, and equipment -154986 -124384 -76645
Loss on impairment of goodwill, inventories, and property,
plant, and equipment 11100000
Compensation, consulting, and management expenses paid
by issuance of common stock 167725 15000
Extraordinary gain on extinguishment of debt -1608501
Deferred tax expense (benefit) -1051698 185245 -118262
Change in:
Accounts receivable -416237 -1843476 -456033
Inventories 97304
Prepaid expenses 174006 -336720 -18284
Other receivables -221327 -310 65974
Other current assets -18497 -148313 3556
Other assets 331133 -283551 -15
Accounts payable and accrued liabilities 3255141 1562981 347490
Cash (used in) provided by operating activities -825964 1165438 771463
Cash flows from investing activities:
Acquisitions of property, plant, and equipment -5992397 -3087666 -468354
Proceeds from sale of property, plant, and equipment 295658 74448 95072
Purchase of short-term investments -50000
Acquisitions of businesses, net of cash acquired -533224 -697224 -256783
Cash used in investing activities -6229963 -3760442 -630065
Cash flows from financing activities:
Proceeds from bank and other borrowings 3697054 2515303
Proceeds from working revolver, net 2769856
Debt issue costs -369765
Proceeds from issuance of common stock, net 3940666 135000 643380
Principal payments on long-term debt, notes payable, and
capital lease obligations -2376487 -346908 -342149
Cash provided by financing activities 7661324 2303395 301231
Net increase (decrease) in cash and cash equivalents 605397 -291609 442629
Cash and cash equivalents, beginning of year 435845 727454 284825
Cash and cash equivalents, end of year $ 1041242 $ 435845 $ 727454
============= ============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1559296 $ 419555 $ 74746
============= ============== ==============
Income taxes $ 0 $ 132649 $ 0
============= ============== ==============
Supplemental schedule of noncash investing and financing activities:
Land and building with basis of $400,000 exchanged for a $500,000 note $ 500000
Default on notes receivable relating to land and building sale (Note 2) $ 500000
Notes payable and subordinated debentures converted to common
stock and stock warrants (Note 6) $ 1343750
Accrued interest forgiven (Note 6) $ 1514468
Acquisition of property, plant, and equipment financed under capital
leases and notes payable $ 897509 $ 1528347 $ 796930
Notes payable incurred in connection with acquisitions of businesses $ 20201140 $ 9148449 $ 380000
Borrowings to refinance existing debt $ 4500000
Stock warrants issued $ 142383 $ 69550
The accompanying notes are an integral part of these consolidated financial statements.
5
BLACK WARRIOR WIRELINE CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Black Warrior Wireline Corp. and Subsidiary (the Company), a Delaware
corporation, is an oil and gas service company currently providing
various services to oil and gas well operators primarily in the Black
Warrior and Mississippi Salt Dome Basins in Alabama and Mississippi, the
Permian Basin in West Texas and New Mexico, the East Texas and Austin
Chalk Basins in East Texas, the Anadarko Basin in Oklahoma, the Powder
River and Green River Basins in Wyoming and Montana, Williston Basin in
North Dakota, and the Gulf of Mexico offshore of Louisiana and in South
Texas. The Company's principal lines of business include (a) wireline
services, (b) directional oil and gas well drilling activities, and (c)
workover services. Further discussion on business segments is located in
Note 16.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary,
Boone Wireline Co. All significant intercompany accounts and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE - Included in accounts receivable are recoverable
costs and related profits not billed, which consist primarily of revenue
recognized on contracts for which billings had not been presented to the
contract owners because the amounts were not billable at the balance
sheet date. Unbilled amounts included in accounts receivable totaled
$48,000 and $554,000 at December 31, 1998 and 1997, respectively.
INVENTORIES - Inventories consist of tool components, subassemblies, and
expendable parts used in directional oil and gas well drilling
activities. Tools manufactured and assembled are transferred to property,
plant, and equipment as completed at the total cost of components,
subassemblies, and expendable parts of each tool. Components,
subassemblies, and expendable parts are capitalized as inventory and
expensed as tools are repaired and maintained. Inventories are classified
as a long-term asset rather than a current asset as is consistent with
industry practice (see Note 19).
LAND AND BUILDING, HELD FOR SALE - Land and building held for sale was
stated at the lower of cost or estimated net realizable value. During
1997, the Company exchanged land and building with a basis of $400,000
for a $500,000 note receivable. The Company did not recognize the
$100,000 gain as no down payment was received. The $100,000 was included
in deferred revenue at December 31, 1997. During 1998, the buyer failed
to pay the note receivable when it became due. Accordingly, the
transaction has been reversed and the land and building are recorded on
the balance sheet at cost.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated
at cost. The cost of maintenance and repairs is charged to expense when
incurred; the cost of betterments is capitalized. The cost of assets sold
or otherwise disposed of and the related accumulated depreciation are
removed from the accounts and the gain or loss on such disposition is
included in income. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets which range from two
to ten years. At December 31, 1998, significantly all of the property,
plant, and equipment has been pledged as collateral for the Company's
borrowings (see Note 19).
GOODWILL - Goodwill is stated at cost and is being amortized on a
straight-line basis principally over twenty-five years. The Company
assesses the recoverability and the amortization period of goodwill not
identified with impaired assets by determining whether the amount can be
recovered through undiscounted cash flows of the businesses acquired,
excluding interest expense and amortization, over the remaining
amortization period. If impairment was indicated by this analysis,
measurement of the loss would be based on the fair market value of the
businesses acquired calculated by discounting projected future cash
flows. The projections would be over a five year period using a discount
rate and terminal value multiple commensurate with current oil and gas
service companies.
The Company considers external factors in making its assessment.
Specifically, changes in oil prices and other economic conditions
surrounding the industry, consolidation within the industry, competition
from other oil and gas well service providers, the ability to employ and
maintain a skilled workforce, and other pertinent factors are among the
factors that could lead management to reassess the realizability and/or
amortization periods of its goodwill (see Note 19).
LONG-LIVED ASSETS - In accordance with SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows over the life of the assets are less than the asset's carrying
amount. If an impairment exists, the amount of such impairment is
calculated based on projections of future discounted cash flows. These
projections are for a period of five years using a discount rate and
terminal value multiple that would be customary for evaluating current
oil and gas service company transactions.
The Company considers external factors in making its assessment.
Specifically, changes in oil prices and other economic conditions
surrounding the industry, consolidation within the industry, competition
from other oil and gas well service providers, the ability to employ and
maintain a skilled workforce, and other pertinent factors are among the
factors that could lead management to reassess the realizability and/or
amortization periods of its goodwill (see Note 19).
INCOME TAXES - The Company accounts for income taxes under an asset and
liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial
7
statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than
enactments of changes in the tax laws or rates.
STOCK-BASED COMPENSATION - In accordance with the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, the Company has chosen to
continue to apply the accounting provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, to
its stock-based employee compensation arrangements.
USE OF ESTIMATES - The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from these estimates.
REVENUE RECOGNITION - Revenues are recognized at the time services are
performed.
EARNINGS PER SHARE - In accordance with SFAS No. 128, Earnings per Share,
the Company presents basic and diluted earnings per share (EPS) on the
face of the statement of operations and a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that shared in the earnings of the entity. The number of
common stock equivalents is determined using the treasury stock method.
Options have a dilutive effect under the treasury stock method only when
the average market price of the common stock during the period exceeds
the exercise price of the options.
SEGMENT REPORTING - In 1998, the Company adopted SFAS 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. Financial information is required to be reported on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments. The financial information
required includes a measure of segment profit or loss, certain specific
revenue and expense items, segment assets and a reconciliation of each
category to the general financial statements. The descriptive information
required includes the way that the operating segments were determined,
the products and services provided by the operating segments, differences
between the measurements used in reporting segment information and those
used in the general purpose financial statements, and changes in the
measurement of segment amounts from period to period. The adoption of
SFAS No. 131 did not affect results of operations or financial position
but did affect the disclosure of segment information (see Note 16).
RECLASSIFICATIONS - Certain items have been reclassified for the year
ended December 31, 1997 in order to conform to classifications used for
the year ended December 31, 1998.
8
3. ACQUISITIONS
Effective June 6, 1997, the Company completed the acquisition of
Production Well Services, Inc. (PWS). PWS is engaged in the wireline and
oil and gas well services business in southern Alabama and southern
Mississippi. The purchase price consisted of $540,000 in cash financed
with the proceeds of a $2,000,000, 9% convertible promissory note and the
issuance of 133,333 shares (issued on January 1, 1998) of the Company's
common stock. In addition to providing the funds to complete the PWS
acquisition, a portion of the funds was used to purchase and improve
equipment. For financial statement purposes, the acquisition was
accounted for as a purchase and, accordingly, PWS's results are included
in the consolidated financial statements since the date of acquisition.
The excess of the purchase price over net assets acquired, goodwill,
approximated $718,000 and is being amortized over twenty-five years. 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 $ 1254055
Cash paid for assets acquired and transaction
costs incurred, net of cash received -16850
Common stock issued in connection with acquisition -280000
Liabilities assumed or incurred $ 957205
===============
Effective June 9, 1997, the Company completed the acquisition of
Petro-Log, Inc. (Petro-Log). Petro-Log is engaged in the wireline and oil
and gas well services business in Wyoming, Montana, and South Dakota. The
$2,137,500 cash purchase price was financed from the proceeds of a
$3,000,000, 10% bridge loan note (subsequently refinanced, see Note 6).
In addition to providing the funds to complete the Petro-Log acquisition,
the funds were used to purchase and improve equipment. For financial
statement purposes, the acquisition was accounted for as a purchase and,
accordingly, Petro-Log's results are included in the consolidated
financial statements since the date of acquisition. The acquisition
resulted in goodwill of approximately $286,000 which is being amortized
over 25 years. 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 $ 3438613
Cash paid for assets acquired and transaction costs incurred -595381
Liabilities assumed or debt incurred $ 2843232
===============
On October 9, 1997, the Company acquired substantially all of the
assets and certain of the liabilities, effective as of September 1, 1997,
of Diamondback Directional, Inc. (DDI). DDI is engaged in providing oil
and gas well drilling services, which consists of horizontal drilling as
9
well as conventional directional drilling. For financial statement
purposes, the acquisition was accounted for as a purchase and,
accordingly, DDI's results are included in the consolidated financial
statements since the date of acquisition. The purchase price consisted
of $2,750,000 in cash financed with the proceeds of a $2,900,000, 7%
convertible promissory note, $3,170,549 of the Company's promissory
notes and 647,569 shares of the Company's common stock. The purchase
price is subject to adjustment, by reduction of the principal amount of
the notes, to the extent the gross receipts, as defined in the purchase
agreement, from the DDI operations for the twelve month period ending
August 31, 1998 and August 31, 1999 fail to meet a specified performance
standard. The acquisition resulted in goodwill of approximately
$7,686,000, which is being amortized over twenty-five years. 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 $ 9771822
Cash paid for assets acquired and transaction
costs incurred, net of cash received -74178
Common stock issued in connection with acquisition -2100000
Liabilities assumed or debt incurred $ 7597644
===============
On December 15, 1997, the Company acquired substantially all of the
assets and certain of the liabilities of C&M Wireline Services, Inc., a
Texas corporation, and C.A.M. Wireline Services, a Texas partnership
(collectively CAM). CAM is engaged in the wireline and oil and gas well
services business in Texas. The purchase price consisted of $650,000 in
cash, financed with the proceeds of a 8.75% note, and the issuance of
24,969 shares of the Company's common stock. For financial statement
purposes, the acquisition was accounted for as a purchase and,
accordingly, CAM's results are included in the consolidated financial
statements since the date of acquisition. Goodwill resulting from the
transaction approximated $270,000 and is being amortized over twenty-five
years. The following is a summary of assets acquired, liabilities
assumed, and consideration paid in connection with the acquisition:
Fair value of assets acquired, including goodwill $ 800815
Cash paid for assets acquired and transaction costs incurred -10815
Common stock issued in connection with acquisition -140000
Liabilities assumed or debt incurred $ 650000
===============
The Company has agreed that in the event it files a registration
statement under the Securities Act of 1933 relating to an underwritten
public offering of its shares, the holder of the shares issued in the
above transactions will have certain rights to have the shares included
in the registration statement.
On March 16, 1998, the Company acquired from Phoenix Drilling Services,
Inc. (Phoenix) the assets of its domestic oil and gas well directional
drilling and downhole survey service business (Phoenix Acquisition) for
$19,000,000. A portion of the purchase price was financed with the
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
proceeds of a $9,000,000 note bearing interest at 9%. The remaining
purchase price was financed through two additional notes, $9,000,000 and
$1,000,000, both of which bear interest at 8% (see Note 4). For financial
statement purposes, the Phoenix Acquisition was accounted for as a
purchase and, accordingly, Phoenix's results are included in the
consolidated financial statements since the date of acquisition. The
excess of the purchase price of Phoenix over net assets acquired,
goodwill, approximated $2,760,000 and is being amortized over twenty-five
years. During the fourth quarter of 1998, the Company finalized its
allocation of the purchase price of Phoenix which resulted in an increase
to goodwill of approximately $260,000. 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 $ 20219422
Cash paid for assets acquired and transaction costs incurred -510765
Liabilities assumed or debt incurred $ 19708657
===============
During the fourth quarter of 1998, the Company assessed the
recoverability of long-lived assets relating to the DDI and Phoenix
acquisitions. The Company concluded the goodwill and certain inventories
and property, plant, and equipment were impaired (see Note 19).
On June 1, 1998, the Company acquired Petro Wireline, Inc. (Petro
Acquisition), which is engaged in the wireline business in the four
corners region of New Mexico, Colorado, Utah, and Arizona, for $875,000.
A portion of the purchase price was financed with the proceeds of a
$525,000 note that bears interest at 9%. The Company entered into a
promissory note with the former owner for the remaining amount of the
purchase price. The $350,000 note bears interest at 1.5% above the prime
rate for commercial loans adjusted as of the first day of each month
during the term of the note (see Note 4). For financial statement
purposes, the Petro Acquisition was accounted for as a purchase and,
accordingly, Petro Wireline's results are included in the consolidated
financial statements since the date of acquisition. The excess of the
purchase price of Petro Wireline over net assets acquired, goodwill,
approximated $87,000 and is being amortized over twenty-five years.
Fair value of assets acquired, including goodwill $ 966091
Cash paid for assets acquired and transaction costs incurred -22459
Liabilities assumed or debt incurred $ 943632
===============
The following table presents unaudited pro forma consolidated results of
operations for the years ended December 31, 1998 and 1997, as if the
acquisitions had occurred at the beginning of the years presented. The
pro forma summary information does not necessarily reflect the
consolidated results of operations as they actually would have been if
the acquisitions had occurred at the beginning of the years presented.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1998 1997
(UNAUDITED) (UNAUDITED)
Revenues $ 38688771 $ 60254678
Loss before benefit for income taxes $ -22259312 $ -5465505
Net loss $ -21278034 $ -5465505
Net loss per common share - basic $ -5.72 $ -1.79
Net loss per common share - diluted $ -5.72 $ -1.79
The unaudited pro forma consolidated results include the historical
accounts of the Company and historical accounts of the acquired
businesses and pro forma adjustments, including the amortization of the
excess purchase price over the fair value of the net assets acquired, the
increase in interest expense resulting from borrowings used to finance
the acquisitions, and the increase and decrease in depreciation expense
as a result of purchase price adjustments.
4. RELATED PARTY TRANSACTIONS
In connection with the DDI acquisition, the Company issued debt of
approximately $3,200,000 to the former owners of DDI. The two majority
stockholders (85%) of DDI are now employees of the Company. The notes
bear interest at 6.5% and are due August 1999, with quarterly interest
payments due beginning in January 1998. Accrued interest payable on these
borrowings totaled approximately $90,000 and $69,000 at December 31, 1998
and 1997, respectively.
In connection with the PWS and Petro-Log acquisitions, the Company
borrowed approximately $7,900,000 from St. James Capital Partners, L.P.
(SJCP), whose chief executive officer and president both serve on the
Company's Board of Directors. Of the amount borrowed, $3,000,000 was
repaid in November 1997 with the proceeds from other borrowings. One
remaining note for $2,900,000 bears interest at 7% with the principal and
interest due October 1999. Accrued interest payable on this borrowing
totaled approximately $250,000 and $46,000 as of December 31, 1998 and
1997, respectively. The other remaining note for $2,000,000 bears
interest at 9% with the principal and interest due June 2002. Accrued
interest payable on this borrowing totaled approximately $283,000 and
$104,000 as of December 31, 1998 and 1997, respectively.
In connection with the Phoenix Acquisition, the Company borrowed
$9,000,000 from St. James Merchant Bankers, L.P. (SJMB) and $1,000,000
from Falcon Seaboard Investment Co., L.P. (Falcon Seaboard), both
affiliated with SJCP. The notes bear interest at 8% with the principal
and interest due in March 2001. Accrued interest payable on this
borrowing totaled approximately $688,000 as of December 31, 1998.
The Company borrowed an additional $2,000,000 from SJMB pursuant to an
agreement dated October 30, 1998. This note bears interest at 10% with
the principal and interest due March 16,
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2001. Accrued interest payable on this borrowing totaled approximately
$45,000 as of December 31, 1998.
At December 31, 1998 and 1997, the Company has a mortgage note payable of
$250,000 and $380,000, respectively, and an account payable of $0 and
$6,090, respectively, to the former owner of Dyna Jet, an employee of the
Company through November 1998 (see Note 6). At December 31, 1998, the
Company has accrued interest payable of approximately $18,400 relating to
this note.
In connection with the Petro Acquisition, the Company has a $350,000
promissory note to a limited partnership partially owned by a person who
is now an employee of the Company. The note bears interest at 1.5% above
the prime rate for commercial loans adjusted as of the first day of each
month during the term of the note. Principal of $116,667 and accrued
interest to date are due and payable each June until June 1, 2001. At
December 31, 1998, the Company has accrued interest payable of
approximately $21,000 relating to this note.
During 1996, a member of the Company's Board of Directors (the Board)
served as a consultant to the Company on various aspects of the Company's
business and strategic issues. The Company compensated the director by
issuing 12,000 shares of common stock. This issuance resulted in the
recognition of $15,000 of expense for the year ended December 31, 1996,
with a corresponding increase in common stock and additional paid in
capital.
At December 31, 1998 and 1997, the Company had a remaining accrual of
approximately $21,000 and $53,000, respectively, relating to the
Company's commitment to pay the president's tax liability resulting from
previously issued common stock as a bonus.
The Company leased office space from the president of the Company from
October 1994 to October 1996 when he sold the building to a
non-affiliated person who continues to lease the space to the Company at
the same rental. The total amount paid to the president during the year
ended December 31, 1996 was $17,264.
At December 31, 1998, the Company was in default with SJCP, SJMB, and
Falcon Seaboard, based on cross default provisions in the agreements. As
such, all notes payable and accrued interest to related parties have been
classified as current on the consolidated balance sheet. The Company was
also in default on the notes payable relating to the DDI acquisition (see
Note 6).
See Notes 6 and 8 for financing arrangements and common stock
transactions with related parties.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment includes the following at December 31,
1998 and 1997:
1998 1997
Vehicles $ 7875896 $ 6016315
Land and building 245000
Workover rigs and related equipment 686317 438155
Operating equipment 22270613 7278663
Office equipment 537668 405604
31615494 14138737
Less accumulated depreciation 8986893 4791052
Net property, plant, and equipment $ 22628601 $ 9347685
================ ================
Depreciation expense for the years ended December 31, 1998, 1997, and
1996 was $4,398,762, $1,308,214, and $574,000, respectively.
The following is a summary of the equipment under capital leases
(included above) at December 31, 1998 and 1997:
1998 1997
Workover rigs and related equipment $ 158909 $ 158909
Vehicles 257508
416417 158909
Less accumulated depreciation 74496 31782
Net equipment under capital lease $ 341921 $ 127127
================ ===============
6. LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
At December 31, 1998 and 1997, long-term debt and other financing
arrangements consisted of the following:
1998 1997
Note payable to Smith Bank, monthly payments of $704 required through
November 2001, including interest at 7.0%.
$ $ 29836
0 29836
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Current portion of notes payable to banks -7624
Notes payable to banks, less current maturities $ 0 $ 22212
=============== ==============
1998 1997
Installment notes payable, monthly payments required in varying amounts
through November 2003, interest at rates ranging from 5.9% to 12.54%.
$ 1302669 $ 692101
Capitalized leases, monthly payments required in varying amounts through
July 2001, including interest ranging from 5.0% to 6.25%.
243156 103905
Notes payable to General Electric Capital Corporation, monthly payments
required in varying amounts through January 2003, interest at 8.75%. A
portion of the proceeds was utilized to refinance the $3,000,000
Petro-Log bridge loan and $1,500,000 of existing equipment debt (see
Note 3).
4577904 5121147
Notes payable to Fleet Capital Corporation, monthly payments required in
varying amounts through March 2002, interest rates ranging from 8.75% to
9.0%.
12799990
18923719 5917153
Current portion of long-term debt (see below) -18923719 -793618
Long-term debt and capital lease obligations, less current
maturities $ 0 $ 5123535
1998 1997
Note payables to former owner of DDI, principal due August 1999,
interest due quarterly at 6.5%.
$ 3182890 $ 3170549
7% convertible note payable to SJCP, principal and interest due October
1999. Convertible at $2.25 per share at any time up to 30 business days
following maturity (see Note 18).
2900000 2900000
9% convertible note payable to SJCP, principal and interest due June
2002. Convertible at $2.25 per share at any time up to 30 business days
following maturity (see Note 18).
2000000 2000000
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Promissory note payable to the former owners of Petro Wireline, Inc.,
due and payable each year in 1/3 increments starting in June 1999,
including interest of 1.5% above the prime rate for commercial loans
adjusted first day of every month.
350000
8% convertible note payable to SJMB, principal and interest due March
2001. Convertible at $2.25 per share at anytime up to 30 business days
following maturity (see Note 18).
9000000
8% convertible note payable to Falcon Seaboard, principal and interest
due March 2001. Convertible at $2.25 per share at anytime up to 30
business days following maturity (see Note 18).
1000000
10% convertible note payable to SJMB, principal and interest due March
2001. Convertible at $2.25 per share at anytime up to 30 business days
following maturity (see Note 18).
2000000
Note payable to former owner of Dyna Jet, Inc., due and payable in April
1998, including interest at 8% per annum.
150000
Note payable to former owner of Dyna Jet, Inc. due and payable in
November 2002 with interest at the rate of the lesser of $1,500 per
month or 8% per annum on unpaid balance.
230000 230000
20662890 8450549
Current portion of notes payable to related parties (see below) -20662890 -380000
Total long-term notes payable to related parties $ 0 $ 8070549
=============== ==============
Substantially all of the Company's assets are pledged as collateral for
the various debt described above.
A certificate of deposit in the amount of $50,000 was pledged as
collateral for the Company's corporate credit card line of credit of
approximately $100,000. Borrowings under the corporate credit cards at
December 31, 1998 and 1997 totaled approximately $0 and $25,000,
respectively, and are included in current payables.
Under the terms of the SJCP notes payable, SJCP, among other things, has
the right to nominate one person for election to the Company's board of
directors and certain preferential rights to provide future financings.
The note agreement also contains prohibitions against
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
consolidating, merging, or entering into a share exchange with another
person without SJCP's consent.
On October 30, 1998, the Company amended the agreements for the
$2,900,000 and $2,000,000 convertible promissory notes with SJCP. The
notes were amended to include anti-dilution provisions that if the
Company issues equity shares, warrants, or options with a per share price
or exercise price less than the original conversion prices on the notes,
the conversion prices on the notes shall be adjusted to equal the price
at which the shares options or warrants were issued. During 1998, the
exercise price on these notes was adjusted to $2.25 due to the
anti-dilution provisions being triggered.
During 1998, the due date of the $230,000 mortgage note payable to the
former owner of Dyna Jet, Inc. was changed from August 1998 to November
2002.
During September and October 1996, the Company executed a Reorganization
Agreement with the holders of certain debt of the Company whereby the
Company converted the remaining portion of its 13% convertible
subordinated debentures and all of its 14% subordinated debentures to
common stock and warrants to purchase common stock. In conjunction with
the conversion, accrued interest was forgiven by the debt holders,
resulting in recognition of an extraordinary gain on extinguishment of
debt of $1,608,501, net of income taxes of $-0-.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a summary of the debt and accrued interest conversion
and extinguishment:
1996
-------------------------------------------------------------
WARRANTS TO
PURCHASE
SHARES OF SHARES OF ACCRUED
PRINCIPAL COMMON COMMON INTEREST
CONVERTED STOCK STOCK FORGIVEN
13% Convertible subordinated
debentures $ 443750 305414 165000 $ 512868
14% subordinated debentures 900000 508750 138750 1001600
$ 1343750 814164 303750 $ 1514468
At December 31, 1998, the Company was not in compliance with certain
general and financial covenants of its loan and security agreement with
Fleet. Under the terms of the loan agreement, the breach of these
covenants constitutes events of default and, at the option of Fleet, the
obligations of the Company to Fleet are subject to being declared by
Fleet to be immediately due and payable. At December 31, 1998, the
Company was unable to obtain any waiver of covenant violations from
Fleet. Due to the indebtedness being callable at the discretion of Fleet
and normal cross default provisions of all other debt, all of the
Company's debt at December 31, 1998 has been classified as current on the
consolidated balance sheet.
Pursuant to the discussion in the preceding paragraph, at December 31,
1998, aggregate maturities of notes payable and long-term debt and the
future minimum lease payments under capital leases are shown as due in
1999.
7. COMMITMENTS
On December 15, 1998, the Company entered into an agreement with
Measurement Specialists, Inc. (MSI) to create an alliance between the two
companies. This agreement contains an option for the Company to acquire
MSI. Both the alliance and the option to purchase expire on April 15,
1999. The alliance between the Company and MSI was effective December 1,
1998 and was created in order to pursue Measurement While Drilling
services using the tools and equipment owned or leased by the Company,
employees of the Company, and the technology of MSI. During the term of
the alliance, the Company will rent equipment and inventory from MSI,
with a monthly rental payment of $12,206 and $15,000, respectively. The
agreement grants the Company the option to acquire substantially all of
the assets of MSI. If the option is exercised, the Company agrees to pay
MSI $74,982 in cash, 144,445 shares of common stock of the Company, and
payment of the notes payable not to exceed $479,416. Under the
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
agreement, the owner of MSI shall be employed by the Company for four
months. If the option to purchase MSI is not exercised, then the
employment agreement terminates.
The Company leases land, office space, and equipment under various
operating leases. The leases generally are for terms of five years and do
not contain purchase options. Rent expense was approximately $922,000,
$558,000, and $202,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
The future minimum lease payments required under noncancelable operating
leases with initial or remaining terms of one or more years at December
31, 1998 were as follows:
1999 $ 529541
2000 349491
2003 172781
2002 57071
2003 12665
Thereafter 10554
$ 1132103
8. COMMON STOCK TRANSACTIONS
On September 18, 1996, the Company offered 800,000 shares of the
Company's common stock, in 20 units of 40,000 shares each, at an offering
price of $1.25 per share, pursuant to a private placement memorandum. Of
the 800,000 shares offered, 600,000 shares were sold by the Company's
placement agent, and the Company received net proceeds (after deducting
issuance costs) of $643,382. Approximately $288,000 in proceeds from the
offering was used to acquire Dyna Jet, Inc. and the remainder of the
proceeds was used for future acquisitions and other general corporate
purposes. Options to purchase 80,000 shares of the Company's common stock
at an exercise price of $1.50 per share were issued to the Company's
placement agent, as additional compensation for services rendered. The
options are exercisable for a period of five years from the date of the
private placement. None of the options had been exercised as of December
31, 1998.
In March 1998, the Company sold 596,000 shares of common stock at a
purchase price of $5.50 per share. The securities were sold pursuant to a
private placement memorandum. The proceeds of $3,035,268, net of issue
costs, were used to fund a portion of the purchase price and related fees
of the Phoenix Acquisition.
In April 1998, the Company sold an additional 176,364 shares of common
stock at a purchase price of $5.50 per share. The securities were sold
pursuant to a private placement memorandum. The proceeds of $902,012, net
of issue costs, were used to pay consulting fees of SJCP.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Issuance of common stock for the settlement of liabilities of the Company
are set forth below. Since the market value of the Company's stock was
not readily available, the per share amounts for these transactions have
been determined by the Company's Board of Directors based on the
Company's consolidated financial results, business developments, common
stock transfer restrictions, number of shares issued and other factors
which would influence the fair value at the date of Board approval.
AMOUNT
MONTH OF MONTH OF RECORDED TO
BOARD ISSUANCE/ NUMBER AMOUNT STOCKHOLDERS'
APPROVAL PURCHASE DESCRIPTION OF SHARES PER SHARE EQUITY
-------- -------- ----------- --------- --------- ------
October 1996 October 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 689375 $ 1.25 $ 861719
October 1996 November 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 96250 $ 1.25 $ 120312
October 1996 December 1996 Issuance to debt holders in
satisfaction of subordinated
debentures 28539 $ 1.25 $ 35674
December 1996 December 1996 Issued to related party in
satisfaction of consulting fees 12000 $ 1.25 $ 15000
May 1997 May 1997 Issuance to individuals in
satisfaction of consulting fees 65000 $ 2.10 $ 136493
9. STOCK WARRANTS
During 1998, the Company issued warrants to purchase shares of the
Company's common stock with the issuance of certain debt (see Note 6).
The warrants gave the holders the right to purchase up to 2,000,000
shares at $5.50, 1,333,333 shares at $2.25, and 47,680 shares at $6.05.
The 2,000,000 and 47,680 warrants expire in March 2003 while the
1,333,333 warrants expire in October 2003.
During 1997, the Company issued warrants to purchase shares of the
Company's common stock in connection with the issuance of certain debt
(see Note 6). The warrants give the holder the right to purchase up to
666,000 shares of the Company's stock at $2.75 per share through May
1998, $3.25 through May 1999 and $3.75 thereafter and through maturity of
the debt, and 725,000 shares at $4.63 per share. The 666,000 warrants
expire in June 2002 while the 725,000 warrants expire in October 2002.
The warrants issued during 1998 and 1997 are subject to "Full Ratchet"
anti-dilution provisions. When the Company issued the 1,333,333 warrants
described at an exercise price of $2.25. The anti-dilution provisions on
all warrants subject to the provision were triggered. Upon each
adjustment of the exercise price, the holder of the warrant shall
thereafter be entitled to purchase, at the exercise price resulting from
the adjustment, the number of shares of common stock obtained by
multiplying the exercise price in effect immediately prior to the
adjustment by the number of shares purchasable prior to the adjustment
and dividing the product thereof by the exercise price resulting from the
adjustment. The following table summarizes information about warrants
outstanding at December 31, 1998:
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
EXERCISE
BALANCE 1998 ANTI-DILUTION 1998 BALANCE PRICE AT
12/31/97 ISSUANCE ISSUANCE EXERCISED 12/31/98 12/31/98
-------- -------- -------- --------- -------- --------
Debt conversion ($2.00 - expires 9/30/01) 236,250 1,500 234,750 $2.00
SJCP ($2.75 - expires 6/5/02) 546,000 121,334 667,334 $2.25
SJCP ($2.75 - expires 6/5/02) 120,000 26,666 146,666 $2.25
SJCP ($4.6327 - expires 10/10/02) 725,000 767,759 1,492,759 $2.25
SJMB ($6.75 - expires 3/16/03) 1,800,000 3,600,000 5,400,000 $2.25
SJMB ($2.25 - expires 10/30/03) 1,333,333 1,333,333 $2.25
Falcon Seaboard ($6.75 - expires 3/16/03) 200,000 400,000 600,000 $2.25
Harris Webb & Garrison
($6.05 -expires 3/15/03) 47,680 80,526 128,206 $2.25
--------- --------- --------- ------- ---------
1,627,250 3,381,013 4,996,285 1,500 10,003,048
========= ========= ========= ===== ==========
During 1996, the Company issued warrants to purchase shares of the
Company's common stock in connection with the conversion of certain debt
(see Note 6). The warrants give holders the right to purchase up to
303,750 shares of the Company's common stock at $2 per share. The
warrants expire on September 30, 2001 and may be redeemed, at the option
of the Company, at the price of $.50 per warrant, provided that the bid
price of common stock has exceeded $5 per share ending on the trading day
prior to the date on which the notice of redemption is given. During 1998
and 1997, 1,500 and 67,500 of these warrants were exercised resulting in
an increase to common stock and additional paid-in capital of $3,000 and
$135,000, respectively.
10.INCOME TAXES
The provision (benefit) for income taxes consists of the following for
the years ended December 31, 1998, 1997, and 1996:
1998 1997 1996
Federal:
Current $ 13,962 $ 39,841
Deferred $ -958,652 161,163 -112,096
---------------- ---------------- -------------
-958,652 175,125 -72,255
---------------- ---------------- -------------
State:
Current 22,834 12,706
Deferred -93,046 24,082 -6,166
---------------- ---------------- -------------
-93,046 46,916 6,540
---------------- ---------------- -------------
Total $ -1,051,698 $ 222,041 $ -65,715
=============== ================ =============
In 1996 no provision or benefit has been allocated to the extraordinary
gain since the taxable income generated by it consumed a large portion of
the Company's net operating loss carryforwards. These carryforwards were
totally offset by a valuation allowance at December 31, 1995 and this
utilization in 1996 reduced expense related to the extraordinary gain to
zero.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The provision (benefit) for federal income taxes differs from the amount
computed by applying the federal income tax statutory rate of 34% to
income (loss) before provision (benefit) for income taxes and
extraordinary gain, as follows:
1998 1997 1996
---- ---- ----
Provision (benefit) at federal statutory rate $ -7503249 $ 227558 $ 122986
State income taxes, net of federal benefit -202818 29238
Nondeductible tax penalties 27669
(Decrease) increase in valuation allowance 6654369 -230828
Other -34755 14458
Provision (benefit) for federal income taxes $ -1051698 $ 222041 $ -65715
=============== ============== ==============
At December 31, 1998 and 1997, the Company has available net operating
loss carryforwards of approximately $8,697,000 and $507,000,
respectively, for federal tax purposes that expire at various dates
through 2011. Additionally, the Company has state net operating loss
carryforwards of approximately $1,740,000 which expire at various dates
to 2011.
Deferred income taxes reflect the impact of temporary differences between
amounts of assets and liabilities recorded for financial reporting
purposes and such amounts as measured in accordance with tax laws. The
items which comprise a significant portion of the deferred tax assets and
liabilities are as follows:
1998 1997
---- ----
Gross deferred tax assets:
Allowance for doubtful accounts receivable $ 804718 $ 53562
Accrued bonuses and other 128389 66574
Operating loss carryforwards 3243847 189103
Alternative minimum tax credit carryforwards 53804
Goodwill 4236568 972
Valuation allowance -6654369
Gross deferred tax asset 1759153 364015
Gross deferred tax liabilities:
Depreciation -1646485 -1376392
Other -112668 -39321
Gross deferred tax liability -1759153 -1415713
Net deferred tax asset (liability) $ 0 $ -1051698
=============== ======= =======
The Company is required to record a valuation allowance when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. At December 31, 1998, the Company has recorded a
valuation allowance of $6,654,369 against the gross deferred tax asset.
At December 31, 1997, the Company has recorded in its consolidated
balance sheet a net deferred tax liability as future taxable amounts
exceed future deductible amounts. Consequently, no valuation allowance
was recorded at December 31, 1997.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11.EARNINGS (LOSS) PER SHARE
The calculation of basic and diluted EPS is as follows:
FOR THE YEAR ENDED 1998 FOR THE YEAR ENDED 1997
----------------------------------------- -------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Income (loss) before extraordinary $ -21016680 $ 447247
item
Extraordinary gain
Net income (loss) $ -21016680 $ 447247
BASIC EPS
Income (loss) available to common
stockholders $ -21016680 3589235 $ -5.86 $ 447247 2533650 $ 0.18
EFFECT OF DILUTIVE SECURITIES
Stock warrants 371552
Stock options 228883
Convertible debt debenture 93377 625671
DILUTED EPS
Income (loss) available to common
stockholders plus assumed conversions $ -21016680 3589235 $ -5.86 $ 540624 3759756 $ 0.14
FOR THE YEAR ENDED 1996
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
Income (loss) before extraordinary $ 427438
item
Extraordinary gain 1608501
Net income (loss) $ 2035939
BASIC EPS
Income (loss) available to common
stockholders $ 2035939 1040192 $ 1.96
EFFECT OF DILUTIVE SECURITIES
Stock warrants
Stock options
Convertible debt debenture
DILUTED EPS
Income (loss) available to common
stockholders plus assumed conversions $ 2035939 1040192 $ 1.96
Options to purchase 1,177,750 shares of common stock and warrants to
purchase 10,303,048 shares of common stock at prices ranging from $1.50
to $8.01 were outstanding during 1998, but were not included in the
computation of the 1998 diluted EPS because the effect would be
anti-dilutive. There were also 24,000 options that were canceled during
1998 that are not included in the computation of the 1998 diluted EPS
because the effect would be anti-dilutive.
Convertible debt instruments which would result in the issuance of
7,511,111 shares of common stock, if the conversion features were
exercised, were outstanding during 1998 but were not included in the
computation of the 1998 diluted EPS because the effect would be
anit-dilutive. The conversion price of these instruments was $2.25 per
share and remained outstanding at December 31, 1998.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Options to purchase 12,500 shares of common stock at $8.01 per share were
outstanding during 1997 but are not included in the computation of the
1997 diluted EPS because the options' exercise price was greater than the
average market price of the common shares. The options, which expire
December 2002, were still outstanding at December 31, 1997.
Options to purchase 240,000 shares of common stock and warrants to
purchase 303,750 shares of common stock were outstanding at December 31,
1996 but are not included in the computation of the 1996 diluted EPS
because the options' and warrants' exercise price was greater than the
average market value of the common shares. There were also 7,500 options
that were canceled during 1996 that are not included in the computation
of the 1996 diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
12. MAJOR CUSTOMERS
Most of the Company's business activity is with customers engaged in
drilling and operating natural gas wells primarily in the Black Warrior
and Mississippi Salt Dome Basins in Alabama and Mississippi, the Permian
Basin in West Texas and New Mexico, the San Juan Basin in New Mexico,
Colorado, and Utah, the East Texas and Austin Chalk Basins in East Texas,
the Powder River and Green River Basins in Wyoming and Montana, the
Williston Basin in North Dakota, and the Gulf of Mexico offshore of
Louisiana and in South Texas. Substantially all of the Company's accounts
receivable at December 31, 1998 and 1997 are from such customers.
Performance in accordance with the credit arrangements is in part
dependent upon the economic condition of the natural gas industry in the
respective geographic areas. The Company does not require its customers
to pledge collateral on their accounts receivable.
For the year ended December 31, 1998, the Company did not derive revenue
from any one customer that was in excess of 10% of its total revenues.
The Company earned revenues in excess of 10% of its total revenues from
the following customers for the years ended December 31, 1997 and 1996,
as follows:
1997 1996
---- ----
Taurus Exploration, Inc. $ 1752849 $ 1916074
Pioneer Resources, Inc. (formerly Parker
and Parsley Development Company) $ 2118484 $ 1793411
Becfield Drilling Company $ 1120898
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. STOCK OPTIONS
The 1997 Omnibus Incentive Plan (Omnibus Plan) provides for the granting
of either incentive stock options or nonqualified stock options to
purchase shares of the Company's common stock to key employees
responsible for the direction and management of the Company. The Omnibus
Plan authorizes the issuance of options to purchase up to an aggregate of
600,000 shares of common stock, with maximum option terms of ten years
from the date of grant. During 1998, the Board authorized an amendment to
the Omnibus Plan to allow additional issuances of options to purchase
400,000 shares of common stock. This amendment increases the total
aggregate number of shares under the Omnibus Plan to 1,000,000, and must
be submitted to a vote of the shareholders for final approval. At
December 31, 1998, 963,750 options had been granted with 36,250 options
available for issue.
The 1997 Non-Employee Stock Option Plan (Non-Employee Plan) provides for
the granting of nonqualified stock options to purchase shares of the
Company's common stock to non-employee directors and consultants. The
Non-Employee Plan authorizes the issuance of options to purchase up to an
aggregate of 100,000 shares of common stock, with maximum option terms of
ten years from the date of grant. During 1998, the Board authorized an
amendment to the Omnibus Plan to allow additional issuances of options to
purchase 200,000 shares of common stock. This amendment increases the
total aggregate number of shares under the Omnibus Plan to 300,000, and
must be submitted to a vote of the shareholders for final approval. At
December 31, 1998 and 1997, 134,000 options had been granted.
Additionally, of the 240,000 options outstanding at December 31, 1996,
options to purchase 160,000 shares of the Company's common stock were
canceled during 1997. Pertinent information regarding stock options is as
follows:
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
WEIGHTED
AVERAGE
WEIGHTED FAIR VALUE
RANGE OF AVERAGE OF STOCK
NUMBER OF EXERCISE EXERCISE AT VESTING
OPTIONS PRICES PRICE GRANT DATE PROVISIONS
------- ------ ----- ---------- ----------
Options outstanding, December 31, 1995 7500 $3.46 - 22.27 $7.24
Options canceled -7500 $3.46 - 22.27 $7.24
Options granted 60000 50% of mean $1.66 $1.25 33.3% per year
share price for
3 months
prior to grant
Options granted 180000 $1.50 - 2.00 $1.78 $1.25 immediate
Options outstanding, December 31, 1996 240000 $1.50 - 2.00 $1.75
Options canceled -60000 50% of mean share
price for 3 months
prior to grant
-100000 $2.00 $2.00
-160000
Options granted 160000 $2.625 $2.625 $2.625 62.5% immediate; 12.5% per year
Exercise price equals FMV of stock at 67500 $2.625 $2.625 $2.625 33.3% immediate; 22.22% per year
81250 $2.625 $2.625 $2.625 20% immediate; 20% per year
40000 $2.625 $2.625 $2.625 25% immediate; 25% per year
10000 $3.38 $3.38 $3.38 25% immediate; 25% per year
358750 $2.65 $2.65
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Exercise price less than FMV of stock 20000 $3.00 $3.00 $3.50 25% immediate; 25% per year
at grant date
Exercise price greater than FMV of
stock at grant date 90000 $4.63 $4.63 $4.25 16.67% immediate; 16.67% per year
112000 $4.63 $4.63 $4.25 3 year pro rata
10000 $4.63 $4.63 $4.25 2 year pro rata
30000 $4.63 $4.63 $4.25 5 year pro rata
12500 $8.01 $8.01 $7.94 5 year pro rata
4000 $4.63 $4.63 $4.25 1 year cliff
258500 $4.79 $4.43
Options outstanding, December 31, 1997 717250 $1.50 - $8.01 $3.30
Options canceled -22500 $2.63 $2.63
-60000 $4.63 $4.63
-5000 $4.63 $4.63
-87500
Options granted
Exercise price equals FMV of stock at
grant date 7500 $6.28 $6.28 $6.28 3 year pro rata
13000 $6.63 $6.63 $6.63 2 year pro rata
100000 $6.50 $6.50 $6.50 5 year pro rata
68000 $6.50 $6.50 $6.50 25% immediate, 25% per year
200000 $6.69 $6.69 $6.69 25% immediate, 25% per year
4500 $8.00 $8.00 $8.00 4 year pro rata
393000 $6.39 $6.39
Exercise price greater than FMV of stock
at grant date 155000 $7.50 $7.50 $6.81 4 year pro rata
Options outstanding, December 31, 1998 1177750 $1.50 - $8.01 $4.90
=======
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
12/31/98 LIFE PRICE 12/31/98 PRICE
ooPRICES
--------
$1.50 80000 3.75 $1.50 80000 $1.50
$2.63 326250 7.65 $2.63 197484 $2.63
$3.00 20000 3.42 $3.00 10000 $3.00
$3.38 10000 3.50 $3.38 5000 $3.38
$4.63 181000 3.67 $4.63 59832 $4.63
$6.28 7500 7.42 $6.28 $6.28
$6.50 168000 5.42 $6.50 17000 $6.50
$6.63 13000 4.45 $6.63 $6.63
$6.69 200000 9.00 $6.69 50000 $6.69
$7.50 155000 4.42 $7.50 $7.50
$8.00 4500 4.36 $8.00 1125 $8.00
$8.01 12500 3.96 $8.01 2500 $8.01
1177750 6.06 $4.90 422941 $3.40
======= ======
The Company applies principles from SFAS No. 123 in accounting for its
stock option plan. In accordance with SFAS No. 123, the Company has
elected to not report the impact of the fair value of its stock options
in the consolidated statements of operations but, instead, to disclose
the pro forma effect and to continue to apply APB Opinion No. 25 and
related interpretations in accounting for its stock options. Accordingly,
no compensation expense has been recognized for stock options issued to
employees with an exercise price at fair market value or above.
Compensation expense of $83,540 and $27,267 has been recognized for the
years ended December 31, 1998 and 1997, respectively, for 134,000 options
granted during 1997 as compensation to non-employees at the options' fair
market value in accordance with SFAS No. 123. Had compensation cost for
all of the Company's stock options issued been determined based on the
fair value at the grant
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
dates for awards consistent with the method prescribed in SFAS No. 123,
the Company's net income (loss) and earnings (loss) per share would have
been reduced or increased to the pro forma amounts indicated as follows:
1998 1997 1996
Net income (loss) - as reported $ -21016680 $ 447247 $ 2035939
Net income (loss) - pro forma $ -21530723 $ 268327 $ 2006094
Earnings (loss) per share - as reported (basic) $ (5.86) $ .18 $ 1.96
Earnings (loss) per share - pro forma (basic) $ (6.00) $ .11 $ 1.93
Earnings (loss) per share - as reported (diluted) $ (5.86) $ .14 $ 1.96
Earnings (loss) per share - pro forma (diluted) $ (6.00) $ .10 $ 1.93
The pro forma amounts reflected above are not representative of the
effects on reported net income (loss) in future years because, in
general, the options granted typically do not vest immediately and
additional awards are made each year.
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following
weighted-average assumptions.
1998 1997 1996
Dividend yield 0% 0% 0%
Expected life (years) 5.62 4 3
Expected volatility 74.7% 60.6% 70.0%
Risk-free interest rate 5.48% 6.11% 6.46%
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. CONTINGENCIES
On November 1, 1995, the Company entered into a Business Consulting
Agreement with MAII pursuant to which MAII was to provide certain
services, including, among others, providing assistance in preparing and
distributing press releases for a period of six months with an option for
renewal and in equity raising transactions through the private placement
of common stock and the restructuring of the Company's indebtedness. The
Agreement stated that the compensation for these services was to be
200,000 shares of freely traded common stock of the Company with 40,000
shares due upon execution of the Agreement and the balance due during the
term of the Agreement as needed by MAII. It was agreed that MAII's
services would not include any services that constituted the rendering of
legal opinions or that were within the ordinary purview of a certified
public accountant or a NASD registered broker/dealer. The Company issued
the 40,000 shares to MAII and has taken the position that the Agreement
has expired and no further compensation is due and owing, that MAII
failed to perform in accordance with the Agreement and that the intent of
the Agreement and understanding of the parties was that the 160,000
shares would only be issued in conjunction with a private sale of the
Company's securities. On September 24, 1996, MAII demanded that the
Company issue the 160,000 shares to it, which the Company refused to do.
Management of the Company believes that it has substantial and
meritorious defenses to the claim asserted by MAII and intends to defend
itself vigorously in any litigation instituted by MAII. In October 1997,
arbitration proceedings were commenced against the Company by MAII.
Management of the Company believes that it will not incur any material
liability to MAII in connection with this claim nor will the claim have a
material adverse effect on the consolidated financial position, results
of operations, or cash flows of the Company. In addition, the Company is
reviewing the advisability of it instituting litigation or an arbitration
proceeding against MAII. There can be no assurance that the Company will
be successful in an action instituted against the Company by MAII or that
the Company will be successful in any action it may institute against
MAII.
On July 9, 1998, Southwick Investments Inc. (Southwick) commenced a
lawsuit against the Company in the Superior Court of Fulton County,
Georgia, based on a professional services agreement dated March 26, 1997,
entered into between Southwick and the Company pursuant to which
Southwick was to develop and implement a plan for raising additional
capital and provide certain financial advisory services. Southwick is
seeking to be awarded damages in an unspecified amount for breach of
contract and the loss in value to Southwick of an option to purchase
50,000 shares of the common stock of the Company at an exercise price of
$4.00 per share, together with court costs and attorney's fees. The
matter was transferred to arbitration at the request of the Company. The
Company filed a counterclaim against Southwick, alleging that Southwick
failed to perform and is due to return a portion of the consideration
previously paid. The Company intends to defend this action and believes
that it has good and meritorious defenses. Management does not believe
the ultimate outcome of these actions will have a materially adverse
effect on the consolidated financial position, results or operations, or
cash flows of the Company.
The Company also is the subject of various legal actions in the ordinary
course of business. Management does not believe the ultimate outcome of
these actions will have a materially adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
31
On November 30, 1995, the Company executed a Reorganization Agreement
with the holders of certain debt of the Company whereby the Company
converted a note payable to RABAD, a partnership of officers and spouses
of officers of the Company, to 148,565 shares of common stock.
The Company guaranteed that RABAD would be able to sell its common stock
received in the 1995 conversion for $2 per share within one year of this
conversion. RABAD engaged Monetary Advancement International, Inc. (MAII)
to sell the shares received in this conversion. Due to a dispute with the
Company that is more fully described in Note 14, MAII had refused to pay
RABAD or return any unsold shares. RABAD and MAII entered into a
settlement agreement in September 1998. The terms of the agreement called
for MAII to reimburse RABAD for the shares originally transferred to MAII
for sale. The Company does not believe the aforementioned guarantee will
result in any liability to the Company based on the terms of the
settlement.
In connection with the above proceedings, the Company has paid legal fees
on behalf of four employees in the amount of $26,072 and $12,420 during
1998 and 1997, respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate fair value:
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, ACCOUNTS RECEIVABLE,
CURRENT PORTION OF LONG-TERM DEBT, AND ACCOUNTS PAYABLE - The carrying
amount is a reasonable estimate of the fair value because of the short
maturity of these instruments.
LONG-TERM DEBT - At December 31, 1998, all long-term debt has been
classified as current. Given the Company's poor operating results and
severe lack of liquidity, as discussed in Note 17, it is not practical to
determine the fair market value of the long-term debt at December 31,
1998. The carrying amount and fair value of long-term debt was
$13,065,798 and $10,858,881, respectively at December 31, 1997.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. SEGMENT AND RELATED INFORMATION
At December 31, 1998, the Company is organized into, and manages its
business based on the performance of, five business units. The business
units have separate management teams and infrastructures that offer
different oil and gas well services. The business units have been
aggregated into three reportable segments: wireline, directional
drilling, and workover and completion since the long-term financial
performance of these reportable segments is affected by similar economic
conditions.
WIRELINE - This segment consists of two business units that perform
various procedures to evaluate 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 year ended December 31, 1998 included Burlington
Resources, Pioneer Natural Resources, and Phillips Petroleum.
DIRECTIONAL DRILLING SERVICES - This segment consists of two business
units that perform procedures to enter a oil producing zone horizontally,
using specialized drilling equipment, and expand the area of interface of
hydrocarbons and thereby greatly enhances recoverability of oil. The
segment also engages in oil and gas well 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 year ended December 31, 1998 included Texaco E&P, Union Pacific
Resources, Clayton Williams Energy, and Chesapeake Operations.
WORKOVER AND COMPLETION - This segment consists of a business unit in
which services include those operations performed on wells when
originally completed or on wells previously placed in production and
requiring additional work to restore or increase production. The
principal market for this segment is the Black Warrior Basin of Alabama.
The major customer of this segment for the year ended December 31, 1998
was Energen Corporation.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The accounting policies of the reportable segments are the same as those
described in Note 2 of Notes to Consolidated Financial Statements. 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 years
ended December 31, 1998 and 1997 is as follows:
WORKOVER
DIRECTIONAL AND
1998 WIRELINE DRILLING COMPLETION TOTAL
Segment revenues $ 11591727 $ 21311450 $ 1533376 $ 34436553
Segment EBITDA -1589874 -12028475 -60260 -13678609
Segment assets 15607165 20853147 283868 36744180
WORKOVER
DIRECTIONAL AND
1997 WIRELINE DRILLING COMPLETION TOTAL
Segment revenues $ 9513189 $ 5931516 $ 1617837 $ 17062542
Segment EBITDA 2132694 1505757 230379 3868830
Segment assets 14695760 10741380 436587 25873727
The Company has certain expenses and assets which are not allocated to
the individual operating segments. A reconciliation of total segment
EBITDA to income (loss) from operations and total segment assets to total
assets, for the years ended December 31, 1998 and 1997 is presented as
follows:
34
1998 1997
EBITDA
Total segment EBITDA $ -13678609 $ 3868830
Depreciation and amortization -4815955 -1442635
Unallocated corporate expense -923173 -1245703
Income (loss) from operations $ -19417737 $ 1180492
=============== ===============
ASSETS
Total segment assets $ 36744180 $ 25873727
Unallocated corporate assets 70670 212256
Total assets $ 36814850 $ 26085983
=============== ===============
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. Results of Operations and Management's Plans
The Company incurred a loss of $21,016,680 in 1998 and had current
liabilities in excess of current assets of $42,618,296 at December 31,
1998. As discussed in Note 6, at December 31, 1998, the Company was in
violation of certain general and financial debt covenants. Accordingly,
all of the indebtedness owed by the Company has been classified as
current at December 31, 1998. Currently, the Company does not have the
liquidity necessary to satisfy its current obligations.
During 1998, the Company experienced a decline in the demand for its
products and services as a result of a significant decrease in the price
of oil and natural gas. The decline in demand materially impacted the
Company's revenues, liquidity and its ability to remain in compliance
with covenants in its loan agreements and meet its obligations during the
last half of 1998. While these conditions continued throughout much of
the first quarter of 1999, prices for oil and natural gas had improved
moderately by the beginning of the second quarter of 1999. Management of
the Company believes that an improvement in its revenues will be
dependent upon a continuing period of improved pricing and decisions by
oil and natural gas producers to make commitments to engage in oil and
natural gas well enhancements.
The Company's outstanding indebtedness includes primarily senior
indebtedness aggregating approximately $18,900,000 at December 31, 1998,
other indebtedness of approximately $3,700,000, and approximately
$16,900,000 owed to SJCP and its affiliates. All of this indebtedness is
shown as currently due and payable on the Company's consolidated balance
sheet at December 31, 1998.
Management's plans with respect to addressing its current financial
situation include primarily the following:
In March 1999 the Company borrowed an additional $2,500,000 from an
affiliate of SJCP, the Company's principal investor (see Note 18).
The Company is engaged in efforts to refinance its senior
indebtedness which is intended to provide, among other things, more
favorable terms and thereby improve liquidity.
In March 1999, the Company entered into a forbearance agreement with
Fleet Capital Corp. which, among other things, permitted the Company
to defer payments of principal to Fleet through June 30, 1999.
In April 1999, General Electric Capital Corp. agreed to defer
payments of interest on an aggregate of approximately $3,900,000 of
indebtedness through June 30, 1999.
The Company has continued through the first quarter of 1999 to
further implement a cost reduction program first implemented in the
last half of 1998 and intends to focus on cost reduction
opportunities through 1999.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Management also intends to raise additional capital in conjunction with
the foregoing plan, which may be either debt or equity capital or a
combination thereof, which, together with the renegotiation of certain
outstanding indebtedness, will be used to meet the Company's other
current liquidity requirements. Management expects that, upon conclusion
of the plan, its indebtedness owing to SJCP and affiliates will be
long-term or converted into equity securities.
Management believes that, provided oil and natural gas prices remain
relatively stable with the level of prices that existed at the end of the
first quarter of 1999, the foregoing plan together with the cost-cutting
program implemented in 1998, which included reductions in personnel and
salaries of existing personnel, closing and consolidating certain
district offices, together with other cost-cutting activities should
enable the Company to operate, commencing with the second quarter of
1999, without a further deterioration of its liquidity condition.
Management of the Company is unable to assure that its efforts to
implement the plan described above will be successful or to state the
terms under which or when the proposed transactions will be completed.
Management expects that in order to complete such transactions
substantial amounts of equity securities may be required to be issued
which may materially dilute the Company's existing stockholders.
18. SUBSEQUENT EVENT
During the first quarter of 1999, the Company entered into an agreement
with SJMB to borrow $2,500,000 under a 10% convertible promissory note
maturing in March 2001. The note is convertible at $1.50 per share and
can be converted by SJMB at anytime up until 30 business days after
maturity of the note. The Company also issued warrants to SJMB in
connection with the note. The warrants give SJMB the right to purchase
2,075,000 shares at an exercise price of $1.50. This transaction triggers
the anti-dilution provisions of warrants and convertible debt previously
issued by the Company (Note 9). All previously issued warrants and
convertible debt, with anti-dilution provisions, have their exercise
prices lowered to $1.50. The triggering of the provisions also calls for
an increase in warrant shares outstanding. The total number of warrant
shares issued as a result of the anti-dilution transaction increased by
4,884,149 resulting in a total of 16,962,197 warrants outstanding.
19. IMPAIRMENT OF LONG-LIVED ASSETS
During 1998, the Company experienced a material decline in demand for its
services as a result of a significant decrease in the price of oil and
natural gas, as well as the loss of a major customer. Consequently,
management evaluated the recoverability of its long-lived assets in
relation to its business segments. The analysis was first performed on an
undiscounted cash flow basis which indicated impairment in its
directional drilling segment. The impairment was then calculated using
projections of discounted cash flows over five years utilizing a discount
rate and terminal value multiple commensurate with current oil and gas
services company transactions. The discount rate and the terminal
multiple used were 12% and 6.5, respectively. The assumptions used in
this analysis represent management's best estimate of future results.
The analysis resulted in a charge to operations for the year ended
December 31, 1998 of $11,100,000, which consisted of a write-down of
$8,121,684, $2,354,221, and $624,095, to goodwill, property, plant, and
equipment, and inventory, respectively.
36