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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
----------------------
COMMISSION FILE NUMBER 1-13817
BOOTS & COOTS INTERNATIONAL
WELL CONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2908692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 POST OAK BOULEVARD, SUITE 800
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
(713) 621-7911
Registrant'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
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, par value $.00001
per share, outstanding at November 12, 2001, was 40,931,000.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
(unaudited)
PAGE
----
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30,
2000 2001
-------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,416,000 $ 534,000
Accounts receivable - net of allowance of $1,339,000 and $692,000
(unaudited) at December 31, 2000 and September 30, 2001, respectively . 5,620,000 7,509,000
Restricted Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,132,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,000 357,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 547,000 957,000
-------------- ---------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 7,984,000 10,489,000
-------------- ---------------
PROPERTY AND EQUIPMENT- net . . . . . . . . . . . . . . . . . . . . . . . . . 7,971,000 6,569,000
OTHER ASSETS:
Goodwill - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,903,000 1,858,000
Deposits and other - net. . . . . . . . . . . . . . . . . . . . . . . . . . 268,000 298,000
-------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,126,000 $ 19,214,000
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable. $ 100,000 $ 765,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,343,000 5,230,000
Accrued liabilities and customer advances . . . . . . . . . . . . . . . . . 6,559,000 4,707,000
-------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 12,002,000 10,702,000
-------------- ---------------
LONG-TERM DEBT AND NOTES PAYABLE - net of current
maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,520,000 12,520,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
365,000 and 322,000 (unaudited) shares issued and outstanding
at December 31, 2000 and September 30, 2001, respectively) . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized,
31,692,000 and 40,931,000 (unaudited) shares issued and outstanding
at December 31, 2000 and September 30, 2001, respectively) . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 53,098,000 55,755,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,494,000) (59,763,000)
-------------- ---------------
Total shareholders' equity (deficit). . . . . . . . . . . . . . . . (6,396,000) (4,008,000)
-------------- ---------------
Total liabilities and shareholders' equity (deficit). . . . . . . . $ 18,126,000 $ 19,214,000
============== ===============
See accompanying notes to condensed consolidated financial statements.
3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2000 2001 2000 2001
------------ ------------ ------------- ------------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,631,000 $ 8,494,000 $ 17,603,000 $29,543,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses. . . . . . . . . . . . . 5,973,000 6,852,000 16,669,000 22,193,000
Selling, General and Administrative . . . . . . . . . . . . . 1,552,000 890,000 3,237,000 3,378,000
Depreciation and Amortization . . . . . . . . . . . . . . . . 760,000 519,000 2,097,000 1,579,000
Loan Guaranty Charge (Note D) . . . . . . . . . . . . . . . . 1,800,000 -- 1,800,000 --
------------ ------------ ------------- ------------
10,085,000 8,261,000 23,803,000 27,150,000
------------ ------------ ------------- ------------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . . . (4,454,000) 233,000 (6,200,000) 2,393,000
Interest Expense, Net and Other . . . . . . . . . . . . . . . . 3,593,000 (10,000) 9,652,000 707,000
------------ ------------ ------------- ------------
Income (Loss) From Continuing Operations Before Income Taxes. . (8,047,000) 243,000 (15,852,000) 1,686,000
Income Tax Expense. . . . . . . . . . . . . . . . . . . . . . . -- 126,000 -- 126,000
------------ ------------ ------------- ------------
Income (Loss) From Continuing Operations. . . . . . . . . . . . (8,047,000) 117,000 (15,852,000) 1,560,000
Gain From Discontinued Operations, net of Income Taxes. . . . . 830,000 -- 1,544,000 300,000
------------ ------------ ------------- ------------
Loss From Sale of Discontinued Operations, net of Income Taxes. (2,505,000) -- (2,505,000) --
------------ ------------ ------------- ------------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . (9,722,000) 117,000 (16,813,000) 1,860,000
Preferred Dividend Requirements & Accretions. . . . . . . . . . 119,000 701,000 357,000 2,129,000
------------ ------------ ------------- ------------
Net Loss Attributable to Common Shareholders. . . . . . . . . . $(9,841,000) $ (584,000) $(17,170,000) $ (269,000)
============ ============ ============= ============
Basic Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . . . . . . $ (0.26) $ (0.01) $ (0.47) $ (0.02)
============ ============ ============= ============
Discontinued Operations. . . . . . . . . . . . . . . . . . . $ (0.05) $ 0.00 $ (0.03) $ 0.01
============ ============ ============= ============
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.31) $ (0.01) $ (0.50) $ (0.01)
============ ============ ============= ============
Weighted Average Common Shares Outstanding - Basic and Diluted. 32,257,000 40,931,000 34,531,000 39,685,000
============ ============ ============= ============
See accompanying notes to condensed consolidated financial statements.
4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDERS'
----------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- ------- ---------- ------- ------------ ------------- -------------
BALANCES, December 31, 2000 365,000 $ - 31,692,000 $ - $53,098,000 $(59,494,000) $ (6,396,000)
Warrant discount
accretion . . . . . . . . . . - - - - 40,000 (40,000) -
Common stock issued for
services and settlements . . . - - 1,109,000 - 575,000 - 575,000
Preferred stock
dividends accrued. . . . . . . - - - - 2,089,000 (2,089,000) -
Preferred stock
conversion to common stock . . (61,000) - 8,130,000 - - - -
PIK shares declared on
preferred stock. . . . . . . . 18,000 - - - - - -
Warrants issued for
consulting services. . . . . . - - - - 54,000 - 54,000
Transaction costs of convertible
debt financing . . . . . . . . - - - - (101,000) - (101,000)
Net Income . . . . . . . . . . . - - - - - 1,860,000 1,860,000
-------- ------- ---------- ------- ------------ ------------- -------------
BALANCES, September 30, 2001 . . . 322,000 $ - 40,931,000 $ - $55,755,000 $(59,763,000) $ (4,008,000)
======== ======= ========== ======= ============ ============= =============
See accompanying notes to condensed consolidated financial statements.
5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2000 2001
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $(16,813,000) $ 1,860,000
Adjustments to reconcile net income (loss) to net cash provided by
or (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 2,097,000 1,579,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . 100,000 139,000
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . -- 4,000
Equity issued for services and settlements . . . . . . . . . . 3,639,000 54,000
------------- ------------
Net cash provided by or (used in) operating activities before
changes in assets and liabilities . . . . . . . . . . . . . (10,977,000) 3,636,000
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . (598,000) (2,028,000)
Restricted Assets. . . . . . . . . . . . . . . . . . . . . . . -- (1,132,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 44,000
Prepaid expenses and other current assets. . . . . . . . . . . 659,000 (410,000)
Deferred financing costs and other assets. . . . . . . . . . . (1,082,000) (22,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . (2,551,000) (113,000)
Accrued liabilities and customer advances. . . . . . . . . . . 5,013,000 (1,378,000)
Change in net assets of discontinued operations. . . . . . . . 29,984,000 --
------------- ------------
Net cash provided by or (used in) operating activities . . . . 20,504,000 (1,403,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of assets. . . . . . . . . . . . . . -- 52,000
Property and equipment additions . . . . . . . . . . . . . . . (260,000) (196,000)
------------- ------------
Net cash used in investing activities. . . . . . . . . . . . . (260,000) (144,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised . . . . . . . . . . . . . . . . 15,000 --
Debt repayments. . . . . . . . . . . . . . . . . . . . . . . . (42,101,000) --
Borrowings under line of credit. . . . . . . . . . . . . . . . 27,317,000 --
Proceeds from exercise of redeemable stocks and warrants . . . 1,240,000 --
Proceeds from pledging arrangement . . . . . . . . . . . . . . -- 665,000
Proceeds from issuance of convertible debt . . . . . . . . . . 8,000,000 --
------------- ------------
Net cash provided by or (used in) financing activities . . . . (5,529,000) 665,000
------------- ------------
Net increase (decrease) in cash and cash equivalents . . . . . 14,715,000 (882,000)
CASH AND CASH EQUIVALENTS, Beginning of Period. . . . . . . . . . . 222,000 1,416,000
------------- ------------
CASH AND CASH EQUIVALENTS, End of Period. . . . . . . . . . . . . . $ 14,937,000 $ 534,000
============= ============
Supplemental Cash Flow Disclosures:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ 1,125,000 $ 13,000
Cash paid for income tax. . . . . . . . . . . . . . . . . . . $ 326,000 $ --
Non-cash Investing and Financing Activities:
Transaction costs of convertible debt financing . . . . . . . -- (101,000)
Common stock issued for services and settlements. . . . . . . -- 575,000
Preferred stock dividends accrued and accretions. . . . . . . $ 357,000 $ 2,129,000
============= ============
See accompanying notes to condensed consolidated financial statements.
6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
A. GOING CONCERN
The Company receives the majority of its revenues from customers in the
energy industry. Demand for the Company's products and services is impacted by
the number and size of projects available, which fluctuate as changes in oil and
gas prices affect customers' exploration and production activities, forecasts
and budgets. These fluctuations have a significant effect on the Company's cash
flows.
Recent activity levels in the oil and gas sector have increased the
frequency of high-risk response work. However, the Company's well control
business has only recently begun to benefit to a meaningful degree from an
increase in the volume of critical events. In the past, the well control
business has provided the Company with the opportunity for profitable operating
activities, but the timing of critical events is unpredictable. Consequently,
the Company's financial performance has been, and continues to be, subject to
significant fluctuations.
The relatively low incidences of critical events over the last two years
have negatively affected the Company's financial position. In response,
commencing in 1999 and continuing into 2001, the Company (a) downsized
personnel, (b) improved its working capital, (c) closed and/or consolidated
certain field offices, (d) consolidated administrative functions, and (e)
discontinued certain business lines to ensure that the Company's resources were
deployed in its most profitable operations. The Company's initial efforts to
rationalize its operations were not sufficient to prevent significant operating
losses in 1999 and 2000. During the first nine months of 2001, the result of
these efforts was fully in place and, in combination with an increase in
operating activity, contributed to a positive net income before preferred stock
dividends during the period.
The prior years' operating losses resulted in an impairment of the
Company's liquidity and an inability to pay certain vendors in a timely manner.
This hampered the Company's capacity to hire sub-contractors, obtain materials
and supplies, and otherwise conduct effective or efficient operations. To
address the Company's liquidity problems and to improve its overall capital
structure, the Company initiated and completed a program in 2000 to raise new
funds, sell assets of certain subsidiaries, retire the Company's existing senior
debt, restructure its subordinated debt and increase its shareholders' equity.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests in its senior
secured credit facility with Comerica Bank-Texas. In connection with this
financing, the Company issued 147,058 shares of common stock and warrants
representing the right to purchase an aggregate of 8,729,985 shares of common
stock of the Company to the participation interest holders and warrants to
purchase an aggregate of 3,625,000 shares of common stock to the investment
group that arranged the financing. The warrants have a term of five years and
can be exercised by the payment of cash in the amount of $0.625 per share as to
8,729,985 shares and $0.75 per share as to 3,625,000 shares of common stock, or
by relinquishing a number of shares subject to the warrant with a market value
equal to the aggregate exercise price of the portion of the warrant being
exercised. On December 28, 2000, $7,729,985 of the participation interest, plus
$757,315 in accrued interest thereon, was exchanged for 89,117 shares of Series
H Cumulative Senior Preferred Stock in the Company. The remaining $1,000,000 of
the participation interest was outstanding as senior secured debt as of
September 30, 2001.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica
Bank-Texas, the Company's primary senior secured lender at that time, was paid
in full as a component of the transaction. Specialty Finance Fund I, LLC, as a
participant in the Comerica senior facility, remains as the senior secured
lender.
On October 24, 2000, the Company announced that it had reached an agreement
in principle with Prudential Insurance Company of America, in the form of a
letter of intent, regarding the restructuring of the Company's subordinated debt
with Prudential. The Company had been in default under its subordinated note
agreement with Prudential since the second quarter of 1999. A restructuring
agreement was executed by both parties on December 28, 2000. The Prudential
restructuring agreement provided that the aggregate indebtedness due to
Prudential be resolved by the Company: (i) paying $12,000,000 cash at closing,
(ii) establishing $7,200,000 of new subordinated debt, (iii) issuing $5,000,000
face value of Series E Cumulative Senior Preferred Stock ($2,850,000 fair
value) and (iv) issuing $8,000,000 face value of Series G Cumulative Convertible
Preferred Stock ($2,600,000 fair value). In addition, $500,000 is contingently
7
payable upon the Company securing a new credit facility or commercial financing
arrangement. All interest payments and dividends are paid in kind and deferred
for two years from the date of closing. Additionally, as a component of the
transaction, Prudential received newly issued warrants to purchase 8,800,000
shares of the Company's common stock for $0.625 per share and the Company agreed
to re-price the existing common stock purchase warrants to purchase 3,165,000
currently held by Prudential to $0.625 per share. The Company has the right,
through January 2, 2002, to repurchase, at a discount to face value, all of the
debt and stock issued to Prudential.
The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 15. As a result of the application of this
accounting standard, the total indebtedness due to Prudential, inclusive of
accrued interest, was reduced by the cash and fair market value of securities
issued by the Company, and the residual balance of the indebtedness was recorded
as the new carrying value of the subordinated note due to Prudential.
Consequently, the $7,200,000 face value of the subordinated note is recorded on
the Company's balance sheet at $11,520,000. The additional carrying value of the
debt in excess of face value represents the accrual of future interest expense
due on the face value of the subordinated note to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain in the year ended
December 31, 2000.
The financing obtained during 2000 from Specialty Finance Fund I, LLC, and
the restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common shareholders. This could
adversely affect the market price for the Company's common stock and limit the
price at which new stock can be issued for future capital requirements.
During the nine months ended September 30, 2001, the Company generated a
net cash deficit from operating activities of $1,403,000 and the Company
utilized net cash of $144,000 in investing activities. Overall, the Company's
net cash position decreased by $882,000 during the period. At September 30,
2001, the Company had a cash balance of $534,000 (see Part 1, Item 1,
Consolidated Statement of Cash Flows).
As of September 30, 2001, the Company's current assets totaled
approximately $10,489,000 and current liabilities were $10,702,000, resulting in
a working capital deficit of approximately $213,000. The Company's highly liquid
current assets, represented by cash of $534,000 and receivables of $7,509,000
were collectively $2,659,000 less than the amount of current liabilities. The
Company is actively exploring new sources of financing, including the
establishment of new credit facilities and the issuance of debt and/or equity
securities. Additionally, the Company continues to pursue methods to expand its
business activities and enhance its operating cash flow. However, absent new
sources of financing, or if the Company does not significantly improve its
operating performance, the Company may not have sufficient funds to meet its
current obligations over the next twelve months and could be forced to dispose
of additional assets or operations outside of the normal course of business in
order to satisfy future liquidity requirements.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. However,
the uncertainties surrounding the sufficiency of its future cash flows and the
lack of firm commitments for additional capital raises substantial doubt about
the ability of the Company to continue as a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. They do not include all information and
notes required by generally accepted accounting principles for complete annual
financial statements. The accompanying condensed consolidated financial
statements include all adjustments, including normal recurring accruals, which,
in the opinion of management, are necessary for a fair presentation of the
financial position at such date and the results of operations and cash flows for
these periods. Certain reclassifications have been made to the prior periods to
conform to the current presentation.
The accompanying condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and the notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
The results of operations for the three month and nine month periods ended
September 30, 2001 are not necessarily indicative of the results to be expected
for the full year.
The Company has filed a Form 10-Q/A amending Item 1 and Item 2 of the
Company's quarterly report on Form 10-Q for the period ended March 31, 2000 (the
"Original Form 10-Q") filed with the Securities and Exchange Commission on July
17, 2000. The purpose of the Form 10-Q/A was to amend the Company's first
quarter financial information for 2000. This amendment resulted from a
8
$1,679,000 provision to Other Expense required to properly reflect the fair
value attributable to certain equity transactions within that quarter. After
making this amendment, the Company's first quarter net loss increased by
$1,679,000 ($0.05 per share). The amendment also increased the year-to-date net
loss at September 30, 2000 by the same amount.
Recently Issued Accounting Standards - In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") was issued. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be measured at
its fair value, recorded in the balance sheet as either an asset or liability
and that changes in the derivative's fair value be recognized currently in
earnings. SFAS 133, as amended, was adopted by the Company on January 1, 2001.
The adoption in January 2001 did not have a material impact on the financial
statements of the Company, as the Company has not entered into arrangements
usually associated with derivative instruments historically or during the nine
months ended September 30, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. Under SFAS 142, goodwill and intangible assets with indefinite
lives are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have indefinite lives will continue to be amortized over their
useful lives (with no maximum life). The amortization provisions of SFAS 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets attributable to acquisitions prior to
July 1, 2001, the amortization provisions of SFAS 142 will be effective January
1, 2002. Management estimates that the adoption of SFAS 142's requirement to not
amortize goodwill will increase operating income by approximately $60,000 in
2002. Management is currently evaluating the effect that adoption of the other
provisions of SFAS 142 that are effective January 1, 2002 will have on its
results of operations and financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143") which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management has yet to
determine the impact that the adoption of SFAS No. 143 will have on the
Company's consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, ("SFAS No. 144") which supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
long-lived Assets and for long-lived Assets to be Disposed Of. SFAS No. 144
establishes a single accounting method for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired, and extends the
presentation of discontinued operations to include more disposal transactions.
SFAS No. 144 also requires that an impairment loss be recognized for assets
held-for-use when the carrying amount of an asset (group) is not recoverable.
The carrying amount of an asset (group) is not recoverable if it exceeds the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset (group), excluding interest charges. Estimated of
future cash flows used to test the recoverability of a long-lived asset (group)
must incorporate the entity's own assumptions about its use of the asset (group)
and must factor in all available evidence. SFAS No. 144 is effective for the
Company for the quarter ending March 31, 2002. Management has yet to determine
the impact that the adoption of SFAS No. 144 will have on the Company's
consolidated financial statements.
C. DISCONTINUED OPERATIONS
The Company's subsidiary ITS Supply Corporation ("ITS") filed in Corpus
Christi, Texas for protection under Chapter 11 of the U.S. Bankruptcy Code. ITS
is now proceeding to liquidate its assets and liabilities pursuant to Chapter 7
of Title 11. At the time of the filing, ITS had total liabilities of
approximately $6,900,000 and tangible assets of approximately $950,000. (see
further discussion of ITS in Note D and Part 2, Item 1, Legal Proceeding)
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 in cash. Comerica
Bank-Texas, the Company's primary senior secured lender at the time, was paid in
full as a component of the transaction.
9
D. COMMITMENTS AND CONTINGENCIES
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Management of the
Company does not believe that any liabilities resulting from any such current
proceedings will have a material adverse effect on its consolidated operations
or financial position.
As previously discussed the Company's subsidiary ITS Supply Corporation
("ITS") filed in Corpus Christi, Texas on May 18, 2000, for protection under
Chapter 11 of the U.S. Bankruptcy Code. ITS is now proceeding to liquidate its
assets and liabilities pursuant to Chapter 7 of Title 11. At the time of the
filing, ITS had total liabilities of approximately $6,900,000 and tangible
assets of approximately $950,000. The Company had an outstanding guaranty on ITS
debt upon which a judgment against the Company was entered by a state district
court in the amount of approximately $1,833,000. The judgment was paid in full
by the Company on August 31, 2001. (See Part 2, Item 1, Legal Proceeding)
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of (1) all lockbox transfers that occurred between ITS and Comerica
Bank, et al. and (2) all intercompany transfers between ITS and the Company or
subsidiaries of the Company. The Chapter 7 Trustee seeks an accounting to
determine if any of the transfers between the parties are avoidable under either
Federal or State of Texas statutes and seeks repayment to ITS of all such
amounts. The Trustee believes that approximately $400,000 of lockbox transfers
and $3,000,000 of intercompany transfers were made between the parties. The
Company has been advised by bankruptcy counsel that it does not believe that it
is probable that an accounting of the transactions between the parties will
demonstrate there is a liability owing by the Company to the ITS Chapter 7
estate. To provide security to Comerica Bank for any potential claims by the
Chapter 7 trustee, the Company has pledged $350,000 in the form of a certificate
of deposit in favor of Comerica Bank. This amount has been classified as a
restricted asset on the balance sheet as of September 30, 2001.
E. BUSINESS SEGMENT INFORMATION
Information concerning operations in different business segments for the
three and nine months ended September 30, 2000 and 2001, is presented below. On
January 1, 2001, the Company redefined the segments that it operates in as a
result of the decision to discontinue ITS and Baylor business operations. The
current segments are Prevention, Response and Restoration. Most of the
Company's subsidiaries operate in all three segments. Accordingly, business
segment disclosures included in this report reflect this classification for all
periods presented. Intercompany transfers between segments were not material.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. For purposes of
this presentation, general and corporate expenses have been allocated between
segments on a pro rata basis based on revenue. Business segment operating data
from continuing operations is presented for purposes of discussion and analysis
of operating results.
For the Three Months Ended September 30:
Prevention Response Restoration Consolidated
------------ ------------ ------------- --------------
2001:
Net Operating Revenues . . . . $ 1,888,000 $ 5,373,000 $ 1,233,000 $ 8,494,000
Operating Income (Loss). . . . 310,000 513,000 (590,000) 233,000
Identifiable Operating Assets. 2,298,000 14,745,000 2,171,000 19,214,000
Capital Expenditures . . . . . -- 117,000 -- 117,000
Depreciation and Amortization. 120,000 306,000 93,000 519,000
Interest Expense . . . . . . . 20,000 60,000 13,000 93,000
2000:
Net Operating Revenues . . . . $ 371,000 $ 4,537,000 $ 723,000 $ 5,631,000
Operating Loss . . . . . . . . (258,000) (2,550,000) (1,646,000) (4,454,000)
Identifiable Operating Assets. 3,858,000 25,830,000 7,526,000 37,214,000
Capital Expenditures . . . . . -- 192,000 -- 192,000
Depreciation and Amortization. 52,000 531,000 177,000 760,000
Interest Expense . . . . . . . 378,000 3,068,000 737,000 4,183,000
10
For the Nine Months Ended September 30:
Prevention Response Restoration Consolidated
------------ ------------ ------------- --------------
2001:
Net Operating Revenues . . . . $ 3,535,000 $22,669,000 $ 3,339,000 $ 29,543,000
Operating Income (Loss). . . . 749,000 2,949,000 (1,305,000) 2,393,000
Identifiable Operating Assets. 2,298,000 14,745,000 2,171,000 19,214,000
Capital Expenditures . . . . . -- 196,000 -- 196,000
Depreciation and Amortization. 219,000 1,141,000 219,000 1,579,000
Interest Expense . . . . . . . 38,000 243,000 36,000 317,000
2000:
Net Operating Revenues . . . . $ 1,825,000 $12,218,000 $ 3,560,000 $ 17,603,000
Operating Loss . . . . . . . . (476,000) (2,579,000) (3,145,000) (6,200,000)
Identifiable Operating Assets. 3,858,000 25,830,000 7,526,000 37,214,000
Capital Expenditures . . . . . -- 260,000 -- 260,000
Depreciation and Amortization. 205,000 1,375,000 517,000 2,097,000
Interest Expense . . . . . . . 767,000 5,158,000 1,473,000 7,398,000
For the nine month periods ended September 30, 2000 and 2001, the Company's
revenue mix was 75% and 76% domestic, respectively, and 25% and 24% foreign,
respectively. (See item 2, Results of Operations, for additional information
and quarterly analysis.)
F. EARNINGS PER SHARE
The weighted average number of shares used to compute basic and diluted
earnings per share for the three and nine month periods ended September 30, 2000
and 2001, respectively, is illustrated below:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2000 2001 2000 2001
------------ ------------ ------------- ------------
Numerator:
For basic and diluted earnings per share-
Net Loss Attributable to
Common Shareholders. . . . . . . . . . $(9,841,000) $ (584 ,000) $(17,170,000) $ (269,000)
Denominator:
For basic earnings per share-
Weighted-average shares. . . . . . . . . . 32,257,000 40,931,000 34,531,000 39,685,000
Effect of dilutive securities:
Preferred stock conversions, stock options
and warrants . . . . . . . . . . . . . . . - - - -
------------ ------------ ------------- ------------
Denominator:
For diluted earnings per share -
Weighted-average shares and
Assumed conversions. . . . . . . . . . . . 32,257,000 40,931,000 34,531,000 39,685,000
------------ ------------ ------------- ------------
For the three and nine month periods ended September 30, 2000 and 2001 the
Company incurred a loss to common shareholders before consideration of the
income (loss) from discontinued operations. As a result, the potential dilutive
effect of stock options, stock warrants and convertible securities was not
calculated, because to do so would have been antidilutive for the periods
presented.
The exercise price of the Company's stock options and stock warrants varies
from $0.625 to $5.00 per share. The Company's convertible securities have
conversion prices that range from $0.75 to $2.75, or, in certain cases, are
based on a percentage of the market price for the Company's common stock.
Assuming that the exercise and conversions are made at the lowest price provided
under the terms of their agreements, the maximum number of potentially dilutive
securities at September 30, 2001 would include: (1) 7,813,030 common shares
issuable upon exercise of stock options, (2) 35,463,099 common shares issuable
upon exercise of stock purchase warrants, (3) 1,400,000 common shares issuable
upon conversion of senior convertible debt, and (4) 41,332,911 common shares
issuable upon conversion of convertible preferred stock. The actual number may
be substantially less depending on the market price of the Company's common
stock at the time of conversion. None of these shares were included in the
computation of earnings per share because to do so would have been antidilutive
for the periods presented.
11
G. FINANCING ARRANGEMENT
On June 18, 2001, the Company entered into an agreement with KBK Financial,
Inc. ("KBK") pursuant to which the Company pledged certain of its accounts
receivable to KBK for a cash advance against the pledged receivables. The
agreement allows the Company to, from time to time, pledge additional accounts
receivable to KBK in an aggregate amount not to exceed $5,000,000. The Company
paid certain fees to KBK for the facility and will pay additional fees of one
percent per annum on the unused portion of the facility and a termination fee of
up to two percent of the maximum amount of the facility. The facility provides
the Company an initial advance of eighty-five percent of the gross amount of
each receivable pledged to KBK. Upon collection of the receivable, the Company
receives an additional residual payment net of fixed and variable financing
charges. The Company's obligations for representations and warranties regarding
the accounts receivable pledged to KBK are secured by a first lien on certain
other accounts receivable of the Company. The facility also provides for
financial reporting and other covenants similar to those in favor of the senior
lender of the Company. The Company had $782,000 of its accounts receivable
pledged to KBK that remained uncollected as of September 30, 2001 and,
accordingly, this amount has been classified as a restricted asset on the
balance sheet as of that date. In addition, as of September 30, 2001, the
Company's cash balances include $330,000 representing accounts receivable that
had been collected by KBK and were in-transit to the Company but which were
potentially subject to being held as collateral by KBK pending collection of
uncollected pledged accounts receivable
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the decision to discontinue ITS and Baylor business operations.
The current segments are Prevention, Response and Restoration. Most of the
Company's subsidiaries operate in all three segments.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. The scope of these services include training, contingency planning,
well plan reviews, services associated with the Company's Safeguard programs and
service fees in conjunction with the WELLSURE(R) risk management program. All of
these services are designed to significantly reduce the risk of a well blowout
or other critical response event. Each of the Company's subsidiaries
contributes revenues to this segment with the majority of the contributions from
the Well Control and Risk Management divisions.
The Response segment consists of personnel and equipment services provided
during an emergency response such as a critical well event or a hazardous
material response. These services are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins. However, when the Company responds to a critical event under
the WELLSURE(R) program, the Company acts as a general contractor and engages
third party services, which form part of the revenues recognized by the Company.
This revenue contribution has the ability to significantly lower the overall
gross profit margins of the segment. Each of the Company's subsidiaries
contributes revenues to this segment.
The Restoration segment consists of "post-event" services designed to
minimize the effects of a critical emergency event as well as industrial and
remediation service. The scope of these services range from environmental
compliance and disposal services to facility decontamination services in the
event of a plant closing. Restoration services are a natural extension of
response service assignments. Each of the Company's subsidiaries contributes
revenues to this segment with the majority of the contributions from the Special
Services division.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto and the other
financial information included in this report and contained in the Company's
periodic reports previously filed with the Commission.
The Company completed the acquisitions of: Boots & Coots, L.P. as of July
31, 1997; ABASCO, Inc. as of September 25, 1997; ITS Supply Corporation as of
January 2, 1998; Boots & Coots Special Services, Inc. (formerly known as Code 3,
Inc.) as of February 20, 1998; Baylor Company as of July 23, 1998, and HAZ-TECH
Environmental Services, Inc. as of November 4, 1998. For all periods presented,
the operations of ITS and Baylor have been reclassified as discontinued
operations.
Business segment operating data from continuing operations is presented for
purposes of discussion and analysis of operating results. On January 1, 2001 the
Company redefined the segments that it operates in as a result of the decision
to discontinue the ITS and Baylor business operations. The current segments are
Prevention, Response and Restoration. Most of the Company's subsidiaries
operate in all three segments. Accordingly, business segments disclosures
included in this report reflect this classification for all periods presented.
14
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 2001 2000 2001
------------ ----------- ------------ ------------
Revenues
Prevention . . . . . . . . . . . . . . . . . . $ 371,000 $1,888,000 $ 1,825,000 $ 3,535,000
Response . . . . . . . . . . . . . . . . . . . 4,537,000 5,373,000 12,218,000 22,669,000
Restoration. . . . . . . . . . . . . . . . . . 723,000 1,233,000 3,560,000 3,339,000
------------ ----------- ------------ ------------
$ 5,631,000 $8,494,000 $17,603,000 $29,543,000
------------ ----------- ------------ ------------
Cost of Sales and Operating Expenses
Prevention . . . . . . . . . . . . . . . . . . $ 208,000 $1,248,000 $ 1,426,000 $ 2,163,000
Response . . . . . . . . . . . . . . . . . . . 4,185,000 4,006,000 10,040,000 15,987,000
Restoration. . . . . . . . . . . . . . . . . . 1,580,000 1,598,000 5,203,000 4,043,000
------------ ----------- ------------ ------------
$ 5,973,000 $6,852,000 $16,669,000 $22,193,000
------------ ----------- ------------ ------------
Selling, General and Administrative Expenses (1)
Prevention . . . . . . . . . . . . . . . . . . $ 182,000 $ 210,000 $ 483,000 $ 404,000
Response . . . . . . . . . . . . . . . . . . . 1,122,000 547,000 2,133,000 2,592,000
Restoration. . . . . . . . . . . . . . . . . . 248,000 133,000 621,000 382,000
------------ ----------- ------------ ------------
$ 1,552,000 $ 890,000 $ 3,237,000 $ 3,378,000
------------ ----------- ------------ ------------
Depreciation and Amortization (2)
Prevention . . . . . . . . . . . . . . . . . . $ 52,000 $ 120,000 $ 205,000 $ 219,000
Response . . . . . . . . . . . . . . . . . . . 531,000 306,000 1,375,000 1,141,000
Restoration. . . . . . . . . . . . . . . . . . 177,000 93,000 517,000 219,000
------------ ----------- ------------ ------------
$ 760,000 $ 519,000 $ 2,097,000 $ 1,579,000
------------ ----------- ------------ ------------
Operating Income (Loss)
Prevention . . . . . . . . . . . . . . . . . . $ (258,000) $ 310,000 $ (476,000) $ 749,000
Response . . . . . . . . . . . . . . . . . . . (2,550,000) 513,000 (2,579,000) 2,949,000
Restoration. . . . . . . . . . . . . . . . . . (1,646,000) (590,000) (3,145,000) (1,305,000)
------------ ----------- ------------ ------------
$(4,454,000) $ 233,000 $(6,200,000) $ 2,393,000
------------ ----------- ------------ ------------
(1) Corporate selling, general and administrative expenses have been
allocated pro rata among segments based upon relative revenues.
(2) Corporate depreciation and amortization expenses have been allocated
pro rata among segments based upon relative revenues.
Certain reclassifications have been made to the prior periods to conform to
the current presentation.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
Prevention revenues were $1,888,000 for the three months ended September
30, 2001, compared to $371,000 for the three months ended September 30, 2000, an
increase of $1,517,000 (409%) in the current period. This increase was
primarily the result of a higher activity level in the Venezuelan Safeguard
operation during the 2001 quarter and an increase in service fees derived from
the "WELLSURE" insurance program.
Response revenues were $5,373,000 for the three months ended September 30,
2001, compared to $4,537,000 for the three months ended September 30, 2000, an
increase of $836,000 (18.4%) in the current period. The increase was primarily
the result of the Company acting as lead contractor on two critical well control
events during the quarter.
Restoration revenues were $1,233,000 for the three months ended September
30, 2001, compared to $723,000 for the three months ended September 30, 2000,
representing an increase of $510,000 (70.5%) in the current period. Improving
liquidity supported Restoration revenues and the Company's relationships with
third party vendors. The Company's ability to expand its services through the
addition of third party vendors led to a revenue increase in the "high tech"
industrial services market.
COST OF SALES AND OPERATING EXPENSES
Prevention cost of sales and operating expenses were $1,248,000 for the
three months ended September 30, 2001, compared to $208,000 for the three months
ended September 30, 2000, an increase of $1,040,000 (500%). The increase is
primarily the result of higher activity in the Venezuela Safeguard operation as
discussed above.
Response cost of sales and operating expenses were $4,006,000 for the three
months ended September 30, 2001, compared to $4,185,000 for the three months
ended September 30, 2000, a decrease of $179,000 (4.3%) for the current period.
The decrease is the result of decreased activity from a lower utilization of
third party subcontractors under the Company's previously described lead
14
contracting role associated with two WELLSURE critical well events and improved
operating margins in the Special Services division.
Restoration cost of sales and operating expenses were $1,598,000 for the
three months ended September 30, 2001, compared to $1,580,000 for the three
months ended September 30, 2000, an increase of $18,000 (1.1%) for the current
period. This increase is primarily due to increased third party costs
associated with "high tech" industrial services described in the Restoration
Revenue discussion above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were $890,000 for
the three months ended September 30, 2001 compared to $1,552,000 for the three
months ended September 30, 2000, a decrease of $662,000 (42.7%) for the current
period. This decrease was the result of financing and consulting costs of
$797,000 that were included in the prior year quarter. As previously footnoted
on the segmented financial table, Corporate selling, general and administrative
expenses have been allocated pro rata among the segments using relative revenue
as the basis for allocation.
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between the current
period and the prior period. As previously footnoted on the segmented financial
table, Depreciation and Amortization expenses have been allocated pro rata among
the segments using relative revenue as the basis for allocation.
INTEREST AND OTHER EXPENSES
The decrease in other expenses (income) to ($10,000) for the three months
ended September 30, 2001 as compared to $3,593,000 for the three months ended
September 30, 2000 was the result of the restructuring of the majority of the
Company's senior and subordinated debt with equity. The quarter ended September
30, 2000 included a charge of $1,268,000 related to legal settlements and other
financial costs.
INCOME TAX EXPENSE
Income taxes for the three months ended September 30, 2001 are a result of
taxable income in the Company's foreign operations.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
Prevention revenues were $3,535,000 for the nine months ended September 30,
2001, compared to $1,825,000 for the nine months ended September 30, 2000,
representing an increase of $1,710,000 (93.7%) in the current period. This was
primarily the result of the successful expansion of this segment through
strategic engineering initiatives which include training, contingency planning
and well plan reviews for new and existing domestic and foreign customers as
well as new revenues associated with the Safeguard and "WELLSURE" programs.
Response revenues were $22,669,000 for the nine months ended September 30,
2001, compared to $12,218,000 for the nine months ended September 30, 2000, an
increase of $10,451,000 (85.5%) in the current period. The principal component
of the increase was a result of the success of the risk management product
"WELLSURE". Under the "WELLSURE" program, the Company acted as lead contractor
on five critical well control events during the first nine months of 2001.
Restoration revenues were $3,339,000 for the nine months ended September
30, 2001, compared to $3,560,000 for the nine months ended September 30, 2000,
representing a decrease of $221,000 (6.2%) in the current period. The decrease
was primarily attributable to $231,000 in reduced sales at Abasco due to a
continuing decline in international direct sales efforts and support.
COST OF SALES AND OPERATING EXPENSES
Prevention cost of sales and operating expenses were $2,163,000 for the
nine months ended September 30, 2001, compared to $1,426,000 for the nine months
ended September 30, 2000, an increase of $737,000 (51.7%) in the current period.
15
The increase was due to the reallocation of resources from the Response segment
to the Prevention segment due to the large increase in activity in the
Prevention segment during this period
Response cost of sales and operating expenses were $15,987,000 for the nine
months ended September 30, 2001, compared to $10,040,000 for the nine months
ended September 30, 2000, an increase of $5,947,000 (59.2%) in the current
period. The increase was a result of increased activity and related third party
costs under the Company's previously described lead contracting role associated
with five WELLSURE critical well events.
Restoration cost of sales and operating expenses were $4,043,000 for the
nine months ended September 30, 2001, compared to $5,203,000 for the nine months
ended September 30, 2000, a decrease of $1,160,000 (22.3%) in the current
period. This decrease was primarily due to the absence of costs associated with
the large international project that occurred during the first nine months of
2000 and reduced operating expenses at Abasco due to the decision to outsource
the manufacturing of Abasco products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were materially
unchanged during the nine months ended September 30, 2001 compared to the prior
period. The nine months ended September 30, 2000 included financing and
consulting costs of $797,000, partially offset by additions in administrative
and accounting staffing and systems, and in support of business development and
sales initiatives. As previously footnoted on the segmented financial table,
Corporate selling, general and administrative expenses have been allocated pro
rata among the segments using relative revenue as the basis for allocation.
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between the current
period and the prior period. As previously footnoted on the segmented financial
table, Depreciation and Amortization expenses have been allocated pro rata among
the segments using relative revenue as the basis for allocation.
INTEREST AND OTHER EXPENSES
The decrease in interest and other expenses to $707,000 for the nine months
ended September 30, 2001 as compared to $9,652,000 of expense in the prior year
period is a result of the restructuring of the majority of the Company's senior
and subordinated debt into equity. The nine months ended September 30, 2000
also included a $1,679,000 non-cash financing charge for an inducement to
convert certain preferred stock into common stock, $942,000 of expenses related
to warrants issued to the participation interest and advisory services
associated therewith and charges of $598,000 related to the Comerica debt.
Other expense for the prior period also includes approximately $1,268,000 in
legal settlements and other financing related costs.
INCOME TAX EXPENSE
Income taxes for the nine months ended September 30, 2001 are a result of
taxable income in the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The Company receives the majority of its revenues from customers in the
energy industry. Demand for the Company's products and services is impacted by
the number and size of projects available, which fluctuate as changes in oil and
gas prices affect customers' exploration and production activities, forecasts
and budgets. These fluctuations have a significant effect on the Company's cash
flows.
Recent activity levels in the oil and gas sector have increased the
frequency of high-risk response work. However, the Company's well control
business has only recently begun to benefit to a meaningful degree from an
increase in the volume of critical events. In the past, the well control
business has provided the Company with the opportunity for profitable operating
activities, but the timing of critical events is unpredictable. Consequently,
the Company's financial performance has been, and continues to be, subject to
significant fluctuations.
The relatively low incidences of critical events over the last two years
have negatively affected the Company's financial position. In response,
commencing in 1999 and continuing into 2001, the Company (a) downsized
personnel, (b) improved its working capital, (c) closed and/or consolidated
16
certain field offices, (d) consolidated administrative functions, and (e)
discontinued certain business lines to ensure that the Company's resources were
deployed in its most profitable operations. The Company's initial efforts to
rationalize its operations were not sufficient to prevent significant operating
losses in 1999 and 2000. During the first nine months of 2001, the result of
these efforts was fully in place and, in combination with an increase in
operating activity, contributed to a positive net income before preferred stock
dividends during the period.
The prior years' operating losses resulted in an impairment of the
Company's liquidity and an inability to pay certain vendors in a timely manner.
This hampered the Company's capacity to hire sub-contractors, obtain materials
and supplies, and otherwise conduct effective or efficient operations. To
address the Company's liquidity problems and to improve its overall capital
structure, the Company initiated and completed a program in 2000 to raise new
funds, sell assets of certain subsidiaries, retire the Company's existing senior
debt, restructure its subordinated debt and increase its shareholders' equity.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests in its senior
secured credit facility with Comerica Bank-Texas. In connection with this
financing, the Company issued 147,058 shares of common stock and warrants
representing the right to purchase an aggregate of 8,729,985 shares of common
stock of the Company to the participation interest holders and warrants to
purchase an aggregate of 3,625,000 shares of common stock to the investment
group that arranged the financing. The warrants have a term of five years and
can be exercised by the payment of cash in the amount of $0.625 per share as to
8,729,985 shares and $0.75 per share as to 3,625,000 shares of common stock, or
by relinquishing a number of shares subject to the warrant with a market value
equal to the aggregate exercise price of the portion of the warrant being
exercised. On December 28, 2000, $7,729,985 of the participation interest, plus
$757,315 in accrued interest thereon, was exchanged for 89,117 shares of Series
H Cumulative Senior Preferred Stock in the Company. The remaining $1,000,000 of
the participation interest was outstanding as senior secured debt as of
September 30, 2001.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica
Bank-Texas, the Company's primary senior secured lender at that time, was paid
in full as a component of the transaction. Specialty Finance Fund I, LLC, as a
participant in the Comerica senior facility, remains as the senior secured
lender.
On October 24, 2000, the Company announced that it had reached an agreement
in principle with Prudential Insurance Company of America, in the form of a
letter of intent, regarding the restructuring of the Company's subordinated debt
with Prudential. The Company had been in default under its subordinated note
agreement with Prudential since the second quarter of 1999. A restructuring
agreement was executed by both parties on December 28, 2000. The Prudential
restructuring agreement provided that the aggregate indebtedness due to
Prudential be resolved by the Company: (i) paying $12,000,000 cash at closing,
(ii) establishing $7,200,000 of new subordinated debt, (iii) issuing $5,000,000
face value of Series E Cumulative Senior Preferred Stock ($2,850,000 fair
value) and (iv) issuing $8,000,000 face value of Series G Cumulative Convertible
Preferred Stock ($2,600,000 fair value). In addition, $500,000 is contingently
payable upon the Company securing a new credit facility of commercial financing
arrangement. All interest payments and dividends are paid in kind and deferred
for two years from the date of closing. Additionally, as a component of the
transaction, Prudential received newly issued warrants to purchase 8,800,000
shares of the Company's common stock for $0.625 per share and the Company agreed
to re-price the existing common stock purchase warrants to purchase 3,165,000
currently held by Prudential to $0.625 per share. The Company has the right,
through January 2, 2002, to repurchase, at a discount to face value, all of the
debt and stock issued to Prudential.
The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 15. As a result of the application of this
accounting standard, the total indebtedness due to Prudential, inclusive of
accrued interest, was reduced by the cash and fair market value of securities
issued by the Company, and the residual balance of the indebtedness was recorded
as the new carrying value of the subordinated note due to Prudential.
Consequently, the $7,200,000 face value of the subordinated note is recorded on
the Company's balance sheet at $11,520,000. The additional carrying value of the
debt in excess of face value represents the accrual of future interest expense
due on the face value of the subordinated note to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain in the year ended
December 31, 2000.
The financing obtained during 2000 from Specialty Finance Fund I, LLC, and
the restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common shareholders. This could
adversely affect the market price for the Company's common stock and limit the
price at which new stock can be issued for future capital requirements.
17
During the nine months ended September 30, 2001, the Company generated a
net cash deficit from operating activities of $1,403,000 and the Company
utilized net cash of $144,000 in investing activities. Overall, the Company's
net cash position decreased by $882,000 during the period. At September 30,
2001, the Company had a cash balance of $534,000 (see Part 1, Item 1,
Consolidated Statement of Cash Flows).
As of September 30, 2001, the Company's current assets totaled
approximately $10,489,000 and current liabilities were $10,702,000, resulting in
a working capital deficit of approximately $213,000. The Company's highly liquid
current assets, represented by cash of $534,000 and receivables of $7,509,000
were collectively $2,659,000 less than the amount of current liabilities. The
Company is actively exploring new sources of financing, including the
establishment of new credit facilities and the issuance of debt and/or equity
securities. Additionally, the Company continues to pursue methods to expand its
business activities and enhance its operating cash flow. However, absent new
sources of financing, or if the Company does not significantly improve its
operating performance, the Company may not have sufficient funds to meet its
current obligations over the next twelve months and could be forced to dispose
of additional assets or operations outside of the normal course of business in
order to satisfy future liquidity requirements.
The accompanying condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. However,
the uncertainties surrounding the sufficiency of its future cash flows and the
lack of firm commitments for additional capital raises substantial doubt about
the ability of the Company to continue as a going concern. The accompanying
condensed financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ from those projected in any forward-looking
statements for the reasons detailed in this report. The forward-looking
statements contained herein are made as of the date of this report and the
Company assumes no obligation to update such forward-looking statements, or to
update the reasons why actual results could differ from those projected in such
forward-looking statements. Investors should consult the information set forth
from time to time in the Company's reports on Forms 10-K, 10-Q and 8-K, and its
Annual Report to Stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, notes and capital leases payable, and
debt obligations. The book value of cash and cash equivalents, accounts
receivable, accounts payable and short-term notes payable are considered to be
representative of fair value because of the short maturity of these instruments.
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical ten-percent increase in market interest rates.
Market rate volatility is dependent on many factors that are impossible to
forecast, and actual interest rate increases could be more severe than the
hypothetical ten-percent increase.
The Company estimates that if prevailing market interest rates had been ten
percent higher for the three and nine months ended September 30, 2000 and
September 30, 2001, and all other factors affecting the Company's debt remained
the same, pretax earnings would have been lower by approximately $92,000,
$122,000, $4,000 and $13,000, respectively. With respect to the fair value of
the Company's fixed-interest rate debt, if prevailing market interest rates had
been ten percent higher at year-end 1998, 1999 and 2000, and all other factors
affecting the Company's debt remained the same, the fair value of the Company's
fixed-rate debt, as determined on a present-value basis, would have been lower
by approximately $247,000 and $212,000 at December 31, 2000 and September 30,
2001, respectively. Given the composition of the Company's debt structure, the
Company does not, for the most part, actively manage its interest rate risk.
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates to the extent that transactions are
not denominated in U.S. dollars. The Company typically denominates its contracts
in U.S. dollars to mitigate the exposure to fluctuations in foreign currencies.
18
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Additionally, the
Company's liquidity problems have adversely impacted the Company's ability to
pay certain vendors on a timely basis. As a consequence, a number of these
vendors filed lawsuits against the Company and some have obtained judgments for
the amount of their claims, plus costs. The Company has retained a third party
to negotiate settlements of some of these claims and is actively engaged in
defending or resolving others. The Company expects that it will be able to
resolve these claims in an orderly fashion and does not believe that these suits
or judgments or any liabilities resulting from any such current proceedings will
have a material adverse effect on its operations or financial position.
However, the Company's business, financial performance and prospects could be
adversely affected if it is unable to adequately defend, pay or settle its
accounts, including as a consequence of efforts to enforce existing or future
judgments.
As previously discussed the Company's subsidiary ITS Supply Corporation
("ITS") filed in Corpus Christi, Texas for protection under Chapter 11 of the
U.S. Bankruptcy Code. ITS is now proceeding to liquidate its assets and
liabilities pursuant to Chapter 7 of Title 11. At the time of the filing, ITS
had total liabilities of approximately $6,900,000 and tangible assets of
approximately $950,000. The Company had an outstanding guaranty on ITS debt upon
which a judgment against the Company was entered by a state district court in
the amount of approximately $1,833,000. The judgment was paid in full by the
Company on August 31, 2001.
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of (1) all lockbox transfers that occurred between ITS and Comerica
Bank, et al. and (2) all intercompany transfers between ITS and the Company or
subsidiaries of the Company. The Chapter 7 Trustee seeks an accounting to
determine if any of the transfers between the parties are avoidable under either
Federal or State of Texas statutes and seeks repayment to ITS of all such
amounts. The Trustee believes that approximately $400,000 of lockbox transfers
and $3,000,000 of intercompany transfers were made between the parties. The
Company has been advised by bankruptcy counsel that it does not believe it is
probable that an accounting of the transactions between the parties will
demonstrate there is a liability owing by the Company to the ITS Chapter 7
estate. To provide security to Comerica Bank for any potential claims by the
Chapter 7 trustee, the Company has pledged $350,000 in the form of a certificate
of deposit in favor of Comerica Bank. This amount has been classified as a
restricted asset on the balance sheet as of September 30, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Document
---------- ---------------------------------------------------------------
3.01 - Amended and Restated Certificate of Incorporation (1)
3.02 - Amendment to Certificate of Incorporation (2)
*3.02(a) - Amendment to Certificate of Incorporation
3.03 - Amended Bylaws (3)
4.01 - Specimen Certificate for the Registrant's Common
Stock (4)
4.02 - Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock (5)
4.03 - Certificate of Designation of Series A Cumulative Senior
Preferred Stock (6)
4.04 - Certificate of Designation of Series B Convertible Preferred
Stock (7)
4.05 - Certificate of Designation of Series C Cumulative Convertible
Junior Preferred Stock (8)
4.06 - Certificate of Designation of Series D Cumulative Junior
Preferred Stock (9)
4.07 - Certificate of Designation of Series E Cumulative Senior
Preferred Stock
4.08 - Certificate of Designation of Series F Convertible Senior
Preferred Stock
4.09 - Certificate of Designation of Series G Cumulative
Convertible Preferred Stock
4.10 - Certificate of Designation of Series H Cumulative Convertible
Preferred Stock
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company (10)
10.02 - Executive Employment Agreement of Larry H. Ramming (11)
10.03 - Executive Employment Agreement of Brian Krause (12)
10.04 - 1997 Incentive Stock Plan (13)
10.05 - Outside Directors' Option Plan (14)
10.06 - Executive Compensation Plan (15)
10.07 - Halliburton Center Sublease (16)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America (17)
10.09 - Participation Rights Agreement dated July 23, 1998, by
and among Boots & Coots International Well Control, Inc.,
The Prudential Insurance Company of America and certain
stockholders of Boots & Coots International Well Control,
Inc. (18)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued to
The Prudential Insurance Company of America(19)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank - Texas (20)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica
Bank - Texas (21)
10.13 - Executive Employment Agreement of Jerry Winchester (22)
10.14 - Executive Employment Agreement of Dewitt Edwards (23)
10.15 - Office Lease for 777 Post Oak (24)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000 (25)
10.19 - Fourth Amendment to Loan Agreement dated May 31, 2000 (26)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000 (27)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000 (28)
10.22 - Seventh Amendment to Loan Agreement dated December 29,2000 (29)
10.23 - Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated December 28, 2000
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April 15,
1999, with Halliburton Energy Services, Inc. (30)
10.26 - Letter of Engagement, dated April 10, 2000, with Maroon Bells
(31)
20
Exhibit No. Document
---------- ---------------------------------------------------------------
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and to
Turner, Volker, Moore (32)
10.28 - Amended and Restated Purchase and Sale Agreement with National
Oil Well, L.P.(33)
21.01 - List of subsidiaries (34)
*Filed herewith
(1) Incorporated herein by reference to exhibit 3.2 of Form 8-K filed August
13, 1997.
(2) Incorporated herein by reference to exhibit 3.3 of Form 8-K filed August
13, 1997.
(3) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August
13, 1997.
(4) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August
13, 1997.
(5) Incorporated herein by reference to exhibit 4.06 of Form 10-QSB filed
May 19, 1998.
(6) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July
17, 2000.
(7) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July
17, 2000.
(8) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.
(9) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.
(10) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed
August 13, 1997.
(11) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed
August 12, 1999.
(12) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed
August 13, 1997.
(13) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.
(14) Incorporated herein by reference to exhibit 10.15 of Form 10-KSB filed
March 31, 1998.
(15) Incorporated herein by reference to exhibit 10.16 of Form 10-KSB filed
March 31, 1998.
(16) Incorporated herein by reference to exhibit 10.17 of Form 8-K filed
March 31, 1998.
(17) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed
August 7, 1998.
(18) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed
August 7, 1998.
(19) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed
August 7, 1998.
(20) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 16, 1998.
(21) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 16, 1998.
(22) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed
April 15, 1999.
(23) Incorporated herein by reference to exhibit 10.30 of Form 10-K filed
April 15, 1999.
(24) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed
July 17, 2000.
21
(25) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed
July 17, 2000.
(26) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed
July 17, 2000.
(27) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed
July 17, 2000.
(28) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed
July 17, 2000.
(29) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed
January 12, 2001.
(30) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed
July 17, 2000.
(31) Incorporated herein by reference to exhibit 10.43 of Form 10-K filed
July 17, 2000.
(32) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.
(33) Incorporated herein by reference to exhibit 2 of Form 8-K filed October
10, 2000.
(34) Incorporated herein by reference to exhibit 21.01 of Form 10-K filed
April 15, 1999.
(b) Reports on Form 8-K
None
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ LARRY H. RAMMING
--------------------------------------------
Larry H. Ramming
Chief Executive Officer
(Principal Financial and Accounting Officer)
Date: November 13, 2001
23