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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
_______________
FORM 10-K
_______________
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 1-13817
_______________
BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
777 POST OAK BOULEVARD, SUITE 800 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
713-621-7911
(Issuer's Telephone Number, Including Area Code)
_______________
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.00001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on March 22, 2002, based on
closing sales price on that day was $11,239,349.
The number of shares of the issuer's common stock outstanding on March 22,
2002 was 41,442,285.
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FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Description of Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 11
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 23
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . 23
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 31
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 14. Exhibits List and Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS
Reports of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boots & Coots International Well Control, Inc. (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.
In connection with these services, the Company has the capacity to supply the
equipment, expertise and personnel necessary to contain the oil and hazardous
materials spills and discharges associated with oil and gas emergencies, to
remediate affected sites and restore affected oil and gas wells to production.
Through its participation in the proprietary insurance program WELLSURE(R), the
Company provides lead contracting and high risk management services, under
critical loss scenarios, to the program's insured clients. Additionally, under
the WELLSURE(R) program the Company provides certain pre-event prevention and
risk mitigation services. The Company also provides snubbing and other high risk
well control management services, pre-event planning, training and consulting
services and markets oil and hazardous materials spill containment and recovery
equipment and a varied line of industrial products for the oil and gas industry.
In addition, the Company provides environmental remediation services to the
petrochemical, chemical manufacturing and transportation industries, as well as
to various state and federal agencies.
RECENT DEVELOPMENTS
Financing Arrangement. On June 18, 2001, the Company entered into an
agreement with KBK Financial, Inc. ("KBK"), in which the Company pledged certain
of its accounts receivable for a cash advance. The agreement allows the Company
to pledge qualifying accounts receivable in an aggregate amount of up to
$5,000,000. The Company receives an initial advance of 85% of the gross amount
of each receivable pledged. Upon collection of the receivable, the Company
receives an additional residual payment from which is deducted (i) a fixed fee
equal to 2% of the gross pledged receivable and (ii) a variable financing charge
equal to KBK's base rate plus 2% calculated over the actual length of time the
advance was outstanding from KBK prior to collection. The Company's
representations regarding the accounts receivable pledged to KBK are secured by
a first lien on certain other accounts receivable of the Company. As of
December 31, 2001, the Company had $2,383,000 of its accounts receivable pledged
to KBK, representing the substantial majority of the Company's receivables that
were eligible for pledging under the facility.
AMEX Listing. The American Stock Exchange (AMEX), by letter dated March 15,
2002, has informed the Company that on or before April 15, 2002, the Company
must submit a reasonable plan to regain compliance with AMEX's continued listing
standards by December 31, 2002. The plan must contain interim milestones that
the Company will be required to meet to remain listed. If the Company fails to
submit a plan the AMEX considers reasonable, fails to meet the milestones
established in the plan or fails to obtain compliance with AMEX's continued
listing standards by December 31, 2002, as reflected in its audited financial
statements for the year then ended, the AMEX has indicated that it may institute
immediate delisting proceedings.
In the past, the Company has voluntarily provided AMEX with information
regarding its plans and expectations regarding compliance with continued listing
standards, and the Company intends to similarly respond to AMEX's latest
requests.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial condition has become so impaired, that it appears questionable, in the
opinion of AMEX, as to whether the company will be able to continue operations
or meet its obligations as they mature.
Going Concern. The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
However, the uncertainties surrounding the sufficiency and timing of its future
cash flows and the lack of firm commitments for additional capital raises
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
3
HISTORY OF COMPANY
The Company was incorporated in Delaware in April 1988, remaining largely
inactive until acquiring IWC Services, Inc., a Texas corporation on July 29,
1997. In the transaction, the stockholders of IWC Services became the holders of
approximately 93% of the outstanding shares of common stock of the Company and
the management of IWC Services assumed management of the Company. IWC Services
is a global-response oil and gas well control service company that specializes
in responding to and controlling oil and gas well emergencies, including
blowouts and well fires. In addition, IWC Services provides snubbing and other
non-critical well control services. IWC Services was organized in June 1995 by
six former key employees of the Red Adair Company.
Following the IWC Services transaction, the Company engaged in a series of
acquisitions. On July 31, 1997, the Company acquired substantially all of the
operating assets of Boots & Coots, L.P., a Colorado limited partnership, and the
stock of its subsidiary corporations, Boots & Coots Overseas, Ltd., and Boots &
Coots de Venezuela, S.A. Boots & Coots LP and its subsidiaries were engaged in
oil well fire fighting, snubbing and blowout control services.
Boots & Coots LP 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, the Company 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 September 25, 1997, the Company acquired Abasco, Inc., a designer and
manufacturer of rapid-response oil and chemical spill containment and
reclamation equipment and products. In response to depressed downstream industry
conditions existing for a significant part of 1999 and 2000, and limitations on
capital, the Company has substantially reduced but not discontinued the
operations of Abasco, including the closure and consolidation of facilities and
reductions in workforce.
On January 2, 1998, the Company acquired all of the capital stock of
International Tool and Supply ("ITS"), a materials and equipment procurement,
transportation and logistics company serving the energy industry. As a result of
ongoing operating losses, a shortage of working capital and the absence of a
currently identified viable purchaser for ITS' operations, substantially all of
the operations of ITS were ceased in April 2000 and it filed for bankruptcy
protection in Corpus Christi, Texas. ITS is currently proceeding to liquidate
its assets and liabilities in bankruptcy.
On February 20, 1998, the Company acquired Boots & Coots Special Services,
Inc., a provider of containment and remediation services in hazardous material
and oil spills for the railroad, transportation and shipping industries, as well
as various state and federal governmental agencies, specializing in the transfer
of hazardous materials and high and low pressure liquids and industrial fire
fighting. Boots & Coots Special Services also provides in-plant remedial plan
implementation, hazardous waste management, petroleum tank management,
industrial hygiene, environmental and occupational, health and safety services.
On July 23, 1998, the Company acquired Baylor Company, a manufacturer of
varied industrial products for the drilling, marine and power generation
industries. As a result of the Company's financial difficulties, substantially
all of the assets of Baylor were sold in September 2000.
Effective November 4, 1998, Boots & Coots Special Services acquired
HAZ-TECH Environmental Services, Inc. HAZ-TECH provided a complete range of
emergency prevention and response services, including hazardous materials and
waste management, OSHA personnel training and environmental site audits, surface
and groundwater hydrology, bio remediation and pond dewatering, and water
treatment to chemical manufacturing, railroad and truck transportation companies
in Texas, Louisiana, Oklahoma and Arkansas.
Halliburton Alliance. The Company conducts business in a global strategic
alliance with the Halliburton Energy Services division of Halliburton Company.
The alliance operates under the name "WELLCALL(SM)" and draws on the expertise
and abilities of both companies to offer a total well control solution for oil
and gas producers worldwide. The Halliburton Alliance provides a complete range
of well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, fire fighting,
relief and directional well planning, and other specialized services.
Business Strategy. As a result of operating losses, the Company has been
forced to operate with a minimum of working capital. As a result, the Company
curtailed its business expansion program, discontinued the operations of ITS,
sold Baylor Company, reduced the operations of Abasco and focused its efforts on
its remaining three core business segments, Prevention, Response and
Restoration. Subject to capital availability, and recognizing that the well
control services business is a finite market with services dependent upon the
4
occurrence of blowouts which cannot be reasonably predicted, the Company intends
to build upon its demonstrated strengths in high-risk management while
increasing revenues from its pre-event and engineering services, environmental
containment and remediation services and non-critical event services.
Executive Offices. The Company's principal executive office is located at
777 Post Oak Boulevard, Suite 800, Houston, Texas, 77056, telephone (713)
621-7911.
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, Brian Krause, 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
Indonesia, for example, experienced a well blowout and fire, he would likely
call a well control emergency response company in Houston that would take the
following steps:
- - Immediately dispatch a control team to the well location to assess the
damage, supervise debris removal, local equipment mobilization and site
preparation;
- - Gather and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;
- - Develop or implement a detailed fire suppression and well-control plan;
- - Mobilize additional well-control and firefighting equipment in Houston;
- - Transport equipment by air freight from Houston to the blowout location;
- - Extinguish the fire and bring the well under control; and
- - Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.
The 1990's have been 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 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 the Company's 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 the
Company, Wild Well Control, Inc., and Cudd Pressure Control, Inc.
Trends. The increased recognition of the importance of risk mitigation
services, training, environmental protection 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 producers are coming to the Company 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 the Company's engineering unit.
5
Decreasing availability of financial capacity in the re-insurance markets
is causing underwriting syndicates to seek significant renewal rate increases
and higher quality risks in the "Control of Well" segment of the energy
insurance market. The Company believes these factors enhance the viability of
proven alternative risk transfer programs such as WELLSURE(R), a proprietary
insurance program in which the Company is the provider of both pre-event
services and loss management.
Volatility of Firefighting Revenues. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company, 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, the Company expects to experience large
fluctuations in its revenues from oil and gas well firefighting and blowout
control services. The Company's acquisitions of complementary businesses were
designed to broaden its product and service offerings and mitigate the revenue
and earnings volatility associated with its oil and gas well firefighting and
blowout control services. The contraction of the Company's service and product
offerings as a consequence of its financial difficulties has made it more
susceptible to this volatility. Accordingly, the Company expects that its
revenues and operating performance may vary considerably from year to year for
the foreseeable future.
The Company's principal products and services for its three business
segments include:
Prevention
Firefighting Equipment Sales and Service. This service line involves the
sale of complete firefighting equipment packages, together with maintenance,
monitoring, updating of equipment and ongoing consulting services. A typical
example of this service line is the industry supported Emergency Response Center
that the Company has established on the North Slope of Alaska and the Emergency
Response Center recently established in Algeria. The Company also provides
ongoing consulting services relating to the Emergency Response Centers,
including equipment sales, training, contingency planning, safety inspections
and emergency response drills.
Drilling Engineering. The Company has a highly specialized in-house
engineering staff which, together with Halliburton Energy Services and John
Wright Company, provides engineering services, including planning and design of
relief well drilling (trajectory planning, directional control and equipment
specifications, and on-site supervision of the 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 the Company's strategy of providing
preventive well control services involves on-site inspection services for
drilling and work over rigs, drilling and production platforms, and field
production facilities. These inspection services are provided by the Company and
offered as a standard option in Halliburton's field service programs.
Training. The Company provides specialized training in well control
procedures for drilling, exploration and production personnel for both U.S. and
international operators. The Company's training services are offered in
conjunction with ongoing educational programs sponsored by Halliburton.
Oil and Chemical Spill Prevention. The Company specializes in the transfer
of hazardous materials and high and low pressure liquids and industrial fire
fighting and provides in-plant remedial plan implementation, hazardous waste
management, petroleum tank management, industrial hygiene, environmental and
occupational, health and safety services.
Strategic Event Planning (S.T.E.P.). A critical component of the services
offered by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator to
control a blowout. This planning process incorporates organizational structures,
action plans, specifications, people and equipment mobilization plans with
engineering details for well firefighting, capping, relief well and kill
operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of services,
it is easily modified to suit the particular needs of a specific client.
Regional Emergency Response Centers (SafeGuard). The Company has
established and maintains industry supported "FireStations" on the North Slope
of Alaska. The Company has sold to a consortium of producers the equipment
required to respond to a blowout or oil or gas well fire, and has agreed to
maintain the equipment and conduct on-site safety inspections and emergency
response drills. The Company also currently has Emergency Response Centers in
Houston, Texas, Anaco, Venezuela, and Algeria.
6
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 of hundreds of thousands of dollars 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 the Company's Critical Event work. Critical Events of catastrophic
proportions can result in significant revenues to the Company in the year of the
incident. The Company's professional firefighting staff has over 200 years of
aggregate 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 the
Company is then 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 and predictable. Non-critical Events can escalate
into Critical Events.
Firefighting Equipment Rentals. This service includes the rental of
specialty well control and firefighting equipment by the Company primarily for
use in conjunction with Critical Events, including firefighting pumps, pipe
racks, Athey wagons, pipe cutters, crimping tools and deluge safety systems. The
Company charges this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical Event.
WELLSURE(R) Program. The Company 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 production
companies, through retail insurance brokers, a program known as "WELLSURE(R),"
which combines traditional well control and blowout insurance with the Company's
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(R) has been arranged with leading London insurance underwriters.
WELLSURE(R) program participants are provided with the full benefit of having
the Company as a safety and prevention partner. In the event of well blowouts,
the Company serves as the integrated emergency response service provider, as
well as lead contractor and project manager for control and restoration of wells
covered under the program.
Industrial and Marine Firefighting. These services consist of two distinct
elements: pre-event consulting and Critical Event management. The pre-event
services offered include complete on-site inspection services, safety audits and
pre-event planning. Based on these pre-event services, the Company can recommend
the equipment, facilities and manpower resources that a client should have
available in order to effectively respond to a fire. The Company also consults
with the client to ensure that the equipment and services required will be
available when needed. If a Critical Event subsequently occurs, the Company can
respond at a client's facility with experienced firefighters and auxiliary
equipment.
Restoration
Oil and Chemical Spill Containment and Reclamation. The Company provides
containment and remediation of hazardous material and oil spills for the
railroad, transportation and shipping industries, as well as various state and
federal governmental agencies. The Company also specializes in the transfer of
hazardous materials and high and low pressure liquids and industrial fire
fighting and provides in-plant remedial plan implementation, hazardous waste
management, petroleum tank management, industrial hygiene, environmental and
occupational, health and safety services.
Containment and Reclamation Products. The Company's Abasco unit has been a
leader in the design and manufacture of a comprehensive line of rapid response
oil and chemical spill containment and reclamation equipment and products,
including mechanical skimmers, containment booms and boom reels, dispersant
sprayers, dispersal agents, absorbents, response vessels, oil and chemical spill
industrial products, spill response packages, oil and chemical spill ancillary
products and waste oil recovery and reclamation products. In response to
depressed downstream industry conditions existing for a significant part of 1999
7
and limitations on capital, the Company has substantially reduced, but not
discontinued, the operations of Abasco, including the closure and consolidation
of facilities and reductions in workforce.
DEPENDENCE UPON CUSTOMERS
The Company is not materially dependent upon a single or a few customers,
although one or a few customers may represent a material amount of business for
a limited period as a result of the unpredictable demand for well control and
firefighting services. 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.
HALLIBURTON ALLIANCE
In response to ongoing changes in the emergency response segment of the
oil and gas service industry, the Company entered into a global strategic
alliance in 1995 with Halliburton Energy Services. Halliburton is widely
recognized as an industry leader in the pumping, cementing, snubbing, production
enhancement, coiled tubing and related services segment of the oil field
services industry. This alliance, WELLCALL(SM), draws on the expertise and
abilities of both companies to offer a total well control solution for oil and
gas producers worldwide. The Halliburton Alliance provides a complete range of
well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, firefighting,
relief and directional well planning and other specialized services. The
specific benefits that WELLCALL(SM) provides to an operator include:
- Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week
- A full-time team of experienced well control specialists that are
dedicated to safety
- Specialized equipment design, rental, and sales
- Contingency planning consultation where WELLCALL(SM) specialists meet
with customers, identify potential problems, and help develop a
comprehensive contingency plan
- A single-point contact to activate a coordinated total response to
well control needs.
Operators contracting with WELLCALL(SM) receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is
region-specific, reservoir-specific, site-specific and well-specific. The
S.T.E.P. plan provides the operator with a written, comprehensive and
coordinated action plan that incorporates historical data, pre-planned call outs
of Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. In the event of a blowout, WELLCALL(SM) provides the
worldwide engineering and well control equipment capabilities of Halliburton and
the firefighting expertise of the Company through an integrated contract with
the operator.
As a result of the Halliburton Alliance, the Company is directly involved
in Halliburton's well control projects that require firefighting and Risk
Management expertise, Halliburton is a primary service vendor to the Company and
the Company has exclusive rights to use certain firefighting technologies
developed by Halliburton. It is anticipated that future Company-owned Fire
Stations, if developed, will be established at existing Halliburton facilities,
such as the Algerian Fire Station, and that maintenance of the Fire Station
equipment will be supported by Halliburton employees. The Halliburton Alliance
also gives the Company access to Halliburton's global communications, credit and
currency management systems, capabilities that could prove invaluable in
connection with the Company's international operations.
Consistent with the Halliburton Alliance, the Company's focus has evolved
to meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many engineering
services, the Company has developed a proactive menu of services to meet their
needs. These services emphasize pre-event planning and training to minimize the
likelihood of a blowout and minimize damages in the event of a blowout. The
Company provides comprehensive advance training, readiness, preparation,
inspections and mobilization drills which allow clients to pursue every possible
preventive measure and to react in a cohesive manner when an event occurs. The
Halliburton Alliance stresses the importance of safety, environmental protection
and cost control, along with asset protection and liability minimization.
8
The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provided that it would remain in effect for an
indefinite period of time and could be terminated prior to September 15, 2005,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination was limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either party,
(iii) the failure of the Alliance to generate economically viable business, or
(iv) the failure of either party to engage in good faith dealing. On April 15,
1999, in connection with a $5,000,000 purchase by Halliburton of the Company's
Series A Cumulative Senior Preferred Stock, the Company and Halliburton entered
into an expanded Alliance Agreement. While the Company considers its
relationship with Halliburton to be good and strives to maintain productive
communication with its chief Alliance partner, there can be no assurance that
the Alliance Agreement will not be terminated by Halliburton. The termination of
the Alliance Agreement could have a material adverse effect on the Company's
future operating performance.
REGULATION
The operations of the Company 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, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is 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 thereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To date, the Company has not been subject to any fines or penalties for
violations of governmental or environmental regulations and has not incurred
material capital expenditures to comply with environmental regulations.
RESEARCH AND DEVELOPMENT
The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.
COMPETITION
The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a rapid
pace. The Company believes that the Halliburton Alliance, the WELLSURE program,
and its acquisitions have strengthened its competitive position in the industry
by expanding the scope of services that the Company offers to its customers.
However, the Company's ability to compete depends upon, among other factors,
capital availability, increasing industry awareness of the variety of services
the Company offers, expanding the Company's network of Fire Stations and further
expanding the breadth of its available services. Competition from other
emergency response companies, some of which have greater financial resources
than the Company, is intense and is expected to increase as the industry
undergoes additional anticipated change. The Company's competitors may also
succeed in developing new techniques, products and services that are more
effective than any that have been or are being developed by the Company or that
render the Company's techniques, products and services obsolete or
noncompetitive. The Company's competitors may also succeed in obtaining patent
protection or other intellectual property rights that might hinder the Company's
ability to develop, produce or sell competitive products or the specialized
equipment used in its business.
EMPLOYEES
As of March 22, 2002, the Company and its operating subsidiaries
collectively had 132 full-time employees, and 41 part-time personnel, who are
available as needed for emergency response projects. In addition, the Company
has several part-time consultants and also employs part-time contract personnel
who remain on-call for certain emergency response projects. The Company is not
subject to any collective bargaining agreements and considers its relations with
its employees to be good.
9
OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE
The Company's 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 the Company being named a defendant in lawsuits asserting
large claims. The Company may be held liable in certain circumstances, including
if it fails to exercise reasonable care in connection with its activities, and
it may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their duties. The Company and its
subsidiaries currently maintain liability insurance coverage with aggregate
policy limits which are believed to be adequate for their 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 the Company is not fully insured could have a
material adverse effect on the Company. No assurance can be given that the
Company will not be subject to future claims in excess of the amount of
insurance coverage which the Company deems appropriate and feasible to maintain.
RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's emergency response services require highly specialized
skills. Because of the unique nature of the industry and the small number of
persons who possess the requisite skills and experience, the Company is highly
dependent upon the personal efforts and abilities of its key employees. In
seeking qualified personnel, the Company will be required to compete with
companies having greater financial and other resources than the Company. Since
the future success of the Company will be dependent upon its ability to attract
and retain qualified personnel, the inability to do so, or the loss of
personnel, could have a material adverse impact on the Company's business.
CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION
The Company customarily enters into service contracts which contain
provisions that hold the Company liable for various losses or liabilities
incurred by the customer in connection with the activities of the Company,
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 the Company's possession or control. The Company may be
responsible for any such losses or liabilities caused by contractors retained by
the Company in connection with the provision of its services. In addition, such
contracts generally require the Company, its 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, the Company frequently enters into agreements with
customers which limit the Company's exposure to liability and/or require the
customer to indemnify the Company for losses or liabilities incurred by the
Company in connection with such services, except in the case of gross negligence
or willful misconduct by the Company. There can be no assurance, however, that
such contractual provisions limiting the liability of the Company will be
enforceable in whole or in part under applicable law.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases a 23,000 square foot office at 777 Post Oak Boulevard.,
Houston, Texas, from an unaffiliated landlord through August 2005 at a current
monthly rental of $44,000. Beginning in February 2000, the Company subleased
approximately 25% of this office space on substantially similar terms and
conditions as the primary lease. The Company leases an 11,000 square foot
Emergency Response Center facility in Anaco, Venezuela, for a monthly rental of
$2,500. The Company owns 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. The Company leases a 7,000 square foot office in the Halliburton
Center, Houston, Texas. This space is rented from an unaffiliated landlord
through May 2002 for an average monthly rental of $7,000, and is subleased on
substantially the same terms. The Company leases a 10,000 square foot office and
equipment storage facility in southeast Houston, Texas, through December 31,
2003 at a monthly rental of $12,290. Additionally, the Company has leased office
and equipment storage facilities in various other cities within the United
States and Venezuela. The future commitments on these additional leases are
immaterial. The Company believes that these facilities will be adequate for its
anticipated needs.
10
ITEM 3. LEGAL PROCEEDINGS
ITS Supply Bankruptcy Claims
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS,
the Company's subsidiary, filed a complaint against Comerica Bank-Texas, the
Company and various subsidiaries of the Company for a formal accounting of all
lockbox transfers that occurred between ITS and Comerica Bank, et al. and all
intercompany transfers between ITS and the Company and its subsidiaries to
determine if any of the transfers are avoidable under Federal or state statutes
and seeking repayment to ITS of all such amounts. The Trustee asserts that there
were approximately $400,000 of lockbox transfers and $3,000,000 of intercompany
transfers made between the parties. The Company does not believe that it is
likely that an accounting of the transactions between the parties will
demonstrate there is a liability owing by the Company to the ITS Chapter 7
estate. To provide security to Comerica Bank for any potential claims by the
Chapter 7 trustee, the Company has pledged a $350,000 certificate of deposit in
favor of Comerica Bank. This amount has been classified as a restricted asset
on the balance sheet as of December 31, 2001.
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 29, 2001, the Company convened its annual meeting of the
stockholders in Houston, Texas. At the meeting, the stockholders elected three
Class I directors serving for a three year term.
The voting was as follows:
FOR WITHHELD ABSTAINING
------------------------------------
Larry H. Ramming 31,042,182 380,002 --
Thomas L. Easley 31,111,117 311,067 --
E.J. "Jed" DiPaolo 31,031,242 390,942 --
Each of the directors was elected by the holders of more than a plurality
of the shares present, in person or by proxy, at the annual meeting.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's 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 the
common stock for each full quarterly period within the two most recent fiscal
years as reported on the AMEX:
HIGH AND LOW SALES PRICES
2000 2001
---- ----
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter . . . . $1.8125 $0.3750 $0.9600 $0.4380
Second Quarter. . . . 0.8125 0.5000 0.7500 0.4500
Third Quarter . . . . 1.0000 0.3750 0.8500 0.5100
Fourth Quarter. . . . 0.8125 0.3125 0.6900 0.3500
On March 22, 2002 the last reported sale price of the common stock as
reported on AMEX was $0.37 per share.
As of March 22, 2002, the Company's common stock was held by approximately
214 holders of record. The Company estimates that it has a significantly larger
number of beneficial stockholders as much of its common stock is held by
broker-dealers in street name for their customers.
The Company has not paid any cash dividends on its common stock to date.
The Company's current policy is to retain earnings, if any, to provide funds for
the operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash dividends. In addition, the Company is
prohibited from paying cash dividends on its common stock before full dividends,
including cumulative dividends, are paid to holders of the Company's preferred
stock.
AMEX, by letter dated March 15, 2002, has informed the Company that on or
before April 15, 2002, the Company must submit a reasonable plan to regain
compliance with AMEX's continued listing standards by December 31, 2002. The
plan must contain interim milestones that the Company will be required to meet
to remain listed. If the Company fails to submit a plan the AMEX considers
reasonable, fails to meet the milestones established in the plan or fails to
obtain compliance with AMEX's continued listing standards by December 31, 2002,
as reflected in its audited financial statements for the year then ended, the
AMEX has indicated that it may institute immediate delisting proceedings.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial condition has become so impaired, that it appears questionable, in the
opinion of AMEX, as to whether the company will be able to continue operations
or meet its obligations as they mature.
SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
During the 2001 year, the Company issued the following securities in
transactions exempt from registration under Section 4(2) the Securities Act of
1933, as amended:
- 8,129,636 shares of common stock in January 2001 in exchange for all
60,972 outstanding shares of Series B Convertible Preferred Stock.
- 750 shares of Series C Preferred Stock and a warrant to purchase
75,000 shares of common stock, at an exercise price of $0.75 per
share, in October 2001 to a lawyer in exchange for legal services
rendered.
12
- 2,091 shares of Series C Preferred Stock in aggregate quarterly
dividends on shares of Series C Preferred Stock outstanding during
2001, as well as 444,295 shares of common stock upon the conversion of
3,332 outstanding shares of Series C Preferred Stock in October 2001.
- 258 shares of Series D Preferred Stock in aggregate quarterly
dividends on shares of Series D Preferred Stock outstanding during
2001.
- 5,125 shares of Series E Preferred Stock in aggregate quarterly
dividends on shares of Series E Preferred Stock outstanding during
2001.
- 8,200 shares of Series G Preferred Stock in aggregate quarterly
dividends on shares of Series G Preferred Stock outstanding during
2001.
- 9,134 shares of Series H Preferred Stock in aggregate quarterly
dividends on shares of Series H Preferred Stock outstanding during
2001.
- 700,000 shares of common stock for legal settlements accrued in 2000,
issued in April 2001.
- 97,900 shares of common stock as compensation to a group that arranged
a participation interest in our senior credit facility in May 2001.
- 161,333 shares of common stock to a financial consultant in June 2001
in exchange for services rendered.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for the fiscal year ended June 30, 1997, the six months ended December
31, 1997, and the years ended December 31, 1998, 1999, 2000 and 2001 which has
been derived from the Company's audited consolidated financial statements. In
the opinion of management of the Company, the unaudited consolidated financial
statements for the six months ended December 31, 1996 and the year ended
December 31, 1997 include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial data for such
period. The results of operations for the six months ended December 31, 1996 and
1997 are not necessarily indicative of results for a full fiscal year. The
results of operations of ITS and Baylor Company 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.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1997
------------ ------------ ------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . . $ 2,564,000 $ 743,000 $ 5,389,000
Operating loss. . . . . . . . . . . . . . . (68,000) (397,000) (432,000)
Loss from continuing operations
before extraordinary item. . . . . . . . (156,000) (411,000) (565,000)
Income (loss) from discontinued
operations, net of income taxes. . . . . - - -
Loss from sale of discontinued
operations, net of income taxes. . . . . - - -
Net loss before
extraordinary item . . . . . . . . . . . (156,000) (411,000) (565,000)
Extraordinary
item - gain (loss) on
debt extinguishment. . . . . . . . . . . - - (193,000)
Net loss. . . . . . . . . . . . . . . . . . (156,000) (411,000) (758,000)
Net loss attributable to common stockholders. (156,000) (411,000) (758,000)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations. . . . . . . . . . . $ (0.01) $ (0.04) $ (0.02)
============ ============ ============
Discontinued operations. . . . . . . . . . $ - $ - $ -
============ ============ ============
Extraordinary item . . . . . . . . . . . . $ - $ - $ (0.01)
============ ============ ============
Net loss . . . . . . . . . . . . . $ (0.01) $ (0.04) $ (0.03)
============ ============ ============
Weighted average common
shares outstanding . . . . . . . . . . . 12,191,000 11,500,000 23,864,000
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------- ------------- ------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . $ 7,154,000 $32,295,000 $ 33,095,000 $ 23,537,000 $36,149,000
Operating income (loss) . . . . . . . . . (360,000) (1,202,000) (19,984,000) (11,390,000) 1,914,000
Income (loss) from continuing operations
before extraordinary item. . . . . . . (374,000) (3,562,000) (26,468,000) (22,732,000) 926,000
Income (loss) from discontinued
operations, net of income taxes. . . . - 566,000 (4,648,000) 1,544,000 402,000
Loss from sale of discontinued
operations, net of income taxes. . . . - - - (2,555,000) -
Net income (loss) before
extraordinary item . . . . . . . . . . (374,000) (2,996,000) (31,116,000) (23,743,000) 1,328,000
Extraordinary
item -gain (loss) on
debt extinguishment. . . . . . . . . . (193,000) - - 2,444,000 -
Net income (loss) . . . . . . . . . . . . (567,000) (2,996,000) (31,116,000) (21,299,000) 1,328,000
Net loss attributable to common
stockholders. . . . . . . . . . . . (567,000) (3,937,000) (32,360,000) (22,216,000) (1,596,000)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations. . . . . . . . . . $ (0.03) $ (0.14) $ (0.81) $ (0.70) $ (0.05)
============ ============ ============= ============= ============
Discontinued operations. . . . . . . . . $ - $ 0.02 $ (0.13) $ (0.03) $ 0.01
============ ============ ============= ============= ============
Extraordinary item . . . . . . . . . . . $ (0.02) $ - $ - $ 0.07 $ -
============ ============ ============= ============= ============
Net loss . . . . . . . . . . . . . . . . $ (0.05) $ (0.12) $ (0.94) $ (0.66) $ (0.04)
============ ============ ============= ============= ============
Weighted average common
shares outstanding . . . . . . . . . . 12,136,000 31,753,000 34,352,000 33,809,000 40,073,000
14
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 2000 2001
------------- ------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . $ 14,062,000 $ 82,156,000 $ 53,455,000 $ 18,126,000 $ 17,754,000
Long-term debt and notes payable,
including current maturities . 1,664,000 50,349,000 43,181,000 12,620,000 12,520,000
Working capital (deficit). . . . . 2,312,000 48,625,000 (20,455,000) (4,018,000) (159,000)
Stockholders' equity (deficit) . . 10,232,000 20,236,000 (4,327,000) (6,396,000) (4,431,000)
Common shares outstanding .. . . 29,999,000 33,044,000 35,244,000 31,692,000 41,442,000
- - The reduction in total assets from 1998 to 1999 is a result of write downs
in 1999.
- - The reduction in total assets from 1999 to 2000 is a result of the sale of
Baylor.
- - The reduction of long-term debt and notes payable, including current
maturities from 1999 to 2000 is the result of a troubled debt
restructuring and payments of debt from the proceeds of the sale of Baylor.
- - Negative working capital in 1999 is due to the classification of long-term
debt as current due to failing certain debt covenants, partially offset by
net assets of discontinued operations being classified as current assets.
- - The change in working capital from 1999 to 2000 is a result of reduction of
current debt due to the effect of the troubled debt restructuring offset by
the reduction of current assets as a result of the sale of Baylor.
15
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 the Company's periodic reports previously filed with
the Securities and Exchange Commission and incorporated herein by reference.
A summary of consolidated operating results for the fiscal years ended
December 31, 1999, 2000 and 2001 is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
------------- ------------- ------------
Revenues. . . . . . . . . . . . . . . . $ 33,095,000 $ 23,537,000 $36,149,000
Costs and expenses:
Cost of sales and operating . . . . . 31,971,000 25,107,000 27,699,000
Selling, general and
administrative. . . . . . . . . . . 13,694,000 5,322,000 4,582,000
Depreciation and
amortization. . . . . . . . . . . . 2,907,000 2,665,000 1,954,000
Write-down of long-lived assets . . . 4,507,000 - -
Loan guaranty charge. . . . . . . . . - 1,833,000 -
Operating income (loss) . . . . . . . (19,984,000) (11,390,000) 1,914,000
Interest (expense) and other income,
net . . . . . . . . . . . . . . . . (6,402,000) (11,277,000) (653,000)
Income tax expense. . . . . . . . . . (82,000) (65,000) (335,000)
Income (loss) from continuing
operations before extraordinary
item. . . . . . . . . . . . . . . . (26,468,000) (22,732,000) 926,000
Income (loss) from discontinued
operations, net of income taxes . . (4,648,000) 1,544,000 402,000
Loss from sale of discontinued
operation net of income tax . . . . . - (2,555,000) -
Extraordinary gain on early debt
extinguishment, net of income taxes . - 2,444,000 -
Net income (loss). . . . . . . . . . (31,116,000) (21,299,000) 1,328,000
Stock and warrant accretions. . . . . (775,000) (53,000) (53,000)
Preferred dividends paid. . . . . . . (14,000) - -
Preferred dividends accrued . . . . . (455,000) (864,000) (2,871,000)
Net loss attributable to common
stockholders .. . . . . . . $(32,360,000) $(22,216,000) $(1,596,000)
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the decision to discontinue the ITS and Baylor business
operations. The current segments are Prevention, Response and Restoration. Most
of the Company's subsidiaries operate in all three segments. Intercompany
transfers between segments were not material. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, selling, general and
administrative and corporate expenses have been allocated between segments on a
pro rata basis based on revenue. Business segment operating data from continuing
operations is presented for purposes of discussion and analysis of operating
results. ITS and Baylor are presented as discontinued operations in the
consolidated financial statements and are therefore excluded from the segment
information for all periods.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. These services include training, contingency planning, well plan
reviews, services associated with the Company's Safeguard programs and service
fees in conjunction with the WELLSURE(R) risk management program. All of these
services are designed to significantly reduce the risk of a well blowout or
other critical response event.
The Response segment consists of personnel and equipment services provided
during an emergency, such as a critical well event or a hazardous material
response. The services provided are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins. However, when the Company responds to a critical event under
the WELLSURE(R) program, the Company acts as a general contractor and engages
16
third party service providers, which form part of the revenues recognized by the
Company. This revenue contribution has the ability to significantly lower the
overall gross profit margins of the segment.
The Restoration segment consists of "post-event" services designed to
minimize the effects of a critical emergency event as well as industrial and
remediation service. The services provided range from environmental compliance
and disposal services to facility decontamination services in the event of a
plant closing. Restoration services are a natural extension of response service
assignments.
Information concerning operations in different business segments for the
years ended December 31, 1999, 2000 and 2001 is presented below. Certain
classifications have been made to the prior periods to conform to the current
presentation.
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
------------- ------------- ------------
REVENUES
Prevention. . . . . . . . . . . . . $ 769,000 $ 2,134,000 $ 5,256,000
Response. . . . . . . . . . . . . . 20,107,000 16,670,000 26,739,000
Restoration . . . . . . . . . . . . 12,219,000 4,733,000 4,154,000
------------- ------------- ------------
33,095,000 23,537,000 36,149,000
============= ============= ============
COST OF SALES AND OPERATING EXPENSES
Prevention. . . . . . . . . . . . . 441,000 1,934,000 2,929,000
Response. . . . . . . . . . . . . . 19,459,000 16,002,000 19,321,000
Restoration . . . . . . . . . . . . 12,071,000 7,171,000 5,449,000
------------- ------------- ------------
31,971,000 25,107,000 27,699,000
============= ============= ============
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (1)
Prevention. . . . . . . . . . . . . 383,000 673,000 722,000
Response. . . . . . . . . . . . . . 7,668,000 3,627,000 3,427,000
Restoration . . . . . . . . . . . . 5,643,000 1,022,000 433,000
------------- ------------- ------------
13,694,000 5,322,000 4,582,000
============= ============= ============
DEPRECIATION AND AMORTIZATION (2)
Prevention. . . . . . . . . . . . . 46,000 251,000 333,000
Response. . . . . . . . . . . . . . 2,303,000 1,772,000 1,401,000
Restoration . . . . . . . . . . . . 558,000 642,000 220,000
------------- ------------- ------------
2,907,000 2,665,000 1,954,000
============= ============= ============
OPERATING INCOME (LOSS) (3)
Prevention. . . . . . . . . . . . . (165,000) (890,000) 1,272,000
Response. . . . . . . . . . . . . . (10,785,000) (6,029,000) 2,590,000
Restoration . . . . . . . . . . . . (9,034,000) (4,471,000) (1,948,000)
------------- ------------- ------------
(19,984,000) (11,390,000) 1,914,000
============= ============= ============
(1) Selling, general and administrative and corporate expenses have been
allocated pro rata among segments based upon relative revenues.
(2) Corporate depreciation and amortization expenses have been allocated pro
rata among segments based upon relative revenues.
(3) Includes write down of long-lived assets of $4,507,000 in 1999 and loan
guarantee charges of $1,833,000 in 2000.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 WITH THE YEAR ENDED DECEMBER 31,
2000
Revenues
Prevention revenues were $5,256,000 for the year ended December 31, 2001,
compared to $2,134,000 for the year ended December 31, 2000, representing an
increase of $3,122,000 (146.3%) in the current year. The increase was primarily
the result of expansion in strategic engineering services, including training,
contingency planning and well plan reviews for new and existing domestic and
foreign customers, as well as growth in the Safeguard and "WELLSURE(R)"
programs.
Response revenues were $26,739,000 for the year ended December 31, 2001,
compared to $16,670,000 for the year ended December 31, 2000, an increase of
$10,069,000 (60.4%) in the current year. The principal component of the increase
was the success of the "WELLSURE(R)" program. Under the "WELLSURE(R)" program,
the Company acted as lead contractor on five critical well control events during
the year of 2001.
17
Restoration revenues were $4,154,000 for the year ended December 31, 2001,
compared to $4,733,000 for the year ended December 31, 2000, representing a
decrease of $579,000 (12.2%) in the current year. The decrease was primarily
attributable to $627,000 in reduced sales at Abasco due to a continuing decline
in international direct sales efforts and support.
Cost of Sales and Operating Expenses
Prevention cost of sales and operating expenses were $2,929,000 for the
year ended December 31, 2001, compared to $1,934,000 for the year ended December
31, 2000, an increase of $995,000 (51.4%) in the current year. The increase was
due to the reallocation of resources from the Response segment to the Prevention
segment due to the large increase in activity in the Prevention segment during
this period.
Response cost of sales and operating expenses were $19,321,000 for the year
ended December 31, 2001, compared to $16,002,000 for the year ended December 31,
2000, an increase of $3,319,000 (20.7%) in the current year. The increase was a
result of increased activity and related third party costs under the Company's
previously described lead contracting role associated with five WELLSURE
critical well events.
Restoration cost of sales and operating expenses were $5,449,000 for the
year ended December 31, 2001, compared to $7,171,000 for the year ended December
31, 2000, a decrease of $1,722,000 (24.0%) in the current year. This decrease
was primarily a result of the revenue decline at Abasco due to the decision to
outsource the manufacturing of Abasco products.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $4,582,000
for the year ended December 31, 2001, compared to $5,322,000 for the year ended
December 31, 2000, a decrease of $740,000 (13.9%) from the prior year. The year
ended December 31, 2000 selling, general and administrative costs were higher
primarily as a result of financing and consulting costs of $797,000, partially
offset in the current year by additions to the administrative, accounting
staffing and systems, and additional support of business development and sales
initiatives. As previously footnoted on the segmented financial table,
corporate selling, general and administrative expenses have been allocated pro
rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2001 and 2000.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.
Interest Expense and Other, Including Finance Costs
The decrease in interest expenses of $10,624,000 for the year ended
December 31, 2001, as compared to the prior year period is a result of the
restructuring of the majority of the Company's senior and subordinated debt into
equity in December 2000. The year ended December 31, 2000 also included a
$1,679,000 non-cash financing charge for an inducement to convert certain
preferred stock into common stock; $1,060,000 of expenses related to warrants
issued to the participation interest in our senior credit facility and
associated advisory services; and charges of $598,000 related to the Comerica
debt. Other expense for the prior period also included approximately $1,609,000
in legal settlements and other financing related costs.
Income Tax Expense
Income taxes for the year ended December 31, 2001 and 2000 are a result of
taxable income in the Company's foreign operations and $43,000 of alternative
minimum tax for the year ended December 31, 2001.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 WITH THE YEAR ENDED DECEMBER 31,
1999
Revenues
Prevention revenues were $2,134,000 for the year December 31, 2000,
compared to $769,000 for the year ended December 31, 1999, representing an
increase of $1,365,000 (177.5%) for the year. These increases were primarily
the result of improvements in non-event engineering and training services of
$675,000 and an increase in non-event related projects in Venezuela of $829,000.
18
Response revenues were $16,670,000 for the year ended December 31, 2000,
compared to $20,107,000 for the year ended December 31, 1999, a decrease of
$3,437,000 (17.1%) from the prior year. The 1999 period included a blowout
where the Company acted as general contractor and generated an additional
$4,460,000 in revenues from pass through third party invoices. Also, the 2000
period showed a decline, as compared to 1999, of $1,215,000 in lower margin
revenues from consulting services due to the Company's strategy to exit that
business in favor of more profitable service lines. These decreases were offset
by improvements in well control response services of $2,238,000.
Restoration revenues were $ 4,733,000 for the year ended December 31,
2000, compared to $ 12,219,000 for the year ended December 31, 1999,
representing a decrease of $ 7,486,000 (61.3%) from the prior year. This
decrease included $4,110,000 which was directly attributable to liquidity
impairments limiting the Company's ability to procure third party services
required for plant services and remediation. An additional $3,376,000 reduction
occurred in Abasco as a result of a decline in international orders for spill
equipment and a concurrent decrease in orders for fire and protective equipment.
Cost of Sales and Operating Expenses
Prevention cost of sales and operating expenses were $1,934,000 for the
year ended December 31, 2000, compared to $441,000 for the year ended December
31, 1999, an increase of $1,493,000 (338.5%) from the prior year. These
increases were primarily a result of increased activity in non-event engineering
and training services of $594,000 and increased costs related to non-event
related projects in Venezuela of $329,000.
Response cost of sales and operating expenses were $16,002,000 for the year
ended December 31, 2000, compared to $19,459,000 for the year ended December 31,
1999, a decrease of $3,457,000 (17.8%) from the prior year. The 1999 period
included a blowout where the company acted as general contractor and generated
an additional $4,242,000 in costs related to revenues from pass through third
party invoices. Also, the 2000 period showed a decline of $1,128,000 in costs
related to lower margin revenues from consulting services due to the Company's
strategy to exit that business in favor of more profitable service lines. These
decreases were offset by additional costs due to revenue improvements in well
control response services of $1,913,000.
Restoration cost of sales and operating expenses were $7,171,000 for the
year ended December 31, 2000, compared to $12,071,000 for the year ended
December 31, 1999, a decrease of $4,900,000 (40.6%) from the prior year. This
decrease was a result of the previously discussed revenue reduction due to
liquidity impairments and lost market share.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $5,322,000
for the year ended December 31, 2000, compared to $13,694,000 for the year ended
December 31, 1999, a decrease of $8,372,000 (61.1%) from the prior year.
Selling, general and administrative expenses were reduced as a consequence of
1999 cost reduction initiatives primarily involving Boots & Coots Special
Services and Abasco. As previously footnoted on the segmented financial table,
selling, general and administrative and corporate expenses have been allocated
pro rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2000 and 1999.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.
Interest Expense and Other, Including Finance Cost
Interest expense for the year ended December 31, 2000 was $7,454,000
compared to $6,184,000 in the prior year. The increase of $1,270,000 in
interest expense is primarily due to the additional senior debt incurred during
the year. The year ended December 31, 2000 also included a $1,679,000 non-cash
financing charge for an inducement to convert certain preferred stock into
common stock, $1,060,000 of expenses related to warrants issued to the
participation interest and advisory services associated therewith and charges of
$598,000 related to the Comerica debt. Other expense for the prior period also
includes approximately $1,609,000 in legal settlements and other financing
related costs.
19
Income Tax Expense
Income taxes for the year ended December 31, 2000 and 1999 are a result of
taxable income in the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The Company generates its revenues from prevention services, emergency
response activities and restoration services. Response activities are generally
associated with a specific emergency or "event" whereas prevention and
restoration activities are generally "non-event" related services. Event related
services typically produce higher operating margins for the Company, but the
frequency of occurrence varies widely and is inherently unpredictable. Non-event
services typically have lower operating margins, but the volume and availability
of work is more predictable. Historically the Company has relied on event driven
revenues as the primary focus of its operating activity, but more recently the
Company's strategy has been to achieve greater balance between event and
non-event service activities. While the Company has successfully improved this
balance, event related services are still the major source of revenues and
operating income for the Company.
The Company's event-related capabilities include hazardous materials and
other emergency response services to industrial customers and governmental
agencies, but the majority of the Company's event related revenues are derived
from well control events (i.e., blowouts) in the oil and gas industry. Demand
for the Company's well control services is impacted by the number and size of
drilling and work over projects, which fluctuate as changes in oil and gas
prices affect exploration and production activities, forecasts and budgets. The
Company's reliance on event driven revenues in general, and well control events
in particular, impairs the Company's ability to generate predictable operating
cash flows.
In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand
its non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE program, which is now providing more predictable and
increasing service fee income, and began marketing its SafeGuard program, which
provides a full range of prevention services domestically and internationally.
For the year ended December 31, 2001, non-event prevention revenues increased to
$5,256,000, a 146.2% increase compared to the prior year, and operating income
grew to $1,272,000 compared to a loss in the prior year. The Company intends to
continue its efforts to increase the revenues it generates from prevention
services in 2002.
The Company's strategy also includes plans to increase non-event
restoration services to its existing customer base. The market for restoration
services is large in comparison to the more specialized emergency response
business, and it provides growth opportunities for the Company. High value
restoration services include snubbing operations, redrilling applications and
project management services. However, proper development of these activities
requires significantly greater capital than what has been available to the
Company. Consequently, the Company is limited to a more selective range of
lower value services, such as site remediation, and has been unable to exploit
the higher margin opportunities available in this business segment. For the
year ended December 31, 2001, restoration revenues were $4,154,000, a 12.2%
decrease compared to the prior year, while operating losses were reduced to
$1,948,000, a 56.4% decrease compared to the prior year.
The Company intends to continue its efforts to increase its non-event
services in the prevention and restoration segments with the objective of
covering all of the Company's fixed operating costs and administrative overhead
from these more predictable non-event services, offsetting the risks of
unpredictable event-driven emergency response business, but maintaining the
benefit of the high operating margins that such events offer. Although the
Company has made progress towards this goal, it has been difficult to achieve
because of the Company's weakened financial position and severe capital
constraints. The Company has been unable to pay certain vendors in a timely
manner, including vendors that the Company considers important to its ongoing
operations, which has hampered the Company's capacity to hire sub-contractors,
obtain materials and supplies, and otherwise conduct effective or efficient
operations.
At the beginning of 2001, the Company had unusually high accounts payable
and accrued liabilities, which had accumulated during a period of financial
restructuring in recent years. During the year ended December 31, 2001, the
Company used $4,140,000 of its available sources of cash to reduce accounts
payable and accrued expenses. This was the principal use of cash for the
Company in 2001, which, when offset with all other operating sources, resulted
in net cash used in operating activities of $3,080,000. Additionally, the
Company used $130,000 in investing activities (principally equipment additions
net of proceeds from equipment sales) and it repaid $100,000 of debt. The
$3,210,000 combined use of cash was funded with $2,203,000 of cash proceeds from
20
a financing facilities, discussed below, and $1,107,000 from reductions of cash
on hand at the beginning of the year. At December 31, 2001, the Company had a
cash balance of $309,000.
On June 18, 2001, the Company entered into a facility with KBK in which it
pledged certain accounts receivable for a cash advance. The facility allows the
Company to pledge additional qualifying accounts receivable up to an aggregate
amount of $5,000,000. The Company paid $135,000 for loan origination fees,
finder's fees and legal fees related to the facility and will pay additional
fees of one percent per annum on the unused portion of the facility and a
termination fee of up to 2% of the maximum amount of the facility. The Company
receives an initial advance of 85% of the gross amount of each receivable
pledged. Upon collection of the receivable, the Company receives an additional
residual payment from which is deducted (i) a fixed fee equal to 2% of the gross
pledged receivable and (ii) a variable financing charge equal to KBK's base rate
plus 2% calculated over the actual length of time the advance was outstanding
from KBK prior to collection. The Company's obligations under the facility are
secured by a first lien on certain other accounts receivable of the Company. As
of December 31, 2001, the Company had $2,383,000 of its accounts receivable
pledged to KBK, representing the substantial majority of the Company's
receivables that were eligible for pledging under the facility.
As of December 31, 2001, the Company's current assets totaled approximately
$9,506,000 and its current liabilities were $9,665,000, resulting in a net
working capital deficit of approximately $159,000 (compared to a beginning year
deficit of $4,018,000). The Company's highly liquid current assets, represented
by cash of $309,000 and receivables and restricted assets of $7,933,000 were
collectively $1,423,000 less than the amount of current liabilities at December
31, 2001 (compared to a beginning year deficit of $4,966,000). The Company has
significantly reduced its net working capital deficit during 2001 but it
continues to experience severe working capital constraints. The Company is
actively exploring new sources of financing, including the establishment of new
credit facilities and the issuance of debt and/or equity securities, but does
not have any current commitments. Absent new near-term sources of financing or
the generation of significant operating income, the Company will not have
sufficient funds to meet its immediate obligations and will be forced to dispose
of additional assets or operations outside of the normal course of business in
order to satisfy its liquidity requirements.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing of its future cash flows
and the lack of firm commitments for additional capital raises substantial doubt
about the ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
- ---------------------------------------------------------------------------------------------
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
DESCRIPTION 2002 2003 2004 2005 2006 THEREAFTER
- ---------------------------------------------------------------------------------------------
Long term debt and
notes payable including
short term debt (1). . . $2,203,000 $1,000,000 - $7,200,000 - -
- ---------------------------------------------------------------------------------------------
Future minimum lease
payments . . . . . . . . $1,033,000 $ 902,000 $640,000 $ 421,000 $208,000 $ 208,000
- ---------------------------------------------------------------------------------------------
Total commitments. . . . $3,236,000 $1,902,000 $640,000 $7,621,000 $208,000 $ 208,000
- ---------------------------------------------------------------------------------------------
(1) Accrued interest totaling $4,320,000 is included in the Company's 12%
Senior Subordinated Note at December 31, 2001 due to the accounting for a
troubled debt restructuring during 2000, but has been excluded from the
above presentation. Accrued interest calculated through December 31, 2002
will be deferred for payment until December 30, 2005. Payments on accrued
interest after December 31, 2002 will begin on March 31, 2003 and will
continue quarterly until December 30, 2005.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified 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 the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
21
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company assesses
its credit risk and provides an allowance for doubtful accounts for any accounts
which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
As of December 31, 2000 and 2001, the Company has net domestic operating
loss carry forwards of approximately $47,155,000 and $46,065,000, 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. The Company has recorded valuation allowances in each year for these net
deferred tax assets since management believes it is more likely than not the
assets will not be realized.
RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
attributable to acquisitions prior to July 1, 2001, the amortization provisions
of SFAS No. 142 will be effective January 1, 2002. Management estimates that
the adoption of SFAS No. 142's requirement to not amortize goodwill will
increase operating income by approximately $59,000 in 2002. Management is
currently evaluating the effect that adoption of the other provisions of SFAS
No. 142 that are effective January 1, 2002 will have on its results of
operations and financial position.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations which covers all legally enforceable obligations associated with the
retirement of tangible long-lived assets and provides the accounting and
reporting requirements for such obligations. SFAS No. 143 is effective for the
Company beginning January 1, 2003. Management has yet to determine the impact
that the adoption of SFAS No. 143 will have on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for
the Impairment of long-lived Assets and for long-lived Assets to be Disposed of.
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
22
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 is
effective for the Company for the quarter ending March 31, 2002. The Company's
adoption of SFAS No. 144, on January 1, 2002 did not have a material impact on
the Company's consolidated financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ from those projected in any forward-looking statements for the reasons
detailed in his report. The forward-looking statements contained herein are made
as of the date of this report and the Company assumes no obligation to update
such forward-looking statements, or to update the reasons why actual results
could differ from those projected in such forward-looking statements. Investors
should consult the information set forth from time to time in the Company's
reports on Forms 10-Q and 8-K, and its Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher throughout 1999, 2000 and 2001, and all other factors affecting the
Company's debt remained the same, pretax earnings would have been lower by
approximately $160,000, $122,000 and $29,000 in 1999, 2000 and 2001,
respectively. With respect to the fair value of the Company's fixed-interest
rate debt, if prevailing market interest rates had been 10% higher at year-end
1999, 2000 and 2001, and all other factors affecting the Company's debt remained
the same, the fair value of the Company's fixed-rate debt, as determined on a
present-value basis, would have been lower by approximately $1,568,000, $247,000
and $212,000 at December 31, 1999, 2000 and 2001, respectively. Given the
composition of the Company's debt structure, the Company does not, for the most
part, actively manage its interest rate risk.
ITEM 8. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following tables list the names and ages of each director and/or
executive officer of the Company, as well as those persons expected to make a
significant contribution to the Company.
NAME AGE POSITION
- ------------------- --- ----------------------------------------------------
Larry H. Ramming. . 55 Chairman of the Board of Directors
Chief Executive Officer and Chief Financial Officer
Brian Krause. . . . 46 Director
Vice President of Boots & Coots Services
K. Kirk Krist . . . 44 Director
Jerry L. Winchester 43 Director
President and Chief Operating Officer
Dewitt H. Edwards . 43 Corporate Secretary - Executive Vice President
Thomas L. Easley. . 56 Director (Vice President & Chief Financial Officer
Through February 7, 2000)
E. J. DiPaolo . . . 49 Director
W. Richard Anderson 49 Director
Tracy S. Turner . . 41 Director
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Larry H. Ramming has served as the Chairman of the Board and Chief
Executive Officer of the Company since the acquisition of IWC Services, Inc. by
the Company on July 29, 1997. Mr. Ramming 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 2004. Previously Mr. Ramming was actively involved
in mortgage banking and the packaging and resale of mortgage notes, consumer
loans and other debt instruments for over 15 years. In addition, Mr. Ramming has
been an active venture capital investor.
Brian Krause has served as a director of the Company since the acquisition
of IWC Services (Well Control Business Unit) by the Company on July 29, 1997.
Mr. Krause serves as a Class III Director for a term that will expire on the
date of the annual meeting of stockholders scheduled for calendar year 2003. Mr.
Krause brings over 20 years of well control and firefighting experience to the
Company. Before joining the group that founded IWC Services, Mr. Krause was
employed for 18 years by the Red Adair Company, Houston, Texas. Mr. Krause
joined the Red Adair Company as a Well Control Specialist in August 1978, was
promoted to Vice President in June 1989 and was again promoted to Vice President
& Senior Well Control Specialist in February 1994. During his tenure with the
Red Adair Company, Mr. Krause participated in hundreds of well control events
worldwide. Mr. Krause, along with Messrs. Henry, Hatteberg and Clayton, resigned
from the Red Adair Company in August 1994 and began the independent business
activities that led to the formation of IWC Services in May 1995.
K. Kirk Krist has served as a director since the acquisition of IWC
Services by the Company on July 29, 1997. Mr. Krist serves as a Class III
Director for a term that will expire on the date of the annual meeting of
stockholders scheduled for calendar year 2003. Mr. Krist also serves on the
Audit and Compensation Committees. Mr. Krist has been a self-employed oil and
gas investor and venture capitalist since 1982.
Jerry L. Winchester has served as a director since July 1997. 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 2002. Mr.
Winchester has served as President and Chief Operating Officer of the Company
since November 1, 1998. Before assuming these positions, 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.
24
Dewitt H. Edwards has served as Executive Vice President of the Company
since September 1, 1998 and has served as Corporate Secretary since April 2000.
Before assuming these positions, Mr. Edwards served in progressive positions of
responsibilities with Halliburton Energy Services from 1979 to 1998, most
recently as Operations Manager - North American Region Resources Management.
Thomas L. Easley served as Vice President and Chief Financial Officer of
the Company since the acquisition of IWC Services by the Company on July 29,
1997 through February 7, 2000, at which time he resigned to pursue another
business activity. Mr. Easley has served as a director since March 25, 1998. Mr.
Easley 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 2004. From May
1995 through July 1996, Mr. Easley served as Vice President and Chief Financial
Officer of DI Industries, Inc. a publicly held oil and gas drilling contractor
with operations in the U.S., Mexico, Central America and South America.
Previously, from June 1992 through May 1995, he served as Vice President,
Finance of Huthnance International, Inc., a closely held offshore oil and gas
drilling contractor. From February 7, 2000, through February 1, 2002, Mr. Easley
served as Executive Vice President-Finance & Administration of Grant
Geophysical, Inc., a closely-held seismic data acquisition and processing
company. He currently provides business and financial consultative services.
E. J. "Jed" DiPaolo has served as a director since May 1999. Mr. DiPaolo
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 2004. Mr. DiPaolo
also serves on the Audit Committee. Mr. DiPaolo is the former Senior Vice
President, Global Business Development of Halliburton Energy Services, having
had responsibility for all worldwide business development activities. Mr.
DiPaolo was employed at Halliburton Energy Services from 1976 to 2002 in
progressive positions of responsibility.
W. Richard Anderson has served as a director since August 1999. Mr.
Anderson 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 2002. Mr.
Anderson also serves on the Audit Committee. 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, 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.
Tracy Scott Turner has served as a director since November 2000. Mr. Turner
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 2002. Mr. Turner also
serves on the Compensation Committee. Mr. Turner is also currently a principal
at Geneva Associates, L.L.C., a merchant bank. In addition, Mr. Turner is the
founding principal of Interra Ventures, L.L.C., a merchant bank which focuses on
telecommunications and energy related investments. From 1993 to 1996, Mr. Turner
served as a Senior Vice President of the Private Placement Group for ABN AMRO
Bank. From 1986 to 1993, he was a Managing Director in the Private Placement
Group for Canadian Imperial Bank of Commerce. Mr. Turner has an investment in
and sits on the board of directors of Rio Bravo Exploration and Production. He
also currently sits on the board of directors of Vertaport, Inc., Early Warning
Corporation and Clean Air Research and Environmental and is a principal of
Turner Land and Cattle Company and Southern Capital Partners, L.L.C. Mr. Turner
is a managing member of Specialty Finance Fund I, L.L.C.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Larry Ramming, Jerry Winchester and Dewitt Edwards voluntarily surrendered
options to purchase 900,000 shares, 1,080,000 shares and 108,000 shares,
respectively, at an exercise price of $0.75 per share to the Company in April
2001. In October 2001, Messrs. Ramming, Winchester and Edwards were awarded
options to purchase 900,000 shares, 1,080,000 shares and 108,000 shares,
respectively, at an exercise price of $0.55 per share. Messrs. Ramming,
Winchester and Edwards, as of the date this report was prepared, had not yet
filed Forms 4 reflecting the issuance of the new options in October 2001.
25
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the cash and non-cash
compensation information for the years ended December 31, 1999, 2000 and 2001
for the Chief Executive Officer and the two other executive officers whose
salary and bonus earned for services rendered to the Company exceeded $100,000
for the years then ended.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ ----------------------------------
Awards Payouts
----------------------------------
Other Securities
Name Annual Restricted Underlying All Other
And Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------
Larry H. Ramming 2001 314,657 71,162(1) 1,800,000(2) 138(3)
Chairman, Chief 2000 295,605 174,402(4)
Executive Officer 1999 280,625
and Chief
Financial Officer
- -----------------------------------------------------------------------------------------------------------
Jerry Winchester 2001 259,066 1,513,000(5) 3,287(6)
President 2000 259,480 3,109
1999 262,000
- -----------------------------------------------------------------------------------------------------------
Dewitt H. Edwards 2001 182,848 408,000(7) 5,388(8)
Executive Vice 2000 167,213 3,109
President 1999 162,000
- -----------------------------------------------------------------------------------------------------------
______________________
(1) Additional compensation in connection with modification of Mr. Ramming's
employment agreement. See "Employment Arrangements" below for further
detail.
(2) 1,350,000 shares covered by options are vested.
(3) Life insurance premium as required by employment agreement.
(4) Represents the fair market value of 1,500 shares of Series C Preferred
Stock of the Company and a warrant to purchase 150,000 shares of common
stock at $0.75 per share issued for performance during 1999 and 2000. The
fair market value was determined to be the face value for each share of
Series C Preferred Stock ($100). A Black-Scholes model using the
assumptions as set forth in Note I to the Financial Statements included
herein was used to determine the fair market value of the warrants.
(5) 1,363,000 shares covered by options are vested.
(6) Life insurance premium as required by employment agreement and
matching contribution to 401(k) plan.
(7) 318,000 shares covered by options are vested.
(8) Life insurance premium as required by employment agreement and matching
contribution to 401(k) plan.
26
The following table sets forth additional information with respect to stock
options granted in 2001 to the named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- -------------------------------------------------------------------------
Potential Realizable Value at Assumed
Percent of Annual Rates of Stock Price
Total Appreciation for Option Term
Number of Options/ Market ------------------------------
Securities SARs Exer- Price
Underlying Granted to cise or at Date Grant Date
Options/ Employees Base of Value
SARs in Fiscal Price Grant Expira- 5% 10% 0%
Name Granted Year ($) ($) tion Date ($) ($) ($)
- -------------------------------------------------------------------------------------------------------------
Larry H. Ramming (1) 900,000 43% 0.55 0.55 5/03/09 141,732 313,192
- -------------------------------------------------------------------------------------------------------------
Jerry Winchester (2) 1,080,000 52% 0.55 0.55 9/09/08 170,079 375,830
- -------------------------------------------------------------------------------------------------------------
Dewitt H. Edwards (3) 108,000 5% 0.55 0.55 8/21/08 17,008 37,583
- -------------------------------------------------------------------------------------------------------------
_______________________
(1) In April 2001, Mr. Ramming voluntarily surrendered an option for
900,000 shares of common stock at the request of the Company. The
Company agreed to reissue an option for the same number of shares at
the prevailing market price no less than 181 days following the
surrender of the option. This option was issued in October 2001.
(2) In April 2001, Mr. Winchester voluntarily surrendered an option for
1,080,000 shares of common stock at the request of the Company. The
Company agreed to reissue an option for the same number of shares at
the prevailing market price no less than 181 days following the
surrender of the option. This option was issued in October 2001.
(3) In April 2001, Mr. Edwards voluntarily surrendered an option for
108,000 shares of common stock at the request of the Company. The
Company agreed to reissue an option for the same number of shares at
the prevailing market price no less than 181 days following the
surrender of the option. This option was issued in October 2001.
27
TEN-YEAR OPTION/SAR REPRICINGS
- ---------------------------------------------------------------------------------------------------------
Length of
Number of Original
Securities Market Option
Underlying Price of Exercise Term
Options/ Stock at Price at Remaining
SARs Time of Time of New at Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended Amendment Amendment Price Amendment
(#) ($) ($) ($)
- ---------------------------------------------------------------------------------------------------------
Larry H. Ramming 10/29/01 900,000 (1) 0.55 0.75 0.55 10 years
Chairman, Chief
Executive Officer and
Chief Financial Officer
- ---------------------------------------------------------------------------------------------------------
Jerry Winchester 10/29/01 1,080,000 (1) 0.55 0.75 0.55 10 years
President
- ---------------------------------------------------------------------------------------------------------
Dewitt H. Edwards 10/29/01 108,000 (1) 0.55 0.75 0.55 10 years
Executive Vice
President
- ---------------------------------------------------------------------------------------------------------
_____________________
(1) In May 2000, Messrs. Ramming, Winchester and Edwards agreed to
surrender options issued to them pursuant to the terms of their
employment agreements in exchange for a promise by the Company to
reissue options on the same terms when shares became available to do
so. Additionally, the Company promised that the new options would be
issued for 120% of the vested shares underlying the surrendered option
shares and would be issued at the market price on the date of
surrender. The Company made this arrangement to free authorized but
unissued shares in connection with a financing transaction. The
options surrendered by Messrs. Ramming, Winchester and Edwards were
then at exercise prices of $1.55, $1.91, and $3.29, respectively. In
October 2000, the Company reissued options for 900,000 shares to Mr.
Ramming, 1,080,000 to Mr. Winchester and 108,000 to Mr. Edwards at
exercise prices of $0.75 per share. In April 2001, the Company
determined that the reissued options would have unintended accounting
consequences and again requested that Messrs. Ramming, Winchester and
Edwards voluntarily surrender these options in exchange for an option
of the same number issued at the market price no less than 181 days
following the date of surrender. The above table reflects this
reissuance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In the period covered by this report, none of the Company's 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 the Company's Board of Directors or compensation committee.
Compensation of Directors. Directors who are employees of the Company do
not generally receive a retainer or fees for service on the board or any
committees. Directors who are not employees of the Company receive a fee of
$1,000 for attendance at each meeting of the Board or 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. In addition, pursuant to the 1997 Non-Employee Directors' Stock
Option Plan, each non-employee director on the date of his or her election to
the Board of Directors automatically will be granted a stock option to purchase
15,000 shares of common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. The plan also provides for the
automatic additional grant to each non-employee director of stock options to
purchase 15,000 shares of common stock for each year the non-employee director
serves on the Board.
Compensation Committee Reports. The Company's compensation committee is
comprised of two or more persons appointed from time to time by, and serving at
the discretion of, the Board of Directors. During 2001, the committee consisted
of Messrs. Krist, Winchester and Turner. Mr. Winchester resigned from the
Compensation Committee effective April 2001. The compensation committee, which
is chaired by Mr. Krist, administers the Company's stock option plans, and in
this capacity makes all option grants or awards to employees, including
28
executive officers, under the plans. In addition, the compensation committee is
responsible for making recommendations to the Board of Directors with respect to
the compensation of the Company's chief executive officer and its other
executive officers and for establishing compensation and employee benefit
policies. During 2001, the compensation committee held three meetings.
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
the Company's 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 any 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.
Beginning in 1999 and continuing through 2001, the Board of Directors
initiated efforts to alleviate the Company's liquidity problems and to improve
its overall capital structure by endeavoring to restructure the Company's debt
and equity positions. The program involved a series of steps designed to raise
new operating capital, sell assets of certain subsidiaries, retire and modify
the Company's existing senior debt, restructure its subordinated debt and
increase its stockholders' equity. The Board agreed that the implementation of
this program would require additional time, effort and responsibility from the
Company's executive officers and its Board of Directors. Additionally, the Board
recognized that, due to the scope of the challenges faced by the Company with
its current debt and liquidity problems, and the high probability that the
Company might not be successful in its reorganization efforts, the Board as a
whole, the Chief Executive Officer and the Company's executive management faced
increased risk and liabilities in the event of failure. The Board of Directors
instructed the compensation committee to review and determine, in light of this
program and the increased risks incurred, the most effective means in which to
compensate and provide incentives for the Board as a whole, the Chief Executive
Officer, the Company's executive management and it's non-employee outside
directors. In April 2001, Messrs. Ramming, Winchester and Edwards agreed to
voluntarily surrender options to purchase 900,000 shares, 1,080,000 shares and
108,000 shares, respectively, at an exercise price of $0.75 per share to the
Company. In October 2001, Messrs. Ramming, Winchester and Edwards were awarded
options to purchase 900,000 shares, 1,080,000 shares and 108,000 shares,
respectively, at an exercise price of $0.55 per share.
1997 Outside Directors' Option Plan. On November 12, 1997, the Board of
Directors of the Company adopted the 1997 Outside Directors' Option Plan (the
"Directors' Plan") and the Company's stockholders approved such plan on December
8, 1997. The Directors' Plan provides for the issuance each year of an option to
purchase 15,000 shares of Common Stock to each member of the Board of Directors
who is not an employee of the Company. The purpose of the Directors' Plan is to
encourage the continued service of outside directors and to provide them with
additional incentive to assist the Company in achieving its 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. Options to purchase 192,000
shares of Common Stock have been granted under the Directors' Plan at an
exercise price of $0.75 per share.
EMPLOYMENT ARRANGEMENTS
Mr. Ramming, the Company's Chairman and Chief Executive Officer, through
1997 was actively involved in a number of independent business activities and
through such date did not devote his full time to the affairs of the Company.
Mr. Ramming executed effective as of August 1, 1997, a one year employment
agreement with the Company which allowed for his outside activities provided
that he devoted such time to the Company's affairs as was reasonably necessary
for the performance of his duties, with such activities not to be competitive
with the Company's business and not to materially adversely affect his
performance as an officer and director of the Company. Through December 31, 1997
Mr. Ramming's employment agreement provided for an annual salary of $125,000 and
an annual automobile allowance of $12,000. Effective January 1, 1998, Mr.
Ramming agreed to prospectively curtail all material outside business activities
and under this interim employment arrangement, his annual salary was increased
to $275,000. A five-year contract, effective April 1, 1999, was entered into
with Mr. Ramming, which provided for an annual salary of $300,000 and an annual
automobile allowance of $18,000. In August 1999, as a result of the Company's
financial condition, Mr. Ramming voluntarily agreed to a deferral of payment of
25% of his monthly salary and vehicle allowance. Such deferral continued though
May 2000. In connection with the employment contract entered in 1999, Mr.
Ramming was granted an option to purchase up to 750,000 shares of the Company's
29
common stock at a per share price of $1.55 (85% of the last bid price of such
common stock on the American Stock Exchange on the date immediately preceding
the contract effectiveness date). The options vest ratably over five years at
the anniversary date of the employment contract, conditioned upon continued
employment at the time of each vesting and subject to immediate vesting based
upon change of control which occurred. These options were voluntarily
surrendered on two occasions and were reissued in October 2001 as an option for
900,000 shares of common stock at an exercise price of $0.55 per share.
Mr. Ramming's employment agreement also provides for life insurance and
medical expense benefits that the Company has not historically provided to him.
During 2001, Mr. Ramming requested that the Company provide the cash equivalent
of these benefits to him. The Company agreed to offset amounts owing from Mr.
Ramming to the Company in the amount of $71,162.15 for 2001, to provide a credit
of $19,579.85 for use by Mr. Ramming against expenses he incurs in 2002, and to
accrue an additional $7,500 per month during 2002 to offset expenses incurred by
Mr. Ramming in lieu of the life insurance and medical expense benefits provided
in his employment agreement.
Mr. Winchester serves as President and Chief Operating Officer of the
Company. Mr. Winchester's employment agreement, which was effective as of
November 1, 1998, provides for an annual salary of $250,000 and an annual
automobile allowance of $12,000. In addition, Mr. Winchester was granted an
option to purchase up to 1,000,000 shares of common stock of the Company at a
per share price of $1.91 (85% of the last bid price of such common stock on the
American Stock Exchange on the date immediately preceding the contract
effectiveness date). 200,000 of such options vested upon execution of this
contract. The balance vests at the rate of 200,000 options per year at the
anniversary date, conditioned upon continued employment at the time of each
vesting. These options were voluntarily surrendered on two occasions and were
reissued in October 2001 as an option for 1,080,000 shares of common stock at an
exercise price of $0.55 per share.
Mr. Edwards serves as Executive Vice President of the Company. Mr. Edwards'
employment agreement, which was effective as of September 1, 1998, provided for
an annual salary of $150,000 and an annual automobile allowance of $12,000. In
2000, Mr. Edward's annual salary under the agreement was increased to $175,000.
In addition, Mr. Edwards was granted an option to purchase up to 100,000 shares
of common stock of the Company at a per share price of $3.29 (85% of the last
bid price of such common stock on the American Stock Exchange immediately
preceding the contract effectiveness date). 20,000 of such options vested upon
execution of this contract. The balance vests at the rate of 20,000 options per
year at the anniversary date, conditioned upon continued employment at the time
of each vesting. These options were voluntarily surrendered on two occasions and
were reissued in October 2001 as an option for 108,000 shares of common stock at
an exercise price of $0.55 per share.
30
The following graph compares the Company's total stockholder return on its
common stock for the years ended December 31, 1997, 1998, 1999, 2000 and 2001
with the Standard & Poors' 500 Stock Index and the Standard & Poors' Energy
Composite Index over the same period.
[GRAPHIC OMITED]
- ---------------------------------------------------------------------------------------
12/97 12/98 12/99 12/00 12/01
- ---------------------------------------------------------------------------------------
Boots & Coots International Well Control, Inc. 100.00 77.42 11.29 12.90 12.90
S&P 500 Index 100.00 128.60 153.68 138.18 120.14
S&P Energy Composite Index 100.00 100.50 118.39 137.06 151.31
- ---------------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 28, 2002, information
regarding the ownership of Common Stock of the Company owned by (i) each person
(or "group" within the meaning of Section 13(d)(3) of the Security Exchange Act
of 1934) known by the Company to own beneficially more than 5% of the Common
Stock; (ii) each director of the Company, (iii) each of the named executive
officers and (iv) all executive officers and directors of the Company as a
group.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------------------ --------------------- -----------------
Larry H. Ramming 6,232,333 (2) 13.1%
Brian Krause 221,700 (3) *
Jerry L. Winchester 1,421,900 (4) 3.3%
K. Kirk Krist 577,632 (5) 1.4%
Thomas L. Easley 354,800 (6) *
Dewitt H. Edwards 318,000 (7) *
E.J. DiPaolo 372,800 (8) *
W. Richard Anderson 382,800 *
Tracy S. Turner 1,814,534 4.2%
Specialty Finance Fund I, L.L.C. 8,877,043 17.7%
All executive officers and directors as a group
(nine persons) 11,696,499 22.2%
---------------
__________
* less than 1%
31
(1) Unless otherwise noted, the business address for purposes hereof for
each person listed is 777 Post Oak Boulevard, Suite 800, Houston,
Texas 77056. Beneficial owners have sole voting and investment power
with respect to the shares unless otherwise noted.
(2) Includes warrants and/or options to purchase 4,475,000 shares of
common stock and preferred stock convertible into 1,757,333 shares of
common stock. Of this number, options and/or warrants convertible into
2,975,000 shares of common stock and preferred stock convertible into
1,526,000 shares of common stock are owned by the Ramming Family
Limited Partnership, of which Larry H. Ramming is a controlling
person.
(3) Includes warrants and/or options to purchase 221,700 shares of common
stock.
(4) Includes warrants and/or options to purchase 1,418,000 shares of
common stock.
(5) Includes warrants and/or options to purchase 288,000 shares of common
stock And preferred stock convertible into 114,800 shares of common
stock.
(6) Includes warrants and/or options to purchase 240,000 shares of common
stock and preferred stock convertible into 114,800 shares of common
stock.
(7) Options to purchase 318,000 shares of common stock.
(8) Includes warrants and/or options to purchase 258,000 shares of common
stock and preferred stock convertible into 114,800 shares of common
stock.
(9) Includes options to purchase shares of common stock. 666,666 of the
shares beneficially owned are held in a partnership, of which Tracy S.
Turner is a general partner.
(10) Tracy S. Turner may also own beneficially all o f the shares owned by
Specialty Finance Fund I, L.L.C., as a Managing Member.
(11) Includes warrants to purchase 8,729,985 shares of common stock and
preferred stock convertible into 657,000 shares of common stock.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements for the year ended December 31,
2001, included after signature page.
2. Financial statement schedules included in Consolidated financial
statements.
3. Exhibit Index
Exhibit No. Document
----------- -------------------------------------------------------------
3.01 - Amended and Restated Certificate of Incorporation(1)
3.02 - Amendment to Certificate of Incorporation(2)
3.02(a) - Amendment to Certificate of Incorporation(3)
3.03 - Amended Bylaws(4)
4.01 - Specimen Certificate for the Registrant's Common
Stock(5)
4.02 - Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(6)
4.03 - Certificate of Designation of Series A Cumulative Senior
Preferred Stock(7)
4.04 - Certificate of Designation of Series B Convertible Preferred
Stock(8)
4.05 - Certificate of Designation of Series C Cumulative Convertible
Junior Preferred Stock(9)
4.06 - Certificate of Designation of Series D Cumulative Junior
Preferred Stock(10)
4.07 - Certificate of Designation of Series E Cumulative Senior
Preferred Stock
4.08 - Certificate of Designation of Series F Convertible Senior
Preferred Stock
4.09 - Certificate of Designation of Series G Cumulative Convertible
Preferred Stock
4.10 - Certificate of Designation of Series H Cumulative Convertible
Preferred Stock
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(11)
10.02 - Executive Employment Agreement of Larry H. Ramming(12)
10.03 - Executive Employment Agreement of Brian Krause(13)
10.04 - 1997 Incentive Stock Plan(14)
10.05 - Outside Directors' Option Plan(15)
10.06 - Executive Compensation Plan(16)
10.07 - Halliburton Center Sublease(17)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(18)
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.(19)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued
to The Prudential Insurance Company of America(20)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank - Texas(21)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica
Bank - Texas(22)
33
Exhibit No. Document
----------- -------------------------------------------------------------
10.13 - Executive Employment Agreement of Jerry Winchester(23)
10.14 - Executive Employment Agreement of Dewitt Edwards(24)
10.15 - Office Lease for 777 Post Oak(25)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000
(26)
10.19 - Fourth Amendment to Loan Agreement dated May 31,
2000(27)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(28)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(29)
10.22 - Seventh Amendment to Loan Agreement dated December 29,
2000(30)
10.23 - Subordinated Note Restructuring Agreement with The
Prudential Insurance Company of America dated December 28,
2000(31)
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April
15, 1999, with Halliburton Energy Services, Inc. (32)
10.26 - Letter of Engagement, dated April 10, 2000, with Maroon Bells
(33)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and
to Turner, Volker, Moore (34)
10.28 - Amended and Restated Purchase and Sale Agreement with
National Oil Well, L.P.(35)
10.29 - KBK Financial, Inc. Account Transfer and Purchase
Agreement(36)
21.01 - List of subsidiaries(37)
*23.01 - Consent of Arthur Andersen LLP
24.01 - Power of Attorney (included on Signature Page)
*99.01 - Letter Regarding Representations from Arthur Andersen LLP
______________________
* Filed herewith
(1) Incorporated herein by reference to exhibit 3.2 of Form 8-K filed August
13, 1997.
(2) Incorporated herein by reference to exhibit 3.3 of Form 8-K filed August
13, 1997.
(3) Incorporated herein by reference to exhibit 3.02(a) of Form 10-Q filed
November 14, 2001
(4) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August
13, 1997.
(5) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August
13, 1997.
(6) Incorporated herein by reference to exhibit 4.06 of Form 10-QSB filed May
19, 1998.
(7) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July
17, 2000.
(8) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July
17, 2000.
(9) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.
(10) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.
(11) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
13, 1997.
34
(12) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed August
12, 1999.
(13) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August
13, 1997.
(14) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.
(15) Incorporated herein by reference to exhibit 10.15 of Form 10-KSB filed
March 31, 1998.
(16) Incorporated herein by reference to exhibit 10.16 of Form 10-KSB filed
March 31, 1998.
(17) Incorporated herein by reference to exhibit 10.17 of Form 8-K filed March
31, 1998.
(18) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August
7, 1998.
(19) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August
7, 1998.
(20) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August
7, 1998.
(21) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 16, 1998.
(22) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 16, 1998.
(23) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed April
15, 1999.
(24) Incorporated herein by reference to exhibit 10.30 of Form 10-K filed April
15, 1999.
(25) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed July
17, 2000.
(26) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July
17, 2000.
(27) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July
17, 2000.
(28) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July
17, 2000.
(29) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July
17, 2000.
(30) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January
12, 2001.
(31) Incorporated herein by reference to exhibit 10.27 of Form 10-K filed April
2, 2001.
(32) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July
17, 2000.
(33) Incorporated herein by reference to exhibit 10.43 of Form 10-K filed July
17, 2000.
(34) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.
(35) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 10,
2000.
(36) Incorporated herein by reference to exhibit 10.29 of Form 10-Q filed August
14, 2001.
(37) Incorporated herein by reference to exhibit 21.01 of Form 10-K filed April
15, 1999.
(b) Reports on Form 8-K
- Form 8-K filed December 5, 2001, Comments of Larry H. Ramming at
Meeting of Stockholders
35
SIGNATURES
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/ LARRY H. RAMMING
---------------------------------
Larry H. Ramming,
Chief Executive and Financial Officer
Date: March 27, 2002.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry H. Ramming his true and lawful
attorney-in-fact and agent with full power of substitution to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intent and purposes as he could do in person, hereby ratifying and confirming
that said attorney-in-fact or his substitute, or any of them, shall do or cause
to be done by virtue here of. 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.
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/ LARRY H. RAMMING Chief Executive Officer, Chief Financial March 27, 2002
- --------------------------- Officer, and Director
Larry H. Ramming
By: /s/ JERRY WINCHESTER President, Chief Operating Officer March 27, 2002
- --------------------------- and Director
Jerry Winchester
By: /s/ BRIAN KRAUSE Vice President and Director March 27, 2002
- ---------------------------
Brian Krause
By: /s/ THOMAS L. EASLEY Director March 27, 2002
- ---------------------------
Thomas L. Easley
By: /s/ K. KIRK KRIST Director March 27, 2002
- ---------------------------
K. Kirk Krist
By: /s/ E. J. DIPAOLO Director March 27, 2002
- ---------------------------
E.J. DiPaolo
By: /s/ W. RICHARD ANDERSON Director March 27, 2002
- ---------------------------
W. Richard Anderson
By: /s/ TRACY TURNER Director March 27, 2002
- ---------------------------
Tracy Turner
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three year period ended December 31, 2001. 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 auditing standards generally
accepted in the 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, 2000 and 2001, and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the consolidated financial statements, the Company experienced recurring
losses from operations during 1999 and 2000. During 2001 the Company realized
income from operations. However, the Company continues to have a net capital
deficiency, and current uncertainties surrounding the sufficiency and timing of
its future cash flows raise substantial doubt about the ability of the Company
to continue as a going concern. Management's plans in regards to these matters
are also described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 2002
F-1
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,416,000 $ 309,000
Receivables - net of allowance for doubtful accounts of
$1,339,000 and $707,000 at December 31, 2000 and 2001,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,620,000 5,194,000
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,739,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401,000 421,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 547,000 843,000
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 7,984,000 9,506,000
-------------- --------------
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . 7,971,000 6,212,000
OTHER ASSETS:
Deferred financing costs and other assets - net of
accumulated amortization of $701,000 and $767,000 at
December 31, 2000 and 2001, respectively . . . . . . . . . . . . . . . . 268,000 191,000
Goodwill - net of accumulated amortization of $595,000
and $653,000 at December 31, 2000 and 2001,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,903,000 1,845,000
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,126,000 $ 17,754,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable. $ 100,000 $ 2,203,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,343,000 2,863,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,559,000 4,599,000
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 12,002,000 9,665,000
-------------- --------------
LONG-TERM DEBT AND NOTES PAYABLE
Net of current maturities. . . . . . . . . . . . . . . . . . . . . . . . . 12,520,000 12,520,000
-------------- --------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,522,000 22,185,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note K)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
365,000 and 327,000 shares issued and outstanding at December
31, 2000 and 2001, respectively) (Note I). . . . . . . . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized,
31,692,454 and 41,442,000 shares issued and outstanding
at December 31, 2000 and 2001, respectively) . . . . . . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 53,098,000 56,659,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (59,494,000) (61,090,000)
-------------- --------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . (6,396,000) (4,431,000)
-------------- --------------
Total liabilities and stockholders' equity (deficit). . . . . . . . $ 18,126,000 $ 17,754,000
============== ==============
See accompanying notes to consolidated financial statements.
F-2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- --------------
REVENUES. . . . . . . . . . . . . . . . . . . . . $ 33,095,000 $ 23,537,000 $ 36,149,000
COSTS AND EXPENSES:
Cost of sales and operating . . . . . . . . . . 31,971,000 25,107,000 27,699,000
Selling, general and administrative . . . . . . 13,694,000 5,322,000 4,582,000
Depreciation and amortization . . . . . . . . . 2,907,000 2,665,000 1,954,000
Write-down of long-lived assets . . . . . . . . 4,507,000 - -
Loan guaranty charge (Note K) . . . . . . . . . - 1,833,000 -
-------------- -------------- --------------
53,079,000 34,927,000 34,235,000
-------------- -------------- --------------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . (19,984,000) (11,390,000) 1,914,000
INTEREST EXPENSE & OTHER, NET . . . . . . . . . . 6,402,000 11,277,000 653,000
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND INCOME TAXES . . . . . . . (26,386,000) (22,667,000) 1,261,000
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . 82,000 65,000 335,000
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . $ (26,468,000) $ (22,732,000) $ 926,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes (Note D). . . . . . . . . . . (4,648,000) 1,544,000 402,000
LOSS FROM SALE OF DISCONTINUED OPERATIONS,
net of income taxes . . . . . . . . . . . . . . . - (2,555,000) -
-------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM . . . . . $ (31,116,000) $ (23,743,000) $ 1,328,000
EXTRAORDINARY GAIN ON EARLY DEBT EXTINGUISHMENT,
net of income taxes . . . . . . . . . . . . . . . - 2,444,000 -
-------------- -------------- --------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $ (31,116,000) $ (21,299,000) $ 1,328,000
STOCK AND WARRANT ACCRETION . . . . . . . . . . . (775,000) (53,000) (53,000)
PREFERRED DIVIDENDS PAID . . . . . . . . . . . . (14,000) - -
PREFERRED DIVIDENDS ACCRUED . . . . . . . . . . . (455,000) (864,000) (2,871,000)
-------------- -------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. . . $ (32,360,000) $ (22,216,000) $ (1,596,000)
============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations. . . . . . . . . . . . . $ (0.81) $ (0.70) $ (0.05)
============== ============== ==============
Discontinued operations. . . . . . . . . . . . $ (0.13) $ (0.03) $ 0.01
============== ============== ==============
Extraordinary item . . . . . . . . . . . . . . $ - $ 0.07 $ -
============== ============== ==============
Net loss . . . . . . . . . . . . . . . . . . . $ (0.94) $ (0.66) $ (0.04)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . 34,352,000 33,809,000 40,073,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------- --------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- ------- ------------ ------- ------------ ------------- -------------
BALANCES, December 31, 1998. . . . . . 140,000 $ - 33,044,000 $ - $25,154,000 $ (4,918,000) $ 20,236,000
Advisory fees paid in connection
with conversion inducement. . . . - - - - (107,000) - (107,000)
Common stock issued in private
placement, net of offering costs. - - 1,400,000 - 1,865,000 - 1,865,000
Exercise of common stock options . . - - 12,000 - 5,000 - 5,000
Inducement to provide for
conversion of preferred
stock to common stock . . . . . . - - - - 460,000 (460,000) -
Preferred stock conversion to
common stock. . . . . . . . . . . (50,000) - 788,000 - - - -
Preferred stock redemption . . . . . (8,000) - - - (200,000) (14,000) (214,000)
Preferred stock issued in private
placement, net of offering cost . 50,000 - - - 4,760,000 - 4,760,000
Preferred stock dividends accrued. . - - - - 455,000 (455,000) -
Warrant discount accretion in
connection with preferred stock
issuance. . . . . . . . . . . . . - - - - 105,000 (105,000) -
Warrant discount accretion in
connection with common stock
issuance. . . . . . . . . . . . . - - - - 210,000 (210,000) -
Warrants issued for consulting
services. . . . . . . . . . . . . - - - - 244,000 - 244,000
Net loss . . . . . . . . . . . . . . - - - - - (31,116,000) (31,116,000)
-------- ------- ------------ ------- ------------ ------------- -------------
BALANCES at December 31, 1999. . . . . 132,000 $ - 35,244,000 $ - $32,951,000 $(37,278,000) $ (4,327,000)
Common stock issued for services
and settlements . . . . . . . . . - - 214,000 - 1,429,000 - 1,429,000
Common stock options exercised . . . - - 47,000 - 15,000 - 15,000
Common stock options issued for
services. . . . . . . . . . . . . - - - - 80,000 - 80,000
Common stock exchanged for
preferred stock . . . . . . . . . 57,000 - (5,689,000) - - - -
Preferred stock and warrants issued
for debt restructuring . . . . . . 130,000 - - - 7,125,000 - 7,125,000
Preferred stock issued upon
conversion of debt. . . . . . . . 89,000 - - - 8,487,000 - 8,487,000
Preferred stock conversion to
common stock. . . . . . . . . . . (70,000) - 1,876,000 - - - -
Preferred stock issued for services
and settlements . . . . . . . . . 23,000 - - - 1,987,000 - 1,987,000
Preferred stock dividends accrued
or issued . . . . . . . . . . . . 4,000 - - - 864,000 (864,000) -
Warrant discount accretion . . . . . - - - - 53,000 (53,000) -
Warrants issued for services and
convertible debt financing. . . . - - - - 1,330,000 - 1,330,000
Transaction costs of convertible
debt financing. . . . . . . . . . - - - - (1,223,000) - (1,223,000)
Net loss . . . . . . . . . . . . . . - - - - - (21,299,000) (21,299,000)
-------- ------- ------------ ------- ------------ ------------- -------------
BALANCES at December 31, 2000. . . . . 365,000 $ - 31,692,000 $ - $53,098,000 $(59,494,000) $ (6,396,000)
Common stock issued for services
and settlements . . . . . . . . . - - 959,000 - 481,000 - 481,000
Executive stock grant. . . . . . . . - - 150,000 - 94,000 - 94,000
Preferred stock issued for services 1,000 - - - 59,000 - 59,000
Preferred stock conversion to
common stock. . . . . . . . . . . (64,000) - 8,574,000 - - - -
Preferred stock dividends accrued. . 25,000 - - - 2,871,000 (2,871,000) -
Warrant discount accretion . . . . . - - - - 53,000 (53,000) -
Warrants issued for services and
convertible debt financing. . . . - - - - 54,000 - 54,000
Warrants exercised . . . . . . . . . - - 67,000 - 50,000 - 50,000
Transaction costs of convertible
debt financing. . . . . . . . . . - - - - (101,000) - (101,000)
Net income . . . . . . . . . . . . . - - - - - 1,328,000 1,328,000
-------- ------- ------------ ------- ------------ ------------- -------------
BALANCES at December 31, 2001. . . . . 327,000 $ - 41,442,000 $ - $56,659,000 $(61,090,000) $ (4,431,000)
======== ======= ============ ======= ============ ============= =============
See accompanying notes to consolidated financial statements.
F-4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ (31,116,000) $ (21,299,000) $ 1,328,000
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 2,907,000 2,665,000 1,954,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484,000 662,000 27,000
Extraordinary gain on debt extinguishment, net of income tax . . . . - (2,444,000) -
Loss from sale of discontinued operations. . . . . . . . . . . . . . - 2,555,000 -
Loss (gain) on sale of assets. . . . . . . . . . . . . . . . . . . . 75,000 - (6,000)
Write-down of long-lived assets. . . . . . . . . . . . . . . . . . . 4,507,000 - -
Amortization of note discount. . . . . . . . . . . . . . . . . . . . 293,000 - -
Equity issued for services and settlements . . . . . . . . . . . . . 244,000 4,826,000 337,000
-------------- -------------- --------------
Net cash provided by or (used in) operating activities before
changes in assets and liabilities. . . . . . . . . . . . . . . . . (21,606,000) (13,035,000) 3,640,000
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,208,000 (1,106,000) 399,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . - - (2,739,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 988,000 481,000 (20,000)
Prepaid expenses and other current assets. . . . . . . . . . . . . (320,000) 526,000 (296,000)
Deferred financing costs and other assets. . . . . . . . . . . . . (1,518,000) 3,190,000 76,000
Accounts payable, accrued liabilities and customer
advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,992,000 2,464,000 (4,140,000)
Change in net assets of discontinued operations . . . . . . . . . . 14,855,000 (1,544,000) -
-------------- -------------- --------------
Net cash provided by (used in) operating activities. . . . . . 3,599,000 (9,024,000) (3,080,000)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . . . . (3,803,000) (260,000) (221,000)
Sale of net assets of discontinued operations, net of selling costs. - 28,973,000 -
Proceeds from sale of property and equipment . . . . . . . . . . . . 375,000 379,000 91,000
-------------- -------------- --------------
Net cash provided by (used in) investing activities. . . . . . (3,428,000) 29,092,000 (130,000)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised . . . . . . . . . . . . . . . . . . . 5,000 15,000 -
Debt repayments. . . . . . . . . . . . . . . . . . . . . . . . . . . - - (100,000)
Borrowings under line of credit. . . . . . . . . . . . . . . . . . . 38,140,000 27,417,000 -
Repayments under line of credit. . . . . . . . . . . . . . . . . . . (45,601,000) (41,738,000) -
Proceeds from issuance of convertible debt . . . . . . . . . . . . . 1,865,000 8,700,000 -
Repayments of senior subordinated note . . . . . . . . . . . . . . . - (12,045,000) -
Transaction costs of convertible debt financing. . . . . . . . . . . - (1,223,000) -
Proceeds from the issuance of redeemable preferred stock
and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,760,000 - -
Proceeds from financing arrangements . . . . . . . . . . . . . . . . - - 2,203,000
Advisory fee paid to induce conversion of preferred stock to
common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . (107,000) - -
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . (14,000) - -
Preferred stock redemption . . . . . . . . . . . . . . . . . . . . . (200,000) - -
-------------- -------------- --------------
Net cash provided by (used in) financing activities. . . . . . (1,152,000) (18,874,000) 2,103,000
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . (981,000) 1,194,000 (1,107,000)
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 1,203,000 222,000 1,416,000
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 222,000 $ 1,416,000 $ 309,000
============== ============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . $ 4,505,000 $ 1,357,000 $ 359,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . 265,000 249,000 122,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in exchange for accrued services rendered. . . . - - 351,000
Stock offering costs . . . . . . . . . . . . . . . . . . . . . . . . 400,000 -
Stocks issued for financing and services . . . . . . . . . . . . . . 315,000 - 50,000
Inducement to provide for conversion of preferred stock to
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000 - -
Stock and warrant accretions . . . . . . . . . . . . . 775,000 53,000 53,000
Transaction costs of convertible debt financing (101,000)
Preferred stock dividends accrued .. . . . . . . . . . 455,000 864,000 2,871,000
See accompanying notes to consolidated financial statements.
F-5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GOING CONCERN AND IMPAIRMENTS:
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 the Company's periodic reports filed herewith and those
previously filed with the Securities and Exchange Commission.
The Company generates its revenues from prevention services, emergency
response activities and restoration services. Response activities are generally
associated with a specific emergency or "event" whereas prevention and
restoration activities are generally "non-event" related services. Event
related services typically produce higher operating margins for the Company, but
the frequency of occurrence varies widely and is inherently unpredictable.
Non-event services typically have lower operating margins, but the volume and
availability of work is more predictable. Historically the Company has relied
on event driven revenues as the primary focus of its operating activity, but
more recently the Company's strategy has been to achieve greater balance between
event and non-event service activities. While the Company has successfully
improved this balance, event related services are still the major source of
revenues and operating income for the Company.
The Company intends to continue its efforts to increase its non-event
services in the prevention and restoration segments with the objective of
covering all of the Company's fixed operating costs and administrative overhead
from these more predictable non-event services, offsetting the risks of
unpredictable event-driven emergency response business, but maintaining the
benefit of the high operating margins that such events offer. Although the
Company has made progress towards this goal, it has been difficult to achieve
because of the Company's weakened financial position and severe capital
constraints.
The Company has been unable to pay certain vendors in a timely manner,
including vendors that the Company considers important to its ongoing
operations, which has hampered the Company's capacity to hire sub-contractors,
obtain materials and supplies, and otherwise conduct effective or efficient
operations.
At the beginning of 2001, the Company had unusually high accounts payable
and accrued liabilities, which had accumulated during a period of financial
restructuring in recent years. During the year ended December 31, 2001, the
Company used $4,140,000 of its available sources of cash to reduce accounts
payable and accrued expenses. This was the principal use of cash for the
Company in 2001, which, when offset with all other operating sources, resulted
in net cash used in operating activities of $3,080,000. Additionally, the
Company used $130,000 in investing activities (principally equipment additions
net of proceeds from equipment sales) and it repaid $100,000 of debt. The
$3,210,000 combined use of cash was funded with $2,203,000 of cash proceeds from
financing facilities, discussed below, and $1,107,000 from reductions of cash on
hand at the beginning of the year. At December 31, 2001, the Company had a cash
balance of $309,000.
On June 18, 2001, the Company entered into a facility with KBK Financial,
Inc ("KBK") in which it pledged certain accounts receivable for a cash advance.
The facility allows the Company to pledge additional accounts receivable up to
an aggregate amount of $5,000,000. The Company paid $135,000 for loan
origination fees, finder's fees and legal fees related to the facility and will
pay additional fees of one percent per annum on the unused portion of the
facility and a termination fee of up to 2% of the maximum amount of the
facility. The Company receives an initial advance of 85% of the gross amount of
each receivable pledged. Upon collection of the receivable, the Company receives
an additional residual payment from which is deducted (i) a fixed fee equal to
2% of the gross pledged receivable and (ii) a variable financing charge equal to
KBK's base rate plus 2% calculated over the actual length of time the advance
was outstanding from KBK prior to collection. The Company's obligations under
the facility are secured by a first lien on certain other accounts receivable of
the Company. As of December 31, 2001, the Company had $2,383,000 of its accounts
receivable pledged to KBK, representing the substantial majority of the
Company's receivables that were eligible for pledging under the facility.
F-6
As of December 31, 2001, the Company's current assets totaled approximately
$9,506,000 and current liabilities were $9,665,000, resulting in a net working
capital deficit of approximately $159,000 (compared to a beginning year deficit
of $4,018,000). The Company's highly liquid current assets, represented by cash
of $309,000 and receivables and restricted assets of $7,933,000 were
collectively $1,423,000 less than the amount of current liabilities at December
31, 2001 (compared to a beginning year deficit of $4,966,000). The Company has
significantly reduced its net working capital deficit during 2001 but it
continues to experience severe working capital constraints. The Company is
actively exploring new sources of financing, including the establishment of new
credit facilities and the issuance of debt and/or equity securities, but does
not have any current commitments. Absent new near-term sources of financing or
significant improvements in the Company's operating performance, the Company
will not have sufficient funds to meet its obligations over the next twelve
months and will be forced to dispose of additional assets or operations outside
of the normal course of business in order to satisfy its liquidity requirements.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing of its future cash flows
and the lack of firm commitments for additional capital raises substantial doubt
about the ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
Impairments
During the fourth quarter of 1999, the Company recorded a charge to
operations of $4,507,000 to reduce the carrying value of long-lived assets as
follows:
Property and Equipment:
Boots & Coots Special Services $ 399,000
ABASCO . . . . . . . . . . . . 286,000
----------
685,000
----------
Goodwill:
Boots & Coots Special Services 2,347,000
Haz-Tech . . . . . . . . . . . 821,000
ABASCO . . . . . . . . . . . . 654,000
----------
3,822,000
----------
TOTAL . . . . . . . . . . . $4,507,000
==========
In addition, certain ABASCO manufactured inventories were reduced $613,000
in 1999 to reflect decreased market value as a result of the decision to suspend
and outsource manufacturing operations at ABASCO. Certain of these inventories
were reduced an additional $94,000 in 2000 in order to reflect these assets at
lower of cost or market.
B. 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. In connection with such services, the Company has the capacity
to supply the equipment, expertise and personnel necessary to contain oil and
hazardous materials spills and discharges associated with such oil and gas
emergencies, to remediate affected sites and restore oil and gas wells to
production. Through its participation in the proprietary insurance program
WELLSURE(R), the Company provides lead contracting and high risk management
services, under critical loss scenarios, to the program's insured clients.
Additionally, the WELLSURE(R) program designates that the Company provide
certain pre-event prevention and risk mitigation services defined under the
program. The Company also provides snubbing and other high risk well control
management services, including pre-event planning, training and consulting
services and markets oil and hazardous materials spill containment and recovery
equipment and a varied line of industrial products for the oil and gas industry.
In addition, the Company provides environmental remediation services to the
petrochemical, chemical manufacturing and transportation industries, as well as
to various state and federal agencies.
F-7
The Company's event-related capabilities include hazardous materials and
other emergency response services to industrial customers and governmental
agencies, but the majority of the Company's event related revenues are derived
from well control events (i.e., blowouts) in the oil and gas industry. Demand
for the Company's well control services is impacted by the number and size of
drilling and work over projects, which fluctuate as changes in oil and gas
prices affect exploration and production activities, forecasts and budgets. The
Company's reliance on event driven revenues in general, and well control events
in particular, impairs the Company's ability to generate predictable operating
cash flows.
In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand
its non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE program, which is now providing more predictable and
increasing service fee income, and began marketing its SafeGuard program, which
provides a full range of prevention services domestically and internationally.
The Company intends to continue its efforts to increase the revenues it
generates from prevention services in 2002.
The Company's strategy also includes plans to increase non-event
restoration services to its existing customer base. The market for restoration
services is large in comparison to the more specialized emergency response
business, and it provides growth opportunities for the Company. High value
restoration services include snubbing operations, redrilling applications and
project management services. However, proper development of these activities
requires significantly greater capital than what has been available to the
Company. Consequently, the Company is limited to a more selective range of
lower value services, such as site remediation, and has been unable to exploit
the higher margin opportunities available in this business segment.
C. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation - The accompanying consolidated financial statements include
the financial transactions and accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Cash And Cash Equivalents - The Company considers all unrestricted, highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Allowance for Doubtful Accounts
The Company performs ongoing evaluations of its customers and generally
does not require collateral. The Company assesses its credit risk and provides
an allowance for doubtful accounts for any accounts which it deems doubtful of
collection.
F-8
The activity in the allowance for doubtful accounts is as follows:
BALANCE AT CHARGE TO
BEGINNING OF COSTS AND WRITE-OFFS BALANCE AT
PERIOD EXPENSES NET OF RECOVERIES END OF PERIOD
-------------- ------------- ------------------ --------------
For Year Ended December 31, 1999 $ 468,000 $ 1,484,000 $ 266,000 $ 1,686,000
For Year Ended December 31, 2000 $ 1,686,000 $ 662,000 $ 1,009,000 $ 1,339,000
For Year Ended December 31, 2001 $ 1,339,000 $ 27,000 $ 659,000 $ 707,000
Restricted Assets - Restricted assets consist of $356,000 in the form of a
certificate of deposit (See Note D) and $2,383,000 of its accounts receivable
pledged to KBK (See Note A) that remained uncollected as of December 31, 2001.
Inventories - Inventories consist primarily of work-in-process and finished
goods. Inventories are valued at the lower of cost or market with cost
determined using the first-in first-out method.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided principally 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). Facilities and leasehold improvements are amortized over
remaining primary lease terms.
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.
Goodwill - The Company amortizes costs in excess of fair value of net
assets of businesses acquired using the straight-line method over periods
ranging from 15 to 40 years. Recoverability is reviewed annually or sooner if
events or changes in circumstances indicate that the carrying amount may exceed
fair value. Recoverability is then determined by comparing the estimated
undiscounted net cash flows of the assets to which the goodwill applies to the
net book value including goodwill of those assets. Goodwill shown in the
consolidated financial statements relates to the Company's acquisitions of the
assets of IWC, Boots & Coots LP, and Boots & Coots Special Services, Inc. (f/k/a
Code 3, Inc.). For business acquisitions made prior to December 31, 1997,
goodwill is amortized over 15 years. Management performs a fair market value
computation for each acquisition and the resulting goodwill is amortized over
the appropriate lives, typically 40 years for each additional acquisition.
Amortization expense of goodwill was $276,000, $143,000 and $59,000 for the
years ended December 31, 1999, 2000 and 2001, respectively.
Realization of Long Lived Assets -In accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" the Company
evaluates the recoverability of property and equipment, goodwill 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. As discussed in Note A, during
the fourth quarter of 1999 the Company recorded a charge to operations of
$4,507,000 to recognize impairments on certain property and equipment and
goodwill.
F-9
Foreign Currency Transactions - The functional currency of the Company's
foreign operations, primarily in Venezuela, is the U.S. dollar. Substantially
all customer invoices and vendor payments are denominated in U.S. currency.
Revenues and expenses from foreign operations are remeasured into U.S. dollars
on the respective transaction dates and foreign currency gains or losses are
included in the consolidated statements of operations.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
Risk Factors - Risk factors of the Company include, but are not limited to,
liquidity constraints, environmental and governmental regulations, and the
ability to generate sufficient cash flows to meet working capital requirements
and to finance its business plan.
Earnings Per Share - Basic and diluted loss per common share was computed
by dividing net loss attributable to common stockholders by the weighted average
common shares outstanding during the years ended December 31, 1999, 2000 and
2001.
The weighted average number of shares used to compute basic and diluted
earnings per share for the three years ended December 31, 1999, 2000, 2001,
respectively, is illustrated below:
For the Three Years Ended December 31,
-----------------------------------------
1999 2000 2001
------------- ------------- ------------
Numerator:
For basic and diluted earnings per share-
Net loss from continuing operations
attributable to common stockholders $(27,712,000) $(21,205,000) $(1,998,000)
============= ============= ============
Denominator:
For basic earnings per share-
Weighted-average shares. . . . . . . . . . 34,352,000 33,809,000 40,073,000
Effect of dilutive securities:
Preferred stock conversions, stock options
and warrants . . . . . . . . . . . . . . . - - -
------------- ------------- ------------
Denominator:
For diluted earnings per share -
Weighted-average shares and
Assumed conversions. . . . . . . . . . . . 34,352,000 33,809,000 40,073,000
============= ============= ============
For the years ended December 31, 1999, 2000 and 2001 the Company incurred a
loss to common stockholders before consideration of the income (loss) from
discontinued operations. As a result, the potential dilutive effect of stock
options, stock warrants and convertible securities was not included in the
calculation of basic or diluted earnings per share because to do so would have
been antidilutive for the periods presented.
The exercise price of the Company's stock options and stock warrants varies
from $0.43 to $5.00 per share. The Company's convertible securities have
conversion prices that range from $0.75 to $2.75, or, in certain cases, are
based on a percentage of the market price for the Company's common stock.
Assuming that the exercise and conversions are made at the lowest price provided
under the terms of their agreements, the maximum number of potentially dilutive
securities at December 31, 2001 would include: (1) 7,843,030 common shares
issuable upon exercise of stock options, (2) 35,471,432 common shares issuable
upon exercise of stock purchase warrants, (3) 1,333,333 common shares issuable
upon conversion of senior convertible debt, and (4) 38,228,892 common shares
issuable upon conversion of convertible preferred stock. The actual number may
be substantially less depending on the market price of the Company's common
stock at the time of conversion.
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 long-term debt, exclusive of accrued interest included in
long-term debt, pursuant to the Company's 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.
F-10
Recently Issued Accounting Standards - In June 1998, Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No.133") was issued. SFAS No.133 establishes accounting and
reporting standards requiring that every derivative instrument be measured at
its fair value, recorded in the balance sheet as either an asset or liability
and that changes in the derivative's fair value be recognized currently in
earnings. The Company's adoption of SFAS No. 133 on January 1, 2001 did not have
a material impact on the Company's consolidated financial position or results of
operations.
In December 1999, SEC Staff Accounting Bulletin: No. 101 Revenue
Recognition in Financial Statements ("SAB No. 101") was issued. SAB No. 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company adopted the provisions of SAB No. 101 in the fourth quarter of 2000, and
there was no material impact on the Company's consolidated financial position or
results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets attributable
to acquisitions prior to July 1, 2001, the amortization provisions of SFAS No.
142 will be effective January 1, 2002. Management estimates that the adoption of
SFAS No. 142's requirement to not amortize goodwill will increase operating
income by approximately $59,000 in 2002. Management is currently evaluating the
effect that adoption of the other provisions of SFAS No. 142 that are effective
January 1, 2002 will have on its results of operations and financial position.
An impairment of the Company's goodwill could result from this analysis.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143") which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management has yet to
determine the impact, if any, that the adoption of SFAS No. 143 will have on the
Company's consolidated financial statements. However, management does not
believe the adoption will have a material impact on Company's consolidated
financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for
the Impairment of long-lived Assets and for long-lived Assets to be Disposed Of.
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. The Company's adoption
of SFAS No. 144, on January 1, 2002 did not have a material impact on the
Company's consolidated financial position or results of operations.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Significant estimates made by management include the allowance for doubtful
accounts, the valuation allowance for tax assets, valuation of equity securities
and accrued liabilities for potential litigation settlements. Actual results
could differ from these estimates.
Reclassifications - Certain reclassifications have been made in the prior
period consolidated financial statements to conform to current year
presentation.
F-11
D. DISCONTINUED OPERATIONS:
The Company's subsidiary ITS Supply Corporation ("ITS") filed in Corpus
Christi, Texas on May 18, 2000, for protection under Chapter 11 of the U.S.
Bankruptcy Code. ITS is now proceeding to liquidate its assets and liabilities
pursuant to Chapter 7 of Title 11. At the time of the filing, ITS had total
liabilities of approximately $6,900,000 and tangible assets of approximately
$950,000. The Company had an outstanding guaranty on ITS debt upon which a
judgment against the Company was entered by a State District Court in the amount
of approximately $1,833,000. The judgment was paid in full by the Company on
August 31, 2001. (See Note K)
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of (1) all lockbox transfers that occurred between ITS and Comerica
Bank, et al. and (2) all intercompany transfers between ITS and the Company or
subsidiaries of the Company. The Chapter 7 Trustee seeks an accounting to
determine if any of the transfers between the parties are avoidable under either
Federal or State of Texas statutes and seeks repayment to ITS of all such
amounts. The Trustee believes that approximately $400,000 of lockbox transfers
and $3,000,000 of intercompany transfers were made between the parties. The
Company does not believe that it is likely that an accounting of the
transactions between the parties will demonstrate there is a liability owing by
the Company to the ITS Chapter 7 estate. To provide security to Comerica Bank
for any potential claims by the Chapter 7 trustee, the Company has pledged
$350,000 in the form of a certificate of deposit in favor of Comerica Bank.
This amount has been classified as a restricted asset on the balance sheet as of
December 31, 2001.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 in cash. Comerica
Bank-Texas, the Company's primary senior secured lender at the time, was paid in
full as a component of the transaction.
The following table presents the revenues, loss from operations and other
components attributable to the discontinued operations of ITS and the Baylor
Company:
F-12
YEAR ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- -------------
Revenues. . . . . . . . . . . . . . . . . . . . . $ 45,769,000 $ 17,654,000 $ -
Income (loss) from operations before income taxes (7,340,000) 1,544,000 402,000
Provision (benefit) for income taxes. . . . . . . (132,000) - -
Losses in excess of investment in ITS . . . . . . 2,824,000 - -
Loss on disposal of Baylor, net of income taxes . - (2,555,000) -
-------------- -------------- -------------
Net income (loss) from discontinued operations. $ (4,648,000) $ (1,011,000) $ 402,000
============== ============== =============
E. DETAIL OF CERTAIN ASSET ACCOUNTS:
Inventories consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
Work in process. . . . . . . . . . . . . . . . . . . . . . $ - $ 138,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . 401,000 283,000
-------------- --------------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 401,000 $ 421,000
============== ==============
Prepaid expenses and other current assets consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
Prepaid insurance. . . . . . . . . . . . . . . . . . . . . $ 388,000 $ 595,000
Other prepaid and current assets . . . . . . . . . . . . . 159,000 248,000
-------------- --------------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 547,000 $ 843,000
============== ==============
Property and equipment consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 136,000 $ 136,000
Buildings and improvements . . . . . . . . . . . . . . . 2,053,000 2,124,000
Well control and firefighting equipment. . . . . . . . . 6,111,000 6,095,000
Shop and other equipment . . . . . . . . . . . . . . . . 2,229,000 2,128,000
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . 2,109,000 1,851,000
Office equipment and furnishings . . . . . . . . . . . . 1,558,000 1,604,000
-------------- --------------
Total property and equipment . . . . . . . . . . . . . . 14,196,000 13,938,000
Less: accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . (6,225,000) (7,726,000)
-------------- --------------
Net property and equipment . . . . . . . . . . . $ 7,971,000 $ 6,212,000
============== ==============
F. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
Accrued loan guarantee charge and other settlements. . . . $ 2,009,000 $ 1,726,000
Accrued job costs. . . . . . . . . . . . . . . . . . . . . 642,000 -
Accrued income and other taxes . . . . . . . . . . . . . . 412,000 430,000
Accrued salaries and benefits. . . . . . . . . . . . . . . 542,000 564,000
Other accrued liabilities. . . . . . . . . . . . . . . . . 2,954,000 1,879,000
-------------- --------------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 6,559,000 $ 4,599,000
============== ==============
F-13
G. INCOME TAXES:
The Company and its 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 YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
------------- ------------- -------------
Federal
Current. . . . . . $ - $ - $ 43,000
Deferred . . . . . - - -
State
Current. . . . . . - - -
Deferred . . . . . - - -
Foreign . . . . . . . . 82,000 65,000 292,000
------------- ------------- -------------
$ 82,000 $ 65,000 $ 335,000
============= ============= =============
Discontinued operations
Current. . . . . . 132,000 - -
Deferred . . . . . - - -
------------- ------------- -------------
$ 214,000 $ 65,000 $ 335,000
============= ============= =============
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 extraordinary item and income taxes were multiplied by the Federal income
tax rate (statutory rate) as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- --------------
Income tax provision (benefit) at the statutory rate (34%) . $ (8,971,000) $ (7,707,000) $ 429,000
Increase resulting from:
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . 82,000 65,000 292,000
Alternative minimum tax . . . . . . . . . . . . . . . . . - - 43,000
State income taxes, net of related tax effect . . . . . . 87,000 - -
Unrecognized (utilized) net operating losses for
continuing operations . . . . . . . . . . . . . . . . . 5,144,000 7,271,000 (554,000)
Foreign income deemed repatriated . . . . . . . . . . . . 1,112,000 378,000
Goodwill amortization . . . . . . . . . . . . . . . . . . 2,674,000 19,000 19,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 39,000 106,000
-------------- -------------- --------------
$ 214,000 $ 65,000 $ 335,000
============== ============== ==============
As of December 31, 2000 and 2001, the Company has net domestic operating
loss carry forwards of approximately $47,155,000 and $46,065,000, 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. The Company has recorded valuation allowances in each year for these net
deferred tax assets since management believes it is more likely than not the
assets will not be realized. The temporary differences representing deferred tax
assets and liabilities are as follows:
F-14
DECEMBER 31, DECEMBER 31,
2000 2001
-------------- --------------
Deferred income tax liabilities
Depreciation and amortization. . . . . . . $ (1,338,000) $ (1,490,000)
-------------- --------------
Total deferred income tax liabilities. $ (1,338,000) $ (1,490,000)
============== ==============
Deferred income tax assets
Net operating loss carryforward . . . . . $ 16,033,000 $ 15,662,000
Asset disposals . . . . . . . . . . . . . 140,000 89,000
Allowance for doubtful accounts . . . . . 165,000 104,000
Accruals. . . . . . . . . . . . . . . . . 19,000 312,000
Foreign tax credit. . . . . . . . . . . . 338,000 630,000
Alternative minimum tax credit. . . . . . - 43,000
Other assets. . . . . . . . . . . . . . . 48,000 69,000
-------------- --------------
Total deferred income tax assets. . $ 16,743,000 $ 16,909,000
============== ==============
Valuation allowance . . . . . . . . . . . $ (15,405,000) $ (15,419,000)
-------------- --------------
Net deferred income tax asset. . . . $ 1,338,000 $ 1,490,000
============== ==============
Net deferred tax asset (liability) . $ - $ -
============== ==============
H. LONG-TERM DEBT AND NOTES PAYABLE AND OTHER FINANCINGS:
Long-term debt and notes payable consisted of the following:
DECEMBER 31, DECEMBER 31,
2000 2001
------------- -------------
12 % Senior Subordinated Note . . . . . . . . . . . . . . . $ 11,520,000 $ 11,520,000
Senior secured credit facility. . . . . . . . . . . . . . . 1,000,000 1,000,000
Other subordinated note . . . . . . . . . . . . . . . . . . 100,000 -
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . 12,620,000 12,520,000
Less: current portion of long-term debt and notes
payable . . . . . . . . . . . . . . . . . . . . 100,000 -
------------- -------------
Total long-term debt and notes payable. . . . . . $ 12,520,000 $ 12,520,000
============= =============
As of December 31, 1999, and continuing through December 28, 2000, the
Company was not in compliance with certain financial covenants of a $30,000,000
subordinated debt agreement with Prudential insurance Company of America
("Prudential") including the Company's EBITDA to total liabilities ratio.
Further, quarterly interest payments on the debt due to Prudential since July
23, 1999 had not been made by the Company.
A restructuring agreement was executed by both parties on December 28,
2000. The Prudential restructuring agreement provided that the aggregate
indebtedness due to Prudential be resolved by the Company: (i) paying
approximately $12,000,000 cash, (ii) establishing $7,200,000 of new subordinated
debt, ("12% Senior Subordinated Note") (iii) issuing $5,000,000 face value of
Series E Cumulative Senior Preferred Stock ($2,850,000 fair value) and (iv)
issuing $8,000,000 face value of Series G Cumulative Convertible Preferred Stock
($2,600,000 fair value). Additionally, as a component of the transaction,
Prudential received newly issued warrants to purchase 8,800,000 shares of the
Company's common stock for $0.625 per share, with a fair value of $1,232,000
fair value, and the Company agreed to re-price the existing warrants held by
Prudential to $0.625 per share, with a fair value of $443,000. In addition,
$500,000 is continently payable upon the Company's securing a new term loan with
a third party lender. All interest payments and dividends are paid in kind and
deferred for two years from the date of closing. Accrued interest calculated
through December 31, 2002 will be deferred for payment until December 30, 2005.
Payments on accrued interest after December 31, 2002 will begin on March 31,
2003 and will continue quarterly until December 30, 2005. The 12% Senior
Subordinated Note is due in full on December 30, 2005 and has covenants which
require the Company to maintain certain financial ratios and also limits the
amount of borrowings from external sources.
The refinancing of the Company's 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 the
Company, and the residual balance of the indebtedness was recorded as the new
carrying value of the subordinated note due to Prudential. Consequently, the
$7,200,000 face value of the 12% Senior Subordinated Note is recorded on the
Company's balance sheet at $11,520,000. The additional carrying value of the
debt effectively represents an accrual of future interest expense 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.
F-15
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests by an
investment group, Specialty Finance Fund I, LLC (Specialty Finance) in its
senior secured credit facility with Comerica - Bank, Texas ("Comerica"). In
connection with this financing, the Company issued 147,058 shares of common
stock and warrants representing the right to purchase an aggregate of 8,729,985
shares of common stock of the Company to the participation interest holders and
warrants to purchase an aggregate of 3,625,000 shares of common stock to the
investment group that arranged the financing, including warrants to purchase an
aggregate of 736,667 shares of common stock to Tracy S. Turner, a director of
the Company. The warrants have a term of five years and can be exercised by the
payment of cash in the amount of $0.625 per share as to 8,729,985 shares and
$0.75 per share as to 3,625,000 shares of common stock, or by relinquishing a
number of shares subject to the warrant with a market value equal to the
aggregate exercise price of the portion of the warrant being exercised. On
December 28, 2000, $7,729,985 of the participation interest, plus $757,315 in
accrued interest thereon, was exchanged for 89,117 shares of Series H Cumulative
Senior Preferred Stock in the Company. The remaining $1,000,000 of the
participation interest was outstanding as senior secured debt as of December 31,
2001. The Company has received a waiver from Specialty Finance indicating that
they have no intention of taking any action that would accelerate any payments
from the Company of the amounts outstanding under the senior secured credit
facility prior to January 31, 2003. Accordingly, the $1,000,000 outstanding
under this facility has been included in long-term debt in the accompanying
financial statements. Tracy S. Turner, a managing member of Specialty Finance is
also a member of the Company's Board of Directors.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica
Bank-Texas, the Company's primary senior secured lender at that time, was paid
in full totaling $13,000,000 as a component of the transaction. Specialty
Finance as a participant in the Comerica senior facility, remains as the sole
senior secured lender.
The new financing obtained during 2000 from Specialty Finance and the
restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common stockholders. This could
adversely affect the market price for the Company's common stock and limit the
price at which new stock can be issued for future capital requirements.
Further, there can be no assurance that the Company will be able to obtain new
capital, and if new capital is obtained that it will be on terms favorable to
the Company.
On June 18, 2001, the Company entered into an agreement with KBK Financial,
Inc. ("KBK") pursuant to which the Company pledged certain of its accounts
receivable to KBK for a cash advance against the pledged receivables. The
agreement allows the Company to, from time to time, pledge additional accounts
receivable to KBK in an aggregate amount not to exceed $5,000,000. The Company
paid certain fees to KBK for the facility and will pay additional fees of one
percent per annum on the unused portion of the facility and a termination fee of
up to two percent of the maximum amount of the facility. The facility provides
the Company an initial advance of eighty-five percent of the gross amount of
each receivable pledged to KBK. Upon collection of the receivable, the Company
receives an additional residual payment net of fixed and variable financing
charges. The Company's obligations for representations and warranties regarding
the accounts receivable pledged to KBK are secured by a first lien on certain
other accounts receivable of the Company. The facility also provides for
financial reporting and other covenants similar to those in favor of the senior
lender of the Company. The Company had $2,383,000 of its accounts receivable
pledged to KBK that remained uncollected as of December 31, 2001 and,
accordingly, this amount has been classified as a restricted asset on the
balance sheet as of that date. In addition, as of December 31, 2001, the
Company's cash balances include $58,000 representing accounts receivable that
had been collected by KBK and were in-transit to the Company but which were
potentially subject to being held as collateral by KBK pending collection of
uncollected pledged accounts receivable.
I. STOCKHOLDERS' EQUITY (DEFICIT):
Common and Preferred Stock
The Company's stockholders approved an increase in the authorized common
stock ($.00001 par) from 50,000,000 shares up to 125,000,000 shares during 2000.
As of December 31, 2000 and 2001, 31,692,454 and 41,442,000 shares were issued
and outstanding, respectively. The Company also has 5,000,000 shares of
preferred stock ($.00001 par) authorized for designation. Under the Company's
Amended and Restated Certificate of Incorporation, the board of directors has
the power, without further action by the holders of common stock, to designate
F-16
the relative rights and preferences of the Company's 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 the stockholders of the Company, 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.
In May 1999, the Company completed the sale of $2,100,000 of common stock
in private placements. In connection with these private placement transactions,
warrants were issued to purchase 420,000 shares of common stock for a five-year
period at $5.00 per share and 700,000 shares of common stock for a four year
period at $4.00 per share. Additional warrants were issued to the investors in
the private placement to purchase 63,000 shares of common stock for a five-year
period at $5.00 per share as a penalty for non-registration of the private
placement common stock within 150 days of the completion of the sale. Using the
Black-Scholes pricing model, an estimated fair value of $219,000 was attributed
to these warrants.
In June 1998, the Company completed the sale through private placement of
196,000 Units of 10% Junior Redeemable Convertible Preferred Stock ("Redeemable
Preferred"), each Unit consisting of one share of the Preferred Stock and one
Unit Warrant representing the right to purchase five shares of common stock of
the Company at a price of $5.00 per share. The Redeemable Preferred Stock could
be redeemed by the Company at any time on or before the six month anniversary of
the date of issuance (from October 17, 1998 through December 8, 1998) without
prior written notice in an amount per share equal to $25.00, plus any accrued
and unpaid dividends thereon. After the six month anniversary of the date of
issuance of the Redeemable Preferred Stock and for so long as such shares are
outstanding, the Company could redeem such shares upon fifteen days prior
written notice. In the event shares of Redeemable Preferred Stock were not
redeemed by the Company on or before the six month anniversary of the date of
issuance, each unredeemed share, until the nine month anniversary of the date of
issuance be convertible, at the election of the holder thereof, into common
stock at 85% of the average of the last reported sales prices of shares of the
common stock (or the average of the closing bid and asked prices if no
transactions have been reported), not to exceed $6.00 per share, for the 10
trading days immediately preceding the receipt by the Company of written notice
from the holder thereof of an election to so convert such share of Redeemable
Preferred Stock. In the event shares of Redeemable Preferred were not Redeemed
Stock on or before the nine month anniversary of the date of issuance, each
unredeemed share became immediately convertible, at the election of the holder
thereof, into common stock at $2.75 per share (proportionately adjusted for
common stock splits, combinations of common stock and dividends paid in shares
of common stock). Using the Black-Scholes pricing model and taking into account
the discount upon conversion, an estimated fair value of $865,000 was attributed
to the warrants issued in connection with the Redeemable Preferred Stock. This
amount was accreted over the initial six-month redemption period in 1998 as a
charge to net loss to common stockholders. During the years ended December 31,
1998 and 1999, the Company redeemed 56,000 and 8,000 shares, respectively, of
Redeemable Preferred Stock for $1,400,000 and $200,000 plus accrued dividends,
respectively, and subsequently retired those shares. The Company did not redeem
any shares in 2000 or 2001.
In March 1999, one holder of the Company's Redeemable Preferred converted
10,000 preferred shares into 121,000 common shares. In April and May 1999, three
unaffiliated investor groups purchased from certain holders 70,000 shares of
Redeemable Preferred with a face amount of $1,750,000, plus accrued
payment-in-kind dividends thereon. The Company entered into an agreement with
two of the investor groups for the preferred shares to cancel further dividend
requirements and to convert such shares into 1,167,000 shares of Common Stock 90
days after closing. The third investor group entered into an agreement with the
Company to convert the preferred shares into 60,000 shares of common stock 90
days after closing and continue the preferred stock dividend until conversion to
common stock. During the years ended December 31, 1999 and 2000, 40,000 and
30,000 preferred shares, respectively, had been converted into 667,000 and
560,000 common shares, respectively. The three investor groups received warrants
to purchase, for a five year period, 381,000 shares of Common Stock at $5.00 per
share. Using the Black-Scholes pricing model, the Company recognized an
inducement charge of $460,000 related to the enhanced conversion rights of this
preferred stock and a further inducement charge of $105,000 related to the
warrrants which was accreted over the agreement period in 1999 as a charge to
net loss to common stockholders.
In March 2000, in satisfaction of a dispute between the Company and certain
unaffiliated parties, the Company agreed to modify the terms of certain warrants
held by such parties to lower the exercise price on 100,000 warrants from $5.00
per share to $1.25 per share and to lower the exercise price on an additional
100,000 warrants to $1.50 per share. The Company also agreed to issue an
F-17
additional 952,153 shares of its common stock upon the conversion of 40,000
shares of Redeemable Preferred held by certain of such unaffiliated parties and
issued warrants to purchase 450,000 shares of common stock at an exercise price
of $1.25 per share, respectively. During 2000, the 40,000 shares of Redeemable
Preferred converted into 363,636 shares of common stock and an additional
952,153 shares of common stock were also issued. The Company relied upon Section
4(2) of the Act for the issuance of the warrant. The Company used no general
advertising or solicitation in connection with such issuance, there were a
limited number of parties, all of whom were accredited investors and
sophisticated and the Company had reason to believe that such purchasers did not
intend to engage in a distribution of such securities. These transactions
resulted in a charge to expense of $1,429,000.
On April 15, 1999, the Company completed the sale of $5,000,000 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. In addition, Halliburton received warrants to purchase,
for a five year period, 1,250,000 shares of the Company's $.00001 par value
Common Stock at $4.00 per share. Also in connection with the equity investment,
the Company and Halliburton entered into an expanded Alliance Agreement which
effectively broadens and extends the term of the alliance between the Company
and Halliburton that has been in effect since 1995. During 2000, the Company
and Halliburton agreed to increase the number of shares to which the warrants
are exercisable to 2,750,000 and to lower the exercise price to $1.25 per share.
On April 28, 2000, the Company 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; has a dividend requirement of 10% per annum, payable
semi-annually at the election of the Company in additional shares of Series B
Preferred Stock in lieu of cash; has voting rights equivalent to 100 votes per
share; and, may be converted at the election of the Company into shares of the
Company's Common Stock on the basis of a $0.75 per share conversion rate.
In order for the Company to have available shares of authorized but
unissued or committed shares of common stock to accommodate the conversion
features of preferred stock issued in connection with the Specialty Finance
borrowing discussed in Note H, as well as common stock purchase warrants related
to this financing, the Company negotiated during the period from April through
June 2000 with certain of its common stock stockholders to contribute an
aggregate of 5,688,650 shares of common stock to the Company in exchange for
56,888 shares of Series B Preferred Stock. This total included certain directors
and officers of the Company who contributed 2,600,000 shares of common stock
they held in exchange for receipt of 26,000 shares of Series B Preferred Stock.
During 2000 and 2001 preferred dividends of an additional 3,497 and 584 shares,
respectively, were awarded to Holders of Series B Preferred Stock. On January
26, 2001, all of the 56,888 shares and the 4,084 of shares related to Preferred
Stock dividends were converted into 8,129,636 shares of common stock.
On May 30, 2000 the Company 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; has a
dividend requirement of 10% per annum, payable quarterly at the election of the
Company in additional shares of Series C Preferred Stock in lieu of cash; has
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 the Company into shares of the Company's Common
Stock on the basis of a $0.75 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.
In August 2000, the Company issued an aggregate of 3,000 shares of its
Series C Preferred Stock and warrants to purchase an aggregate of 300,000 shares
of common stock at $0.75 per share to its outside directors as reimbursement for
expenses associated with their service as directors of the Company. The Company
charged $344,000 to expense as a result of these transactions. In August 2000,
the Company issued 1,500 shares of its Series C Preferred Stock and warrants to
purchase an aggregate of 150,000 shares at $0.75 per share to Larry Ramming, its
Chief Executive Officer, in exchange for compensation and benefits not paid to
Mr. Ramming as required under his employment agreement. The Company charged
$174,000 to expense as a result of these transactions.
F-18
In June 2000, the Company issued 9,750 shares of Series C Preferred Stock
and warrants to purchase an aggregate of 975,000 shares of common stock at $0.75
per share to The Ramming Family Limited Partnership (the "Partnership"), of
which Larry Ramming is a controlling person, in exchange for accrued obligations
relating to renewals, modifications, points, and releases in connection with a
loan to the Company in the original principal amount of $700,000. Subsequently,
the Company also issued to the Partnership a warrant to purchase 2,000,000
shares of common stock at $0.75 per share in satisfaction of its obligation to
do so at the inception of the loan. The Company charged $238,000 to expense for
these warrants.
During 2000, the Company issued 1,625 shares of its Series C Preferred
Stock to third party providers of financial advisory services and as payment for
other obligations; 2,000 shares of its Series C Preferred Stock and a warrant to
purchase 100,000 shares of common stock at $0.75 per share to a third party
provider of legal services; 2,000 shares of its Series C Preferred Stock to a
third party in settlement of litigation; warrants to purchase an aggregate of
300,000 shares of common stock at $0.75 per share to providers of legal
services; an option to purchase 5,000 shares of common stock at $0.75 per share
to a third party provider of consulting services; options to purchase 300,000
shares of common stock at $0.75 per share and 60,000 shares at $1.00 per share
to a third party provider of financial advisory services; options to purchase
100,000 shares of common stock at $1.25 per share and 100,000 shares at $0.75
per share to a third party provider of financial advisory services; and an
option to purchase to 35,000 shares at $0.75 per share to a consultant for
accounting services; an option to purchase 15,000 shares of common stock at
$0.75 per share to a director of the Company in connection with a personal loan
to the Company; and a warrant to purchase 41,700 shares of common stock at $0.75
per share to an officer and director of the Company in satisfaction of Company
obligations paid by such officer and director. The Company charged $758,000 to
expense as a result of these transactions. During 2001, the Company issued 750
shares of its Series C Preferred Stock to third party providers of legal
services and warrants to purchase 75,000 shares of common stock at $0.75 per
share for a third party provider of legal services. This resulted in a 2001
expense of $50,000.
On October 31, 2001, 3,332 shares of series C preferred stock were
converted into 444,295 shares of common stock.
On June 20, 2000 the Company adopted the Certificate of Designation of
Rights and Preferences of the Series D Cumulative Junior Preferred Stock
("Series D Preferred Stock") that designates this issue to consist of 3,500
shares of $.0001 par value per share with a face value of $100 per share; has
dividend requirement of 8% per annum, payable quarterly at the election of the
Company in additional shares of Series D Preferred Stock in lieu of cash; has
voting rights; and is redeemable at any time at the election of the Company in
cash or the issuance of Common Stock purchase warrants on a 2 to 1 share basis
at an exercise price of $0.75 per share.
In April and December 2000, the Company issued 3,000 shares, of its Series
D Cumulative Junior Preferred Stock to three individuals in connection with the
borrowing transaction with Specialty Finance.
In connection with the restructuring arrangement with Prudential and as
further discussed in Note H, during December 2000, the Company issued 50,000
shares of Series E Cumulative Senior Preferred Stock to Prudential which
provides for cash dividends at 12% after the third anniversary, and has the
right to convert to Series F Cumulative Convertible Preferred Stock after 5
years, which in turn is convertible to common stock at a rate of $0.6375 per
share. In addition the Company issued to Prudential 80,000 shares of Series G
Cumulative Convertible Preferred Stock; which has right to convert to common
stock at $1.19 per share minus the amount, if any, by which any shares of Series
H Cumulative Convertible Preferred Stock (see below) should have been converted
to Common Stock at a conversion price of less than $1.25 per share. The Company
also issued warrants to purchase 8,800,000 shares of common stock at $0.625 per
share.
In connection with the $8,700,000 borrowing with Specialty Finance
discussed in Note H, the Company issued 147,058 shares of common stock and
warrants representing the right to purchase an aggregate of 8,729,985 shares of
common stock of the Company to the participation interest holders and warrants
to purchase an aggregate of 3,625,000 shares of common stock to the investment
group that arranged the financing. The warrants have a term of five years and
can be exercised by the payment of cash in the amount of $0.625 per share as to
8,729,985 shares and $0.75 per share as to 3,625,000 shares of common stock, or
by relinquishing a number of shares subject to the warrant with a market value
equal to the aggregate exercise price of the portion of the warrant being
exercised. The fair value of the warrants issued in the transaction was
$986,000.
F-19
Subsequently, in connection with the Seventh Amendment to Loan Agreement
dated as of December 29, 2000, Specialty Finance agreed to convert $7,730,000 of
the participation interest, plus $757,000 in accrued interest thereon, into
89,117 shares of the Company's Series H Cumulative Convertible Preferred Stock.
The remaining $1,000,000 of the participation interest was outstanding as senior
secured debt as of December 31, 2000 and 2001. Specialty Finance Fund has the
right to convert shares of the Series H Stock, and all accrued but unpaid
dividends owing through the date of conversion, into shares of common stock. The
number of shares of common stock to be issued on each share of Series H Stock is
determined by dividing face value plus the amount of any accrued but unpaid
dividends on the Series H Stock by 85% of the ninety day average of the high and
low trading prices preceding the date of notice to the Company; provided, that
the conversion shall not use a price of less than $0.75 per share and shall not
be greater than $1.25 per share unless the conversion occurs between January 1,
2001 and December 31, 2002, when the price shall not be greater than $2.50 per
share. If the Series H Stock is converted into common stock, the Company will
also be obligated to issue warrants providing the holders of the Series H Stock
with the right for a three year period to acquire shares of common stock, at a
price equal to the conversion price determined above, equivalent to ten percent
(10%) of the number of shares into which the shares of Series H Stock are
converted.
For the years ended December 31, 2000 and 2001, the Company accrued
$864,000 and $2,871,000, respectively, for dividends relating to all series of
preferred stock.
Stockholder Rights Plan:
On November 29, 2001 the Company adopted a stockholder rights plan. In
order to provide protection for the stockholders in the event of an attempted
potential acquisition of the Company. Under the plan, the Company has declared a
dividend of one right on each share of common stock of the company. Each right
will entitle the holder to purchase one one-hundredth of a share of a new Series
I Junior Participating Preferred Stock of the Company at an exercise price of
$5.00. 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
the Company 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 the Company 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.
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 the Company's shares of common stock having
a market value of twice such price or, if the Company is 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.
Warrants:
On September 18, 1997, placement agents in connection with a private
placement offering for the sale of common stock were awarded 748,500 warrants at
an exercise price of $1.20, which are exercisable for a period of three to five
years from grant date. At both December 31, 2000 and 2001, 697,500 of these
warrants remained outstanding.
In connection with the acquisitions of ITS and Code 3 in 1998, the Company
issued warrants to purchase 2,000,000 and 500,000 shares, respectively of the
Company's common stock at a price of $2.62 and $4.50 per share, respectively.
During 1998, 1999 and 2000, certain of these warrants were exercised. During
2000, the warrants to purchase common stock at $2.62 per share were re-priced to
$0.625 per share in accordance with the warrant agreement. At both December 31,
2000 and 2001, warrants to purchase 800,000 shares at $0.625 per share and
300,000 shares at $4.50 per share remain outstanding.
F-20
In connection with the July 23, 1998, sale of the Subordinated Notes
referred to in Note H the Company issued to Prudential warrants to purchase,
commencing on July 23, 2000 and terminating with the later of July 23, 2008, or
six months after the Subordinated Notes are fully retired, 3,165,000 shares of
common stock (the "Warrants") of the Company at an initial exercise price of
$6.70 per share. The Warrants contain anti-dilution and repricing provisions
that may result in downward adjustments to the exercise price upon the
occurrence of certain events and a provision for the "cashless" exercise of the
Warrants. The Company granted Prudential a one-time demand registration right
and unlimited "piggyback" registration rights for the shares of common stock
issuable upon the exercise of the Warrants. The Company and certain stockholders
of the Company also agreed with Prudential that in the event of significant
sales of securities of the Company by the Company or such stockholders,
Prudential would be entitled to participate in such sale. Using the
Black-Scholes pricing model, an estimated fair value of $2,382,000 was
attributed to the Warrants issued in connection with the sale of the
Subordinated Notes and was being periodically charged to interest expense over
the term of the Subordinated Notes. As discussed in Note H these warrants were
re-priced to $0.625 per share in 2000 in connection with the debt restructuring
with Prudential.
A summary of warrants outstanding as of December 31, 2001 is as follows:
EXERCISE PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
------------------------------------ --------------- ----------
08/07/2002 . . . . . . . . . . . . $ 1.20 697,500
01/03/2004 . . . . . . . . . . . . 0.625 800,000
03/07/2004 . . . . . . . . . . . . 4.50 300,000
04/17/2003 . . . . . . . . . . . . 5.00 220,000
04/30/2003 . . . . . . . . . . . . 5.00 80,000
05/05/2003 . . . . . . . . . . . . 5.00 20,000
05/18/2003 . . . . . . . . . . . . 5.00 15,000
05/22/2003 . . . . . . . . . . . . 5.00 25,000
06/04/2003 . . . . . . . . . . . . 5.00 200,000
06/05/2003 . . . . . . . . . . . . 5.00 170,000
06/08/2003 . . . . . . . . . . . . 5.00 50,000
05/22/2003 . . . . . . . . . . . . 1.25 100,000
05/22/2003 . . . . . . . . . . . . 1.50 100,000
07/23/2008 . . . . . . . . . . . . 0.625 3,165,396
04/10/2008 . . . . . . . . . . . . 1.25 2,750,000
04/23/2004 . . . . . . . . . . . . 0.75 288,936
04/27/2004 . . . . . . . . . . . . 5.00 163,302
05/03/2004 . . . . . . . . . . . . 5.00 18,130
05/12/2004 . . . . . . . . . . . . 1.25 420,000
05/12/2004 . . . . . . . . . . . . 1.25 700,000
03/09/2005 . . . . . . . . . . . . 1.25 450,000
04/17/2007 . . . . . . . . . . . . 0.75 2,000,000
04/25/2005 . . . . . . . . . . . . 0.75 202,500
04/25/2005 . . . . . . . . . . . . 0.625 2,500,000
05/04/2005 . . . . . . . . . . . . 0.625 2,500,000
05/04/2005 . . . . . . . . . . . . 0.75 924,939
06/04/2005 . . . . . . . . . . . . 0.75 950,711
06/27/2005 . . . . . . . . . . . . 0.75 975,000
06/30/2005 . . . . . . . . . . . . 0.75 1,500,000
06/30/2005 . . . . . . . . . . . . 0.625 3,000,000
07/07/2005 . . . . . . . . . . . . 0.75 33,333
08/24/2005 . . . . . . . . . . . . 0.75 450,000
09/07/2005 . . . . . . . . . . . . 0.75 41,700
12/28/2005 . . . . . . . . . . . . 0.625 729,985
07/23/2008 . . . . . . . . . . . . 0.625 8,800,000
10/31/2006 . . . . . . . . . . . . 0.75 75,000
04/25/2005 . . . . . . . . . . . . 0.75 55,000
----------
35,471,000
==========
Stock Options:
A summary of stock option plans under which stock options remain
outstanding as of December 31, 2001 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 960,000 shares of common stock. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
F-21
stock options covering an aggregate of 460,000 shares of common stock to
employees who were the beneficial owners of 200,000 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 $0.43
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 1,475,000 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 options
covering an aggregate of 1,475,000 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.
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 1,475,000 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 December
31, 2001, stock option grants covering an aggregate of 780,000 shares of Common
Stock have been made under the Plan.
1997 Outside Directors' Option Plan authorizing the issuance each year of
an option to purchase 15,000 shares of common stock to each member of the Board
of Directors who is not an employee of the Company. The purpose of the
Directors' Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist the Company in achieving its
growth objectives. Options maybe 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, 2001, grants of stock options covering an aggregate of
192,000 shares of common stock have been made under the 1997 Outside Directors'
Option 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 the Company. 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 2,315,000 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.
In March 1999, the Company awarded 288,000 options as compensation to an
outside consultant at an exercise price of $2.50 per share, which vest over
twelve months and are exercisable over a five-year period from the date of
grant. Based on a Black-Scholes calculation, the Company recorded a $244,000
compensation charge related to the issuance of these options.
In 2000, the Company issued non-plan option grants to purchase 150,000
shares at $0.75 per share to each member of the board of directors (other than
Tracy Turner) and Dewitt Edwards, Vice President and Secretary. As of December
31, 2001, stock options covering an aggregate of 1,200,000 shares of Common
Stock have been made.
Additional non-plan option grants were issued during 2000 to third party
providers of consulting services in the amount of 600,000 shares and legal
services in the amount of 300,000 shares. As of December 31, 2001, non-plan
option grants covering an aggregate of 900,000 shares of Common Stock have been
made. This resulted in an aggregate 2000 expense of $174,000.
In April 2000, the Company voided stock options covering an aggregate of
3,007,000 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 2,841,000 shares of
common stock were reissued at an exercise price of $0.75. No compensation
expense was required to be recorded at the date of issue. However, the
F-22
reissuance of these options was accounted for as a variable plan, and the
Company was subject to recording compensation expense if the Company's stock
price rose above $0.75. In April 2001, Messrs. Ramming, Winchester and Edwards
agreed to voluntarily surrender 2,088,000 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 2,088,000 shares at an exercise price
of $0.55 per share. As of December 31, 2001, options to purchase 753,000 shares
pursuant to the reissuance in the third quarter of 2000 remain subject to
variable plan accounting.
Stock option activity for the years ended December 31, 1999, 2000 and 2001 was
as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ---------------
Outstanding December 31, 1998 2,442,000 $ 2.55
Granted . . . . . . . . . . 1,360,000 1.55
Exercised . . . . . . . . . (12,000) 0.43
Cancelled . . . . . . . . . (168,000) 3.36
----------- ---------------
Outstanding December 31, 1999 3,622,000 $ 2.14
Granted . . . . . . . . . . 4,565,000 0.76
Exercised . . . . . . . . . (47,000) 0.43
Cancelled . . . . . . . . . (197,000) 4.50
----------- ---------------
Outstanding December 31, 2000 7,943,000 $ 0.76
Granted . . . . . . . . . . 2,088,000 0.55
Exercised . . . . . . . . . - -
Cancelled . . . . . . . . . (2,188,000) 0.79
----------- ---------------
Outstanding December 31, 2001 7,843,000 $ 0.70
=========== ===============
Summary information about the Company's stock options outstanding at
December 31, 2001.
OUTSTANDING EXERCISABLE
- -------------------------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE NUMBER
NUMBER OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 2001 LIFE IN YEARS EXERCISE PRICE DECEMBER 31, 2001 EXERCISE PRICE
- ---------------- ------------------ ------------- --------------- ----------------- ---------------
$ 0.43 126,000 6.00 $ 0.43 101,000 $ 0.43
$ 0.55 2,088,000 10.00 $ 0.55 2,088,000 $ 0.55
$ 0.75 5,439,000 7.55 $ 0.75 3,348,000 $ 0.75
$ 1.00 - $2.00 190,000 2.47 $ 1.29 190,000 $ 1.29
- ---------------- ------------------ ------------- --------------- ----------------- ---------------
$ 0.43 - $2.00 7,843,000 8.05 $ 0.70 5,727,000 $ 0.69
================ ================== ============= =============== ================= ===============
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
stock option grants under its 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 and earnings per share
would have been had the new accounting method been followed. Had compensation
expense for the Company's 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, the Company's reported net loss and
net loss per common share would have changed to the pro forma amounts indicated
below:
F-23
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
-------------- -------------- --------------
Net loss to common stockholders As reported $ (32,360,000) $ (22,216,000) $ (1,596,000)
Pro forma $ (34,142,000) $ (23,757,000) $ (3,130,000)
Net loss per common share . . . As reported $ (0.94) $ (0.66) $ (0.04)
Pro forma $ (0.99) $ (0.70) $ (0.08)
The company used the Black-Scholes option pricing model to estimate the
fair value of options on the date of grant for 1999, 2000 and 2001. The
following assumptions were applied in determining the pro forma compensation
costs
YEAR END DECEMBER 31,
------------------------------
1999 2000 2001
--------- --------- --------
Risk-free interest rate. . . . . . . . 5.7% 6.0% 6.0%
Expected dividend yield. . . . . . . . - -
Expected option life . . . . . . . . . 10 yrs. 10 yrs. 10 yrs
Expected volatility. . . . . . . . . . 109.3% 141.9% 115.8%
Weighted average fair value of options
granted at market value. . . . . . . $ 1.37 $ 0.52 $ 0.34
The effects of applying SFAS No. 123 in the above disclosure may not be
indicative of future amounts as additional awards in future years is
anticipated.
401(k) Plan:
The Company sponsors a 40l(k) Plan adopted in 1999 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. During the years ended December 31, 1999, 2000 and 2001, the Company
contributed approximately $280,000, $70,000 and $101,000 under the Plan.
J. RELATED PARTY TRANSACTIONS
The Company's Chairman and Chief Executive Officer, Larry H. Ramming, and
the Ramming Family Partnership of which Mr. Ramming is a controlling person, was
granted a waiver of the lock-up restrictions on their shares of common stock
with respect to a pledge of such shares to secure a loan, the proceeds of which
were used by Mr. Ramming on April 30, 1998 to purchase the $7,000,000 remaining
balance outstanding of the notes payable (the 10% Notes) issued by the Company
in connection with the acquisitions of ITS and Code 3. Mr. Ramming agreed to
extend the maturity dates of such notes to October 1, 1998 and thereafter on a
month-to-month basis, in exchange for a fee of 1% of the principal balances of
such note. As of December 31, 1998, the Company had paid Mr. Ramming $5,783,000
to be applied toward the principal balance of the 10% Notes held by Mr. Ramming
and $383,000 in interest and extension fees. During the period from January 1,
1999 through April 15, 1999, at which time Mr. Ramming agreed to subordinate and
delay future note payments so long as the Comerica senior secured credit
facility remained outstanding, additional principal payments of $648,000 were
paid to Mr. Ramming. As further consideration for the certain bridge financing,
Mr. Ramming was eligible to be granted 2,000,000 options to purchase common
stock at a per share price of $0.75 subject to issuance and availability of
authorized and unissued or committed common shares which was voluntarily
deferred in exchange for the commitment of the Company to issue subject to
availability of authorized but unissued or committed shares of common stock in
the Company. This act was taken to make available additional authorized but
unissued and uncommitted shares in connection with financing transactions
completed subsequent to December 31, 1999. The aggregate obligation was
satisfied in 2000 with the issuance of 9,750 shares of Series C Preferred Stock
and warrants to purchase an aggregate of 975,000 shares of Common Stock at $0.75
per share as further discussed in Note I. Management believes the terms and
conditions of Mr. Ramming's loan to the Company were favorable to the Company as
compared to those that could have been negotiated with outside parties.
As further described in Note I, the Company has entered into various
financing and equity transactions with the Company's Chairman and Chief
Executive Officer, Larry H. Ramming and the Ramming Family Limited Partnership,
("The Partnership") of which Mr. Ramming is a controlling person. Management
F-24
believes the terms and conditions of the financing and equity transactions made
with Mr. Ramming and the partnership to the Company are as favorable to the
Company as could have been negotiated with outside parties.
In 1998 the Company entered into an agreement with a company controlled by
Mr. Ramming to have available for charter, on a 24 hour per day, 365 days per
year stand-by status, a jet aircraft and full time stand-by crew to be utilized
in connection with the Company's mobilization of personnel and selected
equipment for emergency response well control and spill containment and
remediation spills, which in those events are billed to the utilizing customer
at a rate of Company cost plus a service fee mark up and for other corporate
purposes as needed. During 1999, a total of $128,000 was paid pursuant to such
charter arrangement, based on rates comparable to those available from third
party aircraft charter operators for comparable charter arrangements. This
arrangement was terminated during the second quarter of 1999.
As discussed in Note H, the Company has entered into financing transactions
with an investment group, Specialty Finance. The managing member of Specialty
Finance is also a member of the Company's Board of Directors.
K. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases vehicles, equipment, office and storage facilities under
operating leases with terms in excess of one year.
At December 31, 2001, future minimum lease payments, net of subleases,
under these non-cancelable operating leases are as follows:
YEARS ENDING DECEMBER 31: AMOUNT
-------------------------- ----------
2002 . . . . . . . . . . . $1,033,000
2003 . . . . . . . . . . . 902,000
2004 . . . . . . . . . . . 640,000
2005 . . . . . . . . . . . 421,000
2006 . . . . . . . . . . . 208,000
Thereafter . . . . . . . . 208,000
----------
$3,412,000
==========
Rent expense for the years ended December 31, 1999, 2000 and 2001, was
approximately $2,001,000, $1,557,000, and $1,298,000 respectively.
Litigation
As previously discussed, the Company's subsidiary ITS Supply Corporation
("ITS") filed in Corpus Christi, Texas on May 18, 2000, for protection under
Chapter 11 of the U.S. Bankruptcy Code. ITS is now proceeding to liquidate its
assets and liabilities pursuant to Chapter 7 of Title 11. At the time of the
filing, ITS had total liabilities of approximately $6,900,000 and tangible
assets of approximately $950,000. The Company had an outstanding guaranty on ITS
debt upon which a judgment against the Company was entered by a state district
court in the amount of approximately $1,833,000. The judgment was paid in full
by the Company on August 31, 2001.
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserts that there were approximately $400,000 of lockbox transfers and
$3,000,000 of intercompany transfers were made between the parties. The Company
does not believe that it is likely that an accounting of the transactions
between the parties will demonstrate there is a liability owing by the Company
to the ITS Chapter 7 estate. To provide security to Comerica Bank for any
potential claims by the Chapter 7 trustee, the Company has pledged a $350,000
certificate of deposit in favor of Comerica Bank. This amount has been
classified as a restricted asset on the balance sheet as of December 31, 2001.
F-25
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
L. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND
CONCENTRATION OF CREDIT RISK:
Segments:
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the decision to discontinue ITS and Baylor business operations.
The current segments are Prevention, Response and Restoration. Prior periods
have been restated to conform to this presentation. Most of the Company's
subsidiaries operate in all three segments. Intercompany transfers between
segments were not material. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies. For purposes of this presentation, general and corporate expenses
have been allocated between segments on a pro rata basis based on revenue. ITS
and Baylor are presented as discontinued operations in the consolidated
financial statements and are therefore excluded from the segment information for
all periods.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. The scope of these services include training, contingency planning,
well plan reviews, services associated with the Company's Safeguard programs and
service fees in conjunction with the WELLSURE(R) risk management program. All of
these services are designed to significantly reduce the risk of a well blowout
or other critical response event.
The Response segment consists of personnel and equipment services provided
during an emergency response such as a critical well event or a hazardous
material response. These services are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins. However, when the Company responds to a critical event under
the WELLSURE(R) program, the Company acts as a general contractor and engages
third party services, which form part of the revenues recognized by the Company.
This revenue contribution has the ability to significantly lower the overall
gross profit margins of the segment.
The Restoration segment consists of "post-event" services designed to
minimize the effects of a critical emergency event as well as industrial and
remediation service. The scope of these services range from environmental
compliance and disposal services to facility decontamination services in the
event of a plant closing. Restoration services are a natural extension of
response service assignments.
PREVENTION RESPONSE RESTORATION CONSOLIDATED
------------ ------------- ------------- --------------
Year Ended December 31, 1999
Net operating revenues . . . . $ 769,000 $ 20,107,000 $ 12,219,000 $ 33,095,000
Operating income (loss). . . . (165,000) (10,785,000) (9,034,000) (19,984,000)
Capital expenditures . . . . . - 2,254,000 1,629,000 3,883,000
Depreciation and amortization. 46,000 2,303,000 558,000 2,907,000
Interest expense . . . . . . . 680,000 3,286,000 2,218,000 6,184,000
Year Ended December 31, 2000
Net operating revenues . . . . $ 2,134,000 $ 16,670,000 $ 4,733,000 $ 23,537,000
Operating income (loss). . . . (890,000) (6,029,000) (4,471,000) (11,390,000)
Identifiable operating assets. 1,643,000 12,838,000 3,645,000 18,126,000
Capital expenditures . . . . . - 260,000 - 260,000
Depreciation and amortization. 251,000 1,772,000 642,000 2,665,000
Interest expense . . . . . . . 683,000 5,339,000 1,516,000 7,538,000
Year Ended December 31, 2001
Net operating revenues . . . . $ 5,256,000 $ 26,739,000 $ 4,154,000 $ 36,149,000
Operating Income (loss). . . . 1,272,000 2,590,000 (1,948,000) 1,914,000
Identifiable operating assets. 2,581,000 13,132,000 2,041,000 17,754,000
Capital expenditures . . . . . - 221,000 - 221,000
Depreciation and amortization. 333,000 1,401,000 220,000 1,954,000
Interest expense . . . . . . . 65,000 332,000 52,000 449,000
F-26
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 YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
------------- ------------- -------------
Customer A . . . . . . . . . . . . . 12% - -
Customer B . . . . . . . . . . . . . - - 23%
Customer C . . . . . . . . . . . . . - 17% 10%
The Company's revenues are generated geographically as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
------------- ------------- -------------
Domestic customers . . . . . . . . . 80% 81% 82%
Foreign customers. . . . . . . . . . 20% 19% 18%
None of the Company's customers at December 31, 1999, 2000 and 2001
accounted for greater than ten percent of outstanding accounts receivable. One
customer in Kuwait totaled 10% of total revenues and 55% of foreign revenues
during the year ended December 31, 2001.
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes that any possible
deposit loss is minimal.
M. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the unaudited quarterly results of operations
for 2001 and 2000
QUARTER ENDED
2001 MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001 DECEMBER 31, 2001
- --------------------------------------------- ---------------- --------------- -------------------- -------------------
Revenues. . . . . . . . . . . . . . . . . . . $ 8,973,000 $ 12,076,000 $ 8,494,000 $ 6,606,000
Income (loss) from continuing operations. . . 467,000 976,000 117,000 (634,000)
Net income (loss) . . . . . . . . . . . . . . 767,000 976,000 117,000 (532,000)
Net income (loss) attributable to common
stockholders. . . . . . . . . . . . . . . . . 33,000 282,000 (584,000) (1,327,000)
Net income (loss) per common share:
Basic . . . . . . . . . . . . . . . . 0.00 0.01 (0.01) (0.03)
Diluted . . . . . . . . . . . . . . . 0.00 0.01 (0.01) (0.03)
QUARTER ENDED
2000. MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000
- --------------------------------------------- ---------------- --------------- -------------------- -------------------
Revenues. . . . . . . . . . . . . . . . . . . $ 7,523,000 $ 4,449,000 $ 5,631,000 $ 5,934,000
Loss from continuing operations . . . . . . . (3,459,000) (4,346,000) (8,047,000) (6,880,000)
Net loss. . . . . . . . . . . . . . . . . . . (2,683,000) (4,408,000) (9,722,000) (4,486,000)
Net loss attributable to common stockholders. (2,802,000) (4,527,000) (9,841,000) (5,046,000)
Net loss per common share:
Basic . . . . . . . . . . . . . . . . (0.08) (0.13) (0.31) (0.14)
Diluted . . . . . . . . . . . . . . . (0.08) (0.13) (0.31) (0.14)
The quarterly data for 2000 presented above was not subjected to timely
reviews by independent public accountants as previously disclosed in the
Company's Form 10-Q's. In connection with the year-end audit of the 2000
financial statements, these reviews were completed by the Company's independent
public accountants.
F-27
Basic and diluted 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 per
common share amounts.
N. EVENTS SUBSEQUENT TO DECEMBER 31, 2001 (UNAUDITED)
AMEX Listing
The American Stock Exchange (AMEX) by letter dated March 15, 2002, has
informed the Company that on or before April 15, 2002, the Company must submit a
reasonable plan to regain compliance with AMEX's continued listing standards by
December 31, 2002. The plan must contain interim milestones that the Company
will be required to meet to remain listed. If the Company fails to submit plan
the AMEX considers reasonable, fails to meet the milestones established in the
plan or fails to obtain compliance with AMEX continued listing standards by
December 31, 2002, as reflected in its audited financial statements for the year
then ended, then AMEX has indicated that it my institute immediate delisting
proceedings.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial resources, or whose financial condition has become so impaired, that
it appears questionable, in the opinion of AMEX, as to whether the company will
be able to continue operations or meet its obligations as they mature.
F-28