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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2004; or
  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________.

Commission File Number 0-18754

Black Warrior Wireline Corp.
(Exact name of registrant as specified in its charter)
   
Delaware
11-2904094
(State or other jurisdiction of incorporation of organization)
(I.R.S employer identification no.)
   
100 Rosecrest Lane, Columbus, Mississippi 39701
(Address of principal executive offices, zip code)
 
(662) 329-1047
(Issuer’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
   
YES   
NO     
   
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes        No   

APPLICABLE ONLY TO CORPORATE ISSUERS:

 As of August 5, 2004, 12,499,528 shares of the Registrant’ s Common Stock, $.0005 par value, were outstanding.

  BLACK WARRIOR WIRELINE CORP.  
 
     
 
  QUARTERLY REPORT ON FORM 10-Q  
 
     
 
  INDEX  
 
     
 
PART I – FINANCIAL INFORMATION  
 
     
Page
  
     
 
     
 
Item 1. Financial Statements  
 
     
 
  Condensed Balance Sheets – June 30, 2004 (unaudited)  
 
  and December 31, 2003  
3
  
     
 
  Condensed Statements of Operations –  
 
  Three Months Ended June 30, 2004 (unaudited) and  
 
  June 30, 2003 (unaudited)  
5
  
     
 
  Condensed Statements of Operations –  
 
  Six Months Ended June 30, 2004 (unaudited) and  
 
  June 30, 2003 (unaudited)  
6
  
     
 
  Condensed Statements of Cash Flows –  
 
  Six Months Ended June 30, 2004 (unaudited) and  
 
  June 30, 2003 (unaudited)  
7
  
     
 
  Notes to Condensed Financial Statements –  
 
  Three and Six Months Ended June 30, 2004 (unaudited) and  
 
  June 30, 2003 (unaudited)  
8
  
     
 
Item 2. Management’s Discussion and Analysis of  
 
  Financial Condition and Results of Operations  
18
  
     
 
Item 3. Qualitative and Quantitative Disclosures About Market Risk  
29
  
     
 
Item 4. Controls and Procedures  
29
  
     
 
     
 
PART II – OTHER INFORMATION  
 
     
 
     
 
Item 6. Exhibits and Reports on Form 8-K  
31
  
     
 

2

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Black Warrior Wireline Corp.
Condensed Balance Sheets

               
June 30,
December 31,
  
               
2004
2003
  
               
(Unaudited)
 
ASSETS
  
 
 
Current assets:                  
      Cash and cash equivalents       $
1,509,501
   $
4,661,030
  
      Restricted cash        
499,822
    
961,551
  
      Accounts receivable, less allowance of $756,130 and $588,101, respectively      
7,965,837
8,952,348
  
      Accounts receivable held for sale      
3,390,811
—
  
      Other receivables        
149,826
    
179,317
  
      Prepaid expenses        
1,629,955
    
92,471
  
      Other current assets         1,795,589     1,188,079  
     
 
 
               
 
    
 
  
Total current assets
      
16,941,341
    
16,034,796
  
               
 
    
 
  
Inventories of tool components and sub-assemblies held for sale, net    
5,737,090
    
5,206,639
  
Property, plant and equipment, less accumulated depreciation    
12,533,322
    
18,219,437
  
Property, plant and equipment held for sale, less accumulated depreciation    
4,165,465
    
—
  
Other assets        
275,838
    
448,507
  
Other assets held for sale      
20,595
    
—
  
Goodwill and other intangible assets      
1,237,416
    
1,492,050
  
     
 
 
               
 
    
 
  
Total assets
       $
40,911,067
   $
41,401,429
  
             
 
 
               
 
    
 
  

See accompanying notes to the condensed financial statements.

3

LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
 
    
 
  
        
 
    
 
  
Current liabilities:       
 
    
 
  
Accounts payable 
     $
2,653,149
   $
4,981,558
  
Accounts payable held for sale
      
2,852,182
    
—
  
Accrued salaries and vacation
      
1,027,115
    
866,267
  
Accrued salaries and vacation held for sale
    
264,316
    
—
  
Other accrued expenses
      
1,107,789
    
1,523,447
  
Other accrued expenses held for sale
      
581,846
    
—
  
Accrued interest payable
      
88,308
    
94,981
  
Current maturities of long-term debt
      
18,008,553
    
18,035,237
  
Accrued interest payable to related parties
    
16,397,425
    
14,534,437
  
Notes payable to related parties, net of unamortized discount
    
24,484,721
    
24,402,569
  
     
   
 
               
 
    
 
  
Total current liabilities
      
67,465,404
    
64,438,496
  
               
 
    
 
  
Long-term debt, less current maturities      
231,307
    
356,952
  
Deferred revenue        
109,975
    
109,975
  
             
 
 
               
 
    
 
  
Total liabilities
      
67,806,686
    
64,905,423
  
     
 
 
               
 
    
 
  
Stockholders’ deficit:        
 
    
 
  
Preferred stock, $.0005 par value, 2,500,000 shares authorized,
    
 
    
 
  
none issued at June 30, 2004 or December 31, 2003
    
—
    
—
  
Common stock, $.0005 par value, 175,000,000 shares authorized,
    
 
    
 
  
12,499,528 shares issued and outstanding at
    
 
    
 
  
June 30, 2004 and December 31, 2003
    
6,252
    
6,252
  
Additional paid-in capital
      
20,275,963
    
20,275,963
  
Accumulated deficit
    
(46,573,844 
)
 
(43,141,023 
)
Treasury stock, at cost, 4,620 shares at June 30, 2004 and December 31, 2003
    
(583,393
)
(583,393
)
Loan to shareholder
    
(20,597
)
(61,793
)
   
 
 
               
Total stockholders’ deficit
    
(26,895,619
) 
(23,503,994
) 
   
     
Total liabilities and stockholders’ deficit
    
40,911,067
41,401,429
 
   
 
 

 

See accompanying notes to the condensed financial statements.

4

Black Warrior Wireline Corp.
Condensed Statements of Operations
For the three months ended June 30, 2004 and June 30, 2003

  June 30, 2004   June 30, 2003  
  (Unaudited)   (Unaudited)  
 
 
 
Revenues $
13,170,348
   $
12,148,678
  
   
 
    
 
  
Operating costs  
8,250,732
    
7,686,254
  
   
 
    
 
  
Selling, general and administrative expenses  
2,459,137
    
2,421,906
  
   
 
    
 
  
Depreciation and amortization  
1,538,068
    
1,167,070
  
Income from continuing operations
  
922,411
    
873,448
  
   
 
    
 
  
Interest expense and amortization of debt discount  
(1,188,171
 )  
(1,366,678
  )
   
 
    
 
  
Net gain (loss) on sale of fixed assets  
(2,291
 )  
9,021
  
   
 
    
 
  
Other income  
2,020
    
26,939
  
 
 
 
   
 
    
 
  
Loss from continuing operations before income taxes
  
(266,031
 )  
(457,270
 )
   
 
    
 
  
Provision for income taxes  
—
    
—
  
 
 
 
   
 
    
 
  
Loss before discontinued operations
  
(266,031
 )  
(457,270
  )
   
 
    
 
  
Discontinued operations (Note 6)  
 
    
 
  
   
 
    
 
  
Income (loss) from operations of discontinued directional drilling segment
  
(154,711
 )  
1,060,499
  
   
 
    
 
  
Provision for income taxes
  
—
    
—
  
 
 
 
Net income (loss)
 $
(420,742
 ) $
603,229
  
 
 
 
   
 
    
 
  
Net income (loss) per share - basic and diluted:  
 
    
 
  
   
 
    
 
  
Loss before discontinued operations
 $
(.02
 ) $
(.03
 )
Discontinued operations
  
(.01
 )  
.08
  
 
 
 
   
 
    
 
  
Net income (loss) per share - basic and diluted $
(.03
 ) $
.05
  
 
 
 

See accompanying notes to the condensed financial statements.

5

Black Warrior Wireline Corp.
Condensed Statements of Operations
For the six months ended June 30, 2004 and June 30, 2003

  June 30, 2004   June 30, 2003  
  (Unaudited)   (Unaudited)  
 
 
 
Revenues $
23,709,668
   $
22,518,492
  
   
   
 
Operating costs  
15,865,082
    
15,085,758
  
   
   
 
Selling, general and administrative expenses  
4,571,020
    
4,716,317
  
   
   
 
Depreciation and amortization  
2,737,202
    
2,364,981
  
Income from continuing operations
  
536,364
    
351,436
  
   
   
 
Interest expense and amortization of debt discount  
(2,538,437
 )   
(2,672,924
 ) 
   
   
 
Net gain on sale of fixed assets  
54,056
    
236,566
  
   
   
 
Other income  
6,364
    
35,701
  
 
 
 
   
   
 
Loss from continuing operations before income taxes
  
(1,941,653
 )   
(2,049,221
 ) 
   
   
 
Provision for income taxes  
—
    
—
  
 
 
 
   
   
 
Loss before discontinued operations
  
(1,941,653
 )   
(2,049,221
 ) 
   
   
 
Discontinued operations (Note 6)  
   
 
   
   
 
Income (loss) from operations of discontinued directional
  
   
 
drilling segment (including estimated loss on
  
   
 
disposal of $1,374,939 and $-0-, for the six
  
   
 
months ended June 30, 2004 and 2003,
  
   
 
respectively)
  
(1,491,168
 )   
1,355,165
  
   
   
 
Provision for income taxes
  
—
    
—
  
Net loss
 $
(3,432,821
 )  $
(694,056
 ) 
 
 
 
   
   
 
Net loss per share - basic and diluted:  
   
 
   
   
 
Loss before discontinued operations
 $
(.16
 )  $
(.17
 ) 
Discontinued operations
  
(.12
 )   
.11
  
 
 
 
   
   
 
Net loss per share - basic and diluted $
(.28
 )  $
(.06
 ) 
 
 
 

See accompanying notes to the condensed financial statements.

6

Black Warrior Wireline Corp.
Condensed Statements of Cash Flows
For the six months ended June 30, 2004 and June 30, 2003

    June 30, 2004   June 30, 2003  
   
(Unaudited)
(Unaudited)
  
     
   
 
Cash flows from operating activities: $
274,795
   $
4,018,691
  
   
 
 
     
   
 
Cash flows from investing activities:  
   
 
  Acquisitions of property, plant and equipment  
(4,061,699
 )   
(1,400,769
 )
  Decrease in restricted cash  
461,729
    
—
  
  Proceeds from sale of property, plant and equipment  
342,682
    
680,049
  
   
 
 
 
Cash used in investing activities
  
(3,257,288
 )   
(720,720
 )
   
 
 
Cash flows from financing activities:  
   
 
  Debt issuance costs  
(16,707
 )   
(25,000
 ) 
  Proceeds from bank and other borrowings  
2,438,971
    
4,398,774
  
  Principal payments on long-term debt, notes payable and capital lease obligations  
(4,184,607
 )   
(3,468,302
 ) 
  Proceeds (payments) from (on) working revolver, net  
1,593,307
    
(206,722
 ) 
   
 
 
 
Cash provided by (used in) financing activities
  
(169,036)
    
698,750
  
   
 
 
     
   
 
 
Net increase (decrease) in cash and cash equivalents
  
(3,151,529
 )  
3,996,721
  
  Cash and cash equivalents, beginning of period  
4,661,030
    
2,388,866
  
   
 
 
  Cash and cash equivalents, end of period $
1,509,501
   $
6,385,587
  
   
 
 
     
   
 
Supplemental disclosure of cash flow information:  
   
 
  Cash paid during the period for:  
   
 
 
Interest
 $
682,566
   $
871,710
  
   
 
 
 
Income taxes
 $
—
   $
—
  
   
 
 

See accompanying notes to the condensed financial statements.

7

BLACK WARRIOR WIRELINE CORP.
NOTES TO CONDENSED FINANCIAL STATEMENTS

1.   General
 

The accompanying condensed financial statements reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position of Black Warrior Wireline Corp. (the “Company”). Such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 should be read in conjunction with this document.

Business of the Company. The Company is an oil and gas service company currently providing various services to oil and gas well operators primarily in the continental United States and in the Gulf of Mexico. Through August 6, 2004, the Company’s principal lines of business included (a) wireline services, and (b) directional oil and gas well drilling and downhole surveying services. As discussed in Note 6, on August 6, 2004 the Company sold its directional drilling division to Multi-Shot, LLC, a newly formed Texas limited liability company and such business is treated as a discontinued operation for the three and six month periods ended June 30, 2004 and 2003.

Liquidity. The Company reported net income (loss) for the six months ended June 30, 2004 of approximately ($3,433,000) and for the years ended December 31, 2003, December 31, 2002, and 2001, of approximately ($5,500,000), ($7,600,000), and $5,000,000, respectively. Cash flows provided by operations were approximately $275,000 for the six months ended June 30, 2004 and $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 $16.8 million at June 30, 2004, other indebtedness of approximately $1.4 million and approximately $40.9 million (including approximately $16.4 million of accrued interest) owing to St. James Merchant Bankers, L.P. (“SJMB”) and St. James Capital Partners, L.P. (“SJCP”) (collectively “St. James”) and its affiliates and directors, who are related parties. The Company’s debt and accrued interest owed to related parties is convertible into common stock and is subordinate to its Senior Credit Facility with General Electric Capital Corporation (“GECC”). In addition, no repayments of the related party debt or accrued interest can be made until the Senior Credit Facility is completely extinguished.

As discussed in Note 9 to the Company’ s financial statements for the year ended December 31, 2003, the Company’s Senior Credit Facility is 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 events 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.

8

 

Through August 25, 2004, the Company has amended the terms of its Senior Credit Facility with GECC on eight 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 and, in addition, to consent to the sale of the Company’s directional drilling division. 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 throughout 2004, the Company will be able to generate sufficient cash flow to meet its working capital needs and comply with its debt covenants. If market conditions decline, the Company may be required to obtain additional amendments to its Senior Credit Facility, or obtain capital through equity contributions or financing, including a possible merger or sale of assets, or other business combination. The Company can give no assurances that adequate financing could be obtained or that a suitable business combination or asset sale could be consummated.

On September 14, 2004, the Company’s Credit Facility with General Electric Credit Corporation (“GECC”) will expire. At that time, unless the Credit Facility is extended, an estimated $6.9 million in senior secured indebtedness, after reflecting a payment of $9.6 million made on August 6, 2004 out of the proceeds of the sale of the Company’s directional drilling division, will mature and be payable. In addition, on December 31, 2004, an additional $23.9 million of subordinated secured indebtedness and $17.8 million of accrued interest will be repayable under the terms of loan agreements entered into between the Company and the holders of that indebtedness. The holders of the subordinated secured indebtedness are parties to a Subordination Agreement dated September 14, 2001, entered into with GECC and the Company whereby they have agreed to subordinate their payments of principal and interest and the lien granted to them, to the prior payment of the Company’s indebtedness owing to GECC. The Company’s sale of its directional drilling division on August 6, 2004 and the application of $9.6 million of the proceeds to the reduction of its senior secured indebtedness was the initial step in management’s plans to extend, restructure or refinance this indebtedness. As of August 25, 2004, the Company is continuing its efforts 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 senior secured and subordinated secured indebtedness. These efforts are expected to include efforts regarding a possible merger, sale of assets or other business combination involving the Company as well as a possible reorganization, recapitalization, restructuring and refinancing of the Company’s obligations. At August 25, 2004, the Company has not entered into any definitive agreements with respect to any such transactions, other than the sale of its directional drilling division which was completed on August 6, 2004, 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 repayment, refinancing or restructuring of its outstanding indebtedness. In addition, the Company is engaged in efforts to refinance its outstanding indebtedness owing to GECC which, under the terms of the Company’s Credit Facility, will mature on September 14, 2004. These negotiations are ongoing but may include a refinancing of the indebtedness for a term of up to five years in an aggregate amount of up to $22.0 million and on other terms similar to the Company’s existing Credit Facility. No definitive agreements have been entered into as of August 25, 2004 and there can be no assurance that the Company will be successful in refinancing its outstanding Credit Facility or that any terms offered will be acceptable to the Company. In the event the Company’s efforts to refinance its Credit Facility are unsuccessful, it is likely that the Company will default in the repayment of its indebtedness under its Credit Facility and 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 these plans.

9

 

2.   Stock-Based Compensation
 
The Company applies principles from SFAS No. 123 in accounting for its stock option plan. In accordance with SFAS No. 123, the Company has elected not to report the impact of the fair value of its stock options in the statements of operations but, instead, to disclose the pro forma effect and to continue to apply APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation expense has been recognized for stock options issued to employees with an exercise price at fair market value or above. Compensation expense for options issued to non-employees of the Company are excluded from the pro forma effect below, as compensation expense has been recognized in the accompanying financial statements. Had compensation cost for all of the Company’s stock options issued been determined based on the fair value at the grant dates for awards consistent with the methods prescribed in SFAS No. 123 and later in SFAS No. 148, the Company’s net income or loss and income or loss per share would have been decreased or increased to the pro forma amounts indicated as follows:
         
      Three Months Ended  
      June 30,   June 30,  
      2004   2003  
     
 
 
Net income (loss) - as reported   $
(420,742
 )  $
603,229
  
       
   
 
Less: Total stock-based employee compensation expense determined    
   
 
under fair value method for all awards, net of related tax effects
    
(35,300
 )   
(3,219
 ) 
   
 
 
Net income (loss) - pro forma   $
(456,042
 )  $
600,010
  
   
 
 
       
   
 
Income (loss) per share - as reported (basic and diluted):   $
(0.03
 )  $
0.05
  
   
 
 
Income (loss) per share - pro forma (basic and diluted):   $
(0.04
 )  $
0.05
  
   
 
 
                 
       
Six Months Ended
  
       
June 30,
June 30,
  
       
2004
2003
  
     
 
 
                 
Net income (loss) - as reported   $
(3,432,821
 ) $
(694,056
 )
       
 
    
 
  
Less: Total stock-based employee compensation expense determined    
 
    
 
  
under fair value method for all awards, net of related tax effects
    
(38,300
 )  
(6,438
 )
   
 
 
               
Net income (loss) - pro forma    
(3,471,121
 )  
(700,494
 )