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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
_______________
COMMISSION FILE NUMBER 1-13817
BOOTS & COOTS INTERNATIONAL
WELL CONTROL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2908692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11615 N. HOUSTON-ROSSLYN
HOUSTON, TEXAS 77086
(Address of principal executive offices) (Zip Code)
(281) 931-8884
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
The number of shares of the Registrant's Common Stock, par value $.00001
per share, outstanding at November 13, 2003, were 27,127,540
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
(UNAUDITED)
PAGE
----
Item 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity (Deficit) 5
Condensed Consolidated Statements of Cash Flows . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . . . 7-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . 23
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . 23
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . 24
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 25
Item 4. Submissions of Matters to a Vote of Security Holders. . . . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 26
2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, SEPTEMBER 30
2002 2003
-------------- --------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 261,000 3,231,000
Receivables - net. . . . . . . . . . . . . . . . . . . . . . . . . . 2,868,000 10,749,000
Restricted assets. . . . . . . . . . . . . . . . . . . . . . . . . . 69,000 -
Assets of discontinued operations. . . . . . . . . . . . . . . . . . 212,000 90,000
Prepaid expenses and other current assets. . . . . . . . . . . . . . 620,000 1,551,000
-------------- --------------
Total current assets . . . . . . . . . . . . . . . . 4,030,000 15,621,000
-------------- --------------
PROPERTY AND EQUIPMENT - net . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,561,000
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 5,000
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 7,036,000 $ 19,187,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short term debt and notes. . . . . . . . . . . . . . . . . . . . . . $ 15,000,000 $ 100,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939,000 2,093,000
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 1,897,000 5,082,000
Liabilities of discontinued operations . . . . . . . . . . . . . . . 1,188,000 298,000
-------------- --------------
Total current liabilities . . . . . . . . . . . . . 21,024,000 7,573,000
-------------- --------------
LONG TERM DEBT AND NOTES PAYABLE
net of current maturities. . . . . . . . . . . . . . . . . . . . . . - 13,452,000
Total liabilities . . . . . . . . . . . . . . . . . 21,024,000 21,025,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES. . . . . . . . . . . . . . . . . . . . . - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par value, 5,000,000 shares authorized,
331,000 and 53,000 shares issued and outstanding
at December 31, 2002 and September 30, 2003, respectively). . . . - -
Common stock ($.00001 par value, 125,000,000 shares authorized,
11,216,000 and 26,545,000 shares issued and outstanding
at December 31, 2002 and September 30, 2003, respectively). . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 59,832,000 67,084,000
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . (438,000) (439,000)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . (73,382,000) (68,483,000)
-------------- --------------
Total stockholders' equity (deficit) . . . . . . . . (13,988,000) (1,838,000)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 7,036,000 $ 19,187,000
============== ==============
See accompanying notes to condensed consolidated financial statements.
3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2003 2002 2003
------------ ----------- ------------ -----------
REVENUES
Service . . . . . . . . . . . . . . . . . . . . . . $ 3,464,000 $ 8,051,000 $11,458,000 $20,379,000
Equipment sales . . . . . . . . . . . . . . . . . . - - - 6,629,000
------------ ----------- ------------ -----------
Total Revenues . . . . . . . . . . . . . . . . . 3,464,000 8,051,000 11,458,000 27,008,000
COSTS OF SALES
Service . . . . . . . . . . . . . . . . . . . . . . 1,502,000 3,427,000 4,761,000 6,948,000
Equipment sales . . . . . . . . . . . . . . . . . . - - - 3,082,000
------------ ----------- ------------ -----------
Total Costs of Sales . . . . . . . . . . . . . . 1,502,000 3,427,000 4,761,000 10,030,000
Gross Margin . . . . . . . . . . . . . . . . . . 1,962,000 4,624,000 6,697,000 16,978,000
Operating expenses. . . . . . . . . . . . . . . . . 1,108,000 1,738,000 4,481,000 5,489,000
Selling, general and administrative . . . . . . . . 613,000 689,000 2,026,000 2,160,000
Depreciation and amortization . . . . . . . . . . . 315,000 262,000 889,000 761,000
------------ ----------- ------------ -----------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . (74,000) 1,935,000 (699,000) 8,568,000
INTEREST EXPENSE (INCOME) AND OTHER . . . . . . . . . (1,132,000) 1,272,000 (127,000) 2,178,000
------------ ----------- ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS,
before income taxes . . . . . . . . . . . . . . . . 1,058,000 663,000 (572,000) 6,390,000
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . . . 170,000 187,000 343,000 762,000
------------ ----------- ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS. . . . . . . 888,000 476,000 (915,000) 5,628,000
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes. . . . . . . . . . . . . . . . 497,000 360,000 (6,690,000) 375,000
------------ ----------- ------------ -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . 1,385,000 836,000 (7,605,000) 6,003,000
PREFERRED DIVIDEND REQUIREMENTS &
ACCRETIONS . . . . . . . . . . . . . . . . . . . . 760,000 107,000 2,352,000 1,104,000
------------ ----------- ------------ -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . $ 625,000 $ 729,000 $(9,957,000) $ 4,899,000
============ =========== ============ ===========
Basic Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . $ 0.02 $ 0.02 $ (0.30) $ 0.22
============ =========== ============ ===========
Discontinued Operations. . . . . . . . . . . . . . $ 0.04 $ 0.01 $ (0.63) $ 0.02
============ =========== ============ ===========
Net Income (Loss). . . . . . . . . . . . . . . . . $ 0.06 $ 0.03 $ (0.93) $ 0.24
============ =========== ============ ===========
Weighted Average Common Shares Outstanding - Basic. . 11,190,000 26,232,000 $10,702,000 20,132,000
============ =========== ============ ===========
Diluted Earnings (Loss) per Common Share:
Continuing Operations. . . . . . . . . . . . . . . $ 0.01 $ 0.02 $ (0.30) $ 0.22
============ =========== ============ ===========
Discontinued Operations. . . . . . . . . . . . . . $ 0.04 $ 0.01 $ (0.63) $ 0.02
============ =========== ============ ===========
Net Income (Loss). . . . . . . . . . . . . . . . . $ 0.05 $ 0.03 $ (0.93) $ 0.24
============ =========== ============ ===========
Weighted Average Common Shares Outstanding - Diluted. 11,429,000 26,265,000 10,702,000 20,249,000
============ =========== ============ ===========
See accompanying notes to condensed consolidated financial statements.
4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
-------------------- ------------------- PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSS
--------- --------- ---------- ------- ------------ ------------- ---------------
BALANCES, December 31, 2002 331,000 $ - 11,216,000 $ - $59,832,000 $(73,382,000) $ (438,000)
Warrant discount accretion . . . . . - - - - 40,000 (40,000) -
Warrants exercised . . . . . . . . . - - 2,178,000 - - - -
Common stock options exercised . . . - - 736,000 - 663,000 - -
Common stock issued to retire senior
debt and related accrued interest - - 1,614,000 - 1,598,000 - -
Short swing profit contribution - - - - 3,887,000 - -
Preferred stock conversion to
common stock . . . . . . . . . . . (278,000) - 10,801,000 - - - -
Preferred stock
dividends accrued . . . . . . . . - - - - 1,064,000 (1,064,000) -
Net income . . . . . . . . . . . . - - - - - 6,003,000 -
Foreign currency translation . . . . - - - - - - (1,000)
Comprehensive income . . . . . . . . - - - - - - -
--------- --------- ---------- ------- ------------ ------------- ---------------
BALANCES, September 30, 2003. . . . . 53,000 $ - 26,545,000 $ - $67,084,000 $(68,483,000) $ (439,000)
========= ========= ========== ======= ============ ============= ===============
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
---------------
BALANCES, December 31, 2002 . . . . . $ (13,988,000)
Warrant discount accretion
Warrants exercised . . . . . . . . . -
Common stock options exercised . . . 663,000
Common stock issued to retire senior
debt and related accrued interest 1,598,000
Short swing profit contribution . . 3,887,000
Preferred stock conversion to
common stock . . . . . . . . . . . -
Preferred stock
dividends accrued . . . . . . . . -
Net income . . . . . . . . . . . . . 6,003,000
Foreign currency translation . . . . (1,000)
---------------
Comprehensive income . . . . . . . . 6,002,000
---------------
BALANCES, September 30, 2003. . . . . $ (1,838,000)
===============
See accompanying notes to condensed consolidated financial statements.
5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2002 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $(7,605,000) $ 6,003,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 889,000 761,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . 103,000 -
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . 58,000 -
Equity issued (or retired) for services and settlements. . . . 42,000 -
Loss on reserve for discontinued operations. . . . . . . . . . 2,954,000 -
Other non-cash charges . . . . . . . . . . . . . . . . . . . . - 1,664,000
------------ ------------
Net cash provided by (used in) operating activities before
changes in operating assets and liabilities:. . . . . . . . (3,559,000) 8,428,000
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . 653,000 (7,881,000)
Restricted Assets. . . . . . . . . . . . . . . . . . . . . . . 1,265,000 69,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 138,000 -
Prepaid expenses and other current assets. . . . . . . . . . . 189,000 (931,000)
Net assets/liabilities of discontinued operations. . . . . . . 1,753,000 (768,000)
Deferred financing costs and other assets. . . . . . . . . . . 124,000 -
Accounts payable and accrued liabilities . . . . . . . . . . . (1,655,000) 2,218,000
------------ ------------
Net cash provided by (used in) operating activities. . . . . . (1,092,000) 1,135,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions . . . . . . . . . . . . . . . (98,000) (1,790,000)
Proceeds from sale of property and equipment . . . . . . . . . 44,000 -
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . (54,000) (1,790,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short swing profit contribution. . . . . . . . . . . . . . . . - 3,887,000
Common stock options exercised. . . . . . . . . . . . . . . . - 663,000
Proceeds from short term senior debt financing . . . . . . . . 1,300,000 200,000
Proceeds from pledging activity. . . . . . . . . . . . . . . . (330,000) -
Payments of short term senior debt financing. . . . . . . . . - (950,000)
Payments on unsecured note payable . . . . . . . . . . . . . . - (115,000)
Repayments to pledging arrangements. . . . . . . . . . . . . . - (59,000)
------------ ------------
Net cash provided by financing activities. . . . . . . . . . . 970,000 3,626,000
------------ ------------
Impact of foreign currency on cash . . . . . . . . . . . . . . - (1,000)
Net increase (decrease) in cash and cash equivalents . . . . . (176,000) 2,970,000
CASH AND CASH EQUIVALENTS, Beginning of Period. . . . . . . . . . . 303,000 261,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of Period. . . . . . . . . . . . . . $ 127,000 $ 3,231,000
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest. . . . . . . . . . . . . . . . . . . . $ 21,000 60,000
Cash paid for income taxes. . . . . . . . . . . . . . . . . . 123,000 262,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock and warrant accretions. . . . . . . . . . . . . . . . . 39,000 40,000
Preferred stock dividends accrued . . . . . . . . . . . . . . 2,313,000 1,064,000
Common stock issued for settlements . . . . . . . . . . . . . 49,000 -
See accompanying notes to condensed consolidated financial statements.
6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
A. FINANCIAL CONDITION
At September 30, 2003, the Company had working capital of $8,048,000
including a cash balance of $3,231,000. Though the Company had increased its
stockholders' equity by $12,150,000 for the same period, the Company still
retained a stockholders' deficit of $1,838,000. For the nine months ended
September 30, 2003, the Company generated operating income for the period of
$8,568,000 and net cash from operating activities, before changes in working
capital, of $8,428,000. Net cash generated from operating activities, after
changes in working capital, was $1,135,000. The Company received short swing
profit contribution proceeds of $3,887,000 during the period. As a consequence,
the Company is benefiting from a significantly improved liquidity position as
compared to recent years. 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 into 1,597,642 shares of common stock
during the third quarter of 2003. The Company's short-term liquidity also
improved as a consequence of increases in prevention service revenues and
certain asset sales. A portion of these proceeds were used to repay $700,000 of
principal plus interest owing under the Company's credit facility with
Checkpoint Business, Inc. (See Note F for further discussion). The Company also
paid down current maturities and significantly reduced payables owing to Company
vendors. The Company applied $400,000 of the proceeds to legal settlements (See
Note G for further discussion).
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 nine months ended September 30, 2003, there was a
significant increase in international demand for the Company's services and
equipment, specifically in the Middle East, in connection with events in Iraq.
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. They do not include all information and
notes required by generally accepted accounting principles for complete annual
financial statements. The accompanying condensed consolidated financial
statements include all adjustments, including normal recurring accruals, which,
in the opinion of management, are necessary in order to make the condensed
consolidated financial statements not be misleading. The unaudited condensed
consolidated financial statements and notes thereto and the other financial
information contained in this report should be read in conjunction with the
audited financial statements and notes in the Company's annual report on Form
10-K for the year ended December 31, 2002, and those reports filed previously
with the Securities and Exchange
7
Commission ("SEC"). The results of operations for the three-month and nine
month periods ended September 30, 2002 and 2003 are not necessarily indicative
of the results to be expected for the full year. On August 19, 2003, the
Company's stockholders voted in favor of a one for four reverse stock spit,
effective October 2, 2003. All of the share numbers and per share numbers have
been restated to reflect this reverse split. Certain reclassifications have
been made in the prior period consolidated financial statements to conform to
current year presentation.
C. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation granted under it's
long-term incentive plan using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Stock-based compensation expenses
associated with option grants were not recognized in the net income (loss) for
the nine month periods ended September 30, 2002 and 2003, as all options granted
had exercise prices equal to the market value of the underlying common stock on
the dates of grant. The following table illustrates the effect on net income
(loss) and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------- --------------- --------------
2002 2003 2002 2003
-------------- -------------- --------------- --------------
Net income (loss) attributable to
common stockholders as reported. . $ 625,000 $ 729,000 $ (9,957,000) $ 4,899,000
Less total stock based employee
compensation expense determined
under fair value method for all
awards, net of tax related effects. 186,000 64,000 558,000 192,000
-------------- -------------- --------------- --------------
Pro forma net income (loss)
attributable to common stockholders . $ 439,000 $ 665,000 $ (10,515,000) $ 4,707,000
-------------- -------------- --------------- --------------
Basic net income (loss) per share
As reported . . . . . . . . . . $ 0.06 $ 0.03 $ (0.93) $ 0.24
Pro forma . . . . . . . . . . . $ 0.04 $ 0.03 $ (0.98) $ 0.23
Diluted net income (loss) per share
As reported . . . . . . . . . . $ 0.05 $ 0.03 $ (0.93) $ 0.24
Pro forma . . . . . . . . . . . $ 0.04 $ 0.03 $ (0.98) $ 0.23
D. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS No. 143") which covers all legally enforceable obligations
associated with the retirement of tangible long-lived assets and provides the
accounting and reporting requirements for such obligations. The Company adopted
SFAS No. 143 effective January 1, 2003, as required. The adoption of SFAS No.
143 did not have a material impact on Company's condensed consolidated financial
position or results of operations.
In December 2002, the FASB issued Accounting for Stock-Based Compensation
("SFAS No. 148") amending SFAS No. 123, to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation. The three methods provided in SFAS No. 148 include (1) the
prospective method which is the method currently provided for in SFAS No. 123,
(2) the retroactive restatement method which would allow companies to restate
all periods presented and (3) the modified prospective method which would allow
companies to present the recognition provisions of all outstanding stock-based
employee compensation instruments as of the beginning of the fiscal year of
adoption. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No.
123 to require disclosure in the summary of significant accounting policies of
the effects of an entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per share in annual
and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for their employee stock-based awards using the
fair value method. However, the disclosure provisions are required for all
companies with stock-based employee
8
compensation, regardless of whether they utilize the fair method of accounting
described in SFAS No. 123 or the intrinsic value method described in APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Company does not currently
intend to adopt the fair value method of accounting for stock-based
compensation, however, it has adopted the disclosure provisions of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN No. 46), which addresses consolidation by
business enterprises of variable interest entities. FIN No. 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not expect
to identify any variable interest entities that must be consolidated and thus
the Company does not expect the requirements of FIN No. 46 to have a material
impact on its financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," (" SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No.150 did not have a material
impact on Company's condensed consolidated financial position or results of
operations.
E. DISCONTINUED OPERATIONS
On June 30, 2002, the Company formalized a plan to sell the assets of its
Special Services and Abasco operations. The sales proceeds were approximately
$1,041,000. The operations of these two companies are reflected as discontinued
operations on the condensed consolidated statements of operations and as assets
and liabilities of discontinued operations on the condensed consolidated balance
sheets.
9
The following represents a condensed detail of assets and liabilities for
discontinued operations adjusted for write-downs:
DECEMBER 31, SEPTEMBER 30,
2002 2003
------------- ---------------
Receivables - net . . . . . . . . . . . . . . . . . . . . . $ 174,000 $ 90,000
Restricted assets . . . . . . . . . . . . . . . . . . . . . 38,000 -
------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . $ 212,000 $ 90,000
============= ===============
Short term debt and current maturities of long-term
debt and notes payable . . . . . . . . . . . . . . . . . . $ 32,000 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 801,000 204,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 355,000 94,000
------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . $ 1,188,000 $ 298,000
============= ===============
Reconciliation of change in net asset value of discontinued operations:
Balance of net liability of discontinued
operations at December 31, 2002 $ (976,000)
Income from discontinued operations 375,000
Intercompany transfers 393,000
---------------
Balance of net liability of discontinued operations
at September 30, 2003 $ (208,000)
===============
F. LONG-TERM DEBT AND NOTES PAYABLE
At June 30, 2003, the Company was not in compliance with certain ratio
tests for the trailing twelve-month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults. In connection therewith, the Company issued
$2,658,931 of new subordinated notes to Prudential for accrued and unpaid
interest and fees. The Company believes that it will meet the ratio tests in
the next twelve to fifteen months. Accordingly, the Company has reclassified
$12,157,000 owing to Prudential from current liability to long term debt on the
September 30, 2003 balance sheet. In connection with the July 2003 waiver, the
Company has agreed to apply all of its 'Excess Cash', defined as cash and cash
equivalents over $2,000,000, to Prudential obligations. The Company has
received a partial waiver on the requirement at September 30, 2003 as a result
of the cash and cash equivalents that were being held on September 30, 2003 for
anticipated cash settlements of liabilities in the fourth quarter of 2003. The
Company will be required to pay $582,000 to Prudential on or before November 14,
2003.
At June 30, 2003, Specialty Finance's participation interest of $1,000,000
was outstanding as senior secured debt. The Company had not, at that time,
received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 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. 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
10
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 a
term sheet extending the term of the loan to 24 months. The annual interest
rate under the agreement is 11% and will be paid quarterly.
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.
G. COMMITMENTS AND CONTINGENCIES
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. The Company settled the case on behalf of all
Boots & Coots entities and its employees by paying $500,000, the last
installment of which was paid in March 2003. On September 24, 2003, Mr. Ramming
and entities affiliated with him filed a cross claim against the Company
asserting entitlement to indemnification with respect to the allegations of
plaintiffs pursuant to alleged agreements between the Company and of its
subsidiaries and on the basis of common law principles. Based upon the
allegations made by the plaintiffs against Mr. Ramming and the entities
affiliated with him to date, the Company does not believe that it is obligated
to indemnify Mr. Ramming or such entities
11
on the basis of any contractual, bylaw, common law or other obligation. The
Company intends to closely monitor developments in the lawsuit and assess its
position with respect to such indemnification as circumstances warrant.
On October 17, 2003 a lawsuit styled Gateway Ridgecrest Inc. vs. Boots &
Coots International Well Control, Inc. was filed against the Company demanding
past due rent, future rent through August 2005, net of anticipated rent received
from its current tenants, other costs related to commissions and leasehold
improvements and legal costs as a result of the Company abandoning its lease for
office space located at 777 Post Oak Blvd., Houston, Texas, in early 2003. The
Company intends to defend this lawsuit. The Company has reserved an amount it
believes to be sufficient to offset the anticipated cost associated with this
lawsuit.
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.
H. EARNINGS PER SHARE
Basic income (loss) per share is computed by dividing net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding for the period. The computation of diluted net income (loss)
attributable to common shareholders per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock that are
dilutive to net income attributable to common shareholders were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the Company.
The following table is a reconciliation of the basic and diluted weighted
average shares outstanding for the three and nine months ended September 30,
2002 and 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
Weighted average common shares outstanding:
Basic: . . . . . . . . . . . . . . . . . . . 11,190,000 26,232,000 10,702,000 20,132,000
Senior convertible debt. . . . . . . . . . - - - -
Convertible preferred stock. . . . . . . . 239,000 33,000 - 117,000
Stock purchase warrants (1). . . . . . . . - - - -
Stock options (2). . . . . . . . . . . . . - - - -
---------- ---------- ---------- ----------
Diluted: . . . . . . . . . . . . . . . . . . 11,429,000 26,265,000 10,702,000 20,249,000
---------- ---------- ---------- ----------
(1) Stock purchase warrants to purchase 8,883,000 shares and 6,006,000
shares of common stock were outstanding but not included in the
computations of diluted net income (loss) attributable to common
shareholders per share for the three and nine months ended September 30,
2002 and 2003, respectively, because the exercise prices of the warrants
were greater than the average market price of the common shares and would
be anti-dilutive to the computations in 2002 only.
(2) Stock options to purchase 1,015,000 shares and 326,000 shares of common
stock were outstanding but not included in the computations of diluted net
income (loss) attributable to common shareholders per share for the three
and nine months ended September 30, 2002 and 2003, respectively, because
the exercise prices of the options were greater than the average market
price of the common shares and would be anti-dilutive to the computations
in 2002 only.
I. BUSINESS SEGMENT INFORMATION
On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during 2002, as a result of the decision to
discontinue its Abasco and Special Services business operations. The current
segments are Prevention and Response. Intercompany transfers between segments
were not material. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. For
purposes of this
12
presentation, general and corporate expenses have been allocated between
segments pro rata based on relative revenues. ITS, Baylor, Abasco and Special
Services are presented as discontinued operations in the condensed consolidated
financial statements and are therefore excluded from the segment information for
all periods presented.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. The scope of these services include training, contingency planning,
well plan reviews, services associated with the Company's Safeguard programs and
services in conjunction with the WELLSURE(R) risk management program. All of
these services are designed to significantly reduce the risk of a well blowout
or other critical response event.
The Response segment consists of personnel and equipment services provided
during an emergency response such as a critical well event or a hazardous
material response. These services are designed to minimize response time and
damage while maximizing safety.
Information concerning operations in the two business segments for the
three and nine months ended September 30, 2002 and 2003 is presented below.
PREVENTION RESPONSE CONSOLIDATED
------------ ------------ --------------
THREE MONTHS ENDED SEPTEMBER 30, 2002:
Operating Revenues. . . . . . . . . . $ 1,643,000 $ 1,821,000 $ 3,464,000
Operating Income (Loss) . . . . . . . 145,000 (219,000) (74,000)
Identifiable Operating Assets . . . . 4,091,000 3,838,000 7,929,000
Capital Expenditures. . . . . . . . . - - -
Depreciation and Amortization . . . . 138,000 177,000 315,000
Interest Expense and Other. . . . . . (603,000) (529,000) (1,132,000)
THREE MONTHS ENDED SEPTEMBER 30, 2003:
Operating Revenues. . . . . . . . . . $ 1,742,000 $ 6,309,000 $ 8,051,000
Operating Income (Loss) . . . . . . . (77,000) 2,012,000 1,935,000
Identifiable Operating Assets . . . . 8,839,000 10,348,000 19,187,000
Capital Expenditures. . . . . . . . . 20,000 262,000 282,000
Depreciation and Amortization . . . . 60,000 202,000 262,000
Interest Expense and Other. . . . . . 474,000 798,000 1,272,000
PREVENTION RESPONSE CONSOLIDATED
------------ ------------ --------------
NINE MONTHS ENDED SEPTEMBER 30, 2002:
Operating Revenues. . . . . . . . . . $ 5,909,000 $ 5,549,000 $ 11,458,000
Operating Income (Loss) . . . . . . . (225,000) (474,000) (699,000)
Identifiable Operating Assets . . . . 4,091,000 3,838,000 7,929,000
Capital Expenditures. . . . . . . . . - 98,000 98,000
Depreciation and Amortization . . . . 429,000 460,000 889,000
Interest Expense and Other. . . . . . (68,000) (59,000) (127,000)
NINE MONTHS ENDED SEPTEMBER 30, 2003:
Operating Revenues. . . . . . . . . . $12,572,000 $14,436,000 $ 27,008,000
Operating Income (Loss) . . . . . . . 3,216,000 5,352,000 8,568,000
Identifiable Operating Assets . . . . 8,839,000 10,348,000 19,187,000
Capital Expenditures. . . . . . . . . 833,000 957,000 1,790,000
Depreciation and Amortization . . . . 340,000 421,000 761,000
Interest Expense and Other. . . . . . 992,000 1,186,000 2,178,000
For the three and nine month periods ended September 30, 2002, the
Company's revenue mix between domestic and foreign sales were domestic 79%,
foreign 21% and domestic 70% and foreign 30% respectively. For the three and
nine month periods ended
13
September 30, 2003, the Company's revenue mix between domestic and foreign sales
were domestic 19%, foreign 81% and domestic 14% and foreign 86% respectively.
J. SUBSEQUENT EVENTS
On August 19, 2003, the Company's stockholders voted in favor of a one for
four reverse stock spit, effective October 2, 2003. All of the share numbers and
per share numbers contained herein have been restated to reflect this reverse
split.
On October 9, 2003, the Company settled a short-term note payable to a law
firm for $300,000 cash and 25,000 shares of common stock.
On October 14, 2003, the Company paid $100,000 plus accrued interest in
full payment of the Checkpoint note.
On October 27, 2003, there were 7,984 shares of common stock issued upon
the exercise of a warrant originally issued in connection with the Specialty
Finance Credit Facility.
The Company settled a contingent liability with a public relations firm for
$60,000 cash, 550,000 shares of common stock, 600,000 warrants priced at $0.88
per share and $8,000 per month consulting fees through February 1, 2004 with an
option to extend its contract for one more year at the Company's option. The
value of the cash, securities and warrants of approximately $900,000 has been
charged to interest and other expense (income) in the third quarter of 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides safe harbor
provisions for forward-looking information. Forward-looking information is
based on projections, assumptions and estimates, not historical information.
Some statements in this Form 10 - Q are forward-looking and use words like
"may," "may not," "believes," "do not believe," "expects," "do not expect," "do
not anticipate," and other similar expressions. We may also provide oral or
written forward-looking information on other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can be
guaranteed. Actual events and results of operations may vary materially.
While it is not possible to identify all factors, we face many risks and
uncertainties that could cause actual results to differ from our forward-looking
statements including those contained in this 10-Q, our press releases and our
Forms 10-Q, 8-K and 10-K filed with the United States Securities and Exchange
Commission. We do not assume any responsibility to publicly update any of our
forward-looking statements regardless of whether factors change as a result of
new information, future events or for any other reason.
OVERVIEW
On January 1, 2001, the Company redefined the segments in which it operates
as a result of the discontinued operations of ITS and Baylor business operations
and further redefined the segments during 2002, as a result of the decision to
discontinue its Abasco and Special Services business operations. The current
segments are Prevention and Response. Intercompany transfers between segments
were not material. The accounting policies of the operating segments are the
same as those described in the summary of significant accounting policies. For
purposes of this presentation, general and corporate expenses have been
allocated between segments pro rata based on relative revenues. ITS, Baylor,
Abasco and Special Services are presented as discontinued operations in the
condensed consolidated financial statements and are therefore excluded from the
segment information for all periods presented.
14
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.
AMERICAN STOCK EXCHANGE LISTING
On July 21, 2003 the Company received a letter from The American Stock
Exchange (" AMEX") stating that the Company is not in compliance with the
continued listing standards of AMEX and that AMEX had completed its review of
Boots & Coots' 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 has
sustained 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 has sustained losses from continuing operations and
/ or net losses in three out of its four most recent fiscal years.
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 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 has filed the appropriate additional listing application
and is awaiting AMEX approval.
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 has granted Boots & Coots an extension until the filing due date of
Boots & Coots' Form 10-Q for the period ending September 30, 2003 to gain
compliance with AMEX's listing standards subject to the Company providing AMEX
with updates, at least quarterly or as requested by AMEX, in conjunction with
the initiatives outlined in the submitted Plan.
AMEX may institute immediate delisting proceedings as a consequence of the
Company's failure to achieve compliance to its continued listing standards.
Further, the AMEX will normally consider delisting companies that have sustained
losses from continuing operations or net losses in their five most recent fiscal
years or that have sustained losses that are so substantial in relation to their
operations or financial resources, or whose financial condition has become so
impaired, that it appears questionable, in the opinion of AMEX, as to whether
the company will be able to continue operations or meet its obligations as they
mature.
15
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure about Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified its most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from equipment sales is
recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months, (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable, and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company
assesses its credit risk and provides an allowance for doubtful accounts for any
accounts which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements and notes thereto and
the other financial information included in this report and contained in the
Company's periodic reports previously filed with the SEC.
16
Information concerning operations in different business segments for the
three and nine months ended September 30, 2002 and 2003 is presented below.
Certain reclassifications have been made to the prior periods to conform to the
current presentation.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
2002 2003 2002 2003
----------- ----------- ------------ -----------
REVENUES
Prevention . . . . . . . . . . . . . . . . . . . $1,643,000 $1,742,000 $ 5,909,000 $12,572,000
Response . . . . . . . . . . . . . . . . . . . . 1,821,000 6,309,000 5,549,000 14,436,000
----------- ----------- ------------ -----------
$3,464,000 $8,051,000 $11,458,000 $27,008,000
----------- ----------- ------------ -----------
COST OF SALES
Prevention. . . . . . . . . . . . . . . . . . . $ 440,000 $ 980,000 $ 2,028,000 $ 5,016,000
Response. . . . . . . . . . . . . . . . . . . . 1,062,000 2,447,000 2,733,000 5,014,000
----------- ----------- ------------ -----------
$1,502,000 $3,427,000 $ 4,761,000 $10,030,000
----------- ----------- ------------ -----------
OPERATING EXPENSES(1)
Prevention. . . . . . . . . . . . . . . . . . . $ 629,000 $ 614,000 $ 2,632,000 $ 2,995,000
Response. . . . . . . . . . . . . . . . . . . . 479,000 1,124,000 1,849,000 2,494,000
----------- ----------- ------------ -----------
$1,108,000 $1,738,000 $ 4,481,000 $ 5,489,000
----------- ----------- ------------ -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (2)
Prevention. . . . . . . . . . . . . . . . . . . $ 291,000 $ 165,000 $ 1,045,000 $ 1,005,000
Response. . . . . . . . . . . . . . . . . . . . 322,000 524,000 981,000 1,155,000
----------- ----------- ------------ -----------
$ 613,000 $ 689,000 $ 2,026,000 $ 2,160,000
----------- ----------- ------------ -----------
DEPRECIATION AND AMORTIZATION (3)
Prevention. . . . . . . . . . . . . . . . . . . $ 138,000 $ 60,000 $ 429,000 $ 340,000
Response. . . . . . . . . . . . . . . . . . . . 177,000 202,000 460,000 421,000
----------- ----------- ------------ -----------
$ 315,000 $ 262,000 $ 889,000 $ 761,000
----------- ----------- ------------ -----------
OPERATING INCOME (LOSS)
Prevention. . . . . . . . . . . . . . . . . . . $ 145,000 $ (77,000) $ (225,000) $ 3,216,000
Response. . . . . . . . . . . . . . . . . . . . (219,000) 2,012,000 (474,000) 5,352,000
----------- ----------- ------------ -----------
$ (74,000) $1,935,000 $ (699,000) $ 8,568,000
----------- ----------- ------------ -----------
_________________________________
(1) Operating expenses have been allocated pro rata among segments based upon relative revenues.
(2) Corporate selling, general and administrative expenses have been allocated pro rata among
segments based upon relative revenues.
(3) Corporate depreciation and amortization expenses have been allocated pro rata among segments
based upon relative revenues.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2003 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues
Prevention revenues were $1,742,000 for the three months ended September
30, 2003, compared to $1,643,000 for the three months ended September 30, 2002,
representing an increase of $99,000 (6.0%) in the current quarter. Revenues
were higher as a result of an increase in new accounts for the Company's
WELLSURE(R) CANADA risk management program. This increase was slightly offset
by a decrease in non-event engineering services. Revenues for the Company's
SafeGuard international programs remained primarily unchanged for the quarter.
Response revenues were $6,309,000 for the three months ended September 30,
2003, compared to $1,821,000 for the three months ended September 30, 2002, an
increase of $4,488,000 (246.4%). The increase in the current quarter is
primarily a result of the Company providing lead contractor services in the
Middle East. This increase was partially offset by a decrease in domestic
response services and project related opportunities.
17
Cost of Sales
Prevention cost of sales were $980,000 for the three months ended
September 30, 2003, compared to $440,000 for the three months ended September
30, 2002, an increase of $540,000 (122.7%) in the current quarter. The increase
was a primarily a result of a higher mix of project management work in Venezuela
that resulted in increased subcontractor costs of $500,160.
Response cost of sales were $2,447,000 for the three months ended September
30, 2003, compared to $1,062,000 for the three months ended September 30, 2002,
an increase of $1,385,000 (130.4%) in the current year. The increase was the
result of higher variable personnel costs associated with a larger percentage of
the Company's workforce being deployed, principally in Kuwait and Iraq in the
current quarter.
Operating Expenses
Consolidated operating expenses were $1,738,000 for the three months ended
September 30, 2003, compared to $1,108,000 for the three months ended September
30, 2002, an increase of $630,000 (56.9%) in the current quarter. The increase
was a result of additional labor, insurance and travel costs related to the
previously mentioned increase in revenue. As previously footnoted on the
segmented financial table, operating expenses have been allocated pro rata among
the segments on the basis of relative revenue.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $689,000 for
the three months ended September 30, 2003, compared to $613,000 for the three
months ended September 30, 2002, an increase of $76,000 (12.4%) from the 2002
quarter. The decrease was the result of reduced corporate personnel costs
resulting from the Company's restructuring initiatives begun in June 2002, and
reduced consulting and legal fees partially offset by higher insurance costs
associated with the Company's work in Iraq and certain provisions for
settlements in the current quarter. As previously footnoted on the segmented
financial table, corporate selling, general and administrative expenses have
been allocated pro rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the sale of fixed assets which reduced the depreciable asset base in
2003. As previously footnoted on the segmented financial table, depreciation
and amortization expenses on related corporate assets have been allocated pro
rata among the segments on the basis of relative revenue.
18
Interest Expense and Other expense (income), Including Finance Costs
The increase in interest and other expenses (income) of $2,404,000 for the
three months ended September 30, 2003, as compared to the prior quarter is
explained in the table below:
For the Three Months Ended
--------------------------------
September 30, September 30,
--------------- ---------------
2002 2003
--------------- ---------------
ITS settlement $ (1,073,000) $ -
Reserve for contingent liabilities (297,000) 900,000
Financing fees 100,000 230,000
Interest expense - senior debt 56,000 106,000
KBK finance costs 34,000 -
Loss on sale of fixed assets 13,000 -
Interest on subordinated debt - 83,000
Other 35,000 (47,000)
--------------- ---------------
Total Interest and Other $ (1,132,000) $ 1,272,000
--------------- ---------------
Income Tax Expense
Income taxes for the three months ended September 30, 2003 and 2002 were
$187,000 and $170,000, respectively, and are a result of taxable income in the
Company's foreign operations.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2003 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues
Prevention revenues were $12,572,000 for the nine months ended September
30, 2003, compared to $5,909,000 for the nine months ended September 30, 2002,
representing an increase of $6,663,000 (112.7%) in the current period. Most of
the increases during the first nine months of 2003 were related to a $5,539,000
increase in revenues from equipment sales over the prior period. 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 SafeGuard international services in the 2003 current period.
Response revenues were $14,436,000 for the nine months ended September 30,
2003, compared to $5,549,000 for the nine months ended September 30, 2002, an
increase of $8,887,000 (160.1%) in the current period. This increase was the
result of higher demand for response services, principally related to the
Company providing lead contractor services in Iraq during the 2003 period. This
increase is partially offset by reduced demand for domestic response services
and project related opportunities during the current period.
Cost of Sales
Prevention cost of sales were $5,016,000 for the nine months ended
September 30, 2003, compared to $2,028,000 for the nine months ended September
30, 2002, an increase of $2,988,000 (147.3%) in the current period. The
increase was a result of additional 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.
19
Response cost of sales were $5,014,000 for the nine months ended September
30, 2003, compared to $2,733,000 for the nine months ended September 30, 2002,
an increase of $2,281,000 (83.5%) in the current period. The increase was the
result of higher personnel costs associated with a larger percentage of the
Company's workforce being deployed, principally in Kuwait and Iraq in the
current quarter.
Operating Expenses
Consolidated operating expenses were $5,489,000 for the nine months ended
September 30, 2003, compared to $4,481,000 for the nine months ended September
30, 2002, an increase of $1,008,000 (22.5%) in the current period. The increase
was a result of additional labor and insurance related to the previously
mentioned increase in revenue for the current period. As previously footnoted
on the segmented financial table, operating expenses have been allocated pro
rata among the segments on the basis of relative revenue.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $2,160,000
for the nine months ended September 30, 2003, compared to $2,026,000 for the
nine months ended September 30, 2002, an increase of $134,000 (6.6%) from the
prior period. The increase was a result of reduced corporate personnel costs
related to the Company's restructuring initiatives begun in June 2002 and
reduced professional and legal fees which were offset by certain non recurring
provisions for settlements in the current quarter. As previously footnoted on
the segmented financial table, corporate selling, general and administrative
expenses have been allocated pro rata among the segments on the basis of
relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the sale of fixed assets which reduced the depreciable asset base in
2003. As previously footnoted on the segmented financial table, depreciation
and amortization expenses on related corporate assets have been allocated pro
rata among the segments on the basis of relative revenue.
Interest Expense and Other Expenses (Income), Including Finance Costs
The increase in interest and other expenses (income) of $2,305,000 for the
nine months ended September 30, 2003, as compared to the prior period is
explained in the table below:
For the Nine Months Ended
--------------------------------
September 30, September 30,
--------------- ---------------
2002 2003
--------------- ---------------
ITS settlement $ (1,073,000) -
Reserve for contingent liabilities 279,000 900,000
Restructuring charges (48,000) (67,000)
Financing fees 313,000 300,000
Interest expense - senior debt 109,000 237,000
KBK finance costs 208,000 43,000
Loss on sale of fixed assets 54,000 -
Interest on subordinated notes - 417,000
Other 31,000 (52,000)
Checkpoint settlement - 400,000
--------------- ---------------
Total Interest and Other $ (127,000) $ 2,178,000
--------------- ---------------
20
Income Tax Expense
Income taxes for the nine months ended September 30, 2003 and 2002 were
$762,000 and $343,000, respectively, and are a result of taxable income in the
Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
LIQUIDITY
At September 30, 2003, the Company had working capital of $8,048,000
including a cash balance of $3,231,000. Though the Company had increased its
stockholders' equity by $12,150,000 for the same period, the Company still
retained a stockholders' deficit of $1,838,000. For the nine months ended
September 30, 2003, the Company generated operating income for the period of
$8,568,000 and net cash from operating activities, before changes in working
capital, of $8,428,000. Net cash generated from operating activities, after
changes in working capital, was $1,135,000. The Company received short swing
profit contribution proceeds of $3,887,000 during the period. As a consequence,
the Company is benefiting from a significantly improved liquidity position as
compared to recent years. 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 into 1,597,642 shares of common stock
during the third quarter of 2003. The Company's short-term liquidity also
improved as a consequence of increases in prevention service revenues and
certain asset sales. A portion of these proceeds were used to repay $700,000 of
principal plus interest owing under the Company's credit facility with
Checkpoint Business, Inc. (See Note F for further discussion). The Company also
paid down current maturities and significantly reduced payables owing to Company
vendors. The Company applied $400,000 of the proceeds to legal settlements (See
Note G for further discussion).
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 nine months ended September 30, 2003, there was a
significant increase in international demand for the Company's services and
equipment, specifically in the Middle East, in connection with events in Iraq.
CREDIT FACILITIES/CAPITAL RESOURCES
At June 30, 2003, the Company was not in compliance with certain ratio
tests for the trailing twelve-month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults. In connection therewith, the
21
Company issued $2,658,931 of new subordinated notes to Prudential for accrued
and unpaid interest and fees. The Company believes that it will meet the ratio
tests in the next twelve to fifteen months. Accordingly, the Company has
reclassified $12,157,000 owing to Prudential from current liability to long term
debt on the September 30, 2003 balance sheet In connection with the July 2003
waiver, the Company has agreed to apply all of its 'Excess Cash', defined as
cash and cash equivalents over $2,000,000, to Prudential obligations. The
Company has received a partial waiver on the requirement at September 30, 2003
as a result of the cash and cash equivalents that were being held on September
30, 2003 for anticipated cash settlements of liabilities in the fourth quarter
of 2003. The Company will be required to pay $582,000 to Prudential on or
before November 14, 2003.
At June 30, 2003, Specialty Finance's participation interest of $1,000,000
was outstanding as senior secured debt. The Company had not, at that time,
received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 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. 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 a
term sheet extending the term of the loan to 24 months. The annual interest
rate under the agreement is 11% and will be paid quarterly.
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
22
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.
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
--------------------------------------------------------------------------------
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------------------------------
DESCRIPTION 2003(1) 2004(2) 2005 2006 2007 THEREAFTER
---------------------------- --------- -------- ----------- ------- ------- -----------
Long and short term debt and
notes payable. . . . . . $420,000 - $13,132,000 - - -
---------------------------- --------- -------- ----------- ------- ------- -----------
Future minimum lease
payments $557,000 $46,000 $ 16,000 $12,000 $12,000 $ 6,000
---------------------------- --------- -------- ----------- ------- ------- -----------
Total commitments $977,000 $46,000 $13,148,000 $12,000 $12,000 $ 6,000
---------------------------- --------- -------- ----------- ------- ------- -----------
(1) Principal of $1,300,000 was converted into common stock in
July of 2003. The $100,000 note was paid in full on October 14, 2003.
(2) Accrued interest totaling $2,287,000 is included in the
Company's 12% Senior Subordinated Notes at September 30, 2003 due to
the accounting for a troubled debt restructuring during 2000. This
amount is included in the above presentation. Accrued interest
calculated through March 31, 2003, is deferred for payment until
December 30, 2005. Payments on accrued interest after December 31,
2003 will continue quarterly until December 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher during the three months ended September 30, 2002 and September 30, 2003,
and all other factors affecting the Company's debt remained the same, pretax
earnings would have been lower by approximately $32,000 and $11,000,
respectively. With respect to the fair value of the Company's fixed-interest
rate debt, if prevailing market interest rates had been 10% higher at the
quarter ended September 30, 2003 and 2002 and all other factors affecting the
Company's debt remained the same, the fair value of the Company's fixed-rate
debt, as determined on a present-value basis, would have been lower by
approximately $34,000 and $57,000 at September 30, 2002 and 2003, respectively.
Given the composition of the Company's debt structure, the Company does not, for
the most part, actively manage its interest rate risk.
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates to the extent that transactions are
not denominated in U.S. dollars. The Company typically denominates its contracts
in U.S. dollars to mitigate the exposure to fluctuations in foreign currencies.
The current political and economic climate in Venezuela negatively affects the
Company's ability to change local currencies into U.S. dollars. At present the
Company does not have a large cash exposure, however the collection of the
accounts receivable will be mostly in local currency. The Company is monitoring
the situation closely and is actively pursuing methods to repatriate cash to the
U.S.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) under the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), as of
September 30, 2003. Based on their evaluation, our chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective. During the period covered by this report, there were
no changes in our internal control over financial reporting, as such term is
defined under
23
Rule 13a-15(f) of the Exchange Act, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
In September 1999, a lawsuit styled Jerry Don Calicutt, Jr., et al., v.
Larry H. Ramming, et al., was filed against the Company, certain of its
subsidiaries, Larry H. Ramming, Charles Phillips, certain other employees of the
Company, and several entities affiliated with Larry H. Ramming in the 269th
Judicial District Court, Harris County, Texas. The plaintiffs alleged various
causes of action, including fraud, breach of contract, breach of fiduciary duty
and other intentional misconduct relating to the acquisition of stock of a
corporation by the name of Emergency Resources International, Inc. ("ERI") by a
corporation affiliated with Larry H. Ramming and the circumstances relating to
the founding of the Company. The Company settled the case on behalf of all
Boots & Coots entities and its employees by paying $500,000, the last
installment of which was paid in March, 2003. On September 24, 2003, Mr.
Ramming and entities affiliated with him filed a cross claim against the Company
asserting entitlement to indemnification with respect to the allegations of
plaintiffs pursuant to alleged agreements between the Company and of its
subsidiaries and on the basis of common law principles. Based upon the
allegations made by the plaintiffs against Mr. Ramming and the entities
affiliated with him to date, the Company does not believe that it is obligated
to indemnify Mr. Ramming or such entities on the basis of any contractual,
bylaw, common law or other obligation. The Company intends to closely monitor
developments in the lawsuit and assess its position with respect to such
indemnification as circumstances warrant.
On October 17, 2003 a lawsuit styled Gateway Ridgecrest Inc. vs. Boots &
Coots International Well Control, Inc. was filed against the Company demanding
past due rent, future rent through August 2005, net of anticipated rent received
from its current tenants, other costs related to commissions and leasehold
improvements and legal costs as a result of the Company abandoning its lease for
office space located at 777 Post Oak Blvd., Houston, Texas, in early 2003. The
Company intends to defend this lawsuit. The Company has reserved an amount it
believes to be sufficient to offset the anticipated cost associated with this
lawsuit.
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 3, 2003, the Prudential Company of America converted 59,872 shares
of the Company's Series E Cumulative Convertible Preferred Stock ("Series E
Preferred Stock") with a face value of $5,987,200 into 3,401,800 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.
In July 2003, 571,414 shares of common stock were issued upon the exercise
of warrants that were originally issued to Specialty Finance and subsequently
distributed to its members.
These issuances were exempt private placements pursuant to Section 4(2) of
the Securities Act of 1933.
24
ITEM 3. DEFAULT UPON SENIOR SECURITIES
At June 30, 2003, the Company was not in compliance with certain ratio
tests for the trailing twelve-month period under its loan agreement with the
Prudential Insurance Company of America. Under the Prudential loan agreement,
failure to comply with the ratio tests is an event of default and the note
holder may, at its option, by notice in writing to the Company, declare all of
the Notes to be immediately due and payable together with interest accrued
thereon. On July 3, 2003, the Company reached an agreement with Prudential to
waive these loan defaults. In connection therewith, the Company issued
$2,658,931 of new subordinated notes to Prudential for accrued and unpaid
interest and fees. The Company believes that it will meet the ratio tests in
the next twelve to fifteen months. Accordingly, the Company has reclassified
$12,157,000 owing to Prudential from current liability to long term debt on the
September 30, 2003 balance sheet In connection with the July 2003 waiver, the
Company has agreed to apply all of its 'Excess Cash', defined as cash and cash
equivalents over $2,000,000, to Prudential obligations. The Company has
received a partial waiver on the requirement at September 30, 2003 as a result
of the cash and cash equivalents that were being held on September 30, 2003 for
anticipated cash settlements of liabilities in the fourth quarter of 2003. The
Company will be required to pay $582,000 to Prudential on or before November 14,
2003.
At June 30, 2003, Specialty Finance's participation interest of $1,000,000
was outstanding as senior secured debt. The Company had not, at that time,
received a waiver from Specialty Finance of defaults under their credit
facility. On July 11, 2003, the Company converted this debt and the accrued
interest into equity by issuing 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. 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 a
term sheet extending the term of the loan to 24 months. The annual interest
rate under the agreement is 11% and will be paid quarterly.
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.
25
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.
ITEM 4. SUBMISSIONS 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 WITHHELD ABSTAINING NON VOTES
----------
W. Richard Anderson 91,539,868 1,842,351 -- --
Jerry L. Winchester 91,043,806 2,338,513 -- --
K. Kirk Krist 91,052,446 2,329,776 -- --
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
---------- ---------- ---------- ---------
82,489,793 10,751,480 140,946 --
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Document
------------ -----------------------------------------------
3.01 Amended and Restated Certificate of Incorporation(1)
3.02 Amendment to Certificate of Incorporation(2)
3.02(a) Amendment to Certificate of Incorporation(3)
3.03 Amended Bylaws(4)
4.01 Specimen Certificate for the Registrant's Common
Stock(5)
4.02 Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(6)
26
Exhibit No. Document
------------ -----------------------------------------------
4.03 -- Certificate of Designation of Series A Cumulative Senior Preferred Stock(7)
4.04 -- Certificate of Designation of Series B Convertible Preferred Stock(8)
4.05 -- Certificate of Designation of Series C Cumulative Convertible Junior
Preferred Stock(9)
4.06 -- Certificate of Designation of Series D Cumulative Junior Preferred Stock(10)
4.07 -- Certificate of Designation of Series E Cumulative Senior Preferred Stock(11)
4.08 -- Certificate of Designation of Series F Convertible Senior Preferred Stock(12)
4.09 -- Certificate of Designation of Series G Cumulative Convertible Preferred Stock(13)
4.10 -- Certificate of Designation of Series H Cumulative Convertible Preferred Stock(14)
10.01 -- Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(15)
Open
Open
10.04 -- 1997 Incentive Stock Plan(18)
10.05 -- Outside Directors' Option Plan
10.06 -- Executive Compensation Plan
10.07 -- Halliburton Center Sublease(19)
10.08 -- Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
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
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)
27
Exhibit No. Document
------------ -----------------------------------------------
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
21.01 -- List of subsidiaries(40)
*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.
(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.
28
(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.
(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 November 14, 2002.
(39) Incorporated herein by reference to exhibit 10.34 of Form 10-Q filed November 14, 2002.
(40) Incorporated herein by reference to exhibit 21.01 of Form 10-Q filed May 14, 2002.
29
(b) Reports on Form 8-K
The Company filed an 8-K on August 13, 2003 furnishing its second quarter
earnings release.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ JERRY WINCHESTER
--------------------------------------
Jerry Winchester
Chief Executive Officer
By: /s/ KEVIN JOHNSON
--------------------------------------
Kevin Johnson
Principal Accounting Officer
Date: November 14, 2003
31