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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13817
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BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
11615 N. Houston Rosslyn 77086
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
281-931-8884
(Issuer's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.00001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule (2b-2) [ ].
The aggregate market value of Common stock held by non-affiliates as of
June 30, 2003 was $46,802,000.
The number of shares of the issuer's common stock outstanding on March 29,
2004 was 27,300,000.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this Form
10-K which will be filed with the Securities and Exchange Commission on or
before April 30, 2004.
FORM 10-K
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ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
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PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 11
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 5. Market for Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . 21
Item 8. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 21
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 10. Directors and Executive Officers, . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . 22
Item 13. Certain Relationships and Related Party Transactions. . . . . . . . . . . . . . . . . 22
Item 14. Principal Accounting Fees & Services. . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K. . . . . . . . . . . 23
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
FINANCIAL STATEMENTS
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
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This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on expectations, estimates
and projections as of the date of this filing. These statements by their nature
are subject to risks, uncertainties and assumptions and are influenced by
various factors and, as a consequence, actual results may differ materially from
those expressed in forward-looking statements. See Item 7 of Part II -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boots & Coots International Well Control, Inc. (the "Company") is a
global-response oil and gas service company that specializes in responding to
and controlling oil and gas well emergencies, including blowouts and well fires.
In connection with these services, the Company has the capacity to supply the
equipment, expertise and personnel necessary to contain the oil and hazardous
materials spills and discharges associated with oil and gas emergencies and
restore affected oil and gas wells to production. Through its participation in
the proprietary insurance program WELLSURE(R), the Company provides lead
contracting and high-risk management services, under critical loss scenarios, to
the program's insured clients. Additionally, under the WELLSURE(R) program the
Company provides certain pre-event prevention and risk mitigation services. The
Company also provides high-risk well control management services, and pre-event
planning, training and consulting services.
RECENT DEVELOPMENTS
Financial Improvements. At December 31, 2003 and as of the date of this
filing the Company is not in default on any of its loan agreements. During July,
2003, the Company received substantial benefit from the conversion of $1,689,000
of senior debt that was in default into 1,597,642 shares of common stock.
Additionally, in August, 2003, The Company received short swing profit
contribution proceeds of $3,887,000 as a result of sales of Company securities
by The Prudential Insurance Company of America that were voluntarily reported by
Prudential. During the year ended December 31, 2003 there was a significant
increase in international demand for the Company's services and equipment,
specifically in the Middle East, in connection with the war in Iraq and
subsequent efforts to restore Iraq's oil production. As a consequence, the
Company's liquidity position has improved significantly over recent years. The
Company's short-term liquidity also improved as a consequence of increases in
prevention service revenues and certain asset sales. Improvements in liquidity
allowed the Company to pay down current maturities of outstanding debt,
significantly reduce payables owing to Company vendors and settle certain legal
proceedings relating to the Company's past financial problems.
Restore Iraqi Oil Program. ("RIO"). During the year ended December 31,
2003, the Company relied heavily upon the RIO contract to generate income and
cash flow. The Company operated under the contract as a subcontractor to KBR,
the engineering and construction subsidiary of Halliburton. On January 16, 2004,
Halliburton confirmed that the US Army Corps of Engineers had awarded KBR a
contract to continue its RIO operations in southern Iraq for a period of two
years, with three one-year renewal options.
Pending the transition to the new contract for the RIO program in Iraq, the
Company has temporarily demobilized its personnel in the region. Currently, it
is unclear when the Company will re-mobilize its personnel, if ever, although
the Company remains positioned to continue its previous work and respond
immediately whenever an emergency arises in Iraq.
Amex Listing. On July 21, 2003 the Company received a letter from The
American Stock Exchange (" AMEX") stating that the Company was not in compliance
with the continued listing standards of AMEX and that AMEX had completed its
review of Boots & Coots' previously submitted plan of compliance and supporting
documentation (the "Plan"). AMEX indicated that the plan submitted by Boots &
Coots made a reasonable demonstration of its ability to regain compliance with
continued listing standards.
Specifically, AMEX stated that Boots & Coots was not in compliance with
Section 1003(a)(i) with shareholders equity of less than $2,000,000 and losses
from continuing operations and/or net losses in two of its three most recent
fiscal years and Section 1003(a)(ii) as shareholders equity was less than
$4,000,000 and the Company had sustained losses from continuing operations and /
or net losses in three out of its four most recent fiscal years. As of December
31, 2003, the Company achieved Net Income in two out of the prior three years,
hence the Company is now in compliance with Sections 1003(a)(i) and Section
1003(a)(ii).
Additionally, Amex stated that the Company was not in compliance with
Section 301 of the AMEX Company Guide, which states that a listed company is not
permitted to issue, or to authorize its transfer agent or registrar to issue or
register, additional
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securities of a listed class until it has filed an application for the listing
of such additional securities and received notification from the Exchange that
the securities have been approved for listing. The Company subsequently filed
the appropriate additional listing application and AMEX approved the
application.
Finally, AMEX stated that, according to the Company's definitive proxy
statement that was filed on July 11, 2003, the Company had only one member on
its audit committee. As a result, the Company was not in compliance with audit
committee composition requirements under Section 121B(b)(i) of the AMEX Company
Guide, which requires each issuer to have and maintain an audit committee of at
least three members, compromised solely of independent directors, each of whom
is able to read and understand fundamental financial statements, including a
company's balance sheet, income statement, and cash flow statement or will
become able to do so within a reasonable period of time after his or her
appointment to the audit committee. The Company has subsequently added two
directors, E.J. DiPaolo and Robert S. Herlin, each of whom is independent and
has agreed to serve on the Audit Committee.
AMEX had granted Boots & Coots an extension until the filing due date of
Boots & Coots Form 10-K for the period ending December 31, 2003 to gain
compliance with AMEX's listing standards subject to the Company providing AMEX
with updates, at least quarterly or as requested by AMEX, in conjunction with
the initiatives outlined in the submitted Plan. As of December 31, 2003, the
Company believes it is in compliance with all AMEX listing standards. AMEX has
informed the Company that it will forward written confirmation of the Company's
compliance subsequent to the Company's filing of this Form 10-K with the
Securities and Exchange Commission.
HISTORY OF THE COMPANY
The Company was incorporated in Delaware in April 1988, remaining largely
inactive until acquiring IWC Services, Inc., a Texas corporation on July 29,
1997. IWC Services is a global-response oil and gas well control service company
that specializes in responding to and controlling oil and gas well emergencies,
including blowouts and well fires. In addition, IWC Services provides snubbing
and other non-critical well control services. IWC Services was organized in June
1995 by six former key employees of the Red Adair Company.
Following the IWC Services transaction, the Company engaged in a series of
acquisitions. On July 31, 1997, the Company acquired substantially all of the
operating assets of Boots & Coots, L.P., a Colorado limited partnership, and the
stock of its subsidiary corporations, Boots & Coots Overseas, Ltd., and Boots &
Coots de Venezuela, S.A. Boots & Coots, L.P. and its subsidiaries were engaged
in oil well fire fighting, snubbing and blowout control services. Boots & Coots,
L.P. was organized by Boots Hansen and Coots Matthews, two former employees of
the Red Adair Company who, like the founders of IWC Services, left that firm to
form an independent company, which was a primary competitor of IWC Services. As
a consequence of the acquisition of Boots & Coots, L.P. the Company became a
leader in the worldwide oil well firefighting and blowout control industry,
reuniting many of the former employees of the Red Adair Company.
In September 1997, the Company acquired Abasco, Inc., a manufacturer of oil
and chemical spill containment equipment and products. In January 1998, the
Company acquired international Tool and Supply Corporation, a materials and
equipment procurement, transportation and logistics company. In February 1998,
the Company acquired Code 3, Inc., a provider of containment and remediation
services in hazardous materials and oil spills. In July 1998, the Company
acquired Baylor Company, a manufacturer of industrial products for the drilling,
marine and power generation industries. In November 1998, Code 3, Inc., then
known as "Special Services", acquired HAZ-TECH Environmental Services, Inc., a
provider of hazardous material and waste management and related services. As a
result of ongoing operating losses, the Company discontinued the operation of
Abasco and Special Services, and sold the Baylor Company. International Tool and
Supply Corporation ceased operations and filed for bankruptcy in April 2000.
Halliburton Alliance. The Company conducts business in a global strategic
alliance with the Halliburton Energy Services division of Halliburton Company.
The alliance operates under the name "WELLCALL(SM)" and draws on the expertise
and abilities of both companies to offer a total well control solution for oil
and gas producers worldwide. The Halliburton Alliance provides a complete range
of well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, fire fighting,
relief and directional well planning, and other specialized services.
Business Strategy. The well control response services business is a finite
market with services dependent upon the occurrence of blowouts which cannot be
reasonably predicted. Accordingly, the Company intends to build upon its
demonstrated strengths in high-risk management while endeavoring to increase
predictable revenues from its pre-event and engineering services and
non-critical event services. As a result of historical operating losses, the
Company had been forced to operate with a minimum of working capital.
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As a result, the Company curtailed its business expansion program and was unable
to aggressively pursue growth in its prevention services segmentIraq has
improved finances however, and the Company intends to aggressively develop the
new prevention markets through business development, its insurance programs and
geographic expansion programs
In addition to these internal efforts to grow its response and prevention
service lines, the Company is also seeking complementary business acquisitions
that would enable the Company to provide a more predictable level of income,
broaden its service capabilities and increase its geographic presence.
Simultaneously, the Company continues its efforts to improve its balance sheet
and capital structure.
Executive Offices. The Company's principal executive office is located at
11615 N. Houston-Rosslyn, Houston, Texas, 77086.
THE EMERGENCY RESPONSE SEGMENT OF THE OIL AND GAS SERVICE INDUSTRY
History. The emergency response segment of the oil and gas services
industry traces its roots to the late 1930's when Myron Kinley organized the
Kinley Company, the first oil and gas well firefighting specialty company.
Shortly after organizing the Kinley Company, Mr. Kinley took on an assistant
named Red Adair who learned the firefighting business under Mr. Kinley's
supervision and remained with the Kinley Company until Mr. Kinley's retirement.
When Mr. Kinley retired in the late 1950's, Mr. Adair organized the Red Adair
Company and subsequently hired Boots Hansen, Coots Matthews and Raymond Henry as
members of his professional firefighting staff. Mr. Adair later added Richard
Hatteberg, Danny Clayton, Brian Krause, Mike Foreman and Juan Moran to his
staff, and the international reputation of the Red Adair Company grew to the
point where it was a subject of popular films and the dominant competitor in the
industry. Boots Hansen and Coots Matthews remained with the Red Adair Company
until 1978 when they split off to organize Boots & Coots, an independent
firefighting, snubbing and blowout control company.
Historically, the well control emergency response segment of the oil and
gas services industry has been reactive, rather than proactive, and a small
number of companies have dominated the market. As a result, if an operator in
Indonesia, for example, experienced a well blowout and fire, he would likely
call a well control emergency response company in Houston that would take the
following steps:
- - Immediately dispatch a control team to the well location to assess the
damage, supervise debris removal, local equipment mobilization and site
preparation;
- - Gather and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;
- - Develop or implement a detailed fire suppression and well-control plan;
- - Mobilize additional well-control and firefighting equipment in Houston;
- - Transport equipment by air freight from Houston to the blowout location;
- - Extinguish the fire and bring the well under control; and
- - Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.
The 1990's were a period of rapid change in the oil and gas well control
and firefighting business. The hundreds of oil well fires that were started by
Iraqi troops during their retreat from Kuwait spurred the development of new
firefighting techniques and tools that have become industry standards. Moreover,
after extinguishing the Kuwait fires, the entrepreneurs who created the oil and
gas well firefighting industry, including Red Adair, Boots Hansen and Coots
Matthews, retired, leaving the Company's senior staff as the most experienced
active oil and gas well firefighters in the world. At present, the principal
competitors in the oil and gas well firefighting business are the Company, Wild
Well Control, Inc., and Cudd Pressure Control, Inc.
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Trends. The increased recognition of the importance of risk mitigation
services, training and emergency preparedness, are having a profound impact on
the emergency response segment of the oil and gas services industry. Instead of
waiting for a blowout, fire or other disaster to occur, both major and
independent oil producers are coming to the Company for proactive preparedness
and incident prevention programs. These requests, together with pre-event
consultation on matters relating to well control training, blowout contingency
planning, on-site safety inspections and formal fire drills, are expanding the
market for the Company's engineering unit. Underwriting syndicates continue to
firm renewal rates and seek higher quality risks in the "Control of Well"
segment of the energy insurance market. The Company believes these factors
enhance the viability of proven alternative risk transfer programs such as
WELLSURE(R), a proprietary insurance program in which the Company is the
provider of both pre-event and loss management services.
Volatility of Firefighting Revenues. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company, including changes in the volume and type of
drilling and work-over activity occurring in response to fluctuations in oil and
natural gas prices. Wars, acts of terrorism and other unpredictable factors may
also increase the need for oil and gas well firefighting and blowout control
services from time to time. As a result, the Company expects to experience large
fluctuations in its revenues from oil and gas well firefighting and blowout
control services. The Company's acquisitions of complementary businesses were
designed to broaden its product and service offerings and mitigate the revenue
and earnings volatility associated with its oil and gas well firefighting and
blowout control services. The contraction of the Company's service and product
offerings as a consequence of its financial difficulties has made it more
susceptible to this volatility. Accordingly, the Company expects that its
revenues and operating performance may vary considerably from year to year for
the foreseeable future.
The Company's principal products and services for its two business segments
include:
PREVENTION
Firefighting Equipment Sales and Service. This service line involves the
sale of complete firefighting equipment packages, together with maintenance,
monitoring, updating of equipment and ongoing consulting services.
Drilling Engineering. The Company has a highly specialized in-house
engineering staff which, in alliance with Halliburton Energy Services, provides
engineering services, including planning and design of relief well drilling
(trajectory planning, directional control and equipment specifications, and
on-site supervision of the drilling operations); planning and design of
production facilities which are susceptible to well capping or other control
procedures; and mechanical and computer aided designs for well control
equipment.
Inspections. A cornerstone of the Company's strategy of providing
preventive well control services involves on-site inspection services for
drilling and work over rigs, drilling and production platforms, and field
production facilities. These inspection services are provided by the Company and
offered as a standard option in Halliburton's field service programs.
Training. The Company provides specialized training in well control
procedures for drilling, exploration and production personnel for both U.S. and
international operators. The Company's training services are offered in
conjunction with ongoing educational programs sponsored by Halliburton.
Strategic Event Planning (S.T.E.P.). A critical component of the services
offered by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator to
control a blowout. This planning process incorporates organizational structures,
action plans, specifications, people and equipment mobilization plans with
engineering details for well firefighting, capping, relief well and kill
operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of services,
it is easily modified to suit the particular needs of a specific client.
Regional Emergency Response Centers (SafeGuard). The Company has
established and maintains industry supported emergency response centers. The
centers allow the Company to generate a line of predictable revenues while
expanding its geographic presence. Under a typical "SafeGuard" agreement, the
Company will sell to producers the equipment required to respond to a blowout or
oil or gas well fire and provide an ongoing maintenance and monitoring program
to ensure the equipment is certified for emergency response. The Company also
provides an "in-country" Well Control Specialist in order to minimize initial
response time. Prevention services, under SafeGuard, include on-site training,
contingency planning, safety inspections and emergency response drills. In
addition to its home base in Houston, TX, the Company also currently has
Emergency Response Centers in Anaco, Venezuela, and Hassi Massad, Algeria.
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RESPONSE
Well Control. This service segment is divided into two distinct levels:
"Critical Event" response is ordinarily reserved for well control projects where
hydrocarbons are escaping from a well bore, regardless of whether a fire has
occurred; "Non-critical Event" response, on the other hand, is intended for the
more common sub-surface operating problems that do not involve escaping
hydrocarbons.
Critical Events. Critical Events frequently result in explosive fires,
loss of life, destruction of drilling and production facilities,
substantial environmental damage and the loss of hundreds of thousands of
dollars per day in production revenue. Since Critical Events ordinarily
arise from equipment failures or human error, it is impossible to
accurately predict the timing or scope of the Company's Critical Event
work. Critical Events of catastrophic proportions can result in significant
revenues to the Company in the year of the incident. The Company's
professional firefighting staff has over 200 years of aggregate industry
experience in responding to Critical Events, oil well fires and blowouts.
Non-critical Events. Non-critical Events frequently occur in
connection with workover operations or the drilling of new wells into high
pressure reservoirs. In most Non-critical Events, the blowout prevention
equipment and other safety systems on the drilling rig function according
to design and the Company is then called upon to supervise and assist in
the well control effort so that drilling operations can resume as promptly
as safety permits. While Non-critical Events do not ordinarily have the
revenue impact of a Critical Event, they are more common and predictable.
Non-critical Events can escalate into Critical Events.
Firefighting Equipment Rentals. This service includes the rental of
specialty well control and firefighting equipment by the Company primarily for
use in conjunction with Critical Events, including firefighting pumps, pipe
racks, athey wagons, pipe cutters, crimping tools and deluge safety systems. The
Company charges this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical Event.
WELLSURE(R) Program. The Company and Global Special Risks, Inc., a managing
general insurance agent located in Houston, Texas, and New Orleans, Louisiana,
have formed an alliance that offers oil and gas exploration production
companies, through retail insurance brokers, a program known as "WELLSURE(R),"
which combines traditional well control and blowout insurance with the Company's
post-event response services and well control preventative services including
company-wide and/or well specific contingency planning, personnel training,
safety inspections and engineering consultation. Insurance provided under
WELLSURE(R) has been arranged with leading London insurance underwriters.
WELLSURE(R) program participants are provided with the full benefit of having
the Company as a safety and prevention partner. In the event of well blowouts,
the Company serves as the integrated emergency response service provider, as
well as lead contractor and project manager for control and restoration of wells
covered under the program.
DEPENDENCE UPON CUSTOMERS
The Company has historically not been materially dependent upon a single or
a few customers, although, in 2003, one customer represented a material amount
of business for the period as a result of the unpredictable demand for well
control and firefighting services. The emergency response business is by nature
episodic and unpredictable. A customer that accounted for a material amount of
business as a result of an oil well blow-out or similar emergency may not
account for a material amount of business after the emergency is over.
HALLIBURTON ALLIANCE
In response to ongoing changes in the emergency response segment of the oil
and gas service industry, the Company entered into a global strategic alliance
in 1995 with Halliburton Energy Services. Halliburton is widely recognized as an
industry leader in the pumping, cementing, snubbing, production enhancement,
coiled tubing and related services segment of the oil field services industry.
This alliance, WELLCALL(SM), draws on the expertise and abilities of both
companies to offer a total well control solution for oil and gas producers
worldwide. The Halliburton Alliance provides a complete range of well control
services including pre-event troubleshooting and contingency planning, snubbing,
pumping, blowout control, debris removal, firefighting, relief and directional
well planning and other specialized services. The specific benefits that
WELLCALL(SM) provides to an operator include:
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- Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week
- A full-time team of experienced well control specialists that are
dedicated to safety
- Specialized equipment design, rental, and sales
- Contingency planning consultation where WELLCALL(SM) specialists meet
with customers, identify potential problems, and help develop a
comprehensive contingency plan
- A single-point contact to activate a coordinated total response to
well control needs.
Operators contracting with WELLCALL(SM) receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is
region-specific, reservoir-specific, site-specific and well-specific. The
S.T.E.P. plan provides the operator with a written, comprehensive and
coordinated action plan that incorporates historical data, pre-planned call outs
of Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. In the event of a blowout, WELLCALL(SM) provides the
worldwide engineering and well control equipment capabilities of Halliburton and
the firefighting expertise of the Company through an integrated contract with
the operator.
As a result of the Halliburton Alliance, the Company is directly involved
in Halliburton's well control projects that require firefighting and Risk
Management expertise, Halliburton is a primary service vendor to the Company and
the Company has exclusive rights to use certain firefighting technologies
developed by Halliburton. The Halliburton Alliance also gives the Company access
to Halliburton's facilities world wide as well as global communications, credit
and currency management systems, capabilities that could prove invaluable in
connection with the Company's international operations.
Consistent with the Halliburton Alliance, the Company's focus has evolved
to meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many engineering
services, the Company has developed a proactive menu of services to meet their
needs. These services emphasize pre-event planning and training to minimize the
likelihood of a blowout and minimize damages in the event of a blowout. The
Company provides comprehensive advance training, readiness, preparation,
inspections and mobilization drills which allow clients to pursue every possible
preventive measure and to react in a cohesive manner when an event occurs. The
Halliburton Alliance stresses the importance of safety, environmental protection
and cost control, along with asset protection and liability minimization.
The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provided that it would remain in effect for an
indefinite period of time and could be terminated prior to September 15, 2005,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination was limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either party,
(iii) the failure of the Alliance to generate economically viable business, or
(iv) the failure of either party to engage in good faith dealing. On April 15,
1999, in connection with a $5,000,000 purchase by Halliburton of the Company's
Series A Cumulative Senior Preferred Stock, the Company and Halliburton entered
into an expanded Alliance Agreement. While the Company considers its
relationship with Halliburton to be good and strives to maintain productive
communication with its chief Alliance partner, there can be no assurance that
the Alliance Agreement will not be terminated by Halliburton. The termination of
the Alliance Agreement could have a material adverse effect on the Company's
future operating performance.
REGULATION
The operations of the Company are affected by numerous federal, state, and
local laws and regulations relating, among other things, to workplace health and
safety and the protection of the environment. The technical requirements of
these laws and regulations are becoming increasingly complex and stringent, and
compliance is becoming increasingly difficult and expensive. However, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is obligated to exercise prudent judgment
and reasonable care at all times and the failure to do so could result in
liability under any number of laws and regulations.
Certain environmental laws provide for "strict liability" for remediation
of spills and releases of hazardous substances and some provide liability for
damages to natural resources or threats to public health and safety. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible that
8
changes in the environmental laws and enforcement policies hereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To date, the Company has not been subject to any fines or penalties for
violations of governmental or environmental regulations and has not incurred
material capital expenditures to comply with environmental regulations.
RESEARCH AND DEVELOPMENT
The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.
COMPETITION
The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a rapid
pace. The Company believes that the Halliburton Alliance and the WELLSURE(R)
program have strengthened its competitive position in the industry by expanding
the scope of services that the Company offers to its customers. However, the
Company's ability to compete depends upon, among other factors, capital
availability, increasing industry awareness of the variety of services the
Company offers, expanding the Company's network of Emergency Response Centers
and further expanding the breadth of its available services. Competition from
other emergency response companies, some of which have greater financial
resources than the Company, is intense and is expected to increase as the
industry undergoes additional change. The Company's competitors may also succeed
in developing new techniques, products and services that are more effective than
any that have been or are being developed by the Company or that render the
Company's techniques, products and services obsolete or noncompetitive. The
Company's competitors may also succeed in obtaining patent protection or other
intellectual property rights that might hinder the Company's ability to develop,
produce or sell competitive products or the specialized equipment used in its
business.
EMPLOYEES
As of March 29, 2004, the Company and its operating subsidiaries
collectively had 37 full-time employees, and two part-time personnel, who are
available as needed for emergency response projects. In addition, the Company
has several part-time consultants and also employs part-time contract personnel
who remain on-call for certain emergency response projects. The Company is not
subject to any collective bargaining agreements and considers its relations with
its employees to be good.
OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE
The Company's operations involve ultra-hazardous activities that involve an
extraordinarily high degree of risk. Hazardous operations are subject to
accidents resulting in personal injury and the loss of life or property,
environmental mishaps and mechanical failures, and litigation arising from such
events may result in the Company being named a defendant in lawsuits asserting
large claims. The Company may be held liable in certain circumstances, including
if it fails to exercise reasonable care in connection with its activities, and
it may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their duties. The Company and its
subsidiaries currently maintain liability insurance coverage with aggregate
policy limits which are believed to be adequate for their respective operations.
However, it is generally considered economically unfeasible in the oil and gas
service industry to maintain insurance sufficient to cover large claims. A
successful claim for which the Company is not fully insured could have a
material adverse effect on the Company. No assurance can be given that the
Company will not be subject to future claims in excess of the amount of
insurance coverage which the Company deems appropriate and feasible to maintain.
RELIANCE UPON OFFICERS, DIRECTORS AND EMPLOYEES
The Company's emergency response services require highly specialized
skills. Because of the unique nature of the industry and the small number of
persons who possess the requisite skills and experience, the Company is highly
dependent upon the personal efforts and abilities of its employees. In seeking
qualified personnel, the Company may be required to compete with companies
having greater financial and other resources than the Company. Since the future
success of the Company will be dependent upon its ability to attract and retain
qualified personnel, the inability to do so, or the loss of personnel, could
have a material adverse impact on the Company's business.
9
CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION
The Company customarily enters into service contracts which contain
provisions that hold the Company liable for various losses or liabilities
incurred by the customer in connection with the activities of the Company,
including, without limitation, losses and liabilities relating to claims by
third parties, damage to property, violation of governmental laws, regulations
or orders, injury or death to persons, and pollution or contamination caused by
substances in the Company's possession or control. The Company may be
responsible for any such losses or liabilities caused by contractors retained by
the Company in connection with the provision of its services. In addition, such
contracts generally require the Company, its employees, agents and contractors
to comply with all applicable laws, rules and regulations (which may include the
laws, rules and regulations of various foreign jurisdictions) and to provide
sufficient training and educational programs to such persons in order to enable
them to comply with applicable laws, rules and regulations. In the case of
emergency response services, the Company frequently enters into agreements with
customers which limit the Company's exposure to liability and/or require the
customer to indemnify the Company for losses or liabilities incurred by the
Company in connection with such services, except in the case of gross negligence
or willful misconduct by the Company. There can be no assurance, however, that
such contractual provisions limiting the liability of the Company will be
enforceable in whole or in part under applicable law.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company owns a facility in northwest Houston, Texas, at 11615 N.
Houston-Rosslyn Road, that includes approximately 2 acres of land, a 4,000
square foot office building and a 12,000 square foot manufacturing and warehouse
building. Additionally, the Company has leased office and equipment storage
facilities in various other cities within the United States and Venezuela. The
future commitments on these additional leases are immaterial. The Company
believes that these facilities will be adequate for its anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
On March 27, 2003, a lawsuit styled Gateway Ridgecrest Inc. vs. Boots &
Coots International Well Control, Inc. alleging default by the Company under a
Lease Agreement dated May 4, 1998 (the "Lease Agreement") by and between
Plaintiff and the Company. The leased premises are located at 777 Post Oak
Boulevard, Houston, Harris County, Texas 77056. Plaintiff seeks recovery of:
(a) rent past due, future rent, common area maintenance charges, taxes,
insurance, late charges and other charges proven up through the end of the term
of the lease; (b) prejudgment and post-judgment interest on the amounts awarded
at the maximum lawful rate; (c) attorney's fees, together with interest
thereon; and (d) costs of suit. The Company has properly accrued for any
potential liabilities under the lease agreement. The Company filed its answer
generally denying Plaintiff's claims and asserting the affirmative defenses of
surrender and termination, estoppel and waiver. Both parties have responded to
written discovery. Plaintiff has filed a partial motion for summary judgment
relating to the Company's liability under the Lease Agreement. The hearing on
Plaintiff's motion for summary judgment was held on March 12, 2004, but the
court has not yet ruled on the motion. The Company intends to vigorously defend
this matter.
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000
in cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company by paying the remaining unpaid
$400,000 in March, 2003 in exchange for full and final release by all plaintiffs
from any and all claims related to the subject of the case. On September 24,
2003, Defendants Larry H. Ramming, Buckingham Funding Corporation and Buckingham
Capital Corporation filed a Cross-Claim for Indemnification against the Company
and its subsidiary, IWC Services, Inc., alleging that the Company and IWC
Services, Inc. owed indemnification to said Defendants for the Plaintiffs'
claims that still remain against said Defendants. The Company denies any
indemnification obligation and intends to vigorously defend the matter.
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 19, 2003, the Company convened its annual meeting of the
stockholders in Houston, Texas. At the meeting, the stockholders were asked
to elect one Class I director serving for a one year term, one Class II
director serving for a two year term and one Class III director to server
for a three year term and to approve a one to four reverse stock spit of
the Company's common stock.
The voting was as follows:
Proposal I: Election of Directors.
BROKER
FOR CLASS WITHHELD ABSTAINING NON VOTES
W. Richard Anderson 22,884,967 I 460,588 -- --
Jerry L. Winchester 22,760,952 II 584,628 -- --
K. Kirk Krist 22,763,112 III 582,444 -- --
Each of the directors was elected by the holders of more than a
plurality of the shares present, in person or by proxy, at the annual
meeting.
Proposal II: Amendment to certificate of incorporation affecting a one
for four reverse stock split of the Company's common stock.
BROKER
FOR AGAINST ABSTAINING NON VOTES
20,622,448 2,687,870 35,237 --
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the AMEX under the symbol "WEL."
The following table sets forth the high and low sales prices per share of the
common stock for each full quarterly period within the two most recent fiscal
years as reported on the AMEX:
HIGH AND LOW SALES PRICES
2002 2003
---- ----
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter. . . . $1.84 $1.28 $8.40 $0.48
Second Quarter . . . 1.80 0.68 3.20 0.96
Third Quarter. . . . 0.88 0.24 1.72 1.16
Fourth Quarter . . . 0.96 0.24 1.61 1.10
On March 29, 2004 the last reported sale price of the common stock as
reported on AMEX was $1.36 per share.
As of March 29, 2004, the Company's common stock was held by approximately
20,000 holders of record. The Company estimates that it has a larger number of
beneficial stockholders as much of its common stock is held by broker-dealers in
street name for their customers.
The Company has not paid any cash dividends on its common stock to date.
The Company's current policy is to retain earnings, if any, to provide funds for
the operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash
11
dividends. In addition, the Company is prohibited from paying cash dividends on
its common stock before full dividends, including cumulative dividends, are paid
to holders of the Company's preferred stock.
SALES OF UNREGISTERED SECURITIES
On March 31, 2003, all 12,000 shares of the Company's Junior Redeemable
Convertible Preferred Stock were converted into 149,905 shares of the Company's
common stock.
On March 20, 2003, 2,119 shares of 5,380 outstanding shares of the
Company's Series C Cumulative Convertible Preferred Stock were converted into
70,634 shares of the Company's common stock.
On May 15, 2003, 1,053 shares of 3,261 outstanding shares of the Company's
Series C Cumulative Convertible Preferred Stock were converted into 35,100
shares of the Company's common stock.
On March 27, 2003, all shares of 3,726 outstanding shares of the Company's
Series D Cumulative Junior Preferred Stock were converted into 140,712 shares of
the Company's common stock
On March 21, 2003, the Prudential Insurance Company of America converted
83,231 shares of the Company's Series G Cumulative Convertible Preferred Stock
into 3,015,616 shares of the Company's common stock.
From January to April 2003, all 101,907 outstanding shares of the Company's
Series H Cumulative Convertible Preferred Stock were converted into 3,396,718
shares of the Company's common stock.
On March 20, 2003, the Company's former Chief Executive Officer exercised
options covering 225,000 shares of common stock.
On July 3, 2003, Prudential converted 60,193 and 14,009 shares of the
Company's Series E and Series G Cumulative Convertible Preferred Stock,
respectively into 3,401,801 shares of the Company's common stock. The Series E
Preferred Stock converted included dividends which were paid in kind of 9,872
shares of Series E Preferred Stock. As of the date hereof, 582 shares of Series
E Preferred Stock remain outstanding.
In July 2003, Specialty Finance Fund I, LLC and certain participation
interest holders converted $1,688,641 of senior secured debt and accrued
interest into 1,597,642 shares of common stock.
On August 15, 2003, 16,667, shares of common stock were issued related to
finance charges on certain senior debt.
On October 24, 2003, 25,000 shares of common stock were issued related to a
settlement with a law firm.
On October 31, 2003, 550,000 shares of common stock were issued in settlement of
a liability with a public relations firm.
On November 20, 2003, 135,926 shares of common stock were issued to certain
senior debt holders as finance charges.
These issuances were exempt private placements pursuant to Section 4(2) of
the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for the years ended December 31, 1999, 2000, 2001, 2002 and 2003 which
has been derived from the Company's audited consolidated financial statements.
The results of operations of ITS, Baylor Company, Abasco and Special Services
are presented as discontinued operations. The data should be read in
conjunction with the consolidated financial statements, including the notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere.
12
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------ ------------- -----------
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . $ 14,126,000 $ 10,813,000 $16,938,000 $ 14,102,000 $35,935,000
Operating income (loss) . . . . . . . . . (6,088,000) (3,363,000) 4,407,000 (1,539,000) 10,234,000
Income (loss) from continuing operations
before extraordinary item . . . . . . . (9,171,000) (8,820,000) 3,687,000 (2,525,000) 6,609,000
Income (loss) from discontinued
operations,net of income taxes. . . . . (21,945,000) (12,368,000) (2,359,000) (6,179,000) 482,000
Gain (loss) from sale of discontinued
operations,net of income taxes. . . . . - (2,555,000) - (476,000) -
Net income (loss) before
extraordinary item. . . . . . . . . . . (31,116,000) (23,743,000) 1,328,000 (9,180,000) 7,091,000
Extraordinary item -gain on
debt extinguishment . . . . . . . . . . - 2,444,000 - - -
Net income (loss) . . . . . . . . . . . . (31,116,000) (21,299,000) 1,328,000 (9,180,000) 7,091,000
Net income (loss) attributable to
common stockholders . . . . . . . . . . (32,360,000) (22,216,000) (1,596,000) (12,292,000) 5,868,000
BASIC INCOME (LOSS) PER
COMMON SHARE:
Continuing operations . . . . . . . . . . $ (1.21) $ (1.15) $ 0.08 $ (0.53) $ 0.25
============= ============= ============ ============= ===========
Discontinued operations . . . . . . . . . (2.56) $ (1.77) $ (0.24) $ (0.61) $ 0.02
============= ============= ============ ============= ===========
Extraordinary item. . . . . . . . . . . . $ - 0.29 $ - $ - $ -
============= ============= ============ ============= ===========
Net income (loss) . . . . . . . . . . . . $ (3.77) $ (2.63) $ (0.16) $ (1.14) $ 0.27
============= ============= ============ ============= ===========
Weighted average common
shares outstanding -Basic . . . . . . . 8,588,000 8,452,000 10,018,000 10,828,000 21,878,000
DILUTED INCOME (LOSS) PER
COMMON SHARE:
Continuing operations . . . . . . . . . . $ (1.21) $ (1.15) $ 0.08 $ (0.53) $ 0.24
============= ============= ============ ============= ===========
Discontinued operations . . . . . . . . . (2.56) $ (1.77) $ (0.24) $ (0.61) $ 0.02
============= ============= ============ ============= ===========
Extraordinary item. . . . . . . . . . . . $ - 0.29 $ - $ - $ -
============= ============= ============ ============= ===========
Net income (loss) . . . . . . . . . . . . $ (3.77) $ (2.63) $ (0.16) $ (1.14) $ 0.26
============= ============= ============ ============= ===========
Weighted average common
shares outstanding - Diluted. . . . . . 8,588,000 8,452,000 10,018,000 10,828,000 22,218,000
AS OF DECEMBER 31,
------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------ ------------- -----------
BALANCE SHEET DATA:
Total assets (1). . . . . . . . . . . . . $ 62,248,000 $ 18,126,000 $17,754,000 $ 7,036,000 $19,726,000
Long-term debt and notes payable,
including current maturities (2) . . . 43,122,000 12,620,000 13,545,000 15,000,000 12,398,000
Working capital (deficit) (3) (4) . . . . (14,757,000) 93,000 3,285,000 (16,994,000) 9,375,000
Stockholders' equity (deficit) (4). . . . (4,327,000) (6,396,000) (4,431,000) (13,988,000) 380,000
Common shares outstanding . . . . . . . . 8,811,000 7,991,000 10,361,000 11,216,000 27,300,000
(1.) The reduction in total assets from 1999 to 2000 is a result of the sale of
Baylor. The reductions in total assets from 2001 to 2002 is a result of the
sale of the assets of Special Services and Abasco.
(2.) The reduction of long-term debt and notes payable, including current
maturities from 1999 to 2000 is the result of a troubled debt restructuring
and payments of debt from the proceeds of the sale of Baylor.
(3.) The change in working capital from 1999 to 2000 as a result of reduction of
current debt due to the effect of the troubled debt restructuring offset by
the reduction of current assets as a result of the sale of Baylor. The
change in working capital from 2001 to 2002 is primarily due to the
classification of long term debt as current due to failing certain debt
covenants.
(4.) The change in working capital from 2002 - 2003 is a result of increased
business activities in 2003 which resulted in higher levels of cash and
receivables and payments on long term debt and reclassifying subordinated
debt from current to long term debt. The change in equity from 2002-2003 is
a result of net income in 2003, a short swing profit contribution and
various issuances of common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Securities and Exchange Commission and incorporated herein by reference.
13
Summary consolidated operating results for the fiscal years ended December 31,
2001, 2002 and 2003 are as follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2002 2003
------------ ------------- ------------
Revenues . . . . . . . . . . . . . . . . . . $16,938,000 $ 14,102,000 $35,935,000
Costs and expenses:
Cost of sales. . . . . . . . . . . . . . . 3,085,000 5,809,000 13,448,000
Operating expenses . . . . . . . . . . . . 5,463,000 5,893,000 8,253,000
Selling, general and administrative. . . . 2,739,000 2,737,000 3,004,000
Depreciation and amortization. . . . . . . 1,244,000 1,202,000 996,000
------------ ------------- ------------
Operating income (loss). . . . . . . . . . 4,407,000 (1,539,000) 10,234,000
Interest (expense) and other income, net . (385,000) (443,000) (2,286,000)
Income tax expense . . . . . . . . . . . . 335,000 543,000 1,339,000
------------ ------------- ------------
Income (loss) from continuing operations
before extraordinary item. . . . . . . . 3,687,000 (2,525,000) 6,609,000
Income (loss) from discontinued operations,
net of income taxes. . . . . . . . . . . (2,359,000) (6,179,000) 482,000
Loss from sale of discontinued
operations net of income tax . . . . . . . - (476,000) -
Net income (loss) . . . . . . . . . . . . 1,328,000 (9,180,000) 7,091,000
Stock and warrant accretions . . . . . . . (53,000) (53,000) (53,000)
Preferred dividends accrued. . . . . . . . (2,871,000) (3,059,000) (1,170,000)
Net income (loss) attributable to common
Stockholders . . . . . . . . . . . . . . $(1,596,000) $(12,292,000) $ 5,868,000
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 in
proportion to their relative revenue. Business segment operating data from
continuing operations is presented for purposes of management discussion and
analysis of operating results.
While Cost of Sales expenses are variable based upon the type of revenue
generated, most of 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 extremely high response activity, the Company will utilize third
party consultants to support its response staff and costs of sales will rise
more significantly. In the past, during periods of few critical events,
resources dedicated to emergency response were underutilized or, at times, idle,
while the fixed costs of operations continued to be incurred, contributing to
significant operating losses. To mitigate these consequences, the Company is
actively attempting to expand its non-event services. These services primarily
utilize existing personnel to maximize utilization with only slight increases in
fixed operating costs.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. 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 even.
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.
Information concerning operations in different business segments for the
years ended December 31, 2001, 2002 and 2003 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
14
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002 2003
----------- ------------ -----------
REVENUES
Prevention. . . . . . . . . . . . . . $ 5,189,000 $ 7,666,000 $16,159,000
Response. . . . . . . . . . . . . . . 11,749,000 6,436,000 19,776,000
----------- ------------ -----------
$16,938,000 $14,102,000 $35,935,000
----------- ------------ -----------
COST OF SALES
Prevention. . . . . . . . . . . . . . $ 1,232,000 $ 2,746,000 $ 6,426,000
Response. . . . . . . . . . . . . . . 1,853,000 3,063,000 7,022,000
----------- ------------ -----------
$ 3,085,000 $ 5,809,000 $13,448,000
----------- ------------ -----------
OPERATING EXPENSES (1)
Prevention. . . . . . . . . . . . . . $ 1,863,000 $ 3,547,000 $ 4,228,000
Response. . . . . . . . . . . . . . . 3,600,000 2,346,000 4,025,000
----------- ------------ -----------
$ 5,463,000 $ 5,893,000 $ 8,253,000
----------- ------------ -----------
SELLING, GENERAL AND ADMINISTRATIVE (2)
Prevention. . . . . . . . . . . . . . $ 839,000 $ 1,488,000 $ 1,351,000
Response. . . . . . . . . . . . . . . 1,900,000 1,249,000 1,653,000
----------- ------------ -----------
$ 2,739,000 $ 2,737,000 $ 3,004,000
----------- ------------ -----------
DEPRECIATION AND AMORTIZATION (3)
Prevention. . . . . . . . . . . . . . $ 342,000 $ 617,000 $ 423,000
Response. . . . . . . . . . . . . . . 902,000 585,000 573,000
----------- ------------ -----------
$ 1,244,000 $ 1,202,000 $ 996,000
----------- ------------ -----------
OPERATING INCOME (LOSS)
Prevention. . . . . . . . . . . . . . $ 913,000 $ (732,000) 3,731,000
Response. . . . . . . . . . . . . . . 3,494,000 (807,000) 6,503,000
----------- ------------ -----------
$ 4,407,000 $(1,539,000) $10,234,000
----------- ------------ -----------
(1) Operating expenses have been allocated pro rata between segments based
upon relative revenues.
(2) Selling, general and administrative and corporate expenses have been
allocated pro rata among segments based upon relative revenues.
(3) Corporate depreciation and amortization expenses have been allocated
pro rata among segments based upon relative revenues.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 WITH THE YEAR ENDED DECEMBER 31,
2002
Revenues
Prevention revenues were $16,159,000 for the year ended December 31, 2003,
compared to $7,666,000 for the year ended December 31, 2002, representing an
increase of $8,493,000 (111%) in the current year. Much of the increase during
the 2003 year was the result of a $6,629,000 equipment sale in connection with
operations in Iraq as compared to a $1,090,000 equipment sale provided by the
Company's SafeGuard program in 2002. Increases in revenue from new accounts for
the Company's WELLSURE(R) CANADA risk management program and an increase in
Venezuela revenues were slightly offset by a decrease in other international
SafeGuard services in 2003.
Response revenues were $19,776,000 for the year ended December 31, 2003,
compared to $6,436,000 for the year ended December 31, 2002, an increase of
$13,340,000 (207%) in the current year. $14,755,000 of this increase was the
result of response services related to lead contractor services in Iraq during
2003. This increase was partially offset by reduced demand for domestic
response services during the current year.
Cost of Sales
Prevention cost of sales were $6,426,000 for the year ended December 31,
2003, compared to $2,746,000 for the year ended December 31, 2002, an increase
of $3,680,000 (134%) in the current year. The increase was a result of
replacement equipment costs related to the previously mentioned equipment sales
and increased project management work in Venezuela. The cost of the equipment
sold is based on the purchase price of new assets bought and resold and the net
book value of the Company's equipment sold.
Response cost of sales were $7,022,000 for the year ended December 31,
2003, compared to $3,063,000 for the year ended December 31, 2002, an increase
of $3,959,000 (129%) in the current year. The increase was the result of higher
15
personnel and insurance costs associated with a larger percentage of the
Company's workforce being deployed, principally in Kuwait and Iraq in the
current year.
Operating Expenses
Consolidated operating expenses were $8,253,000 for the year ended December
31, 2003, compared to $5,893,000 for the year ended December 31, 2002, an
increase of $2,360,000 (40%) in the current year. The increase was a result of
additional temporary labor consultants and insurance costs related to the
previously mentioned increase in response revenue for the current year. As
previously footnoted on the segmented financial table, operating expenses have
been allocated pro rata among the segments on the basis of relative revenue.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $3,004,000
for the year ended December 31, 2003, compared to $2,737,000 for the year ended
December 31, 2002, an increase of $272,000 (10%) from the prior year. The
increase was a result of certain non-recurring provisions for settlements in the
current year offset by reduced corporate personnel costs related to the
Company's restructuring initiatives that began in June 2002 and reduced
professional and legal fees. As previously footnoted on the segmented financial
table, corporate selling, general and administrative expenses have been
allocated pro rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expense decreased primarily as a
result of a sale of equipment in connection with operations in Iraq, which
reduced the depreciable asset base in 2003. As previously footnoted on the
segmented financial table, depreciation and amortization expenses on related
corporate assets have been allocated pro rata among the segments on the basis of
relative revenue.
Interest Expense and Other Expenses (Income), Including Finance Costs
The change in interest and other expenses (income) of $1,843,000 for the
year ended December 31, 2003, as compared to the prior year is set forth in the
table below:
For the Years Ended
-------------------------
December 31, December 31,
------------ -----------
2002 2003
------------ -----------
ITS settlement $(1,073,000) -
Reserve for contingent liabilities 279,000 900,000
Restructuring charges 53,000 (67,000)
Financing fees 344,000 332,000
Interest expense - senior debt 170,000 262,000
KBK finance costs 216,000 -
Loss on sale of fixed assets 428,000 -
Interest on subordinated notes 40,000 479,000
Other (14,000) (20,000)
Checkpoint settlement - 400,000
------------ -----------
Total Interest and Other $ 443,000 $2,286,000
------------ -----------
Income Tax Expense
Income taxes for the year ended December 31, 2002 and 2003 were $543,000
and $1,339,000, respectively, and are a result of taxable income in the
Company's foreign operations.
16
Discontinued Operations
Discontinued operations were a gain of $482,000 in 2003 due to settlements
of liabilities at a discount. The 2002 period includes a six month loss from
operations, write downs of goodwill and other assets (See "Note D" Discontinued
operations in the footnotes to the financial statements.)
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 WITH THE YEAR ENDED DECEMBER 31,
2001
Revenues
Prevention revenues were $7,666,000 for the year ended December 31, 2002,
compared to $5,189,000 for the year ended December 31, 2001, an increase of
$2,477,000 (47.7%) in the current year. The increase was primarily the result of
increased service fees 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 $6,436,000 for the year ended December 31, 2002,
compared to $11,749,000 for the year ended December 31, 2001, a decrease of
$5,313,000 (45.2%) in the current year. The decrease was primarily the result of
a decrease of emergency response services as drilling activity declined in
response to weakening general economic and industry conditions. Moreover, the
2001 period contained five significant WELLSURE(R) events while there were only
two critical well events during the 2002 period.
Cost of Sales
Prevention cost of sales were $2,746,000 for the year ended December 31,
2002, compared to $1,232,000 for the year ended December 31, 2001, an increase
of $1,514,000 (122.9%) in the current year. The increase was primarily the
result of increased manufacturing costs associated with an international
equipment sale under the Safeguard program.
Response cost of sales were $3,063,000 for the year ended December 31,
2002, compared to $1,853,000 for the year ended December 31, 2001, an increase
of $1,210,000 (65.3.0%) in the current year. The increase was primarily a
result of higher than usual third party costs incurred by the Company in its
lead contracting role on two response projects during 2002.
Operating Expenses
Consolidated operating expenses were $5,893,000 for the year ended December
31, 2002, compared to $5,463,000 for the year ended December 31, 2001, an
increase of $430,000 (7.8%) 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 $2,737,000
for the year ended December 31, 2002, compared to $2,739,000 for the year ended
December 31, 2001, a decrease of $2,000 from the prior year. The Company
subleased space in its corporate headquarters and reduced corporate personnel
during the second quarter of 2002. The two years are very similar since a
proportionate amount of 2001 expenses have been allocated to discontinued
operations. As previously footnoted on the segmented financial table, corporate
selling, general and administrative expenses have been allocated pro rata among
the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2002 and 2001.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.
17
Interest Expense and Other Expenses (Income), Including Finance Costs
The change in interest and other expenses (income) of $58,000 for the year
ended December 31, 2002, as compared to the year ended December 31, 2001 is set
forth in the table below:
For the Years Ended
-------------------
December 31, December 31,
------------ ------------
2001 2002
---------- ------------
ITS settlement $ - $(1,073,000)
Reserve for contingent liabilities - 279,000
Restructuring charges - 53,000
Financing fees 511,000 344,000
Interest expense - senior debt 80,000 170,000
Interest expense - subordinated debt - 40,000
KBK finance costs - 216,000
Loss on sale of fixed assets (8,000) 428,000
Settlements of certain liabilities (177,000) -
Other (21,000) (14,000)
---------- ------------
Total Interest and Other $ 385,000 $ 443,000
---------- ------------
Income Tax Expense
Income taxes for the year ended December 31, 2002 and 2001 are a result of
taxable income in the Company's foreign operations of $543,000 and $335,000 for
the years ended December 31, 2002 and December 31, 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
LIQUIDITY
At December 31, 2003, the Company had working capital of $9,375,000
including a cash balance of $1,543,000. The Company ended the year with
stockholders' equity of $380,000, an increase of $14,368,000. For the year
ended December 31, 2003, the Company generated operating income of $10,234,000
and net cash used in operating activities, was $406,000. The Company received
short swing profit contribution proceeds of $3,887,000 during 2003 as a result
of sales of Company securities by The Prudential Insurance Company of America
that were voluntarily reported by Prudential. As a consequence, the Company's
liquidity position has improved significantly over the prior year. These
operating and liquidity improvements are primarily a result of activity in the
Middle East and, to some extent, Venezuela. Additionally, the Company received
substantial benefit from the conversion of $1,689,000 of senior debt that was in
default into 1,597,642 shares of common stock during 2003. This transaction
improved the Company's working capital by $1,689,000 and reduced future cash
commitments. The Company's short-term liquidity also improved as a consequence
of increases in prevention service revenues and certain asset sales.
Improvements in liquidity allowed the Company to pay down current maturities of
outstanding debt, significantly reduce payables owing to Company vendors and
settle certain legal proceedings relating to the Company's past financial
problems. The Company believes its liquidity position will meet the Company's
working capital needs into 2005.
The Company generates its revenues from prevention and emergency response
services. Response services are generally associated with a specific well
control emergency or critical "event" whereas prevention services are generally
"non-event" related. The frequency and scale of occurrence for response
services varies widely and is inherently unpredictable. There is no statistical
correlation between common market activity indicators such as commodity pricing,
activity forecasts, E&P operating budgets and resulting response revenues.
Non-event services provide a more predictable base of revenue volume.
Historically the Company has relied upon event driven services as the primary
source of its operating revenues, but more recently the Company's strategy has
been to achieve greater balance between event and non-event service revenues.
While the Company has successfully improved this balance, some level of event
related services is still a required source of revenues and operating income for
the Company.
18
The Company's reliance on event driven revenues in general, and well
control events in particular, has historically impaired the Company's ability to
generate predictable operating cash flows. The level of activity in event
driven revenues along with the continued growth of non-event revenues have
significantly increased the current year's operating income and resulting cash
position. During the year ended December 31, 2003 there was a significant
increase in international demand for the Company's services and equipment,
specifically in the Middle East, in connection with the war in Iraq and
subsequent efforts to restore Iraq's oil production.
Pending the transition to the new contract for the RIO program in Iraq, the
Company has temporarily demobilized its personnel in the region. Currently, it
is unclear when the Company will re-mobilize its personnel, if ever, although
the Company remains positioned to continue its previous work and respond
immediately whenever an emergency arises in Iraq. The Company relied heavily on
the original contract to generate income and cash flow in 2003.
On December 31, 2003, the Company had $1,087,000 of cash and $2,374,000 of
accounts receivable attributable to its Venezuelan operation. The December 31,
2003 foreign exchange rate was 1600 Venezuela Bolivars to one U.S. dollar. At
March 30, 2004, the exchange rate has increased to 1,900 Bolivars to the U.S.
dollar. Venezuela has also been added to the U.S. governments "watch list" for
highly inflationary economies. The Venezuelan government has made it very
difficult for US dollars to be repatriated. If this problem continues in the
future it could have a negative impact on the Company's liquidity.
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
- ------------------------------------------------------------------------------------------
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDING DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION 2004 2005 2006 2007 2008 THEREAFTER
- ------------------------------------------------------------------------------------------------------------
Long and short term debt and
notes payable (1) . . . . $ - $12,398,000 - - - -
- ------------------------------------------------------------------------------------------------------------
Future minimum lease
payments . . . . . . . . . $ 16,000 $ 16,000 $ 16,000 $ 16,000 $ 3,000 $ -
- ------------------------------------------------------------------------------------------------------------
Total commitments . . . . . . $ 16,000 $12,414,000 $ 16,000 $ 16,000 $ 3,000 $ -
- ------------------------------------------------------------------------------------------------------------
(1) Accrued interest totaling $2,287,000 is included in the Company's 12%
Senior Subordinated Notes at December 31, 2003 due to the accounting for a
troubled debt restructuring during 2000. This amount is included in the
above presentation. Accrued interest calculated through March 31, 2003 is
deferred for payment until December 30, 2005. Payments on accrued interest
after December 31, 2003 will continue quarterly until December 30, 2005.
Credit Facilities/Capital Resources
Financial Improvements. At December 31, 2003 and as of the date of this
filing, the Company is not in default on any of its loan agreements. During
July, 2003, the Company received substantial benefit from the conversion of
$1,689,000 of senior debt that was in default into 1,597,642 shares of common
stock. Additionally, in August, 2003, The Company received short swing profit
contribution proceeds of $3,887,000 as a result of sales of Company securities
by The Prudential Insurance Company of America that were voluntarily reported by
Prudential. During the year ended December 31, 2003 there was a significant
increase in international demand for the Company's services and equipment,
specifically in the Middle East, in connection with the war in Iraq and
subsequent efforts to restore Iraq's oil production. As a consequence, the
Company's liquidity position has improved significantly over recent years. The
Company's short-term liquidity also improved as a consequence of increases in
prevention service revenues and certain asset sales. Improvements in liquidity
allowed the Company to pay down current maturities of outstanding debt,
significantly reduce payables owing to Company vendors and settle certain legal
proceedings relating to the Company's past financial problems.
On April 9, 2002, the Company entered into a loan participation agreement
under which it borrowed an additional $750,000 under its existing Senior Secured
Loan Facility with Specialty Finance Fund I, LLC. This Loan Facility was
aquired by San Juan Investments on that day. 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 25,000 shares of common stock to the participation lender at
closing. The participation had an initial maturity of 90 days, which was
extended for an additional 90 days at the Company's option. The Company issued
an additional 25,000 shares of common stock to the participation lender to
extend the maturity date. On October 9, 2002, the loan extension period
matured. On November 11, 2003, the Company and its senior lender executed an
agreement extending the term of the loan to 24 months.
19
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified its most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor, related
workman's compensation insurance, supplies, tools, repairs and depreciation
costs. General and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
As of December 31, 2001, 2002 and 2003, the Company has net domestic
operating loss carry forwards of approximately $46,065,000, $47,155,000 and
$41,227,000, respectively, expiring in various amounts beginning in 2011. The
net operating loss carry forwards, along with the other timing differences,
generate a net deferred tax asset. The Company has recorded valuation allowances
in each year for these net deferred tax assets since management believes it is
more likely than not that the assets will not be realized.
RECENT ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, and subsequently revised the Interpretation in
December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim or annual periods ending on or after March 15, 2004. We have not
identified any variable interest entities. In the event a variable interest
entity is identified, we do not expect the requirements of FIN 46R to have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," (" SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No.150 did not have a material
impact on our consolidated financial statements.
20
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking information. Forward-looking information is
based on projections, assumptions and estimates, not historical information.
Some statements in this Form 10 - K are forward-looking and use words like
"may," "may not," "believes," "do not believe," "expects," "do not expect," "do
not anticipate," and other similar expressions. We may also provide oral or
written forward-looking information on other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and results of operations may vary materially.
While it is not possible to identify all factors, we face many risks and
uncertainties that could cause actual results to differ from our forward-looking
statements including those contained in this 10-K, our press releases and our
Forms 10-Q, 8-K and 10-K filed with the United States Securities and Exchange
Commission. We do not assume any responsibility to publicly update any of our
forward-looking statements regardless of whether factors change as a result of
new information, future events or for any other reason.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher throughout 2001, 2002 and 2003, and all other factors affecting the
Company's debt remained the same, pretax earnings would have been lower by
approximately $29,000, $68,000 and $44,000 in 2001, 2002 and 2003, respectively.
With respect to the fair value of the Company's fixed-interest rate debt, if
prevailing market interest rates had been 10% higher at year-end 2001, 2002 and
2003, and all other factors affecting the Company's debt remained the same, the
fair value of the Company's fixed-rate debt, as determined on a present-value
basis, would have been lower by approximately $212,000, $34,000 and $23,000 at
December 31, 2001, 2002 and 2003, respectively. Given the composition of the
Company's debt structure, the Company does not, for the most part, actively
manage its interest rate risk.
On December 31, 2003 the Company has $1,087,000 of cash and $2,374,000 of
accounts receivable in Venezuela. The December 31, 2003 foreign exchange rate
was 1600 Venezuela Bolivars to one U.S. dollar. At March 30, 2003, the exchange
rate has increased to 1,900 Bolivars to the U.S. dollar. Venezuela has also
been added to the U.S. governments "watch list" for highly inflationary
economies. The Venezuelan government has made it very difficult for US dollars
to be repatriated. If this problem continues in the future it could have an
adverse effect on the Company's liquidity.
ITEM 8. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and principal accounting officer, we
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
as of December 31, 2003. Based on their evaluation, our chief executive officer
and principal accounting officer concluded that the Company's disclosure
controls and procedures are effective.
21
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The section entitled "Election of Directors" in the Registrant's proxy
statement for the 2004 annual meeting of shareholders sets forth the certain
information with respect to the directors of the Registrant and is incorporated
herein by reference.
The section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's proxy statement for the 2004 annual meeting of
shareholders sets forth certain information with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Registrant's proxy
statement for the 2004 annual meeting of shareholders sets forth certain
information with respect to the compensation of management of the Registrant,
and except for the report of the Compensation, Benefits and Stock Option
Committee of the Board of Directors and the information therein under "Executive
Compensation - Performance Graph" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section entitled "Security Ownership of Certain Beneficial Owners" and
"Security Ownership of Directors and Executive Officers" in the Registrant's
proxy statement for the 2004 annual meeting of shareholders sets forth certain
information with respect to the ownership of the Registrant's common stock and
are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The section entitled "Certain Transactions" in the Registrant's proxy
statement for the 2004 annual meeting of shareholders sets forth certain
information with respect to the certain relationships and related transactions,
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The section entitled "Principal Accounting Fees and Services" in the
Registrant's proxy statement for the 2004 annual meeting of shareholders sets
forth certain information with respect to the certain relationships and related
transactions, and is incorporated herein by reference.
22
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements for the year ended December 31,
2003, included after signature page.
2. Financial statement schedules included in Consolidated financial
statements.
3. Exhibit Index
(a) Exhibits
Exhibit No. Document
------------ ------------------------------------------------
3.01 - Amended and Restated Certificate of Incorporation(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)
Certificate of Designation of Series C Cumulative Convertible Junior
4.05 - Preferred Stock(9)
4.06 - Certificate of Designation of Series D Cumulative Junior Preferred Stock(10)
4.07 - Certificate of Designation of Series E Cumulative Senior Preferred Stock(11)
4.08 - Certificate of Designation of Series F Convertible Senior Preferred Stock(12)
4.09 - Certificate of Designation of Series G Cumulative Convertible Preferred Stock(13)
4.10 - Certificate of Designation of Series H Cumulative Convertible Preferred Stock(14)
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(15)
10.02 - Open
10.03 - Open
10.04 - 1997 Incentive Stock Plan(18)
10.05 - Outside Directors' Option Plan
10.06 - Executive Compensation Plan
10.07 - Halliburton Center Sublease(19)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(20)
10.09 - Participation Rights Agreement dated July 23, 1998, by
and among Boots & Coots International Well Control, Inc.,
The Prudential Insurance Company of America and certain
stockholders of Boots & Coots International Well Control,
Inc.(21)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued to The Prudential
Insurance Company of America (22)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank - Texas(23)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica
Bank - Texas(24)
10.13* - Executive Employment Agreement of Jerry Winchester
23
Exhibit No. Document
------------ ------------------------------------------------
10.14 Open
10.15 - Office Lease for 777 Post Oak(25)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000 (26)
10.19 - Fourth Amendment to Loan Agreement dated May 31, 2000(27)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(28)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(29)
10.22 - Seventh Amendment to Loan Agreement dated December 29, 2000(30)
10.23 Subordinated Note Restructuring Agreement with The Prudential Insurance
- Company of America dated December 28, 2000 (31)
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April 15, 1999, with
Halliburton Energy Services, Inc. (32)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and to Turner, Voelker,
Moore (33)
10.28 - Amended and Restated Purchase and Sale Agreement with National Oil Well, L.P. (34)
Open
10.30 - 2000 Long Term Incentive Plan (35)
10.31 - Eighth Amendment to Loan Agreement dated April 12, 2002 (36)
10.32 - Ninth Amendment to Loan Agreement dated May 1, 2002 (37)
10.33 - 1st Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated March 29, 2002 (38)
10.34 - 2nd Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated June 29, 2002 (39)
10.35 - 3rd Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated July 3, 2003 (40)
10.36 - 4th Amendment to Subordinated Note Restructuring Agreement with The Prudential
Insurance Company of America dated November 14, 2003 (41)
21.01 - List of subsidiaries(42)
*31.1 Sec.302 Certification by Jerry Winchester
*31.2 Sec.302 Certification by Kevin Johnson
*32.1 Sec.906 Certification by Jerry Winchester
*32.2 Sec.906 Certification by Kevin Johnson
*Filed herewith
(1) Incorporated herein by reference to exhibit 3.2 of Form 8-K filed August
13, 1997.
(2) Incorporated herein by reference to exhibit 3.3 of Form 8-K filed August
13, 1997.
(3) Incorporated herein by reference to exhibit 3.02(a) of Form 10-Q filed
November 14, 2001.
(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.
24
(9) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.
(10) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.
(11) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed April
2, 2001.
(12) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed April
2, 2001.
(13) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed April
2, 2001.
(14) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed April
2, 2001.
(15) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
13, 1997.
(16) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed August
16, 1999.
(17) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August
13, 1997.
(18) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.
(19) Incorporated herein by reference to exhibit 10.17 of Form 10-KSB filed
March 31, 1998.
(20) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August
7, 1998.
(21) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August
7, 1998.
(22) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August
7, 1998.
(23) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 17, 1998.
(24) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 17, 1998.
(25) Incorporated herein by reference to exhibit 10.30 of Form 10-K filed April
15, 1999.
(26) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July
17, 2000.
(27) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July
17, 2000.
(28) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July
17, 2000.
(29) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July
17, 2000.
(30) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January
12, 2001.
(31) Incorporated herein by reference to exhibit 10.23 of Form 10-K filed April
2, 2001.
(32) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July
17, 2000.
(33) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.
(34) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 11,
2000.
25
(35) Incorporated herein by reference to exhibit 4.1 of Form S-8 filed April 30,
2001.
(36) Incorporated herein by reference to exhibit 10.31 of Form 10-Q filed
November 14, 2002.
(37) Incorporated herein by reference to exhibit 10.32 of Form 10-Q filed
November 14, 2002.
(38) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed May
14, 2003.
(39) Incorporated herein by reference to exhibit 10.34 of Form 10-Q filed August
14, 2003.
(40) Incorporated herein by reference to exhibit 10.35 of Form 10-Q filed
November 14, 2003.
(41) Incorporated herein by reference to exhibit 10.36 of Form 10-Q filed
November 14, 2003.
(42) Incorporated herein by reference to exhibit 21.01 of Form 10-Q filed May
14, 2003.
(b) Reports on Form 8-K
None.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ Jerry Winchester
-------------------------------
Jerry Winchester,
Chief Executive Officer
By: /s/ Kevin Johnson
-------------------------------
Kevin Johnson
Principal Accounting Officer
Date: March 30, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
- --------------------------- ------------------------------------ --------------
By: /s/ K. KIRK KRIST Chairman of the Board of Directors March 30, 2004
- ---------------------------
K. Kirk Krist
By: /s/ JERRY L. WINCHESTER Chief Executive Officer and Director March 30, 2004
- ---------------------------
Jerry L. Winchester
By: /s/ ROBERT HERLIN Director March 30, 2004
- ---------------------------
Robert Stevens Herlin
By: /s/ E.J. DIPAOLO Director March 30, 2004
- ---------------------------
E.J. DiPaolo
By: /s/ W. RICHARD ANDERSON Director March 30, 2004
- ---------------------------
W. Richard Anderson
27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots & Coots
International Well Control, Inc. and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of operations, cash flows, and
stockholders' equity (deficit) for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated financial statements of Boots
& Coots International Well Control, Inc. for the year ended December 31, 2001,
before the restatements and revisions discussed below, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion, modified for a going concern uncertainty, on those financial statements
in their report dated March 14, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Boots & Coots International Well Control, Inc. as of December 31,
2003 and 2002, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed above, the consolidated financial statements of Boots & Coots
International Well Control, Inc. for the year ended December 31, 2001 were
audited by other auditors who have ceased operations. These consolidated
financial statements have been restated and revised as follows:
- - As described in Note D, the Company discontinued its Special Services and
Abasco operations effective June 30, 2002. The 2001 consolidated financial
statements, including disclosures, have been restated to reclassify the related
accounts from continuing operations to discontinued operations.
- - As disclosed in Note C, effective January 1, 2002, the Company changed
its accounting policy for recognizing response revenue on its WELLSURE(R)
program from reporting revenues at gross to reporting revenues at net. The 2001
consolidated financial statements have been restated to give effect for this
change in accounting policy.
We audited the adjustments and disclosures that were included to restate
and revise the 2001 consolidated financial statements. In our opinion, such
adjustments and disclosures are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 consolidated financial statements of the Company other than with respect to
such adjustments and disclosures and, accordingly, we do not express an opinion
or any other form of assurance on the 2001 consolidated financial statements
taken as a whole.
Mann Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
March 7, 2004
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THIS REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT, THE PREDECESSOR
AUDITOR HAS NOT REISSUED THIS REPORT, THE PREVIOUSLY ISSUED REPORT REFERS
TO FINANCIAL STATEMENTS NOT PHYSICALLY INCLUDED IN THIS DOCUMENT, AND THE
PRIOR-PERIOD FINANCIAL STATEMENTS HAVE BEEN REVISED OR RESTATED.
To the Board of Directors of
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Boots & Coots International Well Control, Inc. and subsidiaries as of December
31, 2000 and 2001, and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note A to the consolidated financial statements, the Company experienced
recurring losses from operations during 1999 and 2000. During 2001 the Company
realized income from operations. However, the Company continues to have a net
capital deficiency, and current uncertainties surrounding the sufficiency and
timing of its future cash flows raise substantial doubt about the ability of the
Company to continue as a going concern. Management's plans in regards to these
matters are also described in Note A. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 2002
F-2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
2002 2003
---------------- -------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 261,000 $ 1,543,000
Receivables - net of allowance for doubtful accounts of
$365,000 and $673,000 at December 31, 2002 and 2003. . . . . . . . . . . 2,868,000 13,235,000
Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,000 -
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . 212,000 3,000
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . 620,000 1,542,000
---------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 4,030,000 16,323,000
---------------- -------------
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,301,000
DEFERRED TAX ASSET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 98,000
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 4,000
---------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,036,000 $ 19,726,000
================ =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and current maturities of long-term debt and notes payable. $ 15,000,000 $ -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939,000 746,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,897,000 5,993,000
Liabilities of discontinued operations. . . . . . . . . . . . . . . . . . . 1,188,000 209,000
---------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 21,024,000 6,948,000
---------------- -------------
LONG-TERM DEBT AND NOTES PAYABLE,
net of current maturities. . . . . . . . . . . . . . . . . . . . . . . . . - 12,398,000
---------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,024,000 19,346,000
---------------- -------------
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
331,000 and 53,000 shares issued and outstanding at December
31, 2002 and 2003, respectively) . . . . . . . . . . . . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized,
11,216,000 and 27,300,000 shares issued and outstanding
at December 31, 2002 and 2003, respectively) . . . . . . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 59,832,000 68,603,000
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . _ (270,000)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . (438,000) (439,000)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73,382,000) (67,514,000)
---------------- -------------
Total stockholders' equity (deficit). . . . . . . . . . . . . . . . (13,988,000) 380,000
---------------- -------------
Total liabilities and stockholders' equity (deficit). . . . . . . . $ 7,036,000 $ 19,726,000
================ =============
See accompanying notes to consolidated financial statements.
F-3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
-------------- -------------- --------------
REVENUES
Service. . . . . . . . . . . . . . . . . . . . . . . $ 16,938,000 $ 13,012,000 $ 29,306,000
Equipment Sales. . . . . . . . . . . . . . . . . . . - 1,090,000 6,629,000
-------------- -------------- --------------
Total Revenues . . . . . . . . . . . . . . . . . . 16,938,000 14,102,000 35,935,000
COSTS OF SALES
Service. . . . . . . . . . . . . . . . . . . . . . . $ 3,085,000 $ 5,024,000 $ 10,366,000
Equipment Sales. . . . . . . . . . . . . . . . . . . - 785,000 3,082,000
-------------- -------------- --------------
Total Costs of Sales . . . . . . . . . . . . . . . 3,085,000 5,809,000 13,448,000
Gross Margin . . . . . . . . . . . . . . . . . . . 13,853,000 8,293,000 22,487,000
Operating expenses . . . . . . . . . . . . . . . . . 5,463,000 5,893,000 8,253,000
Selling, general and administrative. . . . . . . . . 2,739,000 2,737,000 3,004,000
Depreciation and amortization. . . . . . . . . . . . 1,244,000 1,202,000 996,000
-------------- -------------- --------------
9,446,000 9,832,000 12,253,000
-------------- -------------- --------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . . . 4,407,000 (1,539,000) 10,234,000
INTEREST EXPENSE & OTHER, NET. . . . . . . . . . . . . 385,000 443,000 2,286,000
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
income taxes . . . . . . . . . . . . . . . . . . . . 4,022,000 (1,982,000) 7,948,000
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . 335,000 543,000 1,339,000
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . $ 3,687,000 $ (2,525,000) $ 6,609,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (INCLUDING
LOSS ON DISPOSAL OF ZERO, $476,000 AND ZERO,
net of income taxes. . . . . . . . . . . . . . . . . (2,359,000) (6,655,000) 482,000
-------------- -------------- --------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . $ 1,328,000 $ (9,180,000) $ 7,091,000
STOCK AND WARRANT ACCRETION. . . . . . . . . . . . . . (53,000) (53,000) (53,000)
PREFERRED DIVIDENDS ACCRUED. . . . . . . . . . . . . . (2,871,000) (3,059,000) (1,170,000)
-------------- -------------- --------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. $ (1,596,000) $ (12,292,000) $ 5,868,000
============== ============== ==============
BASIC INCOME (LOSS) PER COMMON SHARE:
Continuing operations . . . . . . . . . . . . . . . $ 0.08 $ (0.53) $ 0.25
============== ============== ==============
Discontinued operations . . . . . . . . . . . . . . $ (0.24) $ (0.61) $ 0.02
============== ============== ==============
Net income (loss) . . . . . . . . . . . . . . . . . $ (0.16) $ (1.14) $ 0.27
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC . . . 10,018,000 10,828,000 21,878,000
============== ============== ==============
DILUTED INCOME (LOSS) PER COMMON SHARE:
Continuing operations . . . . . . . . . . . . . . . $ 0.08 $ (0.53) $ 0.24
============== ============== ==============
Discontinued operations . . . . . . . . . . . . . . $ (0.24) $ (0.61) $ 0.02
============== ============== ==============
Net income (loss) . . . . . . . . . . . . . . . . . $ (0.16) $ (1.14) $ 0.26
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
DILUTED . . . . . . . . . . . . . . . . . . . . . . 10,018,000 10,828,000 22,218,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- -------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---------------- ------- ---------- -------- ------------ -------------
BALANCES at December 31, 2000 . . . . . . . . . . 365,000 $ - 7,923,000 $ - $53,098,000 $(59,494,000)
Common stock issued for services and
settlements . . . . . . . . . . . . . . . . - - 240,000 - 481,000 -
Executive stock grant . . . . . . . . . . . . . - - 38,000 - 94,000 -
Preferred stock issued for services. . . . . . 1,000 - - - 59,000 -
Preferred stock conversion to common stock. . . (64,000) - 2,143,000 - - -
Preferred stock dividends accrued . . . . . . . 25,000 - - - 2,871,000 (2,871,000)
Warrant discount accretion. . . . . . . . . . . - - - - 53,000 (53,000)
Warrants issued for services and convertible
debt financing. . . . . . . . . . . . . . . - - - - 54,000 -
Warrants exercised. . . . . . . . . . . . . . . - - 17,000 - 50,000 -
Transaction costs of convertible debt financing - - - - (101,000) -
Net income. . . . . . . . . . . . . . . . . . . - - - - - 1,328,000
---------------- ------- ---------- -------- ------------ -------------
BALANCES at December 31, 2001 . . . . . . . . . . 327,000 $ - 10,361,000 $ - $56,659,000 $(61,090,000)
Common stock issued for loans received. . . . . - - 137,000 - 115,000 -
Preferred stock cancelled . . . . . . . . . . . (1,000) - - - (75,000) -
Preferred stock issued for settlements . . . . 1,000 - - - 21,000 -
Preferred stock conversion to common stock. . . (22,000) - 718,000 - - -
Preferred stock dividends accrued . . . . . . . 26,000 - - - 3,059,000 (3,059,000)
Warrant discount accretion. . . . . . . . . . . - - - - 53,000 (53,000)
Net loss. . . . . . . . . . . . . . . . . . . . - - - - - (9,180,000)
Foreign currency translation loss . . . . . . . - - - - - -
-------------
Comprehensive loss. . . . . . . . . . . . . . . - - - - -
---------------- ------- ---------- -------- ------------ -------------
BALANCES at December 31, 2002 . . . . . . . . . . 331,000 $ - 11,216,000 $ - $59,832,000 $(73,382,000)
---------------- ------- ---------- -------- ------------ -------------
Common stock options exercised. . . . . . . . . - - 736,000 - 663,000 -
Common stock issued to retire senior short
term debt . . . . . . . . . . . . . . . . . - - 1,750,000 - 1,766,000 -
Common stock issued for services and
Settlements . . . . . . . . . . . . . . . . - - 575,000 - 872,000 -
Preferred stock conversion to common stock. . . (278,000) - 10,211,000 - - -
Preferred stock dividends accrued . . . . . . . - - - - 1,170,000 (1,170,000)
Short swing profit contribution . . . . . . . . - - - - 3,887,000 -
Warrant discount accretion. . . . . . . . . . . - - - - 53,000 (53,000)
Warrants exercised. . . . . . . . . . . . . . . - - 2,812,000 - - -
Deferred compensation . . . . . . . . . . . . . - - - - 360,000 -
Amortization of deferred compensation . . . . . - - - - - -
Net income. . . . . . . . . . . . . . . . . . . - - - - - 7,091,000
Foreign currency translation loss . . . . . . . - - - - - -
Comprehensive income. . . . . . . . . . . . . . - - - - -
---------------- ------- ---------- -------- ------------ -------------
BALANCES at December 31, 2003 . . . . . . . . . . 53,000 $ - 27,300,000 $ - $68,603,000 $(67,514,000)
---------------- ------- ---------- -------- ------------ -------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
ACCUMULATED TOTAL
OTHER STOCKHOLDER'S
COMPREHENSIVE DEFERRED EQUITY
LOSS COMPENSATION (DEFICIT)
--------------- -------------- -------------
BALANCES at December 31, 2000 . . . . . . . . . . $ - $ - $ (6,396,000)
Common stock issued for services and
settlements . . . . . . . . . . . . . . . . - - 481,000
Executive stock grant . . . . . . . . . . . . . - - 94,000
Preferred stock issued for services. . . . . . - - 59,000
Preferred stock conversion to common stock. . . - - -
Preferred stock dividends accrued . . . . . . . - - -
Warrant discount accretion. . . . . . . . . . . - - -
Warrants issued for services and convertible
debt financing. . . . . . . . . . . . . . . - - 54,000
Warrants exercised. . . . . . . . . . . . . . . - - 50,000
Transaction costs of convertible debt financing - - (101,000)
Net income. . . . . . . . . . . . . . . . . . . - - 1,328,000
--------------- -------------- -------------
BALANCES at December 31, 2001 . . . . . . . . . . $ - $ - $ (4,431,000)
Common stock issued for loans received. . . . . - - 115,000
Preferred stock cancelled . . . . . . . . . . . - - (75,000)
Preferred stock issued for settlements . . . . - - 21,000
Preferred stock conversion to common stock. . . - - -
Preferred stock dividends accrued . . . . . . . - - -
Warrant discount accretion. . . . . . . . . . . - - -
Net loss. . . . . . . . . . . . . . . . . . . . - - (9,180,000)
Foreign currency translation loss . . . . . . . (438,000) - (438,000)
-------------
Comprehensive loss. . . . . . . . . . . . . . . - (9,618,000)
--------------- -------------- -------------
BALANCES at December 31, 2002 . . . . . . . . . . $ (438,000) $ - $(13,988,000)
--------------- -------------- -------------
Common stock options exercised. . . . . . . . . - - 663,000
Common stock issued to retire senior short
term debt . . . . . . . . . . . . . . . . . - - 1,766,000
Common stock issued for services and
Settlements . . . . . . . . . . . . . . . . - - 872,000
Preferred stock conversion to common stock. . . - - -
Preferred stock dividends accrued . . . . . . . - - -
Short swing profit contribution . . . . . . . . - - 3,887,000
Warrant discount accretion. . . . . . . . . . . - - -
Warrants exercised. . . . . . . . . . . . . . . - - -
Deferred compensation . . . . . . . . . . . . . - (360,000) -
Amortization of deferred compensation . . . . . - 90,000 90,000
Net income. . . . . . . . . . . . . . . . . . . - - 7,091,000
Foreign currency translation loss . . . . . . . (1,000) - (1,000)
-------------
Comprehensive income. . . . . . . . . . . . . . - 7,090,000
--------------- -------------- -------------
BALANCES at December 31, 2003 . . . . . . . . . . $ (439,000) $ (270,000) $ 380,000
--------------- -------------- -------------
See accompanying notes to consolidated financial statements.
F-5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,328,000 $ (9,180,000) $ 7,091,000
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 1,244,000 1,202,000 996,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . 188,000 103,000 346,000
Loss from sale of discontinued operations. . . . . . . . . . . . . . - 476,000 -
Non cash write off of the assets of discontinued operations. . . . . - 1,913,000 -
Loss (gain) on sale of assets. . . . . . . . . . . . . . . . . . . . (8,000) 4,000 -
Non cash cost of equipment sales . . . . . . . . . . . . . . . . . . - - 502,000
Non cash compensation charge . . . . . . . . . . . . . . . . . . . . - - 90,000
Interest converted to principal. . . . . . . . . . . . . . . . . . . - - 630,000
Equity issued for services and settlements . . . . . . . . . . . . . 337,000 42,000 872,000
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,924,000 586,000 (10,713,000)
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . (3,521,000) 1,284,000 69,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (138,000) 138,000 -
Prepaid expenses and other current assets. . . . . . . . . . . . . (296,000) 223,000 (922,000)
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . - - (98,000)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 185,000 2,000
Accounts payable and accrued liabilities . . . . . . . . . . . . . (2,826,000) (461,000) 1,499,000
Change in net assets of discontinued operations . . . . . . . . . . (130,000) 1,759,000 (770,000)
-------------- -------------- --------------
Net cash used in operating activities. . . . . . . . . . . . . (1,880,000) (1,726,000) (406,000)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . . . . (175,000) (98,000) (1,799,000)
Sale of net assets of discontinued operations, net of selling costs. - 1,041,000 -
Proceeds from sale of property and equipment . . . . . . . . . . . . 24,000 44,000 -
-------------- -------------- --------------
Net cash provided by (used in) investing activities. . . . . . (151,000) 987,000 (1,799,000)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised . . . . . . . . . . . . . . . . . . . - - 663,000
Debt repayments. . . . . . . . . . . . . . . . . . . . . . . . . . . (100,000) - -
Proceeds from short term senior financing. . . . . . . . . . . . . . - 2,101,000 550,000
Payments to pledging arrangement . . . . . . . . . . . . . . . . . . - (966,000) (59,000)
Payments of short term senior debt financings. . . . . . . . . . . . - - (1,078,000)
Payments of unsecured notes payable. . . . . . . . . . . . . . . . . - - (475,000)
Short swing profit contributions . . . . . . . . . . . . . . . . . . - - 3,887,000
Proceeds from financing arrangements . . . . . . . . . . . . . . . . 1,025,000 - -
-------------- -------------- --------------
Net cash provided by financing activities. . . . . . . . . . . 925,000 1,135,000 3,488,000
-------------- -------------- --------------
Impact of foreign currency on cash . . . . . . . . . . . . . . - (438,000) (1,000)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . (1,106,000) (42,000) 1,282,000
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 1,409,000 303,000 261,000
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 303,000 $ 261,000 $ 1,543,000
============== ============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . $ 359,000 $ 28,000 $ 776,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . 122,000 275,000 1,186,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in exchange for accrued services rendered. . . . 351,000 - -
Stocks issued for financing and services . . . . . . . . . . . . . . 50,000 - -
Stock and warrant accretions .. . . . . . . . . . . . . 53,000 53,000 53,000
Common stock issued to retire short term senior debt .. . . . . . - - 1,776,000
Transaction costs of convertible debt financing. . . . . . . . . . . (101,000) - -
Preferred stock dividends accrued . . . . . . . . . . . 2,871,000 3,059,000 1,170,000
See accompanying notes to consolidated financial statements.
F-6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. FINANCIAL CONDITION
At December 31, 2003, the Company had working capital of $9,375,000
including a cash balance of $1,543,000. The Company ended the year with
stockholders' equity of $380,000, an increase of $14,368,000. For the year
ended December 31, 2003, the Company generated operating income of $10,234,000
and net cash used in operating activities, was $406,000. The Company received
short swing profit contribution proceeds of $3,887,000 during 2003 as a result
of sales of Company securities by The Prudential Insurance Company of America
that were voluntarily reported by Prudential. As a consequence, the Company's
liquidity position has improved significantly over the prior year. These
operating and liquidity improvements are primarily a result of activity in the
Middle East and, to some extent, Venezuela. Additionally, the Company received
substantial benefit from the conversion of $1,689,000 of senior debt that was in
default into 1,597,642 shares of common stock during 2003. This transaction
improved the Company's working capital by $1,689,000 and reduced future cash
commitments. The Company's short-term liquidity also improved as a consequence
of increases in prevention service revenues and certain asset sales.
Improvements in liquidity allowed the Company to pay down current maturities of
outstanding debt, significantly reduce payables owing to Company vendors and
settle certain legal proceedings relating to the Company's past financial
problems. The Company believes it has a strong working capital position that
will keep the Company liquid into 2005.
The Company generates its revenues from prevention and emergency response
services. Response services are generally associated with a specific well
control emergency or critical "event" whereas prevention services are generally
"non-event" related. The frequency and scale of occurrence for response services
varies widely and is inherently unpredictable. There is no statistical
correlation between common market activity indicators such as commodity pricing,
activity forecasts, E&P operating budgets and resulting response revenues.
Non-event services provide a more predictable base of revenue volume.
Historically the Company has relied upon event driven services as the primary
source of its operating revenues, but more recently the Company's strategy has
been to achieve greater balance between event and non-event service revenues.
While the Company has successfully improved this balance, a significant level of
event related services are still a required source of revenues and operating
income for the Company.
The Company's reliance on event driven revenues in general, and well
control events in particular, has historically impaired the Company's ability to
generate predictable operating cash flows. The level of activity in event
driven revenues along with the continued growth of non-event revenues have
significantly increased the current year's operating income and resulting cash
position. During the year ended December 31, 2003 there was a significant
increase in international demand for the Company's services and equipment,
specifically in the Middle East, in connection with the war in Iraq and
subsequent efforts to restore Iraq's oil production.
Pending the transition to the new contract for the RIO program in Iraq, the
Company has temporarily demobilized its personnel in the region. Currently, it
is unclear when the Company will re-mobilize its personnel, if ever, although
the Company remains positioned to continue its previous work and respond
immediately whenever an emergency arises in Iraq.
On December 31, 2003, the Company had $1,087,000 of cash and $2,374,000 of
accounts receivable attributable to its Venezuelan operation. The December 31,
2003 foreign exchange rate was 1600 Venezuela Bolivars to one U.S. dollar. At
March 30, 2004, the exchange rate has increased to 1,900 Bolivars to the U.S.
dollar. Venezuela has also been added to the U.S. governments "watch list" for
highly inflationary economies. The Venezuelan government has made it very
difficult for US dollars to be repatriated. If this problem continues in the
future it could have a negative impact on the Company's liquidity.
F-7
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
B. BUSINESS AND ORGANIZATION
Boots & Coots International Well Control, Inc. and subsidiaries (the
"Company"), is a global-response oil and gas service company that specializes in
responding to and controlling oil and gas well emergencies, including blowouts
and well fires. Through its participation in the proprietary insurance program
WELLSURE(R), the Company also provides lead contracting and high-risk management
services, under critical loss scenarios, to the program's insured clients.
Additionally, the WELLSURE(R) program designates that the Company provides
certain pre-event prevention and risk mitigation services defined under the
program. The Company also provides snubbing and other high-risk well control
management services, including pre-event planning, training and consulting.
In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand its
non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE(R) program, which is now providing more predictable and
increasing service fee income, and began marketing its SafeGuard program, which
provides a full range of prevention services domestically and internationally.
The Company intends to continue its efforts to increase the revenues it
generates from prevention services in 2004.
C. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation - The accompanying consolidated financial statements include
the financial transactions and accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents - The Company considers all unrestricted highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. Revenue and cost from product and equipment sales are recognized upon
customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Effective January 1, 2002 the Company changed its policy on reporting
revenues on WELLSURE(R) events from gross to net in accordance with EITF 99-19
"Reporting Revenue Gross as a Principal Versus Net as an Agent". All periods
presented have been restated to conform with the current year's presentation.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts, which it deems doubtful of collection.
F-8
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Assets - Restricted assets consisted of $109,000 of accounts
receivable pledged to KBK, of which $40,000 were related to discontinued
operations (See Note H) that remained uncollected as of December 31, 2002. There
were no restricted assets as of December 31, 2003.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets as follows: buildings and improvements
(15-31 years), well control and firefighting equipment (8 years), shop and other
equipment (8 years), vehicles (5 years) and office equipment and furnishings (5
years).
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.
Goodwill - The Company adopted "SFAS No. 142" Statement of Financial
Accounting Standards No. 142 "SFAS 142", "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS 142, goodwill is not amortized, but
rather is reviewed at least annually for impairment. Prior to the adoption of
SFAS 142, the Company amortized goodwill on a straight-line basis over periods
ranging from 15 to 40 years. Amortization expense of goodwill included in
continuing operations was, $4,000, zero and zero for the years ended December
31, 2001, 2002 and 2003, respectively, and amortization expense of goodwill
included in discontinued operations was $54,000, zero and zero for the years
ended December 31, 2001, 2002 and 2003, respectively. As of December 31, 2002
and 2003, all goodwill was fully impaired.
The following pro-forma results of operations data for the years ended
December 31, 2001, 2002 and 2003 are presented as if the provisions of SFAS No.
142 had been in effect for all periods presented:
For the Years Ended December 31
----------------------------------------
2001 2002 2003
------------ ------------- -----------
Net income (loss) attributable to
common shareholders, as reported $(1,596,000) $(12,292,000) $ 5,868,000
============ ============= ===========
Add:
Amortization of goodwill 58,000 - -
------------ ------------- -----------
Pro-forma net income (loss)
attributable to common
shareholders $(1,538,000) $(12,292,000) $ 5,868,000
============ ============= ===========
Basic EPS:
Net income (loss) attributable to $ (0.16) $ (1.14) $ 0.27
============ ============= ===========
common shareholders, as reported
Add:
Amortization of goodwill 0.01 - -
------------ ------------- -----------
Adjusted net income (loss) $ (0.15) $ (1.14) $ 0.27
============ ============= ===========
Impairment of Long Lived Assets -In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", the Company evaluates the recoverability of property and
equipment, and other long-lived assets, if facts and circumstances indicate that
any of those assets might be impaired. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset are compared
to the asset's carrying amount to determine if an impairment of such property is
F-9
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value.
Foreign Currency Transactions - The functional currency of the Company's
foreign operations, primarily in Venezuela, is the U.S. dollar. Substantially
all customer invoices and vendor payments are denominated in U.S. currency.
Revenues and expenses from foreign operations are remeasured into U.S. dollars
on the respective transaction dates and foreign currency gains or losses are
included in the consolidated statements of operations.
Comprehensive Income (Loss) - Comprehensive income (loss) consists of
foreign currency translations. In accordance with SFAS No. 52, "Foreign
Currency Translation", the assets and liabilities of its foreign subsidiaries,
denominated in foreign currency, are translated into US dollars at exchange
rates in effect at the consolidated balance sheet date. Revenues and expenses
are translated at the average exchange rate for the period. Related translation
adjustments are reported as comprehensive income (loss) which is a separate
component of stockholders equity.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
A valuation allowance is established for deferred tax assets if it is more
likely than not that such assets will not be realized.
Earnings Per Share - Basic and diluted income (loss) per common share is
computed by dividing net income (loss) attributable to common stockholders by
the weighted average common shares outstanding. On October 2, 2003, the Company
had a reverse one for four stock split. All share numbers, prices and earnings
per share have been conformed to the post split presentation throughout this
document.
The weighted average number of shares used to compute basic and diluted
earnings per share for the three years ended December 31, 2001, 2002 and 2003 is
illustrated below:
For the Years Ended December 31
----------------------------------------
2001 2002 2003
------------ ------------- -----------
Numerator:
For basic and diluted earnings
per share:
Net Income(loss) from continuing
operations attributable to common
stockholders $(1,596,000) $(12,292,000) $ 5,868,000
============ ============= ===========
Denominator:
For basic earnings per share-
Weighted-average shares 10,018,000 10,828,000 21,878,000
Effect of dilutive securities:
Convertible Preferred stock 33,000
Stock options and warrants - - 307,000
------------ ------------- -----------
Denominator:
For diluted earnings per share -
Weighted-average shares 10,018,000 10,828,000 22,218,000
============ ============= ===========
For the years ended December 31, 2001 and 2002 the Company incurred a net
loss attributable to common stockholders before consideration of the income
(loss) from discontinued operations. As a result, the potential dilutive effect
of stock options, stock warrants and convertible securities was not included in
the calculation of diluted earnings per share because to do so would have been
antidilutive for those years.
The exercise price of the Company's stock options and stock warrants varies
from $0.88 to $5.00 per share. The Company's convertible securities have a
conversion price of $3.00. Assuming that the exercise and conversions are made
at the lowest price provided under the terms of their agreements, the maximum
number of potentially
F-10
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dilutive securities at December 31, 2003 would include:
(1) 823,365 common shares issuable upon exercise of stock options, (2) 6,745,000
common shares issuable upon exercise of stock purchase warrants, (3) 300,000
shares of stock to be issued as compensation over a four year vesting period as
earned and (4) 113,400 common shares issuable upon conversion of convertible
preferred stock. The actual number may be substantially less depending on the
market price of the Company's common stock at the time of conversion.
Fair Value of Financial Instruments - The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term maturities of these instruments. Management believes that the
carrying amount debt, exclusive of accrued interest included in debt, pursuant
to the Company's troubled debt restructuring in December 2000 (see Note H),
approximates fair value as the majority of borrowings bear interest at current
market interest rates for similar debt structures.
Recently Issued Accounting Standards -
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, and subsequently revised the Interpretation in
December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim or annual periods ending on or after March 15, 2004. We have not
identified any variable interest entities. In the event a variable interest
entity is identified, we do not expect the requirements of FIN 46R to have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," (" SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No.150 did not have a material
impact on Company's consolidated financial statements.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Significant estimates made by management include the allowance for doubtful
accounts, the valuation allowance for deferred tax assets and accrued
liabilities for potential litigation settlements. Actual results could differ
from these estimates.
Reclassifications - Certain reclassifications have been made to the prior
period consolidated financial statements to conform to current year
presentation.
D. DISCONTINUED OPERATIONS:
On June 30, 2002, the Company made the decision and formalized a plan to
sell the assets of its Special Services and Abasco operations. The sales
proceeds were approximately $1,041,000. The operations of these two companies
are reflected as discontinued operations on the consolidated statements of
operations and as assets and liabilities of discontinued operations on the
consolidated balance sheets.
The following represents a condensed detail of assets and liabilities
adjusted for write-downs:
DECEMBER 31, DECEMBER 31,
2002 2003
---------- ------------
Receivables - net. . . . . . . . . . . . . . . . . . . . . . $ 174,000 $ 3,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . 38,000 -
---------- ------------
Total assets . . . . . . . . . . . . . . . . $ 212,000 $ 3,000
========== ============
F-11
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Short term debt and current maturities of long-term debt and
notes payable . . . . . . . . . . . . . . . . . . . . . . $ 32,000 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 801,000 149,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 355,000 60,000
---------- ------------
Total liabilities. . . . . . . . . . . . . . $1,188,000 $ 209,000
========== ============
Reconciliation of change in net asset value of discontinued operations:
Balance of net asset (liability) of discontinued
operations at December 31, 2002 $(976,000)
Total charge to discontinued operations 482,000
Intercompany transfers 288,000
----------
Balance of net liability of discontinued operations
at December 31, 2003 $ (206,000)
===========
The following table presents the revenues, loss from operations and other
components attributable to the discontinued operations Abasco and Boots and
Coots Special Services:
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2002 2003
------------ ------------ ------------
Revenues . . . . . . . . . . . . . . . $11,661,000 $ 3,743,000 $ -
Income (loss) from operations before
income taxes . . . . . . . . . . . . (2,359,000) (4,334,000) 482,000
Loss on disposal of Abasco and Special
Services, net of income taxes. . . . - (476,000) -
Special Services goodwill. . . . . . . - (1,845,000) -
------------ ------------ ------------
Net income (loss) from discontinued
operations . . . . . . . . . . . . $(2,359,000) $(6,655,000) $ 482,000
============ ============ ============
E. DETAIL OF CERTAIN ASSET ACCOUNTS:
Prepaid expenses and other current assets consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
Prepaid insurance. . . . . . . . $ 540,000 $ 621,000
Prepaid retention bonus. . . . . - 532,000
Other prepaid and current assets 80,000 389,000
------------- -------------
Total. . . . . . . . . . . . $ 620,000 $ 1,542,000
============= =============
F-12
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2002 2003
-------------- --------------
Land . . . . . . . . . . . . . . . . . . . $ 136,000 $ 136,000
Buildings and improvements . . . . . . . . 652,000 663,000
Well control and firefighting equipment. . 5,888,000 5,905,000
Shop and other equipment . . . . . . . . . 666,000 676,000
Vehicles . . . . . . . . . . . . . . . . . 368,000 462,000
Office equipment and furnishings . . . . . 741,000 781,000
-------------- --------------
Total property and equipment . . . . . . . 8,451,000 8,623,000
Less: accumulated depreciation and
amortization . . . . . . . . . . (5,451,000) (5,322,000)
-------------- --------------
Net property and equipment . . . . $ 3,000,000 $ 3,301,000
============== ==============
F. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following as of:
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
Accrued settlements. . . . . . $ 230,000 $ 669,000
Accrued income and other taxes 552,000 1,140,000
Accrued salaries and benefits. 303,000 3,118,000
Other accrued liabilities. . . 812,000 1,066,000
------------- -------------
Total. . . . . . . . . . $ 1,897,000 $ 5,993,000
============= =============
G. INCOME TAXES:
The Company and its wholly-owned domestic subsidiaries file a consolidated
Federal income tax return. The provision for income taxes shown in the
consolidated statements of operations is made up of current, deferred and
foreign tax expense as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
------------- ------------- --------------
Federal
Current. . . . . . $ 43,000 $ - $ 98,000
Deferred . . . . . - - (98,000)
State
Current. . . . . . - - -
Deferred . . . . . - - -
Foreign . . . . . . . . 292,000 543,000 1,339,000
------------- ------------- --------------
$ 335,000 $ 543,000 $ 1,339,000
============= ============= ==============
Discontinued operations
Current. . . . . . - - -
Deferred . . . . . - - -
------------- ------------- --------------
$ 335,000 $ 543,000 $ 1,339,000
============= ============= ==============
The above foreign taxes represent income tax liabilities in the respective
foreign subsidiary's domicile. The provision for income taxes differs from the
amount that would be computed if the income (loss) from continuing operations
before income taxes were multiplied by the Federal income
tax rate (statutory rate) as follows:
F-13
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
-------------- -------------- --------------
Income tax provision (benefit) at the statutory
rate (34%) . . . . . . . . . . . . . . . . . . . $ 1,367,000 $ (674,000) $ 2,702,000
Increase resulting from:
Foreign taxes . . . . . . . . . . . . . . . . 292,000 543,000 230,000
Alternative minimum tax . . . . . . . . . . . 43,000 - -
Unrecognized (utilized) net operating losses
for continuing operations. . . . . . . . . . (1,492,000) 674,000 624,000
Goodwill amortization . . . . . . . . . . . . 19,000 - -
Nondeductible expenses. . . . . . . . . . . . - - 31,000
Other . . . . . . . . . . . . . . . . . . . . 106,000 - -
Change in valuation allowance . . . . . . . . - - (2,248,000)
-------------- -------------- --------------
$ 335,000 $ 543,000 $ 1,339,000
============== ============== ==============
As of December 31, 2001, 2002 and 2003, the Company has net domestic
operating loss carry forwards of approximately $46,065,000, $47,155,000 and
$41,227,000, respectively, expiring in various amounts beginning in 2011. The
net operating loss carry forwards, along with the other timing differences,
generate a net deferred tax asset in each year. The Company has recorded
valuation allowances for most of these net deferred tax assets since management
believes it is more likely than not that most of the assets will not be
realized. The temporary differences representing deferred tax assets and
liabilities are as follows:
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
Deferred income tax liabilities
Depreciation and amortization. . . . . . . $ (1,824,000) $ -
------------- -------------
Total deferred income tax liabilities. $ (1,824,000) $ -
============= =============
Deferred income tax assets
Net operating loss carry forward. . . . . $ 18,082,000 $ 14,017,000
Asset disposals . . . . . . . . . . . . . 292,000 -
Property, plant & equipment . . . . . . . - 506,000
Allowance for doubtful accounts . . . . . 121,000 109,000
Accruals. . . . . . . . . . . . . . . . . 428,000 331,000
Foreign tax credit. . . . . . . . . . . . 1,314,000 1,314,000
Alternative minimum tax credit. . . . . . 43,000 98,000
Other assets. . . . . . . . . . . . . . . 69,000 -
------------- -------------
Total deferred income tax assets. . $ 20,349,000 $ 16,375,000
============= =============
Valuation allowance . . . . . . . . . . . $(18,525,000) $(16,277,000)
------------- -------------
Net deferred income tax asset. . . . $ 1,824,000 $ 98,000
============= -------------
Net deferred tax asset (liability) . $ - $ 98,000
============= =============
F-14
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable consisted of the following:
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
12 % Senior Subordinated Note. . . . . . . . . . $ 11,596,000 $ 11,648,000
Senior secured credit facility . . . . . . . . . 2,800,000 750,000
Other subordinated notes . . . . . . . . . . . . 604,000 -
------------- -------------
Total . . . . . . . . . . . . . . . . . . . 15,000,000 12,398,000
Less: current portion of long-term debt and
notes payable . . . . . . . . . . . . . 15,000,000 -
------------- -------------
Total long-term debt and notes payable. . . $ - $ 12,398,000
============= =============
As of December 31, 2003 and the date hereof, the Company was in compliance
with all of its loan agreements. The December 2000 refinancing of the Company's
debt with Prudential qualified as a troubled debt restructuring under the
provisions of SFAS 15. As a result of the application of this accounting
standard, the total indebtedness due to Prudential, inclusive of accrued
interest, was reduced by the cash and fair market value of securities
(determined by independent appraisal) issued by the Company, and the residual
balance of the indebtedness was recorded as the new carrying value of the
subordinated note due to Prudential. Consequently, the $7,200,000 face value of
the 12% Senior Subordinated Note is recorded on the Company's balance sheet at
$11,520,000. The additional carrying value of the debt effectively represents an
accrual of future interest expense due on the face value of the subordinated
note due to Prudential. The remaining excess of amounts previously due
Prudential over the new carrying value was $2,444,000 and was recognized as an
extraordinary gain. The face value of the note has been increased as of
December 31, 2002 and December 31, 2003 to $9,014,000 and $9,635,043 for the
inclusion of accrued and unpaid interest through December 31, 2002 and December
31, 2003, respectively. Prior to December 2003, the accrued interest from
inception through December 31, 2003 had been included in accrued liabilities and
is now contractually included in the face value of the note.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests by an
investment group, Specialty Finance Fund I, LLC (Specialty Finance) in its
senior secured credit facility with Comerica - Bank, Texas ("Comerica"). In
connection with this financing, the Company issued 36,765 shares of common stock
and warrants representing the right to purchase an aggregate of 2,182,496 shares
of common stock of the Company to the participation interest holders and
warrants to purchase an aggregate of 906,000 shares of common stock to the
investment group that arranged the financing, including warrants to purchase an
aggregate of 184,167 shares of common stock to Tracy S. Turner, a director of
the Company. The warrants have a term of five years and can be exercised by the
payment of cash in the amount of $2.50 per share as to 2,182,496 shares and
$3.00 per share as to 906,000 shares of common stock, or by relinquishing a
number of shares subject to the warrant with a market value equal to the
aggregate exercise price of the portion of the warrant being exercised. On
December 28, 2000, $7,729,985 of the participation interest, plus $757,315 in
accrued interest thereon, was exchanged for 89,117 shares of Series H Cumulative
Senior Preferred Stock in the Company. The remaining $1,000,000 of the
participation interest was outstanding as senior secured debt as of December 31,
2002. Tracy S. Turner, a managing member of Specialty Finance was also a member
of the Company's Board of Directors until May 2003. On July 11, 2003, the
Company converted this debt and the accrued interest into equity by issuing
1,239,008 shares of common stock.
On April 9, 2002, the Company entered into a loan participation agreement
under which it borrowed an additional $750,000 under its existing Senior Secured
Loan Facility with Specialty Finance Fund I, LLC. This Loan Facility was
aquired by San Juan Investments on that day. 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 25,000 shares of common stock to the participation lender at
closing. The participation had an initial maturity of 90 days, which was
extended for an additional 90 days at the Company's option. The Company issued
an additional 25,000 shares of common stock to the participation lender to
extend the maturity date. On October 9, 2002, the loan extension period
matured. On November 11, 2003, the Company and its senior lender executed an
agreement extending the term of the loan to 24 months.
F-15
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 2, 2002, the Company borrowed $250,000 under the Senior Secured Loan
Facility upon similar terms, except that the Company issued 8,334 shares of
common stock to the participating lenders at closing and issued an additional
8,334 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.
The note was paid on August 31, 2003.
On July 5, 2002, the Company entered into a loan participation agreement,
under which it borrowed an additional $100,000 under its existing Senior Secured
Loan Facility. The effective interest rate of the participation was 25% after
taking into account rate adjustment fees. The Company also paid 3% of the
borrowed amount in origination fees, paid closing expenses and issued 32,500
shares of common stock to the participation lender at closing. The
participation had a maturity of 90 days. On September 28, 2002, the loan
matured. On July 11, 2003, the Company converted this note and the accrued
interest into equity by issuing 125,833 shares of common stock.
On July 8, 2002, the Company entered into a loan participation agreement
with a certain party under which it borrowed an additional $200,000 under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC. The
effective interest rate of the participation was 16% after taking into account
rate adjustment fees. The Company also paid 4% of the borrowed amount in
origination fees, paid closing expenses and issued 37,500 shares of common stock
to the participation lender at closing. The participation had a maturity of 90
days. On October 1, 2002, the loan matured. On July 18, 2003, the Company
converted this debt and the accrued interest into equity by issuing 232,800
shares of common stock.
On December 4, 2002, the Company entered into a loan agreement with
Checkpoint Business, Inc. ("Checkpoint") providing for short-term working
capital up to $1,000,000. The effective interest rate under the loan agreement
was 15% per annum. Checkpoint collateral included substantially all of the
assets of the Company, including the stock of the Company's Venezuelan
subsidiary. As of December 31, 2002 and March 28, 2003, the Company had borrowed
$500,000 and an additional $200,000, respectively, under this facility. On March
28, 2003, the Company paid in full the principal balance of $700,000 and
interest outstanding under its loan agreement with Checkpoint. On May 7, 2003,
the Company settled Checkpoint's option to purchase its Venezuelan subsidiary
and terminated Checkpoint's exclusivity rights in exchange for $300,000 of cash
and $100,000 in notes maturing in six months. The Company paid the note on
October 14, 2003.
Substantially all of the Company's assets are pledged as collateral.
I. STOCKHOLDERS' EQUITY:
Common and Preferred Stock
The Company's stockholders approved a reverse one for four stock split
effective October 3, 2003, all of the share numbers in this filing have been
adjusted accordingly. Under the Company's Amended and Restated Certificate of
Incorporation, the board of directors has the power, without further action by
the holders of common stock, to designate the relative rights and preferences of
the Company's preferred stock, when and if issued. Such rights and preferences
could include preferences as to liquidation, redemption and conversion rights,
voting rights, dividends or other preferences, over shares of common stock. The
board of directors may, without further action by the stockholders of the
Company, issue shares of preferred stock which it has designated. The rights of
holders of common stock will be subject to, and may be adversely affected by or
diluted by, the rights of holders of preferred stock.
In June 1998, the Company completed the sale through private placement of
49,000 Units of 10% Junior Redeemable Convertible Preferred Stock ("Redeemable
Preferred"), each Unit consisting of one share of the Preferred Stock and one
Unit Warrant representing the right to purchase five shares of common stock of
the Company at a price of $20.00 per share. The Redeemable Preferred Stock could
be redeemed by the Company at any time on or before the six month anniversary of
the date of issuance (from October 17, 1998 through December 8, 1998) without
prior written notice in an amount per share equal to $100.00, plus any accrued
and unpaid dividends thereon. After the six month anniversary of the date of
issuance of the Redeemable Preferred Stock and for so long as such shares are
outstanding, the Company could redeem such shares upon fifteen days prior
written notice. In the event shares of Redeemable Preferred Stock were not
redeemed by the Company on or before the six month anniversary of the date of
issuance, each unredeemed share, until the nine month anniversary of
F-16
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the date of issuance be convertible, at the election of the holder thereof, into
common stock at 85% of the average of the last reported sales prices of shares
of the common stock (or the average of the closing bid and asked prices if no
transactions have been reported), not to exceed $24.00 per share, for the 10
trading days immediately preceding the receipt by the Company of written notice
from the holder thereof of an election to so convert such share of Redeemable
Preferred Stock. In the event shares of Redeemable Preferred were not Redeemed
Stock on or before the nine month anniversary of the date of issuance, each
unredeemed share became immediately convertible, at the election of the holder
thereof, into common stock at $11.00 per share (proportionately adjusted for
common stock splits, combinations of common stock and dividends paid in shares
of common stock). At December 31, 2002 and 2003 there were 12,000 and zero
shares of redeemable preferred stock issued and outstanding, respectively
On April 15, 1999, the Company completed the sale of 50,000 shares of
$.00001 par value per share with a face value of $100 per share of Series A
Cumulative Senior Preferred Stock ("Series A Stock") to Halliburton Energy
Services, Inc. ("Halliburton"), a wholly-owned subsidiary of Halliburton
Company. The Series A Stock has a dividend requirement of 6.25% per annum
payable quarterly until the fifth anniversary at the date of issuance, whereupon
the dividend requirement increases to the greater of prime plus 6.25% or 14% per
annum, which is subject to adjustment for stock splits, stock dividends and
certain other events. At December 31, 2002 and 2003 there were 50,000 shares of
Series A preferred stock issued and outstanding.
On April 28, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series B Preferred Stock, which designates this
issue to consist of 100,000 shares of $.00001 par value per share with a face
value of $100 per share; have a dividend requirement of 10% per annum, payable
semi-annually at the election of the Company in additional shares of Series B
Preferred Stock in lieu of cash; have voting rights equivalent to 100 votes per
share; and, may be converted at the election of the Company into shares of the
Company's Common Stock on the basis of a $3.00 per share conversion rate. At
December 31, 2002 and 2003 there were zero shares of series B preferred stock
issued and outstanding.
On May 30, 2000 the Company adopted the Certificate of Designation of
Rights and Preferences of the Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") that designates this issue to consist of 50,000
shares of $.00001 par value per share with a face value of $100 per share; have
a dividend requirement of 10% per annum, payable quarterly at the election of
the Company in additional shares of Series C Preferred Stock in lieu of cash;
have voting rights excluding the election of directors equivalent to one vote
per share of Common Stock into which preferred shares are convertible into, and
may be converted at the election of the Company into shares of the Company's
Common Stock on the basis of a $3.00 per share conversion rate. After eighteen
months from the issuance date a holder of Series C Preferred Stock may elect to
have future dividends paid in cash. At December 31, 2002 and 2003 there were
5,256 and 2,414 shares of series C preferred stock issued and outstanding,
respectively
On June 20, 2000 the Company adopted the Certificate of Designation of
Rights and Preferences of the Series D Cumulative Junior Preferred Stock
("Series D Preferred Stock") that designates this issue to consist of 3,500
shares of $.0001 par value per share with a face value of $100 per share; have
dividend requirement of 8% per annum, payable quarterly at the election of the
Company in additional shares of Series D Preferred Stock in lieu of cash; have
voting rights; and are redeemable at any time at the election of the Company in
cash or the issuance of Common Stock purchase warrants on a 2 to 1 share basis
at an exercise price of $3.00 per share. At December 31, 2002 and 2003 there
were 3,656 and zero shares of series D preferred stock issued and outstanding,
respectively.
In connection with the restructuring arrangement with Prudential and as
further discussed in Note H, during December 2000, the Company issued 50,000
shares of Series E Cumulative Senior Preferred Stock to
F-17
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prudential which provide for cash dividends at 12% after the third anniversary,
and have the right to convert to Series F Cumulative Convertible Preferred Stock
after 5 years, which in turn is convertible to common stock at a rate of $2.55
per share. In addition the Company issued to Prudential 80,000 shares of Series
G Cumulative Convertible Preferred Stock; which have the right to convert to
common stock at $4.76 per share minus the amount, if any, by which any shares of
Series H Cumulative Convertible Preferred Stock (see below) should have been
converted to Common Stock at a conversion price of less than $5.00 per share. At
December 31, 2002 and 2003 there were 60,775 and 582, shares of series E
preferred stock outstanding, respectively There were no series F preferred stock
outstanding at December 31, 2002 and December 31, 2003. At December 31, 2002 and
2003, there were 97,240 and zero shares of series G preferred stock issued and
outstanding, respectively.
On December 29, 2000, the Company adopted the Certificate of Designation
of Rights and Preferences of Series H Cumulative Convertible Preferred Stock
("Series H Preferred Stock") that designates this issue to consist of 89,117
shares of $.00001 par value per share with a face value of $100 per share; have
a dividend requirement of 10% per annum compounded, payable semi-annually at the
election of the Company in additional shares of Series H Preferred Stock in lieu
of cash; have voting rights excluding the election of directors equivalent to
one vote per share of Common Stock into which preferred shares are convertible
into, and may be converted at the election of the Company into shares of the
Company's Common Stock on the basis of a $3.00 per share conversion rate. After
eighteen months from the issuance date a holder of Series H Preferred Stock may
elect to have future dividends paid in cash
The number of shares of common stock to be issued on each share of Series H
Stock is determined by dividing face value plus the amount of any accrued but
unpaid dividends on the Series H Stock by 85% of the ninety day average of the
high and low trading prices preceding the date of notice to the Company;
provided, that the conversion shall not use a price of less than $3.00 per share
and shall not be greater than $5.00 per share unless the conversion occurs
between January 1, 2001 and December 31, 2002, when the price shall not be
greater than $10.00 per share. If the Series H Stock is converted into common
stock, the Company will also be obligated to issue warrants providing the
holders of the Series H Stock with the right for a three year period to acquire
shares of common stock, at a price equal to the conversion price determined
above, equivalent to ten percent (10%) of the number of shares into which the
shares of Series H Stock are converted.
At December 31, 2002 and 2003 there were 101,839 and zero shares of series
H preferred stock outstanding, respectively.
For the years ended December 31, 2001, 2002 and 2003, the Company accrued
$2,871,000, $3,059,000 and $1,170,000 respectively, for dividends relating to
all series of preferred stock.
Stockholder Rights Plan:
On November 29, 2001 the Company adopted a stockholder rights plan in order
to provide protection for the stockholders in the event of an attempted
potential acquisition of the Company. Under the plan, the Company has declared
a dividend of one right on each share of common stock of the company. Each
right will entitle the holder to purchase one one-hundredth of a share of a new
Series I Junior Participating Preferred Stock of the Company at an exercise
price of $20.00. The rights are not currently exercisable and will become
exercisable only after a person or group acquires 15% or more of the outstanding
common stock of the Company or announces a tender offer or exchange offer which
would result in ownership of 15% or more of the outstanding common stock. The
rights are subject to redemption by the Company for $0.001 per right at any
time, subject to certain limitations. In addition, the Board of Directors is
authorized to amend the Rights plan at any time prior to the time the rights
become exercisable. The rights will expire on December 17, 2011.
If the rights become exercisable, each right will entitle its holder (other
than such person or members of such group) to purchase, at the right's then
current exercise price, a number of the Company's shares of common stock having
a market value of twice such price or, if the Company is acquired in a merger or
other business combination, each right will entitle its holder to purchase, at
the right's then current exercise price, a number of the acquiring Company's
shares of common stock having a market value of twice such price. Prior to an
acquisition of
F-18
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ownership of 50% or more of the common stock by a person or group, the Board of
Directors may exchange the rights (other than rights owned by such person or
group, which will have become null and void and nontransferable) at an exchange
ratio of one share of common stock (or one one-hundredth of a share of Series I
Preferred Stock) per right.
A summary of warrants outstanding as of December 31, 2003 is as follows:
Warrants:
EXERCISE
PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
- --------------- --------- ---------
01/03/2004. . . 2.24 223,247
03/07/2004. . . 4.04 333,907
04/10/2008. . . 2.75 1,249,447
04/27/2004. . . 4.24 192,554
05/03/2004. . . 4.24 21,378
05/12/2004. . . 2.75 508,517
03/19/2005. . . 2.76 203,819
04/25/2005. . . 2.45 21,460
06/04/2007. . . 2.48 71,814
04/25/2007. . . 2.24 20,916
04/09/2006. . . 2.72 4,588
03/19/2006. . . 2.72 281,394
06/27/2005. . . 2.48 294,951
08/24/2005. . . 2.50 124,946
06/30/2007. . . 2.24 69,722
07/07/2005. . . 2.50 9,994
06/30/2005. . . 2.70 17,285
07/23/2008. . . 2.50 2,431,020
10/31/2006. . . 2.69 20,946
07/15/2005. . . 2.71 4,370
07/18/2008. . . 1.35 38,804
10/18/2008. . . 0.88 600,000
---------
6,745,079
=========
F-19
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options:
A summary of stock option plans under which stock options remain
outstanding as of December 31, 2003 follows:
1996 Incentive Stock Plan authorizing the Board of Directors to provide a
number of key employees with incentive compensation commensurate with their
positions and responsibilities. The 1996 Plan permitted the grant of incentive
equity awards covering up to 240,000 shares of common stock. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 115,000 shares of common stock to
employees who were the beneficial owners of 50,000 options that were previously
granted by IWC Services. These incentive stock options are exercisable for a
period of 10 years from the original date of grant at an exercise price of $1.72
per share.
1997 Incentive Stock Plan authorizing the Board of Directors to provide key
employees with incentive compensation commensurate with their positions and
responsibilities. The 1997 Incentive Stock Plan permits the grant of incentive
equity awards covering up to 368,750 shares of common stock. Grants may be in
the form of qualified or non qualified stock options, restricted stock, phantom
stock, stock bonuses and cash bonuses. As of the date hereof, stock options
covering an aggregate of 368,750 shares of common stock have been made under the
1997 Incentive Stock Plan. Such options vest ratably over a five-year period
from the date of grant.
1997 Executive Compensation Plan authorizing the Board of Directors to
provide executive officers with incentive compensation commensurate with their
positions and responsibilities. The 1997 Executive Compensation Plan permits the
grant of incentive equity awards covering up to 368,750 shares of common stock.
Grants may be in the form of qualified or non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of December
31, 2003, stock option grants covering an aggregate of 195,000 shares of Common
Stock have been made under the Plan.
1997 Outside Directors' Option Plan authorizing the issuance each year of
an option to purchase 3,750 shares of common stock to each member of the Board
of Directors who is not an employee of the Company. The purpose of the
Directors' Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist the Company in achieving its
growth objectives. Options may be exercised over a five-year period with the
initial right to exercise starting one year from the date of the grant, provided
the director has not resigned or been removed for cause by the Board of
Directors prior to such date. After one year from the date of the grant, options
outstanding under the Directors' Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors' Plan are not transferable except by will or by operation of law.
Through December 31, 2003, grants of stock options covering an aggregate of
39,750 shares of common stock have been made under the 1997 Outside Directors'
Option Plan.
2000 Long-Term Incentive Plan authorizes the Board of Directors to provide
full time employees and consultants (whether full or part time) with incentive
compensation in connection with their services to the Company. The plan permits
the grant of incentive equity awards covering up to 1,500,000 shares of common
stock. Grants may be in the form of qualified or non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of the date
hereof, stock option grants covering an aggregate of 75,000 shares of common
stock have been made under the 2000 Long-Term Incentive Plan. Such options vest
ratably over a five-year period from the date of grant. Options granted to
consultants are valued using the Black Scholes pricing model and expensed over
the vesting period.
In April 2000, the Company voided stock options covering an aggregate of
752,000 shares of common stock by agreement with the option holders with the
understanding that the stock options would be repriced and reissued. During the
third quarter of 2000, options covering an aggregate of 710,250 shares of common
stock were reissued at an exercise price of $3.00. No compensation expense was
required to be recorded at the date of issue. However, the reissuance of these
options was accounted for as a variable plan, and the Company was subject to
recording compensation expense if the Company's stock price rose above $3.00.
In April 2001, Messrs. Ramming, Winchester and Edwards agreed to voluntarily
surrender 522,000 of these options at the request of the Compensation Committee
of the Board, because of the potential variable plan accounting associated with
these options. In October 2001 these individuals received fully vested options
to purchase 522,000 shares at an exercise
F-20
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
price of $2.20 per share. As of December 31, 2003, options to purchase 72,750
shares pursuant to the reissuance in the third quarter of 2000 remain subject to
variable plan accounting.
On October 1, 2003 the Company granted 500,000 options at market price on
that day, vesting immediately, as a result of the new employment agreement with
the Company's Chief Executive Officer. The Company also granted 300,000 shares
of stock at no cost, vested over a four year period with 20% vesting
immediately. This resulted in a 2003 compensation expense of $90,000.
Stock option activity for the years ended December 31, 2001, 2002 and 2003
was as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ---------------
Outstanding December 31, 2000 1,986,000 $ 3.04
Granted . . . . . . . . . . 522,000 2.20
Exercised . . . . . . . . . - -
Cancelled . . . . . . . . . (547,000) 3.16
----------- ---------------
Outstanding December 31, 2001 1,961,000 $ 2.80
=========== ===============
Granted . . . . . . . . . . - -
Exercised . . . . . . . . . - -
Cancelled . . . . . . . . . (570,000) 2.88
----------- ---------------
Outstanding December 31, 2002 1,391,000 $ 2.76
=========== ===============
Granted . . . . . . . . . . 500,000 1.20
Exercised . . . . . . . . . (1,034,000) 2.63
Cancelled . . . . . . . . . (34,000) 3.00
----------- ---------------
Outstanding December 31, 2003 823,000 $ 1.96
=========== ===============
Summary information about the Company's stock options outstanding at
December 31, 2003.
Outstanding Exercisable
- --------------------------------------------------------------------- ---------------------------------
Weighted
Average Number
Number Outstanding Remaining Weighted Exercisable Weighted
Range of at Contractual Average At Average
Exercise Prices December 31, 2003 Life in Years Exercise Price December 31, 2003 Exercise Price
- ---------------- ------------------ -------------- --------------- ----------------- ---------------
1.20 500,000 5.00 $ 1.20 500,000 $ 1.20
1.72 5,000 4.00 $ 1.72 5,000 $ 1.72
3.00 293,000 4.78 $ 3.00 67,000 $ 3.00
5.00 25,000 1.47 $ 5.00 25,000 $ 5.00
- ---------------- ------------------ -------------- --------------- ----------------- ---------------
1.20-$5.00 823,000 4.81 $ 1.96 597,000 $ 1.57
================ ================== ============== =============== ================= ===============
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
stock option grants under its employee and director stock option plans if no
intrinsic value of the option exists at the date of the grant. In October 1995,
the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
No. 123"). SFAS No. 123 encourages companies to account for stock-based
compensations awards based on the fair value of the awards at the date they are
granted. The resulting compensation cost would be shown as an expense in the
consolidated statements of operations. Companies can choose not to apply the new
accounting method and continue to apply current accounting requirements;
however, disclosure is required as to what net income and earnings per share
would have been had the new accounting method been followed. Had compensation
expense for the Company's stock-based compensation plans been determined based
on the fair value at the grant dates for awards under stock option plans
consistent with the method of SFAS
F-21
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No. 123, the Company's reported net income (loss) and net income (loss) per
common share would have changed to the pro forma amounts indicated below:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
-------------- -------------- -------------
Net income (loss) to common
stockholders, as reported. . . . . . . . $ (1,596,000) $ (12,292,000) $ 5,868,000
Less total stock based employer
compensation expense determined
under fair value based method for all
awards, net of tax related effects . . 1,534,000 742,000 567,000
Pro forma net income (loss) to
common stockholders. . . . . . . . . . . $ (3,130,000) $ (13,034,000) $ 5,301,000
Basic income (loss)
Per share as reported. . . . . . . $ (0.16) $ (1.14) $ 0.27
Pro forma. . . . . . . . . . . . . $ (0.32) $ (1.20) $ 0.24
Diluted income (loss)
Per share as reported. . . . . . . $ (0.16) $ (1.14) $ 0.26
Pro forma. . . . . . . . . . . . . $ (0.32) $ (1.20) $ 0.24
The company used the Black-Scholes option pricing model to estimate the
fair value of options on the date of grant. The following assumptions were
applied in determining the pro forma compensation costs:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2002 2003
------ ------ -------
Risk-free interest rate 6.0% NA 6.0%
Expected dividend yield NA
Expected option life 10 yrs NA 5 yrs
Expected volatility 115.8% NA 60.0%
Weighted average fair value of options
granted at market value $ 1.36 NA $ 1.20
J. EMPLOYEE BENEFIT PLANS
401(k) Plan:
The Company sponsors a 40l (k) Plan adopted in 2000 for eligible employees
having six months of service and being at least twenty-one years of age.
Employees can make elective contributions of 1% to 15% of compensation, as
defined. During the years ended December 31, 2001, 2002 and 2003, the Company
contributed approximately $65,000, $83,000 and $69,000, respectively, under the
Plan.
K. RELATED PARTY TRANSACTIONS
As discussed in Note H, the Company has entered into financing transactions
with an investment group, Specialty Finance. The managing member of Specialty
Finance was a member of the Company's Board of Directors at that time.
F-22
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
L. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases vehicles, equipment, office and storage facilities under
operating leases with terms in excess of one year.
At December 31, 2003, future minimum lease payments, under these
non-cancelable operating leases are as follows:
YEARS ENDING DECEMBER 31: AMOUNT
- ----------------------------- ---------
2004 $ 16,000
2005 16,000
2006 16,000
2007 16,000
2008 3,000
Thereafter -
-
-----------
$ 67,000
===========
Rent expense for the years ended December 31, 2001, 2002 and 2003 was
approximately $748,000 $275,000 and $35,000 respectively.
Litigation
On March 27, 2003, a lawsuit styled Gateway Ridgecrest Inc. vs. Boots &
Coots International Well Control, Inc. alleging default by the Company under a
Lease Agreement dated May 4, 1998 (the "Lease Agreement") by and between
Plaintiff and the Company. The leased premises are located at 777 Post Oak
Boulevard, Houston, Harris County, Texas 77056. Plaintiff seeks recovery of:
(a) rent past due, future rent, common area maintenance charges, taxes,
insurance, late charges and other charges proven up through the end of the term
of the lease; (b) prejudgment and post-judgment interest on the amounts awarded
at the maximum lawful rate; (c) attorney's fees, together with interest
thereon; and (d) costs of suit. The Company has properly accrued for any
potential liabilities under the lease agreement. The Company filed its answer
generally denying Plaintiff's claims and asserting the affirmative defenses of
surrender and termination, estoppel and waiver. Both parties have responded to
written discovery. Plaintiff has filed a partial motion for summary judgment
relating to the Company's liability under the Lease Agreement. The hearing on
Plaintiff's motion for summary judgment was held on March 12, 2004, but the
court has not yet ruled on the motion. The Company intends to vigorously defend
this matter.
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. In July 2002, the Company agreed to pay $500,000
in cash in four installments, the last installment being due in January 2003, in
partial settlement of the plaintiffs' claims against all of the defendants. As
to the remaining claims, the defendants filed motions for summary judgment. On
September 24, 2002 the court granted the defendants' motions for summary
judgment. The Company had defaulted on the settlement after paying one
installment of $100,000, but has since resettled the case on behalf of all Boots
& Coots entities and all employees of the Company by paying the remaining unpaid
$400,000 in March 2003 in exchange for full and final release by all plaintiffs
from any and all claims related to the subject of the case. On September 24,
2003, Defendants Larry H. Ramming, Buckingham Funding Corporation and Buckingham
Capital Corporation filed a Cross-Claim for Indemnification against the Company
and its subsidiary, IWC Services, Inc., alleging that the Company and IWC
Services, Inc. owed indemnification to said Defendants for the Plaintiffs'
claims that still remain against said Defendants. The Company denies any
indemnification obligation and intends to vigorously defend the matter.
F-23
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
M. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND
CONCENTRATION OF CREDIT RISK:
Segments:
On January 1, 2001, the Company redefined the segments in which it operates
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. 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
years ended December 31, 2001, 2002 and 2003 is presented below. General and
corporate are included in the calculation of identifiable assets and are
included in the Prevention and Response segments.
PREVENTION RESPONSE CONSOLIDATED
------------ ------------- --------------
Year Ended December 31, 2001
Net operating revenues . . . . $ 5,189,000 $ 11,749,000 $ 16,938,000
Operating income (loss). . . . 913,000 3,494,000 4,407,000
Identifiable operating assets. 5,439,000 12,315,000 17,754,000
Capital expenditures . . . . . - 221,000 221,000
Depreciation and amortization. 342,000 902,000 1,244,000
Interest expense . . . . . . . 68,000 155,000 223,000
Year Ended December 31, 2002
Net operating revenues . . . . $ 7,666,000 $ 6,436,000 $ 14,102,000
Operating income (loss). . . . (732,000) (807,000) (1,539,000)
Identifiable operating assets. 3,828,000 3,208,000 7,036,000
Capital expenditures . . . . . - 98,000 98,000
Depreciation and amortization. 617,000 585,000 1,202,000
Interest expense . . . . . . . 416,000 349,000 765,000
Year Ended December 31, 2003
Net operating revenues . . . . $16,159,000 $ 19,776,000 $ 35,935,000
Operating Income (loss). . . . 3,731,000 6,503,000 10,234,000
Identifiable operating assets. 8,871,000 10,855,000 19,726,000
Capital expenditures . . . . . - 1,799,000 1,799,000
Depreciation and amortization. 423,000 573,000 996,000
Interest expense . . . . . . . 1,080,000 1,322,000 2,402,000
F-24
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from major customers and concentration of credit risk:
During the periods presented below, the following customers represented
significant concentrations of consolidated revenues:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
------------ ------------- -------------
Customer A . . . - - 68%
Customer B . . . 32% 14% -
Customer C . . . - 11% -
Customer D . . . 10% - -
The Company's revenues are generated geographically as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2002 2003
------------ ------------- -------------
United States . 75% 55% 13%
Foreign. . . . . 25% 45% 87%
The nature of the Company's revenue stream is cyclical from year to year
such that this history of geographic split does not represent any trend, but is
more related to where the response related events occur during any one year. Of
the 2003 Foreign above are revenues of 72% and 24% generated from Iraq and
Venezuela, respectively. Of the 2001 and 2002 Foreign above are revenues of 58%
and 54% generated from Venezuela.
Accounts Receivable:
None of the Company's customers at December 31, 2001 accounted for greater
than ten percent of outstanding accounts receivable. One domestic customer at
December 31, 2003 accounted for 53% of the outstanding accounts receivable. One
customer in Venezuela accounted for 31% and 17% of December 31, 2002 and 2003
outstanding accounts receivable, respectively.
Cash:
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes that any possible
deposit loss is minimal.
F-25
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the unaudited quarterly results of operations
for 2002 and 2003:
QUARTER ENDED
2002 MARCH 31, 2002 JUNE 30, 2002 SEPTEMBER 30, 2002 DECEMBER 31, 2002
- ---- -------------- ------------- ------------------ -----------------
Revenues $ 4,010,000 $ 3,984,000 $ 3,464,000 $ 2,644,000
Income (loss) from continuing
operations (65,000) (1,738,000) 888,000 (1,610,000)
Net income (loss) (1,830,000) (7,160,000) 1,385,000 (1,575,000)
Net income (loss) attributable to
common stockholders (2,660,000) (7,922,000) 625,000 (2,335,000)
Net income (loss) per common
share:
Basic (0.24) (0.76) 0.06 (0.16)
Diluted (0.24) (0.76) 0.05 (0.16)
QUARTER ENDED
2003 MARCH 31, 2003 JUNE 30, 2003 SEPTEMBER 30, 2003 DECEMBER 31, 2003
- ---- --------------- -------------- ------------------- ------------------
Revenues $ 10,931,000 $ 8,026,000 $ 8,051,000 $ 8,927,000
Income from continuing operations 3,298,000 1,854,000 476,000 981,000
Net income 3,313,000 1,854,000 836,000 1,088,000
Net income attributable to
common stockholders 2,581,000 1,589,000 729,000 969,000
Net income per common share:
Basic 0.19 0.08 0.03 0.04
Diluted 0.16 0.07 0.03 0.04
Basic and diluted loss per common share for each of the quarters presented
above is based on the respective weighted average number of common and dilutive
potential common shares outstanding for each period and the sum of the quarters
may not necessarily be equal to the full year basic and diluted earnings per
common share amounts.
F-26