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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
_______________
FORM 10-K
_______________
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 1-13817
_______________
BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
777 POST OAK BOULEVARD, SUITE 800 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
713-621-7911
(Issuer's Telephone Number, Including Area Code)
_______________
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.00001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in or any amendment to this
Form 10-K [ ].
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on March 22, 2002, based on
closing sales price on that day was $11,239,349.
The number of shares of the issuer's common stock outstanding on March 22,
2002 was 41,442,285.
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FORM 10-K
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Description of Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 11
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 23
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . 23
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 31
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 14. Exhibits List and Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS
Reports of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boots & Coots International Well Control, Inc. (the "Company") is a
global-response oil and gas service company that specializes in responding to
and controlling oil and gas well emergencies, including blowouts and well fires.
In connection with these services, the Company has the capacity to supply the
equipment, expertise and personnel necessary to contain the oil and hazardous
materials spills and discharges associated with oil and gas emergencies, to
remediate affected sites and restore affected oil and gas wells to production.
Through its participation in the proprietary insurance program WELLSURE(R), the
Company provides lead contracting and high risk management services, under
critical loss scenarios, to the program's insured clients. Additionally, under
the WELLSURE(R) program the Company provides certain pre-event prevention and
risk mitigation services. The Company also provides snubbing and other high risk
well control management services, pre-event planning, training and consulting
services and markets oil and hazardous materials spill containment and recovery
equipment and a varied line of industrial products for the oil and gas industry.
In addition, the Company provides environmental remediation services to the
petrochemical, chemical manufacturing and transportation industries, as well as
to various state and federal agencies.
RECENT DEVELOPMENTS
Financing Arrangement. On June 18, 2001, the Company entered into an
agreement with KBK Financial, Inc. ("KBK"), in which the Company pledged certain
of its accounts receivable for a cash advance. The agreement allows the Company
to pledge qualifying accounts receivable in an aggregate amount of up to
$5,000,000. The Company receives an initial advance of 85% of the gross amount
of each receivable pledged. Upon collection of the receivable, the Company
receives an additional residual payment from which is deducted (i) a fixed fee
equal to 2% of the gross pledged receivable and (ii) a variable financing charge
equal to KBK's base rate plus 2% calculated over the actual length of time the
advance was outstanding from KBK prior to collection. The Company's
representations regarding the accounts receivable pledged to KBK are secured by
a first lien on certain other accounts receivable of the Company. As of
December 31, 2001, the Company had $2,383,000 of its accounts receivable pledged
to KBK, representing the substantial majority of the Company's receivables that
were eligible for pledging under the facility.
AMEX Listing. The American Stock Exchange (AMEX), by letter dated March 15,
2002, has informed the Company that on or before April 15, 2002, the Company
must submit a reasonable plan to regain compliance with AMEX's continued listing
standards by December 31, 2002. The plan must contain interim milestones that
the Company will be required to meet to remain listed. If the Company fails to
submit a plan the AMEX considers reasonable, fails to meet the milestones
established in the plan or fails to obtain compliance with AMEX's continued
listing standards by December 31, 2002, as reflected in its audited financial
statements for the year then ended, the AMEX has indicated that it may institute
immediate delisting proceedings.
In the past, the Company has voluntarily provided AMEX with information
regarding its plans and expectations regarding compliance with continued listing
standards, and the Company intends to similarly respond to AMEX's latest
requests.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial condition has become so impaired, that it appears questionable, in the
opinion of AMEX, as to whether the company will be able to continue operations
or meet its obligations as they mature.
Going Concern. The accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
However, the uncertainties surrounding the sufficiency and timing of its future
cash flows and the lack of firm commitments for additional capital raises
substantial doubt about the ability of the Company to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
3
HISTORY OF COMPANY
The Company was incorporated in Delaware in April 1988, remaining largely
inactive until acquiring IWC Services, Inc., a Texas corporation on July 29,
1997. In the transaction, the stockholders of IWC Services became the holders of
approximately 93% of the outstanding shares of common stock of the Company and
the management of IWC Services assumed management of the Company. IWC Services
is a global-response oil and gas well control service company that specializes
in responding to and controlling oil and gas well emergencies, including
blowouts and well fires. In addition, IWC Services provides snubbing and other
non-critical well control services. IWC Services was organized in June 1995 by
six former key employees of the Red Adair Company.
Following the IWC Services transaction, the Company engaged in a series of
acquisitions. On July 31, 1997, the Company acquired substantially all of the
operating assets of Boots & Coots, L.P., a Colorado limited partnership, and the
stock of its subsidiary corporations, Boots & Coots Overseas, Ltd., and Boots &
Coots de Venezuela, S.A. Boots & Coots LP and its subsidiaries were engaged in
oil well fire fighting, snubbing and blowout control services.
Boots & Coots LP was organized by Boots Hansen and Coots Matthews, two
former employees of the Red Adair Company who, like the founders of IWC
Services, left that firm to form an independent company, which was a primary
competitor of IWC Services. As a consequence of the acquisition of Boots &
Coots, the Company became a leader in the worldwide oil well firefighting and
blowout control industry, reuniting many of the former employees of the Red
Adair Company.
On September 25, 1997, the Company acquired Abasco, Inc., a designer and
manufacturer of rapid-response oil and chemical spill containment and
reclamation equipment and products. In response to depressed downstream industry
conditions existing for a significant part of 1999 and 2000, and limitations on
capital, the Company has substantially reduced but not discontinued the
operations of Abasco, including the closure and consolidation of facilities and
reductions in workforce.
On January 2, 1998, the Company acquired all of the capital stock of
International Tool and Supply ("ITS"), a materials and equipment procurement,
transportation and logistics company serving the energy industry. As a result of
ongoing operating losses, a shortage of working capital and the absence of a
currently identified viable purchaser for ITS' operations, substantially all of
the operations of ITS were ceased in April 2000 and it filed for bankruptcy
protection in Corpus Christi, Texas. ITS is currently proceeding to liquidate
its assets and liabilities in bankruptcy.
On February 20, 1998, the Company acquired Boots & Coots Special Services,
Inc., a provider of containment and remediation services in hazardous material
and oil spills for the railroad, transportation and shipping industries, as well
as various state and federal governmental agencies, specializing in the transfer
of hazardous materials and high and low pressure liquids and industrial fire
fighting. Boots & Coots Special Services also provides in-plant remedial plan
implementation, hazardous waste management, petroleum tank management,
industrial hygiene, environmental and occupational, health and safety services.
On July 23, 1998, the Company acquired Baylor Company, a manufacturer of
varied industrial products for the drilling, marine and power generation
industries. As a result of the Company's financial difficulties, substantially
all of the assets of Baylor were sold in September 2000.
Effective November 4, 1998, Boots & Coots Special Services acquired
HAZ-TECH Environmental Services, Inc. HAZ-TECH provided a complete range of
emergency prevention and response services, including hazardous materials and
waste management, OSHA personnel training and environmental site audits, surface
and groundwater hydrology, bio remediation and pond dewatering, and water
treatment to chemical manufacturing, railroad and truck transportation companies
in Texas, Louisiana, Oklahoma and Arkansas.
Halliburton Alliance. The Company conducts business in a global strategic
alliance with the Halliburton Energy Services division of Halliburton Company.
The alliance operates under the name "WELLCALL(SM)" and draws on the expertise
and abilities of both companies to offer a total well control solution for oil
and gas producers worldwide. The Halliburton Alliance provides a complete range
of well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, fire fighting,
relief and directional well planning, and other specialized services.
Business Strategy. As a result of operating losses, the Company has been
forced to operate with a minimum of working capital. As a result, the Company
curtailed its business expansion program, discontinued the operations of ITS,
sold Baylor Company, reduced the operations of Abasco and focused its efforts on
its remaining three core business segments, Prevention, Response and
Restoration. Subject to capital availability, and recognizing that the well
control services business is a finite market with services dependent upon the
4
occurrence of blowouts which cannot be reasonably predicted, the Company intends
to build upon its demonstrated strengths in high-risk management while
increasing revenues from its pre-event and engineering services, environmental
containment and remediation services and non-critical event services.
Executive Offices. The Company's principal executive office is located at
777 Post Oak Boulevard, Suite 800, Houston, Texas, 77056, telephone (713)
621-7911.
THE EMERGENCY RESPONSE SEGMENT OF THE OIL AND GAS SERVICE INDUSTRY
History. The emergency response segment of the oil and gas services
industry traces its roots to the late 1930's when Myron Kinley organized the
Kinley Company, the first oil and gas well firefighting specialty company.
Shortly after organizing the Kinley Company, Mr. Kinley took on an assistant
named Red Adair who learned the firefighting business under Mr. Kinley's
supervision and remained with the Kinley Company until Mr. Kinley's retirement.
When Mr. Kinley retired in the late 1950's, Mr. Adair organized the Red Adair
Company and subsequently hired Boots Hansen, Coots Matthews and Raymond Henry as
members of his professional firefighting staff. Mr. Adair later added Richard
Hatteberg, Danny Clayton, Brian Krause, Mike Foreman and Juan Moran to his
staff, and the international reputation of the Red Adair Company grew to the
point where it was a subject of popular films and the dominant competitor in the
industry. Boots Hansen and Coots Matthews remained with the Red Adair Company
until 1978 when they split off to organize Boots & Coots, an independent
firefighting, snubbing and blowout control company.
Historically, the well control emergency response segment of the oil and
gas services industry has been reactive, rather than proactive, and a small
number of companies have dominated the market. As a result, if an operator in
Indonesia, for example, experienced a well blowout and fire, he would likely
call a well control emergency response company in Houston that would take the
following steps:
- - Immediately dispatch a control team to the well location to assess the
damage, supervise debris removal, local equipment mobilization and site
preparation;
- - Gather and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;
- - Develop or implement a detailed fire suppression and well-control plan;
- - Mobilize additional well-control and firefighting equipment in Houston;
- - Transport equipment by air freight from Houston to the blowout location;
- - Extinguish the fire and bring the well under control; and
- - Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.
The 1990's have been a period of rapid change in the oil and gas well
control and firefighting business. The hundreds of oil well fires that were
started by Iraqi troops during their retreat from Kuwait spurred the development
of new firefighting techniques and tools that have become industry standards.
Moreover, after extinguishing the Kuwait fires, the entrepreneurs who created
the oil and gas well firefighting industry, including Red Adair, Boots Hansen
and Coots Matthews, retired, leaving the Company's senior staff as the most
experienced active oil and gas well firefighters in the world. At present, the
principal competitors in the oil and gas well firefighting business are the
Company, Wild Well Control, Inc., and Cudd Pressure Control, Inc.
Trends. The increased recognition of the importance of risk mitigation
services, training, environmental protection and emergency preparedness, are
having a profound impact on the emergency response segment of the oil and gas
services industry. Instead of waiting for a blowout, fire or other disaster to
occur, both major and independent oil producers are coming to the Company for
proactive preparedness and incident prevention programs. These requests,
together with pre-event consultation on matters relating to well control
training, blowout contingency planning, on-site safety inspections and formal
fire drills, are expanding the market for the Company's engineering unit.
5
Decreasing availability of financial capacity in the re-insurance markets
is causing underwriting syndicates to seek significant renewal rate increases
and higher quality risks in the "Control of Well" segment of the energy
insurance market. The Company believes these factors enhance the viability of
proven alternative risk transfer programs such as WELLSURE(R), a proprietary
insurance program in which the Company is the provider of both pre-event
services and loss management.
Volatility of Firefighting Revenues. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company, including changes in the volume and type of
drilling and work-over activity occurring in response to fluctuations in oil and
natural gas prices. Wars, acts of terrorism and other unpredictable factors may
also increase the need for oil and gas well firefighting and blowout control
services from time to time. As a result, the Company expects to experience large
fluctuations in its revenues from oil and gas well firefighting and blowout
control services. The Company's acquisitions of complementary businesses were
designed to broaden its product and service offerings and mitigate the revenue
and earnings volatility associated with its oil and gas well firefighting and
blowout control services. The contraction of the Company's service and product
offerings as a consequence of its financial difficulties has made it more
susceptible to this volatility. Accordingly, the Company expects that its
revenues and operating performance may vary considerably from year to year for
the foreseeable future.
The Company's principal products and services for its three business
segments include:
Prevention
Firefighting Equipment Sales and Service. This service line involves the
sale of complete firefighting equipment packages, together with maintenance,
monitoring, updating of equipment and ongoing consulting services. A typical
example of this service line is the industry supported Emergency Response Center
that the Company has established on the North Slope of Alaska and the Emergency
Response Center recently established in Algeria. The Company also provides
ongoing consulting services relating to the Emergency Response Centers,
including equipment sales, training, contingency planning, safety inspections
and emergency response drills.
Drilling Engineering. The Company has a highly specialized in-house
engineering staff which, together with Halliburton Energy Services and John
Wright Company, provides engineering services, including planning and design of
relief well drilling (trajectory planning, directional control and equipment
specifications, and on-site supervision of the drilling operations); planning
and design of production facilities which are susceptible to well capping or
other control procedures; and mechanical and computer aided designs for well
control equipment.
Inspections. A cornerstone of the Company's strategy of providing
preventive well control services involves on-site inspection services for
drilling and work over rigs, drilling and production platforms, and field
production facilities. These inspection services are provided by the Company and
offered as a standard option in Halliburton's field service programs.
Training. The Company provides specialized training in well control
procedures for drilling, exploration and production personnel for both U.S. and
international operators. The Company's training services are offered in
conjunction with ongoing educational programs sponsored by Halliburton.
Oil and Chemical Spill Prevention. The Company specializes in the transfer
of hazardous materials and high and low pressure liquids and industrial fire
fighting and provides in-plant remedial plan implementation, hazardous waste
management, petroleum tank management, industrial hygiene, environmental and
occupational, health and safety services.
Strategic Event Planning (S.T.E.P.). A critical component of the services
offered by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator to
control a blowout. This planning process incorporates organizational structures,
action plans, specifications, people and equipment mobilization plans with
engineering details for well firefighting, capping, relief well and kill
operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of services,
it is easily modified to suit the particular needs of a specific client.
Regional Emergency Response Centers (SafeGuard). The Company has
established and maintains industry supported "FireStations" on the North Slope
of Alaska. The Company has sold to a consortium of producers the equipment
required to respond to a blowout or oil or gas well fire, and has agreed to
maintain the equipment and conduct on-site safety inspections and emergency
response drills. The Company also currently has Emergency Response Centers in
Houston, Texas, Anaco, Venezuela, and Algeria.
6
Response
Well Control. This service segment is divided into two distinct levels:
"Critical Event" response is ordinarily reserved for well control projects where
hydrocarbons are escaping from a well bore, regardless of whether a fire has
occurred; "Non-critical Event" response, on the other hand, is intended for the
more common sub-surface operating problems that do not involve escaping
hydrocarbons.
Critical Events. Critical Events frequently result in explosive fires, loss
of life, destruction of drilling and production facilities, substantial
environmental damage and the loss of hundreds of thousands of dollars per day in
production revenue. Since Critical Events ordinarily arise from equipment
failures or human error, it is impossible to accurately predict the timing or
scope of the Company's Critical Event work. Critical Events of catastrophic
proportions can result in significant revenues to the Company in the year of the
incident. The Company's professional firefighting staff has over 200 years of
aggregate industry experience in responding to Critical Events, oil well fires
and blowouts.
Non-critical Events. Non-critical Events frequently occur in connection
with workover operations or the drilling of new wells into high pressure
reservoirs. In most Non-critical Events, the blowout prevention equipment and
other safety systems on the drilling rig function according to design and the
Company is then called upon to supervise and assist in the well control effort
so that drilling operations can resume as promptly as safety permits. While
Non-critical Events do not ordinarily have the revenue impact of a Critical
Event, they are more common and predictable. Non-critical Events can escalate
into Critical Events.
Firefighting Equipment Rentals. This service includes the rental of
specialty well control and firefighting equipment by the Company primarily for
use in conjunction with Critical Events, including firefighting pumps, pipe
racks, Athey wagons, pipe cutters, crimping tools and deluge safety systems. The
Company charges this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical Event.
WELLSURE(R) Program. The Company and Global Special Risks, Inc., a managing
general insurance agent located in Houston, Texas, and New Orleans, Louisiana,
have formed an alliance that offers oil and gas exploration production
companies, through retail insurance brokers, a program known as "WELLSURE(R),"
which combines traditional well control and blowout insurance with the Company's
post-event response services and well control preventative services including
company-wide and/or well specific contingency planning, personnel training,
safety inspections and engineering consultation. Insurance provided under
WELLSURE(R) has been arranged with leading London insurance underwriters.
WELLSURE(R) program participants are provided with the full benefit of having
the Company as a safety and prevention partner. In the event of well blowouts,
the Company serves as the integrated emergency response service provider, as
well as lead contractor and project manager for control and restoration of wells
covered under the program.
Industrial and Marine Firefighting. These services consist of two distinct
elements: pre-event consulting and Critical Event management. The pre-event
services offered include complete on-site inspection services, safety audits and
pre-event planning. Based on these pre-event services, the Company can recommend
the equipment, facilities and manpower resources that a client should have
available in order to effectively respond to a fire. The Company also consults
with the client to ensure that the equipment and services required will be
available when needed. If a Critical Event subsequently occurs, the Company can
respond at a client's facility with experienced firefighters and auxiliary
equipment.
Restoration
Oil and Chemical Spill Containment and Reclamation. The Company provides
containment and remediation of hazardous material and oil spills for the
railroad, transportation and shipping industries, as well as various state and
federal governmental agencies. The Company also specializes in the transfer of
hazardous materials and high and low pressure liquids and industrial fire
fighting and provides in-plant remedial plan implementation, hazardous waste
management, petroleum tank management, industrial hygiene, environmental and
occupational, health and safety services.
Containment and Reclamation Products. The Company's Abasco unit has been a
leader in the design and manufacture of a comprehensive line of rapid response
oil and chemical spill containment and reclamation equipment and products,
including mechanical skimmers, containment booms and boom reels, dispersant
sprayers, dispersal agents, absorbents, response vessels, oil and chemical spill
industrial products, spill response packages, oil and chemical spill ancillary
products and waste oil recovery and reclamation products. In response to
depressed downstream industry conditions existing for a significant part of 1999
7
and limitations on capital, the Company has substantially reduced, but not
discontinued, the operations of Abasco, including the closure and consolidation
of facilities and reductions in workforce.
DEPENDENCE UPON CUSTOMERS
The Company is not materially dependent upon a single or a few customers,
although one or a few customers may represent a material amount of business for
a limited period as a result of the unpredictable demand for well control and
firefighting services. The emergency response business is by nature episodic and
unpredictable. A customer that accounted for a material amount of business as a
result of an oil well blow-out or similar emergency may not account for a
material amount of business after the emergency is over.
HALLIBURTON ALLIANCE
In response to ongoing changes in the emergency response segment of the
oil and gas service industry, the Company entered into a global strategic
alliance in 1995 with Halliburton Energy Services. Halliburton is widely
recognized as an industry leader in the pumping, cementing, snubbing, production
enhancement, coiled tubing and related services segment of the oil field
services industry. This alliance, WELLCALL(SM), draws on the expertise and
abilities of both companies to offer a total well control solution for oil and
gas producers worldwide. The Halliburton Alliance provides a complete range of
well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, firefighting,
relief and directional well planning and other specialized services. The
specific benefits that WELLCALL(SM) provides to an operator include:
- Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week
- A full-time team of experienced well control specialists that are
dedicated to safety
- Specialized equipment design, rental, and sales
- Contingency planning consultation where WELLCALL(SM) specialists meet
with customers, identify potential problems, and help develop a
comprehensive contingency plan
- A single-point contact to activate a coordinated total response to
well control needs.
Operators contracting with WELLCALL(SM) receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is
region-specific, reservoir-specific, site-specific and well-specific. The
S.T.E.P. plan provides the operator with a written, comprehensive and
coordinated action plan that incorporates historical data, pre-planned call outs
of Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. In the event of a blowout, WELLCALL(SM) provides the
worldwide engineering and well control equipment capabilities of Halliburton and
the firefighting expertise of the Company through an integrated contract with
the operator.
As a result of the Halliburton Alliance, the Company is directly involved
in Halliburton's well control projects that require firefighting and Risk
Management expertise, Halliburton is a primary service vendor to the Company and
the Company has exclusive rights to use certain firefighting technologies
developed by Halliburton. It is anticipated that future Company-owned Fire
Stations, if developed, will be established at existing Halliburton facilities,
such as the Algerian Fire Station, and that maintenance of the Fire Station
equipment will be supported by Halliburton employees. The Halliburton Alliance
also gives the Company access to Halliburton's global communications, credit and
currency management systems, capabilities that could prove invaluable in
connection with the Company's international operations.
Consistent with the Halliburton Alliance, the Company's focus has evolved
to meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many engineering
services, the Company has developed a proactive menu of services to meet their
needs. These services emphasize pre-event planning and training to minimize the
likelihood of a blowout and minimize damages in the event of a blowout. The
Company provides comprehensive advance training, readiness, preparation,
inspections and mobilization drills which allow clients to pursue every possible
preventive measure and to react in a cohesive manner when an event occurs. The
Halliburton Alliance stresses the importance of safety, environmental protection
and cost control, along with asset protection and liability minimization.
8
The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provided that it would remain in effect for an
indefinite period of time and could be terminated prior to September 15, 2005,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination was limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either party,
(iii) the failure of the Alliance to generate economically viable business, or
(iv) the failure of either party to engage in good faith dealing. On April 15,
1999, in connection with a $5,000,000 purchase by Halliburton of the Company's
Series A Cumulative Senior Preferred Stock, the Company and Halliburton entered
into an expanded Alliance Agreement. While the Company considers its
relationship with Halliburton to be good and strives to maintain productive
communication with its chief Alliance partner, there can be no assurance that
the Alliance Agreement will not be terminated by Halliburton. The termination of
the Alliance Agreement could have a material adverse effect on the Company's
future operating performance.
REGULATION
The operations of the Company are affected by numerous federal, state, and
local laws and regulations relating, among other things, to workplace health and
safety and the protection of the environment. The technical requirements of
these laws and regulations are becoming increasingly complex and stringent, and
compliance is becoming increasingly difficult and expensive. However, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is obligated to exercise prudent judgment
and reasonable care at all times and the failure to do so could result in
liability under any number of laws and regulations.
Certain environmental laws provide for "strict liability" for remediation
of spills and releases of hazardous substances and some provide liability for
damages to natural resources or threats to public health and safety. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible that
changes in the environmental laws and enforcement policies thereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To date, the Company has not been subject to any fines or penalties for
violations of governmental or environmental regulations and has not incurred
material capital expenditures to comply with environmental regulations.
RESEARCH AND DEVELOPMENT
The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.
COMPETITION
The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a rapid
pace. The Company believes that the Halliburton Alliance, the WELLSURE program,
and its acquisitions have strengthened its competitive position in the industry
by expanding the scope of services that the Company offers to its customers.
However, the Company's ability to compete depends upon, among other factors,
capital availability, increasing industry awareness of the variety of services
the Company offers, expanding the Company's network of Fire Stations and further
expanding the breadth of its available services. Competition from other
emergency response companies, some of which have greater financial resources
than the Company, is intense and is expected to increase as the industry
undergoes additional anticipated change. The Company's competitors may also
succeed in developing new techniques, products and services that are more
effective than any that have been or are being developed by the Company or that
render the Company's techniques, products and services obsolete or
noncompetitive. The Company's competitors may also succeed in obtaining patent
protection or other intellectual property rights that might hinder the Company's
ability to develop, produce or sell competitive products or the specialized
equipment used in its business.
EMPLOYEES
As of March 22, 2002, the Company and its operating subsidiaries
collectively had 132 full-time employees, and 41 part-time personnel, who are
available as needed for emergency response projects. In addition, the Company
has several part-time consultants and also employs part-time contract personnel
who remain on-call for certain emergency response projects. The Company is not
subject to any collective bargaining agreements and considers its relations with
its employees to be good.
9
OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE
The Company's operations involve ultra-hazardous activities that involve an
extraordinarily high degree of risk. Hazardous operations are subject to
accidents resulting in personal injury and the loss of life or property,
environmental mishaps and mechanical failures, and litigation arising from such
events may result in the Company being named a defendant in lawsuits asserting
large claims. The Company may be held liable in certain circumstances, including
if it fails to exercise reasonable care in connection with its activities, and
it may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their duties. The Company and its
subsidiaries currently maintain liability insurance coverage with aggregate
policy limits which are believed to be adequate for their respective operations.
However, it is generally considered economically unfeasible in the oil and gas
service industry to maintain insurance sufficient to cover large claims. A
successful claim for which the Company is not fully insured could have a
material adverse effect on the Company. No assurance can be given that the
Company will not be subject to future claims in excess of the amount of
insurance coverage which the Company deems appropriate and feasible to maintain.
RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's emergency response services require highly specialized
skills. Because of the unique nature of the industry and the small number of
persons who possess the requisite skills and experience, the Company is highly
dependent upon the personal efforts and abilities of its key employees. In
seeking qualified personnel, the Company will be required to compete with
companies having greater financial and other resources than the Company. Since
the future success of the Company will be dependent upon its ability to attract
and retain qualified personnel, the inability to do so, or the loss of
personnel, could have a material adverse impact on the Company's business.
CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION
The Company customarily enters into service contracts which contain
provisions that hold the Company liable for various losses or liabilities
incurred by the customer in connection with the activities of the Company,
including, without limitation, losses and liabilities relating to claims by
third parties, damage to property, violation of governmental laws, regulations
or orders, injury or death to persons, and pollution or contamination caused by
substances in the Company's possession or control. The Company may be
responsible for any such losses or liabilities caused by contractors retained by
the Company in connection with the provision of its services. In addition, such
contracts generally require the Company, its employees, agents and contractors
to comply with all applicable laws, rules and regulations (which may include the
laws, rules and regulations of various foreign jurisdictions) and to provide
sufficient training and educational programs to such persons in order to enable
them to comply with applicable laws, rules and regulations. In the case of
emergency response services, the Company frequently enters into agreements with
customers which limit the Company's exposure to liability and/or require the
customer to indemnify the Company for losses or liabilities incurred by the
Company in connection with such services, except in the case of gross negligence
or willful misconduct by the Company. There can be no assurance, however, that
such contractual provisions limiting the liability of the Company will be
enforceable in whole or in part under applicable law.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases a 23,000 square foot office at 777 Post Oak Boulevard.,
Houston, Texas, from an unaffiliated landlord through August 2005 at a current
monthly rental of $44,000. Beginning in February 2000, the Company subleased
approximately 25% of this office space on substantially similar terms and
conditions as the primary lease. The Company leases an 11,000 square foot
Emergency Response Center facility in Anaco, Venezuela, for a monthly rental of
$2,500. The Company owns a facility in northwest Houston, Texas, at 11615 N.
Houston Rosslyn Road, that includes approximately 2 acres of land, a 4,000
square foot office building and a 12,000 square foot manufacturing and warehouse
building. The Company leases a 7,000 square foot office in the Halliburton
Center, Houston, Texas. This space is rented from an unaffiliated landlord
through May 2002 for an average monthly rental of $7,000, and is subleased on
substantially the same terms. The Company leases a 10,000 square foot office and
equipment storage facility in southeast Houston, Texas, through December 31,
2003 at a monthly rental of $12,290. Additionally, the Company has leased office
and equipment storage facilities in various other cities within the United
States and Venezuela. The future commitments on these additional leases are
immaterial. The Company believes that these facilities will be adequate for its
anticipated needs.
10
ITEM 3. LEGAL PROCEEDINGS
ITS Supply Bankruptcy Claims
On April 27, 2001, in the United States Bankruptcy Court for the Southern
District of Texas, the Chapter 7 Trustee in the bankruptcy proceeding of ITS,
the Company's subsidiary, filed a complaint against Comerica Bank-Texas, the
Company and various subsidiaries of the Company for a formal accounting of all
lockbox transfers that occurred between ITS and Comerica Bank, et al. and all
intercompany transfers between ITS and the Company and its subsidiaries to
determine if any of the transfers are avoidable under Federal or state statutes
and seeking repayment to ITS of all such amounts. The Trustee asserts that there
were approximately $400,000 of lockbox transfers and $3,000,000 of intercompany
transfers made between the parties. The Company does not believe that it is
likely that an accounting of the transactions between the parties will
demonstrate there is a liability owing by the Company to the ITS Chapter 7
estate. To provide security to Comerica Bank for any potential claims by the
Chapter 7 trustee, the Company has pledged a $350,000 certificate of deposit in
favor of Comerica Bank. This amount has been classified as a restricted asset
on the balance sheet as of December 31, 2001.
The Company is involved in or threatened with various other legal
proceedings from time to time arising in the ordinary course of business. The
Company does not believe that any liabilities resulting from any such
proceedings will have a material adverse effect on its operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 29, 2001, the Company convened its annual meeting of the
stockholders in Houston, Texas. At the meeting, the stockholders elected three
Class I directors serving for a three year term.
The voting was as follows:
FOR WITHHELD ABSTAINING
------------------------------------
Larry H. Ramming 31,042,182 380,002 --
Thomas L. Easley 31,111,117 311,067 --
E.J. "Jed" DiPaolo 31,031,242 390,942 --
Each of the directors was elected by the holders of more than a plurality
of the shares present, in person or by proxy, at the annual meeting.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the AMEX under the symbol "WEL."
The following table sets forth the high and low sales prices per share of the
common stock for each full quarterly period within the two most recent fiscal
years as reported on the AMEX:
HIGH AND LOW SALES PRICES
2000 2001
---- ----
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter . . . . $1.8125 $0.3750 $0.9600 $0.4380
Second Quarter. . . . 0.8125 0.5000 0.7500 0.4500
Third Quarter . . . . 1.0000 0.3750 0.8500 0.5100
Fourth Quarter. . . . 0.8125 0.3125 0.6900 0.3500
On March 22, 2002 the last reported sale price of the common stock as
reported on AMEX was $0.37 per share.
As of March 22, 2002, the Company's common stock was held by approximately
214 holders of record. The Company estimates that it has a significantly larger
number of beneficial stockholders as much of its common stock is held by
broker-dealers in street name for their customers.
The Company has not paid any cash dividends on its common stock to date.
The Company's current policy is to retain earnings, if any, to provide funds for
the operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash dividends. In addition, the Company is
prohibited from paying cash dividends on its common stock before full dividends,
including cumulative dividends, are paid to holders of the Company's preferred
stock.
AMEX, by letter dated March 15, 2002, has informed the Company that on or
before April 15, 2002, the Company must submit a reasonable plan to regain
compliance with AMEX's continued listing standards by December 31, 2002. The
plan must contain interim milestones that the Company will be required to meet
to remain listed. If the Company fails to submit a plan the AMEX considers
reasonable, fails to meet the milestones established in the plan or fails to
obtain compliance with AMEX's continued listing standards by December 31, 2002,
as reflected in its audited financial statements for the year then ended, the
AMEX has indicated that it may institute immediate delisting proceedings.
AMEX continued listing standards require that listed companies maintain
stockholders equity of $2,000,000 or more if the Company has sustained operating
losses from continuing operations or net losses in two of its three most recent
fiscal years or stockholders equity of $4,000,000 or more if it has sustained
operating losses from continuing operations or net losses in three of its four
most recent fiscal years. Further, the AMEX will normally consider delisting
companies that have sustained losses from continuing operations or net losses in
their five most recent fiscal years or that have sustained losses that are so
substantial in relation to their operations or financial resources, or whose
financial condition has become so impaired, that it appears questionable, in the
opinion of AMEX, as to whether the company will be able to continue operations
or meet its obligations as they mature.
SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
During the 2001 year, the Company issued the following securities in
transactions exempt from registration under Section 4(2) the Securities Act of
1933, as amended:
- 8,129,636 shares of common stock in January 2001 in exchange for all
60,972 outstanding shares of Series B Convertible Preferred Stock.
- 750 shares of Series C Preferred Stock and a warrant to purchase
75,000 shares of common stock, at an exercise price of $0.75 per
share, in October 2001 to a lawyer in exchange for legal services
rendered.
12
- 2,091 shares of Series C Preferred Stock in aggregate quarterly
dividends on shares of Series C Preferred Stock outstanding during
2001, as well as 444,295 shares of common stock upon the conversion of
3,332 outstanding shares of Series C Preferred Stock in October 2001.
- 258 shares of Series D Preferred Stock in aggregate quarterly
dividends on shares of Series D Preferred Stock outstanding during
2001.
- 5,125 shares of Series E Preferred Stock in aggregate quarterly
dividends on shares of Series E Preferred Stock outstanding during
2001.
- 8,200 shares of Series G Preferred Stock in aggregate quarterly
dividends on shares of Series G Preferred Stock outstanding during
2001.
- 9,134 shares of Series H Preferred Stock in aggregate quarterly
dividends on shares of Series H Preferred Stock outstanding during
2001.
- 700,000 shares of common stock for legal settlements accrued in 2000,
issued in April 2001.
- 97,900 shares of common stock as compensation to a group that arranged
a participation interest in our senior credit facility in May 2001.
- 161,333 shares of common stock to a financial consultant in June 2001
in exchange for services rendered.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for the fiscal year ended June 30, 1997, the six months ended December
31, 1997, and the years ended December 31, 1998, 1999, 2000 and 2001 which has
been derived from the Company's audited consolidated financial statements. In
the opinion of management of the Company, the unaudited consolidated financial
statements for the six months ended December 31, 1996 and the year ended
December 31, 1997 include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial data for such
period. The results of operations for the six months ended December 31, 1996 and
1997 are not necessarily indicative of results for a full fiscal year. The
results of operations of ITS and Baylor Company are presented as discontinued
operations. The data should be read in conjunction with the consolidated
financial statements, including the notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere.
YEAR ENDED SIX MONTHS ENDED DECEMBER 31,
JUNE 30, --------------------------
1997 1996 1997
------------ ------------ ------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . . $ 2,564,000 $ 743,000 $ 5,389,000
Operating loss. . . . . . . . . . . . . . . (68,000) (397,000) (432,000)
Loss from continuing operations
before extraordinary item. . . . . . . . (156,000) (411,000) (565,000)
Income (loss) from discontinued
operations, net of income taxes. . . . . - - -
Loss from sale of discontinued
operations, net of income taxes. . . . . - - -
Net loss before
extraordinary item . . . . . . . . . . . (156,000) (411,000) (565,000)
Extraordinary
item - gain (loss) on
debt extinguishment. . . . . . . . . . . - - (193,000)
Net loss. . . . . . . . . . . . . . . . . . (156,000) (411,000) (758,000)
Net loss attributable to common stockholders. (156,000) (411,000) (758,000)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations. . . . . . . . . . . $ (0.01) $ (0.04) $ (0.02)
============ ============ ============
Discontinued operations. . . . . . . . . . $ - $ - $ -
============ ============ ============
Extraordinary item . . . . . . . . . . . . $ - $ - $ (0.01)
============ ============ ============
Net loss . . . . . . . . . . . . . $ (0.01) $ (0.04) $ (0.03)
============ ============ ============
Weighted average common
shares outstanding . . . . . . . . . . . 12,191,000 11,500,000 23,864,000
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------- ------------- ------------
(UNAUDITED)
INCOME STATEMENT DATA:
Revenues. . . . . . . . . . . . . . . . . $ 7,154,000 $32,295,000 $ 33,095,000 $ 23,537,000 $36,149,000
Operating income (loss) . . . . . . . . . (360,000) (1,202,000) (19,984,000) (11,390,000) 1,914,000
Income (loss) from continuing operations
before extraordinary item. . . . . . . (374,000) (3,562,000) (26,468,000) (22,732,000) 926,000
Income (loss) from discontinued
operations, net of income taxes. . . . - 566,000 (4,648,000) 1,544,000 402,000
Loss from sale of discontinued
operations, net of income taxes. . . . - - - (2,555,000) -
Net income (loss) before
extraordinary item . . . . . . . . . . (374,000) (2,996,000) (31,116,000) (23,743,000) 1,328,000
Extraordinary
item -gain (loss) on
debt extinguishment. . . . . . . . . . (193,000) - - 2,444,000 -
Net income (loss) . . . . . . . . . . . . (567,000) (2,996,000) (31,116,000) (21,299,000) 1,328,000
Net loss attributable to common
stockholders. . . . . . . . . . . . (567,000) (3,937,000) (32,360,000) (22,216,000) (1,596,000)
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing operations. . . . . . . . . . $ (0.03) $ (0.14) $ (0.81) $ (0.70) $ (0.05)
============ ============ ============= ============= ============
Discontinued operations. . . . . . . . . $ - $ 0.02 $ (0.13) $ (0.03) $ 0.01
============ ============ ============= ============= ============
Extraordinary item . . . . . . . . . . . $ (0.02) $ - $ - $ 0.07 $ -
============ ============ ============= ============= ============
Net loss . . . . . . . . . . . . . . . . $ (0.05) $ (0.12) $ (0.94) $ (0.66) $ (0.04)
============ ============ ============= ============= ============
Weighted average common
shares outstanding . . . . . . . . . . 12,136,000 31,753,000 34,352,000 33,809,000 40,073,000
14
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999 2000 2001
------------- ------------- -------------- -------------- --------------
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . $ 14,062,000 $ 82,156,000 $ 53,455,000 $ 18,126,000 $ 17,754,000
Long-term debt and notes payable,
including current maturities . 1,664,000 50,349,000 43,181,000 12,620,000 12,520,000
Working capital (deficit). . . . . 2,312,000 48,625,000 (20,455,000) (4,018,000) (159,000)
Stockholders' equity (deficit) . . 10,232,000 20,236,000 (4,327,000) (6,396,000) (4,431,000)
Common shares outstanding .. . . 29,999,000 33,044,000 35,244,000 31,692,000 41,442,000
- - The reduction in total assets from 1998 to 1999 is a result of write downs
in 1999.
- - The reduction in total assets from 1999 to 2000 is a result of the sale of
Baylor.
- - The reduction of long-term debt and notes payable, including current
maturities from 1999 to 2000 is the result of a troubled debt
restructuring and payments of debt from the proceeds of the sale of Baylor.
- - Negative working capital in 1999 is due to the classification of long-term
debt as current due to failing certain debt covenants, partially offset by
net assets of discontinued operations being classified as current assets.
- - The change in working capital from 1999 to 2000 is a result of reduction of
current debt due to the effect of the troubled debt restructuring offset by
the reduction of current assets as a result of the sale of Baylor.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Securities and Exchange Commission and incorporated herein by reference.
A summary of consolidated operating results for the fiscal years ended
December 31, 1999, 2000 and 2001 is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
------------- ------------- ------------
Revenues. . . . . . . . . . . . . . . . $ 33,095,000 $ 23,537,000 $36,149,000
Costs and expenses:
Cost of sales and operating . . . . . 31,971,000 25,107,000 27,699,000
Selling, general and
administrative. . . . . . . . . . . 13,694,000 5,322,000 4,582,000
Depreciation and
amortization. . . . . . . . . . . . 2,907,000 2,665,000 1,954,000
Write-down of long-lived assets . . . 4,507,000 - -
Loan guaranty charge. . . . . . . . . - 1,833,000 -
Operating income (loss) . . . . . . . (19,984,000) (11,390,000) 1,914,000
Interest (expense) and other income,
net . . . . . . . . . . . . . . . . (6,402,000) (11,277,000) (653,000)
Income tax expense. . . . . . . . . . (82,000) (65,000) (335,000)
Income (loss) from continuing
operations before extraordinary
item. . . . . . . . . . . . . . . . (26,468,000) (22,732,000) 926,000
Income (loss) from discontinued
operations, net of income taxes . . (4,648,000) 1,544,000 402,000
Loss from sale of discontinued
operation net of income tax . . . . . - (2,555,000) -
Extraordinary gain on early debt
extinguishment, net of income taxes . - 2,444,000 -
Net income (loss). . . . . . . . . . (31,116,000) (21,299,000) 1,328,000
Stock and warrant accretions. . . . . (775,000) (53,000) (53,000)
Preferred dividends paid. . . . . . . (14,000) - -
Preferred dividends accrued . . . . . (455,000) (864,000) (2,871,000)
Net loss attributable to common
stockholders .. . . . . . . $(32,360,000) $(22,216,000) $(1,596,000)
On January 1, 2001, the Company redefined the segments that it operates in
as a result of the decision to discontinue the ITS and Baylor business
operations. The current segments are Prevention, Response and Restoration. Most
of the Company's subsidiaries operate in all three segments. Intercompany
transfers between segments were not material. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, selling, general and
administrative and corporate expenses have been allocated between segments on a
pro rata basis based on revenue. Business segment operating data from continuing
operations is presented for purposes of discussion and analysis of operating
results. ITS and Baylor are presented as discontinued operations in the
consolidated financial statements and are therefore excluded from the segment
information for all periods.
The Prevention segment consists of "non-event" services that are designed
to reduce the number and severity of critical well events to oil and gas
operators. These services include training, contingency planning, well plan
reviews, services associated with the Company's Safeguard programs and service
fees in conjunction with the WELLSURE(R) risk management program. All of these
services are designed to significantly reduce the risk of a well blowout or
other critical response event.
The Response segment consists of personnel and equipment services provided
during an emergency, such as a critical well event or a hazardous material
response. The services provided are designed to minimize response time and
damage while maximizing safety. Response revenues typically provide high gross
profit margins. However, when the Company responds to a critical event under
the WELLSURE(R) program, the Company acts as a general contractor and engages
16
third party service providers, which form part of the revenues recognized by the
Company. This revenue contribution has the ability to significantly lower the
overall gross profit margins of the segment.
The Restoration segment consists of "post-event" services designed to
minimize the effects of a critical emergency event as well as industrial and
remediation service. The services provided range from environmental compliance
and disposal services to facility decontamination services in the event of a
plant closing. Restoration services are a natural extension of response service
assignments.
Information concerning operations in different business segments for the
years ended December 31, 1999, 2000 and 2001 is presented below. Certain
classifications have been made to the prior periods to conform to the current
presentation.
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
------------- ------------- ------------
REVENUES
Prevention. . . . . . . . . . . . . $ 769,000 $ 2,134,000 $ 5,256,000
Response. . . . . . . . . . . . . . 20,107,000 16,670,000 26,739,000
Restoration . . . . . . . . . . . . 12,219,000 4,733,000 4,154,000
------------- ------------- ------------
33,095,000 23,537,000 36,149,000
============= ============= ============
COST OF SALES AND OPERATING EXPENSES
Prevention. . . . . . . . . . . . . 441,000 1,934,000 2,929,000
Response. . . . . . . . . . . . . . 19,459,000 16,002,000 19,321,000
Restoration . . . . . . . . . . . . 12,071,000 7,171,000 5,449,000
------------- ------------- ------------
31,971,000 25,107,000 27,699,000
============= ============= ============
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (1)
Prevention. . . . . . . . . . . . . 383,000 673,000 722,000
Response. . . . . . . . . . . . . . 7,668,000 3,627,000 3,427,000
Restoration . . . . . . . . . . . . 5,643,000 1,022,000 433,000
------------- ------------- ------------
13,694,000 5,322,000 4,582,000
============= ============= ============
DEPRECIATION AND AMORTIZATION (2)
Prevention. . . . . . . . . . . . . 46,000 251,000 333,000
Response. . . . . . . . . . . . . . 2,303,000 1,772,000 1,401,000
Restoration . . . . . . . . . . . . 558,000 642,000 220,000
------------- ------------- ------------
2,907,000 2,665,000 1,954,000
============= ============= ============
OPERATING INCOME (LOSS) (3)
Prevention. . . . . . . . . . . . . (165,000) (890,000) 1,272,000
Response. . . . . . . . . . . . . . (10,785,000) (6,029,000) 2,590,000
Restoration . . . . . . . . . . . . (9,034,000) (4,471,000) (1,948,000)
------------- ------------- ------------
(19,984,000) (11,390,000) 1,914,000
============= ============= ============
(1) Selling, general and administrative and corporate expenses have been
allocated pro rata among segments based upon relative revenues.
(2) Corporate depreciation and amortization expenses have been allocated pro
rata among segments based upon relative revenues.
(3) Includes write down of long-lived assets of $4,507,000 in 1999 and loan
guarantee charges of $1,833,000 in 2000.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 WITH THE YEAR ENDED DECEMBER 31,
2000
Revenues
Prevention revenues were $5,256,000 for the year ended December 31, 2001,
compared to $2,134,000 for the year ended December 31, 2000, representing an
increase of $3,122,000 (146.3%) in the current year. The increase was primarily
the result of expansion in strategic engineering services, including training,
contingency planning and well plan reviews for new and existing domestic and
foreign customers, as well as growth in the Safeguard and "WELLSURE(R)"
programs.
Response revenues were $26,739,000 for the year ended December 31, 2001,
compared to $16,670,000 for the year ended December 31, 2000, an increase of
$10,069,000 (60.4%) in the current year. The principal component of the increase
was the success of the "WELLSURE(R)" program. Under the "WELLSURE(R)" program,
the Company acted as lead contractor on five critical well control events during
the year of 2001.
17
Restoration revenues were $4,154,000 for the year ended December 31, 2001,
compared to $4,733,000 for the year ended December 31, 2000, representing a
decrease of $579,000 (12.2%) in the current year. The decrease was primarily
attributable to $627,000 in reduced sales at Abasco due to a continuing decline
in international direct sales efforts and support.
Cost of Sales and Operating Expenses
Prevention cost of sales and operating expenses were $2,929,000 for the
year ended December 31, 2001, compared to $1,934,000 for the year ended December
31, 2000, an increase of $995,000 (51.4%) in the current year. The increase was
due to the reallocation of resources from the Response segment to the Prevention
segment due to the large increase in activity in the Prevention segment during
this period.
Response cost of sales and operating expenses were $19,321,000 for the year
ended December 31, 2001, compared to $16,002,000 for the year ended December 31,
2000, an increase of $3,319,000 (20.7%) in the current year. The increase was a
result of increased activity and related third party costs under the Company's
previously described lead contracting role associated with five WELLSURE
critical well events.
Restoration cost of sales and operating expenses were $5,449,000 for the
year ended December 31, 2001, compared to $7,171,000 for the year ended December
31, 2000, a decrease of $1,722,000 (24.0%) in the current year. This decrease
was primarily a result of the revenue decline at Abasco due to the decision to
outsource the manufacturing of Abasco products.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $4,582,000
for the year ended December 31, 2001, compared to $5,322,000 for the year ended
December 31, 2000, a decrease of $740,000 (13.9%) from the prior year. The year
ended December 31, 2000 selling, general and administrative costs were higher
primarily as a result of financing and consulting costs of $797,000, partially
offset in the current year by additions to the administrative, accounting
staffing and systems, and additional support of business development and sales
initiatives. As previously footnoted on the segmented financial table,
corporate selling, general and administrative expenses have been allocated pro
rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2001 and 2000.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.
Interest Expense and Other, Including Finance Costs
The decrease in interest expenses of $10,624,000 for the year ended
December 31, 2001, as compared to the prior year period is a result of the
restructuring of the majority of the Company's senior and subordinated debt into
equity in December 2000. The year ended December 31, 2000 also included a
$1,679,000 non-cash financing charge for an inducement to convert certain
preferred stock into common stock; $1,060,000 of expenses related to warrants
issued to the participation interest in our senior credit facility and
associated advisory services; and charges of $598,000 related to the Comerica
debt. Other expense for the prior period also included approximately $1,609,000
in legal settlements and other financing related costs.
Income Tax Expense
Income taxes for the year ended December 31, 2001 and 2000 are a result of
taxable income in the Company's foreign operations and $43,000 of alternative
minimum tax for the year ended December 31, 2001.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 WITH THE YEAR ENDED DECEMBER 31,
1999
Revenues
Prevention revenues were $2,134,000 for the year December 31, 2000,
compared to $769,000 for the year ended December 31, 1999, representing an
increase of $1,365,000 (177.5%) for the year. These increases were primarily
the result of improvements in non-event engineering and training services of
$675,000 and an increase in non-event related projects in Venezuela of $829,000.
18
Response revenues were $16,670,000 for the year ended December 31, 2000,
compared to $20,107,000 for the year ended December 31, 1999, a decrease of
$3,437,000 (17.1%) from the prior year. The 1999 period included a blowout
where the Company acted as general contractor and generated an additional
$4,460,000 in revenues from pass through third party invoices. Also, the 2000
period showed a decline, as compared to 1999, of $1,215,000 in lower margin
revenues from consulting services due to the Company's strategy to exit that
business in favor of more profitable service lines. These decreases were offset
by improvements in well control response services of $2,238,000.
Restoration revenues were $ 4,733,000 for the year ended December 31,
2000, compared to $ 12,219,000 for the year ended December 31, 1999,
representing a decrease of $ 7,486,000 (61.3%) from the prior year. This
decrease included $4,110,000 which was directly attributable to liquidity
impairments limiting the Company's ability to procure third party services
required for plant services and remediation. An additional $3,376,000 reduction
occurred in Abasco as a result of a decline in international orders for spill
equipment and a concurrent decrease in orders for fire and protective equipment.
Cost of Sales and Operating Expenses
Prevention cost of sales and operating expenses were $1,934,000 for the
year ended December 31, 2000, compared to $441,000 for the year ended December
31, 1999, an increase of $1,493,000 (338.5%) from the prior year. These
increases were primarily a result of increased activity in non-event engineering
and training services of $594,000 and increased costs related to non-event
related projects in Venezuela of $329,000.
Response cost of sales and operating expenses were $16,002,000 for the year
ended December 31, 2000, compared to $19,459,000 for the year ended December 31,
1999, a decrease of $3,457,000 (17.8%) from the prior year. The 1999 period
included a blowout where the company acted as general contractor and generated
an additional $4,242,000 in costs related to revenues from pass through third
party invoices. Also, the 2000 period showed a decline of $1,128,000 in costs
related to lower margin revenues from consulting services due to the Company's
strategy to exit that business in favor of more profitable service lines. These
decreases were offset by additional costs due to revenue improvements in well
control response services of $1,913,000.
Restoration cost of sales and operating expenses were $7,171,000 for the
year ended December 31, 2000, compared to $12,071,000 for the year ended
December 31, 1999, a decrease of $4,900,000 (40.6%) from the prior year. This
decrease was a result of the previously discussed revenue reduction due to
liquidity impairments and lost market share.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses were $5,322,000
for the year ended December 31, 2000, compared to $13,694,000 for the year ended
December 31, 1999, a decrease of $8,372,000 (61.1%) from the prior year.
Selling, general and administrative expenses were reduced as a consequence of
1999 cost reduction initiatives primarily involving Boots & Coots Special
Services and Abasco. As previously footnoted on the segmented financial table,
selling, general and administrative and corporate expenses have been allocated
pro rata among the segments on the basis of relative revenue.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased primarily as
a result of the reduction in the depreciable asset base between 2000 and 1999.
As previously footnoted on the segmented financial table, depreciation and
amortization expenses to related corporate assets have been allocated pro rata
among the segments on the basis of relative revenue as the basis for allocation.
Interest Expense and Other, Including Finance Cost
Interest expense for the year ended December 31, 2000 was $7,454,000
compared to $6,184,000 in the prior year. The increase of $1,270,000 in
interest expense is primarily due to the additional senior debt incurred during
the year. The year ended December 31, 2000 also included a $1,679,000 non-cash
financing charge for an inducement to convert certain preferred stock into
common stock, $1,060,000 of expenses related to warrants issued to the
participation interest and advisory services associated therewith and charges of
$598,000 related to the Comerica debt. Other expense for the prior period also
includes approximately $1,609,000 in legal settlements and other financing
related costs.
19
Income Tax Expense
Income taxes for the year ended December 31, 2000 and 1999 are a result of
taxable income in the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The Company generates its revenues from prevention services, emergency
response activities and restoration services. Response activities are generally
associated with a specific emergency or "event" whereas prevention and
restoration activities are generally "non-event" related services. Event related
services typically produce higher operating margins for the Company, but the
frequency of occurrence varies widely and is inherently unpredictable. Non-event
services typically have lower operating margins, but the volume and availability
of work is more predictable. Historically the Company has relied on event driven
revenues as the primary focus of its operating activity, but more recently the
Company's strategy has been to achieve greater balance between event and
non-event service activities. While the Company has successfully improved this
balance, event related services are still the major source of revenues and
operating income for the Company.
The Company's event-related capabilities include hazardous materials and
other emergency response services to industrial customers and governmental
agencies, but the majority of the Company's event related revenues are derived
from well control events (i.e., blowouts) in the oil and gas industry. Demand
for the Company's well control services is impacted by the number and size of
drilling and work over projects, which fluctuate as changes in oil and gas
prices affect exploration and production activities, forecasts and budgets. The
Company's reliance on event driven revenues in general, and well control events
in particular, impairs the Company's ability to generate predictable operating
cash flows.
In the past, during periods of low critical events, resources dedicated to
emergency response were underutilized or, at times, idle, while the fixed costs
of operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, the Company began to actively expand
its non-event service capabilities, with particular focus on prevention and
restoration services. Prevention services include engineering activities, well
plan reviews, site audits, and rig inspections. More specifically, the Company
developed its WELLSURE program, which is now providing more predictable and
increasing service fee income, and began marketing its SafeGuard program, which
provides a full range of prevention services domestically and internationally.
For the year ended December 31, 2001, non-event prevention revenues increased to
$5,256,000, a 146.2% increase compared to the prior year, and operating income
grew to $1,272,000 compared to a loss in the prior year. The Company intends to
continue its efforts to increase the revenues it generates from prevention
services in 2002.
The Company's strategy also includes plans to increase non-event
restoration services to its existing customer base. The market for restoration
services is large in comparison to the more specialized emergency response
business, and it provides growth opportunities for the Company. High value
restoration services include snubbing operations, redrilling applications and
project management services. However, proper development of these activities
requires significantly greater capital than what has been available to the
Company. Consequently, the Company is limited to a more selective range of
lower value services, such as site remediation, and has been unable to exploit
the higher margin opportunities available in this business segment. For the
year ended December 31, 2001, restoration revenues were $4,154,000, a 12.2%
decrease compared to the prior year, while operating losses were reduced to
$1,948,000, a 56.4% decrease compared to the prior year.
The Company intends to continue its efforts to increase its non-event
services in the prevention and restoration segments with the objective of
covering all of the Company's fixed operating costs and administrative overhead
from these more predictable non-event services, offsetting the risks of
unpredictable event-driven emergency response business, but maintaining the
benefit of the high operating margins that such events offer. Although the
Company has made progress towards this goal, it has been difficult to achieve
because of the Company's weakened financial position and severe capital
constraints. The Company has been unable to pay certain vendors in a timely
manner, including vendors that the Company considers important to its ongoing
operations, which has hampered the Company's capacity to hire sub-contractors,
obtain materials and supplies, and otherwise conduct effective or efficient
operations.
At the beginning of 2001, the Company had unusually high accounts payable
and accrued liabilities, which had accumulated during a period of financial
restructuring in recent years. During the year ended December 31, 2001, the
Company used $4,140,000 of its available sources of cash to reduce accounts
payable and accrued expenses. This was the principal use of cash for the
Company in 2001, which, when offset with all other operating sources, resulted
in net cash used in operating activities of $3,080,000. Additionally, the
Company used $130,000 in investing activities (principally equipment additions
net of proceeds from equipment sales) and it repaid $100,000 of debt. The
$3,210,000 combined use of cash was funded with $2,203,000 of cash proceeds from
20
a financing facilities, discussed below, and $1,107,000 from reductions of cash
on hand at the beginning of the year. At December 31, 2001, the Company had a
cash balance of $309,000.
On June 18, 2001, the Company entered into a facility with KBK in which it
pledged certain accounts receivable for a cash advance. The facility allows the
Company to pledge additional qualifying accounts receivable up to an aggregate
amount of $5,000,000. The Company paid $135,000 for loan origination fees,
finder's fees and legal fees related to the facility and will pay additional
fees of one percent per annum on the unused portion of the facility and a
termination fee of up to 2% of the maximum amount of the facility. The Company
receives an initial advance of 85% of the gross amount of each receivable
pledged. Upon collection of the receivable, the Company receives an additional
residual payment from which is deducted (i) a fixed fee equal to 2% of the gross
pledged receivable and (ii) a variable financing charge equal to KBK's base rate
plus 2% calculated over the actual length of time the advance was outstanding
from KBK prior to collection. The Company's obligations under the facility are
secured by a first lien on certain other accounts receivable of the Company. As
of December 31, 2001, the Company had $2,383,000 of its accounts receivable
pledged to KBK, representing the substantial majority of the Company's
receivables that were eligible for pledging under the facility.
As of December 31, 2001, the Company's current assets totaled approximately
$9,506,000 and its current liabilities were $9,665,000, resulting in a net
working capital deficit of approximately $159,000 (compared to a beginning year
deficit of $4,018,000). The Company's highly liquid current assets, represented
by cash of $309,000 and receivables and restricted assets of $7,933,000 were
collectively $1,423,000 less than the amount of current liabilities at December
31, 2001 (compared to a beginning year deficit of $4,966,000). The Company has
significantly reduced its net working capital deficit during 2001 but it
continues to experience severe working capital constraints. The Company is
actively exploring new sources of financing, including the establishment of new
credit facilities and the issuance of debt and/or equity securities, but does
not have any current commitments. Absent new near-term sources of financing or
the generation of significant operating income, the Company will not have
sufficient funds to meet its immediate obligations and will be forced to dispose
of additional assets or operations outside of the normal course of business in
order to satisfy its liquidity requirements.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. However, the
uncertainties surrounding the sufficiency and timing of its future cash flows
and the lack of firm commitments for additional capital raises substantial doubt
about the ability of the Company to continue as a going concern. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
DISCLOSURE OF ON AND OFF BALANCE SHEET DEBTS AND COMMITMENTS:
- ---------------------------------------------------------------------------------------------
FUTURE COMMITMENTS TO BE PAID IN THE YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
DESCRIPTION 2002 2003 2004 2005 2006 THEREAFTER
- ---------------------------------------------------------------------------------------------
Long term debt and
notes payable including
short term debt (1). . . $2,203,000 $1,000,000 - $7,200,000 - -
- ---------------------------------------------------------------------------------------------
Future minimum lease
payments . . . . . . . . $1,033,000 $ 902,000 $640,000 $ 421,000 $208,000 $ 208,000
- ---------------------------------------------------------------------------------------------
Total commitments. . . . $3,236,000 $1,902,000 $640,000 $7,621,000 $208,000 $ 208,000
- ---------------------------------------------------------------------------------------------
(1) Accrued interest totaling $4,320,000 is included in the Company's 12%
Senior Subordinated Note at December 31, 2001 due to the accounting for a
troubled debt restructuring during 2000, but has been excluded from the
above presentation. Accrued interest calculated through December 31, 2002
will be deferred for payment until December 30, 2005. Payments on accrued
interest after December 31, 2002 will begin on March 31, 2003 and will
continue quarterly until December 30, 2005.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies," the Company has identified the
accounting principles which it believes are most critical to the reported
financial status by considering accounting policies that involve the most
complex or subjective decisions or assessment. The Company identified our most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue Recognition - Revenue is recognized on the Company's service
contracts primarily on the basis of contractual day rates as the work is
completed. On a small number of turnkey contracts, revenue may be recognized on
21
the percentage-of-completion method based upon costs incurred to date and
estimated total contract costs. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract completion.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
The Company recognizes revenues under the WELLSURE(R) program as follows:
(a) initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) revenues and billings
for pre-event type services provided are recognized when the insurance carrier
has billed the operator and the revenues become determinable and (c) revenues
and billings for contracting and event services are recognized based upon
predetermined day rates of the Company and sub-contracted work as incurred.
Allowance for Doubtful Accounts - The Company performs ongoing evaluations
of its customers and generally does not require collateral. The Company assesses
its credit risk and provides an allowance for doubtful accounts for any accounts
which it deems doubtful of collection.
Income Taxes - The Company accounts for income taxes pursuant to the SFAS
No. 109 "Accounting For Income Taxes," which requires recognition of deferred
income tax liabilities and assets for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. Deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carry forwards.
As of December 31, 2000 and 2001, the Company has net domestic operating
loss carry forwards of approximately $47,155,000 and $46,065,000, respectively,
expiring in various amounts beginning in 2011. The net operating loss carry
forwards, along with the other timing differences, generate a net deferred tax
asset. The Company has recorded valuation allowances in each year for these net
deferred tax assets since management believes it is more likely than not the
assets will not be realized.
RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
attributable to acquisitions prior to July 1, 2001, the amortization provisions
of SFAS No. 142 will be effective January 1, 2002. Management estimates that
the adoption of SFAS No. 142's requirement to not amortize goodwill will
increase operating income by approximately $59,000 in 2002. Management is
currently evaluating the effect that adoption of the other provisions of SFAS
No. 142 that are effective January 1, 2002 will have on its results of
operations and financial position.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations which covers all legally enforceable obligations associated with the
retirement of tangible long-lived assets and provides the accounting and
reporting requirements for such obligations. SFAS No. 143 is effective for the
Company beginning January 1, 2003. Management has yet to determine the impact
that the adoption of SFAS No. 143 will have on the Company's consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for
the Impairment of long-lived Assets and for long-lived Assets to be Disposed of.
SFAS No. 144 establishes a single accounting method for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
extends the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 also requires that an impairment loss be recognized
22
for assets held-for-use when the carrying amount of an asset (group) is not
recoverable. The carrying amount of an asset (group) is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset (group), excluding interest charges.
Estimates of future cash flows used to test the recoverability of a long-lived
asset (group) must incorporate the entity's own assumptions about its use of the
asset (group) and must factor in all available evidence. SFAS No. 144 is
effective for the Company for the quarter ending March 31, 2002. The Company's
adoption of SFAS No. 144, on January 1, 2002 did not have a material impact on
the Company's consolidated financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ from those projected in any forward-looking statements for the reasons
detailed in his report. The forward-looking statements contained herein are made
as of the date of this report and the Company assumes no obligation to update
such forward-looking statements, or to update the reasons why actual results
could differ from those projected in such forward-looking statements. Investors
should consult the information set forth from time to time in the Company's
reports on Forms 10-Q and 8-K, and its Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical 10% increase in market interest rates. Market
rate volatility is dependent on many factors that are impossible to forecast,
and actual interest rate increases could be more severe than the hypothetical
10% increase.
The Company estimates that if prevailing market interest rates had been 10%
higher throughout 1999, 2000 and 2001, and all other factors affecting the
Company's debt remained the same, pretax earnings would have been lower by
approximately $160,000, $122,000 and $29,000 in 1999, 2000 and 2001,
respectively. With respect to the fair value of the Company's fixed-interest
rate debt, if prevailing market interest rates had been 10% higher at year-end
1999, 2000 and 2001, and all other factors affecting the Company's debt remained
the same, the fair value of the Company's fixed-rate debt, as determined on a
present-value basis, would have been lower by approximately $1,568,000, $247,000
and $212,000 at December 31, 1999, 2000 and 2001, respectively. Given the
composition of the Company's debt structure, the Company does not, for the most
part, actively manage its interest rate risk.
ITEM 8. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
23
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following tables list the names and ages of each director and/or
executive officer of the Company, as well as those persons expected to make a
significant contribution to the Company.
NAME AGE POSITION
- ------------------- --- ----------------------------------------------------
Larry H. Ramming. . 55 Chairman of the Board of Directors
Chief Executive Officer and Chief Financial Officer
Brian Krause. . . . 46 Director
Vice President of Boots & Coots Services
K. Kirk Krist . . . 44 Director
Jerry L. Winchester 43 Director
President and Chief Operating Officer
Dewitt H. Edwards . 43 Corporate Secretary - Executive Vice President
Thomas L. Easley. . 56 Director (Vice President & Chief Financial Officer
Through February 7, 2000)
E. J. DiPaolo . . . 49 Director
W. Richard Anderson 49 Director
Tracy S. Turner . . 41 Director
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Larry H. Ramming has served as the Chairman of the Board and Chief
Executive Officer of the Company since the acquisition of IWC Services, Inc. by
the Company on July 29, 1997. Mr. Ramming serves as a Class I Director for a
term that will expire on the date of the annual meeting of stockholders
scheduled for calendar year 2004. Previously Mr. Ramming was actively involved
in mortgage banking and the packaging and resale of mortgage notes, consumer
loans and other debt instruments for over 15 years. In addition, Mr. Ramming has
been an active venture capital investor.
Brian Krause has served as a director of the Company since the acquisition
of IWC Services (Well Control Business Unit) by the Company on July 29, 1997.
Mr. Krause serves as a Class III Director for a term that will expire on the
date of the annual meeting of stockholders scheduled for calendar year 2003. Mr.
Krause brings over 20 years of well control and firefighting experience to the
Company. Before joining the group that founded IWC Services, Mr. Krause was
employed for 18 years by the Red Adair Company, Houston, Texas. Mr. Krause
joined the Red Adair Company as a Well Control Specialist in August 1978, was
promoted to Vice President in June 1989 and was again promoted to Vice President
& Senior Well Control Specialist in February 1994. During his tenure with the
Red Adair Company, Mr. Krause participated in hundreds of well control events
worldwide. Mr. Krause, along with Messrs. Henry, Hatteberg and Clayton, resigned
from the Red Adair Company in August 1994 and began the independent business
activities that led to the formation of IWC Services in May 1995.
K. Kirk Krist has served as a director since the acquisition of IWC
Services by the Company on July 29, 1997. Mr. Krist serves as a Class III
Director for a term that will expire on the date of the annual meeting of
stockholders scheduled for calendar year 2003. Mr. Krist also serves on the
Audit and Compensation Committees. Mr. Krist has been a self-employed oil and
gas investor and venture capitalist since 1982.
Jerry L. Winchester has served as a director since July 1997. Mr.
Winchester serves as a Class II Director for a term that will expire on the date
of the annual meeting of stockholders scheduled for calendar year 2002. Mr.
Winchester has served as President and Chief Operating Officer of the Company
since November 1, 1998. Before assuming these positions, Mr. Winchester was
employed by Halliburton Energy Services since 1981 in positions of increasing
responsibility, most recently as Global Manager - Well Control, Coil Tubing and
Special Services.
24
Dewitt H. Edwards has served as Executive Vice President of the Company
since September 1, 1998 and has served as Corporate Secretary since April 2000.
Before assuming these positions, Mr. Edwards served in progressive positions of
responsibilities with Halliburton Energy Services from 1979 to 1998, most
recently as Operations Manager - North American Region Resources Management.
Thomas L. Easley served as Vice President and Chief Financial Officer of
the Company since the acquisition of IWC Services by the Company on July 29,
1997 through February 7, 2000, at which time he resigned to pursue another
business activity. Mr. Easley has served as a director since March 25, 1998. Mr.
Easley serves as a Class I Director for a term that will expire on the date of
the annual meeting of stockholders scheduled for calendar year 2004. From May
1995 through July 1996, Mr. Easley served as Vice President and Chief Financial
Officer of DI Industries, Inc. a publicly held oil and gas drilling contractor
with operations in the U.S., Mexico, Central America and South America.
Previously, from June 1992 through May 1995, he served as Vice President,
Finance of Huthnance International, Inc., a closely held offshore oil and gas
drilling contractor. From February 7, 2000, through February 1, 2002, Mr. Easley
served as Executive Vice President-Finance & Administration of Grant
Geophysical, Inc., a closely-held seismic data acquisition and processing
company. He currently provides business and financial consultative services.
E. J. "Jed" DiPaolo has served as a director since May 1999. Mr. DiPaolo
serves as a Class I Director for a term that will expire on the date of the
annual meeting of stockholders scheduled for calendar year 2004. Mr. DiPaolo
also serves on the Audit Committee. Mr. DiPaolo is the former Senior Vice
President, Global Business Development of Halliburton Energy Services, having
had responsibility for all worldwide business development activities. Mr.
DiPaolo was employed at Halliburton Energy Services from 1976 to 2002 in
progressive positions of responsibility.
W. Richard Anderson has served as a director since August 1999. Mr.
Anderson serves as a Class II Director for a term that will expire on the date
of the annual meeting of stockholders scheduled for calendar year 2002. Mr.
Anderson also serves on the Audit Committee. Mr. Anderson is the President,
Chief Financial officer and a director of Prime Natural Resources, a
closely-held exploration and production company. Prior to his employment at
Prime, he was employed by Hein & Associates LLP, a certified public accounting
firm, where he served as a partner from 1989 to January 1995 and as a managing
partner from January 1995 until October 1998.
Tracy Scott Turner has served as a director since November 2000. Mr. Turner
serves as a Class II Director for a term that will expire on the date of the
annual meeting of stockholders scheduled for calendar year 2002. Mr. Turner also
serves on the Compensation Committee. Mr. Turner is also currently a principal
at Geneva Associates, L.L.C., a merchant bank. In addition, Mr. Turner is the
founding principal of Interra Ventures, L.L.C., a merchant bank which focuses on
telecommunications and energy related investments. From 1993 to 1996, Mr. Turner
served as a Senior Vice President of the Private Placement Group for ABN AMRO
Bank. From 1986 to 1993, he was a Managing Director in the Private Placement
Group for Canadian Imperial Bank of Commerce. Mr. Turner has an investment in
and sits on the board of directors of Rio Bravo Exploration and Production. He
also currently sits on the board of directors of Vertaport, Inc., Early Warning
Corporation and Clean Air Research and Environmental and is a principal of
Turner Land and Cattle Company and Southern Capital Partners, L.L.C. Mr. Turner
is a managing member of Specialty Finance Fund I, L.L.C.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Larry Ramming, Jerry Winchester and Dewitt Edwards voluntarily surrendered
options to purchase 900,000 shares, 1,080,000 shares and 108,000 shares,
respectively, at an exercise price of $0.75 per share to the Company in April
2001. In October 2001, Messrs. Ramming, Winchester and Edwards were awarded
options to purchase 900,000 shares, 1,080,000 shares and 108,000 shares,
respectively, at an exercise price of $0.55 per share. Messrs. Ramming,
Winchester and Edwards, as of the date this report was prepared, had not yet
filed Forms 4 reflecting the issuance of the new options in October 2001.
25
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the cash and non-cash
compensation information for the years ended December 31, 1999, 2000 and 2001
for the Chief Executive Officer and the two other executive officers whose
salary and bonus earned for services rendered to the Company exceeded $100,000
for the years then ended.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ ----------------------------------
Awards Payouts
----------------------------------
Other Securities
Name Annual Restricted Underlying All Other
And Compen- Stock Options/ LTIP Compen-
Principal Salary Bonus sation Award(s) SARs Payouts sation
Position Year ($) ($) ($) ($) (#) ($) ($)
- -----------------------------------------------------------------------------------------------------------
Larry H. Ramming 2001 314,657 71,162(1) 1,800,000(2) 138(3)
Chairman, Chief 2000 295,605 174,402(4)
Executive Officer 1999 280,625
and Chief
Financial Officer
- -----------------------------------------------------------------------------------------------------------
Jerry Winchester 2001 259,066 1,513,000(5) 3,287(6)
President 2000 259,480 3,109
1999 262,000
- -----------------------------------------------------------------------------------------------------------
Dewitt H. Edwards 2001 182,848 408,000(7) 5,388(8)
Executive Vice 2000 167,213 3,109
President 1999 162,000
- -----------------------------------------------------------------------------------------------------------
______________________
(1) Additional compensation in connection with modification of Mr. Ramming's
employment agreement. See "Employment Arrangements" below for further
detail.
(2) 1,350,000 shares covered by options are vested.
(3) Life insurance premium as required by employment agreement.
(4) Represents the fair market value of 1,500 shares of Series C Preferred
Stock of the Company and a warrant to purchase 150,000 shares of common
stock at $0.75 per share issued for performance during 1999 and 2000. The
fair market value was determined to be the face value for each share of
Series C Preferred Stock ($100). A Black-Scholes model using the
assumptions as set forth in Note I to the Financial Statements included
herein was used to determine the fair market value of the warrants.
(5) 1,363,000 shares covered by options are vested.
(6) Life insurance premium as required by employment agreement and
matching contribution to 401(k) plan.
(7) 318,000 shares covered by options are vested.
(8) Life insurance premium as required by employment agreement and matching
contribution to 401(k) plan.
26
The following table sets forth additional information with respect to stock
options granted in 2001 to the named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
- -------------------------------------------------------------------------
Potential Realizable Value at Assumed
Percent of