UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
_______________
Form
10-K
_______________
For
the fiscal year ended December 31, 2005
Commission
file number 1-13817
_______________
Boots
& Coots
International
Well Control, Inc.
(Name
of
Registrant as specified in Its Charter)
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Delaware
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11-2908692
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(State
or Other Jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or Organization)
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11615
N. Houston Rosslyn
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77086
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Houston,
Texas
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(Zip
Code)
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(Address
of Principal Executive Offices)
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281-931-8884
(Issuer's
Telephone Number, Including Area Code)
_______________
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $.00001 par value
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American
Stock Exchange
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Securities
registered under Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer as
defined
in Rule 403 of the Securities act. Yes o No x
Indicate
by check mark whether the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes x No o
Indicate
by check mark whether the registrant (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K o.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filers (as defined in Exchange
Act Rule
(2b-2))
Large
Accelerated Filer o Accelerated
Filer o Non-Accelerated
Filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the act. Yeso
No x
The
aggregate market value of common stock held by non-affiliates as of June
30,
2005 was $30,761,000
The
number of shares of the issuer's common stock, par value $.00001, outstanding
on
March 30, 2006 was 58,269,971
DOCUMENTS
INCORPORATED BY REFERENCE
2
ANNUAL
REPORT
For
the Year Ended December 31, 2005
TABLE
OF CONTENTS
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CERTIFICATIONS
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FINANCIAL
STATEMENTS
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This
Annual Report on Form 10-K and the documents referred to herein contain
forward-looking statements based on expectations, estimates and projections
as
of the date of this filing. These statements by their nature are subject
to
risks, uncertainties and assumptions and are influenced by various factors
and,
as a consequence, actual results may differ materially from those expressed
in
these forward-looking statements. See Item 1A - Risk Factors and Item 7 of
Part
II - “Management’s
Discussion and Analysis of Financial Condition and Results of Operations
-
Forward-Looking Statements.”
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Description
of Business
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General
Boots
& Coots International Well Control, Inc., Houston, Texas, (the “Company”)
provides a suite of integrated oilfield services centered on the prevention,
emergency response and restoration of blowouts and well fires around the
world.
Our proprietary risk management program, WELLSURE®,
combines traditional well control insurance with post-event response as well
as
preventative services, giving oil and gas operators and insurance underwriters
a
medium for effective management of well control insurance policies. Our
SafeGuard program, developed for international producers and operators sponsored
by us, provides dedicated emergency response and risk management services
including risk assessment, prevention, loss mitigation, contingency planning
and
continuous training and education in all aspects of critical well management.
Through our recently acquired hydraulic workover division, we provide hydraulic
units for emergency well control situations (snubbing) and various hydraulic
well control solutions involving workovers, well drilling, well completion
and
plugging and abandoments. Our corporate headquarters are located in Houston,
Texas, and we operate primarily in the United States, Venezuela, the Middle
East
and Africa.
Recent
Developments
Acquisition
of Hydraulic Workover Division of Oil States International,
Inc.
On
March
3, 2006, we acquired the hydraulic well control business (HWC) of Oil States
International, Inc. (NYSE: OIS). Under terms of the transaction agreement,
we
issued approximately 26.5 million shares (or approximately 46%) of our common
stock and subordinated promissory notes with an aggregate balance of $15
million, subject to adjustment, as consideration for the acquisition.
We
expect
to realize significant operating synergies as a result of the acquisition.
Both
businesses are global leaders in their respective pressure control markets.
The
acquisition significantly expands our presence in the pressure control market
by
enabling us to provide our clients with hydraulic workover services, snubbing
services, engineering, risk management and other prevention services as well
as
full emergency response capability for well control events. We also expect
to
develop business in areas where HWC has ongoing operations but we previously
did
not, including Congo, Egypt, and Dubai.
New
Credit Facility
In
conjunction with the acquisition of HWC, we entered into a new credit facility
with Wells Fargo Bank, National Association which established a revolving
credit
facility of $10,300,000, subject to a borrowing base initially set at
$5,993,189, and a term credit facility of $9,700,000. The term credit facility
is due and payable in full on March 3, 2010, subject to extension to March
3,
2011. The revolving credit facility is due and payable in full on March 3,
2010,
subject to a year-to-year renewal thereafter. We utilized initial borrowings
under these credit facilities to repay amounts outstanding under previous
credit
facilities, and to repurchase all of our outstanding shares of preferred
stock
and for other corporate purposes.
SafeGuard
Algeria
On
November 9, 2004, we announced a significant expansion of the scope of our
services in Algeria with the signing of two SafeGuard contracts totaling
$23.3
million, a substantial portion which we expect to realize during the first
three
years of the agreement. Under the terms of both SafeGuard contracts, we are
providing training, risk analyses, contingency planning and well inspections,
as
well as the prevention and control of blowouts and the mitigation of risk
related to installations. The work under these contracts began in January
2005
and is expected to continue through 2008.
History
of Boots & Coots
Boots
& Coots International Well Control, Inc. was incorporated in Delaware in
April 1988, and remained largely inactive until acquiring IWC Services, Inc.,
a
Texas corporation on July 29, 1997. IWC Services was a global-response oil
and
gas well control service company that specialized in responding to and
controlling oil and gas well emergencies, including blowouts and well fires.
IWC
Services was organized in June 1995 by six former key employees of the Red
Adair
Company.
On
July
31, 1997, we acquired substantially all of the operating assets of Boots
&
Coots, L.P., a Colorado limited partnership, and the stock of our subsidiary
corporations, Boots & Coots Overseas, Ltd., and Boots & Coots de
Venezuela, S.A. Boots & Coots, L.P. and our subsidiaries were engaged in oil
well fire fighting, snubbing and blowout control services. Boots & Coots,
L.P. was organized by Boots Hansen and Coots Matthews, two former employees
of
the Red Adair Company who, like the founders of IWC Services, left that firm
to
form an independent company, which was a primary competitor of IWC Services.
As
a consequence of the acquisition of Boots & Coots, L.P., we became a leader
in the worldwide oil well firefighting and blowout control industry, reuniting
many of the former employees of the Red Adair Company.
On
March
3, 2006, we acquired HWC, which provides hydraulic units for emergency well
control situations (snubbing) and provides various hydraulic well control
solutions involving workover, well drilling, well completion, and plugging
and
abandonment to the oil and gas industry. We
provide our workover products and services primarily to customers in the
U.S., Venezuela, the Middle East, North and West Africa, for both onshore
and offshore applications. Workover products and services are used in operations
on a producing well to restore or increase production. Workover services
are
typically used during the development, production and abandonment stages
of the
well. Our hydraulic workover units are used for workover operations and snubbing
operations in pressure situations.
A
hydraulic workover unit is a specially designed rig used for moving tubulars
in
and out of a wellbore using hydraulic pressure. These units may be used for
servicing wells that are not producing or for working on wells under pressure.
These units may be used for underbalanced drilling and workover and also
in well
control applications. When a unit is snubbing, it is pushing pipe or tubulars
into the well bore against well bore pressures. Because of their small size
and
ability to work on wells under pressure, hydraulic workover units offer some
advantages over larger workover rigs and conventional drilling rigs. However,
most wells where we perform workover service are wells with no
pressure.
Our
business is primarily dependent on the condition of the oil and gas industry
and, in particular, the level of capital expenditures by oil and gas companies
for workover and drilling services in our operating areas, which directly
affects demand for our pre-event planning, prevention, engineering, workover
and
other non-event related products and services, and may indirectly impact
the
longer-term prospects for our well control and other event-driven services.
These expenditures are influenced by prevailing oil and gas prices, expectations
about future demand and prices, the cost of exploring, producing and developing
oil and gas reserves, the discovery rates of new oil and gas reserves, political
and economic conditions, governmental regulation and the availability and
cost
of capital.
Business
Strategy. The
market for well control response services is finite, with services dependent
upon the occurrence of blowouts that cannot be reasonably predicted.
Accordingly, we have endeavored to build upon our demonstrated strengths
in risk
management by increasing our more predictable revenues from our pre-event
and
engineering services and non-critical event services. During 2005, we were
successful in growing these additional services primarily in international
markets by utilizing our existing business platform. The acquisition of HWC
represents a significant expansion of our strategy to include the acquisition
of
assets that support our business strategy. The acquisition of HWC positions
us
to penetrate the “snubbing”, or pressured, well segment of the market. We intend
to continue to seek complementary business acquisitions that would enable
us to
attain more predictable levels of income, broaden our service capabilities
and
increase our geographic presence.
Executive
Offices. Our
principal executive office is located at 11615 N. Houston-Rosslyn, Houston,
Texas, 77086.
The
Emergency Response Segment of the Oil and Gas Service
Industry
History.
The
emergency response segment of the oil and gas services industry traces its
roots
to the late 1930’s when Myron Kinley organized the Kinley Company, the first oil
and gas well firefighting specialty company. Shortly after organizing the
Kinley
Company, Mr. Kinley took on an assistant named Red Adair who learned the
firefighting business under Mr. Kinley’s supervision and remained with the
Kinley Company until Mr. Kinley’s retirement. When Mr. Kinley retired in the
late 1950’s, Mr. Adair organized the Red Adair Company and subsequently hired
Boots Hansen, Coots Matthews and Raymond Henry as members of his professional
firefighting staff. Mr. Adair later added Richard Hatteberg, Danny Clayton,
Mike
Foreman and Juan Moran to his staff, and the international reputation of
the Red
Adair Company grew to the point where it was a subject of popular films and
the
dominant competitor in the industry. Boots Hansen and Coots Matthews remained
with the Red Adair Company until 1978 when they split off to organize Boots
& Coots, an independent firefighting, snubbing and blowout control
company.
Historically,
the well control emergency response segment of the oil and gas services industry
has been reactive, rather than proactive, and a small number of companies
have
dominated the market. As a result, if an operator in West Africa, for example,
experienced a well blowout and fire, he would likely call a well control
emergency response company in Houston, Texas that would take the following
steps:
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·
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Immediately
dispatch a control team to the well location to assess the damage,
supervise debris removal, local equipment mobilization and site
preparation;
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Gather
and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies
and ancillary
firefighting resources;
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Develop
or implement a detailed fire suppression and well-control
plan;
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Mobilize
additional well-control and firefighting equipment in Houston,
Texas;
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Transport
equipment by air freight from Houston Texas to the blowout
location;
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Extinguish
the fire and bring the well under control;
and
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·
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Transport
the control team and equipment back to Houston,
Texas.
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On
a
typical blowout, debris removal, fire suppression and well control can require
several weeks of intense effort and consume large sums of money.
The
1990’s represented a period of rapid change in the oil and gas well control and
firefighting business. The hundreds of oil well fires that were started by
Iraqi
troops during their retreat from Kuwait spurred the development of new
firefighting techniques and tools that have now become industry standards.
Moreover, after extinguishing the Kuwait fires, the entrepreneurs who created
the oil and gas well firefighting industry, including Red Adair, Boots Hansen
and Coots Matthews, retired, leaving our senior staff as the most experienced
active oil and gas well firefighters in the world. At present, the principal
competitors in the oil and gas well firefighting business are Wild Well Control,
Inc.,
a
Superior Energy Services Company (SPN),
and
Cudd Pressure Control, Inc (RPC).
Trends.
In
the
United States and Gulf Coast regions, the increased recognition of the
importance of risk management services, training and emergency preparedness,
are
having a profound impact on the emergency response segment of the oil and
gas
services industry. Instead of waiting for a blowout, fire or other disaster
to
occur, both major and independent oil and gas producers are coming to us
for
proactive preparedness and incident prevention programs. These requests,
together with pre-event consultation on matters relating to well control
training, blowout contingency planning, on-site safety inspections and formal
fire drills, are expanding the market for our engineering services.
Underwriting
syndicates continue to seek firm renewal rates and higher quality risks in
the
“Control of Well” segment of the energy insurance market. We believe these
factors enhance the viability of proven alternative risk transfer programs
such
as WELLSURE®,
a
proprietary insurance program in which we provide both pre-event and loss
management services.
In
the
international markets, national oil and gas companies and large international
operators are becoming aware of the risks associated with older poorly
maintained wells and wellheads, internal competency levels among core employees
and service vendors and societal risks from fields positioned in high population
areas. This awareness is leading to increased demand for comprehensive risk
management services to assess the magnitude of exposure, prevent catastrophic
failures and mitigate damages in the event a loss occurs. We have a proven
ability to provide these risk management services in the form of
training, risk analyses, contingency planning, audit programs and well
inspections, as well as the prevention and control of blowouts and the
mitigation of risks related to installations. These services are typical
of
those provided under our SafeGuard programs in Algeria and Venezuela.
Volatility
of Firefighting Revenues. The
market for oil and gas well firefighting and blowout control services is
highly
volatile due to factors beyond our control, including changes in the volume
and
type of drilling and work-over activity occurring in response to fluctuations
in
oil and natural gas prices. Wars, acts of terrorism and other unpredictable
factors may also increase the need for oil and gas well firefighting and
blowout
control services from time to time. As a result, we expect to experience
large
fluctuations in our revenues from oil and gas well firefighting and blowout
control services reported under our Response segment. Our initiatives to
generate a more predictable non-event revenue stream by expanding the scope
of
our Prevention services with engineering, SafeGuard and WELLSURE capabilities
and our strategy to acquire complementary businesses, such as HWC, are designed
to broaden our product and service offerings and mitigate the revenue and
earnings volatility associated with oil and gas well firefighting and blowout
control services. Despite growth in the Prevention segment, we are susceptible
to this volatility. Accordingly, we expect our revenues and operating
performance to vary considerably from year to year in the
future.
Our
principal products and services for our two business segments
include:
Prevention
SafeGuard.
A
program
designed for national oil and gas companies and large international operators
that combines our technical resources and response capabilities to assess
and
mitigate well control risks and manage loss during and after a well control
event. A typical program outline provides for risk assessment related to
the
client’s internal planning processes, personnel, property and facilities,
prevention services include training, well plan review and intervention planning
and the development of comprehensive audit and inspection programs. In order
to
mitigate a potential loss, the client typically will purchase fire fighting
and
blow out control equipment from us. We provide response personnel “in country”
to maintain the equipment and provide initial response capability in the
early
stages of a well control event. We will also provide “post event” services
including project management and engineering as well as health, safety and
environmental services.
WELLSURE® Program
- Prevention. We
and
Global Special Risks, Inc., a managing general insurance agent located in
Houston, Texas, and New Orleans, Louisiana, have formed an alliance that
offers
oil and gas exploration and production companies, through retail insurance
brokers, a program known as “WELLSURE®,”
which
combines traditional well control and blowout insurance with our post-event
response services and well control preventative services including company-wide
and/or well specific contingency planning, personnel training, safety
inspections and engineering consultation. Insurance provided under
WELLSURE®
has been
arranged with leading London insurance underwriters.
WELLSURE®
program
participants are provided with the full benefit of having us as a safety
and
prevention partner. We generate service fees based upon the scope of prevention
activity required.
Hydraulic
Workover Service. We
provide workover products and services for both onshore and offshore
applications. Workover products and services are used in operations on a
producing well to restore or increase production. Workover services are
typically used during the development, production and abandonment stages
of the
well.
Engineering
Services.
With
greater engineering capabilities than our competitors, we provide pre-event
engineering services that include consultation, well planning, dynamic kill
modeling and intervention planning.
Firefighting
Equipment Sales and Service. In
this
service line, we sell complete firefighting equipment packages, together
with
maintenance, monitoring, updating of equipment and ongoing consulting services.
Specialized
Drilling Engineering. We
have a
highly specialized in-house engineering staff which provides engineering
services, including planning and design of relief well drilling (trajectory
planning, directional control and equipment specifications, and on-site
supervision of drilling operations); planning and design of production
facilities which are susceptible to well capping or other control procedures;
and mechanical and computer aided designs for well control
equipment.
Inspections.
A
cornerstone of our strategy of providing preventive well control services
involves on-site inspection services for drilling and workover rigs, production
platforms and field production facilities.
Training.
We
provide specialized training in well control procedures for drilling,
exploration and production personnel for both U.S. and international operators.
Additionally, we provide competency programs, blowout drills and evaluations
as
well as incident command training.
Response
Well
Control. This
service segment is divided into two distinct levels: “Critical Event” response
is ordinarily reserved for well control projects where hydrocarbons are escaping
from a well bore, regardless of whether a fire has occurred; “Non-critical
Event” response, on the other hand, is intended for the more common sub-surface
operating problems that do not involve escaping hydrocarbons.
Critical
Events. Critical
Events frequently result in explosive fires, loss of life, destruction of
drilling and production facilities, substantial environmental damage and
the
loss significant amounts of money per day in production revenue. Since Critical
Events ordinarily arise from equipment failures or human error, it is impossible
to accurately predict the timing or scope of our Critical Event work. Critical
Events of catastrophic proportions can result in significant revenues to
us in
the year of the incident. Our professional firefighting staff has over 300
years
of combined industry experience in responding to Critical Events, oil well
fires
and blowouts.
Non-critical
Events. Non-critical
Events frequently occur in connection with workover operations or the drilling
of new wells into high pressure reservoirs. In most Non-critical Events,
the
blowout prevention equipment and other safety systems on the drilling rig
function according to design and in those instances, we are called upon to
supervise and assist in the well control effort so that drilling operations
can
resume as promptly as safety permits. While Non-critical Events do not
ordinarily have the revenue impact of a Critical Event, they are more common.
Non-critical Events can escalate into Critical Events.
Firefighting
Equipment Rentals. This
service includes the rental of specialty well control and firefighting equipment
primarily for use in conjunction with Critical Events, including firefighting
pumps, pipe racks, athey wagons, pipe cutters, crimping tools and deluge
safety
systems. We charge this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical
Event.
WELLSURE® Program
- Response. Under
the
WELLSURE insurance program, we serve as the emergency response provider in
the
event of a well blowout, as well as project manager for control and restoration
of wells covered under the program.
Snubbing
Services. We
provide hydraulic workover units for emergency well control situations to
the
oil and gas industry. A
hydraulic workover unit is a specially designed rig used for moving tubulars
in
and out of a wellbore using hydraulic pressure. These units may be used for
servicing wells that are under pressure (snubbing).
These
units may also be used for underbalanced drilling and workover. When a unit
is
snubbing, it is pushing pipe or tubulars into the well bore against well
bore
pressures.
Dependence
upon Customers
We
have
historically not been materially dependent upon a single or a few customers.
The
emergency response business is by nature episodic and unpredictable. A customer
that accounted for a material amount of business as a result of an oil well
blow-out or similar emergency may not account for a material amount of business
after the emergency is over. While prevention services in general are generated
from a base of several hundred customers, a significant portion of the total
revenue in recent years has been generated by less than five international
clients.
Regulation
Our
operations are affected by numerous federal, state, and local laws and
regulations relating, among other things, to workplace health and safety
and the
protection of the environment. The technical requirements of these laws and
regulations are becoming increasingly complex and stringent, and compliance
is
becoming increasingly difficult and expensive. However, we do not believe
that
compliance with current laws and regulations is likely to have a material
adverse effect on our business or financial statements. Nevertheless, we
are
obligated to exercise prudent judgment and reasonable care at all times and
the
failure to do so could result in liability under any number of laws and
regulations.
Certain
environmental laws provide for “strict liability” for remediation of spills and
releases of hazardous substances and some provide liability for damages to
natural resources or threats to public health and safety. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible
that
changes in the environmental laws and enforcement policies hereunder, or
claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to us. Our insurance policies
provide liability coverage for sudden and accidental occurrences of pollution
and/or clean-up and containment of the foregoing in amounts which we believe
are
comparable to companies in the industry. To date, we have not been subject
to
any fines or penalties for violations of governmental or environmental
regulations and have not incurred material capital expenditures to comply
with
environmental regulations.
Research
and Development
We
are
not directly involved in activities that will require the expenditure of
substantial sums on research and development.
Competition
The
emergency response segment of the oil and gas services business is a dynamic
market in which new technical developments could afford a service company
a
significant advantage. At present, the principal competitors in the oil and
gas
well firefighting business are Wild Well Control, Inc., (Superior Energy
Services), and Cudd Pressure Control, Inc (RPC). We believe that our SafeGuard
expansion strategy along with the WELLSURE®
program
and the recent acquisition of HWC have strengthened our competitive position
in
the industry by expanding both the scope of services that we offer to our
customers as well as our geographic presence.
Although
we have a strong market share position in workover products and services,
the
market is highly fragmented. Our main competitors in hydraulic workover include
Halliburton Energy Services (HAL), Cudd Pressure Control, (RPC) and
International Snubbing Services, a Superior Energy Services Company
(SPN).
Our
competitors may succeed in developing new techniques, products and services
that
are more effective than any that have been or are being developed by us or
that
render our techniques, products and services obsolete or noncompetitive.
Our
competitors may also succeed in obtaining patent protection or other
intellectual property rights that might hinder our ability to develop, produce
or sell competitive products or the specialized equipment used in our
business.
Employees
As
of
March 30, 2005, we and our operating subsidiaries collectively had 344 full-time
employees, and 11 part-time personnel, who are available as needed for emergency
response projects. In addition, we have several part-time consultants and
also
employ part-time contract personnel who remain on-call for certain emergency
response projects. We are not subject to any collective bargaining agreements
and consider our relations with our employees, consultants and contract
personnel to be good.
Operating
Hazards; Liability Insurance Coverage
Our
operations involve ultra-hazardous activities that involve an extraordinarily
high degree of risk. Hazardous operations are subject to accidents resulting
in
personal injury and the loss of life or property, environmental mishaps and
mechanical failures, and litigation arising from such events may result in
our
being named a defendant in lawsuits asserting large claims. We may be held
liable in certain circumstances, including if we fail to exercise reasonable
care in connection with our activities, and we may also be liable for injuries
to agents, employees and contractors who are acting within the course and
scope
of their duties. We and our subsidiaries currently maintain liability insurance
coverage with aggregate policy limits which are believed to be adequate for
our
respective operations. However, it is generally considered economically
unfeasible in the oil and gas service industry to maintain insurance sufficient
to cover large claims. A successful claim for which we are not fully insured
could have a material adverse effect on us. No assurance can be given that
we
will not be subject to future claims in excess of the amount of insurance
coverage which we deem appropriate and feasible to maintain.
Reliance
upon Officers, Directors and Employees
Our
services require highly specialized skilled personnel. Because of the unique
nature of the industry and the small number of persons who possess the requisite
skills and experience, we are highly dependent upon the personal efforts
and
abilities of our employees. In seeking qualified personnel, we may be required
to compete with companies having greater financial and other resources than
us.
Our future success will be dependent upon our ability to attract and retain
qualified personnel, and the inability to do so, or the loss of personnel,
could
have a material adverse impact on our business.
Contractual
Obligations to Customers; Indemnification
We
customarily enter into service contracts which contain provisions that hold
us
liable for various losses or liabilities incurred by the customer in connection
with our activities, including, without limitation, losses and liabilities
relating to claims by third parties, damage to property, violation of
governmental laws, regulations or orders, injury or death to persons, and
pollution or contamination caused by substances in our possession or control.
We
may be responsible for any such losses or liabilities caused by contractors
retained by us in connection with the provision of services. In addition,
such
contracts generally require us, our employees, agents and contractors to
comply
with all applicable laws, rules and regulations (which may include the laws,
rules and regulations of various foreign jurisdictions) and to provide
sufficient training and educational programs to such persons in order to
enable
them to comply with applicable laws, rules and regulations. In the case of
emergency response services, we frequently enter into agreements with customers
which limit our exposure to liability and/or require the customer to indemnify
us for losses or liabilities incurred by us in connection with such services,
except in the case of gross negligence or willful misconduct. There can be
no
assurance, however, that such contractual provisions limiting our liability
will
be enforceable in whole or in part under applicable law.
|
Risk
Factors.
|
In
addition to the other information set forth elsewhere or incorporated by
reference in this report, the following factors relating to us and our common
stock should be considered carefully.
Risks
Relating to Our Business
Decreased
oil and gas industry expenditure levels will adversely affect our results
of
operations.
Our
business depends upon the oil and gas industry and its ability and willingness
to make expenditures to explore for, develop and produce oil and gas. If
these
expenditures decline, our business will suffer. The industry’s willingness to
explore, develop and produce depends largely upon the availability of attractive
drilling and workover prospects and the prevailing view of future product
prices. Many factors affect the supply and demand for oil and gas and therefore
influence product prices, including:
|
·
|
the
level of production;
|
|
·
|
the
levels of oil and gas inventories;
|
|
·
|
the
expected cost of developing new
reserves;
|
|
·
|
the
actual cost of finding and producing oil and
gas;
|
|
·
|
the
availability of attractive oil and gas field prospects which may
be
affected by governmental actions or environmental activists which
may
restrict drilling;
|
|
·
|
the
availability of transportation infrastructure and refining
capacity;
|
|
·
|
depletion
rates;
|
|
·
|
the
level of drilling activity;
|
|
·
|
worldwide
economic activity including growth in underdeveloped
countries;
|
|
·
|
national
government political requirements, including the ability of the
Organization of Petroleum Exporting Companies (OPEC) to set and
maintain
production levels and prices for
oil;
|
|
·
|
the
impact of armed hostilities involving one or more oil producing
nations;
|
|
·
|
the
cost of developing alternate energy
sources;
|
|
·
|
environmental
regulation; and
|
|
·
|
tax
policies.
|
If
demand
for drilling services, cash flows of drilling contractors or drilling rig
utilization rates decrease significantly then demand for our services will
decrease, which will adversely affect our results of
operations.
We
may not successfully integrate the businesses we acquire or achieve the benefits
we are seeking from acquisitions.
On
March
3, 2006, we completed the acquisition of the hydraulic workover business
of Oil
States International, Inc., or HWC. Our success will partially depend upon
the
integration of the operations of this business and any other businesses we
may
acquire and our ability to retain and timely employ personnel necessary to
augment our staff in a competitive environment. Our management team does
not
have experience with the combined activities of us and HWC. We may not be
able
to integrate these operations without loss of revenues, increases in operating
or other costs, or other difficulties. In addition, we may not be able to
realize the operating efficiencies and other benefits sought from the
acquisition or from other acquisitions we may pursue in the future.
Disruptions
in the political and economic conditions of the foreign countries in which
we
operate expose us to risks that may have a material adverse effect on our
business.
A
significant portion of our revenue is derived from our operations outside
of the
United States, which exposes us to risks inherent in doing business in each
of
the countries in which we transact business. Our operations in countries
other
than the United States accounted for approximately 55% of our consolidated
revenues for 2005. Further, we anticipate that our revenues from foreign
operations will increase significantly during 2006 as a consequence of our
recently completed acquisition of HWC. Operations in countries other than
the
United States are subject to various risks peculiar to each country. With
respect to any particular country, these risks may include:
|
·
|
expropriation
and nationalization of our assets in that
country;
|
|
·
|
political
and economic instability;
|
|
·
|
civil
unrest, acts of terrorism, force majeure, war, or other armed
conflict;
|
|
·
|
natural
disasters, including those related to earthquakes and
flooding;
|
|
·
|
inflation;
|
|
·
|
currency
fluctuations, devaluations, and conversion
restrictions;
|
|
·
|
confiscatory
taxation or other adverse tax
policies;
|
|
·
|
governmental
activities that limit or disrupt markets, restrict payments, or
limit the
movement of funds;
|
|
·
|
governmental
activities that may result in the deprivation of contract rights;
and
|
|
·
|
trade
restrictions and economic embargoes imposed by the United States
and other
countries.
|
Due
to
the unsettled political conditions in many oil-producing countries, our revenue
and profits are subject to the adverse consequences of war, the effects of
terrorism, civil unrest, strikes, currency controls, and governmental actions.
International areas where we operate that have significant amounts of political
risk include parts of Africa, South America and the Middle East. Operations
in
these areas increase our exposure to the foregoing risks, the occurrence
of any
of which may:
|
·
|
disrupt
our operations;
|
|
·
|
restrict
the movement of funds or limit repatriation of
profits;
|
|
·
|
lead
to U.S. government or international sanctions;
and
|
|
·
|
limit
access to markets for periods of
time.
|
In
addition, military action or continued unrest in the Middle East could impact
the supply and pricing for oil and gas, disrupt our operations in the region
and
elsewhere, and increase our costs for security worldwide.
We
do business in international jurisdictions whose regulatory environments
and
compliance regimes differ from those in the United States. Our business may
suffer because our efforts to comply with United States laws and regulations
could restrict our ability to do business in international jurisdictions,
relative to our competitors who are not subject to United States laws and
regulations.
Our
international business operations include projects in countries where our
competitors who are not subject to United States laws and regulations, such
as
the Foreign Corrupt Practices Act, can gain competitive advantages over us
by
securing business awards, licenses or other preferential treatment in those
jurisdictions using methods that United States law and regulations prohibit
us
from using. For example, our non-U.S. competitors are not subject to the
anti-bribery restrictions of the Foreign Corrupt Practices Act, which make
it
illegal to give anything of value to foreign officials or employees or agents
of
nationally owned oil companies in order to obtain or retain any business
or
other advantage. We may be subject to competitive disadvantages to the extent
that our competitors are able to secure business, licenses or other treatment
by
making payments to government officials and others in position of
influence.
We
are subject to foreign exchange and currency risks, particularly with respect
to
Venezuela.
A
significant portion of our consolidated revenue and consolidated operating
expenses are in foreign currencies, primarily Venezuelan Bolivars.
As a
result, we are subject to significant risks, including:
|
·
|
foreign
exchange risks resulting from changes in foreign exchange rates
and our
exchange controls; and
|
|
·
|
limitations
on our ability to reinvest earnings from operations in one country
to fund
the capital needs of our operations in other
countries.
|
We
operate 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. We typically endeavor to denominate our contracts in U.S. dollars
to mitigate exposure to fluctuations in foreign currencies. On December 31,
2005, we had $857,000 of cash and $779,000 in accounts receivable attributable
to our Venezuelan SafeGuard operations. Of this cash, $538,000 was denominated
in U.S. Dollars and resided in a U.S. bank. Effective February 5, 2004, the
exchange rate in Venezuela changed from 1,600 to 1,920 Bolivars to the U.S.
dollar and effective March 1, 2005, the exchange rate in Venezuela further
devalued from 1,920 to 2,150 Bolivars to the U.S. dollar. We have taken charges
to equity under the caption “foreign currency translation loss” for
approximately $361,000 and $434,000 during the years ended December 31, 2005
and
2004, respectively, to reflect the devaluation of the Bolivar. Venezuela
is also
on the U.S. government’s “watch list” for highly inflationary economies. The
Venezuelan government has made it very difficult for U.S. dollars to be
repatriated.
Demand
for our services and products depends on oil and natural gas industry activity
and expenditure levels that are directly affected by trends in oil and natural
gas prices.
Demand
for our products and services is particularly sensitive to the level of
exploration, development, and production activity of, and the corresponding
capital spending by, oil and natural gas companies, including national oil
companies. Prices for oil and natural gas are subject to large fluctuations
in
response to relatively minor changes in the supply of and demand for oil
and
natural gas, market uncertainty, and a variety of other factors that are
beyond
our control. Any prolonged reduction in oil and natural gas prices will depress
the immediate levels of exploration, development, and production activity,
often
reflected as changes in rig counts. Perceptions of longer-term lower oil
and
natural gas prices by oil and gas companies can similarly reduce or defer
major
expenditures given the long-term nature of many large-scale development
projects. Lower levels of activity result in a corresponding decline in the
demand for our services that could have a material adverse effect on our
revenue
and profitability. Factors affecting the prices of oil and natural gas
include:
|
·
|
governmental
regulations, including the policies of governments regarding the
exploration for and production and development of their oil and
natural
gas reserves;
|
|
·
|
global
weather conditions and natural
disasters;
|
|
·
|
worldwide
political, military, and economic
conditions;
|
|
·
|
the
level of oil production by non-OPEC countries and the available
excess
production capacity within OPEC;
|
|
·
|
economic
growth in China and India;
|
|
·
|
oil
refining capacity and shifts in end-customer preferences toward
fuel
efficiency and the use of natural
gas;
|
|
·
|
the
cost of producing and delivering oil and
gas;
|
|
·
|
potential
acceleration of development of alternative fuels;
and
|
|
·
|
the
level of demand for oil and natural gas, especially demand for
natural gas
in the United States.
|
Historically,
the markets for oil and gas have been volatile and are likely to continue
to be
volatile in the future. This volatility causes oil and gas companies and
drilling contractors to change their strategies and expenditure levels. We
have
experienced in the past, and may experience in the future, significant
fluctuations in operating results based on these changes.
We
must successfully compete for the services of highly trained technical
personnel.
Many
of
the services that we provide are complex and highly engineered and often
must be
performed in harsh conditions. We believe that our success depends upon our
ability to employ and retain technical personnel with the ability to provide
and
enhance these services. In addition, our ability to expand our operations
depends in part on our ability to increase our skilled labor force. The demand
for skilled workers is high and the supply is limited. A significant increase
in
the wages paid by competing employers could result in a reduction of our
skilled
labor force, increases in the wage rates that we must pay, or both. If either
of
these events were to occur, our cost structure could increase, our margins
could
decrease, and our growth potential could be impaired.
Our
hydraulic workover business is susceptible to seasonal earnings volatility
and
may be adversely affected by severe weather.
Our
hydraulic well control operations are directly affected by seasonal differences
in weather in the areas in which the business operates, most notably in the
Gulf
of Mexico and the Gulf Coast region. Weather conditions in the Gulf of Mexico
and the Gulf Coast region generally result in higher activity in the spring,
summer and fall months, with the lowest activity in the winter months. In
addition, summer and fall drilling activity and, therefore, the demand for
our
hydraulic well control services can be restricted due to hurricanes and other
storms prevalent in the Gulf of Mexico and along the Gulf Coast. Repercussions
of severe weather conditions may include:
|
·
|
evacuation
of personnel and curtailment of
services;
|
|
·
|
weather-related
damage to offshore equipment resulting in suspension of
operations;
|
|
·
|
weather-related
damage to our facilities;
|
|
·
|
inability
to deliver men or materials to jobsites;
and
|
|
·
|
loss
of productivity.
|
During
2005, HWC suffered the loss of one workover unit as a consequence of severe
weather in the Gulf of Mexico. As a result, full year results are not likely
to
be a direct multiple of any particular quarter or combination of
quarters.
Our
bank lenders can limit our borrowing capabilities, which may materially impact
our operations.
As
of
March 3, 2006, our bank debt was $11.9 million, and we had approximately
$6.0 million of cash and additional available borrowing capacity under our
bank revolving credit facility. The borrowing base limitation under our
revolving credit facility may be subject to redetermination periodically
at the
discretion of the lender. Upon a redetermination, we could be required to
repay
a portion of our bank debt. We may not have sufficient funds to make such
repayments, which could result in a default under the terms of the loan
agreement and an acceleration of the loan. We intend to finance activities
with
our cash flow from operations, bank borrowings and other financing activities.
In addition, we may significantly alter our capitalization in order to make
future acquisitions. These changes in capitalization may significantly increase
our level of debt. If we incur additional debt for these or other purposes,
the
related risks that we now face could intensify. A higher level of debt also
increases the risk that we may default on our debt obligations. Our ability
to
meet our debt obligations and to reduce our level of debt depends on our
future
performance which is affected by general economic conditions and financial,
business and other factors. Many of these factors are beyond our control.
Our
level of debt affects our operations in several important ways, including
the
following:
|
·
|
a
significant portion of our cash flow from operations must be used
to pay
interest on borrowings and is therefore not available to re-invest
in our
business;
|
|
·
|
the
covenants contained in the agreements governing our debt limit
our ability
to borrow additional funds, pay dividends, dispose of assets or
issue
shares of preferred stock and otherwise may affect our flexibility
in
planning for, and reacting to, changes in business
conditions;
|
|
·
|
our
high level of debt may impair our ability to obtain additional
financing
in the future for working capital, capital expenditures, acquisitions,
or
general corporate or other
purposes;
|
|
·
|
our
highly leveraged financial position makes us more vulnerable to
economic
downturns and could limit our ability to withstand competitive
pressures;
and
|
|
·
|
any
debt that we incur under our revolving credit facility will be
at variable
rates which makes us vulnerable to increases in interest
rates.
|
Our
ability to finance our business activities will require us to generate
substantial cash flow.
Our
business activities require substantial capital. We have budgeted total capital
expenditures for 2006 of approximately $3.0 million. We intend to finance
our capital expenditures in the future through cash flows from operations,
the
incurrence of additional indebtedness and/or the issuance of additional equity
securities. We cannot be sure that our business will continue to generate
cash
flow at or above current levels.
If
we are
unable to generate sufficient cash flow from operations to service our debt,
we
may have to obtain additional financing through the issuance of debt and/or
equity. We cannot be sure that any additional financing will be available
to us
on acceptable terms. Issuing equity securities to satisfy our financing
requirements could cause substantial dilution to our existing stockholders.
If
our
revenues were to decrease due to lower industry activity levels, or other
reasons, and if we could not obtain capital through our revolving credit
facility or otherwise, our ability to operate and grow our business could
be
materially adversely affected.
Risks
Relating to Our Relationship with Oil States Energy
Services
Oil
States Energy Services owns a significant percentage of common stock in our
company, which could limit your ability to influence the outcome of stockholder
votes.
Oil
States International, Inc., through its wholly owned subsidiary, Oil States
Energy Services, owns approximately 46% of our common stock outstanding as
of
the date hereof. In addition, Douglas E. Swanson and Cindy B. Taylor, two
current members of our board of directors are directors of Oil States Energy
Services and executive officers of Oil States International, Inc. As a result,
Oil States Energy Services will be able to exercise significant influence
over
the outcome of matters requiring a stockholder vote, including the election
of
directors, the adoption or amendment of provisions in our charter and bylaws,
the approval of mergers and other significant corporate transactions, including
transactions involving a change of control. The interests of Oil States Energy
Services may differ from yours, and Oil States Energy Services may vote its
common stock in a manner that may adversely affect you.
We
have renounced any interest in specified business opportunities, and Oil
States
International and its director nominees on our board of directors generally
have
no obligation to offer us those opportunities.
Pursuant
to our certificate of incorporation, we have renounced any interest or
expectancy in specified business opportunities in which Oil States
International, any of its affiliates or any of their respective officers,
directors, employees or other agents serving as a member of our board of
directors (collectively, the “Oil States Group”) participates or desires or
seeks to participate and that involves any aspect of the energy equipment
or
services business or industry. Our certificate of incorporation also provides
that if any such business opportunity is presented to a person who is a member
of the Oil States Group, including any of those individuals who also serves
as a
member of our board of directors:
|
·
|
no
member of the Oil States Group or any of those individuals has
any
obligation to communicate or offer the opportunity to us;
and
|
|
·
|
such
entity or individual may pursue the opportunity as that entity
or
individual sees fit,
|
unless:
|
·
|
it
was presented to a member of the Oil States Group who also serves
as a
member of our board of directors solely in that person’s capacity as a
director of our company and no other member of the Oil States Group
independently received notice of or otherwise identified such opportunity;
or
|
|
·
|
the
opportunity was identified solely through the disclosure of information
by
or on behalf of our company.
|
These
provisions of our certificate of incorporation may be amended only by an
affirmative vote of holders of at least 80% of our outstanding common stock.
As
a result of these charter provisions, our future competitive position and
growth
potential could be adversely affected.
Risks
Relating to Ownership of Our Common Stock
Future
sales of our common stock by our existing stockholders may depress our stock
price.
As
of the
date of this report, there are approximately 58.3 million shares of our
common stock are outstanding and approximately 8.6 million shares of our
common
stock that are issuable upon the exercise or conversion of outstanding options
and warrants. We have recently filed a registration registering 26,462,137
shares of our common stock for resale, which constitute approximately 46%
of our
issued and outstanding common stock as of the date hereof. In addition, we
have
filed registration statements with the Securities and Exchange Commission
with
respect to the offer and sale of approximately 4.3 million shares of common
stock underlying certain warrant agreements, employee stock option plans
and
director stock option plans, and we may register additional shares underlying
these or other plans in the future. All of the common stock covered by these
registration statements may be sold by the selling security holders in market
transactions from time to time. Sales of a substantial number of shares of
our
common stock in the public market, or the perception that these sales may
occur,
could cause the market price of our common stock to decline.
We
have not paid, and do not anticipate paying, any dividends on our common
stock
in the foreseeable future.
We
have
never paid any cash dividends on our common stock. We do not expect to declare
or pay any cash or other dividends in the foreseeable future on our common
stock. Our existing revolving credit facility restricts our ability to pay
cash
dividends on our preferred stock and common stock, and we may also enter
into
credit agreements or other borrowing arrangements in the future that further
restrict our ability to declare cash dividends on our preferred stock and
common
stock.
You
may experience dilution of your ownership interests due to the future issuance
of additional shares of our common stock.
We
may in
the future issue our previously authorized and unissued securities, resulting
in
the dilution of the ownership interests of our present stockholders. We are
currently authorized to issue 125 million shares of common stock and five
million shares of preferred stock with such designations, preferences and
rights
as determined by our board of directors. As of the date of this report,
approximately 58.3 million shares of common stock are outstanding, and
approximately 8.6 million shares of common stock are issuable upon the
exercise of outstanding options and warrants. The potential issuance of such
additional shares of common stock may create downward pressure on the trading
price of our common stock. We may also issue additional shares of our common
stock or other securities that are convertible into or exercisable for common
stock in connection with the hiring of personnel, future acquisitions, future
private placements of our securities for capital raising purposes, or for
other
business purposes. The number of shares that can be issued under our employee
plans is approximately 4.3 million shares. Any such issuance would further
dilute the interests of our existing stockholders.
We
may issue preferred stock, the terms of which could adversely affect the
voting
power or value of our common stock.
Our
certificate of incorporation authorizes us to issue, without the approval
of our
stockholders, one or more classes or series of preferred stock having such
preferences, powers and relative, participating, optional and other rights,
including preferences over our common stock respecting dividends and
distributions, as our board of directors may determine. The terms of one
or more
classes or series of preferred stock could adversely impact the voting power
or
value of our common stock. For example, we might afford holders of preferred
stock the right to elect some number of our directors in all events or on
the
happening of specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences
we
might assign to holders of preferred stock could affect the residual value
of
our common stock.
The
ownership interest of Oil States Energy Services, our Rights Agreement,
provisions contained in our certificate of incorporation and bylaws and
provisions of Delaware law could discourage a takeover attempt, which may
reduce
or eliminate the likelihood of a change of control transaction and, therefore,
your ability to sell your shares for a premium.
The
significant ownership position of Oil States Energy Services, our Rights
Agreement, provisions contained in our certificate of incorporation and bylaws
and provisions of Delaware law could make it more difficult for a third party
to
acquire control of our company. We have entered into a Rights Agreement that
would cause extreme dilution to any person or group (other than Oil States
Energy Services, its affiliates and certain of its direct transferees) who
attempts to acquire a significant interest in us without advance approval
of our
board of directors. Our certificate of incorporation and bylaws include
provisions for a classified board, limitations on the removal of directors
and
on stockholder proposals at meetings of stockholders and the inability of
stockholders to call special meetings. Our certificate of incorporation also
authorizes our board of directors to issue preferred stock without stockholder
approval. In addition, Section 203 of the Delaware General Corporation Law
imposes restrictions on mergers and other business combinations between us
and
any holder of 15% or more of our outstanding common stock. Each of these
factors
could increase the difficulty for a third party to acquire us and therefore
delay or prevent a change of control transaction, even if that change would
be
beneficial to our stockholders, which could affect the value of our common
stock
and reduce or eliminate your ability to sell your shares of common stock
at a
premium.
|
Unresolved
Staff Comments.
|
None.
|
Item
2.
|
Description
of Properties.
|
We
own a
facility in northwest Houston, Texas, at 11615 N. Houston-Rosslyn Road, that
includes approximately 2 acres of land, a 4,000 square foot office building
and
a 12,000 square foot manufacturing and warehouse building. We also own
approximately 6.3 acres of land and a 62,470 square foot office for hydraulic
workover services along with approximately 1.8 acres of land and a 9,000
square
foot training facility in Houma, Louisiana. Additionally, we have leased
office
and equipment storage facilities in Houston and Venezuela. (See “Note I”
Commitment and Contingencies in the footnotes to the financial statements.)
We
believe that these facilities will be adequate for our anticipated
needs.
|
Item
3.
|
Legal
Proceedings
|
We
are
involved in or threatened with various legal proceedings from time to time
arising in the ordinary course of business. We do not believe that any
liabilities resulting from any such proceedings will have a material adverse
effect on our operations or financial position.
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to the shareholders during the fourth quarter of
2005.
|
Item
5.
|
Market
for Common Equity and Related Stockholder
Matters.
|
Our
common stock is listed on the AMEX under the symbol “WEL.” The following table
sets forth the high and low sales prices per share of our common stock for
each
full quarterly period within the two most recent fiscal years as reported
on the
AMEX:
|
High
and Low Sales Prices
|
|||||||||||||
|
2005
|
2004
|
||||||||||||
|
|
High
|
Low
|
High
|
Low
|
|||||||||
|
First
Quarter
|
$
|
1.15
|
$
|
0.81
|
$
|
1.65
|
$
|
1.24
|
|||||
|
Second
Quarter
|
1.14
|
0.89
|
1.67
|
1.14
|
|||||||||
|
Third
Quarter
|
1.61
|
1.02
|
1.21
|
0.75
|
|||||||||
|
Fourth
Quarter
|
1.24
|
0.90
|
0.96
|
0.56
|
|||||||||
On March
30,
2006 the last reported sales price of our common stock as reported on AMEX
was $
1.86 per share.
As
of
March 30, 2006,
our
common stock was held by approximately 10,000 holders of record. We estimate
that we have a larger number of beneficial stockholders and much of our common
stock is held by broker-dealers in street name for their customers.
We
have
not paid any cash dividends on our common stock to date. Our current policy
is
to retain earnings, if any, to provide funds for the operation and expansion
of
our business. Our credit facilities prohibit paying cash dividends.
SALES
OF UNREGISTERED SECURITIES
On
March
3, 2006, we issued a total of 28,398,042 shares of our common stock, par
value
$0.00001 per share, in connection with our purchase of the hydraulic workover
business of Oil States and the redemption of our Series A Cumulative Senior
Preferred Stock, par value $0.00001 per share (“Series A Preferred Stock”), from
Halliburton Energy Services, Inc. Specifically, we: (i) 15,877,283 shares
of our
common stock and a subordinated promissory note in the principal amount of
$5,000,000 to HWC Energy Services in exchange for all of the outstanding
membership interests in Hydraulic Well Control, LLC; (ii) 10,584,854 shares
of
our common stock and a subordinated promissory note in the principal amount
of
$10,000,000 to HWC Energy Services for all of the outstanding capital stock
of
HWCES International; and (iii) 1,935,905 shares of our common stock and
$5,000,000 in cash to Halliburton Energy Services, Inc. in exchange for and
redemption of 50,000 shares of our Series A Preferred Stock and the related
accumulated dividends, constituting all of the outstanding shares of Series
A
Preferred Stock.
The
28,398,042 shares of common stock were issued pursuant to the exemption from
registration provided in Regulation D under Section 4(2) of the Securities
Act
of 1933, as amended (the “Act”). Shares of the common stock were issued only to
“accredited investors” as defined in Rule 501(a) of the Act.
The
following table sets forth certain historical financial data for the years
ended
December 31, of 2005, 2004, 2003, 2002 and 2001 which has been derived from
the
our audited consolidated financial statements. The results of operations
of ITS,
Baylor Company, Abasco and Special Services are presented as discontinued
operations. The data should be read in conjunction with the consolidated
financial statements, including the notes, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this Form 10-K.
|
|
Years
Ended December 31,
|
|||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
(in
thousands except per share amounts)
|
||||||||||||||||
|
INCOME
STATEMENT DATA:
|
||||||||||||||||
|
Revenues
|
$
|
29,537
|
$
|
24,175
|
$
|
35,935
|
$
|
14,102
|
$
|
16,938
|
||||||
|
Operating
income (loss)
|
4,563
|
1,066
|
10,234
|
(1,539
|
)
|
4,407
|
||||||||||
|
Income
(loss) from continuing operations
|
2,779
|
(290
|
)
|
6,609
|
(2,525
|
)
|
3,687
|
|||||||||
|
Income
(loss) from discontinued operations, net of income taxes
|
—
|
42
|
482
|
(6,179
|
)
|
(2,359
|
)
|
|||||||||
|
Gain
(loss) from sale of discontinued operations, net of income
taxes
|
—
|
—
|
—
|
(476
|
)
|
—
|
||||||||||
|
Net
income (loss)
|
2,779
|
(248
|
)
|
7,091
|
(9,180
|
)
|
1,328
|
|||||||||
|
Net
income (loss) attributable to common stockholders
|
1,905
|
(996
|
)
|
5,868
|
(12,292
|
)
|
(1,596
|
)
|
||||||||
|
BASIC
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.25
|
$
|
(0.53
|
)
|
$
|
0.08
|
||||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
0.02
|
$
|
(0.61
|
)
|
$
|
(0.24
|
)
|
||||
|
Net
income (loss)
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.27
|
$
|
(1.14
|
)
|
$
|
(0.16
|
)
|
|||
|
Weighted
average common shares outstanding -Basic
|
29,507
|
28,142
|
21,878
|
10,828
|
10,018
|
|||||||||||
|
DILUTED
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.24
|
$
|
(0.53
|
)
|
$
|
0.08
|
||||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
0.02
|
$
|
(0.61
|
)
|
$
|
(0.24
|
)
|
||||
|
Net
income (loss)
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.26
|
$
|
(1.14
|
)
|
$
|
(0.16
|
)
|
|||
|
Weighted
average common shares outstanding - Diluted
|
31,374
|
28,142
|
22,218
|
10,828
|
10,018
|
|||||||||||
|
|
As
of December 31,
|
|||||||||||||||
|
|
2005
|
2004
|
2003
|
2002
|
2001
|
|||||||||||
|
(in
thousands)
|
||||||||||||||||
|
BALANCE
SHEET DATA:
|
||||||||||||||||
|
Total
assets (1)
|
$
|
14,767
|
$
|
18,393
|
$
|
19,726
|
$
|
7,036
|
$
|
17,754
|
||||||
|
Long-term
debt and notes payable, including current maturities (3)
|
6,448
|
7,680
|
12,398
|
15,000
|
13,545
|
|||||||||||
|
Working
capital (deficit) (2) (3)
|
3,565
|
2,553
|
9,375
|
(16,994
|
)
|
3,285
|
||||||||||
|
Stockholders'
equity (deficit) (3)
|
3,795
|
1,180
|
380
|
(13,988
|
)
|
(4,431
|
)
|
|||||||||
|
Common
shares outstanding
|
29,594
|
29,439
|
27,300
|
11,216
|
10,361
|
|||||||||||
|
(1)
|
The
reductions in total assets from 2001 to 2002 is a result of the
sale of
the assets of Special Services and Abasco related to discontinued
operations. (See Note C “Discontinued
Operations”).
|
|
(2)
|
Working
capital is the dollar amount of current assets less current liabilities.
The change in working capital from 2001 to 2002 is primarily due
to the
re-classification of long term debt as current due to failing certain
debt
covenants.
|
|
(3)
|
The
change in working capital from 2002 - 2003 is a result of increased
business activities in 2003 which resulted in higher levels of
cash and
receivables and payments on long term debt and reclassifying subordinated
debt from current to long term debt. The change in equity from
2002-2003
is a result of net income in 2003, a short swing profit contribution
and
various issuances of common stock. The improvement in long term
debt and
notes payable including current maturities and working capital
from 2003
to 2004 is a result of restructuring our obligations with Prudential
in
2004.
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Results
of Operations
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto and the other financial
information contained in our periodic reports previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
Summary
consolidated operating results for the fiscal years ended December 31, of
2005,
2004 and 2003:
|
|
Years
Ended December 31,
|
|||||||||
|
2005
|
2004
|
2003
|
||||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
$
|
29,537
|
$
|
24,175
|
$
|
35,935
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of sales
|
14,488
|
11,929
|
13,448
|
|||||||
|
Operating
expenses
|
7,098
|
6,921
|
8,253
|
|||||||
|
Selling,
general and administrative
|
2,674
|
3,370
|
3,004
|
|||||||
|
Depreciation
and amortization
|
714
|
889
|
996
|
|||||||
|
Operating
income
|
4,563
|
1,066
|
10,234
|
|||||||
|
Interest
expense and other, net
|
655
|
864
|
2,286
|
|||||||
|
Income
tax expense
|
1,129
|
492
|
1,339
|
|||||||
|
Income
(loss) from continuing operations…
|
2,779
|
(290
|
)
|
6,609
|
||||||
|
Income
from discontinued operations, net of income taxes
|
—
|
42
|
482
|
|||||||
|
Net
income (loss)
|
2,779
|
(248
|
)
|
7,091
|
||||||
|
Stock
and warrant accretion
|
—
|
(13
|
)
|
(53
|
)
|
|||||
|
Preferred
dividends accrued
|
(874
|
)
|
(735
|
)
|
(1,170
|
)
|
||||
|
Net
income (loss) attributable to common stockholders
|
$
|
1,905
|
$
|
(996
|
)
|
$
|
5,868
|
|||
On
June
30, 2002, we redefined the segments that we operate in as a result of the
discontinuation of the Abasco and Special Services business operations. These
operations are presented as discontinued operations in the consolidated
financial statements and therefore are excluded from the segment information
for
all periods. Our current business segments are Prevention and Response.
Intercompany transfers between segments were not material. Our accounting
policies of the operating segments are the same as those described in the
summary of significant accounting policies. For purposes of this presentation,
selling, general and administrative and corporate expenses have been allocated
between segments in proportion to their relative revenue. Business segment
operating data from continuing operations is presented for purposes of
management discussion and analysis of operating results.
While
cost of sales expenses are variable based upon the type of revenue generated,
most of our operating expenses represent fixed costs for base labor charges,
rent and utilities. Consequently, operating expenses increase only slightly
as a
result of responding to a critical event. During periods of extremely high
response activity, we utilize third party consultants to support our response
staff and costs of sales will rise more significantly. In the past, during
periods of few critical events, resources dedicated to emergency response
were
underutilized or, at times, idle, while the fixed costs of operations continued
to be incurred, contributing to significant operating losses. To mitigate
these
consequences, we are actively seeking to expand our non-event services. These
services primarily utilize existing personnel to maximize utilization with
only
slight increases in fixed operating costs.
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 includes training, contingency planning, well plan
reviews, services associated with our Safeguard programs and services offered
in
conjunction with our WELLSURE® 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, equipment and 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 mitigate
damage while maximizing safety.
Information
concerning operations in our different business segments for the years ended
December 31, 2005, 2004 and 2003 is presented below. Certain reclassifications
have been made to the prior periods to conform to the current
presentation.
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
||||||||||
|
Prevention
|
$
|
13,860
|
$
|
8,050
|
$
|
16,159
|
||||
|
Response
|
15,677
|
16,125
|
19,776
|
|||||||
|
$
|
29,537
|
$
|
24,175
|
35,935
|
||||||
|
Cost
of Sales
|
||||||||||
|
Prevention
|
$
|
6,226
|
$
|
4,216
|
$
|
6,426
|
||||
|
Response
|
8,262
|
7,713
|
7,022
|
|||||||
|
$
|
14,488
|
$
|
11,929
|
$
|
13,448
|
|||||
|
Operating
Expenses (1)
|
||||||||||
|
Prevention
|
$
|
3,531
|
$
|
2,676
|
$
|
4,228
|
||||
|
Response
|
3,567
|
4,245
|
4,025
|
|||||||
|
$
|
7,098
|
$
|
6,921
|
$
|
8,253
|
|||||
|
Selling,
General and Administrative (2)
|
||||||||||
|
Prevention
|
$
|
1,255
|
$
|
1,122
|
$
|
1,351
|
||||
|
Response
|
1,419
|
2,248
|
1,653
|
|||||||
|
$
|
2,674
|
$
|
3,370
|
$
|
3,004
|
|||||
|
Depreciation
and Amortization (1)
|
||||||||||
|
Prevention
|
$
|
310
|
$
|
261
|
$
|
423
|
||||
|
Response
|
404
|
628
|
573
|
|||||||
|
$
|
714
|
$
|
889
|
$
|
996
|
|||||
|
Operating
Income
|
||||||||||
|
Prevention
|
$
|
2,538
|
$
|
(225
|
)
|
3,731
|
||||
|
Response
|
2,025
|
1,291
|
6,503
|
|||||||
|
$
|
4,563
|
$
|
1,066
|
$
|
10,234
|
|||||
|
(1)
|
Operating
expenses and depreciation have been charged to each segment based
upon
specific identification of expenses and an allocation of remaining
non-segment specific expenses pro rata between segments based upon
relative revenues.
|
|
(2)
|
Selling,
general and administrative expenses have been allocated pro rata
between
segments based upon relative
revenues.
|
Comparison
of the Year ended December 31, 2005 with the Year ended December 31,
2004
Revenues
Prevention
revenues were $13,860,000 for the year ended December 31, 2005, compared
to
$8,050,000 for the year ended December 31, 2004, representing an increase
of
$5,810,000 (72.2%) in the current year. The increase was primarily the result
of
work performed under SafeGuard agreements in Algeria and a moderate increase
in
service fees generated from the WELLSURE®
program.
These increases were offset by a reduction in Venezuelan activity.
Response
revenues were $15,677,000 for the year ended December 31, 2005, compared
to
$16,125,000 for the year ended December 31, 2004, a decrease of $448,000
(2.8%)
in the current year. This decrease was the result of lower revenues from
response to critical well events in Iraq of $1,963,000, of which, $1,301,000
was
a reduction of third party subcontractor pass-through revenue for field
personnel security, offset by increased domestic activity in the Gulf of
Mexico.
Cost
of Sales
Prevention
cost of sales were $6,226,000 for the year ended December 31, 2005, compared
to
$4,216,000 for the year ended December 31, 2004, an increase of $2,010,000
(47.7%) in the current year. The increase is due to the increased variable
expense associated with the related increased revenue in Algeria and the
WELLSURE®
program
partially offset by decreased variable expense in the Venezuelan operation.
Response
cost of sales were $8,262,000 for the year ended December 31, 2005, compared
to
$7,713,000 for the year ended December 31, 2004, an increase of $549,000
(7.1%)
in the current year. This increase was the result of subcontractor costs
of
$5,087,000 for field personnel security related to Iraq response activities
as
compared to $3,848,000 expensed during 2004. The subcontractor costs were
third
party pass-through charges. Excluding these pass-through charges, response
cost
of sales would have been $2,921,000 and $3,673,000 for the year ended December
31, 2005 and 2004, respectively.
Operating
Expenses
Consolidated
operating expenses were $7,098,000 for the year ended December 31, 2005,
compared to $6,921,000 for the year ended December 31, 2004, an increase
of
$177,000 (2.6%) in the current year. This increase is due to increased business
development expense, and administrative costs associated with international
business activities.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses were $2,674,000 for the year
ended
December 31, 2005, compared to $3,370,000 for the year ended December 31,
2004,
a decrease of $696,000 (20.7%) from the prior year. This decrease is primarily
related to reduced litigation expense compared to 2004 partially offset by
increases in costs related to compliance with the Sarbanes Oxley Act of 2002
and
related regulatory requirements.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense decreased by $175,000 for the year
ended
December 31, 2005 compared to the 2004 period, as a result of certain assets
being fully depreciated by year end 2004.
Interest
Expense and Other, Net,
The
reduction in interest and other expenses, net, of $209,000 for the year ended
December 31, 2005 as compared to the prior year is set forth in the table
below:
|
For
the Years Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
(in
thousands)
|
|||||||
|
Financing
fees
|
—
|
190
|
|||||
|
Interest
expense - senior debt
|
53
|
74
|
|||||
|
Interest
on subordinated notes
|
666
|
1,084
|
|||||
|
Interest
credit related to December 2000 subordinated debt restructuring
|
(332
|
)
|
(829
|
)
|
|||
|
Deferred
interest on subordinated debt
|
202
|
76
|
|||||
|
Interest
income on cash investments
|
(49
|
)
|
(25
|
)
|
|||
|
Gain
(loss) on foreign exchange
|
(14
|
)
|
(94
|
)
|
|||
|
Legal
settlements and other
|
129
|
388
|
|||||
|
Total
Interest and Other, Net
|
$
|
655
|
$
|
864
|
|||
Income
Tax Expense
Income
taxes for the year ended December 31, 2005 and 2004 were $1,129,000 and
$492,000, respectively, and are a result of comparative taxable income in
foreign operations and changes in the foreign tax laws. Algeria activity
starting in 2005 accounted for most of the increase in income tax
expense
Comparison
of the Year ended December 31, 2004 with the Year ended December 31,
2003
Revenues
Prevention
revenues were $8,050,000 for the year ended December 31, 2004, compared to
$16,159,000 for the year ended December 31, 2003, representing a decrease
of
$8,109,000 (50.2%) in the current year. This decrease is primarily the result
of
a first quarter 2003 equipment sale of $6,629,000 and a reduction in engineering
services and SafeGuard services in 2004. The reduction in non-event engineering
revenue is a result engineering resources being deployed in response services
in
Iraq and the reduction in SafeGuard services is a result of the first Algerian
SafeGuard contract terminating at the end of 2003.
Response
revenues were $16,125,000 for the year ended December 31, 2004, compared
to
$19,776,000 for the year ended December 31, 2003, a decrease of $3,651,000
(18.5%) in the current year. This decrease was the result of us acting as
lead
contractor in Iraq in 2003, for which it billed $14,755,000 for firefighting
and
engineering services in Iraq under the Restore Iraq Oil (RIO) Program. Iraq
related revenues, not related to the RIO program, were $6,580,000 in 2004,
including $4,040,000 which we received for reimbursement of certain third
party
security related expenses incurred. Excluding these amounts, response revenue
would have been $12,085,000 for the year ended December 31, 2004.
Cost
of Sales
Prevention
cost of sales were $4,216,000 for the year ended December 31, 2004, compared
to
$6,426,000 for the year ended December 31, 2003, a decrease of $2,210,000
(34.4%) in the current year. The decrease was a result of 2003 equipment
costs
related to the previously mentioned equipment sales, partially offset by
increased subcontractor costs in our Venezuelan SafeGuard operations in
2004.
Response
cost of sales were $7,713,000 for the year ended December 31, 2004, compared
to
$7,022,000 for the year ended December 31, 2003, an increase of $691,000
(9.8%)
in the current year. This increase resulted from $3,848,000 of third party
security related costs in 2004 offset by higher activity in the prior year.
Under accounting principles generally accepted in the United States of America,
we are required to recognize the revenue associated with the reimbursement
of
these expenses. Excluding these costs, response cost of sales would have
been
$3,673,000 for the year ended December 31, 2004.
Operating
Expenses
Consolidated
operating expenses were $6,921,000 for the year ended December 31, 2004,
compared to $8,253,000 for the year ended December 31, 2003, a decrease of
$1,332,000 (16.1%) in the current year. The decrease was a result of lower
additional labor, insurance and travel costs for 2004 as compared to the
higher
level of these expenses related to Iraq revenues for 2003.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses were $3,370,000 for the year
ended
December 31, 2004, compared to $3,004,000 for the year ended December 31,
2003,
an increase of $366,000 (12.2%) from the prior year. These costs increases
are
from legal expense related to the Prudential refinancing partially offset
by
reductions in rent expense. In addition, the current year includes the
amortization of certain payroll related costs.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense decreased by $107,000 for the year
ended
December 31, 2004 compared to the 2003 period, as a result of certain assets
being fully depreciated by year end 2003.
Interest
Expense and Other, net
The
reduction in interest expense and other, net of $1,422,000 for the year ended
December 31, 2004 as compared to the prior year is set forth in the table
below:
|
For
the Years Ended December 31,
|
|||||||
|
2004
|
2003
|
||||||
|
(in
thousands)
|
|||||||
|
Financing
fees
|
190
|
332
|
|||||
|
Interest
expense - senior debt
|
74
|
262
|
|||||
|
Interest
on subordinated notes
|
1,084
|
1,147
|
|||||
|
Interest
credit related to December 2000 subordinated debt restructuring
|
(829
|
)
|
(668
|
)
|
|||
|
Deferred
interest on subordinated debt
|
76
|
—
|
|||||
|
Interest
income on cash investments
|
(25
|
)
|
—
|
||||
|
Gain
(loss) on foreign exchange
|
(94
|
)
|
—
|
||||
|
Legal
settlements and other
|
388
|
1,213
|
|||||
|
Total
Interest and Other, Net
|
$
|
864
|
$
|
2,286
|
|||
Income
Tax Expense
Income
taxes for the years ended December 31, 2004 and 2003 were $492,000 and
$1,339,000, respectively, and are a result of comparative taxable income
in our
foreign operations and changes in the foreign tax laws. Venezuela pretax
income
was higher due to high margin response activity in 2003.
Discontinued
Operations
Discontinued
operations contributed a gain of $42,000 in 2004 due to settlements of a
few
remaining liabilities at a negotiated discount. During 2003, many settlements
of
liabilities were made at negotiated discounts (See “Note C” Discontinued
operations in the footnotes to the financial statements.)
Liquidity
and Capital Resources
Liquidity
At
December 31, 2005, we had working capital of $3,565,000, including a cash
balance of $2,594,000. We ended the year with stockholders’ equity of
$3,795,000. For the year we generated operating income of $4,563,000 and
net
cash from operating activities of $2,694,000. Net cash used in investing
activities was $290,000 and payments of debt were $900,000.
We
generate our revenues from prevention and emergency response services. Response
services are generally associated with a specific well control emergency
or
critical “event” whereas prevention services are generally “non-event” related.
The frequency and scale of occurrence for response services varies widely
and is
inherently unpredictable. There is little statistical correlation between
common
industry activity indicators such as commodity pricing, activity forecasts,
E&P operating budgets and resulting response revenues. Non-event services
provide a more predictable base of revenues. Historically we have relied
upon
event driven services as the primary source of our operating revenues, but
more
recently our strategy has been to achieve greater balance between event and
non-event service revenues. While we have successfully improved this balance,
a
significant level of event related services is still a required source of
revenues and operating income for us to be profitable.
On
December 31, 2005, we had $857,000 of cash and $779,000 in accounts receivable
attributable to our Venezuelan SafeGuard operations. Of this cash, $538,000
was
denominated in U.S. Dollars and resided in a U.S. bank , the remaining $319,000
was denominated in Bolivars and resided in a Venezuelan bank. Effective February
5, 2004, the exchange rate in Venezuela changed from 1,600 to 1,920 Bolivars
to
the U.S. dollar and effective March 1, 2005, the exchange rate in Venezuela
further devalued from 1,920 to 2,150 Bolivars to the U.S. dollar. We have
taken
charges to equity under the caption “foreign currency translation loss” for
approximately $361,000 and $434,000 during the years ended December 31, 2005
and
2004, respectively, to reflect the devaluation of the Bolivar. Venezuela
is also
on the U.S. government’s “watch list” for highly inflationary economies. The
Venezuelan government has made it very difficult for U.S. dollars to be
repatriated. We continue to attempt to negotiate dollar denominated contracts.
We are monitoring the situation closely.
Disclosure
of balance sheet debts and commitments:
Our
known
contractual obligations at December 31, 2005 are reflected in the table
below.
|
Future
commitments (000’s)
|
||||||||||||||||
|
Description
|
TOTAL
|
Less
than 1
year
|
1-2years
|
3-4
years
|
More
than 5
years
|
|||||||||||
|
Long
and short term debt and notes payable
|
$
|
5,850
|
$
|
2,250
|
$
|
2,400
|
$
|
1,200
|
—
|
|||||||
|
Related
accrued interest
|
$
|
598
|
$
|
259
|
$
|
299
|
$
|
40
|
—
|
|||||||
|
Future
minimum lease Payments
|
$
|
39
|
$
|
20
|
$
|
16
|
$
|
3
|
—
|
|||||||
|
Total
commitments
|
$
|
6,487
|
$
|
2,529
|
$
|
2,715
|
$
|
1,243
|
—
|
|||||||
Since
December 31, 2005, we have entered into a new revolving credit facility and
term
loan and have issued $15,000,000 in subordinated promissory notes in connection
with our acquisition of HWC on March 3, 2006, as disclosed in the table
below:
|
Future
commitments (000’s)
|
||||||||||||||||
|
Description
|
TOTAL
|
Less
than 1
year
|
1-2years
|
3-4
years
|
More
than 5
years
|
|||||||||||
|
Long
and short term debt and notes payable
|
||||||||||||||||
|
Term
loan
|
$
|
9,700
|
$
|
1,617
|
$
|
3,880
|
$
|
3,880
|
$
|
323
|
||||||
|
Subordinated
debt
|
$
|
15,000
|
$
|
15,000
|
||||||||||||
|
Future
minimum lease Payments
|
$
|
39
|
$
|
20
|
$
|
16
|
$
|
3
|
—
|
|||||||
|
Total
commitments
|
$
|
24,739
|
$
|
1,637
|
$
|
3,896
|
$
|
3,883
|
$
|
15,323
|
||||||
Credit
Facilities/Capital Resources
In
December 2000, the refinancing of our debt with Prudential qualified as a
troubled debt restructuring under the provisions of SFAS 15. As a result
of the
application of this accounting standard, the total indebtedness due to
Prudential, inclusive of accrued interest, was reduced by the cash and fair
market value of securities (determined by independent appraisal) issued by
us,
and the residual balance of the indebtedness was recorded as the new carrying
value of the subordinated note due to Prudential. Consequently, the $7,200,000
face value of the 12.0% Senior Subordinated Note with an initial maturity
date
of 2005 was recorded on our balance sheet at $11,520,000. The additional
carrying value of the debt effectively represented an accrual of future interest
due on the face value of the subordinated note due to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain in 2000.
On
August
13, 2004, we amended our subordinated facility with Prudential. The principal
balance of $9,635,000 would have been due on December 30, 2005. Under the
amended terms, we paid principal of $2,000,000 on August 13, 2004 plus accrued
interest of $28,667. We were also required to pay down approximately $1,635,000
of principal on December 15, 2004. The December 31, 2005 remaining balance
of
$5,100,000 was to be paid in equal quarterly installments over the next four
years with a final maturity of December 31, 2009. This restructuring also
extended the amortization period of the remaining troubled debt restructuring
related credit over the life of the restructured facility. In connection
with
our amended loan agreement, Prudential also exchanged its remaining 582 shares
of Series E preferred stock for 55,429 shares of common stock and surrendered
its warrants to purchase 2,418,000 shares of common stock, and we issued
Prudential 1,250,000 shares of common stock valued at $1,088,000 as well
as
524,206 shares of common stock to pay accrued and unpaid dividends owed on
Series E and Series G preferred stock.
On
April
9, 2002, we entered into a loan participation agreement under which it borrowed
an additional $750,000 under our existing Senior Secured Loan Facility with
Specialty Finance Fund I, LLC. This Loan Facility was acquired by San Juan
Investments on that day. The effective interest rate of the participation
is 11%
after taking into account rate adjustment fees. We also paid 3% of the borrowed
amount in origination fees, paid closing expenses and issued 25,000 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 our
option. We issued an additional 25,000 shares of common stock to the
participation lender to extend the maturity date. On November 11, 2003, we
and
the senior lender executed an agreement extending the term of the loan to
29
months (due April 9, 2006) at 11% interest, paid quarterly. On June 1, 2004,
we
and the senior lender executed an agreement reducing the interest rate to
7%.
In
conjunction with the acquisition of HWC on March 3, 2006, we and our wholly
owned subsidiary, IWC Services, LLC, entered into a Credit Agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association, which
established a revolving credit facility of $10.3 million, subject to an initial
borrowing base of $6.0 million, and a term credit facility of $9.7 million.
The
term credit facility is due and payable in full on March 3, 2010, subject
to
extension under certain circumstances to March 3, 2011. The revolving credit
facility is due and payable in full on March 3, 2010, subject to a year to
year
renewal thereafter. We utilized initial borrowings totaling $10.6 million
under
the credit facilities to repay senior and subordinated debt in full and
repurchase all of our outstanding shares of preferred stock and for other
corporate purposes. The $9.7 million credit facility is payable monthly over
sixty months.
The
Credit Agreement is secured by substantially all of our assets. Unused line
fees
are due monthly on the revolving credit facility and range from 0.25% to
0.50%
per annum, based on the ratio of the outstanding principal amount under the
Credit Agreement to our consolidated EBITDA. At our option, borrowings under
the
Credit Agreement bear interest at either (i) Wells Fargo’s prime commercial
lending rate, or (ii) the Inter-Bank Market Offered Rate plus a margin
ranging, as to the revolving credit facility, from 0.50% to 1.50% per annum,
and, as to the term credit facility, from 3.00% to 3.50%, which margin increases
or decreases based on the ratio of the outstanding principal amount under
the
Credit Agreement to our consolidated EBITDA. The interest rate at March 3,
2006
was 6.17%
The
Credit Agreement contains various restrictive covenants and compliance
requirements, including (1) maintenance of a minimum book net worth through
December 31, 2006 equal to 90% of the pro forma book net Worth calculated
on
March 1, 2006, but in no event less than $25,000,000, or, for each fiscal
year
thereafter, equal to the greater of the minimum book net worth required for
the
preceding fiscal year or 85% of book net worth on the last day of the preceding
fiscal year. For these purposes “book net worth” means the aggregate of our
common and preferred stockholders’ equity on a consolidated basis;
(2) maintenance of a minimum ratio of our consolidated EBITDA less
unfinanced capital expenditures to principal and interest payments required
under the Credit Agreement, on a trailing twelve month basis, of 1.50 to
1.00;
(3) limitation on capital expenditures of $3,000,000 in the aggregate
during any fiscal year; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under the notes in original
aggregate amount of $15,000,000 owing to HWC Energy Services, Inc., subject
to
adjustments based upon working capital on the effective date of the transaction,
indebtedness existing on the date of the Credit Agreement, indebtedness existing
between us and our subsidiaries that is unsecured and subordinated to the
indebtedness arising under the Credit Agreement.
The
$15,000,000 is an unsecured subordinated debt bears interest at a rate of
10%
per annum, subject to adjustments for working capital on the effective date
of
closing owing to HWC Energy Services, Inc., with a one time principal payment
to
HWC Energy Service, Inc. on September 9, 2010.
Substantially
all of our assets are pledged as collateral under the debt
agreements.
Critical
accounting policies
In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure about Critical Accounting Policies,” we have 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. We have identified our most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue
Recognition -
Revenue
is recognized on our service contracts primarily on the basis of contractual
day
rates as the work is completed. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract
completion.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, related workman’s
compensation insurance, supplies, tools, repairs and depreciation costs.
General
and administrative costs are charged to expense as incurred. Fixed assets
are
depreciated over their useful lives. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
We
recognize revenues under the WELLSURE®
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 our predetermined day rates and sub-contracted
work as
incurred.
Allowance
for Doubtful Accounts
- We
perform ongoing evaluations of our customers and generally do not require
collateral. We assess its credit risk and provide an allowance for doubtful
accounts for any accounts which it deems doubtful of collection.
Income
Taxes
- We
account 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
our 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. The domestic tax liabilities are offset
by the
usage of our net domestic operating loss carry forwards. The provision for
tax
expense includes foreign income taxes from Algeria and Venezuela and a minimal
amount of domestic alternative minimum tax liability (See “Note E” Income Taxes
to the consolidated financial statements).
As
of
December 31, 2005, 2004 and 2003, we had net domestic operating loss carry
forwards of approximately $43,308,000, $40,418,000 and $41,227,000,
respectively, expiring in various amounts beginning in 2011. The net operating
loss carry forwards, along with the other timing differences, generate a
net
deferred tax asset. We have recorded valuation allowances in each year for
these
net deferred tax assets since management believes it is more likely than
not
that the assets will not be realized.
Recent
Accounting Standards
In
December 2004, the FASB re-issued SFAS No. 123 “Share Based Payments,” (“SFAS
123R”) that addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for equity instruments
of
us, such as stock options and restricted stock. SFAS 123R eliminates the
ability
to account for share-based compensation transactions using APB Opinion No.
25
and requires instead that such transactions be accounted for using a fair
value
based method. We currently account for stock-based compensation using the
intrinsic method pursuant to APB Opinion No. 25. SFAS 123R requires that
all
stock-based payments to employees, including grants of stock options and
restricted stock, be recognized as compensation expense in the financial
statements based on their fair values. We will be required to apply SFAS
123R
beginning in the fiscal quarter ending March 31, 2006. We will adopt the
provisions of SFAS 123R using the modified - prospective approach. The impact
on
consolidated results of operations will be similar to the proforma results
reported in (“Note B” Significant Accounting Policies) to the consolidated
financial statements.
In
May
2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.” Among other changes, this Statement requires
retrospective application for voluntary changes in accounting principles,
unless
it is impractical to do so. Guidance is provided on how to account for changes
when retrospective application is impractical. This Statement is effective
on a
prospective basis beginning January 1, 2006.
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 - K 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 Form 10-K, 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.
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Our
March
30 debt consists of both fixed-interest and variable-interest rate debt;
consequently, our earnings and cash flows, as well as the fair values of
our
fixed-rate debt instruments, are subject to interest-rate risk.
Our
debt
at December 31, 2005, consisted of fixed-interest rate debt only and had
no
exposure to market interest rate fluctuations.
We
operate 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. We typically endeavor to denominate our contracts in U.S. dollars
to mitigate exposure to fluctuations in foreign currencies. On December 31,
2005, we had $857,000 of cash and $779,000 in accounts receivable attributable
to our Venezuelan SafeGuard operations. Of this cash, $538,000 was denominated
in U.S. Dollars and resided in a U.S. bank; the remaining $319,000 was
denominated in Bolivars and resided in a Venezuelan bank. Effective February
5,
2004, the exchange rate in Venezuela changed from 1,600 to 1,920 Bolivars
to the
U.S. dollar and effective March 1, 2005, the exchange rate in Venezuela further
devalued from 1,920 to 2,150 Bolivars to the U.S. dollar. We have taken charges
to equity under the caption “foreign currency translation loss” for
approximately $361,000 and $434,000 during the years ended December 31, 2005
and
2004, respectively, to reflect the devaluation of the Bolivar. Venezuela
is also
on the U.S. government’s “watch list” for highly inflationary economies. The
Venezuelan government has made it very difficult for U.S. dollars to be
repatriated. We continue to attempt to negotiate dollar denominated contracts.
We are monitoring the situation closely.
|
Item
8.
|
Financial
Statements.
|
Attached
following the Signature Pages and Exhibits.
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
|
Item
9A.
|
Controls
and Procedures
|
Under
the
supervision and with the participation of our management, including our chief
executive officer and senior vice president - finance and administration,
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 December 31, 2005. Our chief executive officer and senior vice president
-
finance and administration concluded, based upon their evaluation, that our
disclosure controls and procedures are effective and ensure that we disclose
the
required information in reports that we file under the Exchange Act and that
the
filings are recorded, processed, summarized and reported with the time periods
specified in SEC rules and forms despite the material weaknesses identified
by
our independent auditors as disclosed in this Form 10-K for the year ended
December 31, 2005. Our chief executive officer and senior vice president
-
finance and administration reached this conclusion after giving consideration
to
communications received from our independent auditors and the disclosure
controls and procedures as they existed during the periods covered by the
financial statements.
In
connection with the audit of our consolidated financial statements for the
year
ended December 31, 2004, our independent auditors, UHY Mann Frankfort Stein
and
Lipp, CPAs, LLP, issued a letter to our audit committee dated March 21, 2005
noting certain matters in our Venezuelan subsidiary that they consider to
be a
material weakness in internal control. The matters listed in the letter included
the lack of controls to mitigate the risk of fraud and the lack of controls
over
financial reporting; particularly with respect to adjustments necessary to
convert the Venezuelan financial statements from Venezuelan generally accepted
accounting principles to accounting principles generally accepted in the
United
States.
This
letter is still in affect and has not been lifted for 2005. We are currently
making changes in policies and procedures to improve and enhance internal
controls with regard to fraud prevention and detection and with respect to
financial reporting in Venezuela and believe these improvements will
appropriately address the matters referred to in the letter. These changes
will
include the following:
|
-
|
We
have hired a CFO with an International background and Sarbanes
Oxley
implementation experience;
|
|
-
|
Continue
to revise and implement the existing policies and procedures of
the
subsidiary;
|
|
-
|
Restructure
the accounting department of the subsidiary and enhance our corporate
reporting requirements.
|
| - |
Utilize
HWC in-country financial manager to support the implementation
of the HWC
integrated accounting system. The HWC financial manager will be
responsible for local internal controls and policies and
procedures.
|
|
Item
9B.
|
Other
Information
|
None.
|
Directors,
Executive Officers, Promoters and Control Persons; Compliance with
Section
16(a) of the Exchange Act.
|
The
following table list the names and ages of each of our directors and/or
executive officers, as well as those persons expected to make a significant
contribution to us as of the date of this document. There are no family
relationships between any director and any other director or executive
officer.
|
NAME
|
AGE
|
POSITION
|
|||
|
Kirk
Krist
|
47
|
Chairman
of the Board
|
|||
|
Jerry
L. Winchester
|
47
|
President,
Chief Executive Officer and Director
|
|||
|
W.
Richard Anderson (1)
|
53
|
Director
|
|||
|
E.
J. DiPaolo (1)
|
53
|
Director
|
|||
|
Robert
Stevens Herlin (1)
|
50
|
Director
|
|||
|
Douglas
E. Swanson
|
67
|
Director
|
|||
|
Cindy
B. Taylor (2)
|
44
|
Director
|
|||
|
Gabe
Aldape
|
46
|
Chief
Financial Officer
|
|||
|
Dewitt
H. Edwards
|
47
|
Senior
Vice President
|
|||
|
Kevin
D. Johnson
|
54
|
Vice
President - Accounting
|
|||
|
(1)
|
Member
of the audit and compensation
committees.
|
|
(1)
|
Member
of the compensation committee.
|
BIOGRAPHIES
OF EXECUTIVE OFFICERS AND DIRECTORS
K.
Kirk
Krist has served as a Class III director since our acquisition of IWC Services
on July 29, 1997. Mr. Krist’s term as a director will expire on the date of the
annual meeting of stockholders scheduled for calendar year 2006. On December
4,
2002, Mr. Krist was elected Chairman of the Board. Mr. Krist is a 1982 graduate
of the University of Texas with a B.B.A. in Business. He has been a
self-employed oil and natural gas investor and venture capitalist since 1982.
Mr.
Winchester has served as our President, Class II Director and COO since 1998.
In
July of 2002 he assumed the position of Chief Executive Officer. Mr.
Winchester serves as a Class II Director for a term that will expire on the
date
of the annual meeting of stockholders scheduled for calendar year 2008.
Prior
to
joining us, Mr. Winchester was employed by Halliburton Energy Services since
1981 in positions of increasing responsibility, most recently as Global Manager
- Well Control, Coil Tubing and Special Services. He received his B.S. in
Engineering Technology from Oklahoma State University in 1982 and is an active
member of the Society of Petroleum Engineers and the International Association
of Drilling Contractors.
Mr.
Anderson has served as a Class I director since August 1999. Mr. Anderson
also
serves as chairman of the Audit Committee and is a member of the Compensation
Committee. Mr. Anderson serves as a Class I Director for a term that will
expire
on the date of the annual meeting of stockholders scheduled for calendar
year
2007. Mr.
Anderson is the President, Chief Financial Officer and a director of Prime
Natural Resources, a closely-held exploration and production company. Prior
to
his employment at Prime in January 1999, he was employed by Hein &
Associates LLP, a certified public accounting firm, where he served as a
partner
from 1989 to January 1995 and as a managing partner from January 1995 until
October 1998.
Mr.
Herlin was appointed a Class I director on September 30, 2003. Mr. Herlin
serves
on the Audit Committee and chairs the Compensation Committee. Mr. Herlin
serves
as a Class I Director for a term that will expire on the date of the annual
meeting of stockholders scheduled for calendar year 2007. Since
2003, Mr. Herlin has served as the President, CEO and a Director of Natural
Gas
Systems, a private company involved in the acquisition and redevelopment
of oil
and gas properties. Since 2003, Mr. Herlin has served as a partner with Tatum
Partners, a service company that provides CFO’s and CEO’s on a contract basis to
clients. Prior to his employment at Natural Gas Systems, he was CFO of
Intercontinental Tower Corporation, a wireless telecom infrastructure operation
in South America from 2000 to 2003.
Mr.
DiPaolo has served as a director from May 1999 to December 4, 2002 then was
reappointed on September 30, 2003. Mr. DiPaolo serves as a Class II Director
for
a term that will expire on the date of the annual meeting of stockholders
scheduled for calendar year 2008. Mr. DiPaolo also serves on the Audit and
Compensation Committees. Since August of 2003, Mr. DiPaolo is a consultant
with
Growth Capital Partners, L.P., a company engaged in investments and merchant
banking. Mr. DiPaolo was the Senior Vice President, Global Business Development
of Halliburton Energy Services, having had responsibility for all worldwide
business development activities until his retirement in 2002. Mr. DiPaolo
was
employed at Halliburton Energy Services from 1976 until his retirement in
progressive positions of responsibility.
Douglas
E. Swanson became a Class III director on March 3, 2006 for a term that will
expire on the date of the annual meeting of stockholders scheduled for calendar
year 2006. Mr. Swanson is the current president and Chief Executive Officer
of
Oil States International Inc. Oil States International, Inc., a diversified
oilfield services company, is a leading manufacturer of products for deepwater
production facilities and subsea pipelines, and a leading supplier of a broad
range of services to the oil and gas industry, including production-related
rental tools, work force accommodations and logistics, oil country tubular
goods
distribution and land drilling services. Oil States is a publicly traded
company
on the New York Stock Exchange under the symbol “OIS”. Douglas E. Swanson has
served as president and chief executive officer of Oil States since January
2000. Prior to joining Oil States, Mr. Swanson served as president and chief
executive officer of Cliffs Drilling Company, a contract drilling company,
from
January 1992 to August 1999. He holds a bachelor’s degree from Cornell College
and is a Certified Public Accountant.
Cindy
B.
Taylor became a Class II director on March 3, 2006 for a term that will expire
on the date of the annual meeting of stockholders scheduled for calendar
year
2008. Mrs. Taylor has served as Senior Vice President — Chief Financial Officer
and Treasurer of Oil States International Inc. since May 2000. Prior to joining
Oil States, Mrs. Taylor served as the Chief Financial Officer of L.E. Simmons
& Associates, Incorporated from August 1999 to May 2000, the Vice President
— Controller of Cliffs Drilling Company from July 1992 to August 1999 and as
a
Senior Manager with Ernst & Young LLP, a public accounting firm, from
January 1984 to July 1992. She received a bachelor’s degree of business
administration from Texas A&M University and is a Certified Public
Accountant.
Gabriel
Aldape has served as interim Chief Financial Officer since March 3, 2006.
Prior
to joining us, Mr. Aldape served as Vice President of HWC. Mr. Aldape was
responsible for directing investment analysis, cost analysis and general
accounting and finance management, including cash management and business
planning, for Capstar Drilling, Oil States land drilling operations. He also
managed the Sarbanes-Oxley compliance effort for HWC and Capstar. Mr. Aldape’s
international experience includes five years as Finance Manager and Controller
in Mexico and Venezuela, as well as directing financial start up efforts
in
Dubai, Congo, Algeria and Egypt. Mr. Aldape has spent 21 years in accounting
and
management in the oil field service industry. He received his bachelor’s degree
of business administration in Accounting from San Antonio’s St. Mary’s
University in 1982, and successfully completed the CPA exam in 1984. He also
completed 21 Hours of graduate Finance studies at the University of Houston.
Dewitt
H.
Edwards has served
as our
Senior Vice President since April 2005 and as Principle Financial Officer
for
the period from April 2005 until March 2006. Prior to his employment, Mr.
Edwards served as a consultant to us. He had been engaged to work on initiatives
to refinance our debt and improve our overall capital structure and liquidity.
Mr. Edwards was previously employed by us as our Executive Vice President
from
September 1998 through May 2002. Prior to that, Mr. Edwards was employed
by
Halliburton Energy Services for 19 years where he served in positions of
increasing authority, including Mid Continent Area Manager and North America
Resource
Manager.
Kevin
D.
Johnson has served as our Vice President - Accounting since April 2005. Mr.
Johnson previously served as our Senior Vice President - Finance from March
2003
to April 2005 and Controller from July 1999 to March 2003. Prior to joining
us,
Mr. Johnson served as assistant controller from March 1997 through June 1999
for
ITEQ, Inc., a public company, engaged in manufacturing and construction of
storage tanks and industrial air filtration systems. Mr. Johnson worked for
10
years in various accounting capacities from August 1987 to January 1997 with
Battle Mountain Gold Company, a public company engaged in world-wide gold
mining, and prior to that, in the oilfield service sector from July 1978
to May
1987 in various capacities including corporate Controller at Galveston Houston
Company, a public company at that time. Prior to his employment at Galveston
Houston Company, Mr. Johnson was employed by Brown and Root (KBR) where Mr.
Johnson started as a systems analyst and accountant. Mr. Johnson graduated
with
a BBA in Accounting/Information Systems from the University of North Texas
in
1975.
Security
Holder Communications.
Security
holder communications intended for the board of directors or for particular
directors (other than stockholder proposals submitted pursuant to Exchange
Act
Rule 14a-8 and communications made in connection with such proposals) may
be
sent in care of the Company's Secretary at Boots & Coots International Well
Control, Inc., 11615 N. Houston Rosslyn, Houston, Texas 77086. The Secretary
will forward all such communications to the board of directors or to particular
directors as directed without
screening such communications.
Code
of Business Conduct and Ethics:
We have
adopted a Code of Business Conduct and Ethics that covers all employees,
directors, and officers that relates to the honest and ethical conduct in
all
business dealings, full, fair, accurate, timely and understandable disclosures
in all reports filed by the us with or submitted to the Securities and Exchange
Commission and in other public communications, compliance with applicable
governmental rules and regulations, and avoidance of conflicts of interest.
The
Code of Business Conduct and Ethics is available on the ‘Company Info’ link at
www.boots-coots.com.
Copies
of the Code of Business Conduct and Ethics may also be obtained upon written
request of our corporate Secretary at our principal executive office
address.
Audit
Committee Independence and Financial Experts:
The
Audit Committee reviews our financial reporting processes, system of internal
controls, and the audit process for monitoring compliance with laws and
regulations. In addition, the committee reviews, with our auditors, the scope
of
the audit procedures to be applied in the conduct of the annual audit, as
well
as the results of that audit. Our board has determined that each of the Audit
Committee members is independent, in accordance with the audit committee
requirements of the American Stock Exchange and the Securities and Exchange
Commission. Messrs Anderson and Herlin are financial experts within the meaning
of Item 401 (h) of Regulation S-K promulgated by the Securities and Exchange
Commission.
|
Item
11.
|
Executive
Compensation
|
The
Summary Compensation Table below sets forth the cash and non-cash compensation
information for the years ended December 31, 2005, 2004 and 2003 for the
Chief
Executive Officer and the other executive officers whose salary and bonus
earned
for services rendered to us exceeded $100,000 for the most recent fiscal
year.
Summary
Compensation Table
|
Annual
Compensation
|
Long-Term
Compensation
|
||||||||||||||||||||||||
|
Awards
|
Payouts
|
||||||||||||||||||||||||
|
Name
And
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Other
Annual
Compen-
sation
(5)
($)
|
Restricted
Stock
Award(s)
($)
|
Securities
Underlying
Options/
SARs
(#)
|
LTIP
Payouts
($)
|
All
Other
Compen-
Sation
(6)
($)
|
|||||||||||||||||
|
Kirk
Krist (1)
|
2005
|
$
|
240,000
|
_
|
$
|
27,500
|
_
|
_
|
|||||||||||||||||
|
Chairman
of the
|
2004
|
242,175
|
$
|
78,975
|
20,000
|
$
|
279,000(1
|
)
|
500,000(1
|
)
|
|||||||||||||||
|
Board
|
2003
|
236,775
|
157,950
|
5,000
|
|||||||||||||||||||||
|
Jerry
Winchester
|
2005
|
268,000
|
_
|
_
|
_
|
$
|
6,654
|
||||||||||||||||||
|
Chief
Executive
|
2004
|
268,000
|
62,500
|
_
|
_
|
3,900
|
|||||||||||||||||||
|
Officer
|
2003
|
263,500
|
187,500
|
$
|
360,000(2
|
)
|
500,000(2
|
)
|
3,606
|
||||||||||||||||
|
Dewitt
H. Edwards
|
2005
|
149,250
|
|
300,000(3
|
)
|
||||||||||||||||||||
|
Senior
Vice
|
|
|
|||||||||||||||||||||||
|
President
-
|
|
||||||||||||||||||||||||
|
Finance
and
|
|
||||||||||||||||||||||||
|
Administration
|
|
||||||||||||||||||||||||
|
Kevin
Johnson
|
2005
|
136,541
|
_
|
4,096
|
|||||||||||||||||||||
|
Vice
President -
|
2004
|
132,667
|
31,250
|
None
|
150,000(4
|
)
|
4,917
|
||||||||||||||||||
|
Accounting
|
2003
|
127,833
|
62,500
|
3,835
|
|||||||||||||||||||||
|
(1)
|
Mr.
Krist serves as a consultant to us and is compensated pursuant
to terms of
a Consulting Agreement. Effective July 15, 2004, we granted Mr.
Krist
options to purchase 400,000 shares of common stock at an exercise
price
equal to the fair market value of the shares on August 19, 2004
(the date
the options were issued), of which 250,000 shares have vested with
the
remaining 150,000 to be vested over the next two years. Mr. Krist
also
received 300,000 shares of restricted stock (valued at $0.93 per
share),
of which 150,000 vested on August 13, 2004 with the remainder to
vest over
the next four years (vesting of the entire remainder may be accelerated
upon completion of a merger or acquisition on terms satisfactory
to the
Board of Directors), conditioned upon continued contractual relationship
at the time of each vesting. As a result of the March 3, 2006 acquisition
Mr. Kirk’s options became vested on that day. Beginning April 3, 2006, Mr.
Kirk will earn $1,000 per day as we require his sevices. Non-executive
board members, including Mr. Krist, receive $5,000 for each board
meeting
attended effective in the fourth quarter of 2003, which is reflected
in
Mr. Krist’s compensation under the heading “Other Annual Compensation”. On
September 30, 2003 Mr. Krist also received a one-time, 100,000
share stock
option vesting over a two year period for services as a board member.
We
previously reported the vested portion of the restricted stock
awards over
the life of the award. We now are reporting the full market value
on the
date of grant. This change in presentation does not affect the
accounting
for this transaction.
|
|
(2)
|
Effective
October 1, 2003, we granted Mr. Winchester options to purchase
500,000
shares of common stock at an exercise price equal to the fair market
value
of the shares on that date. Mr. Winchester also received 300,000
shares of
restricted stock (valued at $1.20 per share), of which 120,000
have vested
with the remainder to vest over the next three years, conditioned
upon
continued employment at the time of each vesting. We previously
reported
the vested portion of the restricted stock awards over the life
of the
award. We now are reporting the full market value on the date of
grant.
This change in presentation does not affect the accounting for
this
transaction.
|
|
(3)
|
Effective
October 12, 2005, Mr. Edwards received 300,000 stock options to
purchase
common stock, vesting over three years, 50 percent in 2006 and
25 percent
in each of 2007 and 2008, pursuant to the 2004 Long Term Incentive
Plan.
Mr. Edwards joined us on April 1,
2005.
|
|
(4)
|
Effective
November 1, 2004, Mr. Johnson received 150,000 stock
options to purchase common stock, vesting over three years, 50
percent in
2005 and 25 percent in each of 2006 and 2007, pursuant to the 2004
Long
Term Incentive Plan.
|
|
(5)
|
Consists
of fees paid for attendance at the Board
meetings.
|
|
(6)
|
Reflects
life insurance premiums and matching contributions to 401(k) plan.
|
OPTION/SAR
GRANTS IN FISCAL YEAR 2005
|
Individual
Grants
|
|
||||||||||||||||||
|
Percent
of
Total
Options/
|
Potential
Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for Option Term
|
||||||||||||||||||
|
Name
|
Number
of
Securities
Underlying
Option/SARS
Granted
(#)
|
SARS
Granted
to
Employees
In
Fiscal
Year
|
Exercise
Price
($/Share)
|
Expiration
Date
|
5%
|
10%
|
|||||||||||||
| Dewitt Edwards | 300,000 | 40.0 | % | $ | 1.13 | 10/12/11 |
$
|
115,000
|
$
|
262,000
|
|||||||||
Based
on
the fair market value of shares of common stock on the date the options were
issued. The actual value received upon sales of the shares may vary materially
from the values cited in the above table.
Aggregated
Option/SAR Exercises
and
December 31, 2005 Option/SAR Values
|
Name
|
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
($)
|
Number
of Securities Underlying
Unexercised
Options /SARs
At
December 31, 2005
(shares)
|
Value
of Unexercised In the
Money
Options/SARs
At
December 31, 2005
($)
|
|||||||||||||||
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||||||||||
|
K.
Kirk Krist
|
_
|
_
|
466,250
|
75,000
|
$
|
39,950
|
$
|
8,250
|
|||||||||||
|
Jerry
Winchester
|
_
|
_
|
537,500
|
_
|
_
|
_
|
|||||||||||||
|
Dewitt
Edwards
|
_
|
_
|
_
|
300,000
|
_
|
_
|
|||||||||||||
|
Kevin
Johnson
|
_
|
_
|
158,100
|
75,000
|
$
|
27,250
|
$
|
27,250
|
|||||||||||
Equity
Compensation Plan Information
|
Number
of securities
to
be issued upon
exercise
of
outstanding
options
and
warrants
(a)
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
(b
)
|
Number
of Securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in column (a))
(c)
|
||||||||
|
Plan
Category
|
||||||||||
|
Equity
compensation plans approved by security holders
|
5,847,000
|
$
|
1.02
|
4,030,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||
|
Total
|
5,847,000
|
$
|
1.02
|
4,030,000
|
||||||
Compensation
Committee Interlocks and Insider Participation
In
the
period covered by this report, none of our executive officers served as a
board
member or member of a compensation committee or similar body for another
company
that had an executive officer serving as a member of our board of directors
or
compensation committee.
COMPENSATION
OF DIRECTORS
Directors
who are also employed by us do not generally receive a retainer or fees for
service on the board or any committees. The Chairman of the Board and directors
who are not employed by us are entitled to receive a fee of $5,000 for
attendance at each meeting of the board, $2,500 per committee chaired and
$2,500
for each special committee meeting. Both employee and non-employee directors
are
reimbursed for reasonable out-of-pocket expenses incurred in attending meetings
of the board or committees and for other reasonable expenses related to the
performance of their duties as directors. The Chairman of the audit committee
receives a $50,000 annual stipend for his additional responsibilities. In
addition, during 2003,each non-employee director was granted an option to
purchase 100,000 shares of common stock at the fair market value on September
30, 2003 ($1.24). These options vested over a two-year period beginning on
September 30, 2003. The two directors added on March 3, 2006, were not eligible
to participate in this grant.
BOARD
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Determination
of Executive Compensation.
The
objectives of the Compensation Committee in determining executive compensation
are to retain and reward qualified individuals serving as our executive
officers. To achieve these objectives, the committee relies primarily on
salary,
annual bonuses (awardable either in stock or cash) and awards under our various
stock option plans. In making its decisions, the committee takes into account
the conditions within our industry, our income statement and cash flow, and
the
attainment of various designated business objectives. Individual performances
are also reviewed, taking into account the individual's responsibilities,
experience and potential, his or her period of service and current salary
and
the individual's compensation level as compared to similar positions at other
companies. The committee's evaluation of these considerations is, for the
most
part, subjective and, to date, it has not established any specific written
compensation plans or formulas pursuant to which the executive officers’ annual
compensation is determined. Messrs.
Anderson, DiPaolo and Herlin currently serve on the Compensation
Committee.
The
board
of directors instructed the Compensation Committee to review and determine
the
most effective means in which to compensate and provide incentives for the
board
as a whole, the Chief Executive Officer, our executive management and our
non-employee outside directors. The Compensation Committee established a
bonus
plan that awards executive management and certain employees a cash bonus
in an
amount equal to a varying percentage of their base salary depending our
performance against certain net income and EBITDA goals.
Compensation
Arrangements
Determination
of the Chief Executive Officer's Compensation.
On July
27, 2002, we appointed Jerry L. Winchester as our Chief Executive Officer.
Under
the terms of his employment agreement, we pay Mr. Winchester an annual salary
of
$250,000 and an annual automobile allowance of $18,000. In addition, on October
1, 2003, Mr. Winchester was granted an option to purchase up to 500,000 shares
of our common stock at a per share price of $1.20, which was the fair market
value of our common stock on that date. The option vested on the effective
date
of the agreement. Mr. Winchester was also granted 300,000 shares of restricted
stock with 60,000 shares vesting on the effective date of his employment
agreement and the remainder vesting over the following four years, conditioned
upon continued employment at the time of each vesting. The terms of Mr.
Winchester’s contract were negotiated utilizing the input of a third party
compensation consultant who evaluated competitive market trends and a market
study, and the terms were based upon the key roles of Mr. Winchester in
maintaining the close working relationship with Halliburton, developing new
business, identifying and completing acquisitions, resolving outstanding
issues
of prior period litigation and maturing debt, and providing leadership during
a
period of volatility in our business. The option award pertains to Mr.
Winchester’s performance on these issues during 2003, while the restricted stock
award is an incentive to his performance during the period of the
contract.
Mr.
Krist
serves as our Chairman of the Board and also serves from time to time as
a
consultant to us. Mr. Krist's consulting agreement became effective July
15,
2004, resulting in the payment of an annual fee of $241,200 for the first
year
of the two year agreement. In addition, Mr. Krist has been granted an option
to
purchase up to 400,000 shares of common stock of us at a price of $0.93 per
share, which was the fair market value on August 19, 2004, the date the options
were issued. Of these options, 250,000 vested on the date of the agreement
and
75,000 vested on August 19, 2005. The remaining 75,000 options will vest
no
later than August 19, 2006. Mr. Krist was also granted 300,000 shares of
restricted stock, of which 150,000 shares vested on August 13, 2004 with
the
remainder to be vested over four years (vesting of the entire remainder may
be
accelerated upon completion of a sufficiently large merger or acquisition
on
terms satisfactory to the Board of Directors), conditioned upon continued
consulting at the time of each vesting. In addition, in the second and final
year of the agreement, Mr. Krist will continue to be paid the annual fee
of
$241,200 until January 15, 2006 or until the completion of the above mentioned
merger or acquistion, whichever is longer, and thereafter will earn $1,000
per
day as we require his services. As
a
result of the March 3, 2006 acquisition, Mr. Kirk’s options became vested on
that day. Beginning April 3, 2006, Mr. Kirk will earn $1,000 per day as we
require his services. Non-executive board members, including Mr. Krist, receive
$5,000 for each board meeting attended, which is reflected in Mr. Krist’s
compensation. On September 30, 2003, Mr. Krist also received a one-time,
100,000
share stock option vesting over a two year period for services as a board
member.
The
board
of directors may adjust the day rate at its sole discretion.
|
Respectfully
submitted,
|
|
|
THE
COMPENSATION COMMITTEE
|
|
|
W.
Richard Anderson
|
|
|
E.
J. DiPaolo
|
|
|
Robert
S. Herlin, Chairman
|
|
PERFORMANCE
OF COMMON STOCK
The
following graph compares our total stockholder return on an investment of
$100
at December 31, 2000 in the common stock for the years ended December 31,
2001,
2002, 2003, 2004 and 2005 as compared to the Standard & Poors' 500 Stock
Index and the Standard & Poors' Energy Composite Index over the same
period.
|
|
12/00
|
12/01
|
12/02
|
12/03
|
12/04
|
12/05
|
|||||||||||||
|
Boots
& Coots International Well Control, Inc.
|
100.00
|
114.29
|
36.57
|
72.00
|
52.00
|
59.43
|
|||||||||||||
|
S&P
500 Index
|
100.00
|
88.12
|
68.64
|
88.33
|
97.94
|
102.75
|
|||||||||||||
|
S&P
Energy Composite Index
|
100.00
|
89.60
|
79.63
|
100.04
|
131.60
|
172.88
|
|||||||||||||
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management.
|
|
Name
and Address of
Beneficial
Owner(1)
|
Amount
and Nature of
Beneficial
Ownership
|
Percent
of Class
|
|||||
|
Jerry
L. Winchester
|
653,561
|
(2)
|
1.1
|
%
|
|||
|
K.
Kirk Krist
|
940,259
|
(3)
|
1.6
|
%
|
|||
|
Dewitt
H. Edwards
|
--
|
*
|
|||||
|
Kevin
D. Johnson
|
83,100
|
(4)
|
*
|
||||
|
W.
Richard Anderson
|
160,000
|
(5)
|
*
|
||||
|
Jed
DiPaolo
|
103,750
|
(6)
|
*
|
||||
|
Robert
S. Herlin
|
103,750
|
(6)
|
*
|
||||
|
Don
Cobb
|
100,000
|
(7)
|
*
|
||||
|
Gabe
Aldape
|
50,000
|
(8)
|
*
|
||||
| Douglas E. Swanson |
--
|
* | |||||
| Cindy B. Taylor |
--
|
* | |||||
|
Oil
States Energy Services, Inc.
333
Clay Street, Suite 4620
Houston,
Texas 77002
|
26,462,137
|
(9)
|
45.2
|
%
|
|||
|
All
executive officers and directors as a group (nine people)
|
2,194,420
|
3.6
|
%
|
||||
|
*
|
less
than 1%
|
|
(1)
|
Unless
otherwise noted, the business address for purposes hereof for each
person
listed is 11615 N. Houston Rosslyn, Houston, Texas 77086. Beneficial
owners have sole voting and investment power with respect to the
shares
unless otherwise noted.
|
|
(2)
|
Includes
options and/or warrants to purchase 513,750 shares of common stock
exercisable within 60 days.
|
|
(3)
|
Includes
options and/or warrants to purchase 312,500 shares of common stock
exercisable within 60 days
|
|
(4)
|
Consists
of options to purchase 83,100 shares of common stock exercisable
within 60
days
|
|
(5)
|
Consists
of options and/or warrants to purchase 160,000 shares of common
stock
exercisable within 60 days.
|
|
(6)
|
Consists
of options to purchase 103,750 shares of common stock exercisable
within
60 days.
|
|
(7)
|
Consists
of options to purchase 100,000 shares of common stock exercisable
within
60 days.
|
|
(8)
|
Consists
of options to purchase 50,000 shares of common stock exercisable
within 60
days.
|
|
(9)
|
Oil
States Energy Services Inc. is a wholly owned subsidiary of Oil
States International, Inc., which may be deemed to have shared
voting and
investment power over such shares.
|
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities and Exchange Act of 1934 requires our officers and
directors to file reports of ownership and changes in ownership of our common
stock with the Securities and Exchange Commission and the American Stock
Exchange.
Gabe
Aldape joined us on March 3, 2006 as Chief Financial Officer. His Form 3
was not
filed on a timely basis due to a delay in receiving filing codes to submit
reports through the EDGAR system. Mr. Aldape would also have been required
to
file a Form 4, in March, 2006, reporting the grant of 150,000 stock options
to
purchase common stock pursuant to the 2004 Long Term Incentive Plan in
connection with his employment. Mr. Aldape will file each of these forms
as soon
as practicable.
|
Item
13.
|
Certain
Relationships and Related Party
Transactions
|
None.
|
Item
14.
|
Principal
Accounting Fees and
Services
|
During
2005 and 2004, we incurred the following fees for services performed by UHY
Mann
Frankfort Stein and Lipp, CPA’s LLP (“UHY”):
|
Audit
Fees
|
|||||||
|
Fee
Type
|
2005
|
2004
|
|||||
|
Audit
Fees
|
$
|
190,000
|
$
|
192,000
|
|||
|
Audit
Related fees
|
46,000
|
53,000
|
|||||
|
Tax
Fees
|
—
|
—
|
|||||
|
Other
Fees
|
16,000
|
—
|
|||||
|
Total
Fees
|
$
|
252,000
|
$
|
245,000
|
|||
AUDIT
FEES
Audit
fees represent the aggregate fees for professional services rendered by UHY
for
the audit of our annual financial statements for the fiscal years ended December
31, 2005 and December 31, 2004, and the reviews of our financial statements
included in our Forms 10-Q for all quarters of fiscal 2005 and
2004.
Audit
Related Fees - Audit-related
fees include professional services rendered by UHY for audits ofour employee
benefit plans.
Tax
Fees - We
use an
independent consultant other than UHY to perform all tax related consulting
work.
All
Other Fees -Other
fees paid to UHY during 2005 were related to the acquisition of HWC and no
other
fees where paid in 2004.
Pre
Approval Policies and Procedures - The
Audit
Committee has established written pre-approval policies that require the
approval by the Audit Committee of all services provided by UHY as the principal
independent accountants and all audit services provided by other independent
accountants. All of the services described above provided by UHY to us were
approved in accordance with the policy.
Work
Performed by Principal Accountant’s Full Time, Permanent Employees -
UHY’s
work on our audit was performed by UHY partners and employees.
The
Selection of Auditors - The
Board
of Directors appointed UHY as principal independent accountants to examine
the
financial statements and the books and records of us for the years ending
December 31, 2005 and 2004. The appointment was made upon the recommendation
of
the Audit Committee. UHY has advised that neither the firm nor any member
of the
firm has any direct financial interest or any material indirect interest
in us.
Also, during at least the past three years, neither the firm nor any member
of
the firm has had any connection with us in the capacity of promoter,
underwriter, voting trustee, Director, officer or employee.
PART
IV
|
Item
15.
|
Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|
|
(a)
|
1.
|
Consolidated
financial statements for the year ended December 31, 2005, included
after
signature page.
|
|
2.
|
Financial
statement schedules included in consolidated financial
statements.
|
|
3.
|
Exhibit
Index
|
|
(a)
|
Exhibits
|
|
Exhibit
No.
|
Document
|
|
|
3.01
|
—
|
Amended
and Restated Certificate of Incorporation (Incorporated herein
by
reference to exhibit 3.2 of Form 8-K filed August 13,
1997.)
|
|
3.02
|
—
|
Amendment
to Certificate of Incorporation (Incorporated herein by reference
to
exhibit 3.3 of Form 8-K filed August 13, 1997.)
|
|
3.02(a)
|
—
|
Amendment
to Certificate of Incorporation (Incorporated herein by reference
to
exhibit 3.02(a) of Form 10-Q filed November 14, 2001.)
|
|
3.03
|
—
|
Amended
Bylaws ( Incorporated herein by reference to exhibit 3.4 of Form
8-K filed
August 13, 1997.)
|
|
3.03
|
—
|
Amendment
to Certificate of Incorporation ( Incorporated herein by reference
to
exhibit 3.1 of Form 8-K filed March 3, 2006.)
|
|
4.01
|
—
|
Specimen
Certificate for the Registrant’s Common Stock (Incorporated herein by
reference to exhibit 3.4 of Form 8-K filed August 13,
1997.)
|
|
4.02
|
—
|
Certificate
of Designation of 10% Junior Redeemable Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.08 of Form 10-QSB
filed May
19, 1998.)
|
|
4.03
|
—
|
Certificate
of Designation of Series A Cumulative Senior Preferred Stock (Incorporated
herein by reference to exhibit 4.07 of Form 10-K filed July 17,
2000.)
|
|
4.04
|
—
|
Certificate
of Designation of Series B Convertible Preferred Stock (Incorporated
herein by reference to exhibit 4.08 of Form 10-K filed July 17,
2000.)
|
|
4.05
|
—
|
Certificate
of Designation of Series C Cumulative Convertible Junior Preferred
Stock
(Incorporated herein by reference to exhibit 4.09 of Form 10-K
filed July
17, 2000.)
|
|
4.06
|
—
|
Certificate
of Designation of Series D Cumulative Junior Preferred Stock (Incorporated
herein by reference to exhibit 4.10 of Form 10-K filed July 17,
2000.
)
|
|
4.07
|
—
|
Certificate
of Designation of Series E Cumulative Senior Preferred Stock (Incorporated
herein by reference to exhibit 4.07 of Form 10-K filed April 2,
2001.)
|
|
4.08
|
—
|
Certificate
of Designation of Series F Convertible Senior Preferred Stock
(Incorporated herein by reference to exhibit 4.08 of Form 10-K
filed April
2, 2001.)
|
|
4.09
|
—
|
Certificate
of Designation of Series G Cumulative Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.09 of Form 10-K
filed April
2, 2001.)
|
|
4.10
|
—
|
Certificate
of Designation of Series H Cumulative Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.10 of Form 10-K
filed April
2, 2001.)
|
|
4.11
|
—
|
Registration
Rights Agreement dated March 3,2006 between Boots &Coots International
Well Control, Inc. and HWC Energy Services, Inc. (Incorporated
herein by
reference to exhibit 4.1 to the Current Report on Form 8-K filed
March
9,2006.)
|
|
10.01
|
—
|
Alliance
Agreement between IWC Services, Inc. and Halliburton Energy Services,
a
division of Halliburton Company (Incorporated herein by reference
to
exhibit 10.1 of Form 8-K filed August 13, 1997
|
|
10.02
|
—
|
Open
|
40
|
Exhibit
No.
|
Document
|
|
|
10.03
|
—
|
Open
|
|
10.04
|
—
|
1997
Incentive Stock Plan (Incorporated herein by reference to exhibit
10.33 of
Form 10-Q filed August 16, 1999.)
|
|
10.05
|
—
|
Outside
Directors’ Option Plan (Incorporated herein by reference to exhibit 10.4
of Form 8-K filed August 13, 1997.)
|
|
10.06
|
—
|
Executive
Compensation Plan (Incorporated herein by reference to exhibit
10.14 of
Form 10-KSB filed March 31, 1998.)
|
|
10.07
|
—
|
Halliburton
Center Sublease (Incorporated herein by reference to exhibit
10.17 of Form
10-KSB filed March 31, 1998.)
|
|
10.08
|
—
|
Registration
Rights Agreement dated July 23, 1998, between Boots & Coots
International Well Control, Inc. and The Prudential Insurance
Company
America ( Incorporated herein by reference to exhibit 10.22
of Form 8-K
filed August 7, 1998.)
|
|
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. (Incorporated herein by reference to exhibit
10.23 of Form
8-K filed August 7, 1998.)
|
|
10.10
|
—
|
Common
Stock Purchase Warrant dated July 23, 1998, issued to The Prudential
Insurance Company of America (Incorporated herein by reference
to exhibit
10.24 of Form 8-K filed August 7, 1998)
|
|
10.11
|
—
|
Loan
Agreement dated October 28, 1998, between Boots & Coots International
Well Control, Inc. and Comerica Bank — Texas (Incorporated herein by
reference to exhibit 10.25 of Form 10-Q filed November 17,
1998.)
|
|
10.12
|
—
|
Security
Agreement dated October 28, 1998, between Boots & Coots International
Well Control, Inc. and Comerica Bank — Texas (Incorporated herein by
reference to exhibit 10.26 of Form 10-Q filed November 17,
1998.)
|
|
10.13
|
—
|
Executive
Employment Agreement of Jerry Winchester (Incorporated herein
by reference
to exhibit 10.13 of Form 10-K filed March 30, 2004.)
|
|
10.14
|
—
|
Open
|
|
10.15
|
—
|
Office
Lease for 777 Post Oak (Incorporated herein by reference to
exhibit 10.30
of Form 10-K filed April 15, 1999.)
|
|
10.16
|
—
|
Open
|
|
10.17
|
—
|
Open
|
|
10.18
|
—
|
Third
Amendment to Loan Agreement dated April 21, 2000 (Incorporated
herein by
reference to exhibit 10.38 of Form 10-K filed July 17,
2000.)
|
|
10.19
|
—
|
Fourth
Amendment to Loan Agreement dated May 31, 2000 (Incorporated
herein by
reference to exhibit 10.39 of Form 10-K filed July 17,
2000.)
|
|
10.20
|
—
|
Fifth
Amendment to Loan Agreement dated May 31, 2000 (Incorporated
herein by
reference to exhibit 10.40 of Form 10-K filed July 17,
2000.)
|
|
10.21
|
—
|
Sixth
Amendment to Loan Agreement dated June 15, 2000 (Incorporated
herein by
reference to exhibit 10.41 of Form 10-K filed July 17,
2000.)
|
|
10.22
|
—
|
Seventh
Amendment to Loan Agreement dated December 29, 2000 (Incorporated
herein
by reference to exhibit 99.1 of Form 8-K filed January 12,
2001.)
|
|
10.23
|
—
|
Subordinated
Note Restructuring Agreement with The Prudential Insurance
Company of
America dated December 28, 2000 (Incorporated herein by reference
to
exhibit 10.23 of Form 10-K filed April 2, 2001.)
|
|
10.25
|
—
|
Preferred
Stock and Warrant Purchase Agreement, dated April 15, 1999,
with
Halliburton Energy Services, Inc. (Incorporated herein by reference
to
exhibit 10.41 of Form 10-K filed July 17,
2000.)
|
|
10.27
|
—
|
Form
of Warrant issued to Specialty Finance Fund I, LLC and to Turner,
Voelker,
Moore (Incorporated herein by reference to exhibit 10.47 of
Form 10-Q
filed November 14, 2000.)
|
|
Exhibit
No.
|
Document
|
|
|
10.28
|
—
|
Amended
and Restated Purchase and Sale Agreement with National Oil
Well, L.P.
(Incorporated herein by reference to exhibit 2 of Form 8-K
filed October
11, 2000.)
|
|
10.29
|
—
|
Open
|
|
10.30
|
—
|
2000
Long Term Incentive Plan (Incorporated herein by reference
to exhibit 4.1
of Form 8-K filed April 30, 2001.)
|
|
10.31
|
—
|
Eighth
Amendment to Loan Agreement dated April 12, 2002 (Incorporated
herein by
reference to exhibit 10.31 of Form 10-Q filed November 14,
2002.)
|
|
10.32
|
—
|
Ninth
Amendment to Loan Agreement dated May 1, 2002 (Incorporated
herein by
reference to exhibit 10.31 of Form 10-Q filed November 14,
2002.)
|
|
10.33
|
—
|
1st
Amendment to Subordinated Note Restructuring Agreement with
The Prudential
Insurance Company of America dated March 29, 2002 (Incorporated
herein by
reference to exhibit 10.33 of Form 10-Q filed November 14,
2002.)
|
|
10.34
|
—
|
2nd
Amendment to Subordinated Note Restructuring Agreement with
The Prudential
Insurance Company of America dated June 29, 2002 (Incorporated
herein by
reference to exhibit 10.34 of Form 10-Q filed August 14,
2003.)
|
|
10.35
|
—
|
3rd
Amendment to Subordinated Note Restructuring Agreement with
The Prudential
Insurance Company of America dated July 3, 2003 (Incorporated
herein by
reference to exhibit 10.35 of Form 10-Q filed November 14,
2003.)
|
|
10.36
|
—
|
4th
Amendment to Subordinated Note Restructuring Agreement with
The Prudential
Insurance Company of America dated November 14, 2003 (Incorporated
herein
by reference to exhibit 10.36 of Form 10-Q filed November 14,
2003.)
|
|
10.37
|
―
|
5th
Amendment to Subordinated Note Restructuring Agreement with
The Prudential
Insurance Company of America dated August 13, 2004 (Incorporated
herein by
reference to exhibit 10.37 of Form 10-Q filed August 16,
2004.)
|
|
10.38
|
―
|
Consulting
Agreement with Kirk Krist (Incorporated herein by reference
to exhibit
10.10 of Form 8-K filed August 24, 2004.)
|
|
10.39
|
—
|
Non
Employee Stock Option Plan (Incorporated herein by reference
to exhibit
4.1 of Form S-8 filed September 28, 2004.)
|
|
10.40
|
—
|
2004
Long Term Incentive Plan (Incorporated herein by reference
to exhibit 4.1
of Form S-8 filed September 28, 2004.)
|
|
10.41
|
—
|
Credit
and Security Agreement dated March 3, 2006 by and between & Coots
International Well Control, Inc. and Wells Fargo Bank, National
Association. (Incorporated herein by reference to exhibit 10.10
of Form 8K
filed March 9, 2006)
|
|
10.42
|
―
|
Transaction
Agreement by and among Boots & Coots International Well Control, Inc.,
HWC Acquisition, LLC, HWC Merger Corporation, Hydraulic Well
Control, LLC
and HWC Energy Services, Inc. dated as of November 21, 2005
(Incorporated
herein by reference to exhibit 2.1 to the Current Report on
Form 8-K filed
March 9, 2006.)
|
|
10.43
|
―
|
Subordinated
Note Agreement with HWC Energy Services dated March 3, 2006
(Incorporated
herein by reference to exhibit 4.1 to the Current Report on
Form 8-K filed
March 9, 2006.)
|
|
—
|
List
of subsidiaries
|
|
|
*23.1
|
―
|
Consent
of UHY
Mann Frankfort Stein & Lipp CPAs, LLP
|
|
―
|
§302
Certification by Jerry Winchester
|
|
|
―
|
§302
Certification by Dewitt H. Edwards
|
|
|
―
|
§906
Certification by Jerry Winchester
|
|
|
―
|
§906
Certification by Dewitt H. Edwards
|
*Filed
herewith
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant 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/
Dewitt H. Edwards
|
|
|
Dewitt
H. Edwards
|
||
|
Principal
Accounting Officer
|
||
|
Date:
March 31, 2006
|
||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the
date indicated.
|
Signature
|
Title
|
Date
|
||
|
By:
/s/ K. KIRK KRIST
|
Chairman
of the Board of Directors
|
March
31, 2006
|
||
|
K.
Kirk Krist
|
||||
|
By:
/s/ JERRY WINCHESTER
|
Chief
Executive Officer and Director
|
March
31, 2006
|
||
|
Jerry
Winchester
|
||||
|
By:
/s/ ROBERT HERLIN
|
Director
|
March
31, 2006
|
||
|
Robert
Stevens Herlin
|
||||
|
By:
/s/ E.J. DIPAOLO
|
Director
|
March
31, 2006
|
||
|
E.J.
DiPaolo
|
||||
|
By:
/s/ W. RICHARD ANDERSON
|
Director
|
March
31, 2006
|
||
|
W.
Richard Anderson
|
||||
|
By:
/s/ DOUGLAS E. SWANSON
|
Director
|
March
31, 2006
|
||
|
Douglas
E. Swanson
|
||||
|
By:
/s/ CINDY B. TAYLOR
|
Director
|
March
31, 2006
|
||
|
Cindy
B. Taylor
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Boots
& Coots International Well Control, Inc.
We
have
audited the accompanying consolidated balance sheets
of
Boots & Coots International Well Control, Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years
in
the period ended December 31, 2005. These consolidated financial statements
are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Boots &
Coots International Well Control, Inc. and subsidiaries as of December 31,
2005
and 2004, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of
America.
|
UHY
Mann Frankfort Stein & Lipp CPAs, LLP
|
|
|
Houston,
Texas
|
|
|
March
27, 2006
|
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands except share and per share amounts)
|
ASSETS
|
|||||||
|
|
December
31,
2005
|
December
31,
2004
|
|||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,594
|
$
|
1,428
|
|||
|
Receivables
— net of allowance for doubtful accounts of $345,000
and $489,000 at December 31, 2005 and 2004
|
6,142
|
10,340
|
|||||
|
Prepaid
expenses and other current assets
|
1,862
|
1,850
|
|||||
|
Total
current assets
|
10,598
|
13,618
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
2,462
|
2,872
|
|||||
|
DEFERRED
TAX ASSET
|
—
|
98
|
|||||
|
OTHER
ASSETS
|
1,707
|
1,805
|
|||||
|
Total
assets
|
$
|
14,767
|
$
|
18,393
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Short
term debt and current maturities of long-term debt and notes
payable
|
$
|
2,250
|
$
|
1,200
|
|||
|
Current
portion of accrued interest
|
259
|
332
|
|||||
|
Accounts
payable
|
376
|
3,468
|
|||||
|
Foreign
income tax payable
|
585
|
45
|
|||||
|
Accrued
liabilities
|
3,563
|
6,020
|
|||||
|
Total
current liabilities
|
7,033
|
11,065
|
|||||
|
Long
term debt and notes payable, net of current maturities
|
3,600
|
5,550
|
|||||
|
Accrued
interest net of current portion
|
339
|
598
|
|||||
|
TOTAL
LIABILITIES
|
10,972
|
17,213
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
—
|
—
|
|||||
|
STOCKHOLDERS'
EQUITY:
|
|||||||
|
Preferred
stock ($.00001 par, 5,000,000 shares authorized, 53,000 shares issued
and
outstanding.
|
—
|
—
|
|||||
|
Common
stock ($.00001 par, 125,000,000 shares authorized, 29,594,000 and
29,439,000 shares issued and outstanding at December 31, 2005 and
2004,
respectively)
|
—
|
—
|
|||||
|
Additional
paid-in capital
|
71,859
|
70,888
|
|||||
|
Deferred
Compensation
|
(225
|
)
|
(325
|
)
|
|||
|
Accumulated
other comprehensive loss
|
(1,234
|
)
|
(873
|
)
|
|||
|
Accumulated
deficit
|
(66,605
|
)
|
(68,510
|
)
|
|||
|
Total
stockholders' equity
|
3,795
|
1,180
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
14,767
|
$
|
18,393
|
|||
See
accompanying notes to consolidated financial statements.
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands except per share and share amounts)
|
Year
Ended
December
31,
2005
|
Year
Ended
December
31,
2004
|
Year
Ended
December
31,
2003
|
||||||||
|
REVENUES
|
||||||||||
|
Service
|
$
|
29,537
|
$
|
24,175
|
$
|
29,306
|
||||
|
Equipment
Sales
|
—
|
—
|
6,629
|
|||||||
|
Total
Revenues
|
29,537
|
24,175
|
35,935
|
|||||||
|
COSTS
OF SALES, excluding depreciation & amortization
|
||||||||||
|
Service
|
14,488
|
11,929
|
10,366
|
|||||||
|
Equipment
Sales
|
—
|
—
|
3,082
|
|||||||
|
Total
Costs of Sales
|
14,488
|
11,929
|
13,448
|
|||||||
|
Gross
Margin
|
15,049
|
12,246
|
22,487
|
|||||||
|
Operating
expenses
|
7,098
|
6,921
|
8,253
|
|||||||
|
Selling,
general and administrative
|
2,674
|
3,370
|
3,004
|
|||||||
|
Depreciation
and amortization
|
714
|
889
|
996
|
|||||||
|
10,486
|
11,180
|
12,253
|
||||||||
|
OPERATING
INCOME
|
4,563
|
1,066
|
10,234
|
|||||||
|
INTEREST
EXPENSE & OTHER, NET
|
655
|
864
|
2,286
|
|||||||
|
INCOME
FROM CONTINUING OPERATIONS BEFORE
|
||||||||||
|
income
taxes
|
3,908
|
202
|
7,948
|
|||||||
|
INCOME
TAX EXPENSE
|
1,129
|
492
|
1,339
|
|||||||
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
$
|
2,779
|
$
|
(290
|
)
|
$
|
6,609
|
|||
|
INCOME
FROM DISCONTINUED OPERATIONS
|
||||||||||
|
net
of income taxes
|
—
|
42
|
482
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
2,779
|
$
|
(248
|
)
|
$
|
7,091
|
|||
|
STOCK
AND WARRANT ACCRETION
|
—
|
(13
|
)
|
(53
|
)
|
|||||
|
PREFERRED
DIVIDENDS ACCRUED
|
(874
|
)
|
(735
|
)
|
(1,170
|
)
|
||||
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
1,905
|
$
|
(996
|
)
|
$
|
5,868
|
|||
|
BASIC
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||
|
Continuing
operations
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.25
|
|||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
0.02
|
||||
|
Net
income (loss)
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.27
|
|||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING BASIC
|
29,507,000
|
28,142,000
|
21,878,000
|
|||||||
|
DILUTED
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||
|
Continuing
operations
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.24
|
|||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
0.02
|
||||
|
Net
income (loss)
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.26
|
|||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING DILUTED
|
31,374,000
|
28,142,000
|
22,218,000
|
|||||||
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT)
Years
Ended December 31, 2005, 2004 and 2003
(in
Thousands)
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Additional
|
Other
|
Stockholder’s
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Paid
in
Capital
|
Accumulated
Deficit
|
Comprehensive
Loss
|
Deferred
Compensation
|
Equity
(Deficit)
|
||||||||||||||||||||
|
BALANCES
at December 31, 2002
|
331
|
$
|
—
|
11,216
|
$
|
—
|
$
|
59,832
|
$
|
(73,382
|
)
|
$
|
(438
|
)
|
$
|
—
|
$
|
(13,988
|
)
|
|||||||||
|
Common
stock options exercised
|
—
|
—
|
736
|
—
|
663
|
—
|
—
|
—
|
663
|
|||||||||||||||||||
|
Common
stock issued to retire senior short term debt
|
—
|
—
|
1,750
|
—
|
1,766
|
—
|
—
|
—
|
1,766
|
|||||||||||||||||||
|
Common
stock issued for services and Settlements
|
—
|
—
|
575
|
—
|
872
|
—
|
—
|
—
|
872
|
|||||||||||||||||||
|
Preferred
stock conversion to common stock
|
(278
|
)
|
—
|
10,211
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Preferred
stock dividends accrued
|
—
|
—
|
—
|
—
|
1,170
|
(1,170
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Short
swing profit contribution
|
—
|
—
|
—
|
—
|
3,887
|
—
|
—
|
—
|
3,887
|
|||||||||||||||||||
|
Warrant
discount accretion
|
—
|
—
|
—
|
—
|
53
|
(53
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Warrants
exercised
|
—
|
—
|
2,812
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Deferred
compensation
|
—
|
—
|
—
|
—
|
360
|
—
|
—
|
(360
|
)
|
—
|
||||||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
90
|
90
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
7,091
|
—
|
—
|
7,091
|
|||||||||||||||||||
|
Foreign
currency translation loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(1
|
)
|
—
|
(1
|
)
|
|||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
7,091
|
—
|
—
|
7,090
|
|||||||||||||||||||
|
BALANCES
at December 31, 2003
|
53
|
$
|
—
|
27,300
|
$
|
—
|
$
|
68,603
|
$
|
(67,514
|
)
|
$
|
(439
|
)
|
$
|
(270
|
)
|
$
|
380
|
|||||||||
|
Common
stock options issued for services
|
—
|
—
|
—
|
—
|
72
|
—
|
—
|
—
|
72
|
|||||||||||||||||||
|
Common
stock issued for debt refinancing
|
—
|
—
|
1,250
|
—
|
1,088
|
—
|
—
|
—
|
1,088
|
|||||||||||||||||||
|
Common
stock issued for services
|
—
|
—
|
250
|
—
|
237
|
—
|
—
|
—
|
237
|
|||||||||||||||||||
|
Restricted
common stock issued
|
—
|
—
|
60
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock conversion to common stock
|
—
|
—
|
579
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock dividends accrued
|
—
|
—
|
—
|
—
|
735
|
(735
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Warrant
discount accretion
|
—
|
—
|
—
|
—
|
13
|
(13
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Deferred
compensation
|
—
|
—
|
—
|
—
|
140
|
—
|
—
|
(140
|
)
|
—
|
||||||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
85
|
85
|
|||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(248
|
)
|
—
|
—
|
(248
|
)
|
|||||||||||||||||
|
Foreign
currency translation loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(434
|
)
|
—
|
(434
|
)
|
|||||||||||||||||
|
Comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(682
|
)
|
||||||||||||||||||
|
BALANCES
at December 31, 2004
|
53
|
$
|
—
|
29,439
|
$
|
—
|
$
|
70,888
|
$
|
(68,510
|
)
|
$
|
(873
|
)
|
$
|
(325
|
)
|
$
|
1,180
|
|||||||||
|
Common
stock options exercised
|
—
|
—
|
35
|
—
|
23
|
—
|
—
|
—
|
23
|
|||||||||||||||||||
|
Restricted
common stock issued
|
—
|
—
|
120
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock dividends accrued
|
—
|
—
|
—
|
—
|
874
|
(874
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Stock
Options and restricted stock grant expense
|
—
|
—
|
—
|
—
|
74
|
—
|
—
|
—
|
74
|
|||||||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
100
|
100
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
2,779
|
—
|
—
|
2,779
|
|||||||||||||||||||
|
Foreign
currency translation loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(361
|
)
|
—
|
(361
|
)
|
|||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
2,418
|
|||||||||||||||||||
|
BALANCES
at December 31, 2005
|
53
|
$
|
—
|
29,594
|
$
|
—
|
$
|
71,859
|
$
|
(66,605
|
)
|
$
|
(1,234
|
)
|
$
|
(225
|
)
|
$
|
3,795
|
|||||||||
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
Ended
December
31,
2005
|
Year
Ended
December
31,
2004
|
Year
Ended
December
31,
2003
|
||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income (loss)
|
$
|
2,779
|
$
|
(248
|
)
|
$
|
7,091
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided (used in) operating
activities
|
||||||||||
|
Depreciation
and amortization
|
714
|
889
|
996
|
|||||||
|
Amortization
of deferred loan cost
|
202
|
75
|
—
|
|||||||
|
Bad
debt expense (recovery)
|
(144
|
)
|
108
|
346
|
||||||
|
Loss
(gain) on sale of assets
|
(14
|
)
|
(9
|
)
|
—
|
|||||
|
Non
cash cost of equipment sales
|
—
|
—
|
502
|
|||||||
|
Non
cash compensation charge
|
174
|
85
|
90
|
|||||||
|
Interest
converted to principal
|
—
|
—
|
630
|
|||||||
|
Equity
issued for services and settlements
|
—
|
309
|
872
|
|||||||
|
Deferred
taxes
|
98
|
—
|
(98
|
)
|
||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Receivables
|
4,342
|
2,787
|
(10,713
|
)
|
||||||
|
Restricted
assets
|
—
|
—
|
69
|
|||||||
|
Prepaid
expenses and other current assets
|
(12
|
)
|
(308
|
)
|
(922
|
)
|
||||
|
Other
assets
|
(368
|
)
|
(789
|
)
|
2
|
|||||
|
Accounts
payable and accrued liabilities
|
(5,077
|
)
|
1,712
|
1,499
|
||||||
|
Change
in net assets of discontinued operations
|
—
|
(206
|
)
|
(770
|
)
|
|||||
|
Net
cash provided by (used in) operating activities
|
2,694
|
4,405
|
(406
|
)
|
||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Property
and equipment additions
|
(306
|
)
|
(491
|
)
|
(1,799
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
16
|
40
|
—
|
|||||||
|
Net
cash used in investing activities
|
(290
|
)
|
(451
|
)
|
(1,799
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Common
stock options exercised
|
23
|
—
|
663
|
|||||||
|
Debt
repayments
|
(900
|
)
|
(3,635
|
)
|
—
|
|||||
|
Proceeds
from short term senior financing
|
—
|
—
|
550
|
|||||||
|
Payments
to pledging arrangement
|
—
|
—
|
(59
|
)
|
||||||
|
Payments
of short term senior debt financings
|
—
|
—
|
(1,078
|
)
|
||||||
|
Payments
of unsecured notes payable
|
—
|
—
|
(475
|
)
|
||||||
|
Short
swing profit contributions
|
—
|
—
|
3,887
|
|||||||
|
Net
cash provided by (used in)financing activities
|
(877
|
)
|
(3,635
|
)
|
3,488
|
|||||
|
Impact
of foreign currency on cash
|
(361
|
)
|
(434
|
)
|
(1
|
)
|
||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
1,166
|
(115
|
)
|
1,282
|
||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
1,428
|
1,543
|
261
|
|||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
|
2,594
|
$
|
1,428
|
$
|
1,543
|
||||
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
||||||||||
|
Cash
paid for interest
|
$
|
593
|
$
|
1,421
|
$
|
776
|
||||
|
Cash
paid for income taxes
|
170
|
1,379
|
1,186
|
|||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
|
Stock
and warrant accretions
|
—
|
13
|
53
|
|||||||
|
Deferred
compensation
|
—
|
140
|
360
|
|||||||
|
Common
stock issued for debt modification
|
—
|
1,088
|
—
|
|||||||
|
Common
stock issued to retire short term senior debt
|
—
|
—
|
1,776
|
|||||||
|
Preferred
stock dividends accrued
|
874
|
735
|
1,170
|
|||||||
See
accompanying notes to consolidated financial statements.
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
A.
|
Business
and Organization
|
Boots
& Coots International Well Control, Inc. and subsidiaries (the “Company”),
is a global-response oil and gas service company that specializes in responding
to and controlling oil and gas well emergencies, including blowouts and well
fires. Through our participation in the proprietary insurance program
WELLSURE®,
we also
provide lead contracting and high-risk management services, under critical
loss
scenarios, to the program’s insured clients. Additionally, the
WELLSURE®
program
designates that we provide certain pre-event prevention and risk mitigation
services defined under the program. We also provide snubbing and other high-risk
well control management services, including pre-event planning, training and
consulting.
In
the
past, during periods of low critical events, resources dedicated to emergency
response were underutilized or, at times, idle, while the fixed costs of
operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, we began to actively expand our
non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, we developed
the WELLSURE®
program,
which is now providing more predictable and increasing service fee income,
and
began marketing our SafeGuard program, which provides a full range of prevention
services domestically and internationally. We intend to continue our effort
to
increase the revenues it generates from prevention services in 2006.
|
B.
|
Significant
Accounting Policies:
|
Consolidation
-
The
accompanying consolidated financial statements include the financial
transactions and accounts of us and our subsidiaries. All significant
intercompany accounts and transactions are eliminated in
consolidation.
Cash
and Cash Equivalents - We
consider all unrestricted highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. At December
31,
2005, restricted cash totaled $30,000.
Revenue
Recognition -
Revenue
is recognized on our service contracts primarily on the basis of contractual
day
rates as the work is completed. Revenue and cost from product and equipment
sales is recognized upon delivery, 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, related workman’s
compensation insurance, supplies, tools, repairs and depreciation costs. General
and administrative costs are charged to expense as incurred. Fixed assets are
depreciated over their useful lives. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
We
recognize revenues under the WELLSURE®
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 our predetermined day rates and sub-contracted work
as
incurred.
Allowance
for Doubtful Accounts
- We
perform ongoing evaluations of our customers and generally do not require
collateral. We assess our credit risk and provide an allowance for doubtful
accounts for any accounts which we deem doubtful of collection.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property
and Equipment
-
Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets
as
follows: buildings and improvements (15-31 years), well control and firefighting
equipment (8 years), shop and other equipment (8 years), vehicles (5 years)
and
office equipment and furnishings (5 years).
Expenditures
for repairs and maintenance are charged to expense when incurred. Expenditures
for major renewals and betterments, which extend the useful lives of existing
equipment, are capitalized and depreciated over the remaining useful life
of the
equipment. Upon retirement or disposition of property and equipment, the
cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of
operations.
Impairment
of Long Lived Assets -In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, we evaluate
the recoverability of property and equipment, and other long-lived assets,
if
facts and circumstances indicate that any of those assets might be impaired.
If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset’s carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value.
Comprehensive
Income (Loss) -
Comprehensive income (loss) includes foreign currency translations. In
accordance with SFAS No. 52, “Foreign Currency Translation”, the assets and
liabilities of its foreign subsidiaries, denominated in foreign currency,
are
translated into US dollars at exchange rates in effect at the consolidated
balance sheet date. Revenues and expenses are translated at the average exchange
rate for the period. Related translation adjustments are reported as
comprehensive income (loss) which is a separate component of stockholders
equity.
Income
Taxes
- We
account 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
our 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. The domestic tax liabilities are offset
by the
usage of our net domestic operating loss carry forwards. The provision for
tax
expense includes foreign income taxes from Algeria and Venezuela and a minimal
amount of domestic alternative minimum tax liability (See Note G.).
Earnings
Per Share -
Basic
and diluted income (loss) per common share is computed by dividing net income
(loss) attributable to common stockholders by the weighted average common
shares
outstanding. On October 2, 2003, we had a reverse one for four stock split.
All
share numbers, prices and earnings per share have been conformed to the post
split presentation throughout this document.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The
weighted average number of shares used to compute basic and diluted earnings
per
share for the three years ended December 31, 2005, 2004 and 2003 is illustrated
below:
|
|
Years
Ended December 31
|
|||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands)
|
||||||||||
|
Numerator:
|
||||||||||
|
For
basic and diluted earnings per share:
|
||||||||||
|
Net
Income(loss) attributable to common stockholders
|
$
|
1,905
|
$
|
(996
|
)
|
$
|
5,868
|
|||
|
Denominator:
|
||||||||||
|
For
basic earnings per share-
|
||||||||||
|
Weighted-average
shares
|
29,507
|
28,142
|
21,878
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Convertible
Preferred stock
|
—
|
—
|
33
|
|||||||
|
Stock
options and warrants
|
1,867
|
—
|
307
|
|||||||
|
Denominator:
|
||||||||||
|
For
diluted earnings per share -
|
||||||||||
|
Weighted-average
shares
|
31,374
|
28,142
|
22,218
|
|||||||
For
the
year ended December 31, 2004 we incurred a net loss attributable to common
stockholders. As a result, the potential dilutive effect of stock options,
stock
warrants and convertible securities was not included in the calculation of
diluted earnings per share because to do so would have been antidilutive
for
2004.
The
exercise price of our stock options and stock warrants varies from $0.67
to
$3.00 per share. Our convertible securities have a conversion price of $3.00.
Assuming that the exercises and conversions are made at the lowest price
provided under the terms of their agreements, the maximum number of potentially
dilutive securities at December 31, 2005, 2004 and 2003 would include: (1)
5,814,690, 5,202,440 and 823,365 common shares respectively, issuable upon
exercise of stock options, (2) 2,582,033, 3,067,355 and 6,745,000, common
shares
respectively, issuable upon exercise of stock purchase warrants, (3) 270,000
and
330,000 shares of stock to be issued as compensation over a four year vesting
period as earned, (4) 98,067, 88,867 and 113,400 common shares, respectively,
issuable upon conversion of convertible preferred stock. The actual numbers
may
be substantially less depending on the market price of our common stock at
the
time of conversion.
Employee
stock-based compensation- We
apply
APB Opinion 25, “Accounting for Stock Issued to Employees,” and related
interpretations in accounting for our stock-based compensation plans.
Accordingly, no compensation cost has been recognized for stock option grants
under our employee and director stock option plans if no intrinsic value
of the
option exists at the date of the grant. In October 1995, the FASB issued
SFAS
No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”). SFAS No.
123 encourages companies to account for stock-based compensations awards
based
on the fair value of the awards at the date they are granted. The resulting
compensation cost would be shown as an expense in the consolidated statements
of
operations. Companies can choose not to apply the new accounting method and
continue to apply current accounting requirements; however, disclosure is
required as to what net income (loss) and earnings (loss) per share would
have
been had the new accounting method been followed. Had compensation expense
for
our stock-based compensation plans been determined based on the fair value
at
the grant dates for awards under stock option plans consistent with the method
of SFAS No. 123, our reported net income (loss) and net income (loss) per
common
share would have changed to the pro forma amounts indicated below:
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands except per share amounts)
|
||||||||||
|
Net
income (loss) attributable to common stockholders, as
reported
|
$
|
1,905
|
$
|
(996
|
)
|
$
|
5,868
|
|||
|
Less
total stock based employee compensation expense determined under
fair
value based method for all awards, net of tax related
effects
|
(929
|
)
|
(382
|
)
|
(567
|
)
|
||||
|
Pro
forma net income (loss) attributable to common
stockholders
|
$
|
976
|
$
|
(1,378
|
)
|
$
|
5,301
|
|||
|
Basic
income (loss)
|
||||||||||
|
Per
share as reported
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.27
|
|||
|
Pro
forma
|
$
|
0.03
|
$
|
(0.05
|
)
|
$
|
0.24
|
|||
|
Diluted
income (loss)
|
||||||||||
|
Per
share as reported
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.26
|
|||
|
Pro
forma
|
$
|
0.03
|
$
|
(0.05
|
)
|
$
|
0.24
|
|||
We
used
the Black-Scholes option pricing model to estimate the fair value of options
on
the date of grant. The following weighted average assumptions were applied
in
determining the pro forma compensation costs:
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Risk-free
interest rate
|
3.6
|
%
|
3.4
|
%
|
6.0
|
%
|
||||
|
Expected
dividend yield
|
―
|
―
|
―
|
|||||||
|
Expected
option life
|
3
yrs
|
3
yrs
|
5
yrs
|
|||||||
|
Expected
volatility
|
79.3
|
%
|
62.4
|
%
|
60.0
|
%
|
||||
|
Weighted
average fair value of options granted at market value
|
$
|
0.56
|
$
|
0.33
|
$
|
1.20
|
||||
Fair
Value of Financial Instruments -
The
carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term maturities of these
instruments. Management believes that the carrying amount of debt, exclusive
of
accrued interest included in debt, pursuant to our troubled debt restructuring
in December 2000 (see Note H), approximates fair value as the majority of
borrowings bear interest at current market interest rates for similar debt
structures.
Recently
Issued Accounting Standards In
December 2004, the FASB re-issued SFAS No. 123 “Share Based Payments,” (“SFAS
123R”) that addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for our equity
instruments, such as stock options and restricted stock. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25 and requires instead that such transactions be accounted for
using a fair value based method. We currently accounts for stock-based
compensation using the intrinsic method pursuant to APB Opinion No. 25. SFAS
123R requires that all stock-based payments to employees, including grants
of
stock options and restricted stock, be recognized as compensation expense
in the
financial statements based on their fair values. We will be required to apply
SFAS 123R beginning in the fiscal quarter ending March 31, 2006. We will
adopt
the provisions of SFAS 123R using the modified - prospective approach. The
impact on consolidated results of operations will be similar to the proforma
results reported in Note B to the consolidated financial
statements.
In
May
2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.” Among other changes, this Statement requires
retrospective application for voluntary changes in accounting principles,
unless
it is impractical to do so. Guidance is provided on how to account for
changes
when retrospective application is impractical. This Statement is effective
on a
prospective
basis beginning January 1, 2006.
Use
of Estimates
-
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and accompanying
notes. Significant estimates made by management include the allowance for
doubtful accounts, the valuation allowance for deferred tax assets and accrued
liabilities for potential litigation settlements. Actual results could differ
from these estimates.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reclassifications
-
Certain
reclassifications have been made to the prior period consolidated financial
statements to conform to current year presentation.
|
C.
|
Discontinued
Operations:
|
On
June
30, 2002, we made the decision and formalized a plan to sell the assets of
our
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 consolidated statements of operations and as assets and
liabilities of discontinued operations on the consolidated balance
sheets.
The
following table presents the revenues, loss from operations and other components
attributable to the discontinued operations Abasco and Boots and Coots Special
Services:
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Income
from operations before income taxes
|
—
|
42
|
482
|
|||||||
|
Net
income from discontinued operations
|
$
|
—
|
$
|
42
|
$
|
482
|
||||
|
D.
|
Detail
of Certain Balance Sheet
Accounts:
|
Prepaid
expenses and other current assets consisted of the following as of:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
(in
thousands)
|
|||||||
|
Prepaid
insurance
|
$
|
546
|
$
|
704
|
|||
|
Prepaid
Agency Fees
|
271
|
231
|
|||||
|
Prepaid
Taxes
|
203
|
342
|
|||||
|
Other
prepaid and current assets
|
842
|
573
|
|||||
|
Total
|
$
|
1,862
|
$
|
1,850
|
|||
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Property
and equipment consisted of the following as of:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
(in
thousands)
|
|||||||
|
Land
|
$
|
136
|
$
|
136
|
|||
|
Buildings
and improvements
|
734
|
723
|
|||||
|
Well
control and firefighting equipment
|
6,115
|
6,003
|
|||||
|
Shop
and other equipment
|
114
|
132
|
|||||
|
Computer
systems
|
568
|
568
|
|||||
|
Vehicles
|
612
|
554
|
|||||
|
Office
equipment and furnishings
|
970
|
847
|
|||||
|
Total
property and equipment
|
9,249
|
8,963
|
|||||
|
Less:
accumulated depreciation and amortization
|
6,787
|
6,091
|
|||||
|
Net
property and equipment
|
$
|
2,462
|
$
|
2,872
|
|||
Depreciation
expense was $714,000, $889,000 and $1,015,000 for the years ended December
31,
2005, 2004 and 2003, respectively.
Other
assets consisted of the following as of:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
(in
thousands)
|
|||||||
|
Deferred
Loan Cost, net
|
$
|
809
|
$
|
1,013
|
|||
|
Agency
Commission Fees, net
|
527
|
789
|
|||||
|
Deferred
Merger Costs and Other, net
|
371
|
3
|
|||||
|
Total
|
$
|
1,707
|
$
|
1,805
|
|||
The amount
of deferred loan cost amortized to interest expense was $202,000, $77,000
and zero for the year ended December 31, 2005, 2004 and 2003, respectively.
Amortization expense related to agency commission fees were $262,000 and
$17,000
and zero for the year ended December 31, 2005, 2004 and 2003,
respectively.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accrued
liabilities consisted of the following as of:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
(in
thousands)
|
|||||||
|
Accrued
income and other taxes
|
$
|
706
|
$
|
307
|
|||
|
Accrued
payables
|
752
|
3,891
|
|||||
|
Accrued
salaries and benefits
|
860
|
880
|
|||||
|
Other
accrued liabilities
|
1,245
|
942
|
|||||
|
Total
|
$
|
3,563
|
$
|
6,020
|
|||
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
E.
|
Income
Taxes:
|
We
and
our wholly-owned domestic subsidiaries file a consolidated federal income
tax
return. The provision for income taxes shown in the consolidated statements
of
operations is made up of current, deferred and foreign tax expense as
follows:
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
(in
thousands)
|
||||||||||
|
Federal
|
||||||||||
|
Current
|
$
|
—
|
$
|
—
|
$
|
98
|
||||
|
Deferred
|
98
|
—
|
(98
|
)
|
||||||
|
State
|
||||||||||
|
Current
|
—
|
—
|
—
|
|||||||
|
Deferred
|
—
|
—
|
—
|
|||||||
|
Foreign
|
1,031
|
492
|
$
|
1,339
|
||||||
|
$
|
1,129
|
$
|
492
|
$
|
1,339
|
|||||
The
above
foreign taxes represent income tax liabilities in the respective foreign
subsidiary’s domicile. The provision for income taxes differs from the amount
that would be computed if the income (loss) from continuing operations before
income taxes were multiplied by the federal income tax rate (statutory rate)
as
follows:
|
Year
Ended December 31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
(in
thousands)
|
||||||||||
|
Income
tax provision at the statutory rate (34%)
|
$
|
1,328
|
$
|
69
|
$
|
2,702
|
||||
|
Increase
resulting from:
|
||||||||||
|
Foreign
taxes in excess of statutory rate
|
80
|
103
|
230
|
|||||||
|
Adjustment
to net operating loss from continuing operations
|
(978
|
)
|
—
|
624
|
||||||
|
Nondeductible
expenses
|
28
|
29
|
31
|
|||||||
|
Change
in valuation allowance
|
671
|
291
|
(2,248
|
)
|
||||||
|
$
|
1,129
|
$
|
492
|
$
|
1,339
|
|||||
As
of
December 31, 2005, 2004 and 2003, we had net domestic operating loss carry
forwards of approximately $43,308,000, $41,351,000 and $41,227,000,
respectively, expiring in various amounts beginning in 2011. The net operating
loss carry forwards, along with the other timing differences, generate a
net
deferred tax asset in each year. We have recorded valuation allowances for
most
of these net deferred tax assets since management believes it is more likely
than not that most of the assets will not be realized. The temporary differences
representing deferred tax assets and liabilities are as
follows:
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
(in
thousands)
|
|||||||
|
Deferred
income tax assets
|
|||||||
|
Net
operating loss carry forward
|
$
|
14,630
|
$
|
14,059
|
|||
|
Depreciation
|
389
|
432
|
|||||
|
Allowance
for doubtful accounts
|
117
|
166
|
|||||
|
Accruals
|
27
|
597
|
|||||
|
Foreign
tax credit
|
1,957
|
1,314
|
|||||
|
Alternative
minimum tax credit
|
118
|
98
|
|||||
|
Total
deferred income tax assets
|
$
|
17,238
|
$
|
16,666
|
|||
|
Valuation
allowance
|
$
|
(17,238
|
)
|
$
|
(16,568
|
)
|
|
|
Net
deferred income tax asset
|
$
|
—
|
$
|
98
|
|||
|
Net
deferred income tax asset
|
$
|
—
|
$
|
98
|
|||
|
F.
|
Long-Term
Debt and Notes Payable:
|
Long-term
debt and notes payable consisted of the following:
|
December
31,
|
|||||||
|
2005
|
2004
|
||||||
|
12
% Senior Subordinated Note
|
$
|
5,100
|
$
|
6,000
|
|||
|
Senior
secured credit facility
|
750
|
750
|
|||||
|
Total
|
5,850
|
6,750
|
|||||
|
Less:
current portion of long-term debt and notes payable
|
2,250
|
1,200
|
|||||
|
Long-term
debt and notes payable, net of current portion
|
$
|
3,600
|
$
|
5,550
|
|||
In
December 2000, the refinancing of our debt with Prudential which qualified
as a
troubled debt restructuring under the provisions of SFAS 15. As a result
of the
application of this accounting standard, the total indebtedness due to
Prudential, inclusive of accrued interest, was reduced by the cash and fair
market value of securities (determined by independent appraisal) issued by
us,
and the residual balance of the indebtedness was recorded as the new carrying
value of the subordinated note due to Prudential. Consequently, the $7,200,000
face value of the 12.0% Senior Subordinated Note with an initial maturity
date
of 2005 was recorded on our balance sheet at $11,520,000. The additional
carrying value of the debt effectively represented an accrual of future interest
due on the face value of the subordinated note due to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain in 2000.
On
August
13, 2004, we amended our subordinated facility with Prudential. The principal
balance of $9,635,000 would have been due on December 30, 2005. Under the
amended terms, we paid principal of $2,000,000 on August 13, 2004 plus accrued
interest of $28,667. We were also required to pay down approximately $1,635,000
of principal on December 15, 2004. The December 31, 2005 remaining balance
of
$5,100,000 was to be paid in equal quarterly installments over the next four
years with a final maturity of December 31, 2009. This restructuring also
extended the amortization period of the remaining troubled debt restructuring
related credit over the life of the restructured facility. In connection
with
our amended loan agreement, Prudential also exchanged its remaining 582 shares
of our Series E preferred stock for 55,429 shares of our common stock and
surrendered its warrants to purchase 2,418,000 shares of common stock, and
we
issued Prudential 1,250,000 shares of our common stock valued at $1,088,000
as
well as 524,206 shares of common stock to pay accrued and unpaid dividends
owed
on Series E and Series G preferred stock.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On
April
9, 2002, we entered into a loan participation agreement under which it borrowed
an additional $750,000 under our existing Senior Secured Loan Facility with
Specialty Finance Fund I, LLC. This Loan Facility was acquired by San Juan
Investments on that day. The effective interest rate of the participation
was
11% after taking into account rate adjustment fees. We also paid 3% of the
borrowed amount in origination fees, paid closing expenses and issued 25,000
shares of our 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 our option. We issued an additional 25,000 shares of
our
common stock to the participation lender to extend the maturity date. On
November 11, 2003, we and the senior lender executed an agreement extending
the
term of the loan to 29 months (due April 9, 2006) at 11% interest, paid
quarterly. On June 1, 2004, we and the senior lender executed an agreement
reducing the interest rate to 7%.
In
conjunction with the acquisition of HWC on March 3, 2006, we and our wholly
owned subsidiary, IWC Services, LLC, entered into a Credit Agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association, which
established a revolving credit facility totaling $10.3 million, subject to
an
initial borrowing base of $6.0 million, and a term credit facility of $9.7
million. The term credit facility is due and payable in full on March 3,
2010,
subject to extension under certain circumstances to March 3, 2011. The revolving
credit facility is due and payable in full on March 3, 2010, subject to a
year
to year renewal thereafter. We utilized initial borrowings under the credit
agreement totaling $10.6 million to repay senior and subordinated debt in
full
and repurchase all of our outstanding shares of preferred stock and for other
corporate purposes. The $9.7 million credit facility is payable monthly over
sixty months.
The
Credit Agreement is secured by substantially all of our assets. Unused line
fees
are due monthly on the revolving credit facility and range from 0.25%
to 0.50% per annum, based on the ratio of the outstanding principal amount
under the Credit Agreement to our consolidated EBITDA at our option, borrowings
under the Credit Agreement bear interest at either (i) Wells Fargo’s prime
commercial lending rate, or (ii) the Inter-Bank Market Offered Rate plus a
margin ranging, as to the revolving credit facility, from 0.50% to 1.50%
per
annum, and, as to the term credit facility, from 3.00% to 3.50%, which margin
increases or decreases based on the ratio of the outstanding principal amount
under the Credit Agreement to our consolidated EBITDA. The interest rate
at
March 3, 2006 was 6.17%.
The
Credit Agreement contains various restrictive covenants and compliance
requirements, including (1) maintenance of a minimum book net worth through
December 31, 2006 equal to 90% of the pro forma book net Worth calculated
on
March 1, 2006, but in no event less than $25,000,000, or, for each fiscal
year
thereafter, equal to the greater of the minimum book net worth required for
the
preceding fiscal year or 85% of book net worth on the last day of the preceding
fiscal year. For these purposes “book net worth” means the aggregate of our
common and preferred stockholders’ equity on a consolidated basis;
(2) maintenance of a minimum ratio of our consolidated EBITDA less
unfinanced capital expenditures to principal and interest payments required
under the Credit Agreement, on a trailing twelve month basis, of 1.50 to
1.00;
(3) limitation on capital expenditures of $3,000,000 in the aggregate
during any fiscal year; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under the notes in original
aggregate amount of $15,000,000 owing to HWC Energy Services, Inc., subject
to
adjustments based upon working capital on the effective date of the transaction,
indebtedness existing on the date of the Credit Agreement, indebtedness existing
between us and our subsidiaries that is unsecured and subordinated to the
indebtedness arising under the Credit Agreement.
The
$15,000,000 unsecured subordinated notes bears interest at a rate of 10%
per
annum, subject to adjustments for working capital on the effective date of
closing owing to HWC Energy Services, Inc., with a one time principal payment
to
HWC Energy Service, Inc. on September 9, 2010.
Substantially
all of our assets are pledged as collateral under the debt
agreements.
|
G.
|
Stockholders’
Equity:
|
Common
and Preferred Stock
Our
stockholders approved a reverse one for four stock split effective October
3,
2003, and all of the share numbers in this filing have been adjusted
accordingly. Under our Amended and Restated Certificate of Incorporation,
the
board of directors has the power, without further action by the holders of
common stock, to designate the relative rights and preferences of our preferred
stock, when and if issued. Such rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends
or
other preferences, over shares of common stock. The board of directors may,
without further action by our stockholders , issue shares of preferred stock
which it has designated. The rights of holders of common stock will be subject
to, and may be adversely affected by or diluted by, the rights of holders
of
preferred stock.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On
April
15, 1999, we completed the sale of 50,000 shares of $.00001 par value per
share
with a face value of $100 of Series A Cumulative Senior Preferred Stock ("Series
A Stock") to Halliburton Energy Services, Inc. ("Halliburton"), a wholly-owned
subsidiary of Halliburton Company. The Series A Stock has a dividend requirement
of 6.25% per annum payable quarterly until the fifth anniversary at the date
of
issuance, whereupon the dividend requirement increases to the greater of
prime
plus 6.25% or 14% per annum, which is subject to adjustment for stock splits,
stock dividends and certain other events. At December 31, 2005 and 2004 there
were 50,000 shares of our Series A preferred stock issued and outstanding.
This
preferred stock was paid in full in connection with closing the HWC
acquisition.
On
April
28, 2000, we adopted the Certificate of Designation of Rights and Preferences
of
the Series B Preferred Stock, which designates this issue to consist of 100,000
shares of $.00001 par value per share with a face value of $100 per share;
have
a dividend requirement of 10% per annum, payable semi-annually at the election
of us in additional shares of our Series B Preferred Stock in lieu of cash;
have
voting rights equivalent to 100 votes per share; and, may be converted at
the
election of us into shares of our common stock on the basis of a $3.00 per
share
conversion rate. At December 31, 2005 and 2004 there were no shares of series
B
preferred stock issued and outstanding.
On
May
30, 2000 we adopted the Certificate of Designation of Rights and Preferences
of
the Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”)
that designates this issue to consist of 50,000 shares of $.00001 par value
per
share with a face value of $100 per share; have a dividend requirement of
10%
per annum, payable quarterly at the election of us in additional shares of
our
Series C Preferred Stock in lieu of cash; have voting rights excluding the
election of directors equivalent to one vote per share of common stock into
which preferred shares are convertible into, and may be converted at the
election of us into shares of the our common stock on the basis of a $3.00
per
share conversion rate. After eighteen months from the issuance date a holder
of
Series C Preferred Stock may elect to have future dividends paid in cash.
At
December 31, 2005 and 2004 there were 2,943 and 2,616, respectively, shares
of
series C preferred stock issued and outstanding. This preferred stock was
paid
in full in connection with closing the HWC acquisition.
On
December 29, 2000, we adopted the Certificate of Designation of Rights and
Preferences of Series H Cumulative Convertible Preferred Stock (“Series H
Preferred Stock”) that designates this issue to consist of 89,117 shares of
$.00001 par value per share with a face value of $100 per share; have a dividend
requirement of 10% per annum compounded, payable semi-annually at the election
of the us in additional shares of our Series H Preferred Stock in lieu of
cash;
have voting rights excluding the election of directors equivalent to one
vote
per share of common stock into which preferred shares are convertible into,
and
may be converted at the election of us into shares of our common stock on
the
basis of a $3.00 per share conversion rate. At December 31, 2005 and 2004
there
were no shares of series H preferred stock outstanding.
For
the
years ended December 31, 2005, 2004 and 2003, we accrued $874,000, $735,000
and
$1,170,000, respectively, for dividends relating to all series of preferred
stock. All 5,000,000 shares of the authorized Preferred stock are available
for
any future issue in any class of preferred stock.
Stockholder
Rights Plan:
On
November 29, 2001 we adopted a stockholder rights plan in order to provide
protection for the stockholders in the event of an attempted potential
acquisition of us. Under the plan, we have declared a dividend of one right
on
each share of our common stock. Each right will entitle the holder to purchase
one one-hundredth of a share of a new Series I Junior Participating Preferred
Stock of us at an exercise price of $20.00. The rights are not currently
exercisable and will become exercisable only after a person or group acquires
15% or more of the outstanding common stock of us or announces a tender offer
or
exchange offer which would result in ownership of 15% or more of the outstanding
common stock. The rights are subject to redemption by us for $0.001 per right
at
any time, subject to certain limitations. In addition, the Board of Directors
is
authorized to amend the Rights plan at any time prior to the time the rights
become exercisable. The rights will expire on December 17,
2011.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
If
the
rights become exercisable, each right will entitle its holder (other than
such
person or members of such group) to purchase, at the right’s then current
exercise price, a number of our shares of common stock having a market value
of
twice such price or, if we are acquired in a merger or other business
combination, each right will entitle its holder to purchase, at the right’s then
current exercise price, a number of the acquiring Company’s shares of common
stock having a market value of twice such price. Prior to an acquisition
of
ownership of 50% or more of the common stock by a person or group, the Board
of
Directors may exchange the rights (other than rights owned by such person
or
group, which will have become null and void and nontransferable) at an exchange
ratio of one share of common stock (or one one-hundredth of a share of Series
I
Preferred Stock) per right. The Board of Directors waived this requirement
for
the HWC acquisition.
A
summary
of warrants outstanding as of December 31, 2005 is as follows:
|
Expiration
Date
|
Exercise
Price
Per
Share
|
Number
of
Shares
|
|||||
|
03/19/2006
|
3.00
|
254,715
|
|||||
|
04/09/2006
|
3.00
|
4,153
|
|||||
|
10/31/2006
|
3.00
|
18,750
|
|||||
|
04/25/2007
|
1.77
|
26,465
|
|||||
|
06/04/2007
|
2.02
|
88,056
|
|||||
|
06/30/2007
|
1.77
|
88,181
|
|||||
|
04/10/2008
|
2.35
|
1,464,213
|
|||||
|
07/18/2008
|
1.40
|
37,500
|
|||||
|
10/03/2008
|
0.88
|
600,000
|
|||||
|
2,582,033
|
|||||||
In
connection with closing the HWC acquisition, 1,464,213 warrants priced at
$2.35
were eliminated.
Stock
Options:
A
summary
of stock option plans under which stock options remain outstanding as of
December 31, 2005 follows:
1996
Incentive Stock Plan authorizing
the Board of Directors to provide a number of key employees with incentive
compensation commensurate with their positions and responsibilities. The
1996
Plan permitted the grant of incentive equity awards covering up to 240,000
shares of common stock. In connection with the acquisition of IWC Services
by
us, we issued incentive stock options covering an aggregate of 115,000 shares
of
common stock to employees who were the beneficial owners of 50,000 options
that
were previously granted by IWC Services. These incentive stock options are
exercisable for a period of 10 years from the original date of grant at an
exercise price of $1.72 per share.
1997
Incentive Stock Plan authorizing
the Board of Directors to provide key employees with incentive compensation
commensurate with their positions and responsibilities. The 1997 Incentive
Stock
Plan permits the grant of incentive equity awards covering up to 368,750
shares
of common stock. Grants may be in the form of qualified or non qualified
stock
options, restricted stock, phantom stock, stock bonuses and cash bonuses.
As of
the December 31, 2005, stock options covering an aggregate of 368,750 shares
of
common stock have been made under the 1997 Incentive Stock Plan. Such options
vest ratably over a five-year period from the date of grant. These incentive
stock options are exercisable for a period of 10 years from the original
date of
grant at an exercise price of ranging from $1.72 to $3.00 per
share.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1997
Executive Compensation Plan authorizing
the Board of Directors to provide executive officers with incentive compensation
commensurate with their positions and responsibilities. The 1997 Executive
Compensation Plan permits the grant of incentive equity awards covering up
to
368,750 shares of common stock. Grants may be in the form of qualified or
non
qualified stock options, restricted stock, phantom stock, stock bonuses and
cash
bonuses. As of December 31, 2005, there were stock options of 501,090 stock
options outstanding under the Plan.
1997
Outside Directors’ Option Plan authorizing
the issuance each year of an option to purchase 3,750 shares of common stock
to
each member of the Board of Directors who is not an employee. The purpose
of the
Directors’ Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist us in achieving our growth
objectives. Options may be exercised over a five-year period with the initial
right to exercise starting one year from the date of the grant, provided
the
director has not resigned or been removed for cause by the Board of Directors
prior to such date. After one year from the date of the grant, options
outstanding under the Directors’ Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors’ Plan are not transferable except by will or by operation of law.
Through December 31, 2005, grants of stock options covering an aggregate
of
454,750 shares of common stock have been made under the 1997 Outside Directors’
Option Plan. At December 31, 2005, there were 415,000 stock options outstanding
under the plan.
2000 Long-Term
Incentive Plan
authorizes the Board of Directors to provide full time employees and consultants
(whether full or part time) with incentive compensation in connection with
their
services to us. The plan permits the grant of incentive equity awards covering
up to 1,500,000 shares of common stock. Grants may be in the form of qualified
or non qualified stock options, restricted stock, phantom stock, stock bonuses
and cash bonuses. As of the date hereof, stock option grants covering an
aggregate of 783,125 shares of common stock have been made under the 2000
Long-Term Incentive Plan. Such options vest ratably over a five-year period
from
the date of grant. Options granted to consultants are valued using the Black
Scholes pricing model and expensed over the vesting period. At December
31, 2005, there were 601,600 stock options outstanding under the
plan.
In
April
2000, we voided stock options covering an aggregate of 752,000 shares of
common
stock by agreement with the option holders with the understanding that the
stock
options would be repriced and reissued. During the third quarter of 2000,
options covering an aggregate of 710,250 shares of common stock were reissued
at
an exercise price of $3.00. No compensation expense was required to be recorded
at the date of issue. However, the reissuance of these options was accounted
for
as a variable plan, and we were subject to recording compensation expense
if our
stock price rose above $3.00. In April 2001, Messrs. Ramming, Winchester
and
Edwards agreed to voluntarily surrender 522,000 of these options at the request
of the Compensation Committee of the Board, because of the potential variable
plan accounting associated with these options. In October 2001 these individuals
received fully vested options to purchase 522,000 shares at an exercise price
of
$2.20 per share. As of December 31, 2005, options to purchase 64,100 shares
pursuant to the reissuance in the third quarter of 2000 remain subject to
variable plan accounting.
On
October 1, 2003 we granted 500,000 options at market price on that day, vesting
immediately, as a result of the new employment agreement with our Chief
Executive Officer. We also granted 300,000 shares of restricted stock at
no
cost, vested over a four year period with 20% vesting immediately. This resulted
in a 2005 and 2004 compensation expense of $72,000 and $90,000 in
2003.
On
July
15, 2004 we granted 400,000 options at market price on that day, of which
250,000 vested immediately and the remaining 150,000 will vest over a two
year
period, as a result of the new contract agreement with our Chairman of the
Board. We also granted 300,000 shares of restricted stock at no cost with
150,000 shares vesting on August 13, 2004 and the remainder to be vested
over a
four year period conditioned upon continued consulting at the time of each
vesting. This resulted in a compensation expense of $58,000 and $81,000 in
2005
and 2004, respectively.
2004 Long-Term
Incentive Plan
authorizes the Board of Directors to provide full time employees and consultants
(whether full or part time) with incentive compensation in connection with
their
services to us. The plan permits the grant of incentive equity awards covering
up to 6,000,000 shares of common stock. Grants may be in the form of qualified
or non qualified stock options, restricted stock, phantom stock, stock bonuses
and cash bonuses. As of the date hereof, stock option grants covering an
aggregate of 4,492,000 shares of common stock have been made under the 2004
Long-Term Incentive Plan. Such options vest ratably over a five-year period
from
the date of grant. Options granted to consultants are valued using the Black
Scholes pricing model and expensed over the vesting period. At December 31,
2005, there were 4,297,000 stock options outstanding under the plan. An
additional 2,000,000 of our stock options were authorized by the Board of
Directors and approved by a majority vote of the stockholders on March 1,
2003.
In connection with the acquisition of HWC on March 3, 2006, an additional
895,000 of our stock options, priced at $1.50 per option have been approved
to
be issued to employees of HWC.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock
option activity for the years ended December 31, 2005, 2004 and 2003 was
as
follows:
|
|
Number
of
Shares
(in
thousands)
|
Weighted
Average
Exercise
Price
Per
Share
|
|||||
|
Outstanding
December 31, 2002
|
1,391
|
$
|
2.76
|
||||
|
Granted
|
500
|
1.20
|
|||||
|
Exercised
|
(1,034
|
)
|
2.63
|
||||
|
Cancelled
|
(34
|
)
|
3.00
|
||||
|
Outstanding
December 31, 2003
|
823
|
$
|
1.96
|
||||
|
Granted
|
4,434
|
0.75
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
|
(55
|
)
|
3.84
|
||||
|
Outstanding
December 31, 2004
|
5,202
|
$
|
0.90
|
||||
|
Granted
|
873
|
1.10
|
|||||
|
Exercised
|
(35
|
)
|
0.67
|
||||
|
Cancelled
|
(225
|
)
|
1.34
|
||||
|
Outstanding
December 31, 2005
|
5,815
|
$
|
1.02
|
||||
Summary
information about our stock options outstanding at December 31,
2005:
|
Outstanding
|
Exercisable
|
|||||||||||||||
|
Range
of
Exercise
Prices
|
Number
Outstanding
at
December
31, 2005
(in
thousands)
|
Weighted
Average
Remaining
Contractual
Life
in Years
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
At
December
31, 2005
(in
thousands)
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
$0.67
|
3,547
|
4.84
|
$
|
0.67
|
1,626
|
$
|
0.67
|
|||||||||
|
$0.92
|
15
|
4.38
|
$
|
0.92
|
15
|
$
|
0.92
|
|||||||||
|
$0.93
|
400
|
3.54
|
$
|
0.93
|
400
|
$
|
0.93
|
|||||||||
|
$1.04
|
100
|
5.50
|
$
|
1.04
|
—
|
$
|
1.04
|
|||||||||
|
$1.11
|
50
|
5.79
|
$
|
1.11
|
—
|
$
|
1.11
|
|||||||||
|
$1.13
|
300
|
5.79
|
$
|
1.13
|
—
|
$
|
1.13
|
|||||||||
|
$1.20
|
500
|
7.75
|
$
|
1.20
|
500
|
$
|
1.20
|
|||||||||
|
$1.24
|
400
|
2.75
|
$
|
1.24
|
400
|
$
|
1.24
|
|||||||||
|
$1.26
|
300
|
5.67
|
$
|
1.26
|
—
|
$
|
1.26
|
|||||||||
|
$1.72
|
2
|
1.58
|
$
|
1.72
|
2
|
$
|
1.72
|
|||||||||
|
$3.00
|
201
|
3.90
|
$
|
3.00
|
191
|
$
|
3.00
|
|||||||||
|
$0.67-$3.00
|
5,815
|
4.93
|
$
|
1.02
|
3,134
|
$
|
1.00
|
|||||||||
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
H.
|
Employee
Benefit Plans
|
401(k)
Plan:
We
sponsor a 40l (k) Plan adopted in 2000 for eligible employees having six
months
of service and being at least twenty-one years of age. Employees can make
elective contributions of 1% to 15% of compensation, as defined. Employees
over
fifty years old may contribute an additional $4,000 and $5,000 in 2005 and
2006,
respectively. During the years ended December 31, 2005, 2004 and 2003, we
contributed approximately $88,000, $72,000 and $69,000, respectively, under
the
Plan.
|
I.
|
Commitments
and Contingencies:
|
Leases
We
lease
vehicles, equipment, office and storage facilities under operating leases
with
terms in excess of one year.
At
December 31, 2005, future minimum lease payments, under these non-cancelable
operating leases are as follows:
|
Year
Ending December 31,
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2006
|
$
|
20
|
||
|
2007
|
16
|
|||
|
2008
|
3
|
|||
|
2009
|
—
|
|||
|
2010
|
—
|
|||
|
Thereafter
|
—
|
|||
|
$
|
39
|
|||
Rent
expense for the years ended December 31, 2005, 2004 and 2003 was approximately
$32,000, $50,000 and $35,000, respectively.
Litigation
We
are
involved in or threatened with various legal proceedings from time to time
arising in the ordinary course of business. We do not believe that any
liabilities resulting from any such proceedings will have a material adverse
effect on its operations or financial position.
|
J.
|
Business
Segment Information, Revenues from Major Customers and Concentration
of
Credit Risk:
|
Segments:
Our
current business 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 pro rata based on relative
revenues. Special Services and Abasco are presented as discontinued operations
in the condensed consolidated financial statements and are therefore excluded
from the segment information for all periods presented.
Our
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 our Safeguard programs and services in
conjunction with the WELLSURE®
risk
management program. All of these services are designed to significantly reduce
the risk of a well blowout or other critical response event.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our
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 mitigate
damage while maximizing safety.
Information
concerning operations in the two business segments for the years ended December
31, 2005, 2004 and 2003 is presented below. General and corporate are included
in the calculation of identifiable assets and are included in the Prevention
and
Response segments.
|
Prevention
|
Response
|
Consolidated
|
||||||||
|
Year
Ended December 31, 2005
|
||||||||||
|
Net
operating revenues
|
$
|
13,860
|
$
|
15,677
|
$
|
29,537
|
||||
|
Operating
income
|
2,538
|
2,025
|
4,563
|
|||||||
|
Identifiable
operating assets
|
6,929
|
7,838
|
14,767
|
|||||||
|
Capital
expenditures
|
—
|
306
|
306
|
|||||||
|
Depreciation
and amortization
|
310
|
404
|
714
|
|||||||
|
Interest
expense
|
274
|
310
|
584
|
|||||||
|
Year
Ended December 31, 2004
|
||||||||||
|
Net
operating revenues
|
$
|
8,050
|
$
|
16,125
|
$
|
24,175
|
||||
|
Operating
income (loss)
|
(225
|
)
|
1,291
|
1,066
|
||||||
|
Identifiable
operating assets
|
6,125
|
12,268
|
18,393
|
|||||||
|
Capital
expenditures
|
—
|
491
|
491
|
|||||||
|
Depreciation
and amortization
|
261
|
628
|
889
|
|||||||
|
Interest
expense
|
148
|
295
|
443
|
|||||||
|
Year
Ended December 31, 2003
|
||||||||||
|
Net
operating revenues
|
$
|
16,159
|
$
|
19,776
|
$
|
35,935
|
||||
|
Operating
Income (loss)
|
3,731
|
6,503
|
10,234
|
|||||||
|
Identifiable
operating assets
|
8,871
|
10,855
|
19,726
|
|||||||
|
Capital
expenditures
|
—
|
1,799
|
1,799
|
|||||||
|
Depreciation
and amortization
|
423
|
573
|
996
|
|||||||
|
Interest
expense
|
1,080
|
1,322
|
2,402
|
|||||||
Revenue
from major customers and concentration of credit risk:
During
the periods presented below, the following customers represented significant
concentrations of consolidated revenues:
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
Customer
A
|
41
|
%
|
21
|
%
|
—
|
|||||
|
Customer
B
|
11
|
%
|
—
|
—
|
||||||
|
Customer
C
|
—
|
11
|
%
|
68
|
%
|
|||||
Our
revenues are generated geographically as follows:
|
Year
Ended December 31,
|
||||||||||
|
|
2005
|
2004
|
2003
|
|||||||
|
United
States
|
19
|
%
|
35
|
%
|
13
|
%
|
||||
|
Foreign
|
81
|
%
|
65
|
%
|
87
|
%
|
||||
The
nature of our revenue stream is cyclical from year to year such that this
history of geographic split does not represent any trend, but is more related
to
where the response related events occur during any one year. Of the 2005
Foreign
above are revenues of 41% and 12% generated from Iraq and Venezuela,
respectively. Of the 2004 Foreign above are revenues of 32% and 28% generated
from Iraq and Venezuela, respectively. Of the 2003 Foreign above are revenues
of
72% and 24% generated from Iraq and Venezuela, respectively.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accounts
Receivable:
Three
of
our customers at December 31, 2005 accounted for 64% of outstanding accounts
receivable. One of our customers at December 31, 2004 accounted for 68% of
outstanding accounts receivable. One domestic customer at December 31, 2003
accounted for 53% of the outstanding accounts receivable. One customer in
Venezuela accounted for 10% and 7% of December 31, 2005 and 2004 outstanding
accounts receivable, respectively.
Cash:
We
maintain deposits in banks which may exceed the amount of federal deposit
insurance available. Management believes that any possible deposit loss is
minimal. In connection with the acquisitions on March 3, 2004, all of our
investments were used as a source of cash for the credit agreement so we
no
longer have a material sum on deposit in banks earning interest
income.
|
K.
|
Quarterly
Financial Data (Unaudited)
|
The
table
below summarizes the unaudited quarterly results of operations for 2005 and
2004:
|
Quarter
Ended
|
|||||||||||||
|
2005
|
March
31, 2005
|
June
30, 2005
|
September
30, 2005
|
December
31, 2005
|
|||||||||
|
Revenues
|
$
|
14,290
|
$
|
4,762
|
$
|
4,612
|
$
|
5,873
|
|||||
|
Income
(loss)from continuing operations
|
2,473
|
(663
|
)
|
(469
|
)
|
1,438
|
|||||||
|
Net
income
(loss)
|
2,473
|
(663
|
)
|
(469
|
)
|
1,438
|
|||||||
|
Net
income (loss)
attributable to common stockholders
|
2,262
|
(879
|
)
|
(691
|
)
|
1,213
|
|||||||
|
Net
income
(loss) per common share:
|
|||||||||||||
|
Basic
|
0.08
|
(0.03
|
)
|
(0.02
|
)
|
0.04
|
|||||||
|
Diluted
|
0.07
|
(0.03
|
)
|
(0.02
|
)
|
0.04
|
|||||||
|
Quarter
Ended
|
|||||||||||||
|
2004
|
March
31, 2004
|
June
30, 2004
|
September
30, 2004
|
December
31, 2004
|
|||||||||
|
Revenues
|
$
|
4,411
|
$
|
6,936
|
$
|
3,308
|
$
|
9,520
|
|||||
|
Income
(loss)
from continuing operations
|
8
|
485
|
(1,310
|
)
|
527
|
||||||||
|
Net
income (loss)
|
8
|
483
|
(1,333
|
)
|
594
|
||||||||
|
Net
income (loss) attributable to common
stockholders
|
(114
|
)
|
289
|
(1,552
|
)
|
381
|
|||||||
|
Net
income (loss) per common
share:
|
|||||||||||||
|
Basic
|
0.00
|
0.01
|
(0.05
|
)
|
0.01
|
||||||||
|
Diluted
|
0.00
|
0.01
|
(0.05
|
)
|
0.01
|
||||||||
Basic
and
diluted earnings (loss) per common share for each of the quarters presented
above is based on the respective weighted average number of common and dilutive
potential common shares outstanding for each period and the sum of the quarters
may not necessarily be equal to the full year basic and diluted earnings
(loss)
per common share amounts.
BOOTS
AND COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
L.
|
Subsequent
Events
|
On
March
3, 2006, we acquired the hydraulic well control business (HWC) of Oil States
International, Inc. (NYSE: OIS). Under the terms of the agreement, we issued
approximately 26.5 million shares (or approximately 46%) of our common stock
and
subordinated promissory notes with an aggregate balance of $15 million, subject
to adjustment, as consideration for the acquisition.
We
expect
to realize significant operating synergies as a result of the acquisition.
Both
businesses are global leaders in their respective pressure control markets.
The
acquisition will significantly expand our presence in the pressure control
market by enabling us to provide our clients with hydraulic workover services,
snubbing services, engineering, risk management and other prevention services
as
well as full emergency response capability for well control events. We also
expect to benefit from our ability to develop business in areas where HWC
has
ongoing operations but we previously did not, including Congo, Egypt, and
Dubai.
We
also
increased our board of directors from five to seven members. Douglas E. Swanson
and Cindy B. Taylor have been appointed to the board as independent directors.
Gabriel Aldape, former vice president - finance of HWC, has been appointed
as
interim chief financial officer of Boots & Coots.
In
conjunction with the acquisition of HWC on March 3, 2006, we and our wholly
owned subsidiary, IWC Services, LLC, entered into a Credit Agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association, which
established a revolving credit facility of $10.3 million, subject to an initial
borrowing base of $6.0 million, and a term credit facility of $9.7 million.
The
term credit facility is due and payable in full on March 3, 2010, subject
to
extension under certain circumstances to March 3, 2011. The revolving credit
facility is due and payable in full on March 3, 2010, subject to a year to
year
renewal thereafter. We utilized initial borrowings totaling $10.6 million
under
the credit facilities to repay senior and subordinated debt in full and
repurchase all of our outstanding shares of preferred stock and for other
corporate purposes.
The
Credit Agreement is secured by substantially all of our assets. Unused line
fees
are due monthly on the revolving credit facility and range from 0.25% to
0.50%
per annum, based on the ratio of the outstanding principal amount under the
Credit Agreement to our consolidated EBITDA.
At
our
option, borrowings under the Credit Agreement bear interest at either
(i) Wells Fargo’s prime commercial lending rate, or (ii) the
Inter-Bank Market Offered Rate plus a margin ranging, as to the revolving
credit
facility, from 0.50% to 1.50% per annum, and, as to the term credit facility,
from 3.00% to 3.50%, which margin increases or decreases based on the ratio
of
the outstanding principal amount under the Credit Agreement to our consolidated
EBITDA. The interest rate at March 3, 2006 was 6.17%.
The
Credit Agreement contains various restrictive covenants and compliance
requirements, including (1) maintenance of a minimum book net worth through
December 31, 2006 equal to 90% of the pro forma book net Worth calculated
on
March 1, 2006, but in no event less than $25,000,000, or, for each fiscal
year
thereafter, equal to the greater of the minimum book net worth required for
the
preceding fiscal year or 85% of book net worth on the last day of the preceding
fiscal year. For these purposes “book net worth” means the aggregate of our
common and preferred stockholders’ equity on a consolidated basis;
(2) maintenance of a minimum ratio of our consolidated EBITDA less
unfinanced capital expenditures to principal and interest payments required
under the Credit Agreement, on a trailing twelve month basis, of 1.50 to
1.00;
(3) limitation on capital expenditures of $3,000,000 in the aggregate
during any fiscal year; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under the notes in original
aggregate amount of $15,000,000 owing to HWC Energy Services, Inc., indebtedness
existing on the date of the Credit Agreement, indebtedness existing between
us
and our subsidiaries that is unsecured and subordinated to the indebtedness
arising under the Credit Agreement.
The
$15,000,000 is an unsecured subordinated debt bears interest at a rate of
10%
per annum, subject to adjustments for working capital on the effective date
of
closing owing to HWC Energy Services, Inc., with a one time principal payment
to
HWC Energy Service, Inc. on September 9, 2010.
F-23