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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 QUARTER ENDED JUNE 30, 2003
_______________
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.)
11615 N. HOUSTON ROSSYLN
HOUSTON, TEXAS 77086
(Address of principal executive (Zip Code)
offices)
(281) 931-8884
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The number of shares of the Registrant's Common Stock, par value $.00001
per share, outstanding at August 13, 2003, were 106,111,720.
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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 Stockholders' Equity (Deficit) .5
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . .6
Notes to Condensed Consolidated Financial Statements . . . . . . . . 7-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . .. . . .14-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . 23
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . 23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 25
Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 26-29
2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
2002 2003
-------------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 261,000 748,000
Receivables - net. . . . . . . . . . . . . . . . . . . . . . . . . . 2,868,000 8,178,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . 69,000 -
Assets of discontinued operations. . . . . . . . . . . . . . . . . . 212,000 104,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . 620,000 480,000
-------------- -------------
Total current assets . . . . . . . . . . . . . . . . 4,030,000 9,510,000
-------------- -------------
PROPERTY AND EQUIPMENT - net . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,617,000
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,000
-------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 7,036,000 $ 13,132,000
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and notes. . . . . . . . . . . . . . . . . . . . . . $ 15,000,000 $ 13,712,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939,000 2,506,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 1,897,000 3,008,000
Liabilities of discontinued operations . . . . . . . . . . . . . . . 1,188,000 758,000
-------------- -------------
Total current liabilities. . . . . . . . . . . . . . 21,024,000 19,984,000
-------------- -------------
LONG TERM DEBT AND NOTES PAYABLE
net of current maturities .. . . . . . . . . . . - 1,300,000
Total liabilities. . . . . . . . . . . . . . . . . . 21,024,000 21,284,000
-------------- -------------
COMMITMENTS AND CONTINGENCIES. . . . . . . . . . . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par value, 5,000,000 shares authorized,
331,000 and 127,000 shares issued and outstanding
at December 31, 2002 and June 30, 2003, respectively) . . . . . . - -
Common stock ($.00001 par value, 125,000,000 shares authorized,
44,862,000 and 83,818,000 shares issued and outstanding
at December 31, 2002 and June 30, 2003, respectively) . . . . . . - 1,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 59,832,000 61,491,000
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . (438,000) (432,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (73,382,000) (69,212,000)
-------------- -------------
Total stockholders' equity (deficit) . . . . . . . . (13,988,000) (8,152,000)
-------------- -------------
Total liabilities and stockholders' equity (deficit) $ 7,036,000 $ 13,132,000
============== =============
See accompanying notes to condensed consolidated financial statements.
3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2003 2002 2003
------------ ----------- ------------- -----------
REVENUES
Service . . . . . . . . . . . . . . . . . . . . . . $ 2,894,000 $ 8,026,000 $ 6,904,000 $12,328,000
Equipment sales . . . . . . . . . . . . . . . . . . 1,090,000 - 1,090,000 6,629,000
------------ ----------- ------------- -----------
Total Revenues . . . . . . . . . . . . . . . . . 3,984,000 8,026,000 7,994,000 18,957,000
COSTS OF SALES
Service . . . . . . . . . . . . . . . . . . . . . . 1,115,000 2,640,000 2,484,000 3,521,000
Equipment sales . . . . . . . . . . . . . . . . . . 775,000 - 775,000 3,082,000
------------ ----------- ------------- -----------
Total Costs of Sales . . . . . . . . . . . . . . 1,890,000 2,640,000 3,259,000 6,603,000
Gross Margin . . . . . . . . . . . . . . . . . . 2,094,000 5,386,000 4,735,000 12,354,000
Operating expenses. . . . . . . . . . . . . . . . . 1,747,000 1,892,000 3,373,000 3,751,000
Selling, general and administrative . . . . . . . . 734,000 634,000 1,413,000 1,471,000
Depreciation and amortization . . . . . . . . . . . 288,000 254,000 574,000 499,000
------------ ----------- ------------- -----------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . (675,000) 2,606,000 (625,000) 6,633,000
INTEREST EXPENSE (INCOME) AND OTHER . . . . . . . . . 905,000 481,000 1,005,000 906,000
------------ ----------- ------------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS,
before income taxes . . . . . . . . . . . . . . . . (1,580,000) 2,125,000 (1,630,000) 5,727,000
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . 158,000 271,000 173,000 575,000
------------ ----------- ------------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . (1,738,000) 1,854,000 (1,803,000) 5,152,000
LOSS (INCOME) FROM DISCONTINUED OPERATIONS,
net of income taxes. . . . . . . . . . . . . . . . (5,422,000) - (7,187,000) 15,000
------------ ----------- ------------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . (7,160,000) 1,854,000 (8,990,000) 5,167,000
PREFERRED DIVIDEND REQUIREMENTS & ACCRETIONS. . . . . 762,000 265,000 1,592,000 997,000
------------ ----------- ------------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . $(7,922,000) $ 1,589,000 $(10,582,000) $ 4,170,000
============ =========== ============= ===========
Basic Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . $ (0.06) $ 0.02 $ (0.08) $ 0.06
============ =========== ============= ===========
Discontinued Operations. . . . . . . . . . . . . . $ (0.13) $ 0.00 $ (0.17) $ 0.00
============ =========== ============= ===========
Net Income (Loss). . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.25) $ 0.06
============ =========== ============= ===========
Weighted Average Common Shares Outstanding - Basic. . 42,180,000 82,726,000 $ 41,811,000 68,125,000
============ =========== ============= ===========
Diluted Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . $ (0.06) $ 0.02 $ (0.08) $ 0.05
============ =========== ============= ===========
Discontinued Operations. . . . . . . . . . . . . . $ (0.13) $ 0.00 $ (0.17) $ 0.00
============ =========== ============= ===========
Net Income (Loss). . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.25) $ 0.05
============ =========== ============= ===========
Weighted Average Common Shares Outstanding - Diluted. 42,180,000 98,508,000 41,811,000 85,546,000
============ =========== ============= ===========
See accompanying notes to condensed consolidated financial statements.
4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER STOCKHOLDERS'
------------------ ------------------- PAID-IN ACCUMULATED COMPREHENSIVE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS (DEFICIT)
--------- ------- ---------- ------- ----------- ------------- ---------- -------------
BALANCES, December 31, 2002 331,000 $ - 44,862,000 $ - $59,832,000 $(73,382,000) $(438,000) $(13,988,000)
Warrant discount accretion .. - - - - 26,000 (26,000) -
Warrants Exercised. . . . . . . - - 8,712,000 - - - - -
Common stock options exercised - - 2,945,000 - 663,000 - - 663,000
Preferred stock conversion to
common stock . . . . . . . . (204,000) - 27,299,000 - - - - -
Preferred stock
dividends accrued. . . . . . - - - - 971,000 (971,000) - -
Net income (loss). . . . . . . - - - - - 5,167,000 - 5,167,000
Foreign currency translation - - - - - - 6,000 6,000
-------------
Comprehensive income . . . . . - - - - - - - 5,173,000
--------- ------- ---------- ------- ----------- ------------- ---------- -------------
BALANCES, June 30, 2003. . . . . 127,000 $ - 83,818,000 $ 1,000 $61,491,000 $(69,212,000) $(432,000) $ (8,152,000)
========= ======= ========== ======= =========== ============= ========== =============
See accompanying notes to condensed consolidated financial statements.
5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2002 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,990,000) $ 5,167,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 574,000 499,000
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . . 45,000 -
Non cash write off of the net assets of discounted operations. . 3,495,000 -
Other non-cash charges . . . . . . . . . . . . . . . . . . . . . - 578,000
------------ ------------
Net cash provided by (used in) operating activities before
changes in operating assets and liabilities:. . . . . . . . . (4,876,000) 6,244,000
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . 234,000 (5,310,000)
Restricted Assets. . . . . . . . . . . . . . . . . . . . . . . . 448,000 69,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 138,000 -
Prepaid expenses and other current assets. . . . . . . . . . . . 554,000 140,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 124,000 1,000
Accounts payable and accrued liabilities . . . . . . . . . . . . 1,170,000 1,063,000
Change in net assets and liabilities of discontinued operations. 1,255,000 (322,000)
------------ ------------
Net cash provided by (used in) operating activities. . . . . . . (953,000) 1,885,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . . (99,000) (1,508,000)
Proceeds from sale of property and equipment . . . . . . . . . . 42,000 -
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . . (57,000) (1,508,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised. . . . . . . . . . . . . . . . . - 663,000
Proceeds from short term senior debt financing . . . . . . . . . - 200,000
Proceeds from pledging activity. . . . . . . . . . . . . . . . . 969,000 -
Payments of short term senior debt financing. . . . . . . . . . - (700,000)
Repayments to pledging arrangements. . . . . . . . . . . . . . . - (59,000)
------------ ------------
Net cash provided by financing activities. . . . . . . . . . . . 969,000 104,000
------------ ------------
Impact of foreign currency on cash . . . . . . . . . . . . . . . - 6,000
Net increase (decrease) in cash and cash equivalents . . . . . . (41,000) 487,000
CASH AND CASH EQUIVALENTS, Beginning of Period. . . . . . . . . . . . 303,000 261,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of Period. . . . . . . . . . . . . . . $ 262,000 $ 748,000
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . . $ 21,000 60,000
Cash paid for income taxes. . . . . . . . . . . . . . . . . . . - 262,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock and warrant accretions. . . . . . . . . . . . . . . . . . 26,000 26,000
Preferred stock dividends accrued . . . . . . . . . . . . . . . 1,566,000 971,000
Common stock issued for settlements . . . . . . . . . . . . . . 49,000 -
See accompanying notes to condensed consolidated financial statements.
6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
A. GOING CONCERN
At June 30, 2003, the Company had a working capital deficit of $10,474,000
and a total stockholders' deficit of $8,152,000. In addition, the Company was in
default under its loan agreements with The Prudential Insurance Company of
America, Specialty Finance Fund 1, LLC, and certain other loan participants in
the Specialty Finance credit facility and, as a consequence, these lenders and
the participants in the Specialty Finance credit facility could have accelerated
the maturity of their obligations at any time. As of the filing of this
quarterly report on Form 10-Q, the Company has converted the Specialty Finance
notes and certain of the participation notes to equity and the Company has
signed an agreement with Prudential to waive its loan defaults through December
31, 2003. Some of these obligations have been classified as current liabilities
at June 30, 2003 in the accompanying condensed consolidated balance sheet due to
the short term nature of the waivers. See Note F for further discussion of the
Company's debt. The Company also had significant past due vendor payables at
June 30, 2003.
The Company generates its revenues from prevention services and emergency
response activities. Response activities are generally associated with a
specific emergency or "event" whereas prevention 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 majority of the Company's event related revenues are derived 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.
During the six months ended June 30, 2003, the Company's short term
liquidity improved as a consequence of increased demand for its emergency
response services and certain asset sales. The asset sales resulted in net
proceeds (after replacement costs) to the Company of approximately $2,000,000. A
portion of these proceeds were used to repay $700,000 plus interest owing under
the Company's credit facility with Checkpoint Business, Inc. (See Note F for
further discussion). The Company also applied $400,000 of the proceeds to settle
the Calicutt lawsuit (See Note G for further discussion) and to reduce payables
owing to certain of the Company's significant vendors
During the six months ended June 30, 2003, there was a significant increase
in demand for the Company's services and equipment, particularly internationally
and specifically in the Middle East, in connection with the war in Iraq. Such
increase in activity resulted in the Company generating income from operations
of $6,633,000 for the first six months of 2003. In August 2003, Prudential paid
the Company $3,887,000 to disgorge profits it inadvertently incurred under
Section 16(b) of the Securities Exchange Act of 1934. This payment has
substantially improved the Company's cash, working capital and stockholders'
equity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the short term nature of Prudential's waivers raise
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying consolidated
7
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 in order to make the condensed
consolidated financial statements not be misleading. The unaudited condensed
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, 2002, and those reports filed previously
with the Securities and Exchange Commission ("SEC"). The results of operations
for the three-month and six month periods ended June 30, 2002 and 2003 are not
necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made in the prior period consolidated financial
statements to conform to current year presentation.
C. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation granted under it's
long-term incentive plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Stock-based compensation expenses
associated with option grants were not recognized in the net income (loss) for
the six month periods ended June 30, 2002 and 2003, as all options granted had
exercise prices equal to the market value of the underlying common stock on the
dates of grant. The following table illustrates the effect on net income (loss)
and earnings per share if the Company had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003
--------------- -------------- --------------- --------------
Net income (loss) attributable to
common stockholders as reported. . . . . . . . . . . . . . . $ (7,922,000) $ 1,589,000 $ (10,582,000) $ 4,170,000
Less total stock based employee
compensation expense determined
under fair value based method for all
awards, net of tax related effects. . . . . . . . . . . . . . 186,000 64,000 372,000 128,000
--------------- -------------- --------------- --------------
Pro forma net income (loss) attributable to common stockholders $ (8,108,000) $ 1,525,000 $ (10,954,000) $ 4,042,000
--------------- -------------- --------------- --------------
Basic net income (loss) per share
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.25) $ 0.06
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.26) $ 0.06
Diluted net income (loss) per share
As reported . . . . . . . . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.25) $ 0.05
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . $ (0.19) $ 0.02 $ (0.26) $ 0.05
D. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS 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. The Company adopted
SFAS No. 143 effective January 1, 2003, as required. The adoption of SFAS No.
143 did not have a material impact on Company's condensed consolidated financial
position or results of operations.
8
In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation instruments as of the beginning of the fiscal year of
adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No.
123 to require disclosure in the summary of significant accounting policies of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee compensation, regardless of whether they
utilize the fair method of accounting described in SFAS No. 123 or the intrinsic
value method described in APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company does not currently intend to adopt the fair value method
of accounting for stock-based compensation, however, it has adopted the
disclosure provisions of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," (" SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The Company does not believe that the adoption of
SFAS 150 will have a significant impact on its financial statements.
E. DISCONTINUED OPERATIONS
On June 30, 2002, the Company made the decision and formalized a plan to
sell the assets of its Special Services and Abasco operations. The sales
proceeds were approximately $1,041,000. The operations of these two companies
are reflected as discontinued operations on the condensed consolidated
statements of operations and as assets and liabilities of discontinued
operations on the condensed consolidated balance sheets.
9
The following represents a condensed detail of assets and liabilities for
discontinued operations adjusted for write-downs:
DECEMBER 31, JUNE 30,
2002 2003
------------------------
Receivables - net. . . . . . . . . . . . . . . . . $ 174,000 $ 104,000
Restricted assets. . . . . . . . . . . . . . . . . 38,000 -
------------- ---------
Total assets . . . . . . . . . . . $ 212,000 $ 104,000
============= =========
Short term debt and current maturities of long-term
debt and notes payable . . . . . . . . . . . . . . $ 32,000 $ -
Accounts payable . . . . . . . . . . . . . . . . . 801,000 427,000
Accrued liabilities. . . . . . . . . . . . . . . . 355,000 331,000
------------- ---------
Total liabilities. . . . . . . . . $ 1,188,000 $ 758,000
============= =========
Reconciliation of change in net asset value of discontinued operations:
Balance of net liability of discontinued
operations at December 31, 2002 $(976,000)
Income from discontinued operations 15,000
Intercompany transfers 307,000
-----------
Balance of net liability of discontinued operations
at June 30, 2003 $ (654,000)
===========
F. LONG-TERM DEBT AND NOTES PAYABLE
As of June 30, 2003, the Company was not in compliance with the ratio tests
for the trailing twelve month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults through December 31, 2003. The Company issued
$2,658,931 of new subordinated notes to Prudential. As a result, Prudential
agreed to waive the Company's past covenant defaults through December 31, 2003.
All of the Prudential debt is still classified as current debt since the waiver
is not for a full twelve month period.
As of June 30, 2003, Specialty Finance's participation interest of
$1,000,000 was outstanding as senior secured debt. The Company had not, at that
time, received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 4,956,033 shares of common stock. This note was
converted to equity subsequent to June 30, 2003 and accordingly has been
classified as long term in the accompanying financial statements.
On April 9, 2002, the Company entered into a loan participation agreement
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 had an initial maturity of 90 days, which was
extended for an additional 90 days at the Company's option. The Company issued
an additional 100,000 shares of common stock to the participation lender to
extend the maturity date. On October 9, 2002, the loan extension period matured.
10
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured.
On July 5, 2002, the Company entered into a loan participation agreement
under which it borrowed an additional $100,000 under its existing Senior Secured
Loan Facility. The effective interest rate of the participation was 25% after
taking into account rate adjustment fees. The Company also paid 3% of the
borrowed amount in origination fees, paid closing expenses and issued 130,000
shares of common stock to the participation lender at closing. The participation
had a maturity of 90 days. On September 28, 2002, the loan matured. On July 11,
2003, the Company converted this note and the accrued interest into equity by
issuing 503,333 shares of common stock. This note was converted to equity
subsequent to June 30, 2003, and accordingly has been classified as long term in
the accompanying financial statements.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation was 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. On July 18, 2003, the Company
converted this debt and the accrued interest into equity by issuing 931,200
shares of common stock. This note was converted to equity subsequent to June 30,
2003, and accordingly has been classified as long term in the accompanying
financial statements.
On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short term working
capital up to $1,000,000. The effective interest rate of under the loan
agreement was 15% per annum. Checkpoint collateral included substantially all of
the assets of the Company, including the stock of the Company's Venezuelan
subsidiary. As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. On March
28, 2003, the Company paid in full the principal balance of $700,000 and
interest outstanding under its loan agreement with Checkpoint. On May 7, 2003,
the Company settled Checkpoint's option to purchase its Venezuelan subsidiary
and terminated Checkpoint's exclusivity rights in exchange for $300,000 of cash
and $100,000 in notes maturing in six months.
G. COMMITMENTS AND CONTINGENCIES
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000 in
cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company by paying the remaining unpaid
$400,000 in March 2003 in exchange for full and final release by all plaintiffs
from any and all claims related to the subject of the case.
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.
11
H. EARNINGS PER SHARE
Basic income (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. The computation of diluted net income (loss)
attributable to common shareholders per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock that are
dilutive to net income attributable to common shareholders were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average shares outstanding for the three and six months ended June 30, 2002 and
2003:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------
2002 2003 2002 2003
----------------------------------------------
Weighted average common shares outstanding:
Basic: 42,180,000 82,726,000 41,811,000 68,125,000
Senior convertible debt - - - 1,333,000
Convertible preferred stock - 15,781,000 - 16,087,000
Stock purchase warrants (1) - - - -
Stock options (2) - 1,000 - 1,000
---------- ---------- ---------- ----------
Diluted: 42,180,000 98,508,000 41,811,000 85,546,000
---------- ---------- ---------- ----------
(1) Stock purchase warrants to purchase 35,471,000 shares and 26,623,000
shares of common stock were outstanding but not included in the
computations of diluted net income (loss) attributable to common
shareholders per share for the three and six months ended June 30, 2002 and
2003, respectively, because the exercise prices of the warrants were
greater than the average market price of the common shares and would be
anti-dilutive to the computations.
(2) Stock options to purchase 7,848,000 shares and 1,322,000 shares of
common stock were outstanding but not included in the computations of
diluted net income (loss) attributable to common shareholders per share for
the three and six months ended June 30, 2002 and 2003, respectively,
because the exercise prices of the options were greater than the average
market price of the common shares and would be anti-dilutive to the
computations.
I. BUSINESS SEGMENT INFORMATION
On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during 2002, as a result of the decision to
discontinue its Abasco and Special Services business operations. The current
segments are Prevention and Response. 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. ITS, Baylor,
Abasco and Special Services are presented as discontinued operations in the
condensed consolidated financial statements and are therefore excluded from the
segment information for all periods presented.
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
services 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.
12
Information concerning operations in the two business segments for the
three and six months ended June 30, 2002 and 2003 is presented below.
PREVENTION RESPONSE CONSOLIDATED
------------ ----------- --------------
Three Months Ended June 30, 2002:
Net Operating Revenues . . . . . $ 2,537,000 $1,447,000 $ 3,984,000
Operating Income (Loss). . . . . (475,000) (200,000) (675,000)
Identifiable Operating Assets. . 5,755,000 5,029,000 10,784,000
Capital Expenditures . . . . . . - 61,000 61,000
Depreciation and Amortization. . 182,000 106,000 288,000
Interest Expense and Other . . . 490,000 415,000 905,000
Three Months Ended June 30, 2003:
Net Operating Revenues . . . . . $ 2,171,000 $5,855,000 $ 8,026,000
Operating Income (Loss). . . . . 315,000 2,291,000 2,606,000
Identifiable Operating Assets. . 7,502,000 5,630,000 13,132,000
Capital Expenditures . . . . . . 129,000 347,000 476,000
Depreciation and Amortization. . 86,000 168,000 254,000
Interest Expense and Other . . . 181,000 300,000 481,000
PREVENTION RESPONSE CONSOLIDATED
------------ ----------- --------------
Six Months Ended June 30, 2002:
Net Operating Revenues . . . . $ 4,266,000 $3,728,000 $ 7,994,000
Operating Income (Loss). . . . (370,000) (255,000) (625,000)
Identifiable Operating Assets. 5,755,000 5,029,000 10,784,000
Capital Expenditures . . . . . - 99,000 99,000
Depreciation and Amortization. 291,000 283,000 574,000
Interest Expense and Other . . 536,000 469,000 1,005,000
Six Months Ended June 30, 2003:
Net Operating Revenues . . . . $10,830,000 $8,127,000 $ 18,957,000
Operating Income (Loss). . . . 3,294,000 3,339,000 6,633,000
Identifiable Operating Assets. 7,502,000 5,630,000 13,132,000
Capital Expenditures . . . . . 862,000 646,000 1,508,000
Depreciation and Amortization. 279,000 220,000 499,000
Interest Expense and Other . . 517,000 389,000 906,000
For the three and six month periods ended June 30, 2002, the Company's
revenue mix between domestic and foreign sales were domestic 59%, foreign 41%
and domestic 66% and foreign 34% respectively. For the three and six month
periods ended June 30, 2003, the Company's revenue mix between domestic and
foreign sales were domestic 19%, foreign 81% and domestic 11% and foreign 89%
respectively.
J. SUBSEQUENT EVENTS
On July 3, 2003, 59,872 shares of the Company's Series E Cumulative
Convertible Preferred Stock ("Series E Preferred Stock") were converted into
13,607,202 shares of the Company's common stock. The converted Series E
Preferred Stock conversion included dividends which were paid in kind of 9,872
shares of Series E Preferred Stock. As of the date hereof, 903 shares of Series
E Preferred Stock remains outstanding.
On July 3, 2003, the Company re-priced 8,800,000 of Prudential's warrants
from $0.625 to $0.35. The related expense determined by the Black-Scholes option
pricing model will be a non cash expense in the third quarter.
In July 2003, 6,390,566 shares of common stock were issued to retire
$1,688,641 of senior debt principal and accrued interest.
13
In July 2003, 2,285,657 shares of common stock were issued upon the
exercise of warrants.
In August 2003, Prudential paid the Company $3,887,000 to disgorge profits
as required under Section 16(b) of the Securities Exchange Act of 1934.
The following schedule shows the pro forma effect of these transactions as
if they had occurred on June 30, 2003
Current Assets $13,397,000
Total Assets $17,079,000
Total Liabilities $19,745,000
Total Stockholders' Equity (Deficit) $(2,726,000)
Total Liabilities and Stockholders' Equity (Deficit) $17,079,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking information. Forward-looking information is based
on projections, assumptions and estimates, not historical information. Some
statements in this Form 10 - Q are forward-looking and use words like "may,"
"may not," "believes," "do not believe," "expects," "do not expect," "do not
anticipate," and other similar expressions. We may also provide oral or written
forward-looking information on other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and results of operations may vary materially.
While it is not possible to identify all factors, we face many risks and
uncertainties that could cause actual results to differ from our forward-looking
statements including those contained in this 10-Q, our press releases and our
Forms 10-Q, 8-K and 10-K filed with the United States Securities and Exchange
Commission. We do not assume any responsibility to publicly update any of our
forward-looking statements regardless of whether factors change as a result of
new information, future events or for any other reason.
OVERVIEW
On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during 2002, as a result of the decision to
discontinue its Abasco and Special Services business operations. The current
segments are Prevention and Response. 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. ITS, Baylor,
Abasco and Special Services are presented as discontinued operations in the
condensed consolidated financial statements and are therefore excluded from the
segment information for all periods presented.
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
services 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.
14
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.
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 that the Company would
be required to meet to remain listed. AMEX subsequently notified the Company
that its plan had been accepted; however, on June 28, 2002, the Company
submitted an amendment to the plan to take into account, among other things,
certain restructuring initiatives that the Company had undertaken. Since
submitting the amended plan, the Company has been actively pursuing alternatives
that would allow it to fulfill the objectives outline in the amended plan.
AMEX may institute immediate delisting proceedings as a consequence of the
Company's failure to achieve compliance its continued listing standards.
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 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.
On July 21, 2003 the Company received a letter from AMEX stating that the
Company is not in compliance with the continued listing standards of AMEX and
that AMEX had completed its review of Boots & Coots' revised plan of compliance
and supporting documentation (the "Plan"). AMEX indicated that the plan
submitted by Boots & Coots on June 16, 2003 makes a reasonable demonstration of
its ability to regain compliance with continued listing standards.
Specifically, Boots & Coots is not in compliance with: Section 1003(a)(i)
with shareholders equity of less than $2,000,000 and has sustained losses from
continuing operations and/or net losses in two of its three most recent fiscal
years and Section 1003(a)(ii) with shareholders equity of less than $4,000,000
and has sustained losses from continuing operations and / or net losses in three
out of its four most recent fiscal years.
Additionally, according to the Company's Form 10-Q for the period ended
March 31, 2003, the Company's total shares outstanding at May 13, 2003 amounted
to 82,767,293 shares. This amount is greater than those listed with the
Exchange. As such, the Company is not in compliance with Section 301 of the AMEX
Company Guide, which states that a listed company is not permitted to issue, or
to authorize its transfer agent or registrar to issue or register, additional
securities of a listed class until it has filed an application for the listing
of such additional securities and received notification from the Exchange that
the securities have been approved for listing.
Finally, according to the Company's definitive proxy statement that was
filed on July 11, 2003, the Company has one member on its audit committee. As a
result, the Company is not in compliance with audit committee composition
requirements under Section 121B(b)(i) of the AMEX Company Guide, which requires
each issuer to have and maintain an audit committee of at least three members,
compromised solely of independent directors, each of whom is able to read and
understand fundamental financial statements, including a company's balance
sheet, income statement, and cash flow statement or will become able to do so
within a reasonable period of time after his or her appointment to the audit
committee.
AMEX has granted Boots & Coots an extension until the filing due date of
Boots & Coots' Form 10-Q for the period ending September 30, 2003 to gain
compliance with AMEX's listing standards subject to the Company providing AMEX
with updates, at least quarterly or as requested by AMEX, in conjunction with
the initiatives outlined in the submitted Plan.
15
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.
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 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.
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 the 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.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the unaudited 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 SEC.
Information concerning operations in different business segments for the
three and six months ended June 30, 2002 and 2003 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
16
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2002 2003 2002 2003
----------- ---------- ----------- -----------
REVENUES
Prevention . . . . . . . . . . . . . . . . . . . $2,537,000 $2,171,000 $4,266,000 $10,830,000
Response . . . . . . . . . . . . . . . . . . . . 1,447,000 5,855,000 3,728,000 8,127,000
----------- ---------- ----------- -----------
$3,984,000 $8,026,000 $7,994,000 $18,957,000
----------- ---------- ----------- -----------
COST OF SALES
Prevention. . . . . . . . . . . . . . . . . . . $1,172,000 $ 728,000 $1,588,000 $ 4,036,000
Response. . . . . . . . . . . . . . . . . . . . 718,000 1,912,000 1,671,000 2,567,000
----------- ---------- ----------- -----------
$1,890,000 $2,640,000 $3,259,000 $ 6,603,000
----------- ---------- ----------- -----------
OPERATING EXPENSES(1)
Prevention. . . . . . . . . . . . . . . . . . . $1,197,000 $ 865,000 $2,003,000 $ 2,381,000
Response. . . . . . . . . . . . . . . . . . . . 550,000 1,027,000 1,370,000 1,370,000
----------- ---------- ----------- -----------
$1,747,000 $1,892,000 $3,373,000 $ 3,751,000
----------- ---------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
Prevention. . . . . . . . . . . . . . . . . . . $ 461,000 $ 177,000 $ 754,000 $ 840,000
Response. . . . . . . . . . . . . . . . . . . . 273,000 457,000 659,000 631,000
----------- ---------- ----------- -----------
$ 734,000 $ 634,000 $1,413,000 $ 1,471,000
----------- ---------- ----------- -----------
DEPRECIATION AND AMORTIZATION (3)
Prevention. . . . . . . . . . . . . . . . . . . $ 182,000 $ 86,000 $ 291,000 $ 279,000
Response. . . . . . . . . . . . . . . . . . . . 106,000 168,000 283,000 220,000
----------- ---------- ----------- -----------
$ 288,000 $ 254,000 $ 574,000 $ 499,000
----------- ---------- ----------- -----------
OPERATING INCOME (LOSS)
Prevention. . . . . . . . . . . . . . . . . . . $ (475,000) $ 315,000 $ (370,000) $ 3,294,000
Response. . . . . . . . . . . . . . . . . . . . (200,000) 2,291,000 (255,000) 3,339,000
----------- ---------- ----------- -----------
$ (675,000) $2,606,000 $ (625,000) $ 6,633,000
----------- ---------- ----------- -----------
__________________________________________
(1) Operating expenses have been allocated pro rata among segments based
upon relative revenues.
(2) Corporate selling, general and administrative expenses have been
allocated pro rata among segments based upon relative revenues.
(3) Corporate depreciation and amortization expenses have been allocated
pro rata among segments based upon relative revenues.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2003 WITH THE THREE MONTHS ENDED
JUNE 30, 2002
Revenues
Prevention revenues were $2,171,000 for the three months ended June 30,
2003, compared to $2,537,000 for the three months ended June 30, 2002,
representing a decrease of $366,000 (14.0%) in the current quarter. Revenues
were higher in the 2002 quarter as a result of international equipment sales
provided under the Company's Safeguard program. The 2003 quarter benefited from
an increase Venezuela revenues in the 2003 quarter.
Response revenues were $5,855,000 for the three months ended June 30, 2003,
compared to $1,447,000 for the three months ended June 30, 2002, an increase of
$4,408,000 (304.6%). The increase in the current quarter is primarily a result
of the Company acting as lead contractor in Iraq, for which it billed $4,400,000
for firefighters and engineers to be in Kuwait or Iraq as needed.
Cost of Sales
Prevention cost of sales were $728,000 for the three months ended June 30,
2003, compared to $1,172,000 for the three months ended June 30, 2002, a
decrease of $444,000 (37.9%) in the current quarter. The decrease was a result
of higher than usual costs incurred in connection with an international
equipment sale under the SafeGuard program in the prior quarter.
17
Response cost of sales were $1,912,000 for the three months ended June 30,
2003, compared to $718,000 for the three months ended June 30, 2002, an increase
of $1,194,000 (166.3%) in the current year. The increase was the result of
higher personnel costs associated with a larger percentage of the Company's
workforce being deployed, principally in Kuwait and Iraq in the current quarter.
Operating Expenses
Consolidated operating expenses were $1,892,000 for the three months ended
June 30, 2003, compared to $1,747,000 for the three months ended June 30, 2002,
an increase of $145,000 (8.3%) in the current quarter. The increase was a
result of additional labor, insurance and travel costs related to the previously
mentioned increase in revenue. As previously footnoted on the segmented
financial table, operating expenses have been allocated pro rata among the
segments on the basis of relative revenue.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $634,000 for
the three months ended June 30, 2003, compared to $734,000 for the three months
ended June 30, 2002, a decrease of $100,000 (13.6%) from the prior quarter. The
decrease was the result of reduced corporate personnel costs resulting from the
Company's restructuring initiatives begun in June 2002, partially offset by
higher insurance costs associated with the Company's work in Iraq. 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 sale of fixed assets which reduced the depreciable asset base in
2003. 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.
Interest Expense and Other, Including Finance Costs
The decrease in interest and other expenses of $424,000 for the three
months ended June 30, 2003, as compared to the prior quarter is explained in the
table below:
For the Three Months Ended
------------------------------
June 30, 2002 June 30, 2003
-------------- --------------
Calicutt legal settlement $ 579,000 $ -
Restructuring charges 46,000 -
Financing fees - new debt 106,000 -
Interest expense - senior debt 38,000 66,000
KBK finance costs 88,000 15,000
Loss on sale of fixed assets 48,000 -
Checkpoint settlement - 400,000
-------------- --------------
Total Interest and Other $ 905,000 $ 481,000
-------------- --------------
Income Tax Expense
Income taxes for the three months ended June 30, 2002 and 2003 were
$158,000 and $271,000, respectively, and are a result of taxable income in the
Company's foreign operations.
18
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 WITH THE SIX MONTHS ENDED JUNE
30, 2002
Revenues
Prevention revenues were $10,830,000 for the six months ended June 30,
2003, compared to $4,266,000 for the six months ended June 30, 2002,
representing an increase of $6,564,000 (153.9%) in the current period. Most of
the increases during the first half of 2003 were related to a $5,539,000
increase in revenues from equipment sales over the prior period and by increased
Venezuela revenues in the 2003 current period.
Response revenues were $8,127,000 for the six months ended June 30, 2003,
compared to $3,728,000 for the six months ended June 30, 2002, an increase of
$4,399,000 (118.0%) in the current period. This increase was the result of
higher demand for response services, principally related to the Company acting
as lead contractor in Iraq during the 2003 period, for which it billed
$5,500,000 for firefighters and engineers to be in Kuwait or Iraq as needed.
This increase is partially offset by reduced demand for domestic response
activity during the current period.
Cost of Sales
Prevention cost of sales were $4,036,000 for the six months ended June 30,
2003, compared to $1,588,000 for the six months ended June 30, 2002, an increase
of $2,448,000 (154.2%) in the current period. The increase was a result of
additional equipment costs related to the previously mentioned equipment sales.
Response cost of sales were $2,567,000 for the six months ended June 30,
2003, compared to $1,671,000 for the six months ended June 30, 2002, an increase
of $896,000 (53.6%) in the current period. The increase was the result of
higher personnel costs associated with a larger percentage of the Company's
workforce being deployed, principally in Kuwait and Iraq in the current quarter.
Operating Expenses
Consolidated operating expenses were $3,751,000 for the six months ended
June 30, 2003, compared to $3,373,000 for the six months ended June 30, 2002, an
increase of $378,000 (11.2%) in the current period. The increase was a result
of additional labor and insurance related to the previously mentioned increase
in revenue for the current period. As previously footnoted on the segmented
financial table, operating expenses have been allocated pro rata among the
segments on the basis of relative revenue.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $1,471,000
for the six months ended June 30, 2003, compared to $1,413,000 for the six
months ended June 30, 2002, an increase of $58,000 (4.1%) from the prior period.
The increase was a result of higher insurance costs related to working in Iraq
partially offset by reduced corporate personnel costs related to the Company's
restructuring initiatives begun in June 2002. 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 sale of fixed assets which reduced the depreciable asset base in
2003. 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.
19
Interest Expense and Other, Including Finance Costs
The decrease in interest and other expenses of $99,000 for the six months
ended June 30, 2003, as compared to the prior period is explained in the table
below:
For the Six Months Ended
--------------------------------
June 30, 2002 June 30, 2003
------------- -------------
Calicutt legal settlement $ 579,000 $ -
Restructuring charges (51,000) (67,000)
Financing fees 213,000 70,000
Interest expense - senior debt 53,000 131,000
KBK finance costs 174,000 43,000
Loss on sale of fixed assets 41,000 -
Interest on subordinated notes - 334,000
Other (4,000) (5,000)
Checkpoint settlement - 400,000
--------------- ---------------
Total Interest and Other $ 1,005,000 $ 906,000
--------------- ---------------
Income Tax Expense
Income taxes for the six months ended June 30, 2002 and 2003 were $173,000
and $575,000, respectively, and are a result of taxable income in the Company's
foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
LIQUIDITY
At June 30, 2003, the Company had a working capital deficit of $10,474,000
and a total stockholders' deficit of $8,152,000. In addition, the Company was in
default under its loan agreements with The Prudential Insurance Company of
America, Specialty Finance Fund 1, LLC, and certain other loan participants in
the Specialty Finance credit facility and, as a consequence, these lenders and
the participants in the Specialty Finance credit facility could have accelerated
the maturity of their obligations at any time. As of the filing of this
quarterly report on Form 10-Q, the Company has converted the Specialty Finance
notes and certain of the participation notes to equity and the Company has
signed an agreement with Prudential to waive its loan defaults through December
31, 2003. Some of these obligations have been classified as current liabilities
at June 30, 2003 in the accompanying condensed consolidated balance sheet due to
the short term nature of the waivers. See Note F for further discussion of the
Company's debt. The Company also had significant past due vendor payables at
June 30, 2003.
The Company generates its revenues from prevention services and emergency
response activities. Response activities are generally associated with a
specific emergency or "event" whereas prevention 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.
20
The majority of the Company's event related revenues are derived 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.
During the six months ended June 30, 2003, the Company's short term
liquidity improved as a consequence of increased demand for its emergency
response services and certain asset sales. The asset sales resulted in net
proceeds (after replacement costs) to the Company of approximately $2,000,000. A
portion of these proceeds were used to repay $700,000 plus interest owing under
the Company's credit facility with Checkpoint Business, Inc. (See Note F for
further discussion). The Company also applied $400,000 of the proceeds to settle
the Calicutt lawsuit (See Note G for further discussion) and to reduce payables
owing to certain of the Company's significant vendors
During the six months ended June 30, 2003, there was a significant increase
in demand for the Company's services and equipment, particularly internationally
and specifically in the Middle East, in connection with the war in Iraq. Such
increase in activity resulted in the Company generating income from operations
of $6,633,000 for the first six months of 2003. In August 2003, Prudential paid
the Company $3,887,000 to disgorge profits it inadvertently incurred under
Section 16(b) of the Securities Exchange Act of 1934. This payment has
substantially improved the Company's cash, working capital and stockholders'
equity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the short term nature of Prudential's waivers raise
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying consolidated 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.
CREDIT FACILITIES/CAPITAL RESOURCES
As of June 30, 2003, the Company was not in compliance with the ratio tests
for the trailing twelve month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults through December 31, 2003. The Company issued
$2,658,931 of new subordinated notes to Prudential. As a result, Prudential
agreed to waive the Company's past covenant defaults through December 31, 2003.
All of the Prudential debt is still classified as current debt since the waiver
is not for a full twelve month period.
As of June 30, 2003, Specialty Finance's participation interest of
$1,000,000 was outstanding as senior secured debt. The Company had not, at that
time, received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 4,956,033 shares of common stock. This note was
converted to equity subsequent to June 30, 2003 and accordingly has been
classified as long term in the accompanying financial statements.
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 allowed 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's
obligations for representations and warranties regarding the accounts receivable
pledged to KBK were secured by a first lien on certain other accounts receivable
of the Company. The Company had $109,000 of its accounts receivable pledged to
KBK that remained uncollected as of December 31, 2002
21
and, this amount was classified as restricted asset on the balance sheet as of
December 31, 2002. Included in the December 31, 2002 balance sheet is $38,000 of
restricted assets related to discontinued operations. In addition, as of
December 31, 2002 the Company's cash balances included $9,000 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. The KBK facility
was terminated in May, 2003.
On April 9, 2002, the Company entered into a loan participation agreement
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 had an initial maturity of 90 days, which was
extended for an additional 90 days at the Company's option. The Company issued
an additional 100,000 shares of common stock to the participation lender to
extend the maturity date. On October 9, 2002, the loan extension period matured.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured.
On July 5, 2002, the Company entered into a loan participation agreement
under which it borrowed an additional $100,000 under its existing Senior Secured
Loan Facility. The effective interest rate of the participation was 25% after
taking into account rate adjustment fees. The Company also paid 3% of the
borrowed amount in origination fees, paid closing expenses and issued 130,000
shares of common stock to the participation lender at closing. The participation
had a maturity of 90 days. On September 28, 2002, the loan matured. On July 11,
2003, the Company converted this note and the accrued interest into equity by
issuing 503,333 shares of common stock. This note was converted to equity
subsequent to June 30, 2003, and accordingly has been classified as long term in
the accompanying financial statements.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation was 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. On July 18, 2003, the Company
converted this debt and the accrued interest into equity by issuing 931,200
shares of common stock. This note was converted to equity subsequent to June 30,
2003, and accordingly has been classified as long term in the accompanying
financial statements.
On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short term working
capital up to $1,000,000. The effective interest rate of under the loan
agreement was 15% per annum. Checkpoint collateral included substantially all of
the assets of the Company, including the stock of the Company's Venezuelan
subsidiary. As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. On March
28, 2003, the Company paid in full the principal balance of $700,000 and
interest outstanding under its loan agreement with Checkpoint. On May 7, 2003,
the Company settled Checkpoint's option to purchase its Venezuelan subsidiary
and terminated Checkpoint's exclusivity rights in exchange for $300,000 of cash
and $100,000 in notes maturing in six months.
22
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
--------------------------------------------------------------------------------------
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------------------
DESCRIPTION 2003(1) 2004(2) 2005 2006 2007 THEREAFTER
---------------------------- ----------- ------------ --------- -------- -------- ----------
Long and short term debt and
notes payable. . . . . . $2,083,000 $12,929,000 - - - -
---------------------------- ----------- ------------ --------- -------- -------- ----------
Future minimum lease
payments. . . . . . . . . $ 388,000 $ 640,000 $ 421,000 $208,000 $208,000 -
---------------------------- ----------- ------------ --------- -------- -------- ----------
Total commitments. . . . . . $2,471,000 $13,569,000 $ 421,000 $208,000 $208,000 -
--------------------------------------------------------------------------------------------------
(1) Principal of $1,300,000 was converted into common stock subsequent to
June 30, 2003, and accordingly is classified as long term on the
Company's balance sheet
(2) Accrued interest totaling $2,444,000 is included in the Company's 12%
Senior Subordinated Notes at June 30, 2003, due to the accounting for
a troubled debt restructuring during 2000. This amount is included in
the above presentation. Accrued interest calculated through March 31,
2003, is deferred for payment until December 30, 2005. Payments on
accrued interest after December 31, 2003 will continue quarterly until
December 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 June 30, 2002 and June 30, 2003, and all
other factors affecting the Company's debt remained the same, pretax earnings
would have been lower by approximately $21,000 and $17,000, 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 June
30, 2002 and 2003 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 $232,000 and $57,000
at June 30, 2002 and 2003, 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.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), as of June
30, 2003. Based on their evaluation, our chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures are effective. During the period covered by this report, there were
no changes in our internal control over financial reporting, as such terms is
defined under Rule 13a-15(f) of the Exchange Act, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000
in cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company by paying the remaining unpaid
$400,000 in March, 2003.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 31, 2003, all 12,000 shares of the Company's Junior Redeemable
Convertible Preferred Stock were converted into 599,618 shares of the Company's
common stock.
On March 20, 2003, 2,119 shares of 5,379 outstanding shares of the
Company's Series C Cumulative Convertible Preferred Stock were converted into
282,534 shares of the Company's common stock.
On May 15, 2003, 830 shares of 3,260 outstanding shares of the Company's
Series C Cumulative Convertible Preferred Stock were converted into 140,400
shares of the Company's common stock.
On March 27, 2003, all shares of 3,726 outstanding shares of the Company's
Series D Cumulative Junior Preferred Stock were converted into 562,848 shares of
the Company's common stock
On March 21, 2003, the Prudential Insurance Company, converted 83,232
shares of the Company's series G cumulative convertible preferred stock into
12,062,462 shares of the Company's common stock.
From January to April 2003, all shares of the Company's Series H Cumulative
Convertible Preferred Stock were converted into 13,650,744 shares of the
Company's common stock.
On March 20, 2003, the Company's former Chief Executive Officer exercised
for 900,000 shares of common stock and stock options
During March, April and May 2003, there were a total of 2,045,492 shares of
common stock issued upon the exercise of employee stock options.
24
During April, May and June 2003, there were a total of 8,712,135 shares of
common stock issued upon the exercise of warrants originally issued in
connection with the Specialty Finance Credit Facility and prior private
placements.
These issuances were structured as exempt private placements pursuant to
Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
As of June 30, 2003, the Company was not in compliance with the ratio tests
for the trailing twelve month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults through December 31, 2003. The Company issued
$2,658,931 of new subordinated notes to Prudential. As a result, Prudential
agreed to waive the Company's past covenant defaults through December 31, 2003.
All of the Prudential debt is still classified as current debt since the waiver
is not for a full twelve month period.
As of June 30, 2003, Specialty Finance's participation interest of
$1,000,000 was outstanding as senior secured debt. The Company had not, at that
time, received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 4,956,033 shares of common stock. This note was
converted to equity subsequent to June 30, 2003 and accordingly has been
classified as long term in the accompanying financial statements.
On April 9, 2002, the Company entered into a loan participation agreement
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 had an initial maturity of 90 days, which was
extended for an additional 90 days at the Company's option. The Company issued
an additional 100,000 shares of common stock to the participation lender to
extend the maturity date. On October 9, 2002, the loan extension period
matured.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured.
On July 5, 2002, the Company entered into a loan participation agreement
under which it borrowed an additional $100,000 under its existing Senior Secured
Loan Facility. The effective interest rate of the participation was 25% after
taking into account rate adjustment fees. The Company also paid 3% of the
borrowed amount in origination fees, paid closing expenses and issued 130,000
shares of common stock to the participation lender at closing. The
participation had a maturity of 90 days. On September 28, 2002, the loan
matured. On July 11, 2003, the Company converted this note and the accrued
interest into equity by issuing 503,333 shares of common stock. This note was
converted to equity subsequent to June 30, 2003, and accordingly has been
classified as long term in the accompanying financial statements.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation was 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. On July 18, 2003, the
Company converted this debt and the accrued interest into equity by issuing
931,200 shares
25
of common stock. This note was converted to equity subsequent to June 30, 2003,
and accordingly has been classified as long term in the accompanying financial
statements.
On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short term working
capital up to $1,000,000. The effective interest rate of under the loan
agreement was 15% per annum. Checkpoint collateral included substantially all of
the assets of the Company, including the stock of the Company's Venezuelan
subsidiary. As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. On March
28, 2003, the Company paid in full the principal balance of $700,000 and
interest outstanding under its loan agreement with Checkpoint. On May 7, 2003,
the Company settled Checkpoint's option to purchase its Venezuelan subsidiary
and terminated Checkpoint's exclusivity rights in exchange for $300,000 of cash
and $100,000 in notes maturing in six months.
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)
- Open
- Open
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
26
Exhibit No. Document
------------ -----------------------------------------------
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)
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)
- Open
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)
- Open
10.30 - 2000 Long Term Incentive Plan(38)
10.31 - Eighth Amendment to Loan Agreement dated April 12, 2002(38)
10.32 - Ninth Amendment to Loan Agreement dated May 1, 2002(39)
10.33 - 1st Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated March 29, 2002(40)
10.34 - 2nd Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated June 29, 2002(41)
21.01 - List of subsidiaries(42)
*31.1 Sec.302 Certification by Jerry Winchester
*31.2 Sec.302 Certification by Kevin Johnson
*32.1 Sec.906 Certification by Jerry Winchester
*32.2 Sec.906 Certification by Kevin Johnson
*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.
27
(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.
(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.
28
(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.
(39) Incorporated herein by reference to exhibit 10.32 of Form 10-Q filed
November 14, 2002.
(40) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed
November 14, 2002.
(41) Incorporated herein by reference to exhibit 10.34 of Form 10-Q filed
November 14, 2002.
(42) Incorporated herein by reference to exhibit 21.01 of Form 10-Q filed May
14, 2002.
(b) Reports on Form 8-K
The Company filed an 8-K on April 1, 2003, filing its fiscal 2002
earnings release
The Company filed an 8-K on May 2, 2003, filing its first quarter 2003
earnings release
29
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/ JERRY WINCHESTER
--------------------------------
Jerry Winchester
Chief Executive Officer
By: /s/ KEVIN JOHNSON
--------------------------------
Kevin Johnson
Principal Accounting Officer
Date: August 14, 2003
30