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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANTGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
_______________
COMMISSION FILE NUMBER 1-13817
BOOTS & COOTS INTERNATIONAL
WELL CONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2908692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 POST OAK BOULEVARD, SUITE 800
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
(713) 621-7911
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date:
The number of shares of the Registrant's Common Stock, par value $.00001
per share, outstanding at November 12, 2002, was 44,862,057.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
(UNAUDITED)
PAGE
Item 1. Financial Information
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . . . . . 4
Condensed Consolidated Statement of Stockholders' Equity (Deficit). 5
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . . . 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 13-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . 21
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . 21
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 22
Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . . . 23
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 23-26
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30,
2001 2002
-------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 303,000 $ 127,000
Receivables - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,557,000 2,801,000
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353,000 88,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,000 -
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . 6,756,000 456,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 843,000 654,000
-------------- ---------------
Total current assets. . . . . . . . . . . . . . . . . . . . 12,950,000 4,126,000
-------------- ---------------
PROPERTY AND EQUIPMENT - net. . . . . . . . . . . . . . . . . . . . . . . . . 4,613,000 3,736,000
OTHER ASSETS:
Deposits and other - net. . . . . . . . . . . . . . . . . . . . . . . . . . 191,000 67,000
-------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 17,754,000 $ 7,929,000
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable. $ 1,025,000 $ 14,515,000
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155,000 2,468,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,481,000 1,494,000
Liabilities of discontinued operations. . . . . . . . . . . . . . . . . . . 3,004,000 1,427,000
-------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . 9,665,000 19,904,000
-------------- ---------------
LONG-TERM DEBT AND NOTES PAYABLE - net of current
Maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,520,000 -
Total liabilities . . . . . . . . . . . . . . . . . . . . . 22,185,000 19,904,000
-------------- ---------------
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized, 327,123
and 318,413 shares issued and outstanding at December 31, 2001
and September 30, 2002, respectively). . . . . . . . . . . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized
41,442,285 and 44,817,790 shares issued and outstanding at
December 31, 2001 and September 30, 2002, respectively) . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 56,659,000 59,072,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 61,090,000) (71,047,000)
-------------- ---------------
Total stockholders' equity (deficit). . . . . . . . . . . . (4,431,000) (11,975,000)
-------------- ---------------
Total liabilities and stockholders' equity (deficit). . . . $ 17,754,000 $ 7,929,000
============== ===============
See accompanying notes to condensed consolidated financial statements.
3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,507,000 $ 3,464,000 $13,717,000 $11,458,000
COSTS AND EXPENSES:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884,000 1,502,000 2,332,000 4,761,000
Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,584,000 1,108,000 3,883,000 4,481,000
Selling, general and administrative . . . . . . . . . . . . . . . . . 923,000 613,000 2,474,000 2,026,000
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 351,000 315,000 1,012,000 889,000
------------ ------------ ------------ ------------
3,742,000 3,538,000 9,701,000 12,157,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . 765,000 (74,000) 4,016,000 (699,000)
INTEREST EXPENSE (INCOME) AND OTHER . . . . . . . . . . . . . . . . . . 481,000 (1,132,000) 989,000 (127,000)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS, before
income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,000 1,058,000 3,027,000 (572,000)
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . . . . . . . . . . - 170,000 - 343,000
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . 284,000 888,000 3,027,000 (915,000)
Income (loss) from discontinued operations net of income taxes of
zero. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (167,000) 497,000 (1,167,000) (6,690,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000 1,385,000 1,860,000 (7,605,000)
PREFERRED DIVIDEND REQUIREMENTS AND ACCRETIONS. . . . . . . . . . . . . 701,000 760,000 2,129,000 2,352,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS . . . . . . . . . $ (584,000) $ 625,000 $ (269,000) $(9,957,000)
============ ============ ============ ============
Basic Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.00 $ 0.02 $ (0.07)
============ ============ ============ ============
Discontinued Operations. . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.01 $ (0.03) $ (0.16)
============ ============ ============ ============
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.01 $ (0.01) $ (0.23)
============ ============ ============ ============
Weighted Average Common Shares Outstanding - Basic. . . . . . . . . . . 40,931,000 44,759,000 39,685,000 42,806,000
============ ============ ============ ============
Diluted Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.00 $ 0.02 $ (0.07)
============ ============ ============ ============
Discontinued Operations. . . . . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.01 $ (0.03) $ (0.16)
============ ============ ============ ============
Net Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.01 $ (0.01) $ (0.23)
============ ============ ============ ============
Weighted Average Common Shares Outstanding - Diluted. . . . . . . . . . 40,931,000 45,715,000 39,685,000 42,806,000
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
------------------- -------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
-------- --------- ---------- -------- ------------ ------------- ---------------
BALANCES, December 31, 2001 327,123 $ - 41,442,285 $ - $56,659,000 $(61,090,000) $ (4,431,000)
Warrant discount
accretion . . . . . . . . - - - - 39,000 (39,000) -
Preferred stock
dividends accrued. . . . . 13,238 - - - 2,313,000 (2,313,000) -
Preferred stock converted to
common . . . . . . . . . . (21,221) - 2,828,837 - - - -
Preferred stock cancelled. . (915) - - - (75,000) - (75,000)
Preferred stock issued for
settlements. . . . . . . . 188 - - - 19,000 - 19,000
Common stock issued for debt - - 546,668 - 117,000 - 117,000
Net loss . - - - - - (7,605,000) (7,605,000)
-------- --------- ---------- -------- ------------ ------------- ---------------
BALANCES, September 30, 2002 318,413 $ - 44,817,790 $ - $59,072,000 $(71,047,000) $ (11,975,000)
======== ========= ========== ======== ============ ============= ===============
See accompanying notes to condensed consolidated financial statements.
5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2001 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,860,000 $(7,605,000)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 1,012,000 889,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . - 103,000
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . - 58,000
Equity issued (or retired) for services and settlements. . . . 54,000 42,000
Loss on reserve for discontinued operations. . . . . . . . . . - 2,954,000
------------ ------------
Net cash provided by (used in) operating activities before
changes in operating assets and liabilities:. . . . . . . . 2,926,000 (3,559,000)
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . (1,608,000) 653,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . (449,000) 1,265,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . - 138,000
Prepaid expenses and other current assets. . . . . . . . . . . (410,000) 189,000
Net assets/liabilities of discontinued operations. . . . . . . (492,000) 1,753,000
Deferred financing costs and other assets. . . . . . . . . . . (67,000) 124,000
Accounts payable and accrued liabilities . . . . . . . . . . . (868,000) (1,655,000)
------------ ------------
Net cash used in operating activities. . . . . . . . . . . . . (968,000) (1,092,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . - (98,000)
Proceeds from sale of property and equipment . . . . . . . . . - 44,000
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . - (54,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term senior financing. . . . . . . . . . . - 1,300,000
Proceeds (payments) (to) from pledging arrangement . . . . . . 84,000 (330,000)
------------ ------------
Net cash provided by financing activities. . . . . . . . . . . 84,000 970,000
------------ ------------
Net decrease in cash and cash equivalents. . . . . . . . . . . (884,000) (176,000)
CASH AND CASH EQUIVALENTS, Beginning of Period. . . . . . . . . . . 1,409,000 303,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of Period. . . . . . . . . . . . . . $ 525,000 $ 127,000
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ 13,000 $ 21,000
Cash paid for income taxes. . . . . . . . . . . . . . . . . . - 123,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transaction costs of convertible debt financing . . . . . . . (101,000) -
Common stock issued for services and settlements. . . . . . . 575,000 49,000
Stock and warrant accretions. . . . . . . . . . . . . . . . . 40,000 39,000
Preferred stock dividends accrued . . . . . . . . . . . . . . 2,089,000 2,313,000
See accompanying notes to condensed consolidated financial statements.
6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
A. GOING CONCERN
During the nine months of 2002, demand for the Company's services declined
as mounting losses and shortages of working capital restricted the Company's
ability to compete in a difficult and competitive marketplace. As a result, the
Company discontinued certain of its operations resulting in a loss from
discontinued operations of $6.7 million. The Company's continuing operations
incurred a $0.9 million loss for the nine months ended September 30, 2002. The
combined losses have materially impaired the Company's liquidity position and
hamper the Company's capacity to pay vendors on a timely basis, obtain materials
and supplies, and otherwise conduct effective or efficient operations.
The Company continues to experience severe working capital constraints. As
of September 30, 2002, the Company's current assets totaled approximately
$4,126,000 and current liabilities were $19,904,000, resulting in a net working
capital deficit of approximately $15,778,000 (compared to a beginning year
working capital of $3,285,000). The Company's highly liquid current assets,
represented by cash of $127,000 and receivables and restricted assets of
$2,889,000 were collectively $16,888,000 less than the amount of current
liabilities at September 30, 2002 (compared to a beginning year deficit of
$4,452,000). The Company is actively exploring new sources of financing,
including the establishment of new credit facilities and the issuance of debt
and/or equity securities, but does not have any current commitments. During the
second quarter of 2002, the Company entered into loan participation agreements
with certain parties under which it borrowed an additional $1,300,000 under its
existing senior secured loan facility. The participation agreements had an
initial maturity of 90 days, which, in certain cases, the Company was able to
extend for an additional 90 days. As of October 25, 2002, all of the loan
participations, including those that were extended, had matured. As of November
12, 2002, none of the loan participations had been repaid nor has the Company
received formal demand for payment from any of the loan participants. However,
in the loan documentation the Company has waived the notices which might
otherwise be required by law and, as a consequence, the loan participants have
the current ability to post the collateral securing their notes for foreclosure.
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America ("Prudential") contains customary
affirmative and negative covenants, including that the Company not permit the
ratio of its total debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) for the trailing twelve months to be greater than 3.25 to
1 or the ratio of its EBITDA to consolidated interest expense to be less than
2.9 to 1. On March 29, 2002 and on June 29, 2002, Prudential agreed to waive
compliance with the ratio tests for the twelve months ended March 31, 2002 and
June 30, 2002, respectively. As of September 30, 2002, the Company was not in
compliance with the ratio tests for the trailing twelve month period and the
Company did not receive a waiver from Prudential for this period. Under the
Subordinated Note Restructuring Agreement, failure to comply with the ratio
tests is an event of default and the note holder may, at its option, by notice
in writing to the Company, declare all of the Notes to be immediately due and
payable together with interest accrued thereon. Accordingly, the Company has
classified this obligation as a current liability on its balance sheet. As of
November 12, 2002, the Company had not received a written notice of default from
Prudential.
The Company does not have sufficient funds to meet its immediate
obligations. The Company is in default under its senior and subordinated credit
facilities and is unable to pay its debts as they come due. The Company is
actively exploring its options, including filing for bankruptcy protection and
including methods to restructure outside of filing for bankruptcy protection, by
obtaining funds to refinance its senior debt, restructuring its subordinated
debt, negotiating discounts on its nonessential trade debt and converting its
dividend bearing preferred stock to common equity, however, at this time the
Company does not have any commitments for new financing nor has it obtained
commitments from any party to restructure its existing obligations.
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 raise 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.
7
B. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all
information and notes required by generally accepted accounting principles for
complete annual financial statements. The accompanying consolidated financial
statements include all adjustments, including normal recurring accruals, which,
in the opinion of management, are necessary in order to make the consolidated
financial statements not be misleading. The unaudited consolidated financial
statements and notes thereto and the other financial information contained in
this report should be read in conjunction with the audited financial statements
and notes in the Company's annual report on Form 10-K for the year ended
December 31, 2001, and those reports filed previously with the Securities and
Exchange Commission ("SEC"). The results of operations for the three month and
nine month periods ended September 30, 2001 and 2002 are not necessarily
indicative of the results to be expected for the full year. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
C. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
attributable to acquisitions prior to July 1, 2001, the amortization provisions
of SFAS No. 142 were effective January 1, 2002. The Company adopted SFAS No.
142, on January 1, 2002 and applied this accounting method in determining the
losses from operations for the nine months ended September 30, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. SFAS No. 143 is
effective for the Company beginning January 1, 2003. Management has yet to
determine the impact that the adoption of SFAS No. 143 will have on the
Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". SFAS No. 144 establishes a single accounting method for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and extends the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 also requires that an
impairment loss be recognized for assets held-for-use when the carrying amount
of an asset is not recoverable. The carrying amount of an asset 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, excluding interest
charges. Estimates of future cash flows used to test the recoverability of a
long-lived asset must incorporate the entity's own assumptions about its use of
the asset and must factor in all available evidence. The Company adopted SFAS
No. 144, on January 1, 2002 and applied this accounting method in determining
the losses from operations for the nine months ended September 30, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44
and 64, Amendment of SFAS Statement No. 13, and Technical Corrections." This
statement rescinds the following statement of SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," and its amendment SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking Fund Requirements," as well as,
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". The
statement also amends SFAS No. 13, "Accounting for Leases", by eliminating an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. Management does not
believe that this statement will have a material impact on the results of
operations or financial conditions of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)." Under the terms of SFAS No. 146, the
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred rather than at
the date an entity commits to an exit plan. The effective date of the statement
is for exit or disposal activities initiated after December 31, 2002 with early
application encouraged. The Company elected early adoption for its current
period disposal activities.
8
D. DISCONTINUED OPERATIONS
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 in cash. Comerica
Bank-Texas, the Company's primary senior secured lender at the time, was paid in
full as a component of the transaction. For the nine months ended September 30,
2001, the Company recorded $300,000 of gain due to the subsequent collection of
receivables that were over 90 days old at the time of the sale and which the
Company had retained rights to the proceeds.
On June 30, 2002, the Company made the decision and formalized a plan to
sell the assets of its Special Services and Abasco operations. The sales
proceeds were approximately $1,041,000. The operations of these two companies
are reflected as discontinued operations on the condensed consolidated
statements of operations and as assets and liabilities of discontinued
operations on the condensed consolidated balance sheets. A non-cash charge of
$2,954,000 is included in the condensed consolidated financial statements to
write down the net assets of these operations to their estimated fair market
value less cost of sale.
The following represents a condensed detail of assets and liabilities
adjusted for write downs:
DECEMBER 31, SEPTEMBER 30,
2001 2002
------------- ---------------
(UNAUDITED)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000 $
Receivables - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,637,000 329,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,386,000 127,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,000 -
Property, plant and equipment - net. . . . . . . . . . . . . . . . . . . . 1,599,000 -
Goodwill - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845,000 -
------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 6,756,000 $ 456,000
============= ===============
Short term debt and current maturities of long-term debt and notes payable $ 1,178,000 $ 108,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708,000 915,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000 404,000
------------- ---------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . $ 3,004,000 $ 1,427,000
============= ===============
Charges to income related to the nine month period ended September 30, 2002:
Goodwill write down $ 1,845,000
Property, plant and equipment write down to fair value 495,000
Inventory write down to fair value 65,000
Future lease costs, net of estimated sublease proceeds 407,000
Severance costs 82,000
Other accruals 60,000
------------
2,954,000
Nine months loss from operations 3,736,000
------------
Total charge to discontinued operations $ 6,690,000
============
Reconciliation of change in net asset value of discontinued operations:
Balance of net asset (liability) of discontinued
operations at December 31, 2001 $ 3,752,000
Total charge to discontinued operations (6,690,000)
Intercompany transfers 1,967,000
------------
Balance of net liability of discontinued operations
at September 30, 2002 $ (971,000)
============
9
E. LONG-TERM DEBT AND NOTES PAYABLE AND OTHER FINANCINGS
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America contains customary affirmative and
negative covenants, including that the Company not permit the ratio of its total
debt to earnings before interest, taxes, depreciation and amortization (EBITDA)
for the trailing twelve months to be greater than 3.25 to 1 or the ratio of its
EBITDA to consolidated interest expense to be less than 2.9 to 1. On March 29,
2002 and on June 29, 2002, Prudential agreed to waive compliance with the ratio
tests for the twelve months ended March 31, 2002 and June 30 2002, respectively.
As of September 30, 2002, the Company was not in compliance with the ratio tests
for the trailing twelve month period and the Company did not receive a waiver
from Prudential for this period. Under the Subordinated Note Restructuring
Agreement, failure to comply with the ratio tests is an event of default and the
note holder may, at its option, by notice in writing to the Company, declare all
of the Notes to be immediately due and payable together with interest accrued
thereon. Accordingly, the Company has classified this obligation as a current
liability on its balance sheet. As of November 12, 2002, the Company had not
received a written notice of default from Prudential.
During the second quarter, Prudential agreed to modifications to the
Subordinated Note Restructuring Agreement to accommodate up to $5 million in
borrowings under the KBK facility and an aggregate of $6 million under the
Company's existing senior credit facility or a new senior credit facility. The
Company had agreed to pay Prudential a fee of $100,000 in connection with the
waiver of financial covenants required with the recent participations in the
existing credit facility (as discussed below and in Note I). This amount was
charged to interest expense for the nine months ended September 30, 2002. As of
November 12, 2002, the Company had not paid the Prudential fee of $100,000,
which was due May 15, 2002.
On April 9, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation had an initial
maturity of 90 days, which was extended for an additional 90 days at the
Company's option. The Company issued an additional 100,000 shares of common
stock to the participation lender to extend the maturity date. On October 9,
2002, the loan extension period matured. As of November 12, 2002, none of the
loan participation has been repaid nor has the Company received formal demand
for payment from the loan participants. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participation lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured. As
of November 12, 2002, the loan has not been repaid nor has the Company received
formal demand for payment from the loan participants. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.
On July 5, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $100,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 25% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 130,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On September 29, 2002, the loan matured. As of November 12, 2002,
the loan has not been repaid nor has the Company received formal demand for
payment from the loan participant. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. As of November 12, 2002, the
loan has not been repaid nor has the Company received formal demand for payment
10
from the loan participant. However, in the loan documentation the Company has
waived the notices which might otherwise be required by law and, as a
consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.
F. COMMITMENTS AND CONTINGENCIES
The Company's subsidiary ITS Supply Corporation ("ITS") filed in Corpus
Christi, Texas on May 18, 2000, for protection under Chapter 11 of the U.S.
Bankruptcy Code. ITS is now proceeding to liquidate its assets and liabilities
pursuant to Chapter 7 of Title 11. At the time of the filing, ITS had total
liabilities of approximately $6,900,000 and tangible assets of approximately
$950,000. The Company had an outstanding guaranty on ITS debt upon which a
judgment against the Company was entered by a state district court in the amount
of approximately $1,833,000. The judgment was paid in full on August 31, 2001.
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS
Supply Corporation, the Company's subsidiary, filed a complaint against Comerica
Bank-Texas, the Company and various subsidiaries of the Company for a formal
accounting of all lockbox transfers that occurred between ITS and Comerica Bank,
et al and all intercompany transfers between ITS and the Company and its
subsidiaries to determine if any of the transfers are avoidable under Federal or
state statutes and seeking repayment to ITS of all such amounts. The Trustee
asserted that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. In September 2002, a
settlement agreement was reached between the parties and the Trustee withdrew
all claims for avoidable transfers.
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, certain other employees of the Company, and
several entities affiliated with Larry H. Ramming in the 269th Judicial District
Court, Harris County, Texas. The plaintiffs allege various causes of action,
including fraud, breach of contract, breach of fiduciary duty and mismanagement
relating to the acquisition of stock of a corporation by the name of Emergency
Resources International, Inc. ("ERI") by a corporation affiliated with Larry H.
Ramming and the circumstances relating to the founding of the Company. In July
2002, the Company agreed to pay $500,000 in cash in four installments, the last
installment being due in January 2003, in partial settlement of the plaintiff's
claims against all of the defendants. As to the remaining claims, the
defendants filed motions for summary judgment. On September 24, 2002 the court
granted the defendants motions for summary judgment. As of November 12, 2002,
the Company had paid the first of the four installments due on the partial
settlement, but was in default in respect to the remaining payments. As a
result of the default, the lawsuit was reinstated by the plaintiffs. The case
has been put on the January 20, 2003, trial docket.
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 believes it is not likely that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position, however, given the Company's inability to pay its current obligations,
any liabilities resulting from such proceedings might have a material adverse
effect.
G. EARNINGS PER SHARE
The weighted average number of shares used to compute basic and diluted
earnings per share for the three and nine month periods ended September 30, 2001
and 2002, respectively, is illustrated below:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2001 2002 2001 2002
------------ ----------- ------------ ------------
Numerator:
For basic and diluted earnings per share-
Net Income (Loss) Attributable to
Common Shareholders $ (584,000) $ 625,000 $ (269,000) $(9,957,000)
============ =========== ============ ============
Denominator:
For basic earnings per share-
Weighted-average shares 40,931,000 44,759,000 39,685,000 42,806,000
Effect of dilutive securities:
Preferred stock conversions, stock options
and warrants - 956,000 - -
------------ ----------- ------------ ------------
Denominator:
For diluted earnings per share -
Weighted-average shares and
assumed conversions 40,931,000 45,715,000 39,685,000 42,806,000
============ =========== ============ ============
11
For the nine months ended September 30, 2002, the Company incurred a loss
to common stockholders before consideration of the loss from discontinued
operations. At September 30, 2002, the exercise price of the Company's stock
options and stock warrants varied 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 were made at
the lowest price provided under the terms of their agreements, the maximum
number of potentially dilutive securities at September 30, 2002 would include
approximately: (1) 7,660,000 common shares issuable upon exercise of stock
options, (2) 35,533,000 common shares issuable upon exercise of stock purchase
warrants, (3) 1,333,000 common shares issuable upon conversion of senior
convertible debt, and (4) 37,210,000 common shares issuable upon conversion of
convertible preferred stock. The actual number may be substantially less
depending on the market price of the Company's common stock at the time of
conversion. Certain securities were not included in the calculation of diluted
earnings per share, because to do so would have been antidilutive for the
periods presented.
For the three and nine months ended September 30, 2001, there were
approximately (1) 7,813,000 common shares issuable upon exercise of stock
options, (2) 35,463,000 of common shares issuable upon exercise of stock
purchase warrants, (3) 1,400,000 common shares issuable upon conversion of
senior convertible debt, and (4) 41,333,000 common shares issuable upon
conversion of convertible preferred stock that were not included in the
computation of earnings per share because to do so would have been antidilutive
for the periods presented.
H. BUSINESS SEGMENT INFORMATION
On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during the second quarter of 2002, as a
result of the decision to discontinue its Abasco and Special Services business
operations. The current segments are Prevention and Response. Intercompany
transfers between segments were not material. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, general and corporate
expenses have been allocated between segments on a pro rata basis based on
revenue. ITS, Baylor, Abasco and Special Services are presented as discontinued
operations in the condensed consolidated financial statements and are therefore
excluded from the segment information for all periods presented.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. The scope of these services include training, contingency planning,
well plan reviews, services associated with the Company's Safeguard programs and
services in conjunction with the WELLSURE(R) risk management program. All of
these services are designed to significantly reduce the risk of a well blowout
or other critical response event.
The Response segment consists of personnel and equipment services provided
during an emergency response such as a critical well event or a hazardous
material response. These services are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins.
Information concerning operations in the two business segments for the
three and nine months ended September 30, 2001 and 2002 is presented below.
General and corporate are included in the calculation of identifiable assets and
are included in the Prevention and Response segments.
12
PREVENTION RESPONSE CONSOLIDATED
----------- ------------ --------------
Three Months Ended September 30, 2001:
Net Operating Revenues . . . . . . . . $ 1,868,000 $ 2,639,000 $ 4,507,000
Operating Income . . . . . . . . . . . 184,000 581,000 765,000
Identifiable Operating Assets. . . . . 4,160,000 12,219,000 16,379,000
Capital Expenditures . . . . . . . . . - - -
Depreciation and Amortization. . . . . 130,000 221,000 351,000
Interest Expense . . . . . . . . . . . 55,000 121,000 176,000
Three Months Ended September 30, 2002:
Net Operating Revenues . . . . . . . . $ 1,643,000 $ 1,821,000 $ 3,464,000
Operating Income (Loss). . . . . . . . 145,000 (219,000) (74,000)
Identifiable Operating Assets. . . . . 4,091,000 3,838,000 7,929,000
Capital Expenditures . . . . . . . . . - - -
Depreciation and Amortization. . . . . 138,000 177,000 315,000
Interest Expense . . . . . . . . . . . 116,000 125,000 241,000
PREVENTION RESPONSE CONSOLIDATED
------------ ------------ --------------
Nine Months Ended September 30, 2001:
Net Operating Revenues . . . . . . . $ 3,483,000 $10,234,000 $ 13,717,000
Operating Income . . . . . . . . . . 435,000 3,581,000 4,016,000
Identifiable Operating Assets. . . . 4,160,000 12,219,000 16,379,000
Capital Expenditures . . . . . . . . - - -
Depreciation and Amortization. . . . 232,000 780,000 1,012,000
Interest Expense . . . . . . . . . . 80,000 236,000 316,000
Nine Months Ended September 30, 2002:
Net Operating Revenues . . . . . . . $ 5,909,000 $ 5,549,000 $ 11,458,000
Operating Income (Loss). . . . . . . (225,000) (474,000) (699,000)
Identifiable Operating Assets. . . . 4,091,000 3,838,000 7,929,000
Capital Expenditures . . . . . . . . - 98,000 98,000
Depreciation and Amortization. . . . 429,000 460,000 889,000
Interest Expense . . . . . . . . . . 349,000 328,000 677,000
For the three month and nine month periods ended September 30, 2001 and
2002, the Company's revenue from foreign sources included 54% and 42% foreign
sales respectively, while the three and nine month periods ended September 30,
2002 included 21% and 30 %, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ from those projected in any forward-looking
statements for the reasons detailed in this report. The forward-looking
statements contained herein are made as of the date of this report and the
Company assumes no obligation to update such forward-looking statements, or to
update the reasons why actual results could differ from those projected in such
forward-looking statements. Investors should consult the information set forth
from time to time in the Company's reports on Forms 10-K, 10-Q and 8-K, and its
Annual Report to Stockholders.
13
SEGMENT OVERVIEW
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the discontinuation of ITS and Baylor's operations, as well as on
June 30, 2002, for the Abasco and Special Services business operations. All of
these operations are presented as discontinued operations in the consolidated
financial statements and therefore are excluded from the segment information for
all periods. The current segments are Prevention and Response. Intercompany
transfers between segments were not material. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, 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.
Most of the Company's operating expenses represent fixed costs for base
labor charges, rent and utilities. Consequently, operating expenses increase
only slightly as a result of responding to a critical event. In the past,
during periods of few critical events, resources dedicated to emergency response
were underutilized or, at times, idle, while the fixed costs of operations
continued to be incurred, contributing to significant operating losses. To
mitigate these consequences, the Company is actively expanding its non-event
service capabilities. These services primarily utilize existing personnel
resources to maximize utilization with only slight increases in fixed operating
costs.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. 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.
OPERATING OVERVIEW
On June 30, 2002, the Company discontinued certain of its operations
associated with downstream service activities. Demand for these services had
weakened during the first half of the year and the Company incurred a loss on
discontinued operations of $6.7 million. (See note D to Financial Statements.)
The Company's continuing operations generate revenues from prevention
services and response activities. Response activities are generally associated
with a specific emergency or "event" whereas prevention activities are generally
"non-event" related services. Event related services typically produce high
operating margins for the Company, but the frequency of occurrence varies widely
and is inherently unpredictable. "Non-event" service revenues vary according to
the type of services provided. Typically, well control related prevention
services have operating margins that are comparable to those in the Response
segment, however, equipment sales, which are also captured under the Prevention
segment, may have lower operating margins. Historically, the Company has relied
on event driven revenues as the primary focus of its operating activity. The
Company's strategy is to achieve a greater balance between "event" and
"non-event" service activities and to attain profitability absent significant
contributions from the Response segment. While the Company has successfully
improved this balance in the current year, event related services are still the
major source of revenues and operating income for the Company.
The Company's event-related capabilities are primarily derived from well
control events (i.e., blowouts) in the oil and gas industry. Additionally, the
Company provides project management services during critical events that add
additional revenue for the Response segment. However, 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. Despite
consistent progress in generating "non-event" revenues, the Company's reliance
on event driven revenues impairs the Company's ability to generate predictable
operating cash flows.
Most of the Company's operating expenses represent fixed costs for base
labor charges, rent and utilities. Consequently, operating expenses increase
only slightly as a result of responding to a critical event. During periods of
few critical events, resources dedicated to emergency response may be
underutilized or, at times idle, while the fixed costs of operations continue to
be incurred, contributing to significant operating losses. To mitigate these
consequences, the Company has actively expanded its non-event service
capabilities. These services primarily utilize existing personnel resources to
maximize utilization of fixed operating costs.
14
Non-event services include engineering activities, well plan reviews, site
audits, rig inspections, the Company's WELLSURE(R) program, which is now
providing more predictable and increasing service fee income, and the Safeguard
program, which provides a full range of prevention services domestically and
internationally.
The Company's strategy also includes plans to provide other high value and
high operating margin services, including snubbing operations, redrilling
applications and project management services. However, proper development of
these higher operating margin activities requires significantly greater capital
than what is currently available to the Company. Consequently, the Company has
been unable to exploit these higher margin opportunities.
The Company continues to focus its efforts on increasing its non-event
services with the objective of covering all of the Company's fixed operating
costs and administrative overhead from these more predictable 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 significant progress towards this goal, it
has to date been unable to achieve it because of the Company's weakened
financial position and severe capital constraints.
AMERICAN STOCK EXCHANGE LISTING
The American Stock Exchange ("AMEX") by letter dated March 15, 2002,
required the Company to submit a reasonable plan to regain compliance with
AMEX's continued listing standards by December 31, 2002. On April 15, 2002, the
Company submitted a plan that included interim milestones that the Company would
be required to meet to remain listed. AMEX subsequently notified the Company
that its plan had been accepted; however, on June 28, 2002, the Company
submitted an amendment to the plan to take into account, among other things,
certain restructuring initiatives that the Company had undertaken. The Company
has not been advised by AMEX whether or not it approved the June 28, 2002,
amended plan. Since submitting the amended plan, the Company has been actively
pursuing alternatives that would allow it to fulfill the objectives outline in
the amended plan. As of November 12, 2002, the Company has not met the interim
milestones that were required for completion on September 30, 2002 or those that
were required for completion on October 30, 2002. The Company does not, at this
time, have any prospects or commitments for new financing or the restructuring
of its existing obligations that, if successfully completed, would result
in compliance with AMEX's continued listing standards by December 31, 2002.
Accordingly, management does not believe it is likely that the Company will meet
the AMEX's continued listing standards by December 31, 2002.
AMEX has indicated that it may institute immediate delisting proceedings if
it does not accept the Company's plan or if the Company fails to meet the
milestones contained in the plan. Similarly, if the Company otherwise fails to
achieve compliance with AMEX continued listing standards by December 31, 2002,
as reflected in its audited financial statements for the year then ended, AMEX
has indicated that it may institute immediate delisting proceedings. As of
November 12, the Company has not been advised by AMEX of any immediate delisting
procedures.
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.
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 its reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified its most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. Revenue and cost from product and equipment sales is recognized upon
customer acceptance and contract completion.
15
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.
When the Company responds to a critical event under the WELLSURE(R) program, the
Company acts as a general contractor and engages third party service providers.
The Company records revenue related to general contracting services net of the
cost of third party service providers.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to SFAS No.
109, "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements and notes thereto and the other
financial information included in this report and contained in the Company's
periodic reports previously filed with the SEC.
Information concerning operations in different business segments for the
three and nine months ended September 30, 2001 and 2002 is presented below.
Certain reclassifications have been made to the prior periods to conform to the
current presentation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2001 2002 2001 2002
---------- ----------- ----------- ------------
REVENUES
Prevention. . . . . . . . . . . . . . . . . . . $1,868,000 $1,643,000 $ 3,483,000 $ 5,909,000
Response. . . . . . . . . . . . . . . . . . . . 2,639,000 1,821,000 10,234,000 5,549,000
---------- ----------- ----------- ------------
$4,507,000 $3,464,000 $13,717,000 $11,458,000
---------- ----------- ----------- ------------
COST OF SALES
Prevention. . . . . . . . . . . . . . . . . . . $ 457,000 $ 440,000 $ 926,000 $ 2,028,000
Response. . . . . . . . . . . . . . . . . . . . 427,000 1,062,000 1,406,000 2,733,000
---------- ----------- ----------- ------------
$ 884,000 $1,502,000 $ 2,332,000 $ 4,761,000
---------- ----------- ----------- ------------
OPERATING EXPENSES
Prevention. . . . . . . . . . . . . . . . . . . $ 740,000 $ 629,000 $ 1,261,000 $ 2,632,000
Response. . . . . . . . . . . . . . . . . . . . 844,000 479,000 2,622,000 1,849,000
---------- ----------- ----------- ------------
$1,584,000 $1,108,000 $ 3,883,000 $ 4,481,000
---------- ----------- ----------- ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
Prevention. . . . . . . . . . . . . . . . . . . $ 356,000 $ 291,000 $ 628,000 $ 1,045,000
Response. . . . . . . . . . . . . . . . . . . . 567,000 322,000 1,846,000 981,000
---------- ----------- ----------- ------------
$ 923,000 $ 613,000 $ 2,474,000 $ 2,026,000
---------- ----------- ----------- ------------
DEPRECIATION AND AMORTIZATION (3)
Prevention. . . . . . . . . . . . . . . . . . . $ 130,000 $ 138,000 $ 232,000 $ 429,000
Response. . . . . . . . . . . . . . . . . . . . 221,000 177,000 780,000 460,000
---------- ----------- ----------- ------------
$ 351,000 $ 315,000 $ 1,012,000 $ 889,000
---------- ----------- ----------- ------------
OPERATING INCOME (LOSS)
Prevention. . . . . . . . . . . . . . . . . . . $ 185,000 $ 145,000 $ 436,000 $ (225,000)
Response. . . . . . . . . . . . . . . . . . . . 580,000 (219,000) 3,580,000 (474,000)
---------- ----------- ----------- ------------
$ 765,000 $ (74,000) $ 4,016,000 $ (699,000)
---------- ----------- ----------- ------------
(1) Operating expenses have been allocated pro rata between segments based
upon relative revenues.
(2) Corporate selling, general and administrative expenses have been
allocated pro rata between segments based upon relative revenues.
(3) Corporate depreciation and amortization expenses have been allocated
pro rata between segments based upon relative revenues.
16
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2002 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
Revenues
Prevention revenues were $1,643,000 for the three months ended September
30, 2002, compared to $1,868,000 for the three months ended September 30, 2001,
representing a decrease of $225,000 (12.0%) in the current year. The decrease
was primarily the result of lower activity level in the Venezuelan Safeguard
operation as compared to an unusually high level of activity in the prior year's
quarter.
Response revenues were $1,821,000 for the three months ended September 30,
2002, compared to $2,639,000 for the three months ended September 30, 2001, a
decrease of $818,000 (31.0%) in the current year. The decrease is primarily the
result of a lack of emergency response services as overall industry conditions
weakened. Moreover, the 2001 quarter contained two significant critical events
while the Company had one critical well event during the 2002 period.
Cost of Sales
Prevention cost of sales were $440,000 for the three months ended September
30, 2002, compared to $457,000 for the three months ended September 30, 2001, a
decrease of $17,000 (3.8%) in the current quarter. The decrease was a result of
lower costs related to lower activity level in the Venezuelan Safeguard
operation as discussed above.
Response cost of sales were $1,062,000 for the three months ended September
30, 2002, compared to $427,000 for the three months ended September 30, 2001, an
increase of $635,000 (148.9%) in the current year. The increase was a result of
higher than usual third party costs under the Company's previously described
lead contracting roll associated with one Response project during the third
quarter of 2002.
Operating Expenses
Consolidated operating expenses were $1,108,000 for the three months ended
September 30, 2002, compared to $1,584,000 for the three months ended September
30, 2001, a decrease of $476,000 (30.0%) in the current year. This decrease was
primarily a result of decreased payroll related expenses as a result of
decreased activity.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $613,000 for
the three months ended September 30, 2002, compared to $923,000 for the three
months ended September 30, 2001, a decrease of $310,000 (33.6%) from the prior
year. These reductions were primarily a result of decreased payroll and rent
requirements in the Company's continuing operations as well as a result of the
reorganization plan initiated during the second quarter of 2002. As previously
noted on the segmented financial table, corporate selling, general and
administrative expenses have been allocated pro rata among segments on the basis
of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses were $315,000 for the
three months ended September 30, 2002, compared to $351,000 for the three months
ended September 30, 2001, a decrease of $36,000 (10.2%) from the prior year due
to a lower tangible and intangible asset base in continuing operations. As
previously noted on the segmented financial table, depreciation and amortization
expenses on related corporate assets have been allocated pro rata among segments
on the basis of relative revenue.
Interest Expense and Other, Including Finance Costs
The decrease in interest and other expenses (income) of $1,613,000 for the
three months ended September 30, 2002, as compared to the prior year period is
primarily a result of non-cash benefits of $1,373,000 related to favorable legal
settlements that allowed the Company to reduce its expense provisions, of which
$1,073,000 is related to the ITS settlement as discussed above.
17
Income Tax Expense
Income taxes for the three months ended September 30, 2002 are a result of
taxable income in the Company's foreign operations.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2001 (UNAUDITED)
Revenues
Prevention revenues were $5,909,000 for the nine months ended September 30,
2002, compared to $3,483,000 for the nine months ended September 30, 2001,
representing an increase of $2,426,000 (69.7%) in the current year. The increase
was primarily the result of service fee increases associated with the
WELLSURE(R) program and expanded services and equipment sales provided under the
Company's Safeguard program slightly offset by a decrease in domestic prevention
activities.
Response revenues were $5,549,000 for the nine months ended September 30,
2002, compared to $10,234,000 for the nine months ended September 30, 2001, a
decrease of $4,685,000 (45.8%) in the current year. The decrease is primarily
the result of a decrease of emergency response services as overall industry
conditions weakened. Moreover, the 2001 period contained five significant
WELLSURE(R) events while the Company only had two critical well events during
the 2002 period.
Cost of Sales
Prevention cost of sales were $2,028,000 for the nine months ended
September 30, 2002, compared to $926,000 for the nine months ended September 30,
2001, an increase of $1,102,000 (118.9%) in the current year. The increase was
primarily due to manufacturing costs incurred from an international equipment
sale under the Safeguard program.
Response cost of sales were $2,733,000 for the nine months ended September
30, 2002, compared to $1,406,000 for the nine months ended September 30, 2001,
an increase of $1,327,000 (94.4%) in the current year. The increase was a result
of higher than usual third party costs under the Company's previously described
lead contracting roll associated with two Response projects during the first
nine months of 2002.
Operating Expenses
Consolidated operating expenses were $4,481,000 for the nine months ended
September 30, 2002, compared to $3,883,000 for the nine months ended September
30, 2001, an increase of $598,000 (15.4%) in the current year. This increase was
primarily a result of expanding engineering staffing levels, increases in
support staff for the WELLSURE(R) program and business development costs
associated with the Safeguard program. Also included were increases in operating
overhead associated with higher insurance premiums, professional fees and other
personnel expenses.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $2,026,000
for the nine months ended September 30, 2002, compared to $2,474,000 for the
nine months ended September 30, 2001, a decrease of $448,000 (18.1%) from the
prior year. These reductions were primarily a result of decreased payroll and
rent requirements in the continuing operations as a result of the reorganization
plan initiated during the second quarter of 2002. As previously noted on the
segmented financial table, corporate selling, general and administrative
expenses have been allocated pro rata among segments on the basis of relative
revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses were $889,000 for the
nine months ended September 30, 2002, compared to $1,012,000 for the nine months
ended September 30, 2001, a decrease of $123,000 (12.2%) from the prior year due
to a lower asset base. As previously noted on the segmented financial table,
depreciation and amortization expenses on related corporate assets have been
allocated pro rata among segments on the basis of relative revenue.
18
Interest Expense and Other, Including Finance Costs
The decrease in interest and other expenses of $1,116,000 for the nine
months ended September 30, 2002, as compared to the prior year period is
primarily a result of non-cash benefits of $1,073,000 related to favorable legal
settlements that allowed the Company to reduce its expense provisions related to
the ITS settlement as discussed above. The nine months ended September 30, 2001
included $350,000 for potential claims in the ITS bankruptcy proceeding, which
has been settled for $286,000 during the current period, and $143,000 in
financing costs related to the KBK financing that commenced during the period.
Income Tax Expense
Income taxes for the nine months ended September 30, 2002 are a result of
taxable income in the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to experience severe working capital constraints. The
Company does not have sufficient funds to meet its immediate obligations. This
hampers the Company's ability to hire sub-contractors, obtain materials and
supplies, and otherwise conduct effective or efficient operations. The Company
is in default under its senior and subordinated credit facilities and is unable
to pay its debts as they come due. The Company is actively exploring its
options, including filing for bankruptcy protection and including methods to
restructure outside of filing for bankruptcy protection, by obtaining funds to
refinance its senior debt, restructuring its subordinated debt, negotiating
discounts on its nonessential trade debt and converting its dividend bearing
preferred stock to common equity, however, at this time the Company does not
have any commitments for new financing nor has it obtained commitments from any
party to restructure its existing obligations.
As of September 30, 2002, the Company's current assets totaled
approximately $4,126,000 and current liabilities were $19,904,000, resulting in
a net working capital deficit of approximately $15,778,000 (compared to a
beginning year working capital of $3,285,000). The Company's highly liquid
current assets, represented by cash of $127,000 and receivables and restricted
assets of $2,889,000 were collectively $16,888,000 less than the amount of
current liabilities at September 30, 2002 (compared to a beginning year deficit
of $4,452,000).
On June 18, 2001, the Company entered into a facility with KBK Financial,
Inc. in which it pledged certain accounts receivable for cash advances. The
facility allows the Company to pledge additional accounts receivable up to an
aggregate amount of $5,000,000. In 2001, the Company paid $135,000 for loan
origination fees, finder's fees and legal fees related to the facility and will
pay additional fees of one percent per annum on the unused portion of the
facility and a termination fee of up to 2% of the maximum amount of the
facility. The Company receives an initial advance of 85% of the gross amount of
each receivable pledged. Upon collection of the receivable, the Company
receives an additional residual payment from which is deducted (i) a fixed fee
equal to 2% of the gross pledged receivable and (ii) a variable financing charge
equal to KBK's base rate plus 2% calculated over the actual length of time the
advance was outstanding from KBK prior to collection. The Company's obligations
under the facility are secured by a first lien on certain other accounts
receivable of the Company. As of September 30, 2002, the Company had $182,000
of its accounts receivable pledged to KBK (including the receivables related to
discontinued operations), representing the substantial majority of the Company's
receivables that were eligible for pledging under the facility.
On April 9, 2002, the Company entered into a loan participation agreement
with certain party under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation had an initial
maturity of 90 days, which was extended for an additional 90 days at the
Company's option. The Company issued an additional 100,000 shares of common
stock to the participation lender to extend the maturity date. On October 9,
2002, the loan extension period matured. As of November 12, 2002, none of the
loan participation has been repaid nor has the Company received formal demand
for payment from the loan participant. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participating lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured. As
19
of November 12, 2002, none of the loan participations have been repaid nor has
the Company received formal demand for payment from the loan participants.
However, in the loan documentation the Company has waived the notices which
might otherwise be required by law and, as a consequence, the loan participants
have the current ability to post the collateral securing their notes for
foreclosure.
On July 5, 2002, the Company entered into a loan participation agreement
with a certain parties under which it borrowed an additional $100,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 25% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 130,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On September 29, 2002, the loan matured. As of November 12, 2002,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. As of November 12, 2002,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America contains customary affirmative and
negative covenants, including that the Company not permit the ratio of its total
debt to earnings before interest, taxes, depreciation and amortization (EBITDA)
for the trailing twelve months to be greater than 3.25 to 1 or the ratio of its
EBITDA to consolidated interest expense to be less than 2.9 to 1. On March 29,
2002 and on June 29, 2002, Prudential agreed to waive compliance with the ratio
tests for the twelve months ended March 31, 2002 and June 30, 2002,
respectively. As of September 30, 2002, the Company was not in compliance with
the ratio tests for the trailing twelve month period and the Company did not
receive a waiver from Prudential for this period. Under the Subordinated Note
Restructuring Agreement, failure to comply with the ratio tests is an event of
default and the note holder may, at its option, by notice in writing to the
Company, declare all of the Notes to be immediately due and payable together
with interest accrued thereon. Accordingly, the Company has classified this
obligation as a current liability on its balance sheet. As of November 12,
2002, the Company has not received a written notice of default from Prudential.
During the second quarter, Prudential agreed to modifications to the
Subordinated Note Restructuring Agreement to accommodate up to $5 million in
borrowings under the KBK facility and an aggregate of $6 million under the
Company's existing senior credit facility or a new senior credit facility. The
Company has agreed to pay Prudential a fee of $100,000 in connection with the
waiver of financial covenants required with the recent participations in the
existing credit facility (as discussed below and in Note I). This amount was
charged to interest expense for the nine months ended September 30, 2002. As of
November 12, 2002, the Company has not paid the Prudential fee of $100,000,
which was due May 15, 2002.
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.
20
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) . . . . . . . . . . $10,195,000 - - - - -
All future minimum lease
payments . . . . . . . . . . $ 258,000 $902,000 $640,000 $421,000 $208,000 $ 208,000
----------- -------- -------- -------- -------- -----------
Total commitments. . . . . . $10,453,000 $902,000 $640,000 $421,000 $208,000 $ 208,000
=========== ======== ======== ======== ======== ===========
(1) Accrued interest totaling $4,320,000 is included in the Company's 12%
Senior Subordinated Note at September 30, 2002, due to the accounting
for a troubled debt restructuring during 2000, but has been excluded
from the above presentation. Accrued interest calculated through
September 30, 2002, will be deferred for payment until December 30,
2005. Payments on accrued interest after December 31, 2002, will begin
on March 31, 2003, and will continue quarterly until December 30,
2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's market sensitive financial
instruments contains "forward-looking statements".
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher during the three months ended September 30, 2001 and September 30, 2002
and the nine months ended September 30, 2001 and 2002, and all other factors
affecting the Company's debt remained the same, pretax earnings would have been
lower by approximately $18,000, $32,000, $32,000 and $68,000 respectively. With
respect to the fair value of the Company's fixed-interest rate debt, if
prevailing market interest rates had been 10% higher at the quarter ended
September 30, 2001 and 2002 and all other factors affecting the Company's debt
remained the same, the fair value of the Company's fixed-rate debt, as
determined on a present-value basis, would have been lower by approximately
$16,000 and $34,000 at September 30, 2001 and 2002, respectively. Given the
composition of the Company's debt structure, the Company does not, for the most
part, actively manage its interest rate risk.
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates to the extent that transactions are
not denominated in U.S. dollars. The Company typically denominates its contracts
in U.S. dollars to mitigate the exposure to fluctuations in foreign currencies.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Principal Accounting Officer, of the effectiveness of the design and operation
of the Company's Disclosure Controls and Procedures (as defined in Rules 13a -
14c and 15d - 14c under the Securities Exchange act of 1934). Based upon that
evaluation, the Chief Executive Officer and the Chief Principal Accounting
Officer concluded that the Company's Disclosure Controls and Procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
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
asserted that approximately $400,000 of lockbox transfers and $3,000,000 of
intercompany transfers were made between the parties. In September, 2002 a
settlement agreement was reached between the parties and the Trustee withdrew
all claims for avoidable transfers.
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, certain other employees of the Company, and
several entities affiliated with Larry H. Ramming in the 269th Judicial District
Court, Harris County, Texas. The plaintiffs allege various causes of action,
including fraud, breach of contract, breach of fiduciary duty and mismanagement
relating to the acquisition of stock of a corporation by the name of Emergency
Resources International, Inc. ("ERI") by a corporation affiliated with Larry H.
Ramming and the circumstances relating to the founding of the Company. In July
2002, the Company agreed to pay $500,000 in cash in four installments, the last
installment being due in January 2003, in partial settlement of the plaintiff's
claims against all of the defendants. As to the remaining claims, the
defendants filed motions for summary judgment. On September 24, 2002 the court
granted the defendants motions for summary judgment. As of November 12, 2002,
the Company had paid the first of the four installments due on the partial
settlement, but was in default in respect to the remaining payments. As a
result of the default, the lawsuit was reinstated by the plaintiffs. The case
has been put on the January 20, 2003, trial docket.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2002, the Company issued an
aggregate of 572,534 shares of common stock in transactions that were not
registered under the Securities Act of 1933, as amended. Of these shares,
159,200 were issued upon conversion by two existing stockholders of shares of
the Company's Preferred Stock. No consideration other than the surrender of
shares of Preferred Stock previously owned by the stockholder was paid in
connection with the conversion and, therefore, the transaction did not
constitute a sale of securities for purposes of the Securities Act.
Of the remaining 413,334 shares of common stock issued, 280,000 shares of
common stock were issued to two participants in the Company's senior secured
loan in connection with a loan to the Company of an aggregate of $300,000.
Another 133,334 shares of common stock were issued to extend the loans of the
three other participants for loans that were outstanding at the beginning of the
quarter. The Company believes that each participant is an accredited investor
and that no general solicitation occurred in connection with the loan.
Accordingly, the Company is relying on the exemption contained in Section 4(2)
of the Securities Act in connection with these issuances.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Subordinated Note Restructuring Agreement between the Company and The
Prudential Insurance Company of America contains customary affirmative and
negative covenants, including that the Company not permit the ratio of its total
debt to earnings before interest, taxes, depreciation and amortization (EBITDA)
for the trailing twelve months to be greater than 3.25 to 1 or the ratio of its
EBITDA to consolidated interest expense to be less than 2.9 to 1. On March 29,
2002 and on June 29, 2002, Prudential agreed to waive compliance with the ratio
tests for the twelve months ended March 31, 2002 and June 30 2002, respectively.
As of September 30, 2002, the Company was not in compliance with the ratio tests
for the trailing twelve month period and the Company did not receive a waiver
from Prudential for this period. Under the Subordinated Note Restructuring
Agreement, failure to comply with the ratio tests is an event of default and the
note holder may, at its option, by notice in writing to the Company, declare all
of the Notes to be immediately due and payable together with interest accrued
thereon. As of November 13, 2002, the Company has not received a written notice
of default from Prudential. Accordingly, the Company has classified this note
as short term debt and current maturities of long term debt.
22
On April 9, 2002, the Company entered into a loan participation agreement
with certain parties under which it borrowed an additional $750,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 11% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 100,000 shares of common
stock to the participation lender at closing. The participation had an initial
maturity of 90 days, which was extended for an additional 90 days at the
Company's option. The Company issued an additional 100,000 shares of common
stock to the participation lender to extend the maturity date. On October 9,
2002, the loan extension period matured. As of November 12, 2002, none of the
loan participation has been repaid nor has the Company received formal demand
for payment from the loan participant. However, in the loan documentation the
Company has waived the notices which might otherwise be required by law and, as
a consequence, the loan participants have the current ability to post the
collateral securing their notes for foreclosure.
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 33,334 shares of
common stock to the participation lenders at closing and issued an additional
33,334 shares of common stock to extend the maturity of those notes for an
additional 90 days. On October 25, 2002, the loan extension period matured. As
of November 12, 2002, none of the loan participations have been repaid nor has
the Company received formal demand for payment from the loan
participants. However, in the loan documentation the Company has waived the
notices which might otherwise be required by law and, as a consequence, the loan
participants have the current ability to post the collateral securing their
notes for foreclosure.
On July 5, 2002, the Company entered into a loan participation agreement
with certain parties under which it borrowed an additional $100,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 25% after taking into account
rate adjustment fees. The Company also paid 3% of the borrowed amount in
origination fees, paid closing expenses and issued 130,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On September 29, 2002, the loan matured. As of November 12, 2002,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.
On July 8, 2002, the Company entered into a loan participation agreement
with certain parties under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation is 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 150,000 shares of common
stock to the participation lender at closing. The participation had a maturity
of 90 days. On October 1, 2002, the loan matured. As of November 12, 2002,
none of the loan participation has been repaid nor has the Company received
formal demand for payment from the loan participant. However, in the loan
documentation the Company has waived the notices which might otherwise be
required by law and, as a consequence, the loan participants have the current
ability to post the collateral securing their notes for foreclosure.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Document
- --------------- ----------------------------------------------------
3.01 - Amended and Restated Certificate of Incorporation(1)
3.02 - Amendment to Certificate of Incorporation(2)
3.02(a) - Amendment to Certificate of Incorporation(3)
3.03 - Amended Bylaws(4)
4.01 - Specimen Certificate for the Registrant's Common Stock(5)
4.02 - Certificate of Designation of 10% Junior Redeemable Convertible Preferred Stock(6)
4.03 - Certificate of Designation of Series A Cumulative Senior Preferred Stock(7)
4.04 - Certificate of Designation of Series B Convertible Preferred Stock(8)
4.05 - Certificate of Designation of Series C Cumulative Convertible Junior Preferred Stock(9)
4.06 - Certificate of Designation of Series D Cumulative Junior Preferred Stock(10)
23
Exhibit No. Document
- --------------- ----------------------------------------------------
4.07 - Certificate of Designation of Series E Cumulative Senior Preferred Stock(11)
4.08 - Certificate of Designation of Series F Convertible Senior Preferred Stock(12)
4.09 - Certificate of Designation of Series G Cumulative Convertible Preferred Stock(13)
4.10 - Certificate of Designation of Series H Cumulative Convertible Preferred Stock(14)
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton Company(15)
10.03 - Executive Employment Agreement of Brian Krause(16)
10.04 - 1997 Incentive Stock Plan(17)
10.05 - Outside Directors' Option Plan(18)
10.06 - Executive Compensation Plan(19)
10.07 - Halliburton Center Sublease(20)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(21)
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.(22)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued to The Prudential Insurance
Company of America (23)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica Bank - Texas(24)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica Bank - Texas(25)
10.13 - Executive Employment Agreement of Jerry Winchester(26)
10.15 - Office Lease for 777 Post Oak(27)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000 (28)
10.19 - Fourth Amendment to Loan Agreement dated May 31, 2000(29)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(30)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(31)
10.22 - Seventh Amendment to Loan Agreement dated December 29,2000(32)
10.23 - Subordinated Note Restructuring Agreement with The Prudential Insurance Company of
America dated December 28, 2000 (33)
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April 15, 1999, with Halliburton
Energy Services, Inc. (34)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and to Turner, Voelker, Moore (35)
10.28 - Amended and Restated Purchase and Sale Agreement with National Oil Well, L.P.(36)
10.29 - KBK Financial, Inc. Account Transfer and Purchase Agreement(37)
10.30 - 2000 Long Term Incentive Plan(38)
*10.31 - Eighth Amendment to Loan Agreement dated April 12,2002
*10.32 - Ninth Amendment to Loan Agreement dated May 1, 2002
*10.33 - 1st Amendment to Subordinated Note Restructuring Agreement with The Prudential Insurance
Company of America dated March 29, 2002
*10.34 - 2nd Amendment to Subordinated Note Restructuring Agreement with The Prudential Insurance
Company of America dated June 29, 2002
21.01 - List of subsidiaries(39)
*99.01 - Certification by Chief Executive Officer
*99.02 - Certification by Principal Accounting Officer
*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.
24
(4) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August 13, 1997.
(5) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August 13, 1997.
(6) Incorporated herein by reference to exhibit 4.08 of Form 10-QSB filed May 19, 1998.
(7) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July 17, 2000.
(8) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July 17, 2000.
(9) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July 17, 2000.
(10) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July 17, 2000.
(11) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed April 2, 2001.
(12) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed April 2, 2001.
(13) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed April 2, 2001.
(14) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed April 2, 2001.
(15) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August 13, 1997.
(16) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August 13, 1997.
(17) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed March 31, 1998.
(18) Incorporated herein by reference to exhibit 10.05 of Form 10-Q filed May 14, 2002.
(19) Incorporated herein by reference to exhibit 10.06 of Form 10-Q filed May 14, 2002.
(21) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August 7, 1998.
(22) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August 7, 1998.
(23) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August 7, 1998.
(24) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed November 17, 1998.
(25) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed November 17, 1998.
(26) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed April 15, 1999.
(27) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed April 15, 1999.
(28) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July 17, 2000.
(29) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July 17, 2000.
(30) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July 17, 2000.
(31) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July 17, 2000.
(32) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January 12, 2001.
25
(33) Incorporated herein by reference to exhibit 10.23 of Form 10-K filed April 2, 2001.
(34) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July 17, 2000.
(35) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed November 14, 2000.
(36) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 11, 2000.
(37) Incorporated herein by reference to exhibit 10.29 of Form 10-Q filed August 13, 2001.
(38) Incorporated herein by reference to exhibit 4.1 of Form S-8 filed April 30, 2001.
(39) Incorporated herein by reference to exhibit 21.01 of Form 10-Q filed May 14, 2002.
(b) Reports on Form 8-K
None
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ Jerry Winchester
---------------------------
Jerry Winchester
(Chief Executive Officer)
By: /s/ Kendal Glades
---------------------------
Kendal Glades
(Principal Accounting Officer)
Date: November 13, 2002
27
CERTIFICATION BY JERRY WINCHESTER PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Jerry Winchester, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boots & Coots
International Well Control, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrants internal
controls; and
6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weakness.
Date: November 13, 2002
/s/ Jerry Winchester
Jerry Winchester
President and Chief Executive Officer
28
CERTIFICATION BY KENDAL GLADES PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Kendal Glades, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Boots & Coots
International Well Control, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have significant role in the registrants internal
controls; and
6. The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weakness.
Date: November 13, 2002
/s/ Kendal Glades
Kendal Glades
Principal Accounting Officer
29