Boots & Coots 10-Q 9-30-2005
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
Form
10-Q
x QUARTERLY
REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarter Ended September 30, 2005
or
o TRANSITION
REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Transition Period from _____ to _____
_______________
Commission
File Number 1-13817
Boots
& Coots International
Well
Control, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
11-2908692
|
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
|
|
|
11615
N. Houston-Rosslyn
|
|
|
|
|
Houston,
Texas
|
|
77086
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
(281)
931-8884
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Rule
12b-2 of the Exchange Act).
Yes o
No
x
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o
No
x
The
number of shares of the Registrant's Common Stock, par value $.00001 per share,
outstanding at November 11, 2005, was 29,499,429.
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
TABLE
OF CONTENTS
PART
I
FINANCIAL
INFORMATION
(Unaudited)
|
|
Page
|
|
|
|
|
|
3
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
|
|
|
|
|
11
|
|
|
18
|
|
|
18
|
|
PART
II
OTHER
INFORMATION
|
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
20
|
|
|
21
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(000’s
except share and per share amounts)
ASSETS
|
|
|
|
September
30,
2005
|
|
December
31,
2004
|
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,666
|
|
$
|
1,428
|
|
Receivables
— net
|
|
|
6,234
|
|
|
10,340
|
|
Prepaid
expenses and other current assets
|
|
|
1,678
|
|
|
1,850
|
|
Total
current assets
|
|
|
9,578
|
|
|
13,618
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT — net
|
|
|
2,450
|
|
|
2,872
|
|
DEFERRED
TAX ASSET
|
|
|
98
|
|
|
98
|
|
OTHER
ASSETS
|
|
|
1,530
|
|
|
1,805
|
|
Total
assets
|
|
$
|
13,656
|
|
$
|
18,393
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
1,950
|
|
$
|
1,200
|
|
Current
portion of accrued interest
|
|
|
278
|
|
|
332
|
|
Accounts
payable
|
|
|
329
|
|
|
3,468
|
|
Accrued
liabilities
|
|
|
4,501
|
|
|
6,065
|
|
Total
current liabilities
|
|
|
7,058
|
|
|
11,065
|
|
|
|
|
|
|
|
|
|
Long
term debt and notes payable, net of current maturities
|
|
|
3,900
|
|
|
5,550
|
|
Accrued
interest, net of current portion
|
|
|
396
|
|
|
598
|
|
Total
liabilities
|
|
|
11,354
|
|
|
17,213
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock ($.00001 par value, 5,000,000 shares authorized, 53,000 shares
issued and outstanding at September 30, 2005 and December
31, 2004)
|
|
|
—
|
|
|
—
|
|
Common
stock ($.00001 par value, 125,000,000 shares authorized, 29,499,000
and 29,439,000 shares issued and outstanding at September
30, 2005
and December 31, 2004, respectively)
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
71,604
|
|
|
70,888
|
|
Deferred
compensation |
|
|
(250 |
) |
|
(325 |
) |
Accumulated
other comprehensive loss
|
|
|
(1,234
|
)
|
|
(873
|
)
|
Accumulated
deficit
|
|
|
(67,818
|
)
|
|
(68,510
|
)
|
Total
stockholders' equity
|
|
|
2,302
|
|
|
1,180
|
|
Total
liabilities and stockholders' equity
|
|
$
|
13,656
|
|
$
|
18.393
|
|
See
accompanying notes to condensed consolidated financial
statements.
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s
except share and per share amounts)
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
4,612
|
|
$
|
3,308
|
|
$
|
23,664
|
|
$
|
14,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES, excluding depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
1,846
|
|
|
975
|
|
|
12,520
|
|
|
5,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
2,766
|
|
|
2,333
|
|
|
11,144
|
|
|
9,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
1,842
|
|
|
1,770
|
|
|
5,822
|
|
|
5,033
|
|
Selling,
general and administrative
|
|
|
662
|
|
|
1,038
|
|
|
1,989
|
|
|
2,706
|
|
Depreciation
and amortization
|
|
|
152
|
|
|
279
|
|
|
592
|
|
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
110
|
|
|
(754
|
)
|
|
2,741
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE AND OTHER, NET
|
|
|
85
|
|
|
309
|
|
|
523
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS, before
income taxes
|
|
|
25
|
|
|
(1,063
|
)
|
|
2,218
|
|
|
39
|
|
INCOME
TAX EXPENSE
|
|
|
494
|
|
|
247
|
|
|
877
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
|
|
(469
|
)
|
|
(1,310
|
)
|
|
1,341
|
|
|
(817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS, net
of income taxes
|
|
|
—
|
|
|
(23
|
)
|
|
—
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
(469
|
)
|
|
(1,333
|
)
|
|
1,341
|
|
|
(842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
DIVIDEND REQUIREMENTS & ACCRETIONS
|
|
|
222
|
|
|
219
|
|
|
649
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(691
|
)
|
$
|
(1,552
|
)
|
$
|
692
|
|
$
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
Discontinued
Operations
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Net
Income (Loss)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic
|
|
|
29,499,000
|
|
|
28,405,000
|
|
|
29,497,000
|
|
|
27,380,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
Operations
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
Discontinued
Operations
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
$
|
0.00
|
|
Net
Income (Loss)
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Diluted
|
|
|
29,499,000
|
|
|
28,405,000
|
|
|
31,376,000
|
|
|
27,380,000
|
|
See
accompanying notes to condensed consolidated financial statements.
Nine
Months Ended September 30, 2005
(000’s)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid
in
|
|
Accumulated
|
|
Other
Comprehensive
|
|
Deferred
|
|
Total
Stockholder’s
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Compensation
|
|
Equity
|
|
BALANCES,
December 31, 2004
|
|
|
53
|
|
$
|
—
|
|
|
29,439
|
|
$
|
—
|
|
$
|
70,888
|
|
$
|
(68,510
|
)
|
$
|
(873
|
)
|
$
|
(325
|
)
|
$
|
1,180
|
|
Preferred
stock dividends accrued
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
649
|
|
|
(649
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization
of deferred compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
75
|
|
Stock
options and grants expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
67
|
|
Restricted
stock issued
|
|
|
—
|
|
|
—
|
|
|
60
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,341
|
|
|
—
|
|
|
—
|
|
|
1,341
|
|
Foreign
currency translation loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(361
|
)
|
|
—
|
|
|
(361
|
)
|
Comprehensive
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
980
|
|
BALANCES,
September 30, 2005
|
|
|
53
|
|
$
|
—
|
|
|
29,499
|
|
$
|
—
|
|
$
|
71,604
|
|
$
|
(67,818
|
)
|
$
|
(1,234
|
)
|
$
|
(250
|
)
|
$
|
2,302
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000’s)
(Unaudited)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,341
|
|
$
|
(842
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
592
|
|
|
780
|
|
Other
non-cash charges
|
|
|
142
|
|
|
361
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
4,106
|
|
|
7,416
|
|
Prepaid
expenses and other current assets
|
|
|
172
|
|
|
(133
|
)
|
Net
assets/liabilities of discontinued operations
|
|
|
—
|
|
|
(150
|
)
|
Other
assets
|
|
|
275
|
|
|
—
|
|
Accounts
payable and accrued liabilities
|
|
|
(4,959
|
)
|
|
(2,615
|
)
|
Net
cash provided by operating activities
|
|
|
1,669
|
|
|
4,817
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Property
and equipment additions
|
|
|
(170
|
)
|
|
(339
|
)
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
18
|
|
Net
cash used in investing activities
|
|
|
(170
|
)
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
of subordinated debt
|
|
|
(900
|
)
|
|
(2,000
|
)
|
Impact
of foreign currency on cash
|
|
|
(361
|
)
|
|
(434
|
)
|
Net
increase in cash and cash equivalents
|
|
|
238
|
|
|
2,062
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
1,428
|
|
|
1,543
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
1,666
|
|
$
|
3,605
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
539
|
|
$
|
948
|
|
Cash
paid for income taxes
|
|
|
142
|
|
|
1,194
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Stock
and warrant accretions
|
|
|
—
|
|
|
13
|
|
Deferred
compensation
|
|
|
75
|
|
|
140
|
|
Common
stock issued for debt modification
|
|
|
—
|
|
|
1,088
|
|
Preferred
stock dividends accrued
|
|
|
649
|
|
|
522
|
|
See
accompanying notes to condensed consolidated financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information
and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do
not
include all information and notes required by accounting principles generally
accepted in the United States of America for complete annual financial
statements. The accompanying condensed consolidated financial statements include
all adjustments, including normal recurring accruals, which, in the opinion
of
management, are necessary in order to make the condensed consolidated financial
statements not misleading. The unaudited condensed consolidated financial
statements and notes thereto and the other financial information contained
in
this report should be read in conjunction with the audited financial statements
and notes in the Company’s annual report on Form 10-K for the year ended
December 31, 2004, and those reports filed previously with the Securities and
Exchange Commission (“SEC”). The results of operations for the three and nine
month periods ended September 30, 2005 are not necessarily indicative of the
results to be expected for the full year. Certain reclassifications have been
made to the prior period consolidated financial statements to conform to current
period presentation.
B.
RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2004, the FASB re-issued SFAS No. 123 “Share Based Payments,” (“SFAS
123R”) that addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for equity instruments
of
the company, such as stock options and restricted stock. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25 and requires instead that such transactions be accounted for
using a fair value based method. The Company currently accounts for stock-based
compensation using the intrinsic method pursuant to APB Opinion No. 25. SFAS
123R requires that all stock-based payments to employees, including grants
of
stock options and restricted stock, be recognized as compensation expense in
the
financial statements based on their fair values. The Company will be required
to
apply SFAS 123R beginning in the fiscal quarter ending March 31, 2006. The
Company is currently assessing the provisions of SFAS 123R and its implications
on the consolidated financial statements.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3.
SFAS
No. 154 changes the requirements for accounting and reporting on a change in
accounting principle,
while
carrying forward the guidance in APB
Opinion No. 20, Accounting
Changes
and FASB
Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements,
with
respect to accounting for changes in estimates, changes in the reporting entity,
and the correction of errors.
APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change, the
cumulative effect of changing to the new accounting principle. SFAS No. 154
requires retrospective application to prior periods’ financial statements for
voluntary changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The
impact of SFAS No. 154 will depend on accounting change, if any, that occurs
in
a future period.
C.
LONG-TERM DEBT AND NOTES PAYABLE
The
remaining balance of the Company’s amended subordinated facility with Prudential
as of September 30, 2005 of $5,100,000 is payable in equal quarterly
installments through the final maturity date of December 31, 2009. The agreement
limits additional borrowings to an aggregate of $3,000,000. At September 30,
2005, and through the date of this document, the Company is in compliance with
all of its financial covenants.
On
April
9, 2002, the Company entered into a loan participation agreement under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC, which
was acquired by San Juan Investments. The Company borrowed $750,000 on that
day
and the amount remains outstanding as of September 30, 2005. The loan is now
classified as a current liability and will be due on April 9, 2006.
Substantially all of the Company’s assets are pledged as collateral under the
senior debt agreement.
D.
COMMITMENTS AND CONTINGENCIES
The
Company is involved in or threatened with various legal proceedings from time
to
time arising in the ordinary course of business. Management does not believe
that any liabilities resulting from any such proceedings will have a material
adverse effect on its operations or financial position.
E.
EARNINGS PER SHARE
Basic
and
diluted income (loss) per common share is computed by dividing net income (loss)
attributable to common stockholders by the weighted average common shares
outstanding. The weighted average number of shares used to compute basic and
diluted earnings per share for the three and nine months ended September, 2005
and 2004 is set forth below (in thousands):
|
|
For
the three months ended September 30,
|
|
For
the nine months ended September 30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss) from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
attributable to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders
|
|
$
|
(691
|
)
|
$
|
(1,552
|
)
|
$
|
692
|
|
$
|
(1,377
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
basic earnings per share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares
|
|
|
29,499
|
|
|
28,405
|
|
|
29,497
|
|
|
27,380
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and warrants
|
|
|
—
|
|
|
—
|
|
|
1,879
|
|
|
—
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
diluted earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares
|
|
|
29,499
|
|
|
28,405
|
|
|
31,376
|
|
|
27,380
|
|
The
exercise price of the Company’s stock options and stock warrants varies from
$0.67 to $5.00 per share. The Company’s convertible securities have a conversion
price of $3.00. Assuming that exercises and conversions are made at the lowest
price provided under the terms of their agreements, the maximum number of
potentially dilutive securities at September 30, 2005, and 2004 would include:
(1) 5,585,000 and 1,323,000 common shares respectively, issuable upon exercise
of stock options, (2) 2,572,000 and 2,932,000, common shares respectively,
issuable upon exercise of stock purchase warrants, (3) 330,000 and 540,000
shares of common stock, respectively, to be issued as compensation over a four
year vesting period as earned, and (4) 96,000 and 87,000 common shares,
respectively, issuable upon conversion of convertible preferred stock. The
actual numbers may be substantially less depending on the market price of the
Company’s common stock at the time of conversion.
F.
EMPLOYEE BASED STOCK COMPENSATION
The
Company accounts for stock-based compensation granted under its long-term
incentive plan using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and
related interpretations. Stock-based compensation expense associated with option
grants were not recognized in the net income (loss) for the three and nine
month
periods ended September 30, 2005 and 2004, as all options granted had exercise
prices equal to the market value of the underlying common stock on the dates
of
grant.
The
following table illustrates the effect on net income (loss) and earnings (loss)
per share if the Company had applied the fair value recognition provisions
of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation":
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
September
30, 2005
|
|
September
30, 2004
|
|
Net
income (loss) attributable to common stockholders as
reported
|
|
$
|
(691
|
)
|
$
|
(1,552
|
)
|
$
|
692
|
|
$
|
(1,377
|
)
|
Less
total stock based employee compensation expense determined under
fair
value method for all awards, net of tax related effects
|
|
|
247
|
|
|
14
|
|
|
739
|
|
|
43
|
|
Pro
forma net loss attributable to common stockholders
|
|
$
|
(938
|
)
|
$
|
(1,566
|
)
|
$
|
(47
|
)
|
$
|
(1,420
|
)
|
Basic
net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
Pro
forma
|
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
0.00
|
|
$
|
(0.05
|
)
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.02
|
)
|
$
|
(0.05
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
Pro
forma
|
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
0.00
|
|
$
|
(0.05
|
)
|
The
company used the Black-Scholes option pricing model to estimate the fair value
of options on the date of grant. The following assumptions were applied in
determining the pro forma compensation costs:
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
Risk-free
interest rate
|
|
|
3.4
|
%
|
|
3.4
|
%
|
Expected
dividend yield
|
|
|
―
|
|
|
―
|
|
Expected
option life
|
|
|
3
yrs
|
|
|
3
yrs
|
|
Expected
volatility
|
|
|
71.5
|
%
|
|
62.4
|
%
|
Weighted
average fair value of options granted
at market value
|
|
$
|
0.43
|
|
$
|
0.33
|
|
G.
BUSINESS SEGMENT INFORMATION
The
operating segments are Prevention and Response. The Prevention segment consists
of "non-event" services that are designed to reduce the number and severity
of
critical well events to oil and gas operators. The scope of these services
includes training, contingency planning, well plan reviews, services associated
with the Company's Safeguard programs and services in conjunction with the
WELLSURE®
risk
management program. All of these services are designed to significantly reduce
the risk of a well blowout or other critical response event.
The
Response segment consists of personnel and equipment services provided during
an
emergency response such as a critical well event. These services are designed
to
minimize response time and damage while maximizing safety.
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 expenses have been allocated between segments pro rata based
on
relative revenues. Operating expenses and depreciation have been charged to
each
segment based upon specific identification of expense and an allocation of
remaining non-segment specific expenses pro rata between segments based upon
relative revenues.
Information
concerning operations in the two business segments for the three and nine months
ended September 30, 2005 and 2004 is presented below (in
thousands).
|
|
Prevention
|
|
Response
|
|
Consolidated
|
|
Three
Months Ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Revenues
|
|
$
|
3,109
|
|
$
|
1,503
|
|
$
|
4,612
|
|
Operating
Income (Loss)
|
|
|
203
|
|
|
(93
|
)
|
|
110
|
|
Identifiable
Operating Assets
|
|
|
5,966
|
|
|
7,690
|
|
|
13,656
|
|
Capital
Expenditures
|
|
|
41
|
|
|
41
|
|
|
82
|
|
Depreciation
and Amortization
|
|
|
86
|
|
|
66
|
|
|
152
|
|
Interest
Expense and Other, net
|
|
|
58
|
|
|
27
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Revenues
|
|
$
|
1,947
|
|
$
|
1,361
|
|
$
|
3,308
|
|
Operating
Income (Loss)
|
|
|
(332
|
)
|
|
(422
|
)
|
|
(754
|
)
|
Identifiable
Operating Assets
|
|
|
6,495
|
|
|
8,638
|
|
|
15,133
|
|
Capital
Expenditures
|
|
|
101
|
|
|
135
|
|
|
236
|
|
Depreciation
and Amortization
|
|
|
121
|
|
|
158
|
|
|
279
|
|
Interest
Expense and Other, net
|
|
|
147
|
|
|
162
|
|
|
309
|
|
|
|
Prevention
|
|
Response
|
|
Consolidated
|
|
Nine
Months Ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Revenues
|
|
$
|
10,339
|
|
$
|
13,325
|
|
$
|
23,664
|
|
Operating
Income
|
|
|
1,936
|
|
|
805
|
|
|
2,741
|
|
Identifiable
Operating Assets
|
|
|
5,966
|
|
|
7,690
|
|
|
13,656
|
|
Capital
Expenditures
|
|
|
74
|
|
|
96
|
|
|
170
|
|
Depreciation
and Amortization
|
|
|
238
|
|
|
354
|
|
|
592
|
|
Interest
Expense and Other, net
|
|
|
208
|
|
|
315
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
Net
Operating Revenues
|
|
$
|
6,294
|
|
$
|
8,361
|
|
$
|
14,655
|
|
Operating
Income (Loss)
|
|
|
(595
|
)
|
|
1,320
|
|
|
725
|
|
Identifiable
Operating Assets
|
|
|
6,495
|
|
|
8,638
|
|
|
15,133
|
|
Capital
Expenditures
|
|
|
145
|
|
|
194
|
|
|
339
|
|
Depreciation
and Amortization
|
|
|
298
|
|
|
482
|
|
|
780
|
|
Interest
Expense and Other, net
|
|
|
227
|
|
|
459
|
|
|
686
|
|
The Company’s response revenue stream is event driven and unpredictable, making
it difficult to determine a trend from quarter to quarter in revenues and
country to country distribution of revenues. During the third quarter 2004
foreign revenues of 0% and 25% of total revenues were generated from Iraq and
Venezuela, respectively. During the third quarter 2005 foreign revenues of
0%
and 12% of total revenues were generated from Iraq and Venezuela, respectively.
For the nine months ended September 30, 2005 foreign revenues of 51% and 14%
of
total revenues were generated from Iraq and Venezuela, respectively. For the
nine months ended September 30, 2004 foreign revenues of 16% and 27% of total
revenues were generated from Iraq and Venezuela, respectively.
At
September 30, 2005, two Algerian customers accounted for 24% of the outstanding
accounts receivable and one Venezuelan customer accounted for 27% of the
outstanding accounts receivable. The Company does not consider this
concentration to represent significant credit risk given the nature of the
customers and their payment history.
ITEM
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking
statements
The
Private Securities Litigation Reform Act of 1995 provides safe harbor provisions
for forward-looking information. Forward-looking information is based on
projections, assumptions and estimates, not historical information. Some
statements in this Form 10-Q are forward-looking and use words like “may,” “may
not,” “believes,” “do not believe,” “expects,” “do not expect,” “do not
anticipate,” and other similar expressions. We may also provide oral or written
forward-looking information on other materials we release to the public.
Forward-looking information involves risks and uncertainties and reflects our
best judgment based on current information. Our results of operations can be
affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. In addition, other factors may affect the accuracy of our
forward-looking information. As a result, no forward-looking information can
be
guaranteed. Actual events and results of operations may vary
materially.
While
it
is not possible to identify all factors, we face many risks and uncertainties
that could cause actual results to differ from our forward-looking statements
including those contained in this 10-Q, our press releases and our Forms 10-Q,
8-K and 10-K filed with the United States Securities and Exchange Commission.
We
do not assume any responsibility to publicly update any of our forward-looking
statements regardless of whether factors change as a result of new information,
future events or for any other reason.
Overview
The
operating segments are Prevention and Response. The
Prevention segment consists of "non-event" services that are designed to reduce
the number and severity of critical well events to oil and gas operators. The
scope of these services includes training, contingency planning, well plan
reviews, services associated with the Company's Safeguard programs and services
in conjunction with the WELLSURE® risk management program. All of these services
are designed to significantly reduce the risk of a well blowout or other
critical response event.
The
Response segment consists of personnel and equipment services provided during
an
emergency response such as a critical well event or a hazardous material
response. These services are designed to minimize response time and mitigate
damage while maximizing safety.
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 expenses have been allocated between segments pro rata based
on
relative revenues. Operating expenses and depreciation have been charged to
each
segment based upon specific identification of expense and an allocation of
remaining non-segment specific expenses pro rata between segments based upon
relative revenues.
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 considers its most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue
Recognition -
Revenue
is recognized on the Company’s service contracts primarily on the basis of
contractual day rates as the work is completed. Revenue and cost from product
and equipment sales are recognized upon customer acceptance and contract
completion. Revenue from reimbursement of subcontractor costs are recognized
on
the basis of contractual day rates as the work is completed.
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.
The
Company recognizes revenues under the WELLSURE®
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. A valuation allowance
is established for deferred tax assets if it is more likely than not that such
assets will not be realized.
Recently
Issued Accounting Standards
- In
December 2004, the FASB re-issued SFAS No. 123 “Share Based Payments,” (“SFAS
123R”) that addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for equity instruments
of
the company, such as stock options and restricted stock. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB
Opinion No. 25 and requires instead that such transactions be accounted for
using a fair value based method. The Company currently accounts for stock-based
compensation using the intrinsic method pursuant to APB Opinion No. 25. SFAS
123R requires that all stock-based payments to employees, including grants
of
stock options and restricted stock, be recognized as compensation expense in
the
financial statements based on their fair values. The Company will be required
to
apply SFAS 123R beginning in the fiscal quarter ending March 31, 2006. The
Company is currently assessing the provisions of SFAS 123R and its implications
on the consolidated financial statements.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB
Statement No. 3.
SFAS
No. 154 changes the requirements for accounting and reporting on a change in
accounting principle,
while
carrying forward the guidance in APB
Opinion No. 20, Accounting
Changes
and FASB
Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements,
with
respect to accounting for changes in estimates, changes in the reporting entity,
and the correction of errors.
APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change, the
cumulative effect of changing to the new accounting principle. SFAS No. 154
requires retrospective application to prior periods’ financial statements for
voluntary changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The
impact of SFAS No. 154 will depend on accounting change, if any, that occurs
in
a future period.
Results
of operations
The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto and
the
other financial information included in this report and contained in the
Company’s periodic reports previously filed with the SEC.
Information
concerning operations in different business segments for the three and nine
months ended September 30, 2005 and 2004 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
period presentation.
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
3,109
|
|
$
|
1,947
|
|
$
|
10,339
|
|
$
|
6,294
|
|
Response
|
|
|
1,503
|
|
|
1,361
|
|
|
13,325
|
|
|
8,361
|
|
|
|
$
|
4,612
|
|
$
|
3,308
|
|
$
|
23,664
|
|
$
|
14,655
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
1,404
|
|
$
|
740
|
|
$
|
4,572
|
|
$
|
2,999
|
|
Response
|
|
|
442
|
|
|
235
|
|
|
7,948
|
|
|
2,412
|
|
|
|
$
|
1,846
|
|
$
|
975
|
|
$
|
12,520
|
|
$
|
5,411
|
|
Operating
Expenses(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
1,051
|
|
$
|
895
|
|
$
|
2,724
|
|
$
|
2,431
|
|
Response
|
|
|
791
|
|
|
875
|
|
|
3,098
|
|
|
2,602
|
|
|
|
$
|
1,842
|
|
$
|
1,770
|
|
$
|
5,822
|
|
$
|
5,033
|
|
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
Expenses
(2)
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
365
|
|
$
|
523
|
|
$
|
869
|
|
$
|
1,161
|
|
Response
|
|
|
297
|
|
|
515
|
|
|
1,120
|
|
|
1,545
|
|
|
|
$
|
662
|
|
$
|
1,038
|
|
$
|
1,989
|
|
$
|
2,706
|
|
Depreciation
and Amortization (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
86
|
|
$
|
121
|
|
$
|
238
|
|
$
|
298
|
|
Response
|
|
|
66
|
|
|
158
|
|
|
354
|
|
|
482
|
|
|
|
$
|
152
|
|
$
|
279
|
|
$
|
592
|
|
$
|
780
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prevention
|
|
$
|
203
|
|
$
|
(332
|
)
|
$
|
1,936
|
|
$
|
(595
|
)
|
Response
|
|
|
(93
|
)
|
|
(422
|
)
|
|
805
|
|
|
1,320
|
|
|
|
$
|
110
|
|
$
|
(754
|
)
|
$
|
2,741
|
|
$
|
725
|
|
_________________________________
|
(1)
|
Operating
expenses and depreciation have been charged to each segment based
upon
specific identification of expenses and an allocation of remaining
non-segment specific expenses pro rata between segments based upon
relative revenues.
|
|
(2)
|
Selling,
general and administrative expenses have been allocated pro rata
between
segments based upon relative
revenues.
|
Comparison
of the Three Months Ended September 30, 2005 with the Three Months Ended
September 30, 2004
Revenues
Prevention
revenues were $3,109,000 for the quarter ended September 30, 2005, compared
to
$1,947,000 for the three months ended September 30, 2004, representing increase
of $1,162,000 (59.7%) in the current quarter. The increase was primarily the
result of the Company performing work under its SafeGuard agreement in Algeria,
partially offset by a decrease in service fees generated from the Company’s
WELLSURE®
program
and a reduction in Venezuelan activity.
Response
revenues were $1,503,000 for the quarter ended September 30, 2005, compared
to
$1,361,000 for the three months ended September 30, 2004, increase of $142,000
(10.4%) in the current quarter. This increase was primarily the result of
activity in India, WELLSURE®
client
events and activity related to hurricane Katrina in the Gulf of Mexico.
Cost
of Sales
Prevention
cost of sales were $1,404,000 for the quarter ended September 30, 2005, compared
to $740,000 for the quarter ended September 30, 2004, an increase of $664,000
(89.7%) in the current quarter. The increase is due to the increased variable
expenses associated with the increased SafeGuard revenue in Algeria offset
by
decreased variable expense in the Venezuelan operation.
Response
cost of sales were $442,000 for the quarter ended September 30, 2005, compared
to $235,000 for the quarter ended September 30, 2004, an increase of $207,000
(88.1%) in the current quarter. This increase was due to higher subcontractor
costs in the current quarter as compared to the prior year.
Operating
Expenses
Consolidated
operating expenses were $1,842,000 for the quarter ended September 30, 2005,
compared to $1,770,000 for the quarter ended September 30, 2004, an increase
of
$72,000 (4.1%) in the current quarter. This increase is due to increased
business development expense, accrued incentive compensation expense and
administrative costs associated with international business activities. As
previously footnoted on the segmented financial table, operating expenses have
been charged to each segment based upon specific identification of expenses
and
an allocation of remaining non-segment specific expenses pro rata between
segments based upon relative revenues.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses were $662,000 for the quarter
ended
September 30, 2005, compared to $1,038,000 for the quarter ended September
30,
2004, a decrease of $376,000 (36.2%) from the prior year’s quarter. This
decrease is primarily related to reduced litigation expense compared to 2004
slightly offset by increases in costs related to compliance with the Sarbanes
Oxley Act of 2002 and related regulatory requirements. As previously footnoted
on the segmented financial table, selling, general and administrative expenses
have been allocated pro rata between segments based upon relative
revenue.
Depreciation
Consolidated
depreciation and amortization expense decreased by $127,000 in the quarter
ended
September 30, 2005 compared to the 2004 quarter, as a result of certain assets
being fully depreciated by year end 2004. As previously footnoted on the
segmented financial table, depreciation has been charged to each segment based
upon allocation of expenses pro rata between segments based upon relative
revenues.
Interest
Expense and Other, Net
Changes
in interest expense and other, net of $224,000 for the quarter ended September
30, 2005, as compared to the prior year quarter are set forth in the table
below
(in thousands):
|
|
For
the Three Months Ended
|
|
|
|
September
30, 2005
|
|
September
30, 2004
|
|
Financing
fees
|
|
$
|
—
|
|
$
|
190
|
|
Interest
expense - senior debt
|
|
|
13
|
|
|
13
|
|
Interest
on subordinated notes
|
|
|
162
|
|
|
289
|
|
Interest
credit related to December
2000
subordinated debt restructuring
|
|
|
(81
|
)
|
|
(245
|
)
|
Interest
income on cash investments
|
|
|
(10
|
)
|
|
—
|
|
Gain
on foreign exchange
|
|
|
—
|
|
|
(3
|
)
|
Amortization
of deferred loan costs
|
|
|
51
|
|
|
—
|
|
Legal
settlements and other
|
|
|
(50
|
)
|
|
65
|
|
Total
Interest and Other, net
|
|
$
|
85
|
|
$
|
309
|
|
Income
Tax Expense
Income
taxes for the quarter ended September 30, 2005 and 2004 were $494,000 and
$247,000, respectively, and are a result of taxable income in the Company’s
foreign operations.
Comparison
of the Nine Months Ended September 30, 2005 with the Nine Months Ended September
30, 2004
Revenues
Prevention
revenues were $10,339,000 for the nine months ended September 30, 2005, compared
to $6,294,000 for the nine months ended September 30, 2004, representing an
increase of $4,045,000 (64.3%) in the current period. The increase was primarily
the result of the Company performing work under its SafeGuard agreements in
Algeria and a moderate increase in service fees generated from the Company’s
WELLSURE®
program.
These increases were offset by a reduction in Venezuelan activity.
Response
revenues were $13,325,000 for the nine months ended September 30, 2005, compared
to $8,361,000 for the nine months ended September 30, 2004, an increase of
$4,964,000 (59.4%) in the current period. This increase was the result of
revenues from response to critical well events in Iraq, which includes pass
through subcontractor costs of $5,341,000 related to subcontractor charges
incurred for field personnel security, partially offset by a general reduction
in response activity levels during the second quarter. The revenue resulting
from the pass through of subconatractors costs reduces operating margins for
the
quarter compared to normalized operating levels.
Cost
of Sales
Prevention
cost of sales were $4,572,000 for the nine months ended September 30, 2005,
compared to $2,999,000 for the nine months ended September 30, 2004, an increase
of $1,573,000 (52.5%) in the current period. The increase is due to the
increased variable expense associated with the increased revenue in Algeria
and
the Company’s WELLSURE®
program
offset by decreased variable expense in the Venezuelan operation.
Response
cost of sales were $7,948,000 for the nine months ended September 30, 2005,
compared to $2,412,000 for the nine months ended September 30, 2004, an increase
of $5,536,000 (229.5%) in the current period. This increase was the result
of
subcontractor costs of $5,341,000 for field personnel security related to Iraq
response activities. The subcontractor costs were third party pass-through
charges.
Operating
Expenses
Consolidated
operating expenses were $5,822,000 for the nine months ended September 30,
2005,
compared to $5,033,000 for the nine months ended September 30, 2004, an increase
of $789,000 (15.7%) in the current period. This increase is due to increased
business development expense, accrued incentive compensation expense and
administrative costs associated with international business activities. As
previously footnoted on the segmented financial table, operating expenses have
been charged to each segment based upon specific identification of expenses
and
an allocation of remaining non-segment specific expenses pro rata between
segments based upon relative revenues.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses were $1,989,000 for the nine months
ended September 30, 2005, compared to $2,706,000 for the nine months ended
September 30, 2004, a decrease of $717,000 (26.5%) from the prior period. This
decrease is primarily related to reduced litigation expense compared to 2004
partially offset by increases in costs related to compliance with the Sarbanes
Oxley Act of 2002 and related regulatory requirements. As previously footnoted
on the segmented financial table, selling, general and administrative expenses
have been allocated pro rata between segments based upon relative
revenue.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense decreased by $188,000 in the nine months
ended September 30, 2005 compared to the 2004 period, as a result of certain
assets being fully depreciated by year end 2004. As previously footnoted on
the
segmented financial table, depreciation has been charged to each segment based
upon allocation of expenses pro rata between segments based upon relative
revenues.
Interest
Expense and Other, Net
Changes
in interest expense and other, net of $163,000 for the nine months ended
September 30, 2005, as compared to the prior period are set forth in the table
below (in thousands):
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
2005
|
|
September
30, 2004
|
|
Financing
fees
|
|
$
|
—
|
|
$
|
190
|
|
Interest
expense - senior debt
|
|
|
39
|
|
|
60
|
|
Interest
on subordinated note
|
|
|
513
|
|
|
867
|
|
Interest
credit related to December 2000 subordinated debt
restructuring
|
|
|
(256
|
)
|
|
(677
|
)
|
Interest
expense on financing agreements
|
|
|
46
|
|
|
—
|
|
Interest
income on cash investments
|
|
|
(34
|
)
|
|
—
|
|
Gain
on foreign exchange
|
|
|
(14
|
)
|
|
(104
|
)
|
Amortization
of deferred loan costs
|
|
|
152
|
|
|
—
|
|
Legal
Settlements and other
|
|
|
77
|
|
|
350
|
|
Total
Interest and Other, net
|
|
$
|
523
|
|
$
|
686
|
|
Income
taxes for the nine months ended September 30, 2005 and 2004 were $877,000 and
$856,000, respectively, and are a result of taxable income in the Company’s
foreign operations.
Liquidity
and Capital Resources/Industry Conditions
Liquidity
At
September 30, 2005, the Company had working capital of $2,520,000, including
a
cash balance of $1,666,000. The Company ended the quarter with stockholders’
equity of $2,302,000. For the nine months ended September 30, 2005, the Company
generated operating income of $2,741,000 and net cash provided from operating
activities of $1,669,000. Net cash used in investing activities was $170,000
and
payments of debt were $900,000.
The
Company generates its revenues from prevention and emergency response services.
Response services are generally associated with a specific well control
emergency or critical “event” whereas prevention services are generally
“non-event” related. The frequency and scale of occurrence for response services
varies widely and is inherently unpredictable. There is little statistical
correlation between common market activity indicators such as commodity pricing,
activity forecasts, E&P operating budgets and resulting response revenues.
Non-event services provide a more predictable base of revenues. Historically
the
Company has relied upon event driven services as the primary source of its
operating revenues, but more recently the Company’s strategy has been to achieve
greater balance between event and non-event service revenues. While the Company
has successfully improved this balance, a significant level of event related
services is still a required source of revenues and operating income for the
Company.
On
September 30, 2005, the Company had $951,000 cash and $1,847,000 accounts
receivable attributable to its Venezuelan SafeGuard operations. Of this cash,
$457,000 was denominated in U.S. Dollars and resided in a U.S. bank. Effective
February 5, 2004, the exchange rate changed from 1,600 to 1,920 Bolivars to
the
U.S. dollar and effective March 1, 2005, the exchange rate changed again from
1,920 to 2,150 Bolivars to the U.S. dollar. The Company has taken a charge
to
equity under the caption “foreign currency translation loss” for approximately
$361,000 and $434,000 during the nine months ended September 30, 2005 and 2004,
respectively, to reflect the devaluation of the Bolivar. Venezuela is also
on
the U.S. government’s “watch list” for highly inflationary economies. The
Venezuelan government has made it very difficult for U.S. dollars to be
repatriated. The Company is monitoring the situation closely.
Disclosure
of on and off balance sheet debts and commitments:
Future
commitments (000’s)
|
|
Description
|
|
TOTAL
|
|
Less
than 1 year
|
|
1-3years
|
|
4-5
years
|
|
More
than 5
years
|
|
Long
and short term debt and notes payable
|
|
$
|
5,850
|
|
$
|
1,950
|
|
$
|
2,400
|
|
$
|
1,500
|
|
|
—
|
|
Related
accrued non-cash interest
|
|
$
|
674
|
|
$
|
278
|
|
$
|
335
|
|
$
|
61
|
|
|
—
|
|
Future
minimum lease Payments
|
|
$
|
46
|
|
$
|
22
|
|
$
|
24
|
|
$
|
—
|
|
|
—
|
|
Total
commitments
|
|
$
|
6,570
|
|
$
|
2,250
|
|
$
|
2,759
|
|
$
|
1,561
|
|
|
—
|
|
Credit
Facilities/Capital Resources
The
remaining balance of the Company’s amended subordinated facility with Prudential
as of September 30, 2005 of $5,100,000 is payable in equal quarterly
installments through the final maturity date of December 31, 2009. The agreement
limits additional borrowings to an aggregate of $3,000,000. At September 30,
2005, and through the date of this document, the Company is in compliance with
all of its financial covenants.
On
April
9, 2002, the Company entered into a loan participation agreement under its
existing Senior Secured Loan Facility with Specialty Finance Fund I, LLC, which
was acquired by San Juan Investments. The Company borrowed $750,000 on that
day
and the amount remains outstanding as of September 30, 2005. The loan is now
classified as a current liability and will be due on April 9, 2006.
Substantially all of the Company’s assets are pledged as collateral under the
senior debt agreement.
The
Company’s debt consists of fixed-interest rate debt only and has no exposure to
market interest rate fluctuations.
The
Company operates internationally, giving rise to exposure to market risks from
changes in foreign exchange rates to the extent that transactions are not
denominated in U.S. dollars. The Company typically endeavors to denominate
its
contracts in U.S. dollars to mitigate exposure to fluctuations in foreign
currencies. On September 30, 2005, the Company had $951,000 cash and $1,847,000
accounts receivable attributable to its Venezuelan SafeGuard operations. Of
this
cash, $457,000 was denominated in U.S. Dollars and resided in a U.S. bank.
Effective February 5, 2004, the exchange rate changed from 1,600 to 1,920
Bolivars to the U.S. dollar and effective March 1, 2005, the exchange rate
changed again from 1,920 to 2,150 Bolivars to the U.S. dollar. The Company
has
taken a charge to equity under the caption “foreign currency translation loss”
for approximately $361,000 and $434,000 during the nine months ended September
30, 2005 and 2004, respectively, to reflect the devaluation of the Bolivar.
Venezuela is also on the U.S. government’s “watch list” for highly inflationary
economies. The Venezuelan government has made it very difficult for U.S. dollars
to be repatriated. The Company is monitoring the situation closely.
Under
the
supervision and with the participation of our management, including our chief
executive officer and senior vice president - finance and administration, we
conducted an evaluation of the effectiveness of the design and operation of
our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”),
as of September 30, 2005. Our chief executive officer and senior vice president
- finance and administration concluded, based upon their evaluation, that our
disclosure controls and procedures are effective and ensure that we disclose
the
required information in reports that we file under the Exchange Act and that
the
filings are recorded, processed, summarized and reported with the time periods
specified in SEC rules and forms despite the material weaknesses identified
by
our independent auditors as disclosed in our Form 10-K for the year ended
December 31, 2004 and filed with the Securities and Exchange commission on
March
31, 2005. Our chief executive officer and senior vice president - finance and
administration reached this conclusion after giving consideration to
communications received from our independent auditors and the disclosure
controls and procedures as they existed during the periods covered by the
financial statements.
PART
II
The
Company is involved in or threatened with various legal proceedings from time
to
time arising in the ordinary course of business. The Company does not believe
that any liabilities resulting from any such proceedings will have a material
adverse effect on its operations or financial position.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
None
Item
3. Default
Upon Senior Securities
None
Item
4. Submissions
of Matters to a Vote of Security Holders
None.
Item
5. Other
Information
None
Exhibit
No.
|
|
Document
|
|
|
―
|
§302
Certification by Jerry Winchester
|
|
|
—
|
§302
Certification by Dewitt H. Edwards
|
|
|
—
|
§906
Certification by Jerry Winchester
|
|
|
—
|
§906
Certification by Dewitt H. Edwards
|
|
*Filed
herewith
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
BOOTS
& COOTS INTERNATIONAL WELL
|
|
CONTROL,
INC.
|
|
|
|
By:
/s/ Jerry Winchester
|
|
Jerry
Winchester
|
|
Chief
Executive Officer
|
|
|
|
By:
/s/ Dewitt H. Edwards
|
|
Dewitt
H. Edwards
|
|
Senior
Vice President - Finance and
Administration
|
Date:
November 14, 2005
21