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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002
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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 May 10, 2002, was 41,575,619.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
(UNAUDITED)
PAGE
-----
Item 1. Financial Information. . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations. . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity. . . . 5
Condensed Consolidated Statements of Cash Flows. . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 11-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . 17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . 18
Item 4. Submissions of Matters to a Vote of Security Holders . . . . . . 18
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18-20
2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
2001 2002
-------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,000 $ 773,000
Receivables - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,194,000 4,794,000
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,739,000 1,817,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421,000 800,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 843,000 533,000
-------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . 9,506,000 8,717,000
-------------- -------------
PROPERTY AND EQUIPMENT - net. . . . . . . . . . . . . . . . . . . . . . . . . 6,212,000 5,772,000
OTHER ASSETS:
Goodwill - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,000 1,845,000
Deposits and other - net. . . . . . . . . . . . . . . . . . . . . . . . . . 191,000 163,000
-------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 17,754,000 $ 16,497,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable. $ 2,203,000 $ 1,708,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,863,000 4,435,000
Accrued liabilities and customer advances . . . . . . . . . . . . . . . . . 4,599,000 4,076,000
-------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . 9,665,000 10,219,000
-------------- -------------
LONG-TERM DEBT AND NOTES PAYABLE - net of current
maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,520,000 12,520,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . 22,185,000 22,739,000
-------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
327,123 and 327,876 shares issued and outstanding
at December 31, 2001 and March 31, 2002, respectively) . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized,
41,442,285 and 41,442,285 shares issued and outstanding
at December 31, 2001 and March 31, 2002, respectively) . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 56,659,000 57,508,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,090,000) (63,750,000)
-------------- -------------
Total stockholders' equity (deficit). . . . . . . . . . . . (4,431,000) (6,242,000)
-------------- -------------
Total liabilities and stockholders' equity (deficit). . . . $ 17,754,000 $ 16,497,000
============== =============
See accompanying notes to condensed consolidated financial statements.
3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2002
------------ ------------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,973,000 $ 6,700,000
COSTS AND EXPENSES:
Cost of sales and operating . . . . . . . . . . . . . . . . . 6,756,000 6,909,000
Selling, general and administrative . . . . . . . . . . . . . 1,244,000 966,000
Depreciation and amortization . . . . . . . . . . . . . . . . 529,000 460,000
------------ ------------
8,529,000 8,335,000
------------ ------------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . 444,000 (1,635,000)
INTEREST EXPENSE (INCOME) AND OTHER . . . . . . . . . . . . . . (23,000) 180,000
------------ ------------
INCOME FROM DISCONTINUED OPERATIONS, before income taxes. . . . 467,000 (1,815,000)
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . . . . . . - 15,000
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . . . . . . 467,000 (1,830,000)
INCOME FROM DISCONTINUED OPERATIONS, net of income taxes. . . . 300,000 -
------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . 767,000 (1,830,000)
PREFERRED DIVIDEND REQUIREMENTS & ACCRETIONS. . . . . . . . . . 734,000 830,000
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS . . . . . $ 33,000 $(2,660,000)
============ ============
Basic and Diluted Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . . . . . . $ (0.01) $ (0.06)
============ ============
Discontinued Operations. . . . . . . . . . . . . . . . . . . $ 0.01 $ 0.00
============ ============
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.06)
============ ============
Weighted Average Common Shares Outstanding - Basic and Diluted. 37,564,000 41,442,285
============ ============
See accompanying notes to condensed consolidated financial statements.
4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
---------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------- ---------- ------- ----------- ------------- -------------
BALANCES, December 31, 2001 327,123 $ - 41,442,285 $ - $56,659,000 $(61,090,000) $ (4,431,000)
Warrant discount
accretion . . . . . . . - - - - 13,000 (13,000)
Preferred stock
dividends accrued. . . . 565 - - - 817,000 (817,000) -
Preferred stock issued for
settlements. . . . . . . 188 - - - 19,000 - 19,000
Net loss . . . . . . . . . - - - - - (1,830,000) (1,830,000)
------- ------- ---------- ------- ----------- ------------- -------------
BALANCES, March 31, 2002 327,876 $ - 41,442,285 $ - $57,508,000 $(63,750,000) $ (6,242,000)
======= ======= ========== ======= =========== ============= =============
See accompanying notes to condensed consolidated financial statements.
5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 767,000 $(1,830,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 529,000 460,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . 99,000 15,000
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . - 29,000
Equity issued for services and settlements . . . . . . . . . . 54,000 -
------------ ------------
Net cash provided by (used in) operating activities before
changes in operating assets and liabilities:. . . . . . . . 1,449,000 (1,326,000)
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . (166,000) 385,000
Restricted Assets. . . . . . . . . . . . . . . . . . . . . . . - 922,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 (379,000)
Prepaid expenses and other current assets. . . . . . . . . . . 209,000 310,000
Deferred financing costs and other assets. . . . . . . . . . . (27,000) 28,000
Accounts payable and accrued liabilities . . . . . . . . . . . (1,694,000) 1,068,000
------------ ------------
Net cash provided by (used in) operating activities. . . . . . (167,000) 1,008,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . (54,000) (52,000)
Proceeds from sale of property and equipment . . . . . . . . . - 3,000
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . (54,000) (49,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under financing arrangements. . . . . . . . . . . . - (495,000)
------------ ------------
Net cash used in financing activities. . . . . . . . . . . . . - (495,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . . (221,000) 464,000
CASH AND CASH EQUIVALENTS, Beginning of Period. . . . . . . . . . . 1,416,000 309,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of Period. . . . . . . . . . . . . . $ 1,195,000 $ 773,000
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . $ 6,000 $ 94,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock and warrant accretions . . . . . . . . . . . . . . . . . 13,000 13,000
Preferred stock dividends accrued. . . . . . . . . . . . . . . 721,000 817,000
Preferred stock issued for settlement. . . . . . . . . . . . . - 19,000
See accompanying notes to condensed consolidated financial statements.
6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
A. GOING CONCERN
The Company incurred losses from continuing operations of $26.5 million in
1999 and $ 22.7 million in 2000. In response, the Company reduced its
personnel, consolidated its field offices, sold assets, discontinued certain
operations, repaid senior debt and restructured its subordinated debt. With
these changes in effect, on January 1, 2001, the Company redefined its operating
segments to emphasize prevention and restoration services to augment its
traditional emergency response activities.
During the year ended December 31, 2001, the Company acted as lead response
contractor on five critical well events and generated $0.9 million of income
from continuing operations; however, the Company continued to be adversely
impacted from insufficient liquidity and capital resources.
During the first quarter of 2002, demand for the Company's emergency
response services declined as overall industry conditions continued to weaken.
Moreover, the Company had no major critical well events during the period. As a
result, the Company incurred a $1.8 million loss from continuing operations for
the quarter. This loss further impairs the Company's liquidity position and its
ability to pay certain vendors in a timely manner, including vendors that the
Company considers important to its ongoing operations. This reduced liquidity
hampers the Company's capacity to hire sub-contractors, obtain materials and
supplies, and otherwise conduct effective or efficient operations.
The Company continues to experience severe working capital constraints. As
of March 31, 2002, the Company's current assets totaled approximately $8,717,000
and current liabilities were $10,219,000, resulting in a net working capital
deficit of approximately $1,502,000 (compared to a beginning year deficit of
$159,000). The Company's highly liquid current assets, represented by cash of
$773,000 and receivables and restricted assets of $6,611,000 were collectively
$2,835,000 less than the amount of current liabilities at March 31, 2002
(compared to a beginning year deficit of $1,423,000). 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. During April and
May 2002, the Company entered into loan participation agreements with certain
parties under which it borrowed an additional $1,000,000 under the Senior
Secured Loan Facility. The participation agreements have an initial maturity of
90 days, which may be extended for an additional 90 days at the Company's
option. The new borrowings are not sufficient to meet the Company's current
working capital requirements. Absent new near-term sources of financing or the
generation of significant operating income, the Company will not have sufficient
funds to meet its immediate obligations and will be forced to dispose of
additional assets or operations outside of the normal course of business in
order to satisfy its liquidity requirements.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing 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 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 consolidated financial statements include
all adjustments, including normal recurring accruals, which, in the opinion of
management, are necessary in order to make the consolidated financial statements
not be misleading. The unaudited consolidated financial statements and notes
thereto and the other financial information contained in this report should be
read in conjunction with the audited financial statements and notes in the
Company's annual report on Form 10-K for the year ended December 31, 2001, and
those reports filed previously with the Securities and Exchange Commission
("SEC"). The results of operations for the three-month periods ended March 31,
2001 and 2002 are not necessarily indicative of the results to be expected for
the full year.
7
C. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 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 No. 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 No. 142 were effective January 1, 2002. Management estimates that the
adoption of SFAS No. 142's requirement to not amortize goodwill will increase
operating income by approximately $59,000 in 2002. Management is currently
evaluating the effect that adoption of the other provisions of SFAS No. 142 that
are effective January 1, 2002 will have on its results of operations and
financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" 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 FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS 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. Estimates 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. The Company's adoption of SFAS No. 144, on January 1, 2002 did not
have a material impact on the Company's consolidated financial position or
results of operations.
D. INVENTORIES
Inventories consisted of the following as of:
DECEMBER 31, MARCH 31,
2001 2002
------------- -----------
(unaudited)
Work in process. . . . . . $ 138,000 $ 520,000
Finished goods . . . . . . 283,000 280,000
------------- -----------
Total. . . . . . . $ 421,000 $ 800,000
============= ===========
E. DISCONTINUED OPERATIONS
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. For the three months ended March 31,
2001, the Company recorded $300,000 of gain due to the subsequent collection of
receivables that were over 90 days old at the time of the sale.
F. LONG-TERM DEBT AND NOTES PAYABLE AND OTHER FINANCINGS
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America contains customary affirmative and
negative covenants, including that the Company not permit the ratio of its total
debt to earnings before interest, taxes and depreciation and amortization
(EBITDA) for the trailing twelve months to be greater than 3.25 to 1 or the
ratio of its EBITDA to consolidated interest expense to be less than 2.9 to 1.
On March 29, 2002, Prudential agreed to waive compliance with the ratio tests
for the twelve months ended March 31, 2002. Significant improvements in the
Company's operating performance during the current quarter, or a modification or
8
waiver of the ratio tests, will be required for the Company to regain compliance
for the twelve months ended June 30, 2002. The Company does not have a
commitment from Prudential that it will modify or waive compliance with these
tests in the future.
Prudential also agreed to modifications to the Subordinated Note
Restructuring Agreement to accommodate up to $5 million in borrowings under the
KBK facility and an aggregate of $6 million under the Company's existing senior
credit facility or a new senior credit facility. The Company has agreed to pay
Prudential a fee of $100,000 in connection with the waiver of financial
covenants required with the recent participations in the existing credit
facility. This amount has been charged to interest expense for the three months
ended March 31, 2002 (as discussed in NOTE J).
G. COMMITMENTS AND CONTINGENCIES
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 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 all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserts that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. The bankruptcy court has
scheduled a hearing on July 29, 2002.
The Company does not believe it is likely 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. However, there is no assurance that the
Company will not be found liable. To provide security to Comerica Bank for any
potential claims by the Chapter 7 trustee, the Company has pledged a $350,000
certificate of deposit in favor of Comerica Bank. This amount has been
classified as a restricted asset on the balance sheet as of December 31, 2001
and March 31, 2002.
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
H. EARNINGS PER SHARE
For the three months ended March 31, 2001 and 2002 the Company incurred a
loss to common stockholders before consideration of the income from discontinued
operations. As a result, the potential dilutive effect of stock options, stock
warrants and convertible securities was not included in the calculation of basic
or diluted earnings per share because to do so would have been antidilutive for
the periods presented.
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. 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 for the three months ended March 31, 2001 would include: (1)
7,913,000 common shares issuable upon exercise of stock options, (2) 35,048,000
common shares issuable upon exercise of stock purchase warrants, (3) 1,680,000
common shares issuable upon conversion of senior convertible debt, and (4)
25,508,000 common shares issuable upon conversion of convertible preferred
stock.
At March 31, 2002, the exercise price of the Company's stock options and
stock warrants varies from $0.43 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 for the three months ended March 31, 2002 would include: (1)
7,843,000 common shares issuable upon exercise of stock options, (2) 35,471,000
common shares issuable upon exercise of stock purchase warrants, (3) 1,333,000
9
common shares issuable upon conversion of senior convertible debt, and (4)
38,338,000 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.
I. BUSINESS SEGMENT INFORMATION
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the discontinued ITS and Baylor business operations. The current
segments are Prevention, Response and Restoration. Most of the Company's
subsidiaries operate in all three segments. 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.
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.
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 service providers, 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.
The Restoration segment consists of "post-event" services designed to
minimize the effects of a critical emergency event, as well as industrial and
remediation services. 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.
Information concerning operations in different business segments for the
three-months ended March 31, 2001 and 2002 is presented below. General and
corporate are included in the calculation of identifiable assets and are
included in the Response and Restoration business segment and the domestic
segment.
PREVENTION RESPONSE RESTORATION CONSOLIDATED
----------- ------------ ------------- --------------
Three months Ended March 31, 2001:
Net Operating Revenues. . . . . . $ 1,150,000 $ 6,995,000 $ 828,000 $ 8,973,000
Operating Income (Loss) . . . . . 576,000 101,000 (233,000) 444,000
Identifiable Operating Assets . . 2,211,000 13,450,000 1,592,000 17,253,000
Capital Expenditures. . . . . . . 4,000 47,000 3,000 54,000
Depreciation and Amortization . . 56,000 396,000 77,000 529,000
Interest Expense. . . . . . . . . 6,000 37,000 4,000 47,000
Three months Ended March 31, 2002:
Net Operating Revenues. . . . . . $ 2,035,000 $ 4,101,000 $ 564,000 $ 6,700,000
Operating Income (Loss) . . . . . 216,000 (1,074,000) (777,000) (1,635,000)
Identifiable Operating Assets . . 5,011,000 10,098,000 1,388,000 16,497,000
Capital Expenditures. . . . . . . - 52,000 - 52,000
Depreciation and Amortization . . 137,000 269,000 54,000 460,000
Interest Expense. . . . . . . . . 63,000 128,000 18,000 209,000
For the three-month periods ended March 31, 2002 and 2001, the Company's
revenue mix between domestic and foreign sales were substantially consistent
with those for the year ended December 31, 2001 (domestic 82%, foreign 18%).
J. SUBSEQUENT EVENTS
On April 9, 2002, the Company entered into a loan participation agreement
with certain parties under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation has an initial
10
maturity of 90 days, which may be extended for an additional 90 days at the
Company's option. The Company will be required to issue an additional 100,000
shares of common stock to the participation lender if it exercises this right to
extend the maturity.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that it issued 33,334 shares of common stock
and will be required to issue an additional 33,334 shares of common stock if it
exercises its right to extend the maturity of that note for an additional 90
days. The Company has amended the Senior Secured Loan Facility to reflect these
additional participations in the facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
OVERVIEW
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the discontinued ITS and Baylor business operations. The current
segments are Prevention, Response and Restoration. Most of the Company's
subsidiaries operate in all three segments. 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, selling, general and administrative
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. Baylor
is presented as a discontinued operation in the consolidated financial
statements and therefore is excluded from the segment information for all
periods.
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. 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.
The Response segment consists of personnel and equipment services provided
during an emergency, such as a critical well event or a hazardous material
response. The services provided 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 service providers, which form part of the revenues recognized by the
Company. WELLSURE(R) responses therefore have the ability to significantly
increase revenues while lowering the overall gross profit margins of the
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 services. The services provided 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.
AMERICAN STOCK EXCHANGE LISTING
The American Stock Exchange (AMEX) by letter dated March 15, 2002, required
the Company to submit a reasonable plan to regain compliance with AMEX's
continued listing standards by December 31, 2002. On April 15, 2002, the
Company submitted a plan that included interim milestones which the Company will
be required to meet to remain listed. If the Company fails to obtain compliance
with AMEX continued listing standards by December 31, 2002, as reflected in its
audited financial statements for the year then ended, then AMEX has indicated
that it may institute immediate delisting proceedings.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial resources, or whose financial condition has become so impaired, that
it appears questionable, in the opinion of AMEX, as to whether the company will
be able to continue operations or meet its obligations as they mature. The
Company's plan, as submitted, meets AMEX requirements.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified its most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
11
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
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
service providers, which form part of the revenues recognized by the Company.
WELLSURE(R) responses therefore have the ability to significantly increase
revenues while lowering the overall gross profit margins of the company.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to SFAS No.
109 "Accounting For Income Taxes," which requires recognition of deferred income
tax liabilities and assets for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
Deferred income tax liabilities and assets are determined based on the temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and available tax carry forwards.
12
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the unaudited 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 SEC.
Information concerning operations in different business segments for the
three months ended March 31, 2001 and 2002 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2002
----------- ------------
REVENUES
Prevention. . . . . . . . . . . . . $1,150,000 $ 2,035,000
Response. . . . . . . . . . . . . . 6,995,000 4,101,000
Restoration . . . . . . . . . . . . 828,000 564,000
----------- ------------
$8,973,000 $ 6,700,000
----------- ------------
COST OF SALES AND OPERATING EXPENSES
Prevention. . . . . . . . . . . . . $ 358,000 $ 1,388,000
Response. . . . . . . . . . . . . . 5,529,000 4,315,000
Restoration . . . . . . . . . . . . 869,000 1,206,000
----------- ------------
$6,756,000 $ 6,909,000
----------- ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (1)
Prevention. . . . . . . . . . . . . $ 160,000 $ 294,000
Response. . . . . . . . . . . . . . 969,000 591,000
Restoration . . . . . . . . . . . . 115,000 81,000
----------- ------------
$1,244,000 $ 966,000
----------- ------------
DEPRECIATION AND AMORTIZATION (2)
Prevention. . . . . . . . . . . . . $ 56,000 $ 137,000
Response. . . . . . . . . . . . . . 396,000 269,000
Restoration . . . . . . . . . . . . 77,000 54,000
----------- ------------
$ 529,000 $ 460,000
----------- ------------
OPERATING INCOME (LOSS)
Prevention. . . . . . . . . . . . . $ 576,000 $ 216,000
Response. . . . . . . . . . . . . . 101,000 (1,074,000)
Restoration . . . . . . . . . . . . (233,000) (777,000)
----------- ------------
$ 444,000 $(1,635,000)
----------- ------------
(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.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 WITH THE THREE MONTHS ENDED
MARCH 31, 2001 (UNAUDITED)
Revenues
Prevention revenues were $2,035,000 for the three months ended March 31,
2002, compared to $1,150,000 for the three months ended March 31, 2001,
representing an increase of $885,000 (77.0%) in the current year. The increase
was primarily the result of service fee increases associated with the
WELLSURE(R) program and expanded services provided under the Safeguard program.
Response revenues were $4,101,000 for the three months ended March 31,
2002, compared to $6,995,000 for the three months ended March 31, 2001, a
decrease of $2,894,000 (41.4%). During the first quarter of 2002, demand for the
Company's emergency response services declined as overall industry conditions
continued to weaken. Specifically, downstream transportation activity decreased
approximately 45%. This decrease led to a 42% decline in downstream response
revenues. Moreover, the Company had no major critical well events during the
period.
Restoration revenues were $564,000 for the three months ended March 31,
2002, compared to $828,000 for the three months ended March 31, 2001,
representing a decrease of $264,000 (31.9%) in the current year. The decrease
was primarily attributable to reduced domestic inventory sales and reduced
prices in the current quarter.
13
Cost of Sales and Operating Expenses
Prevention cost of sales and operating expenses were $1,388,000 for the
three months ended March 31, 2002, compared to $358,000 for the three months
ended March 31, 2001, an increase of $1,030,000 (287.7%) in the current year.
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 $4,315,000 for the three
months ended March 31, 2002, compared to $5,529,000 for the three months ended
March 31, 2001, a decrease of $1,214,000 (22.0%) in the current year. The
decrease was a result of reduced revenues and reallocation of resources as
discussed above, partially offset by an event in the first quarter of 2002 that
required higher than usual related third party costs.
Restoration cost of sales and operating expenses were $1,206,000 for the
three months ended March 31, 2002, compared to $869,000 for the three months
ended March 31, 2001, an increase of $337,000 (38.8%) in the current year. This
increase was primarily a result of reallocation of resources from the Response
segment to the Restoration segment due to increased activity in the Restoration
segment during this period.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $966,000 for
the three months ended March 31, 2002, compared to $1,244,000 for the three
months ended March 31, 2001, a decrease of $278,000 (22.3%) from the prior year.
These reductions are primarily a result of decreased payroll and rents. As
previously footnoted on the segmented financial table, corporate selling,
general and administrative expenses have been allocated pro rata among the
segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2001 and 2002
and the effect of not amortizing goodwill ($15,000 for the three months ended
March 31, 2002) as per SFAS No. 142. As previously footnoted on the segmented
financial table, depreciation and amortization expenses on related corporate
assets have been allocated pro rata among the segments on the basis of relative
revenue as the basis for allocation.
Interest Expense and Other, Including Finance Costs
The increase in interest and other expenses of $203,000 for the three
months ended March 31, 2002, as compared to the prior year period is primarily a
result of the interest expense incurred in connection with the pledging of
receivables in the current year (see discussion of KBK Financial, Inc. below)
and financing fees related to the Prudential waiver discussed below as compared
to nominal interest expense in the prior year period.
Income Tax Expense
Income taxes for the three months ended March 31, 2002 are a result of
taxable income in the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The Company generates its revenues from prevention services, emergency
response activities and restoration services. Response activities are generally
associated with a specific emergency or "event" whereas prevention and
restoration activities are generally "non-event" related services. Event
related services typically produce higher operating margins for the Company, but
the frequency of occurrence varies widely and is inherently unpredictable.
Non-event services typically have lower operating margins, but the volume and
availability of work is more predictable. Historically the Company has relied
on event driven revenues as the primary focus of its operating activity, but
more recently the Company's strategy has been to achieve greater balance between
event and non-event service activities. While the Company has successfully
improved this balance, event related services are still the major source of
revenues and operating income for the Company.
The Company's event-related capabilities include hazardous materials and
other emergency response services to industrial customers and governmental
agencies, but the majority of the Company's event related revenues are derived
14
from well control events (i.e., blowouts) in the oil and gas industry. Demand
for the Company's well control services is impacted by the number and size of
drilling and work over projects, which fluctuate as changes in oil and gas
prices affect exploration and production activities, forecasts and budgets. The
Company's reliance on event driven revenues in general, and well control events
in particular, impairs the Company's ability to generate predictable operating
cash flows.
In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand its
non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE(R) program, which is now providing more predictable and
increasing service fee income, and began marketing its Safeguard program, which
provides a full range of prevention services domestically and internationally.
The Company's strategy also includes plans to increase non-event
restoration services to its existing customer base. The market for restoration
services is large in comparison to the more specialized emergency response
business, and it provides growth opportunities for the Company. High value
restoration services include snubbing operations, redrilling applications and
project management services. However, proper development of these activities
requires significantly greater capital than what has been available to the
Company. Consequently, the Company is limited to a more selective range of lower
value services, such as site remediation, and has been unable to exploit the
higher margin opportunities available in this business segment.
The Company intends to continue its efforts to increase its non-event
services in the prevention and restoration segments with the objective of
covering all of the Company's fixed operating costs and administrative overhead
from these more predictable non-event services, offsetting the risks of
unpredictable event-driven emergency response business, but maintaining the
benefit of the high operating margins that such events offer. Although the
Company has made progress towards this goal, it has been difficult to achieve
because of the Company's weakened financial position and severe capital
constraints.
The Company has been unable to pay certain vendors in a timely manner,
including vendors that the Company considers important to its ongoing
operations. This reduced liquidity has hampered the Company's capacity to hire
sub-contractors, obtain materials and supplies, and otherwise conduct effective
or efficient operations.
On June 18, 2001, the Company entered into a facility with KBK Financial,
Inc. in which it pledged certain accounts receivable for a cash advance. The
facility allows the Company to pledge additional accounts receivable up to an
aggregate amount of $5,000,000. In 2001, the Company paid $135,000 for loan
origination fees, finder's fees and legal fees related to 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 2% of the maximum amount of the
facility. The Company receives an initial advance of 85% of the gross amount of
each receivable pledged. Upon collection of the receivable, the Company receives
an additional residual payment from which is deducted (i) a fixed fee equal to
2% of the gross pledged receivable and (ii) a variable financing charge equal to
KBK's base rate plus 2% calculated over the actual length of time the advance
was outstanding from KBK prior to collection. The Company's obligations under
the facility are secured by a first lien on certain other accounts receivable of
the Company. As of March 31, 2002, the Company had $1,460,000 of its accounts
receivable pledged to KBK, representing the substantial majority of the
Company's receivables that were eligible for pledging under the facility.
On April 9, 2002, the Company entered into a loan participation agreement
with certain parties under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation has an initial
maturity of 90 days, which may be extended for an additional 90 days at the
Company's option. The Company will be required to issue an additional 100,000
shares of common stock to the participation lender if it exercises this right to
extend the maturity.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that it issued 33,334 shares of common stock
and will be required to issue an additional 33,334 shares of common stock if it
exercises its right to extend the maturity of that note for an additional 90
days. The Company has amended the Senior Secured Loan Facility to reflect these
additional participations in the facility.
15
The Company continues to experience severe working capital constraints. As
of March 31, 2002, the Company's current assets totaled approximately $8,717,000
and current liabilities were $10,219,000, resulting in a net working capital
deficit of approximately $1,502,000 (compared to a beginning year deficit of
$159,000). The Company's highly liquid current assets, represented by cash of
$773,000 and receivables and restricted assets of $6,611,000 were collectively
$2,835,000 less than the amount of current liabilities at March 31, 2002
(compared to a beginning year deficit of $1,423,000). 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. As discussed
above, in April and May 2002, the Company borrowed an additional $1,000,000
under the Senior Secured Loan Facility. The new borrowings are not sufficient
to meet the Company's current working capital requirements. Absent new
near-term sources of financing or the generation of significant operating
income, the Company will not have sufficient funds to meet its immediate
obligations and will be forced to dispose of additional assets or operations
outside of the normal course of business in order to satisfy its liquidity
requirements.
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America contains customary affirmative and
negative covenants, including that the Company not permit the ratio of its total
debt to earnings before interest, taxes and depreciation and amortization
(EBITDA) for the trailing twelve months to be greater than 3.25 to 1 or the
ratio of its EBITDA to consolidated interest expense to be less than 2.9 to 1.
On March 29, 2002, Prudential agreed to waive compliance with the ratio tests
for the twelve months ended March 31, 2002. Significant improvements in the
Company's operating performance during the current quarter, or a modification or
waiver of the ratio tests, will be required for the Company to regain compliance
for the twelve months ended June 30, 2002. The Company does not have a
commitment from Prudential that it will modify or waive compliance with these
tests in the future.
Prudential also agreed to modifications to the Subordinated Note
Restructuring Agreement to accommodate up to $5 million in borrowings under the
KBK facility and an aggregate of $6 million under the Company's existing senior
credit facility or a new senior credit facility. The Company has agreed to pay
Prudential a fee of $100,000 in connection with the recent participations in the
existing credit facility. This amount has been charged to expense and credited
against fees required to be paid to Prudential under the Subordinated Note
Restructuring Agreement in the event the Company enters into a new credit
facility with a commercial lender.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing 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.
16
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
DESCRIPTION 2002 2003 2004 2005 2006 THEREAFTER
------------------------ ---------- ---------- -------- ---------- -------- -----------
Long term debt and
notes payable including
short term debt (1) $1,708,000 $1,000,000 - $7,200,000 - -
Future minimum lease
payments $ 775,000 $ 902,000 $640,000 $ 421,000 $208,000 $ 208,000
------------------------ ---------- ---------- -------- ---------- -------- -----------
Total commitments $2,483,000 $1,902,000 $640,000 $7,621,000 $208,000 $ 208,000
------------------------ ---------- ---------- -------- ---------- -------- -----------
(1) Accrued interest totaling $4,320,000 is included in the Company's 12%
Senior Subordinated Note at March 31, 2002, due to the accounting for a
troubled debt restructuring during 2000, but has been excluded from the
above presentation. Accrued interest calculated through March 31, 2002,
will be deferred for payment until December 30, 2005. Payments on accrued
interest after December 31, 2002, will begin on March 31, 2003, and will
continue quarterly until December 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's market sensitive financial
instruments contains "forward-looking statements".
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 10% 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
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher during the three months ended March 31, 2001 and March 31, 2002, and all
other factors affecting the Company's debt remained the same, pretax earnings
would have been lower by approximately $5,000 and $21,000, respectively. With
respect to the fair value of the Company's fixed-interest rate debt, if
prevailing market interest rates had been 10% higher at the quarter ended March
31, 2001 and 2002 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 $248,000 and
$232,000 at March 31, 2001 and 2002, 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
ITS SUPPLY BANKRUPTCY CLAIMS
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 all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserts that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. The bankruptcy court has
scheduled a hearing on July 29, 2002.
The Company does not believe it is likely 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. However, there is no assurance that the
Company will not be found liable. To provide security to Comerica Bank
17
for any potential claims by the Chapter 7 trustee, the Company has pledged a
$350,000 certificate of deposit in favor of Comerica Bank. This amount has been
classified as a restricted asset on the balance sheet as of December 31, 2001
and March 31, 2002.
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
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)
3.03 - Amended Bylaws(4)
4.01 - Specimen Certificate for the Registrant's Common
Stock(5)
4.02 - Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(6)
4.03 - Certificate of Designation of Series A Cumulative Senior Preferred Stock(7)
4.04 - Certificate of Designation of Series B Convertible Preferred Stock(8)
4.05 - Certificate of Designation of Series C Cumulative Convertible Junior Preferred Stock(9)
4.06 - Certificate of Designation of Series D Cumulative Junior Preferred Stock(10)
4.07 - Certificate of Designation of Series E Cumulative Senior Preferred Stock(11)
4.08 - Certificate of Designation of Series F Convertible Senior Preferred Stock(12)
4.09 - Certificate of Designation of Series G Cumulative Convertible Preferred Stock(13)
4.10 - Certificate of Designation of Series H Cumulative Convertible Preferred Stock(14)
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(15)
10.02 - Executive Employment Agreement of Larry H. Ramming(16)
10.03 - Executive Employment Agreement of Brian Krause(17)
10.04 - 1997 Incentive Stock Plan(18)
*10.05 - Outside Directors' Option Plan
*10.06 - Executive Compensation Plan
10.07 - Halliburton Center Sublease(19)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(20)
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.(21)
18
Exhibit No. Document
------------ ------------------------------------------------------
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued to The Prudential Insurance
Company of America (22)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank - Texas(23)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica
Bank - Texas(24)
10.13 - Executive Employment Agreement of Jerry Winchester(25)
10.14 - Executive Employment Agreement of Dewitt Edwards(26)
10.15 - Office Lease for 777 Post Oak(27)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000 (28)
10.19 - Fourth Amendment to Loan Agreement dated May 31, 2000(29)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(30)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(31)
10.22 - Seventh Amendment to Loan Agreement dated December 29,2000(32)
10.23 - Subordinated Note Restructuring Agreement with The Prudential Insurance Company of
America dated December 28, 2000 (33)
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April 15, 1999, with Halliburton
Energy Services, Inc. (34)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and to Turner, Voelker, Moore (35)
10.28 - Amended and Restated Purchase and Sale Agreement with National Oil Well, L.P.(36)
10.29 - KBK Financial, Inc. Account Transfer and Purchase Agreement(37)
*21.01 - List of subsidiaries
10.30 - 2000 Long Term Incentive Plan(38)
* 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 3.02(a) of Form 10-Q filed
November 14, 2001.
(4) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August
13, 1997.
(5) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August
13, 1997.
(6) Incorporated herein by reference to exhibit 4.08 of Form 10-QSB filed May
19, 1998.
(7) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July
17, 2000.
(8) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July
17, 2000.
(9) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.
(10) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.
(11) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed April
2, 2001.
(12) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed April
2, 2001.
19
(13) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed April
2, 2001.
(14) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed April
2, 2001.
(15) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
13, 1997.
(16) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed August
16, 1999.
(17) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August
13, 1997.
(18) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.
(19) Incorporated herein by reference to exhibit 10.17 of Form 10-KSB filed
March 31, 1998.
(20) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August
7, 1998.
(21) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August
7, 1998.
(22) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August
7, 1998.
(23) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 17, 1998.
(24) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 17, 1998.
(25) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed April
15, 1999.
(26) Incorporated herein by reference to exhibit 10.30 of Form 10-K filed April
15, 1999.
(27) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed April
15, 1999.
(28) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July
17, 2000.
(29) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July
17, 2000.
(30) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July
17, 2000.
(31) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July
17, 2000.
(32) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January
12, 2001.
(33) Incorporated herein by reference to exhibit 10.23 of Form 10-K filed April
2, 2001.
(34) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July
17, 2000.
(35) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.
(36) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 11,
2000.
(37) Incorporated herein by reference to exhibit 10.29 of Form 10-Q filed August
13, 2001.
(38) Incorporated herein by reference to exhibit 4.1 of Form S-8 filed April 30,
2001.
(b) Reports on Form 8-K
None
20
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: May 14, 2002
21