ITEM 1. BUSINESS
GENERAL
Black Warrior Wireline Corp. (the "Company") is an oil and gas well service company currently providing various services to oil and gas well operators. The Company's service area includes primarily 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 areas of the Gulf of Mexico offshore Louisiana and South Texas. The Company's principal lines of business include (a) wireline services and (b) directional oil and gas well drilling and downhole surveying services. In July 2001, the Company sold its workover and completion line of business. As is further described below, the Company is engaged in negotiations with respect to the sale of the assets and business of its directional drilling and downhole surveying division. The Company has been engaged in the oil and gas well service business for more than the past five years.
WIRELINE SERVICES
The Company's wireline logging service activities contributed revenues of $45.8 million (approximately 69.9% of revenues) in 2003, $34.1 million (approximately 60.3% of revenues) in 2002, and $39.7 million (approximately 52.1% of revenues) in 2001. At December 31, 2003, the Company owned 52 operational motor vehicle mounted wireline units, of which 38 are equipped with a state-of-the-art computer system, six are equipped with an analog computer system and eight are devoted exclusively to hoisting operations. In addition, as of December 31, 2003, the Company owned 15 operational skid- mounted cased-hole wireline units , all of which are equipped with state of the art computers, and two skid-mounted units are devoted to providing services for the plug and abandonment of wells. The skid-mounted units are able to be used for offshore work by being hoisted aboard barges.
The truck or skid-mounted wireline logging services are used to evaluate downhole well 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, plugged and abandoned. Such services are provided using a wireline unit equipped with an armored cable that is lowered by winch into an existing well. The cable lowers instruments and tools into the well to perform a variety of services and tests. The wireline unit's 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 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 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. After depletion of a well, the operator is required to plug the well prior to its abandonment. The Company's plug and abandonment equipment is utilized for this purpose by pumping cement into the well and capping the well.
The Company performs its wireline services at the well site for operators of the wells primarily pursuant to contracts entered into 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. These services are provided using Company-owned equipment throughout its service area dispatched from its twenty-three service facilities located throughout its service area. Approximately 48.5% of the Company's wireline service revenues are derived from onshore activities and approximately 51.5% from offshore activities.
Manufacturing. The Company operates 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, 2003, the Company manufactured for internal use two new wireline trucks, one new plug and abandonment skid-mounted package and one new offshore wireline skid. The manufacturing facility also totally refurbished for internal use two wireline trucks.
DIRECTIONAL DRILLING SERVICES
The Company's directional drilling services contributed revenues of $19.7 million (approximately 30.1% of revenues) in 2003, $22.5 million (approximately 39.7% of revenues) in
2002, and $36.4 million (approximately 47.8% of revenues) in 2001. The Company has been engaged in the directional drilling service business since 1997 when it acquired Diamondback Directional, Inc. and 1998 when it acquired Phoenix Drilling Services.
Directional drilling is the intentional deviation of a well bore. The deviation is achieved by utilizing downhole motors and guidance equipment to move the well bore in a given direction and intersect a target formation at an angle up to horizontal.
The Company also provides directional surveying services and directional surveying equipment to operators in the oil and gas industry. These services include gyros, magnetic, single shot, high accuracy magnetic probe, electric surface recording gyro, and measurement while drilling services. Management of the Company believes these services are state-of-the-art.
These services are provided throughout the Company's service area.
Proposed Sale of Directional Drilling Services. The Company is engaged in negotiations with respect to the sale of its directional drilling division. The proposed transaction, which is subject to the negotiation and execution of a definitive purchase and sale agreement, includes, among the other expected terms and conditions, the sale of all the equipment, inventory, the net working capital of the division and its owned real estate and leases. The net working capital sold is expected to include current assets subject to current liabilities assumed of the division. The purchase price is expected to be approximately $11.0 million, less certain possible closing adjustments. Among other matters, the closing of the transaction is expected to be subject to the Company obtaining all necessary lender and other consents and approvals, the absence of any event having a material adverse effect on the assets or business sold, the buyer having obtained financing for the transaction, the receipt by the Company of a fairness opinion from Simmons & Company International and compliance with other legal requirements. It is expected that either party will have the right to terminate the agreement prior to closing for any reason. Under certain circumstances, the Company could be required to pay the buyer $50,000 upon a termination of the agreement. The purchaser is expected to be a newly organized corporation in which Mr. Allen Neel and two other employees of the directional drilling division are expected to be employees and hold minority equity interests. The net proceeds from the sale, after payment of expenses of the transaction, are intended to be applied in reduction of the Company's senior secured indebtedness. There is no assurance that a definitive agreement can be negotiated and executed on terms acceptable to the Company, that the transaction will be completed or that it will be completed on the terms being negotiated by management.
OTHER SERVICES
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
There were no customers from which the Company earned in excess of 10% of its revenues during the three years ended December 31, 2003. One customer, Encore Operating, accounted for 19.9% and 20.2% of directional services revenues, respectively in 2002 and 2003.
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 37 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 Executive Officer, and maintains $1.0 million policies on the lives of each of Allen R. Neel, Executive Vice-President and Danny Ray Thornton, Vice President. See Item 10, "Directors and Executive Officers of the Registrant." 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 oilfield 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. Periods of declines in oil and natural gas commodity prices result in reduced demand for oil and natural gas well services and thereby intensified competition adversely affecting the Company's revenues and financial condition. While competition at the present time is intense, the levels of prices for oil and natural gas in the first quarter of 2004 has resulted in increased demand for oil and gas well services and the Company's ability to compete with other suppliers of services has improved.
Competition principally occurs in the areas of technology, price, quality of products and field personnel, equipment availability and facility locations. Although, because most services are awarded based on competitively quoted bids, price competition remains a significant characteristic of the industry. Salesmanship and equipment availability are also important factors in securing the award of contracts. The Company's ability to offer more technologically advanced services is believed by management to have reduced the extent of the Company's exposure to severe price competition. The Company continues to make a conscious effort to compete, not just on price, but also 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, marketing 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 or that the services of such persons will not be attracted by the Company's competitors. Losses of marketing and sales personnel to competitors has adversely affected and could in the future adversely affect the Company's revenues.
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. Numerous governmental agencies issue regulations to implement and enforce laws which are often difficult and costly to comply with, and the violation of which may result in the revocation of permits, issuance of corrective action orders, assessment of administrative and civil penalties and even criminal proceedings.
In its operations, the Company is subject to the following statutes, among others:
o The federal Resource Conservation and Recovery Act and comparable state statutes. The U.S. Environmental Protection Agency (EPA) and state agencies have limited the approved methods of disposal for some types of hazardous and non-hazardous wastes. The Company generates wastes, some of which are hazardous wastes.
o The federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as the "Superfund" law, and comparable state statutes impose liability, without regard to fault or legality of the original conduct, on classes of persons that are considered to have contributed to the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or the site where the release occurred and companies that disposed of or arranged for the disposal of the hazardous substances at the site where the release occurred.
o The federal Water Pollution Control Act and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into state waters or waters of the United States. The discharge of pollutants are prohibited unless permitted by the EPA or applicable state agencies. In addition, the Oil Pollution Act of 1990 as amended by the Coast Guard Authorization Act of 1996, imposes a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages, including natural resource damages, resulting from such spills in waters of the United States.
Management of the Company believes that the Company is in substantial compliance with the above laws.
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.
EMPLOYEES
As of March 1, 2004, the Company employed approximately 349 persons on a full-time basis. Of the Company's employees, 21 are management personnel, 16 are administrative personnel and 312 are operational personnel. The Company also uses the services of approximately eight 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 changed its name to Black Warrior Wireline Corp. concurrently with merging with a predecessor of the Company incorporated under the laws of the State of Alabama. The Company and its predecessors have been engaged in providing 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. The Company intends that the forward-looking statements herein be covered by the safe-harbor provisions for forward-looking statements contained in the Securities Exchange Act of 1934, as amended, and this statement is included for the purpose of complying with these safe-harbor provisions. Forward-looking statements include, but are not limited to, the matters described below as risk factors, as well as under "Item 1. Business - General," "- Principal Customers and Marketing," "-Operating Hazards and Insurance," "--Competition," and "--Regulation." "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - General," "-Twelve-Month Periods Ended December 31, 2003 and 2002", "-Twelve-Month Periods Ended December 31, 2002 and 2001", "-Possible Future Impairment of Long-Lived Assets," "- Liquidity and Capital Resources," "-Significant Accounting Policies" and "Item 7A. Quantitative and Qualitative Disclosure About Market Risk." Such forward-looking statements relate to the Company's ability to generate revenues and attain and maintain profitability and cash flow, the stability and level of prices for oil and natural gas, predictions and expectations as to the fluctuations in the levels of oil and natural gas prices, 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 negotiate and enter into a definitive agreement on terms acceptable to it for the sale of its directional drilling division and to sell that division on the terms being negotiated by management or to sell that division on any other terms, the belief of management that the sale of its directional drilling division will facilitate a merger, sale, refinancing, restructuring or reorganization of its wireline division after such a sale, the ability of the Company to engage in any other strategic transaction, including any possible merger, sale of all or a portion of the Company's assets or other business combination transaction involving the Company, the ability of the Company to raise additional debt or equity capital to meet its requirements and to obtain additional financing when required, the ability of the Company to restructure its outstanding indebtedness at or before maturity or refinance its debt obligations as they come due on September 14, 2004 and December 31, 2004 or to obtain extensions of the maturity dates for the payment of principal, or to engage in another recapitalization or reorganization transaction, the Company's ability to maintain compliance with the covenants of its various loan documents and other agreements pursuant to which securities, including debt instruments, have been issued and obtain waivers of violations that occur and consents to amendments as required, the Company's ability to implement and, if appropriate, expand a cost-cutting program, the ability of the Company to compete in the premium oil and gas services market, the ability of the Company to re-deploy its equipment among regional operations as required, and the ability of the Company to provide services using state of the art tooling. The inability of the Company to meet these objectives or requirements or the consequences on the Company from adverse developments in
general economic conditions, changes in capital markets, adverse developments in the oil and gas industry, developments in international relations and the commencement or expansion of hostilities by the United States or other governments and events of terrorism, declines and fluctuations in the prices for oil and natural gas, and other factors could have a material adverse effect on the Company. Material declines in the prices for oil and gas can be expected to adversely affect the Company's revenues. The Company cautions readers that various risk factors described below could cause the Company's operating results and financial condition to differ materially from those expressed in any forward-looking statements made by the Company and could adversely affect the Company's financial condition and its ability to pursue its business strategy and plans. Risk factors that could affect the Company's revenues, profitability and future business operations include, among others, the following:
RISKS RELATED TO THE COMPANY
Current Maturities of Substantial Outstanding Secured Indebtedness Could Lead to Foreclosure on the Company's Assets. At December 31, 2003, the Company's total indebtedness, inclusive of accrued interest of $14.5 million, was approximately $57.3 million. The Company had outstanding at March 31, 2004 total indebtedness, inclusive of accrued interest of $15.6 million, of $57.9 million. Its senior secured credit facility, pursuant to which $18.6 million of indebtedness was outstanding as of December 31, 2003, expires on September 14, 2004 and indebtedness then outstanding under the credit facility will be due and payable. In addition, $42.8 million of subordinated secured indebtedness, including accrued interest, will be due and payable on December 31, 2004. Defaults in the repayment of this indebtedness, either at maturity or prior thereto by acceleration of the due date, could lead the creditors to foreclose on substantially all of the Company's assets resulting in a possible loss to the Company's stockholders of their entire investment.
The Company's History of Net Losses May Impose Significant Impediments to the Company's Ability to Repay or Refinance Its Outstanding Indebtedness at Maturity in 2004. The Company had net income (loss) for the three years ended December 31, 2003, 2002, and 2001 of approximately ($5.5 million), ($7.6 million), and $5.0 million, respectively. Cash flows provided by operations were approximately $10.6 million, $5.4 million and $16.3 million for the years ended December 31, 2003, 2002, and 2001, respectively. The Company is highly leveraged. The Company's level of indebtedness and the potential defaults thereunder, together with its history of losses for the years ended December 31, 2003 and December 31, 2002, as well as for the year ended December 31, 2000 and prior years, and periodic covenant violations and events of default under loan agreements, pose substantial risks to the Company and the holders of its securities, including the possibility that the Company will 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 at maturity. The Company's history of losses and periodic covenant defaults can be expected to make it more difficult to refinance its outstanding indebtedness.
The Company's Plans to Recapitalize and Refinance Its Indebtedness May Not Materialize. Commencing initially in 2001 and intensified thereafter in 2003, the Company has been pursuing efforts, utilizing the services of Simmons & Company International, to enter into a possible merger, sale of its assets, or other business combination transaction, a refinancing transaction or restructuring of its balance sheet. The results of these efforts led management to conclude in late 2003 that a sale of its directional drilling and downhole surveying assets can be expected to facilitate a more favorable transaction involving its remaining wireline activities. Accordingly, the Company is engaged in negotiations to sell the assets of its directional drilling division. It intends to use the net proceeds from the sale of these assets to reduce the outstanding principal of its senior secured indebtedness. The Company intends this transaction as a first step in the merger or sale of its remaining business or a reorganization, restructuring or refinancing of its outstanding indebtedness. The sale of the directional drilling assets is expected to be subject to material conditions including the ability of the intended purchaser to obtain financing for the transaction, the ability of the parties to negotiate and execute a definitive purchase and sale agreement and the ability of the parties to obtain all required consents and otherwise fulfill all of the closing conditions under the definitive agreement expected to be entered into. Among other closing conditions, consents and waivers from creditors of the Company to various covenants under the terms of their credit and loan agreements with the Company will be required to complete the sale. These necessary consents and waivers may not be forthcoming or may only be forthcoming on terms the Company is unable or unwilling to meet or fail to meet the terms and conditions of any definitive agreement that is entered into. The failure to complete the sale of the directional division may make impossible or impair the Company's ability to seek to proceed further to attempt to engage in a merger or other sale of its wireline assets, or to reorganize, restructure or refinance its outstanding indebtedness.
Restrictions On Operations Imposed by Lenders; Borrowings Secured by Substantially All the Company's Assets. The Company has outstanding at December 31, 2003 senior secured indebtedness aggregating approximately $17.6 million under its Credit Agreement with General Electric Capital Corporation ("GECC"). This indebtedness is collateralized by substantially all the Company's assets. The instruments governing the Company's indebtedness to GECC impose significant operating and financial restrictions on the Company. Failure to maintain compliance with these covenants could result in the Company being unable to make further borrowings under its revolving credit arrangement with GECC which borrowings are necessary to enable the Company to fund its ongoing operations. The financial covenants in the Credit Agreement that the Company is required to comply with include: (a) limitations on capital expenditures to $8.0 million during each of the years 2002 and 2003 and $5.0 million during the six-months ended June 30, 2004, (b) having a fixed charge coverage ratio at the end of each quarter, commencing with the quarter ended March 31, 2004, of not less than 1.3:1.0 for the preceding twelve-month period, (c) having an interest coverage ratio at the end of each quarter, commencing with the quarter ended March 31, 2004, of not less than 3.0:1.0 for the preceding twelve-month period,
and d) commencing with the quarter ending March 31, 2004, having a ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA"), minus capital expenditures paid in cash, of not more than 2:0:1.0 for the four fiscal quarters then ended. The Company is required to maintain a cumulative operating cash flow at the end of each month, increasing in monthly increments from $(500,000) for the month ended February 29, 2004 to $2.0 million for the six months ended July 31, 2004. Such restrictions, as well as various other affirmative and negative covenants in the Credit Agreement, affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company to incur additional indebtedness, pay dividends, repay indebtedness prior to its stated maturity, sell assets or engage in mergers or acquisitions. These restrictions also limit the ability of the Company to effect future financings, make certain capital expenditures, withstand a downturn in the Company's business or economy in general, or otherwise conduct necessary corporate activities. The Credit Agreement places restrictions, and under certain circumstances prohibitions, on the Company's ability to borrow money under the revolving credit provisions of the Credit Agreement. The Company's ability to borrow under this revolving credit arrangement is necessary to fund the Company's ongoing operations and a default under the Credit Agreement could impair or terminate the Company's ability to borrow funds under the revolving credit provisions. If the Company were to default on its indebtedness owing to GECC and such indebtedness was accelerated, so as to become due and immediately payable, 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 GECC would constitute a default under other indebtedness of the Company owing to other creditors, 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.
At December 31, 2001, before reflecting an amendment to the Credit Facility entered into in June 2002, the Company was in violation of financial covenants relating to its fixed charge coverage ratio, minimum interest coverage ratio, and ratio of senior funded debt to EBITDA. By amendment to the Credit Facility entered into as of June 10, 2002, GECC waived these defaults as well as violations relating to the Company's failure to timely deliver its financial statements for the year ended December 31, 2001 as required by the Credit Facility and selling certain assets in violation of the terms of the Credit Facility.
At December 31, 2003, before reflecting an amendment to the Credit Facility entered into in March 2004, the Company was in violation of the cumulative operating cash flow covenant. By amendment to the Credit Facility entered into as of March 31, 2004, GECC waived this default and amended and relaxed the covenant regarding the maintenance of a minimum cumulative operating cash flow for the months of February 2004 through July 31, 2004.
In addition to the June 2002 and March 2004 amendments, the Company and GECC entered into further amendments to the financial covenants favorable to the Company in January 2002, October 2002, February 2003 and April 2003 and January 2004.
Material Charges to Operations. In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, 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. In accordance with SFAS No. 142 Goodwill and Other Intangible Assets, the Company must assess annually the potential of impairment of the carrying value of its goodwill and other indefinite-lived intangible assets. If circumstances indicate that an impairment has occurred, the assessment must be performed more frequently.
In 1998, the Company experienced a large decline in demand for its services as a result of a substantial 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 under SFAS No. 144 indicated impairment in its directional drilling assets. 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. In 2003, in connection with the Company's plans to dispose of its directional drilling division, management analyzed under SFAS No. 142 the carrying value of its goodwill carried on its balance sheet arising out of the 1997 acquisition of Diamondback Directional, Inc and Phoenix Drilling Services in 1998. This analysis resulted in a charge to operations for the year ended December 31, 2003 in the amount of approximately $1.7 million.
There can be no assurance that the Company will not experience further impairment charges in the future which could adversely affect its operating results.
Substantial Dilution. The Company has outstanding as of February 29, 2004, common stock purchase warrants, options and convertible notes which, including accrued interest that is also convertible, are entitled to purchase or be converted into an aggregate of 151,361,114 shares of the Company's Common Stock at exercise and conversion prices ranging from $0.75 to $8.01. Accordingly, if all such securities were exercised or converted, the 12,499,528 shares of Common Stock issued and outstanding on February 29, 2004, would represent 7.6% of the shares outstanding on a fully diluted basis. Of the Company's outstanding common stock purchase warrants, options and convertible notes, including interest, 151,296,114 shares of Common Stock are issuable at an exercise or conversion price of $0.75 per share. At March 31, 2004, the
exercise price of the warrants exceeded the market price of the Company's Common Stock on the OTCBB (Over the Counter Bulletin Board).
The Company's convertible notes outstanding in the principal amount of $24.6 million as of December 31, 2003, accrue interest at the rate of 15% per annum. Under the terms of the Company's Credit Facility, the Company is prohibited from paying interest currently on such indebtedness. During the year ended December 31, 2003, $3.7 million of interest accrued on such indebtedness which, at a conversion price of $0.75 of accrued interest for one share of the Company's Common Stock, is convertible into 4.9 million shares. During the year ending December 31, 2004, the Company expects that an additional $3.7 million of interest will accrue on such notes which at December 31, 2004 will be convertible into 4.9 million additional shares. Such notes are due and payable on December 31, 2004 and can be expected to accrue interest through such time. As a consequence, in the event the notes and accrued interest were converted, the holders of the Company's shares outstanding will experience additional potential dilution.
Under the terms of agreements entered into by the Company with the holders of outstanding convertible notes extending the maturity date of such notes, the Company agreed that if it had not entered into a purchase or merger agreement on or before certain dates, the holders would become entitled to receive five-year common stock purchase warrants exercisable at $0.75 per share. Because such an agreement was not entered into by December 31, 2003, the Company became obligated to issue approximately 18.0 million additional warrants. As a consequence, the holders of the Company's shares outstanding will experience additional potential dilution by virtue of the terms of these agreements.
Dependence on Major Customers. A large portion of the Company's revenues has been generated from a relatively small number of companies. During the year ended December 31, 2003, one customer (Encore Operating) accounted for 6.1% of the Company's revenues. During the year ended December 31, 2002, that same customer accounted for 7.9% of the Company's revenues. 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 February 29, 2004, St. James Capital Partners, L.P. and its affiliated entity SJMB, L.P., and including their affiliates and partners (the "St. James Affiliates"), held 5,017,481 shares of Common Stock, representing approximately 40.1% of the shares outstanding, promissory notes of the Company, including accrued interest, convertible at a per share conversion price of $0.75 of principal and interest into 52,566,945 shares of Common Stock and warrants exercisable at $0.75 per share to purchase an additional 80,854,169 shares of Common Stock. Upon conversion of the principal and accrued interest of the notes and exercise of the warrants, The St. James Affiliates, and its affiliates and partners, would hold an aggregate of 138,438,595 shares representing 84.3% of the Company's shares of
Common Stock then outstanding. In addition, The St. James Affiliates has certain additional contractual rights which, among other things, give to The St. James Affiliates 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 The St. James Affiliates. As of February 29, 2004, two of the Company's three Directors are a principal or employee of The St. James Affiliates. The foregoing gives The St. James Affiliates the ability to exert significant influence over the business and affairs of the Company. The interests of The St. James Affiliates may not always be the same as the interests of the Company's other securityholders.
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 R. Thornton, Vice-President, Wireline Services, and certain of the Company's other officers and 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 31, 2005) and Thornton and Neel (through April 1, 2006), and has purchased "key-man" life insurance with respect to each of such persons.
RISKS RELATED TO THE OIL AND GAS WELL SERVICE BUSINESS
Intense Competition. The wireline and directional drilling industry is an 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 are 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. Competition exists not only for revenues but also for employees and the loss of marketing or sales or other employees can lead to a loss of revenues. Strong and stable market conditions and the Company's ability to meet intense competitive pressures are essential to the Company's maintaining a positive liquidity position and meeting debt covenant requirements. Decreases in market conditions or failure to mitigate competitive pressures could result in non-compliance of its debt covenants and the triggering of the prepayment clauses of the Company's debt.
Fluctuations in Levels of Prices for Oil and Natural Gas; Possible Adverse Impact on the Company's Revenues. 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 and natural gas production 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 exploration and development costs, in turn, are influenced by numerous factors including, but not limited to, the extent of domestic production, the level of imports of foreign natural gas and oil, the general level of market demand on a regional, national and worldwide basis, domestic and foreign economic conditions that determine levels of industrial production, political events in foreign oil producing regions, hostilities, strikes and other disruptions affecting the production of oil and natural gas as well as the delivery of those commodities, and variations in governmental regulations and tax laws or the imposition of new governmental requirements upon the natural gas and oil industry, among other factors. Prices for natural gas and oil are subject to worldwide fluctuation in response to relatively minor changes in supply of and demand for natural gas and oil, the activities of OPEC, market uncertainty and a variety of additional factors that are beyond the Company's control.
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 prior-year 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 in the United States. 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 which continued into 1999, oil companies cut upstream capital spending, particularly in the second half of 1998. As a consequence of the decline in levels of oil and natural gas prices throughout 1999 from levels experienced in 1996 and 1997, producers of oil and natural gas curtailed their utilization of oil and natural gas well service activities. A repetition of similar events occurring in the future can again adversely affect the Company's operations.
In 2003, industry activity in the form of active drilling rig activity in the continental United States increased leading to the improved results in the Company's wireline division. Because of reduced demand for the Company's directional drilling services in the second half of 2003 and the loss of an employee, revenues of the directional drilling division declined in 2003, notwithstanding the increased rig count. The Company's revenues tend to increase and decrease as the active drilling rig count increases and decreases. There can be no assurance that there will be a continued improvement in oil and natural gas prices and active rig counts, that prices will be maintained at their current levels, that such improvement in prices as has occurred will enable the Company to operate profitably or that the Company will continue to experience an ongoing increase in the demand for and utilization of its services. Future declines in oil and natural gas prices can be expected to adversely impact the Company's revenues.
Possible Scarcity of Trained and Other 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. In addition, the Company's sales personnel are largely responsible for assuring satisfactory relationships with customers and furthering the Company's ability to bid for and obtain contracts to provide further services. 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 and compensation policies are competitive and that its relationship with its workforce is good, a significant increase in the wages or compensation paid by other employers could result in a reduction in the Company's workforce, increases in wage and compensation rates, or both. If either of these events occurred for a significant period of time, the Company's revenues could be impacted. There can be no assurance that the Company's operations and a continued improvement in its revenues may not be adversely affected by a scarcity of operating and other personnel.
Operating Hazards and Uninsured Risks. The Company's insurance coverage may not in all situations provide sufficient funds to protect the Company from all liabilities that could result from its operations. 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, but injuries and losses may occur under circumstances not covered by the Company's insurance.
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.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases 5,000 square feet of office space in Columbus, Mississippi for a five-year term expiring on December 31, 2006 for its executive offices. The monthly rental is $5,000, plus electric and gas utilities.
The Company maintains District Offices at 23 locations throughout its service area and a manufacturing facility in Laurel, Mississippi. The aggregate annual rental for these facilities is $593,000. 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 also maintains executive offices in its Conroe, Texas District Office. The Company believes that all of the facilities are adequate for its current requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a number of legal proceedings which it considers to be ordinary 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.
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, 2003, to a vote of security holders of the Company, through the solicitation of proxies, or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Quotations for the Company's Common Stock appeared in the OTC Bulletin Board(R) under the trading symbol BWWL and BWWLE through May 14, 2004. 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 ------------------------------------------------- 2002 HIGH LOW - ------------------------------------------------------------------------
First Quarter $0.45 $0.30 Second Quarter $0.60 $0.46 Third Quarter $0.35 $0.10 Fourth Quarter $0.20 $0.09
BID PRICES ------------------------------------------------- 2003 HIGH LOW - ------------------------------------------------------------------------
First Quarter $0.40 $0.10 Second Quarter $0.50 $0.24 Third Quarter $0.50 $0.30 Fourth Quarter $0.44 $0.24
BID PRICES ------------------------------------------------- 2004 HIGH LOW - ------------------------------------------------------------------------
First Quarter $0.39 $0.25 Second Quarter (through May 14) $0.35 $0.29
There can be no assurance that following the filing of this Annual Report, the Company's Common Stock will again commence to be quoted on the OTC Bulletin Board(R) or that there will be an active trading market for its Common Stock.
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 May 14, 2004, the closing bid quotation for the Common Stock, as reported by the OTC Bulletin Board, was $0.31.
As of March 8, 2004, the Company had approximately 426 shareholders of record and believes it has in excess of 500 beneficial holders of its Common Stock.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and management has no present intention of commencing to pay dividends. The Company is prohibited from paying dividends under the terms of its outstanding loan agreements.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2003, the Company did not sell any securities not registered under the Securities Act of 1933, as amended.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither the Company nor any "affiliated purchaser," as defined in Rule 10b-18(a)(3), repurchased any shares of the Company's Common Stock during the quarter ended December 31, 2003.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is certain financial information for each of the five years ended December 31, 2003 taken from the Company's audited financial statements:
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(1) See Note 5 to Notes to Financial Statements for information regarding acquisitions made by the Company. (2) See Note 9 to Notes to Financial Statements for information relating to the Company's outstanding indebtedness.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The Company's results of operations are affected primarily by the extent of utilization and rates paid for its services and equipment. The energy services sector is completely dependent upon the upstream spending by the exploration and production side of the industry. A decline in oil and gas commodity prices can be expected to result in a decline in the demand for the Company's services and equipment. The Company showed improvement in revenues during 2003 over 2002 reflecting the increased count of active drilling rigs; however, directional drilling revenues declined because of decreased activity in the Company's customer base and the loss of an employee. There can be no assurance that the Company's revenues in 2004 will equal or exceed its revenues in 2003 and prior years. There can be no assurance that the Company will continue to experience any material increase in the demand for and utilization of its services and its revenues and return to profitability.
During the year ended December 31, 2004, the Company's Credit Facility with General Electric Credit Corporation will expire. At that time, an estimated $14.1 million in senior secured indebtedness will mature and be payable. In addition, on December 31, 2004, an additional $42.8 million of subordinated secured indebtedness, including accrued interest, will be repayable under the terms of subordination agreements entered into between the Company and the holders of that indebtedness. The Company's plans for the reorganization, repayment or refinancing of this indebtedness include the sale of its directional drilling division and the application of the net proceeds to the reduction of its senior secured indebtedness. While the Company has no specific plans for the further reorganization, restructuring or refinancing of its outstanding indebtedness subsequent to that transaction, the Company intends to continue its efforts commenced initially in late 2001 and intensified thereafter in 2003, through Simmons & Company International as its financial advisor, to examine various alternative means to maximize its value to shareholders and repay, refinance or restructure its indebtedness. These efforts are expected to include efforts regarding a possible merger, sale of the wireline business assets or other business combination involving the Company. These efforts are also expected to include efforts regarding a possible reorganization, recapitalization, restructuring or refinancing of the Company's obligations on its balance sheet in order to maximize its value to shareholders and repay its existing obligations. At April 21, 2004, the Company has not entered into any definitive agreements with respect to any such transactions and there can be no assurance that any definitive agreements will be entered into or that the Company will be successful in pursuing its plans for the reorganization, repayment or refinancing of its outstanding indebtedness. In the event the Company's plans are unsuccessful, the Company's secured creditors could assert their rights to foreclose on the Company's assets and a stockholder's investment in the Company
could be lost. The Company intends to engage in ongoing efforts to pursue its plans, but there can be no assurance these efforts will be successful.
As a result of the above factors, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of the asset-carrying amounts or the amounts and classifications of liabilities that might result should the Company be unable to continue as a going concern.
OPERATING RESULTS
The following table sets forth the Company's revenues from its two principal lines of business for each of the years ended December 31, 2003, 2002, and 2001 (in thousands). In July 2001, the Company sold its workover and completion line of business.
2003 2002 2001 - -------------------------------------------------------------------------------
Wireline Services $45,757 $34,094 $ 39,682
Directional Drilling $19,692 $22,489 36,425
-------------------------------------------------------- $65,449 $56,583 $ 76,107
========================================================
As a consequence of the decline in levels of oil and natural gas prices throughout 1999 from levels experienced in 1996 and 1997, producers of oil and natural gas curtailed their utilization of oil and natural gas well service activities. Increases in oil and natural gas prices subsequent to mid-1999 through 2000 resulted in an increase in demand for oil and natural gas well services. This impacted favorably the utilization of the Company's services and revenues through the third quarter of 2001. Oil and natural gas commodity prices declined throughout much of 2001, impacting the Company's operations in the fourth quarter of 2001 and into 2002. Throughout much of 2002, oil and gas prices improved resulting in improved demand for the Company's services, however, this improved demand and greater revenues to the Company were insufficient to enable the Company to operate profitably. Revenues for 2003 increased by approximately 15.7% over the year 2002 levels. During 2003, the Company benefited from increased oil and natural gas prices which resulted in an increase in demand for the Company's wireline services, mainly in the second and third quarters of 2003, this resulted in an approximately 34.2% increase in wireline services revenues. Directional drilling revenues declined by approximately 12.4% because of decreased demand for the Company's services in
the second half of 2003, as well as the loss of a sales employee. There can be no assurance that there will be a continued improvement in oil and natural gas prices, that such improvement in prices as has occurred will enable the Company to maintain in 2004 the level of revenues realized in 2003, operate profitably in 2004 or that the Company will experience an increase in the demand for and utilization of its services that will enable it to operate again at the levels experienced during 2001. Future declines in oil and natural gas prices can be expected to adversely impact the Company's revenues. See "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" and the risk factors described thereunder.
TWELVE MONTH PERIODS ENDED DECEMBER 31, 2003 AND 2002
Revenues increased by approximately $8.9 million or 15.7% to $65.4 million for the year ended December 31, 2003 as compared to revenues of $56.6 million for the year ended December 31, 2002. Wireline services revenues increased by approximately $11.7 million in 2003 from 2002 primarily due to the increased demand for the Company's services. Directional drilling revenues decreased from 2002 by approximately $2.8 million mainly as a result of the decreased demand for the Company's services in the second half of 2003.
Operating costs increased by $4.3 million for the year ended December 31, 2003, as compared to 2002. This increase was due primarily to the increase in corresponding revenues of the Company as compared to 2002. Salaries and benefits increased by approximately $3.0 million for 2003 as compared to 2002. This was due primarily to the Company's increased employee base as the Company expanded its services to include tubing conveyed perforating and plugging and well abandoning services in the second half of 2002. Operating costs as a percentage of revenues decreased to 68.2% in 2003 from 71.2% in 2002 primarily because of the increased utilization of the Company's assets as well as increases in pricing of the Company's services.
In 2003, the Company recorded a $3.1 million writedown related to the impairment of its directional drilling assets.
Selling, general and administrative expenses decreased by approximately $65,000 to $10.6 million in 2003. As a percentage of revenues, selling, general and administrative expenses decreased to 16.2% in 2003 from 18.8% in 2002, primarily as a result of the increased revenue level generated in 2003 which did not require a corresponding increase in selling, general and administrative expenses.
Depreciation and amortization decreased from $8.0 million in 2002, to $7.7 million in 2003, primarily because of the decrease in capital expenditures in 2003 of $3.1 million from $7.7 million in 2002, resulting in a decreased asset base.
Interest expense and amortization of debt discount decreased by approximately $64,000 for 2003 as compared to 2002. This was directly related to lower interest rates on outstanding senior debt in 2003 as well as the amortization of senior debt in 2003.
Net gain on sale of fixed assets increased in 2003 to a net gain of $244,000 from a $177,000 net gain in 2002. Other income increased by approximately $47,000 in 2003.
The provision for income taxes was $0 in 2003 and 2002. A full valuation allowance has been recorded against the net deferred tax assets generated each year from the net operating losses to be carried forward.
The Company's net loss for 2003 was $5.5 million, compared with a net loss of $7.6 million in 2002. The improvement in the Company's results in 2003 over 2002 was primarily attributable to the increased demand for the Company's services in 2003 and offset by the impairment of $3.1 million recorded on the directional assets.
TWELVE MONTH PERIODS ENDED DECEMBER 31, 2002 AND 2001
Revenues decreased by approximately $19.5 million or 25.7% to $56.6 million for the year ended December 31, 2002 as compared to revenues of $76.1 million for the year ended December 31, 2001. Wireline services revenues decreased by approximately $5.6 million in 2002 from 2001 primarily due to the decreased demand for the Company's services. Directional drilling revenues decreased from 2001 by approximately $13.9 million mainly as a result of the downturn in market conditions for most of 2002.
Operating costs decreased by $8.7 million for the year ended December 31, 2002, as compared to 2001. This decrease was due primarily to the decrease in corresponding revenues of the Company as compared to 2001. Salaries and benefits increased by $945,000 for 2002 as compared to 2001. This was due primarily to the Company's increased employee base as the Company expanded its services to include tubing conveyed perforating and plugging and well abandoning services. Operating costs as a percentage of revenues increased to 71.2% in 2002 from 64.4% in 2001 primarily because of the decreased utilization of the Company's assets as well as decreases in pricing of the Company's services.
Selling, general and administrative expenses increased by approximately $1.8 million from $8.9 million in 2001 to $10.7 million in 2002. As a percentage of revenues, selling, general and administrative expenses increased from 11.7% in 2001 to 18.8% in 2002, primarily as a result of the reduced revenue level generated in 2002.
Depreciation and amortization increased from $6.6 million in 2001, to $8.0 million in 2002, primarily because of the higher asset base of depreciable properties in 2002 over 2001 resulting from the Company's capital expenditures of $7.7 million in 2002.
Interest expense and amortization of debt discount decreased by approximately $485,000 for 2002 as compared to 2001. This was directly related to lower interest rates on outstanding senior debt in 2002.
During 2001, the Company recognized a loss of $1,322,481 as a result of the repayment of indebtedness owing to Coast Business Credit in September 2001 and a cash collateral fee agreement entered into with the St. James Affiliates. The Company recorded a gain of $175,003 as a result of a negotiated payment of promissory notes and related obligations.
Net gain or loss on sale of fixed assets increased in 2002 to a net gain of $177,000 from a $34,000 net gain in 2001. Other income decreased by approximately $11,000 in 2002.
The provision for income taxes was $0 in 2002 and 2001. The provision is $0 due to the fact that a full valuation allowance has been recorded against the net deferred tax assets generated in the years ended prior to December 31, 2002.
The Company's net loss for 2002 was $7.6 million, compared with a net income of $5.0 million in 2001. The Company's loss in 2002 was primarily attributable to the reduced demand for the Company's services throughout 2002 compared with the enhanced demand for the Company's services in 2001. The reduced operating results was the result of decreased revenues and the decrease in demand for the Company's services throughout 2002.
POSSIBLE FUTURE IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, 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 of its long-lived assets.
During 2003, management evaluated the recoverability of its long-lived assets in relation to its business segments. The analysis was performed using the proposed sale prices for the directional drilling segment. As a result of this analysis an impairment was indicated for which the Company reduced the carrying amount of property, plant and equipment for the directional drilling segment and recognized an impairment expense of $1.4 million.
In 1998, 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. There can be no assurance that such a charge to operations may not occur again in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by the Company's operating activities was $10.6 million for the year ended December 31, 2003 as compared to cash provided by operating activities of $5.4 million for the year ended December 31, 2002. Investing activities of the Company used cash of approximately $3.1 million during the year ended December 31, 2003 for the acquisition of property, plant and equipment and was offset by proceeds from the sale of fixed assets of $684,000. During the year ended December 31, 2002, acquisitions of property, plant and equipment used cash of $7.7 million offset by proceeds of $219,000 from the sale of fixed assets.
Financing activities during the year ended December 31, 2003 provided cash of $5.4 million offset by principal payments on long-term notes and the Company's working capital revolving loan of $10.3 million. Financing activities provided cash of $7.6 million from borrowings during the year ended December 31, 2002 offset by principal payments on long-term notes and capital lease obligations of $5.6 million.
During the year ended December 31, 2003, the Company expended $3.3 million for the acquisition of property, plant and equipment financed under notes payable. During the year ended December 31, 2002, the Company expended $4.2 million for the acquisition of property, plant and equipment financed under the capital expenditure credit facility with GECC and notes payable.
The Company's outstanding indebtedness includes primarily senior secured indebtedness aggregating approximately $17.6 million at December 31, 2003, other indebtedness of approximately $0.8 million, and $24.6 million of principal and $14.5 million of accrued interest owing to the St. James Affiliates. During the year ended December 31, 2003, an aggregate of $42.6 million of indebtedness will mature. In addition to the proposed sale of its directional drilling assets, the Company presently intends to continue to intensify its efforts regarding a possible merger, sale of assets or other business combination involving the Company or a refinancing, recapitalization or other reorganization involving the Company. Such efforts might also involve the possible sale of a part of the Company's business.
The following table sets forth information as of December 31, 2003 with respect to the Company's known contractual obligations of the types specified below:
GECC Credit Facility. On September 14, 2001, the Company entered into the Credit Facility with GECC providing for the extension of revolving, term and capex credit facilities to the Company aggregating up to $40.0 million. The Company and GECC entered into amendments to the Credit Facility in January 2002, June 2002, October 2002, February 2003, April 2003, January 2004 and March 2004. As amended, the Credit Facility includes a revolving loan of up to $15.0 million, but not exceeding 85% of eligible accounts receivable, a term loan of $17.0 million, and a capex loan of up to $8.0 million, but not exceeding a borrowing base of the lesser of 70% of the hard costs of acquired eligible equipment, 100% of its forced liquidation value and the Company's EBITDA for the month then ended, less certain principal, interest and maintenance payments. Eligible accounts are defined to exclude, among other items, accounts outstanding of debtors that are more than 60 days overdue or 90 days following the original invoice date and of debtors that have suspended business or commenced various insolvency proceedings and accounts with reserves established against them to the extent of such reserves as GECC may set from time to time in its reasonable credit judgment. Borrowings under the capex loan are at the sole and exclusive discretion of GECC. The interest rate on borrowings under the revolving loan is 1.75% above a base rate and on borrowings under the term loan and capex loan is 2.5% above the base rate. The base rate is the higher of (i) the rate publicly quoted from time to time by the Wall Street Journal as the base rate on corporate loans posted by at least 75% of the nation's thirty largest banks, or (ii) the average of the rates on overnight Federal funds transactions by members of the Federal Reserve System, plus 0.5%. Subject to the absence of an event of default and fulfillment of certain other conditions, the Company can elect to borrow or convert any loan and pay interest at the LIBOR rate plus applicable margins of 3.25% on the revolving loan and 4.0% on the term loan and capex loan. If an event of default has occurred, the interest rate is increased by 2%. Advances under the Credit Facility are collateralized by a senior lien against substantially all of the Company's assets. The Credit Facility expires on September 14, 2004.
Initial borrowings under the Credit Facility advanced on September 14, 2001 aggregated $21.6 million. Proceeds of the initial borrowings were used to repay outstanding indebtedness aggregating $21.4 million to Coast Business Credit, Bendover Company and certain other indebtedness. At December 31, 2003, borrowings outstanding under the Credit Facility aggregated $17.6 million, of which $3.2 million was outstanding under the revolving loan, $9.3 million was outstanding under the term loan and $5.1 million was outstanding under the capex
loan. At March 31, 2004, borrowings outstanding under the Credit Facility aggregated $15.2 million. Borrowings under the revolving loan are able to be repaid and re-borrowed from time to time for working capital and general corporate needs, subject to the Company's continuing compliance with the terms of the agreement, with the outstanding balance of the revolving loan to be paid in full at the expiration of the Credit Facility on September 14, 2004. The term loan is to be repaid in 35 equal monthly installments of $283,333 with a final installment of $7,083,333 due and payable on September 14, 2004. At December 31, 2003 the Company had available $2.4 million under the revolving loan. The capex loan is available to be borrowed through June 30, 2004, as amended by the March 2004 amendment, at the discretion of GECC, and is to be repaid in equal monthly installments of 1/60th of each of the amounts borrowed from time to time with the remaining outstanding balance of the entire capex loan due and payable on September 14, 2004
Borrowings under the Credit Facility may be prepaid or the facility terminated or reduced by the Company at any time subject to the payment of an amount equal to 1% of the prepayment or reduction occurring before September 14, 2004. The Company is required to prepay borrowings out of the net proceeds from the sale of any assets, subject to certain exceptions, or the stock of any subsidiary, the net proceeds from the sale of any stock or debt securities by the Company, and any borrowings in excess of the applicable borrowing availability, including borrowings under the term loan and capex loan in excess of 50% of the forced liquidation value of the eligible capex and term loan equipment and borrowings under the term loan in excess of 70% of the forced liquidation value of eligible term loan equipment. The value of the term loan equipment is established by appraisal.
Initial borrowings under the Credit Facility were subject to the fulfillment at or before the closing of a number of closing conditions, including among others, the accuracy of the representations and warranties made by the Company in the loan agreement, delivery of executed loan documents, officers' certificates, an opinion of counsel, repayment of the Coast senior secured loan, the extension of the maturity date of $24.6 million principal amount of the Company's outstanding subordinated notes to December 31, 2004 with no payments of principal or interest to be made prior to that date, and the completion of due diligence. Future advances are subject to the continuing accuracy of the Company's representations and warranties as of such date (other than those relating expressly to an earlier date), the absence of any event or circumstance constituting a "material adverse effect," as defined, the absence of any default or event of default under the Credit Facility, and the borrowings not exceeding the applicable borrowing availability under the Credit Facility, after giving effect to such advance. A "material adverse effect" is defined to include an event having a material adverse effect on the Company's business, assets, operations, prospects or financial or other condition, on the Company's ability to pay the loans, or on the collateral and also includes a decline in the "Average Rig Count" (excluding Canada and international rigs) published by Baker Hughes, Inc. falling below 675 for 12 consecutive weeks.
Under the Credit Facility, the Company is obligated to maintain compliance with a number of affirmative and negative covenants. Affirmative covenants the Company must comply with include requirements to maintain its corporate existence and continue the conduct of its business substantially as conducted in September 2001, promptly pay all taxes and governmental assessments and levies, maintain its corporate records, maintain insurance, comply with applicable laws and regulations, provide supplemental disclosure to the lenders, conduct its affairs without violating the intellectual property of others, conduct its operations in compliance with environmental laws and provide a mortgage or deed of trust to the lenders granting a first lien on the Company's real estate upon the request of the lenders and provide certificates of title on newly acquired equipment with the lender's lien noted.
Negative covenants the Company may not violate include, among others, (i) forming or acquiring a subsidiary, merging with, acquiring all or substantially all the assets or stock of another person, (ii) making an investment in or loan to another person, (iii) incurring any indebtedness other than permitted indebtedness, (iv) entering into any transaction with an affiliate except on fair and reasonable terms no less favorable than would be obtained from a non-affiliated person, (v) making loans to employees in amounts exceeding $50,000 to any employee and a maximum of $250,000 in the aggregate, (vi) making any change in its business objectives or operations that would adversely affect repayment of the loans or in its capital structure, including the issuance of any stock, warrants or convertible securities other than (A) on exercise of outstanding securities or rights, (B) the grant of stock in exchange for extensions of subordinated debt, (C) options granted under an existing or future incentive option plan, or (D) in its charter or by-laws that would adversely affect the ability of the Company to repay the indebtedness, (vii) creating or permitting to exist any liens on its properties or assets, with the exception of those granted to the lenders or in existence on the date of making the loan, (viii) selling any of its properties or other assets, including the stock of any subsidiary, except inventory in the ordinary course of business and equipment or fixtures with a value not exceeding $100,000 per transaction and $250,000 per year, (ix) failing to comply with the various financial covenants in the loan agreement, (x) making any restricted payment, including payment of dividends, stock or warrant redemptions, repaying subordinated debt, rescission of the sale of outstanding stock, (xi) making any payments to stockholders of the Company other than compensation to employees and payments of management fees to any stockholder or affiliate of the Company, or (xii) amending or changing the terms of the Company's subordinated debt.
As amended through March 2004, the financial covenants require the Company to maintain an increasing cumulative operating cash flow at the end of each month, commencing with the month ended February 29, 2004, as follows:
FISCAL MONTH CUMULATIVE OPERATING CASH FLOW ------------ ------------------------------
For the 1 Month Ending February 29, 2004 $(50,000)
For the 2 Months Ending March 31, 2004 $200,000
For the 3 Months Ending April 30, 2004 $500,000
For the 4 Months Ending May 31, 2004 $850,000
For the 5 Months Ending June 30, 2004 $1,350,000
For the 6 Months Ending July 31, 2004 $2,000,000
Cumulative operating cash flow is defined, for the period February 29, 2004 through July 31, 2004, as the sum of EBITDA for such month minus capital expenditures paid in cash for such month plus EBITDA for each preceding month commencing on February 1, 2004 minus capital expenditures paid in cash for each preceding month commencing February 1, 2004. For the period ended December 31, 2003 and January 31, 2004, the Company was not in compliance with the cumulative operating cash flow covenant which was waived by GECC by the amendment of March 2004.
Events of default under the Credit Facility include (a) the failure to pay when due principal or interest or fees owing under the Credit Facility, (b) the failure to perform the covenants under the Credit Facility relating to use of proceeds, maintenance of a cash management system, maintenance of insurance, delivery of certificates of title, delivery of required consents of holders of outstanding subordinated notes, maintenance of compliance with the financial covenants in the loan agreement and compliance with any of the loan agreement's negative covenants, (c) the failure, within specified periods of 3 or 5 days of when due, to deliver monthly unaudited and annual audited financial statements, annual operating plans, and other reports, notices and information, (d) the failure to perform any other provision of the loan agreement which remains un-remedied for 20 days or more, (e) a default or breach under any other agreement to which the Company is a party beyond any grace period that involves the
failure to pay in excess of $250,000 or causes or permits to cause in excess of $250,000 of indebtedness to become due prior to its stated maturity, (f) any representation or warranty or certificate delivered to the lenders being untrue or incorrect in any material respect, (g) a change of control of the Company, (h) the occurrence of an event having a material adverse effect, and (i) the attachment, seizure or levy upon of assets of the Company which continues for 30 days or more and various other bankruptcy and other events. Upon the occurrence of a default or event of default, the lenders may discontinue making loans to the Company. Upon the occurrence of an event of default, the lenders may terminate the Credit Facility, declare all indebtedness outstanding under the Credit Facility due and payable, and exercise any of their rights under the Credit Facility which includes the ability to foreclose on the Company's assets.
The Company has amended the terms of its Credit Facility with GECC on seven occasions the principal effects of which were to relax certain of the terms of the financial covenants so as to be more favorable to the Company. There can be no assurance that the Company will be able to obtain further amendments to these financial covenants if required or that the failure to obtain such amendments when requested may not result in the Company being placed in violation of those financial covenants. Before reflecting amendments to the Credit Facility made in June 2002 and March 2004, the Company was in violation of the financial covenants relating to its fixed charge coverage ratio, minimum interest coverage ratio, and ratio of senior funded debt to EBITDA in 2001 and cumulative operating cash flow in December 2003 and January 2004. By amendments to the Credit Facility entered into as of June 10, 2002 and March 31, 2004, GECC waived these defaults as well as violations relating to the Company's failure to timely deliver its financial statements for the year ended December 31, 2001 as required by the Credit Facility and selling certain assets in violation of the terms of the Credit Facility. The Company agreed to pay GECC a fee of $100,000 in connection with entering into the amendment in 2001 and $35,000 in 2004.
In connection with the April 2003 amendment to the Credit Facility, the Company is required to provide GECC with weekly reports setting forth an aging of its accounts payable and weekly cash budgets for the immediately following thirteen week period. Also in connection with entering into that amendment, the Company agreed to pay GECC an amendment fee of $100,000, of which $50,000 was payable in June 2003 and $50,000 was payable on December 31, 2003, and a fee of $300,000 in the event of a sale of all the assets or stock of the Company or other event that results in a change of control, as defined, of the Company. GECC consented to a capex loan of $1.0 million to the Company at the time of entering into the amendment.
Reference is made to the Credit Agreement, filed as an Exhibit to the Company's Current Report on Form 8-K for September 14, 2001, the First and Second Amendments thereto, filed as exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, the Third Amendment thereto, filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, the Fourth Amendment and Fifth Amendment,
filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and the Sixth Amendment and the Seventh Amendment filed as Exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, for a complete statement of the terms and conditions.
Note Extensions. In connection with the GECC refinancing, the Company agreed with the holders to extend the maturity date from June 30, 2001 to December 31, 2004 on $6.9 million of the $7.0 million principal amount of promissory notes. The remainder of the outstanding principal was repaid. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an 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 the shares were issued. The Company repaid approximately $83,000 to noteholders who chose not to extend the maturity dates and the St. James Affiliates purchased $1.6 million from noteholders who chose not to extend the maturity dates. As a condition to extend the maturity date, holders of the notes are to receive additional five-year common stock purchase warrants exercisable at $0.75 per share, valued at $0.01, if the Company has not entered into a purchase or merger agreement on or before certain dates. Because such an agreement was not entered into by December 31, 2003, the Company became obligated to issue approximately 18.0 million additional warrants. The exercise price of the warrants that were issued is subject to anti-dilution adjustments 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 were issued.
The Company also extended until December 31, 2004 the promissory notes totaling $17.7 million owing to the St. James Affiliates which matured in March, 2001. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an 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 the shares were issued.
All of the debt and interest owed to the St. James Affiliates is subordinated to the Company's Credit Facility and cannot be repaid until all the amounts owed pursuant to the Credit Facility have been repaid.
Substantially all of the Company's assets are pledged as collateral for the debts described above.
Recently Issued Accounting Pronouncements
In April 2002, the FASB issued FAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which is effective for transactions occurring after May 15, 2002. FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from extinguishment of debt. FAS 44 set forth industry-specific transitional guidance that did not apply to the Company. FAS 145 amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. FAS 145 also makes technical corrections to certain existing pronouncements that are not substantive in nature. Due to the adoption of FAS 145, the Company reclassified the early extinguishment of debt in 2001 from an extraordinary item to continuing operations in 2003.
In 2003, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." The disclosure requirements of Statement No. 123, Accounting for Stock-Based Compensation, which apply to stock compensation plans of all companies, are amended to require certain disclosures about stock-based employee compensation plans in an entity's accounting policy note. Those disclosures include a tabular format of pro forma net income and, if applicable, earnings per share under the fair value method if the intrinsic value method is used in any period presented. Pro forma information in a tabular format is also required in the notes to interim financial information if the intrinsic value method is used in any period presented. The amendments to the disclosure and transition provisions of Statement No. 123 are effective for fiscal years ending after December 15, 2002.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 addresses when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity (VIE). It defines VIEs as entities that either do not have any equity investors with a controlling financial interest, or have equity investors that do not provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. FIN 46 also requires disclosures about VIEs that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after January 31, 2003. The Company has not obtained an interest in a VIE subsequent to that date. A modification to FIN 46 (FIN 46(R)) was released in December 2003. FIN 46(R) delayed the effective date for VIEs created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period ending after March 15, 2004. FIN 46(R) delayed the effective date for special-purpose entities until the first fiscal year or interim period after December 15, 2003. The Company is not the primary beneficiary of any SPEs at December 31, 2003. The Company will adopt FIN 46(R) for non-SPE entities as of March 31, 2004. The
adoption of FIN 46 did not result in the consolidation of any VIEs, nor is the adoption of FIN 46(R) expected to result in the consolidation of any VIEs. The Company is continuing to evaluate the impact FIN 46(R) will have on its financial statements.
In May 2003, the FASB issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for classifying and measuring certain financial instruments that have characteristics of both liabilities and equity. The guidance in Statement 150 became effective June 1, 2003, for all financial instruments created or modified after May 31, 2003, and otherwise became effective as of July 1, 2003. In November 2003, the FASB deferred for an indefinite period the application of the guidance in Statement 150 to non-controlling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent's financial statements under Statement 150. The deferral is limited to mandatorily redeemable non-controlling interests associated with finite-lived subsidiaries. Management does not believe it has any involvement with such entities as of December 31, 2003.
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 2003.
SIGNIFICANT ACCOUNTING POLICIES
The Company's Discussion and Analysis of Financial Condition and Results of Operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the allowance for bad debts, inventory, long-lived assets, intangibles and goodwill. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
The Company's inventory consists of tool components, sub-assemblies and expendable parts used in directional oil and gas well drilling activities. Components, sub-assemblies and expendable parts are capitalized as long-term inventory and expensed based on a per hour of motor use calculation and then adjusted to reflect physical inventory counts. The Company's classification and treatment is consistent with industry practice.
The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When the Company determines that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable, any impairment is measured based on a projected net cash flows expected to result from that asset, including eventual disposition.
Property and equipment are carried at original cost less applicable depreciation. Depreciation is recognized on the straight line basis over lives ranging from two to ten years. Major renewals and improvements are capitalized and depreciated over each asset's estimated remaining useful life. Maintenance and repair costs are charged to expense as incurred. When assets are sold or retired, the remaining costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in income. Property and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company estimates the future undiscounted cash flows of the affected assets to determine the recoverability of carrying amounts. Warrants are valued based upon an independent valuation. The difference between the face value of the warrant issued and the value per the valuation is amortized into income through interest expense over the life of the related debt instrument.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
From time to time, the Company holds financial instruments comprised of debt securities and time deposits. All such instruments are classified as securities available for sale. The Company does not invest in portfolio equity securities, or commodities, or use financial derivatives for trading or hedging purposes. The Company's debt security portfolio represents funds held temporarily pending use in its business and operations. The Company manages these funds accordingly. The Company seeks reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while, at the same time, seeking to achieve a favorable rate of return. The Company's market risk exposure consists of exposure to
changes in interest rates and to the risks of changes in the credit quality of issuers. The Company typically invests in investment grade securities with a term of three years or less. The Company believes that any exposure to interest rate risk is not material.
Under the Credit Facility with GECC, the Company is subject to market risk exposure related to changes in the prime interest rate. Assuming the Company's level of borrowings from GECC at December 31, 2003 remained unchanged throughout 2004, if a 100 basis point increase in interest rates under the Credit Agreement from rates in existence at December 31, 2003 prevailed throughout the year 2004, it would increase the Company's 2004 interest expense by approximately $176,000. The Company's indebtedness to GECC matures on September 14, 2004.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements of the Company meeting the requirements of Regulation S-K are filed on the succeeding pages of this Item 8 of this Annual Report on Form 10-K, as listed below:
Report of Independent Certified Public Accountants for the Years Ended December 31, 2003 and 2002 .............................
Report of Independent Accountants for the Year Ended December 31, 2001 ............................................
Balance Sheets as of December 31, 2003, and 2002 ..................................
Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 ..............................
Statements of Stockholders Deficit for the Years Ended December 31, 2003, 2002, and 2001 .................
Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001 ............................
Notes to Financial Statements..................................
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 18, 2002, the Company dismissed PricewaterhouseCoopers, LLP ("PWC") as its principal independent accountants. On October 31, 2002, the Company engaged Grant Thornton LLP as its principal independent accountants to audit its financial statements. Information required to be disclosed in response to this Item and Item 304(a) of Regulation S-K was previously reported in the Company's Current Report on Form 8-K for September 18, 2002.
In connection with the audits of the fiscal years ended December 31, 2001 and December 31, 2000 and through September 18, 2002, the date of dismissal of PWC, the Company had no disagreements with PWC with respect to accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of PWC, would have caused PWC to make reference to the subject matter of its disagreement in connection with its opinion.
During the two fiscal years ended December 31, 2001 and through September 18, 2002, the date of dismissal of PWC, there had been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)) except, in a letter addressed to the President of the Company relating to PWC's audit of the Company's financial statements as of December 31, 2001 delivered to the Company over the Internet on September 25, 2002, PWC reported what it described as a "Reportable Condition" constituting "a material weakness in the Company's internal control structure over the safeguarding and financial reporting of the Company's inventory."
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management, including William Jenkins, its President and Chief Executive Officer, and Ronald Whitter, its Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report, and, based on their evaluation, Mr. Jenkins and Mr. Whitter have concluded that these controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and other procedures that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including Mr. Jenkins and Mr. Whitter, as appropriate to allow timely decisions regarding required disclosure.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains information concerning the current Directors and executive officers of the Company:
NAME AGE POSITION ---------------------------------------------------------------------------
William L. Jenkins 50 President, Chief Executive Officer and Director
Allen R. Neel 46 Executive Vice-President and Secretary
Danny R. Thornton 52 Vice-President/Operations
Charles E. Underbrink 49 Director
James H. Harrison 35 Director
William L. Jenkins has been President, Chief Executive 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 and Secretary of the Company and has been employed by the Company since August 1990. 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 R. 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 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. Mr. Thornton is Mr. Jenkins' brother-in-law.
Charles E. Underbrink was elected a Director on April 1, 1998. For more than the past five years, he has been employed as the Chairman of St. James Capital Corp. and SJMB, L.L.C., Houston based merchant banking firms. From the inception of St. James Capital Corp. and SJMB, L.L.C. until March 1, 2001 he also served as the Chief Executive officer of each.
James H. Harrison was elected a Director on February 25, 2003. He is the Chief Financial Officer of St. James Capital Corp. and SJMB, L.L.C., Houston-based merchant banking firms. Prior to joining St. James Capital Corp. and SJMB, L.L.C. in January of 1998, he served as a Manager at Ernst & Young LLP, a national public accounting firm. Mr. Harrison has been employed by SJMB, L.L.C. and its affiliates for more than the past five years.
The Company has agreed that one person designated by the St. James Affiliates will be nominated for election to the Company's Board of Directors.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has appointed an Audit Committee consisting of Messrs. Jenkins, Underbrink and Harrison. The Company's Audit Committee, among other things, meets with its independent accountants to review its accounting policies, internal controls and other accounting and auditing matters; approves the engagement of the Company's independent accountants; and reviews the engagement and fees relating to the scope of the annual audit, special audit work and non-audit services which may be recommended or required by the independent accountants. The Company's securities are not listed on a registered national securities exchange or in an automated inter-dealer quotation system and, accordingly, it is not subject to the listing standards imposed by rules adopted under the U.S. Securities Exchange Act of 1934, as amended, relating to audit committees.
The Company's Board of Directors has determined that it does not have an Audit Committee Financial Expert serving on its Audit Committee. The Company does not have an Audit Committee Financial Expert serving on its Audit Committee because at this time the limited magnitude of its revenues and operations does not, in the view of its Board of Directors, justify or require that it obtain the services of a person having the attributes required to be an Audit Committee Financial Expert serving on its Board of Directors and Audit Committee. The
Board of Directors may in the future determine that a member elected to the Board in the future has the attributes to be determined to be an Audit Committee Financial Expert.
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 during the Company's most recent fiscal year.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive officer and principal financial and accounting officer. A copy of the Company's Code of Ethics has been filed as an exhibit to this annual report.
ITEM 11.
ITEM 11. 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 2003 for all services rendered to the Company in each of the years 2003, 2002, and 2001.
- ---------------------------------
(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) Includes automobile allowance paid to Messrs. Jenkins, Neel and Thornton. (3) Includes loans forgiven under Mr. Jenkins' January 1, 2002 employment agreement.
Compensation Decisions. The Company's full Board of Directors acts on matters involving the compensation of the Company's President and Chief Executive Officer. Mr. Jenkins acts on matters concerning executive officer compensation other than to himself. Mr. Jenkins does not participate as a Director in board actions regarding his compensation. The Company's Board of Directors also acts on matters involving the grant of options under the Company's option plans other than the 2000 Stock Incentive Plan. Messrs. Jenkins and Harrison have been appointed to the option committee under the 2000 Stock Incentive Plan. At the present time, a compensation committee of the Board of Directors has not been appointed.
STOCK OPTION EXERCISES AND HOLDINGS AT DECEMBER 31, 2003.
The following table provides information with respect to the above named executive officers regarding Company options exercised during the year ended December 31, 2003 and options held at December 31, 2003 (such officers did not exercise any options during the most recent fiscal year).
- ---------------------------- (1) Based on the closing sales price on December 31, 2003 of $0.25.
No options were granted to the above named executive officers during 2003.
OTHER PLANS
The Company has not adopted any other long-term incentive plans or defined benefit or actuarial pension plans.
EMPLOYMENT AGREEMENTS
Mr. Jenkins serves as the Company's President, Chief Executive Officer and a Director pursuant to an employment agreement, as amended effective January 1, 2002, expiring on December 31, 2005. Under the agreement, Mr. Jenkins receives a base salary of not less than $350,000 per year. If the Company achieves, during any calendar quarter beginning January 1, 2002, a ratio of EBITDA to sales of 20% or more, Mr. Jenkins will be paid a bonus for the quarter of 1% of the Company's EBITDA during the quarter. In January 2004, Mr. Jenkins was paid $73,555 as a result of the Company exceeding the 20% EBITDA target in the second and third quarters of 2003. As an incentive to retain Mr. Jenkins' services, the Company loaned to Mr. Jenkins on March 22, 2002, the sum of $190,000, bearing interest at the applicable federal rate, to be repaid at the rate of one-third of the principal, plus accrued interest, on October 1 of each of the years 2002, 2003 and 2004. If Mr. Jenkins remains employed by the Company on September 30 preceding the date annual principal and interest is due on the loan, the sum due and owing the following day is forgiven. Accordingly, on October 1, 2002 and October 1, 2003, $61,793 and $61,793, respectively, of principal and interest owing by Mr. Jenkins to the Company was forgiven. In the event of a Change of Control, as defined, the death or permanent
disability of Mr. Jenkins or in the event his employment is terminated without cause, the entire amount owing by Mr. Jenkins is forgiven. In the event of a Change of Control, as defined, the Company agrees that the employment agreement will terminate and Mr. Jenkins will be paid a sum equal to three times the compensation paid to Mr. Jenkins during the twelve months preceding the Change of Control. A Change of Control is defined in the agreement as any person or group of persons acquiring 20% or more of the outstanding shares of voting capital stock of the Company, the sale of more than 25% of the assets of the Company in a single or series of related transactions, a merger of the Company with any other person or firm, a change, during any period of twelve consecutive calendar months, in the individuals who were Directors at the beginning of such period (including Directors whose election or nomination for election was approved by at least two-thirds of the Directors then in office who were Directors at the beginning of the period or whose election was so approved) and such persons cease for any reason other than death or disability to constitute a majority of the Directors then in office, or St. James Capital Corp. ceases to be the general partner, managing partner or otherwise ceases to control St. James Capital Partners, L.P. or SJMB, L.P. The Company also agreed to issue to Mr. Jenkins a five-year common stock purchase warrant to purchase 2.5 million shares of stock exercisable at $0.75 per share. In the event of Mr. Jenkins' death, subject to any restrictions contained in the Company's agreement with GECC, the Company agreed to repurchase the shares and options held by Mr. Jenkins at the fair market value of the shares, as to shares repurchased, and the difference between the fair market value and the option exercise price, as to options repurchased. Under the agreement, the fair market value is the average of the mid-point between the bid and asked prices for the Company's common stock for the twenty trading days preceding death. The Company also confirmed the prior agreement to pay to Mr. Jenkins in the event of a sale of the Company or a significant division thereof, a sum equal to 1% of the gross sale proceeds or gross value of any stock received, subject to a maximum payment of $500,000. The amended employment agreement further provides that while in the employ of the Company and thereafter Mr. Jenkins will not divulge or use any confidential information of the Company and during the term of his employment will not engage in activities in competition with the Company.
The Company has entered into a five-year employment agreement terminating on May 31, 2008 with Allen R. Neel, Executive Vice-President of the Company. Under his agreement, Mr. Neel is to receive base compensation of $165,000 per year. The Company has entered into a five-year employment agreement terminating on April 1, 2006 with Danny R. Thornton, Vice President, Operations, of the Company. Under his agreement, Mr. Thornton receives base compensation of $115,000 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 restrictions on such persons engaging in activities in competition with the Company during the term of their employment. The agreements also contain provisions, added by amendments in
2002 as to Mr. Neel and 2003 as to Mr. Thornton, whereby in the event of a change of control of the Company, such persons are to be paid a sum equal to their total annual compensation as in effect for the twelve months preceding the change of control. A change of control is defined under the agreements the same as under Mr. Jenkins' contract described above with the addition of a provision that if Mr. Jenkins ceases to be President, Chief Executive Officer, a Director or an employee of the Company, a change of control will have occurred for the purposes of the agreements.
DIRECTORS' COMPENSATION
Non-employee Directors of the Company are authorized to receive compensation in the amount of $5,000 each quarter. In addition, the Company's Directors are reimbursed for their out-of-pocket expenses in attending meetings of the Board of Directors and committees of the Board.
Under the Company's Stock Incentive Plan, on the date of each annual meeting of stockholders held after January 1, 2000, each non-employee Director automatically receives an option grant for 50,000 shares on the date such person joins the Board of Directors and each individual who is to continue to serve as a non-employee Board member is automatically granted a Non-Statutory Option to purchase 5,000 shares of the Company's Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. No options were granted during 2003 under the automatic grant provisions of the Plan because no annual meeting of stockholders was held. Upon his election to the Board in February 2003, Mr. Harrison declined the automatic option grant of 50,000 shares.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 1, 2004 (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 1, 2004, the Company had 12,496,408 shares of Common Stock outstanding.
(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., 100 Rosecrest Lane, Columbus, Mississippi 39701. (3) The percentage of outstanding shares calculation is based upon 12,496,408 shares outstanding as of March 1, 2004, except as otherwise noted.
(4) Includes 3,000,000 shares issuable on exercise of options and 2,500,000 shares issuable on exercise of warrants. (5) Includes 1,050,000 shares issuable on exercise of an option. (6) Includes an aggregate of 112,479,634 shares held directly by SJCP, SJMB and their affiliates and shares issuable on exercise of warrants and conversion of notes and accrued interest through March 1, 2004 deemed held beneficially by Mr.. Underbrink because of his relationships with SJCP and SJMB. Also includes 5,067,383 shares issuable on exercise of warrants and conversion of notes and accrued interest through March 1, 2004 held directly by Mr. Underbrink and 1,612,778 shares issuable on conversion of notes and accrued interest through March 1, 2004 held by Mr. Underbrink and jointly with another person. (7) Includes shares issuable to SJCP, SJMB and their affiliates and shares issuable on exercise of warrants and conversion of notes and accrued interest through March 1, 2004 that may be deemed held beneficially by Mr. Harrison because of his relationships with SJCP and SJMB. Mr. Harrison disclaims a beneficial ownership of such securities. Other than the holdings of SJCP, SJMB and their affiliates in which Mr. Harrison disclaims a beneficial interest, Mr. Harrison holds no shares in which he has a direct or indirect beneficial interest. (8) Includes shares issuable to SJCP and SJMB and their affiliates on conversion of notes and accrued interest through March 1, 2004 and exercise of warrants. See "Item 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Commencing in June 1997 through February, 2000, the Company entered into a series of transactions whereby it sold to the St. James Affiliates for an aggregate purchase price of $26.4 million its 15% Convertible Promissory Notes and common stock purchase warrants as follows:
DATE OF PRINCIPAL AMOUNT NUMBER OF SHARES TRANSACTION OF PURCHASABLE ON EXERCISE NOTES (SOLD)(1) OF WARRANTS (5) -------------------- -----------------------------------------------
June 6, 1997 $2.0 million(2) 2,442,000 October 9, 1997 $2.9 million 4,478,277 January 23, 1998 $10.0 million(3) 18,000,000 October 30, 1998 $2.0 million 4,000,000 February 18, 1999 $2.5 million 4,150,000 December 17, 1999 $3.5 million 14,350,000 February 14, 2000 $3.5 million(4) 14,350,000 ---------------------------------------------------- Total $26.4 million Total 61,770,277 - -----------------------------
(1) Convertible at a current conversion price of $0.75 per share, as adjusted pursuant to anti-dilution adjustments, subject to further possible adjustment as provided in the terms of the warrants. (2) Excludes an additional $3.0 million borrowed in June 1997 that was repaid in October 1997. (3) On December 14, 2000 $1,750,000 of this note was converted into 2,333,333 shares of Common Stock, leaving a remaining principal balance of $8,250,000 convertible into an aggregate of 11,000,000 shares of Common Stock. (4) On September 14, 2001, $83,118 of this principal balance was repaid , leaving a remaining principal balance of $3,416,882 convertible into an aggregate of 4,555,843 shares of Common Stock. (5) Each warrant represents the right to purchase one share of Common Stock at $0.75 per share, subject to possible further anti-dilution adjustments. In March 2002, in connection with the extension of the maturity date of $17.7 million of indebtedness, the Company agreed to extend the expiration date of all these warrants to December 31, 2004.
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 transactions 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 to borrowings by the Company from GECC in the maximum aggregate amount of $40.0 million. The principal and accrued interest on the notes are convertible into shares of the Company's Common Stock at the conversion prices set forth in the table above. The conversion price of the Notes and the exercise price of the Warrants is subject to anti-dilution adjustments for certain issuances of securities by the Company at prices per share of Common Stock less than the conversion or exercise price then in effect in which event the conversion price and exercise price are reduced to the lower price at which such shares were
issued. As a consequence of several transactions involving the Company and the St. James Affiliates, the conversion and exercise prices of the securities when initially issued were reduced pursuant to the anti-dilution adjustments to $0.75 per share. 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 the St. James Affiliates would be nominated for election to the Company's Board of Directors. Mr. Charles E. Underbrink, Chairman of SJMB, L.L.C. and St. James Capital Corp., serves on the Company's Board of Directors. In addition, in February 2003, subsequent to the resignation of John L. Thompson as a Director, Mr. James H. Harrison, an employee of SJMB, L.L.C., was elected a Director. The agreements grant the St. James Affiliates 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 the St. James Affiliates. 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 the St. James Affiliates, 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 the St. James Affiliates and GECC, the St. James Affiliates could seek to foreclose against the collateral for the notes.
On December 14, 2000, certain of the St. James Affiliates converted $1,750,000 principal amount of a note and $2,013,111 of accrued interest on indebtedness owing to it into 5,017,481 shares of the Company's Common Stock at a conversion price of $0.75 per share.
During the years ended December 31, 2003 and 2002, $3.7 million and $3.7 million, respectively, of interest accrued on loans owed by the Company to the St. James Affiliates. At December 31, 2003, the total accrued interest on such loans is convertible into an aggregate of 51.8 million shares.
On June 17, 1999, the Company sold for $200,000 approximately $329,000 of trade accounts receivable, which was fully reserved due to the customer declaring bankruptcy, to RJ Air, LLC, an entity partially owned by John L. Thompson, a member of the Company's Board of Directors at the time. As of December 31, 2000, the Company had collected $100,000 of the sale price. The remaining $100,000 is represented by an unsecured promissory note executed by Mr. Thompson dated March 1, 2002 in the principal amount of $100,000 bearing interest at the rate
of 6% per annum from the inception of sale of the accounts receivable with $50,000, plus one-half of the interest then accrued, due on December 31, 2002 and the balance of principal and interest due on June 30, 2003. Mr. Thompson resigned as a Director on February 20, 2003. By letter dated December 20, 2002, Mr. Thompson requested that the Company amend the note to extend each of the principal payment dates by six months. The Company agreed to this extension as of December 20, 2002. On March 21, 2003, Mr. Thompson agreed with the Company to the rescission of this amendment of the note, the Company, having been advised by counsel that such extension of the note was unlawful under the Securities Exchange Act of 1934, as amended. As of December 31, 2003, $100,000 of principal and $28,000 of accrued interest was outstanding.
In connection with the GECC refinancing, the Company agreed with the holders to extend the maturity date of $6.9 million of the $7.0 million principal amount of promissory notes due on June 30, 2001 to December 31, 2004. The remainder of $0.1 million of the outstanding principal was repaid. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an 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 the shares were issued. As a condition to extend the maturity date, holders of the notes are to receive additional five-year common stock purchase warrants exercisable at $0.75 per share if the Company has not entered into a purchase or merger agreement on or before certain dates. Because such an agreement was not entered into by December 31, 2003, the Company is obligated to issue 18.0 million additional warrants to these noteholders. The exercise price of the warrants is subject to anti-dilution adjustments 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 were issued. As of March 31, 2004, Mr. Underbrink held individually a direct or indirect interest in $3.5 million principal amount of the promissory notes issued in connection with the GECC refinancing.
The Company also extended until December 31, 2004 the promissory notes totaling $17.7 million owing to the St. James Affiliates which matured in March, 2001. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an 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 the shares were issued.
In connection with the extension of the maturity date of $6.9 million and $17.7 million of indebtedness described above, the Company agreed to extend the expiration date of warrants to
purchase an aggregate of 33,070,277 shares of the Company's common stock to December 31, 2004.
The Company has agreed to pay to SJMB, L.P. a fee of approximately $274,000 in consideration of SJMB, L.P. providing cash collateral of $8.2 million deposited to secure the performance of a continuing guaranty extended by SJMB, L.P. of the Company's borrowing from Coast Business Credit in 2000. In addition, SJMB, L.L.C. received a fee in September, 2001 of $200,000 for services provided by SJMB, L.L.C. in connection with the Company's borrowing from GECC. Under the terms of the Credit Facility, the Company is restricted from paying any further sums to either of SJMB, L.P. or SJMB, L.L.C. unless the Company's quarterly report on Form 10-Q reflected that the Company had EBITDA of at least $7.0 million for the quarter ended September 30, 2001 and the amount of such payment is limited to no more than $150,000. The EBITDA sum was not met and payment of the $274,000 balance due SJMB, L.P. is deferred.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following sets forth fees incurred by the Company for services provided by Grant Thornton LLP for the years ended December 31, 2003 and 2002, the Company's independent public accountant at those year ends:
Audit Fees Audit Related Fees Tax Fees All Other Fees
2003 $106,186 $5,000 $38,250 $8,206 2002 $187,801
The Company's Board of Directors believes that the provision of the services during the two years ended December 31, 2003 is compatible with maintaining the independence of Grant Thornton LLP. The Company's Audit Committee approves before the engagement the rendering of all audit and non-audit services provided to the Company by its independent auditor. Engagements to render services are not entered into pursuant to any pre-approval policies and procedures adopted by the Audit Committee.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
The Exhibits required by Regulation S-K 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).
3.2.1 Certificate of Amendment to the Company's Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on February 13, 2001. (incorporated by reference to the Company's Registration Statement on Form S-8, effective date March 21, 2001.)
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).
10.6 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).
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).
10.26 [intentionally omitted]
10.30 Letter dated April 12, 2000 to the Company from SJCP, SJMB and Charles Underbrink (Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999).
10.31 Agreement for Purchase and Sale dated February 9, 2001 between the Company and Charles E. Underbrink.
10.32 Warrant dated February 9, 2001 to purchase 700,000 shares of Common Stock issued to Charles E. Underbrink.
10.33 Registration Rights Agreement dated February 9, 2001 between the Company and Charles E. Underbrink.
10.34 Agreement for Purchase and Sale dated February 9, 2001 between the Company and St. James Capital Partners, L.P.
10.35 Warrant dated February 9, 2001 to purchase 400,000 shares of Common Stock issued to St. James Capital Partners, L.P.
10.36 Registration Rights Agreement dated February 9, 2001 between the Company and St. James Capital Partners, L.P.
10.37.1 Credit Agreement dated as of September 14, 2001 among the Company and General Electric Capital Corporation, as agent and lender. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.2 Revolving Note in the principal amount of $15.0 million dated September 14, 2001. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.3 Term Note in the principal amount of $17.0 million dated September 14, 2001. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.4 Form of Capex Note. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.5 Security Agreement dated September 14, 2001 between the Company and General Electric Capital Corporation. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.6 Annex A to Credit Agreement - Definitions. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.7 Annex F to Credit Agreement - Financial Covenants. (Filed as an exhibit to the Company's Current Report on Form 8-K for September 14, 2001).
10.37.8 First Amendment to Credit Agreement entered into as of January 26, 2002. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.37.9 Second Amendment to Credit Agreement entered into as of June 10, 2002. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.37.10 Third Amendment to Credit Agreement with General Electric Capital Corporation entered into as of October 31, 2002. (Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
10.37.11 Fourth Amendment to Credit Agreement with General Electric Capital Corporation entered into as of February 14, 2003. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002).
10.37.12 Fifth Amendment to Credit Agreement with General Electric Capital Corporation entered into as of April 14, 2003. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.)
10.37.13 Sixth Amendment to Credit Agreement with General Electric Capital Corporation entered into as of January 15, 2004.*
10.37.14 Seventh Amendment to Credit Agreement with General Electric Capital Corporation entered into as of March 31, 2004.*
10.38 Amended and Restated Employment Agreement effective as of January 1, 2002 with William L. Jenkins. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.39 Promissory Note dated March 1, 2002 made by John L. Thompson. (Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).
10.40.1 Employment Agreement dated June 1, 2003 between the Company and Allen R. Neel.*
10.41.1 Employment Agreement dated April 1, 2001 between the Company and Danny R. Thornton.*
10.41.2 Amendment to Employment Agreement dated April 1, 2001 between the Company and Danny R. Thornton.*
14 Code of Ethics*
21 Subsidiaries. The Company has no subsidiaries.
23 (a) Consent of Grant Thornton LLP* (b) Consent of PricewaterhouseCoopers, LLP*
31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a)* 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)* 32.1 Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)* 32.2 Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)*
- ------------------------ * Filed or furnished with this Annual Report on Form 10-K (b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the quarter ended December 31, 2003.
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: May 19, 2004
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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Black Warrior Wireline Corp.
We have audited the accompanying balance sheets of Black Warrior Wireline Corp. (a Delaware corporation) as of December 31, 2003 and 2002, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Black Warrior Wireline Corp. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 9, as of December 31, 2003, the Company was in default of certain debt covenants of its Senior Credit Facility. By amendment to the Credit Facility entered into as of March 31, 2004, all defaults were waived by the lenders. In addition, the Company incurred a net loss of $5,537,940 during the year ended December 31, 2003, and, as of that date, the Company's current liabilities exceeded its current assets by $48,403,700 and its total liabilities exceeded its total assets by $23,503,994. These factors, among others, as discussed in Note 2 to the financial statements, 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 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 8 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002.
Grant Thornton Houston, Texas May 11, 2004
PRICEWATERHOUSECOOPERS - ---------------------- PRICEWATERHOUSECOOPERS LLP 1000 Morgan Keegan Tower Fifty North Front St. Memphis TN 38103-1193 Telephone (901) 522-2000 Facsimile (901) 523-2045
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Black Warrior Wireline Corporation
In our opinion, the statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 2001 (appearing on pages 59 through 61 of the Black Warrior Wireline Corporation 2001 Annual Report to Shareholders which has been incorporated by reference in this Form 10-K) present fairly, in all material respects, the results of operations and cash flows of Black Warrior Wireline Corporation for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP Memphis, TN June 10, 2002, except for Note 16, as to which the date is May 18, 2004
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
NOTE 1 - GENERAL INFORMATION
Black Warrior Wireline Corp. (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 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, Williston Basin in North Dakota and the Gulf of Mexico offshore of Louisiana and Texas. The Company's principal lines of business include (a) wireline services and (b) directional oil and gas well drilling activities and downhole surveying services. As is further described in Note 21, the Company is proposing to sell the assets and business of its directional drilling division.
NOTE 2 - LIQUIDITY
The Company reported net income (loss) for the years ended December 31, 2003, 2002, and 2001 of approximately ($5,550,000), ($7,600,000) and $5,000,000, respectively. Cash flows provided by operations were approximately $10,600,000, $5,400,000 and $16,350,000 for the years ended December 31 2003, 2002, and 2001, respectively. The Company is highly leveraged. The Company's outstanding indebtedness includes primarily senior indebtedness aggregating approximately $17.6 million at December 31, 2003, other indebtedness of approximately $0.8 million and approximately $39.1 million (including approximately $14.5 million of accrued interest) owing to St. James Merchant Bankers, L.P. ("SJMB") and St. James Capital Partners, L.P. ("SJCP") (collectively "St. James") and its affiliates and directors, who are related parties. The Company's debt and accrued interest owed to related parties is convertible into common stock and is subordinate to the Senior Credit Facility (see Note 9). In addition, no repayments of the related party debt or accrued interest can be made until the Senior Credit Facility is completely extinguished.
As discussed in Note 9, prior to June 10, 2002 and March 31, 2004, the Senior Credit Facility was subject to affirmative and general covenants and certain financial covenants. The Company was in violation of certain of these covenants as of December 31, 2001, December 31, 2003 and January 31, 2004 resulting in an event of default. These covenant violations also resulted in violations and events of default of the subordinated debt under the cross default provisions of the subordinated debt agreements. All covenant violations and events of default were waived as of June 10, 2002 and March 31, 2004 by the respective debt-holders.
Through March 31, 2004, the Company has amended the terms of its Senior Credit Facility with GECC on seven occasions, the principal effects of which were to relax certain of the terms of the financial covenants so as to be more favorable to the Company. In connection with the March 31, 2004 amendment to the Credit Facility, the Company is required to maintain a cumulative operating cash flow commencing with the month ended February 29, 2004 (see Note 9 for specified amounts by month and period).
Strong and stable market conditions and the Company's ability to meet intense competitive pressures are essential to the Company's maintaining a positive liquidity position and meeting debt covenant requirements. Decreases in market conditions or failure to mitigate competitive pressures could result in non-compliance with its debt covenants and the triggering of the prepayment clauses of the Company's debt. The Company believes that if market conditions remain stable during 2004, the Company will be able to generate sufficient cash flow to meet its working capital needs and comply with its debt covenants until the maturity of its Senior Credit Facility on September 14, 2004. If market conditions decline significantly, the Company may be required to obtain additional amendments to its Senior Credit Facility, or obtain capital through equity contributions or financing, including a possible merger or sale of assets, or other business combination.
During the year ended December 31, 2004, the Company's Credit Facility with General Electric Credit Corporation will expire. At that time, an estimated $14.1 million in senior secured indebtedness will mature and be payable. In addition, on December 31, 2004, an additional $42.8 million of subordinated secured indebtedness, including accrued interest, will be repayable under the terms of loan agreements entered into between the Company and the holders of that indebtedness. The Company's plans for the reorganization, repayment or refinancing of this indebtedness include the sale of its directional drilling division and the application of the net proceeds to the reduction of its senior secured indebtedness. While the Company has no specific plans for the further reorganization, restructuring or refinancing of its outstanding indebtedness subsequent to the consummation of the
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
sale of its directional drilling segment, the Company intends to continue its efforts commenced initially in late 2001 and intensified thereafter in 2003, through Simmons & Company International as its financial advisor, to examine various alternative means to maximize its value to shareholders and repay, refinance or restructure its indebtedness. These efforts are expected to include efforts regarding a possible merger, sale of the wireline business assets or other business combination involving the Company. These efforts are also expected to include efforts regarding a possible reorganization, recapitalization, restructuring and refinancing of the Company's obligations on its balance sheet in order to maximize its value to shareholders and repay its existing obligations. At April 8, 2004, the Company has not entered into any definitive agreements with respect to any such transactions and there can be no assurance that any definitive agreements will be entered into or that the Company will be successful in pursuing its plans for the reorganization, repayment or refinancing of its outstanding indebtedness. In the event the Company's plans are unsuccessful, the Company's secured creditors could assert their rights to foreclose on the Company's assets and a stockholder's investment in the Company could be lost. The Company intends to engage in ongoing efforts to pursue its plans.
As a result of the above factors, there is substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of the asset-carrying amounts or the amounts and classifications of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
RESTRICTED CASH - Restricted cash refers to the cash receipts from customer sales that are allocated to the repayment of the revolving line of credit, therefore, these funds are not available to the Company for general corporate use.
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. Unbilled amounts included in accounts receivable totaled $468,696 and $829,458 at December 31, 2003 and 2002, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at an adequate level to absorb losses in the Company's accounts receivable. Management of the Company continually monitors the accounts receivable from its customers for any collectability issues. An allowance for doubtful accounts is established based on reviews of individual customer accounts, recent loss experience, current economic conditions, and other pertinent factors. Accounts deemed uncollectible are charged to the allowance. Provisions for bad debts and recoveries on accounts previously charged-off are added to the allowance. All accounts outstanding more than 30 days are considered past due.
INVENTORIES OF TOOL COMPONENTS AND SUB-ASSEMBLIES, NET - Inventories consist of tool components, subassemblies and expendable parts used in directional oil and gas well drilling activities. Components, subassemblies and expendable parts are capitalized as long-term inventory and expensed based on a per hour of motor use calculation and then adjusted to reflect physical inventory counts. The Company's classification and treatment is consistent with industry practice.
LAND AND BUILDING, HELD FOR SALE - Land and building held for sale is stated at the lower of cost or estimated net realizable value. During 2001, the Company sold land held for sale with a cost of approximately $93,000 and recognized a gain of approximately $10,000. The remaining land and building held for sale was reclassified back into property, plant and equipment due to the absence of a sale since 2001.
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
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
estimated useful lives of the assets, which range from two to ten years. At December 31, 2003 and 2002, significantly all of the property, plant and equipment has been pledged as collateral for the Company's borrowings (see Note 9).
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill is stated at cost. The Company implemented SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002 and ceased amortization of goodwill and indefinite-lived intangible assets. SFAS No. 142 requires an assessment of potential impairment upon adoption and annually thereafter in the month the Company elects to perform its analysis or more frequently if events or circumstances indicate that an impairment may have occurred.
During 2003, 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 an analysis of proposed sale prices for the directional drilling segment. As the value of implied goodwill was zero, the amount of the impairment was limited to the carrying amount for the directional drilling segment, or $1.7 million. The assumptions used in this analysis represent management's best estimates of future activity.
The Company's amortizable intangible assets consist of a non-compete agreement associated with the purchase of Big Gun Perforating in February 2002. The agreement is reported under goodwill and other intangible assets on the balance sheet and is being amortized on a straight-line basis over five years, the life of the contract.
LONG-LIVED ASSETS - In accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 and natural gas 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 items that could lead management to reassess the realizability and/or amortization periods of its long-lived assets.
During 2003, management evaluated the recoverability of its long-lived assets in relation to its business segments. The analysis was performed using the proposed sale prices for the directional drilling segment. As a result of this analysis an impairment was indicated for which the Company reduced the carrying amount of property, plant and equipment for the directional drilling segment and recognized an impairment expense of $1.4 million.
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 financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates.
STOCK-BASED COMPENSATION - At December 31, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 17. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
BASIS OF PRESENTATION - Certain prior year amounts have been reclassified to conform to current year presentation.
REVENUE RECOGNITION - The Company derives revenues from performance of services and the sale of equipment. Service revenues are recognized at the time services are performed. The Company's sales are typically not subject to rights of return and, historically, sales returns have not been significant. Revenue related to equipment sales is recognized when the equipment has been shipped and title and risk of loss have passed to the customer. Deferred revenue, net of related deferred cost of sales, is recorded as unearned revenues in Deferred Revenue in the accompanying Balance Sheet.
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 - The Company reports its business segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. 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
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
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 (see Note 21).
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2002, the FASB issued FAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which is effective for transactions occurring after May 15, 2002. FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from extinguishment of debt. FAS 44 set forth industry-specific transitional guidance that did not apply to the Company. FAS 145 amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. FAS 145 also makes technical corrections to certain existing pronouncements that are not substantive in nature. Due to the adoption of FAS 145, the Company reclassified the early extinguishment of debt in 2001 from an extraordinary item to continuing operations in 2003.
In 2003, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." The disclosure requirements of Statement No. 123, Accounting for Stock-Based Compensation, which apply to stock compensation plans of all companies, are amended to require certain disclosures about stock-based employee compensation plans in an entity's accounting policy note. Those disclosures include a tabular format of pro forma net income and, if applicable, earnings per share under the fair value method if the intrinsic value method is used in any period presented. Pro forma information in a tabular format is also required in the notes to interim financial information if the intrinsic value method is used in any period presented. The amendments to the disclosure and transition provisions of Statement No. 123 are effective for fiscal years ending after December 15, 2002.
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 addresses when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity (VIE). It defines VIEs as entities that either do not have any equity investors with a controlling financial interest, or have equity investors that do not provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. FIN 46 also requires disclosures about VIEs that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 applied immediately to variable interest entities created after January 31, 2003. The Company has not obtained an interest in a VIE subsequent to that date. A modification to FIN 46 (FIN 46(R)) was released in December 2003. FIN 46(R) delayed the effective date for VIEs created before February 1, 2003, with the exception of special-purpose entities, until the first fiscal year or interim period ending after March 15, 2004. FIN 46(R) delayed the effective date for special-purpose entities until the first fiscal year or interim period after December 15, 2003. The Company is not the primary beneficiary of any SPEs at December 31, 2003. The Company will adopt FIN 46(R) for non-SPE entities as of March 31, 2004. The adoption of FIN 46 did not result in the consolidation of any VIEs, nor is the adoption of FIN 46(R) expected to result in the consolidation of any VIEs. The Company is continuing to evaluate the impact FIN 46(R) will have on its financial statements.
In May 2003, the FASB issued Statement 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for classifying and measuring certain financial instruments that have characteristics of both liabilities and equity. The guidance in Statement 150 became effective June 1, 2003, for all financial instruments created or modified after May 31, 2003, and otherwise became effective as of July 1, 2003. In November 2003, the FASB deferred for an indefinite period the application of the guidance in Statement 150 to non-controlling interests that are classified as equity in the financial statements of a subsidiary but would be classified as a liability in the parent's financial statements under Statement 150. The deferral is limited to mandatorily redeemable non-controlling interests associated with finite-lived subsidiaries. Management does not believe it has any involvement with such entities as of December 31, 2003, nor any financial instruments subject to this statement.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
NOTE 4 - OTHER INTANGIBLE ASSETS
Other intangible assets consist of a non-compete agreement associated with the purchase of Big Gun Perforating, Inc. The agreement is reported under goodwill and other intangible assets on the balance sheet and is being amortized on a straight-line basis over five years, the life of the contract. The gross carrying amount of the agreement was $386,425 on December 31, 2003 and $249,175 on December 31, 2002. Accumulated amortization totaled $131,792 as of December 31, 2003.
Aggregate amortization expense: For the year ended December 31, 2002 $49,835 For the year ended December 31, 2003 $81,956
Estimated amortization expense: For the year ended December 31, 2004 $128,568 For the year ended December 31, 2005 $128,568
NOTE 5 - ACQUISITIONS
In February 2002, the Company acquired the assets of Big Gun Perforating, Inc. for $300,000. The acquisition enabled the Company to expand its tubing conveyed perforating ("TCP") services to its existing onshore and offshore customer base.
The acquisition did not result in any significant changes in previously reported revenues, income (loss) before provision for income taxes, discontinued operations, net income (loss) or basic or diluted earnings per share on a pro forma basis.
NOTE 6 - RELATED PARTY TRANSACTIONS
During 1997, the Company acquired substantially all of the assets and certain of the liabilities of Diamondback Directional Drilling, Inc. ("DDI"). In connection with the acquisition, the Company issued debt of approximately $3,200,000 to the former owners of DDI, hereinafter referred to as Bendover. One of the majority stockholders of Bendover was an officer and director of the Company. During the first quarter of 2000, the Company executed a Compromise Agreement With Release with Bendover whereby Bendover agreed to settle litigation and return to the Company promissory notes of approximately $3,200,000 principal amount plus accrued interest and receive in exchange 2,666,667 shares of the Company's common stock, valued in the transaction at $0.75 per share, and a promissory note in the principal amount of $1,182,890 due on January 15, 2001, bearing interest at 10% per annum. The maturity of the promissory note was subsequently extended to June 15, 2001 at an interest rate of 20% per annum with 10% per annum paid monthly and the balance deferred until maturity. This note, as amended and extended, was not paid when due and Bendover commenced a lawsuit on July 20, 2001 against the Company seeking to collect the principal sum of $1,182,890 plus accrued interest. In September 2001, the Company paid approximately $1.1 million to Bendover out of the proceeds of the General Electric Capital Corporation ("GECC") financing, as more fully discussed in Note 9, in full payment of all outstanding principal and interest obligations owing to Bendover and the lawsuit was dismissed. The payoff resulted in an gain of approximately $175,000, net of taxes. Interest expense on this note totaled $152,642 for the year ended December 31, 2001.
The Company has executed notes payable to SJMB and SJCP. The chairman and an employee of SJMB, L.L.C., the general partner of SJMB, both serve on the Company's Board of Directors. At December 31, 2003 and 2002, notes due to SJMB, SJCP and related parties totaled $23,566,882 and $23,566,882, respectively. The notes bear interest at 15%. Interest expense and accrued interest associated with these notes were as follows:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
2003 2002 2001 ----------- ----------- ----------
Interest expense $ 3,535,000 $ 3,535,000 $3,216,000 Accrued interest $13,551,000 $10,016,000 $6,432,000
The Company borrowed $1,000,000 from Falcon Seaboard Investment Co., L.P. ("Falcon Seaboard"), which is affiliated with SJMB. The note bears interest at 15% with the principal and interest due in December 2004. Accrued interest payable on this borrowing totaled approximately $660,000 and $508,000 as of December 31, 2003 and 2002, respectively. Interest expense on this note approximated $150,000, $150,000 and $140,000 for each of the three years ended December 31, 2003, 2002 and 2001, respectively.
The Company has agreed to pay to SJMB a fee of approximately $274,000 in consideration of SJMB providing cash collateral of $8.2 million deposited to secure the performance of the continuing guaranty extended by SJMB of the Company's former financing arrangement with Coast Business Credit ("Coast"), a financial institution. In addition, SJMB, L.L.C., the general partner of SJMB, received a fee in September 2001 of $200,000 for services provided by SJMB, L.L.C. in connection with the Company acquiring a credit facility from GECC (see Note 9). Under the terms of the Credit Facility, the Company is restricted from paying any further sums to either SJMB or SJMB, L.L.C.. This payable is included in current liabilities at December 31, 2003.
In February 2001, the Company issued to a Director of the Company and SJCP five-year warrants to purchase 700,000 and 400,000 shares, respectively, of the Company's Common Stock at exercise prices of $0.75 per share. The warrants were issued in consideration of guarantees extended to Coast by the Director and SJCP in connection with the Company's borrowings from Coast in 2000.
On June 17, 1999, the Company sold approximately $329,000 of trade accounts receivable, which was fully reserved due to the customer declaring bankruptcy, to RJ Air, LLC, an entity affiliated with a former member of the Company's Board of Directors, for $200,000. As of December 31, 2003, the Company has collected $100,000 of the sale price and the remaining $100,000 is included in deferred revenue.
In connection with the five year employment agreement effective January 1, 2002 entered into with Mr. Jenkins to remain as the Company's President and Chief Executive Officer, the Company agreed to loan Mr. Jenkins $190,000, bearing interest at the applicable federal rate, to be repaid at the rate of one-third of the principal, plus accrued interest on October 1 of each of the years 2002, 2003 and 2004. If Mr. Jenkins remains employed by the Company on September 30 preceding the date annual principal and interest is due on the loan, the sum due and owing the following day is forgiven. In the event of a Change of Control, as defined, the death or permanent disability of Mr. Jenkins or in the event his employment is terminated without cause, the entire amount owing by Mr. Jenkins is forgiven. The Company is amortizing the loan balance into compensation cost over the life of the loan. Compensation expense related to the loan for the years ended December 31, 2003 and 2002 was approximately $82,000. The unamortized balance at December 31, 2003 was $61,793.
See Notes 9 and 11 for financing arrangements and common stock transactions with related parties.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment include the following at December 31, 2003 and 2002:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
2003 2002 -------------- ---------------
Land and building $ 401,250 $ 401,250 Vehicles 14,672,731 14,106,273 Operating equipment 41,758,200 41,446,918 Office equipment 1,081,500 986,457 -------------- --------------- 57,913,681 56,940,898 Less: accumulated depreciation 39,694,244 32,371,555 -------------- ---------------
Net property, plant and equipment $ 18,219,437 $ 24,569,343 ============== ===============
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was $7,608,383, $7,888,302 and $6,444,445, respectively.
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
In contrast to accounting standards in effect during 2001, SFAS 142, Goodwill and Other Intangible Assets, which became effective beginning in 2002, provides that goodwill, as well as identifiable intangible assets with indefinite lives, should not be amortized. Accordingly, with the adoption of SFAS 142 in 2002, the Company discontinued the amortization of goodwill and indefinite-lived intangibles. In addition, useful lives of intangible assets with finite lives were reevaluated on adoption of SFAS 142. In 2003, in connection with the Company's plans to dispose of its directional drilling division, management analyzed under SFAS 142 the carrying value of its goodwill carried on its balance sheet arising out of the 1997 acquisition of Diamondback Directional, Inc and the 1998 acquisition of Phoenix Drilling Services. This analysis resulted in a charge to operations for the year ended December 31, 2003 in the amount of approximately $1.7 million. The information presented below reflects adjustments to information reported in 2001 as if SFAS 142 had been applied in 2001. The adjustments include the effects of not amortizing goodwill and indefinite-lived intangible assets and the modification in the estimated useful lives of intangible assets with finite lives. The balance in unamortized goodwill was $1,237,417 and $2,960,442 at December 31, 2003 and 2002, respectively.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
NOTE 9 - LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS
At December 31, 2003 and 2002, long-term debt and other financing arrangements consisted of the following:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - -------------------------------------------------------------------------------
Notes payable to related parties consist of the following at December 31, 2003 and 2002:
On September 14, 2001, the Company entered into the Credit Facility with GECC providing for the extension of revolving, term and capex credit facilities to the Company aggregating up to $40.0 million. The Company and GECC entered into amendments to the Credit Facility in January 2002, June 2002, October 2002, February 2003 and
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
April 2003. As amended, the Credit Facility includes a revolving loan of up to $15.0 million, but not exceeding 85% of eligible accounts receivable, a term loan of $17.0 million, and a capex loan of up to $8.0 million, but not exceeding a borrowing base of the lesser of 70% of the hard costs of acquired eligible equipment, 100% of its forced liquidation value and the Company's EBITDA for the month then ended, less certain principal, interest and maintenance payments. Eligible accounts are defined to exclude, among other items, accounts outstanding of debtors that are more than 60 days overdue or 90 days following the original invoice date and of debtors that have suspended business or commenced various insolvency proceedings and accounts with reserves established against them to the extent of such reserves as GECC may set from time to time in its reasonable credit judgment. Borrowings under the capex loan are at the sole and exclusive discretion of GECC. The interest rate on borrowings under the revolving loan is 1.75% above a base rate and on borrowings under the term loan and capex loan is 2.5% above the base rate. The base rate is the higher of (i) the rate publicly quoted from time to time by the Wall Street Journal as the base rate on corporate loans posted by at least 75% of the nation's thirty largest banks, or (ii) the average of the rates on overnight Federal funds transactions by members of the Federal Reserve System, plus 0.5%. Subject to the absence of an event of default and fulfillment of certain other conditions, the Company can elect to borrow or convert any loan and pay interest at the LIBOR rate plus applicable margins of 3.25% on the revolving loan and 4.0% on the term loan and capex loan. If an event of default has occurred, the interest rate is increased by 2%. Advances under the Credit Facility are collateralized by a senior lien against substantially all of the Company's assets. The Credit Facility expires on September 14, 2004.
Initial borrowings under the Credit Facility advanced on September 14, 2001 aggregated $21.6 million. Proceeds of the initial borrowings were used to repay outstanding indebtedness aggregating $21.4 million to Coast Business Credit, Bendover Company and certain other indebtedness. At December 31, 2003, borrowings outstanding under the Credit Facility aggregated $17.6 million, of which $3.2 million was outstanding under the revolving loan, $9.3 million was outstanding under the term loan and $5.1 was outstanding under the capex loan. Borrowings under the revolving loan are able to be repaid and re-borrowed from time to time for working capital and general corporate needs, subject to the Company's continuing compliance with the terms of the agreement, with the outstanding balance of the revolving loan to be paid in full at the expiration of the Credit Facility on September 14, 2004. The term loan is to be repaid in 35 equal monthly installments of $283,333 with a final installment of $7,083,333 due and payable on September 14, 2004. At December 31, 2003 the Company had available $2.4 million under the revolving loan. No further advances are permitted on the capex loan beyond June 2004 and it is to be repaid in equal monthly installments of 1/60th of each of the amounts borrowed from time to time with the remaining outstanding balance of the entire capex loan due and payable on September 14, 2004.
Borrowings under the Credit Facility may be prepaid or the facility terminated or reduced by the Company at any time subject to the payment of an amount equal to 2% of the prepayment or reduction occurring before September 14, 2003, and 1% of the prepayment or reduction occurring thereafter but before September 14, 2004. The Company is required to prepay borrowings out of the net proceeds from the sale of any assets, subject to certain exceptions, or the stock of any subsidiary, the net proceeds from the sale of any stock or debt securities by the Company, and any borrowings in excess of the applicable borrowing availability, including borrowings under the term loan and capex loan in excess of 50% of the forced liquidation value of the eligible capex and term loan equipment and borrowings under the term loan in excess of 70% of the forced liquidation value of eligible term loan equipment. The value of the term loan equipment is established by appraisal.
Initial borrowings under the Credit Facility were subject to the fulfillment at or before the closing of a number of closing conditions, including among others, the accuracy of the representations and warranties made by the Company in the loan agreement, delivery of executed loan documents, officers' certificates, an opinion of counsel, repayment of the Coast senior secured loan, the extension of the maturity date of $24.6 million principal amount of the Company's outstanding subordinated notes to December 31, 2004 with no payments of principal or interest to be made prior to that date, and the completion of due diligence. Future advances are subject to the continuing accuracy of the Company's representations and warranties as of such date (other than those relating expressly to an earlier date), the absence of any event or circumstance constituting a "material adverse effect," as defined, the absence of any default or event of default under the Credit Facility, and the borrowings not exceeding the applicable borrowing availability under the Credit Facility, after giving effect to such advance. A "material adverse effect" is defined to include an event having a material adverse effect on the Company's business, assets, operations, prospects or financial or other condition, on the Company's ability to pay the loans, or on the collateral and also includes a
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
decline in the "Average Rig Count" (excluding Canada and international rigs) published by Baker Hughes, Inc. falling below 675 for 12 consecutive weeks.
Under the Credit Facility, the Company is obligated to maintain compliance with a number of affirmative and negative covenants. Affirmative covenants the Company must comply with include requirements to maintain its corporate existence and continue the conduct of its business substantially as now conducted, promptly pay all taxes and governmental assessments and levies, maintain its corporate records, maintain insurance, comply with applicable laws and regulations, provide supplemental disclosure to the lenders, conduct its affairs without violating the intellectual property of others, conduct its operations in compliance with environmental laws and provide a mortgage or deed of trust to the lenders granting a first lien on the Company's real estate upon the request of the lenders and provide certificates of title on newly acquired equipment with the lender's lien noted.
Negative covenants the Company may not violate include, among others, (i) forming or acquiring a subsidiary, merging with, acquiring all or substantially all the assets or stock of another person, (ii) making an investment in or loan to another person, (iii) incurring any indebtedness other than permitted indebtedness, (iv) entering into any transaction with an affiliate except on fair and reasonable terms no less favorable than would be obtained from a non-affiliated person, (v) making loans to employees in amounts exceeding $50,000 to any employee and a maximum of $250,000 in the aggregate, (vi) making any change in its business objectives or operations that would adversely affect repayment of the loans or in its capital structure, including the issuance of any stock, warrants or convertible securities other than (A) on exercise of outstanding securities or rights, (B) the grant of stock in exchange for extensions of subordinated debt, (C) options granted under an existing or future incentive option plan, or (D) in its charter or by-laws that would adversely affect the ability of the Company to repay the indebtedness, (vii) creating or permitting to exist any liens on its properties or assets, with the exception of those granted to the lenders or in existence on the date of making the loan, (viii) selling any of its properties or other assets, including the stock of any subsidiary, except inventory in the ordinary course of business and equipment or fixtures with a value not exceeding $100,000 per transaction and $250,000 per year, (ix) failing to comply with the various financial covenants in the loan agreement, (x) making any restricted payment, including payment of dividends, stock or warrant redemptions, repaying subordinated debt, rescission of the sale of outstanding stock, (xi) making any payments to stockholders of the Company other than compensation to employees and payments of management fees to any stockholder or affiliate of the Company, or (xii) amending or changing the terms of the Company's subordinated debt.
As amended through March 2004, the financial covenant the Company is required to maintain a cumulative operating cash flow at the end of each month, commencing with the month ended February 29, 2004, increasing as follows:
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Cumulative operating cash flow is defined, for the period February 29, 2004 through July 31, 2004, as the sum of earnings before interest, taxes depreciation and amortization ("EBITDA") for such month minus capital expenditures paid in cash for such month plus EBITDA for each preceding month commencing on February 1, 2004 minus capital expenditures paid in cash for each preceding month commencing February 1, 2004.
For the period ended December 31, 2003 and January 31, 2004, the Company was not in compliance with the cumulative operating cash flow covenant which was waived by GECC by the amendment of March 2004.
Events of default under the Credit Facility include (a) the failure to pay when due principal or interest or fees owing under the Credit Facility, (b) the failure to perform the covenants under the Credit Facility relating to use of proceeds, maintenance of a cash management system, maintenance of insurance, delivery of certificates of title, delivery of required consents of holders of outstanding subordinated notes, maintenance of compliance with the financial covenants in the loan agreement and compliance with any of the loan agreement's negative covenants, (c) the failure, within specified periods of 3 or 5 days of when due, to deliver monthly unaudited and annual audited financial statements, annual operating plans, and other reports, notices and information, (d) the failure to perform any other provision of the loan agreement which remains un-remedied for 20 days or more, (e) a default or breach under any other agreement to which the Company is a party beyond any grace period that involves the failure to pay in excess of $250,000 or causes or permits to cause in excess of $250,000 of indebtedness to become due prior to its stated maturity, (f) any representation or warranty or certificate delivered to the lenders being untrue or incorrect in any material respect, (g) a change of control of the Company, (h) the occurrence of an event having a material adverse effect, and (i) the attachment, seizure or levy upon of assets of the Company which continues for 30 days or more and various other bankruptcy and other events. Upon the occurrence of a default or event of default, the lenders may discontinue making loans to the Company. Upon the occurrence of an event of default, the lenders may terminate the Credit Facility, declare all indebtedness outstanding under the Credit Facility due and payable, and exercise any of their rights under the Credit Facility which includes the ability to foreclose on the Company's assets.
The Company has amended the terms of its Credit Facility with GECC on seven occasions, the principal effects of which were to relax certain of the terms of the financial covenants so as to be more favorable to the Company. There can be no assurance that the Company will be able to obtain further amendments to these financial covenants if required or that the failure to obtain such amendments when requested may not result in the Company being placed in violation of those financial covenants. Before reflecting amendments to the Credit Facility made in March 2004, the Company was in violation of the financial covenant relating to its cumulative operating cash flow. By amendment to the Credit Facility entered into as of March 31, 2004, GECC waived this default as well. The Company agreed to pay GECC a fee of $35,000 in connection with entering into the amendment.
In connection with an April 2003 amendment to the Credit Facility, the Company is required to provide GECC with weekly reports setting forth an aging of its accounts payable and weekly cash budgets for the immediately following thirteen week period. Also in connection with entering into that amendment, the Company agreed to pay GECC an amendment fee of $100,000, of which $50,000 was paid in June 2003 and $50,000 in December 2003, and a fee of $300,000 in the event of a sale of all the assets or stock of the Company or other event that results in a change of control of the Company. GECC consented to a capex loan of $1.0 million to the Company at the time of entering into the amendment.
Reference is made to the Credit Agreement, filed as an Exhibit to the Company's Current Report on Form 8-K for September 14, 2001, the First and Second Amendments thereto, filed as exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2001, the Third Amendment thereto, filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, the Fourth Amendment and Fifth Amendment, filed as Exhibits to the Annual Report on Form 10-K for the year ended December 31, 2002, and the Sixth and Seventh amendment filed as Exhibits to this Annual Report on Form 10-K for the year ended December 31, 2003, for a complete statement of the terms and conditions.
In connection with the GECC refinancing, the Company agreed with the holders of the $7.0 million principal amount of promissory notes to extend the maturity date from June 30, 2001 to December 31, 2004 on $6.9 million of the $7.0 million promissory notes. The remainder of the outstanding principal was repaid. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an anti-dilution adjustment for certain issuances of securities by the Company at prices per share of
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
common stock less than the conversion price then in effect, in which event the conversion price is reduced to the lower price at which the shares were issued. The Company repaid approximately $83,000 to noteholders who chose not to extend the maturity dates and St. James purchased $1.6 million from noteholders who chose not to extend the maturity dates. As a condition to extend the maturity date, holders of the notes are to receive additional five-year common stock purchase warrants exercisable at $0.75 per share, originally valued at $0.01, if the Company has not entered into a purchase or merger agreement on or before certain dates. Because such an agreement was not entered into by December 31, 2001, the Company became obligated to issue approximately 2.4 million additional warrants. Because such an agreement was not entered into by December 31, 2002, the Company became obligated to issue approximately 5.2 million additional warrants. Because such agreement was not entered into by December 31, 2003 the Company became obligated to issue approximately 10.4 million additional warrants. Under the terms of the note extensions, because the Company did not enter into a purchase or merger agreement by December 31, 2003 with a closing date no later than March 31, 2004, an aggregate of 18.0 million additional warrants are due to be issued. The exercise price of the warrants that are to be issued are subject to anti-dilution adjustments 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 were issued.
The Company also extended until December 31, 2004 the promissory notes totaling $17.7 million owing to St. James which matured in March, 2001. The notes bear interest at 15% per annum and are convertible into shares of the Company's common stock at a conversion price of $0.75 per share, subject to an 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 the shares were issued. The Company also extended the expiration date of 28.7 million warrants until December 31, 2004 in connection with the extension of the St. James promissory notes.
All of the debt and interest owed to St. James and its affiliates is subordinated to the Company's Credit Facility and cannot be repaid until all the amounts owed pursuant to the Credit Facility have been repaid.
Under the terms of the SJCP notes payable, SJCP has rights, which include the right to nominate one person for election to the Company's board of directors and has certain preferential rights to provide future financing. The note agreement also contains prohibitions against consolidating, merging or entering into a share exchange with another person without SJCP's consent.
Substantially all of the Company's assets are pledged as collateral for the debts described above.
Maturities of debt are as follows:
FISCAL YEAR - -----------
2004 $42,602,119 2005 356,952 2006 -- 2007 -- 2008 -- Thereafter -- ----------- $42,959,071 -----------
NOTE 10 - COMMITMENTS
The Company leases land, office space and equipment under various operating leases. The leases expire at various dates through 2007. Rent expense was approximately $3,117,000, $2,763,000 and $2,572,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
The future minimum lease payments required under noncancelable leases with initial or remaining terms of one or more years at December 31, 2003 were as follows:
OPERATING LEASES ------------ FISCAL YEAR - ----------- 2004 $ 591,384 2005 381,743 2006 214,036 2007 50,688 2008 -- Thereafter -- ---------- Total minimum lease payments $1,237,851 ----------
NOTE 11 - COMMON STOCK TRANSACTIONS
As further discussed in Note 6, the Company issued 2,666,667 shares in the first quarter of 2000 to the owners of Bendover in return for the dismissal of a lawsuit between the former owner of DDI and the Company.
As of December 31, 2003, the Company's certificate of incorporation permits it to issue up to 175,000,000 shares of common stock, of which 12,504,148 shares were issued and outstanding at December 31, 2003 and 2002. The Company has outstanding as of December 31, 2003 and 2002 common stock purchase warrants, options and convertible debt securities entitled to purchase or be converted into an aggregate of 140,180,544 and 132,402,882 shares, respectively, of the Company's common stock at exercise and conversion prices ranging from $0.75 to $8.01.
NOTE 12 - STOCK WARRANTS
During 2002, the Company issued 2,500,000 five-year warrants to William L. Jenkins, President and Chief Executive Officer exercisable at $0.75 per share as per his amended employment agreement effective January 1, 2002 and expiring December 31, 2005.
During 2002, the Company issued 2,420,909 five-year warrants to SJMB and affiliates of SJMB exercisable at $0.75 per share in connection with the extension of their indebtedness (see Note 9).
During 2001, the Company issued to the Chairman of SJMB, L.L.C. and to SJCP five-year warrants to purchase 700,000 and 400,000 shares, respectively, of the Company's Common Stock at exercise prices of $0.75 per share. The warrants were issued in consideration of guarantees extended to Coast by the Chairman of SJMB, L.L.C. and
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
SJCP in connection with the Company's borrowings from Coast in 2000 and the guarantees of the Chairman of SJMB, L.L.C. and SJCP of that indebtedness.
During 2000, the Company issued warrants to purchase shares of the Company's common stock with the issuance of certain debt (see Note 9). The warrants gave the holders the right to purchase up to 14,350,000 shares at $0.75. These warrants expire December 31, 2004.
During 1999, the Company issued warrants to purchase shares of the Company's common stock with the issuance of certain debt (see Note 9). The warrants gave the holders the right to purchase up to 1,075,000 shares at $1.50 (2,150,000 shares at $0.75 as adjusted for anti-dilution) and 14,350,000 shares at $0.75. The warrants expire December 31, 2004.
The warrants issued during 2002, 2001, 2000 and 1999 are subject to "Full Ratchet" anti-dilution provisions. In December of 1999, the Company issued the 14,350,000 warrants at an exercise price of $0.75. Consequently, 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, 2003:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
During 1996, the Company issued warrants to purchase shares of the Company's common stock in connection with the conversion of certain debt. The warrants give holders the right to purchase up to 303,750 shares of the Company's common stock at $2 per share. A total of 69,000 of these warrants have been exercised. No warrants were exercised during 2001, 2000 or 1999. The warrants expired on September 30, 2001 and were cancelled.
NOTE 13 - INCOME TAXES
The (benefit)/provision for income taxes consists of the following for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001 -------- --------- --------
Federal: Current $ -- $ -- $ -- Deferred -- -- -- -------- --------- -------- -- -- -- -------- --------- -------- State: Current -- -- -- Deferred -- -- -- -------- --------- -------- -- -- -- -------- --------- --------
Total $ -- $ -- $ -- -------- --------- --------
The (benefit)/provision for federal income taxes differs from the amount computed by applying the federal income tax statutory rate of 34% to the Company's income/(loss) before income taxes, as follows:
At December 31, 2003 and 2002, the Company has available federal tax net operating loss carryforwards (NOL's) of approximately $33,332,000 and $31,823,000, respectively, that unless previously utilized, expire at various dates beginning 2010 through 2022. The Company's utilization of NOL's is subject to a number of uncertainties, including the ability to generate future taxable income. In addition, the Company has been subject to a number of "ownership changes" as defined under Internal Revenue Code Section 382. As a result, Section 382 imposes additional limitations on utilization of certain of the Company's NOL's.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
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:
2003 2002 ------------ ------------
Gross deferred tax assets: Allowance for doubtful accounts receivable $ 219,362 $ 315,422 Accrued bonuses and other 202,535 189,266 Operating loss carryforwards 12,432,884 11,869,987 Goodwill 3,690,506 3,319,718 Asset impairment 518,822 Valuation allowance (13,549,350) (11,989,707) ------------ ------------ Gross deferred tax asset 3,514,759 3,704,686 ------------ ------------
Gross deferred tax liabilities: Depreciation (3,402,091) (3,592,018) Other (112,668) (112,668) ------------ ------------ Gross deferred tax liability (3,514,759) (3,704,686) ------------ ------------
Net deferred tax asset (liability) $ -- $ -- ------------ ------------
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, 2003 and 2002, the Company has recorded a valuation allowance of $13,549,350 and $11,989,707 against the gross deferred tax asset.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
NOTE 14 - INCOME (LOSS) PER SHARE
The calculation of basic and diluted EPS is as follows:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
Options issued to purchase 15,440,000 shares of common stock and warrants to purchase 73,363,465 shares of common stock at price ranging from $0.75 to $8.01 were outstanding during 2003, but were not included in the computation of the 2003 diluted EPS because the effect would be anti-dilutive. There were 2,006,800 options to purchase common stock cancelled during 2003 that were not included in the computation of 2003 diluted EPS because the effect would be anti-dilutive.
Options issued to purchase 17,446,800 shares of common stock and warrants to purchase 68,175,803 shares of common stock at price ranging from $0.75 to $8.01 were outstanding during 2002, but were not included in the computation of the 2002 diluted EPS because the effect would be anti-dilutive.
Options issued to purchase 17,358,000 shares of common stock and warrants to purchase 63,254,894 shares of common stock at prices ranging from $0.75 to $8.01 were outstanding during 2001, but were not included in the computation of the 2001 diluted EPS because the effect would be anti-dilutive.
Convertible debt instruments, including convertible interest, which would result in the issuance of 51,761,698, 46,780,080 and, 42,084,458 shares of common stock, if the conversion features were exercised, were outstanding during 2003, 2002 and 2001 respectively, but were not included in the computation of the 2003, 2002 or 2001 diluted EPS because the effect would be anti-dilutive. The conversion price of these instruments was $0.75 per share at December 31, 2003, 2002 and 2001 and remained outstanding at December 31, 2003.
NOTE 15 - MAJOR CUSTOMERS
Most of the Company's business activity is with customers engaged in drilling and operating oil and 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 Texas. Substantially all of the Company's accounts receivable at December 31, 2003 and 2002 are from such customers. Performance in accordance with the credit arrangements is in part dependent upon the economic condition of the oil and natural gas industry in the respective geographic areas. The Company does not require its customers to pledge collateral on their accounts receivable.
There were no customers from whom the Company earned in excess of 10% of its revenues during the years ended December 31, 2003, 2002 or 2001.
NOTE 16 - EARLY EXTINGUISHMENT OF DEBT
During 2001, the Company recognized a loss of $1,322,481 on fees relating to the early extinguishment of the Coast debt and the SJMP Cash Collateral Fee Agreement. The Company recorded a gain of $175,003 as a result of a negotiated payment of the Bendover promissory notes and related obligations. Due to the adoption of FAS 145, the Company reclassified the early extinguishment of debt in 2001 from an extraordinary item to continuing operations in 2003.
NOTE 17 - STOCK OPTIONS
The 2000 Stock Incentive Plan ("2000 Incentive Plan") provides for the granting of incentive stock options or non-qualified stock options to purchase shares of the Company's common stock to key employees and non-employee directors or consultants. The 2000 Incentive Plan authorizes the issuance of options to purchase up to an aggregate of 17,500,000 shares of common stock with maximum option terms of ten years from the date of the grant. There are five types of grants that can be made under the 2000 Incentive Plan. The Discretionary Option Grant Program allows eligible individuals in the Company's employ or service (including officers and consultants) to be granted options to purchase shares of common stock at an exercise price equal to not less than the fair market value of the stock at the date of the grant. All grants made in 2000 were made under this program. The Stock Issuance Program is a non-compensatory program under which individuals in the Company's employ or service may be issued shares of common stock directly through the purchase of such shares at a price not less than the fair market value at the time of issuance or as a bonus tied to performance. The Salary Investment Option Grant Program is a compensatory program that, if
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
activated by the plan administrator, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below market stock grants. The Automatic Option Grant Program causes options to be granted automatically at periodic intervals to eligible non-employee members of the Board of Directors to purchase shares of common stock at an exercise price equal to their fair market value at the date of the grant. The Director Fee Option Grant Program is a compensatory program that, if activated by the plan administrator, would allow non-employee Board members the opportunity to apply a portion of any annual retainer fee otherwise payable to them in cash each year to the acquisition of special below market option grants.
The Board and shareholders approved the 2000 Incentive Plan on February 11, 2000 and an amendment on February 9, 2001, respectively. At December 31, 2003, 19,532,500 shares had been granted, of which 4,523,000 shares were cancelled and 2,490,500 remained to be granted under this plan.
The 1997 Omnibus Incentive Plan ("1997 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 1997 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 1997 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 1997 Omnibus Plan to 1,000,000. The amendment was approved by the shareholders on February 9, 2001. At December 31, 2003 and 2002, 430,500 and 600,300 options were outstanding, respectively. At December 31, 2003, 569,500 options remain available to be granted. Options to purchase 169,800 shares of common stock were cancelled during 2003.
The 1997 Non-Employee Stock Option Plan ("1997 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 1997 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 1997 Non-Employee 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 1997 Non-Employee Plan to 300,000. The amendment was approved by the shareholders on February 9, 2001. At December 31, 2003 and 2002, no options were outstanding, respectively. At December 31, 2003, 300,000 options remain available to be granted. Pertinent information regarding stock options is as follows:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 2003:
The Company applies principles from SFAS No. 123 in accounting for its stock option plan. In accordance with SFAS No. 123, the Company has elected not to report the impact of the fair value of its stock options in the statements of operations but, instead, to disclose the pro forma effect and to continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation expense has been recognized for stock options issued to employees with an exercise price at fair market value or above. Compensation expense for options issued to non-employees of the Company are excluded from the pro forma effect below, as compensation expense has been recognized in the accompanying financial statements. Had compensation cost for all of the Company's stock options issued been determined based on the fair value at the grant dates for awards consistent with the method prescribed in SFAS No. 123, the Company's net income (loss) and income (loss) per share would have been reduced or increased to the pro forma amounts indicated as follows:
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:
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
2003 2002 2001 ------- ------- ------
Dividend yield 0% 0% 0% Expected life (years) 2.09 3.08 4.00 Expected volatility 100.00% 100.00% 74.74% Risk-free interest rate 2.98% 3.30% 4.92%
NOTE 18 - CONTINGENCIES
The Company 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 financial position, results of operations or cash flows of the Company.
NOTE 19 - 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, RESTRICTED CASH, 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 - The carrying value of the Company's long-term debt approximates fair value due to the variable nature of the interest rate and the interest rate reset periods.
RELATED PARTY DEBT - Management is unable to estimate the fair value of the Company's related party debt. This debt is due within one year but is subject to subordination to the Company's senior debt. The debt and accumulated accrued interest in aggregate is carried at a book value of $38.8 million in the statement of financial position at December 31, 2003.
NOTE 20 - EMPLOYEE BENEFIT PLAN
The Company maintains a Retirement Savings Plan (the 401(k) Plan) for its employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. The Company's contributions to the 401(k) Plan are discretionary. Employees vest in their contributions immediately and vest in the Company's contributions ratably over six years. The Company made no contributions to the 401(k) Plan for the years ended December 31, 2003, 2002, and 2001.
NOTE 21 - SEGMENT AND RELATED INFORMATION
At December 31, 2003 and 2002, the Company is organized into, and manages its business based on the performance of two business units. The business units have separate management teams and infrastructures that offer different oil and gas well services. The business units have been divided into two reportable segments: wireline and directional drilling, since the long-term financial performance of these reportable segments is affected by similar economic conditions.
At December 31, 2000, the Company was organized into three business units. As more fully described in Note 22, the workover and completion segment was discontinued during 2001. Accordingly, the results of its operations prior to discontinuance have been presented as discontinued operations in the statement of operations.
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
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
segment include all major oil and gas producing regions of the United States. Major customers of this segment for the years ended December 31, 2003, 2002 and 2001 included Burlington Resources, Anadarko Petroleum, Chevron, Apache Corp and Denbury Management.
DIRECTIONAL DRILLING SERVICES - This segment performs procedures to enter an 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 years ended December 31, 2003, 2002 and 2001 included Encore Operating, Anadarko Petroleum, Cortez Operating, Ergon Operating, and Lewis Petroleum.
Proposed Sale of Directional Drilling Services. The Company is engaged in negotiations with respect to the sale of its directional drilling division. The proposed transaction, which is subject to the negotiation and execution of a definitive purchase and sale agreement, includes, among the other expected terms and conditions, the sale of all the equipment, inventory, the net working capital of the division and its owned real estate and leases. The net working capital sold is expected to include current assets subject to current liabilities assumed of the division. The purchase price is expected to be approximately $11.0 million, less certain possible closing adjustments. Among other matters, the closing of the transaction is expected to be subject to the Company obtaining all necessary lender and other consents and approvals, the absence of any event having a material adverse effect on the assets or business sold, the buyer having obtained financing for the transaction, the receipt by the Company of a fairness opinion from Simmons & Company International and compliance with other legal requirements. It is expected that either party will have the right to terminate the agreement prior to closing for any reason. Under certain circumstances, the Company could be required to pay the buyer $50,000 upon a termination of the agreement. The purchaser is expected to be a newly organized corporation in which Mr. Allen Neel and two other employees of the directional drilling division are expected to be employees and hold minority equity interests. The net proceeds from the sale, after payment of expenses of the transaction, are intended to be applied in reduction of the Company's senior secured indebtedness. There is no assurance that a definitive agreement can be negotiated and executed on terms acceptable to the Company, that the transaction will be completed or that it will be completed on the terms being negotiated by management.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
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, 2003, 2002 and 2001 is presented as follows:
NOTE 22 - DISCONTINUED OPERATIONS
In July 2001, the Company sold all physical assets associated with its workover and completion business unit for $525,000. The Company recorded a gain of $476,172, net of income taxes of $0. This business unit had an operating loss of approximately $99,000 for the year ended December 31, 2001.
BLACK WARRIOR WIRELINE CORP. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 - --------------------------------------------------------------------------------
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------------------- Years ended December 31, 2003 and December 31, 2002 - --------------------------------------------------------------------------------
INDEX TO EXHIBITS FILED WITH THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003
10.40.1 Employment Agreement dated June 1, 2003 between the Company and Allen R. Neel.
10.41.1 Employment Agreement dated April 1, 2001 between the Company and Danny R. Thornton.
10.41.2 Amendment to Employment Agreement dated April 1, 2001 between the Company and Danny R. Thornton.
14 Code of Ethics
23 (a) Consent of Grant Thornton LLP (c) Consent of PricewaterhouseCoopers, LLP
31.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) 32.1 Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed) 32.2 Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)