United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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Mark One:
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Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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For the fiscal year ended December 31, 2004; or
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Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from __________ to __________.
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Commission File No. 0-18754
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BLACK WARRIOR WIRELINE CORP.
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(Exact name of Registrant as specified in its charter)
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Delaware
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11-2904094 |
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(State or other jurisdiction of
Incorporation or organization) |
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(IRS Employer Identification No.) |
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100 Rosecrest, Columbus, Mississippi
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39701 |
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(Address of Principal Executive Offices)
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(Zip Code) |
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(662) 329-1047
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(Registrant’s
telephone number, including area code)
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Securities Registered
Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
(Title of Each Class)
Common Stock, par value $.0005 per share
Common Stock, par value $.0005 per share
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 past twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. Yes No
Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No
No State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
$2,749,896
(Non-affiliates have been determined on the basis of holdings set forth under Item 12 of this Annual Report on Form 10-K.)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
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Class: Common Stock, par value $.0005 per share
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Outstanding at February 28, 2005: 12,499,528 shares
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DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on Form 10-K
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Item Number
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General
Black Warrior Wireline Corp. (the “Company”) is an oil and gas well service company currently primarily providing wireline 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. In July 2001, the Company sold its workover and completion line of business and in August 2004, the Company sold its directional oil and gas well drilling and downhole surveying business. The Company has been engaged in the oil
and gas well
service business for over 21 years.
On
December 17, 2004, the Company announced in a press release that it had entered
into a letter of intent dated November 11, 2004 with Lincolnshire Management,
Inc. for the sale of the Company to an affiliate of Lincolnshire Management,
Inc. At
April 12, 2005, the Company is engaged in negotiations relating to the terms
and
conditions of that transaction, among other matters. There can be no assurance
that these negotiations will be successfully concluded resulting in terms acceptable
to the Company or that the Company will enter into a transaction on the terms
described in the December 17, 2004 announcement or on any other terms.
Wireline Services
The Company’s wireline logging service activities produced revenues of $53.8 million in 2004, $45.8 million of revenues in 2003, and $34.1 million of revenues in 2002. At December 31, 2004, the Company owned 39 operational motor vehicle mounted wireline units all of which 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, 2004, the Company owned 15 operational skid-mounted cased-hole wireline units, all of which are equipped with state of the art computers, and three additional skid-mounted units are devoted to providing services for the plug and abandonment (“P&A”) of wells. The skid-mounted units are able to be used for offshore work by being hoisted aboard barges and
platforms.
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
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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, using conventional wireline methods and tubing conveyed perforating (“TCP”), both of which open 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 wireline service 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 sixteen service facilities located throughout its service area. During the year ended December 31, 2004, approximately 48.5% of the Company’s wireline service revenues were 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, 2004, the Company manufactured for internal use four new wireline trucks and two new offshore wireline skids. The manufacturing facility also totally refurbished for internal use seven wireline trucks.
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Discontinued Directional Drilling Services
The Company’s discontinued directional drilling services contributed revenues of $10.5 million in 2004, $19.7 million in 2003, and $22.5 million in 2002. Commencing in 1997 through August 2004, the Company was engaged in the directional drilling service business since its acquisitions of Diamondback Directional, Inc. in 1997 and Phoenix Drilling Services in 1998. The Company sold its directional drilling services business in August 2004.
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 provided 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.
Sale of Directional Drilling Services. On August 6, 2004, the Company completed the sale of its assets associated with its directional drilling business, (referred to as the “Multi-Shot Business”) pursuant to an Asset Purchase Agreement entered into on June 3, 2004. The buyer of the Multi-Shot Business was a newly-organized Texas limited liability company, with the name Multi-Shot, LLC, which included among its members Allen Neel, formerly the Executive Vice President of the Company, as well as two of the Company’s other former employees employed in the Multi-Shot Business. These persons are referred to as the Key Multi-Shot Employees. The Company has been advised that as of August 6, 2004, these persons held less than an approximately 10% equity interest in the buyer.
The transaction included the sale of all the Company’s assets used in the Multi-Shot Business, including certain real property located in Odessa, Texas; improvements and fixtures located on the property; machinery, equipment, trucks, trade fixtures, data processing equipment, furniture, spare parts, and all other tangible personal property used in connection with the Multi-Shot Business; raw materials, jobs in progress, equipment and components held for service, rent or sale, and supply inventory; customer and supplier files, accounting and financial and other records; contracts, leases, agreements and other written or verbal arrangements and customer pre-payments for unshipped goods and services; technical data, written specifications, assembling and process information; governmental and other licenses and permits, to the extent transferable; service marks, trade
marks and
intellectual property; general intangibles; accounts and other receivables as of the closing date; deposits, goodwill; and prepaid rentals.
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The assets sold excluded the Company’s cash and cash equivalents, real property located in Broussard, Louisiana and Corpus Christi, Texas, investments, the purchase price for the Multi-Shot Business, and all assets of the Company used in its wireline, P&A and TCP business. The buyer assumed specified liabilities, jobs in progress, current liabilities of approximately $3.7 million, as of the closing date, and obligations of the Company under contracts assumed. Liabilities assumed by the buyer do not include taxes imposed on the Company arising out of the operation of the Multi-Shot Business, liabilities or expenses of the Company arising out of the transaction, obligations of the Company under employee benefit plans, liabilities arising from the sale of products or services by the Multi-Shot Business prior to the closing date of the sale, including
claims asserted
under pre-closing warranties, liabilities associated with any claim, proceeding or litigation, deferred revenue, and liabilities and obligations arising out of non-compliance with environmental laws.
The purchase price was $11.0 million consisting of $10.4 million in cash and approximately $628,000 payable by assignment and release by the three Key Multi-Shot Employees of their claims under their employment agreements with the Company to change of control payments that may be due in the aggregate of that amount. The purchase price was subject to adjustment at and as of the closing of the sale for increases and decreases in the Multi-Shot Business’ net working capital of $270,000 as of November 30, 2003 and increases and decreases in its inventory of approximately $5,207,000 as of December 31, 2003. On the basis of an initial closing date balance sheet prepared by the Company and delivered at the closing of the sale on August 6, 2004, the purchase price was reduced by a net adjustment of approximately $22,000. This net adjustment reflected a
decrease in net
working capital subsequent to November 30, 2003 through the closing of approximately $552,000, and an increase in inventory value subsequent to December 31, 2003 through the closing of approximately $530,000.
The Asset Purchase Agreement provides that within 45 days after the closing, the buyer was to prepare and deliver a proposed final closing date balance sheet to include the buyer’s calculation of the final adjustment amounts for increases and decreases as of the closing date in net working capital of $270,000 as of November 30, 2003 and increases and decreases as of the closing date in inventory of approximately $5,207,000 as of December 31, 2003, which adjustments, when determined, would result in establishing the final purchase price.
In addition to post closing adjustments, at the closing of the transaction the buyer issued a note payable to the Company in the principal amount of $146,085 for certain capital expenditures made by the Company related to the Multi-Shot Business prior to the closing. The Asset Purchase Agreement provides that the note is to bear interest at the prime interest rate and was to become due two years after the closing of the transaction, but would become immediately due upon a change of control of the Company or upon a sale or merger of Multi-Shot LLC or a sale of all or substantially all of the assets of Multi-Shot LLC. The final amount of the note at closing was calculated based on the capital expenditures made by the Company related to the Multi-Shot Business through the date of the closing of the transaction.
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In the Asset Purchase Agreement, the Company made representations and warranties as to its due organization, authority to execute and perform the Asset Purchase Agreement, its title to and condition of the assets sold, matters relating to the contracts assumed by the buyer, ownership and condition of the equipment sold, title to inventory and absence of liens, the existence of licenses to conduct the Multi-Shot Business, matters as to employment of employees, compliance with laws, absence of litigation and default or breach of any leases, contracts or licenses, the absence of any lien or breach of the Asset Purchase Agreement arising out of the transaction, the enforceability of the Asset Purchase Agreement, the accuracy of certain financial information provided to the buyer, employee benefits, the absence of certain changes or events, required consents and approvals,
absence of adverse
information, liens on assets, identity of customers, insurance, interest in customers, business practices, environmental laws and accuracy of disclosure.
The buyer represented and warranted its due organization, its authority to execute and perform the Asset Purchase Agreement, the enforceability against it of the Asset Purchase Agreement, and the absence of any breach or violation of other agreements.
The closing of the transaction was conditioned on the accuracy as of the closing of the respective representations and warranties of the parties, the absence of any condition or event that had or would reasonably be expected to have a material adverse effect on the Multi-Shot Business or on the Company’s ability to complete the transaction, the compliance by the parties with all the covenants and agreements contained in the Asset Purchase Agreement as of the closing, the delivery of closing officers’ certificates, documents and opinions, the absence of any litigation seeking to restrain or prohibit the transaction or asserting ownership of a material portion of the assets sold or any claim by any person that it is entitled to all on any portion of the purchase price, the buyer obtaining financing for the transaction, the Company having obtained all necessary
approvals and
consents to complete the transaction, and the Company having obtained a fairness opinion from Simmons & Company International.
The Asset Purchase Agreement provides that the Company will indemnify the buyer, its members, managers, officers, partners, agents and employees against costs, lawsuits, liabilities, deficiencies, claims and expenses (referred to in the Asset Purchase Agreement as Damages) arising out of a breach of a covenant or warranty, the inaccuracy of any representation in the Asset Purchase Agreement or other document furnished under the Asset Purchase Agreement, or based upon or arising out of any liability or obligation of the Multi-Shot Business relating to any period prior to the closing date, other than assumed liabilities, arising out of facts and circumstances existing prior to the closing date, other than assumed liabilities, or arising out of facts or circumstances existing on the closing date which are a violation of the Asset Purchase Agreement or relate to the violation
of any
government regulation with respect to real property while the Company was in possession of the property.
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The Asset Purchase Agreement provides that the buyer will indemnify the Company, its directors, officers, partners, agents and employees from Damages arising out of a breach of a covenant or warranty, the inaccuracy of any representation in the Asset Purchase Agreement or other document furnished under the Asset Purchase Agreement, or based upon or arising out of any liability or obligation of the Multi-Shot Business relating to any period on and after the closing date, arising out of facts and circumstances existing as of or after the closing date, other than those based upon or arising out of liabilities retained by the Company, or arising out of facts or circumstances existing on and after the closing date which are a violation of the Asset Purchase Agreement.
As entered into, the Asset Purchase Agreement provides that the Company’s representations and warranties as to title to assets, taxes and environmental matters survive the closing of the transaction for the period of the applicable statute of limitations. The Company’s other representations and warranties survive the closing for a period ending on the earlier of twenty-four (24) months following the closing date or a change of control of the Company, provided in any event such representations and warranties will survive the closing for a period of twelve (12) months. The representations and warranties of the buyer survive the closing for a period ending on the earlier of twenty-four (24) months from the closing or a change in control of the Company, provided in any event such representations and warranties will survive the closing for a period of
twelve (12)
months. Neither party is entitled to indemnification for any individual claim of less than $5,000 or until the total of all individual claims exceeding that amount exceed $100,000, at which time the indemnified party will be entitled to indemnification for all amounts exceeding $100,000. The Company’s liability to the buyer for indemnification arising out of breaches of representations and warranties relating to title of assets, taxes and environmental matters, and including any other indemnification payments, is limited to the amount of the final purchase price. Otherwise, a party’s liability to the other for indemnification is limited to $5.0 million with respect to claims made during the first twelve months after the closing date or $2.5 million with respect to claims made during the second twelve months after the closing date, provided, however, if there is a change in control of the Company consummated at any time prior to twenty-four
months after the
closing date, then upon the later of (a) the change in control of the Company, or (b) one year following the closing date, the liability of both parties is reduced to $-0- as to claims for Damages occurring thereafter.
Other covenants in the Asset Purchase Agreement as entered into include the following:
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If, within twelve months of the
closing, there is a change of control of the Company, the Company has agreed
that it will not dissolve its corporate entity prior to the end of the
indemnification period described above and it will deposit $500,000 to be held in escrow and if such change of control occurs prior to December 31, 2004, the Company agreed not to distribute prior to December 31, 2004 the proceeds from such event to its stockholders to the extent it causes the Company to have less than $5.0 million in liquid assets,
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After termination of the Agreement or the closing, the parties will not divulge, communicate or use to the detriment of the other or for the benefit of any other person, any confidential information or trade secrets of such party.
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In addition, the Asset Purchase Agreement provided that at the closing each party would execute a non-competition agreement, whereby each party agrees that for a period of two years from the closing date neither party (and including the affiliates of the parties) will participate in a business in competition with the business engaged in by the other party as of the closing under the Asset Purchase Agreement in the Gulf Coast, Rocky Mountain or Mid-Continent areas of the United States. The Company’s non-competition agreement will terminate upon the sale of 50% or more of the capital stock of the Company in a bona-fide transaction to a third party purchaser in which the current officers or directors of the Company own, cumulatively, not more than a 10% interest. Additionally, the Company’s non-competition agreement will not apply to any third party
purchaser of 50% or
more of the assets of the Company in a bona-fide transaction to a third party purchaser in which the current officers or directors of the Company own, cumulatively, not more than a 10% interest, nor will the provisions of the Company’s non-competition agreement apply to any third party, unrelated investment entity and its affiliates that become an affiliate of the Company by virtue of making an investment in the Company.
The parties also entered into a transition services agreement at the closing whereby the Company agreed to provide for up to 180 days after the closing to the buyer certain consulting services of its director of information technology, human services, chief financial officer and human resources and benefits administrator, as well as access to the Company’s computer network.
The parties entered into an amendment to the Agreement on June 10, 2004 to correct a drafting error.
Out of the net cash proceeds from the sale of the Multi-Shot Business, approximately $9.6 million was applied to the reduction of indebtedness owing to the Company’s senior secured creditor.
In February 2005, the Company entered into a Compromise Agreement with the buyer resolving certain matters that had arisen under the Asset Purchase Agreement subsequent to the closing. Among the matters resolved was the determination of the final purchase price adjustment under the asset purchase agreement and resolution of the capital expenditure note issued by the buyer at the closing. Pursuant to the Compromise Agreement, the Company paid to the buyer $940,000, and the principal amount of the buyer’s capital expenditure note, which was increased to approximately $168,000, was deemed paid. Among other things, the Company’s payment reflected a compromise with respect to any and all claims of the buyer with respect to accounts receivable and also reflected a compromise with respect to the final purchase price adjustment. In addition, the
Company’s
representations warranties and covenants in the Asset Purchase Agreement as to the Multi-Shot Business relating to inventory, net working capital, purchase price adjustments, financial statements, accounts receivable, condition of assets (other than real property and leased real property) were agreed not to survive the execution of the Compromise Agreement. Otherwise, the representations warranties and covenants
of the Asset Purchase Agreement continue in effect. The Compromise Agreement also effected an amendment of events constituting a change of control of the Company to provide that if the obligations of the Company survive the transaction, then neither a merger of the Company with any other person or firm nor a sale of 50% or more of the Company’s issued and outstanding stock would be deemed to be a change of control of the Company for the purposes of Section 6.11 of the Asset Purchase Agreement. Section 6.11 of the Asset Purchase Agreement provides that if a change of control of the Company occurs on or before August 6, 2005, the Company will not dissolve until the end of the Company’s indemnification obligation period under the Asset Purchase Agreement and the Company will deposit $500,000 in escrow to be held subject to the claims of the buyer under the indemnification provisions of the Asset Purchase Agreement. The Compromise also provided
that the transition
services agreement expired.
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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, 2004. 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 30 persons working from its district offices. The Company relies extensively on its reputation in the industry to create customer awareness of its services.
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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 a $1.0 million policy on the life of 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.
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Competition principally occurs in the areas of technology, price, quality of products and field personnel, equipment availability and facility locations. 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:
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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.
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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.
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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.
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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, 2005, the Company employed approximately 337 persons on a full-time basis. Of the Company’s employees, 19 are management personnel, 16 are administrative personnel and 302 are operational 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.
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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, 2004 and 2003”, “-Twelve-Month Periods Ended December 31, 2003 and 2002”, “-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 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 negotiate acceptable terms and conclude a transaction with an affiliate of Lincolnshire Management, Inc. for a sale of 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 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 if and when
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:
-12-
Risks Related to the Company
Restrictions On Operations Imposed by Lenders; Borrowings Secured by Substantially All the Company’s Assets. The Company has outstanding at December 31, 2004 senior secured indebtedness aggregating approximately $7.9 million under its Restated 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 prohibit the
Company from making
capital expenditures in any fiscal year in an aggregate amount exceeding $3.0 million and require the Company to have at the end of each fiscal quarter commencing with the quarter ending December 31, 2004 a ratio of EBITDA to fixed charges, including interest expense, scheduled payments of principal, capital expenditures paid and income taxes paid, for the twelve months then ended of 1.5 to 1.0. For the purpose of such calculation, fixed charges for the twelve months ended December 31, 2004 are calculated as the fixed charges for the quarter ended December 31, 2004 multiplied by four, fixed charges for the twelve months ended March 31, 2005 are calculated as the fixed charges for the six months ended March 31, 2005 multiplied by two, and fixed charges for the twelve months ended June 30, 2005 are calculated as the fixed charges for the nine months ended June 30, 2005 multiplied by one and one-third. 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.
-13-
On various occasions in the past, the Company was in violation of covenants contained in the Company’s Credit Agreement with GECC entered into in on September 14, 2001. There can be no assurance that the Company will not again violate certain of the covenants of its existing Credit Agreement.
Substantial Dilution. The Company has outstanding as of February 28, 2005, 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 135,256,461 shares of the Company’s Common Stock at exercise and conversion prices ranging from $0.75 to $2.63. Accordingly, if all such securities were exercised or converted, the 12,499,528 shares of Common Stock issued and outstanding on February 28, 2005, would represent 8.5% of the shares outstanding on a fully diluted basis. Of the Company’s outstanding common stock purchase warrants, options and convertible notes, including interest, 135,251,461 shares of Common Stock are issuable at an exercise or conversion price of $0.75 per share. At February 28, 2005, 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 $23.0 million as of December 31, 2004, 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, 2004, $3.5 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 approximately 4.6 million shares. During the year ending December 31, 2005, the Company expects that an additional $3.5 million of interest will accrue on such notes which at December 31, 2005 will be convertible into approximately 4.6 million additional shares. As extended, such notes are due and payable on February 13 and February 14,
2008 and, if such
notes remain outstanding, 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.
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, 2004, one customer, Apache Corporation, accounted for 7.4% of the Company’s revenues. During the year ended December 31, 2003, that same customer accounted for 5.2% 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.
-14-
Substantial Control by Principal Investors. As of February 28, 2005, St. James Capital Partners, L.P., its affiliated entity SJMB, L.P., (such limited partnerships are collectively referred to as the “St. James Partnerships”) and Charles E. Underbrink, Chairman of both of the general partners of the St. James Partnerships, held directly or indirectly 5,157,481 shares of Common Stock, representing approximately 41.3% of the Company’s shares outstanding. As of February 28, 2005, the subordinated promissory notes of the Company, including accrued interest, convertible at a per share conversion price of $0.75 of principal and interest, were convertible into an aggregate of approximately 53,902,477 shares of Common Stock. As of February 28, 2005 warrants exercisable at $0.75 per share to purchase an aggregate of approximately 70,761,185
shares of Common
Stock were outstanding. In the event of the conversion of the principal of and accrued interest on the notes and exercise of the warrants and including the 5,157,481 shares held by the St. James Partnerships and Mr. Underbrink, such persons would hold an aggregate of 90,142,987 shares representing approximately 92.5% of the Company’s shares of Common Stock then outstanding, as of February 28, 2005. Other holders (collectively referred to as the “Other Subordinated Debtholders”), of the Company’s other outstanding subordinated promissory notes, including accrued interest outstanding as of February 28, 2005, which are convertible at a per share conversion price of $0.75 of principal and interest, have the right to convert the principal and accrued interest on their notes into an aggregate of approximately 4,012,491 shares of Common Stock and hold in the aggregate warrants exercisable at $0.75 per share to purchase an additional 14,435,000
shares of Common
Stock. The St. James Partnerships also have certain additional contractual rights which, among other things, give to the St. James Partnerships the right to nominate two persons 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 Partnerships. As of February 28, 2005, two of the Company’s three Directors are a principal or employee of the general partners of the St. James Partnerships. The foregoing gives the St. James Partnerships and Mr. Underbrink, as well as the Other Subordinated Debtholders, the ability to exert significant influence over the business and affairs of the Company. The interests of the St. James Partnerships and Mr. Underbrink and the Other
Subordinated Debtholders
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, 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 January 1, 2008) and Thornton (through April 1, 2006), and has purchased “key-man” life insurance with respect to Messrs. Jenkins and Thornton.
-15-
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 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.
Risks Related to the Oil and Gas Well Service Business
Intense Competition. The wireline oil and gas well service business 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 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.
-16-
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.
Industry activity in the form of active drilling rig activity in the continental United States materially impacts the results in the Company’s wireline business. The Company’s revenues tend to increase and decrease as the active oil and gas well drilling rig count increases and decreases. Oil and natural gas prices materially affect the numbers of oil and gas wells drilled during any given period of time and the number of active drilling rigs in operation during the period. There can be no assurance that there will be a continued improvement in oil and natural gas prices and active rig counts or that the current levels of prices and rig counts will be maintained. There can be no assurance that the 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 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 and sales experience and ability, 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.
-17-
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. Offshore wireline service activities can be materially adversely affected by tropical storm and hurricane activity. 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.
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 16 locations throughout its service area and a manufacturing facility in Laurel, Mississippi. The aggregate annual rental for these facilities is approximately $434,000. Of such facilities, three are owned by the Company and the others are leased with rental periods of from a month-to-month basis to five years. The Company believes that all of the facilities are adequate for its current requirements.
-18-
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.
No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2004, to a vote of security holders of the Company, through the solicitation of proxies, or otherwise.
-19-
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Quotations for the Company’s Common Stock appeared in the OTC Bulletin Board® under the trading symbol BWWL through March 22, 2005. 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
|
|
||||
|
|
|
|
|
||||
|
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
|
|
$
|
0.40
|
|
$
|
0.10
|
|
|
Third Quarter
|
|
$
|
0.20
|
|
$
|
0.10
|
|
|
Fourth Quarter
|
|
$
|
0.20
|
|
$
|
0.10
|
|
|
|
|
Bid Prices
|
|
||||
|
|
|
|
|
||||
|
2005
|
|
High
|
|
Low
|
|
||
|
|
|
|
|
|
|
||
|
First Quarter (through March 22)
|
|
$
|
0.27
|
|
$
|
0.15
|
|
There is very limited trading activity in the Company’s Common Stock. There can be no assurance that there will be an active trading market for its Common Stock at the time a stockholder