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 June 30, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filers (as defined in Exchange Act
Rule
(12b-2))
Large
Accelerated Filer o
|
|
Accelerated
Filer o
|
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o
No
x
The
number of shares of the Registrant's Common Stock, par value $.00001 per
share,
outstanding at August 14, 2006, was 58,748,821.
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
TABLE
OF CONTENTS
PART
I
FINANCIAL
INFORMATION
(Unaudited)
|
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
7
|
Item
2.
|
|
15
|
Item
3.
|
|
24
|
Item
4.
|
|
24
|
|
|
|
|
PART
II
OTHER
INFORMATION
|
|
Item
1.
|
|
25
|
Item
1A.
|
|
25
|
Item
2.
|
|
25
|
Item
3.
|
|
25
|
Item
4.
|
|
25
|
Item
5.
|
|
25
|
Item
6.
|
|
26
|
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(000’s
except share and per share amounts)
ASSETS
|
|
|
|
|
|
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
(unaudited)
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,402
|
|
$
|
2,564
|
|
Restricted
cash
|
|
|
303
|
|
|
30
|
|
Receivables,
net
|
|
|
21,113
|
|
|
6,142
|
|
Inventory
|
|
|
846
|
|
|
—
|
|
Prepaid
expenses and other current assets
|
|
|
4,633
|
|
|
1,862
|
|
Total
current assets
|
|
|
36,297
|
|
|
10,598
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
40,879
|
|
|
2,462
|
|
GOODWILL
|
|
|
4,304
|
|
|
—
|
|
OTHER
ASSETS
|
|
|
597
|
|
|
1,707
|
|
Total
assets
|
|
$
|
82,077
|
|
$
|
14,767
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Current
maturities of long term debt
|
|
$
|
1,940
|
|
$
|
2,250
|
|
Current
portion of accrued interest
|
|
|
—
|
|
|
259
|
|
Accounts
payable
|
|
|
4,422
|
|
|
376
|
|
Foreign
income tax payable
|
|
|
1,547
|
|
|
585
|
|
Accrued
liabilities
|
|
|
8,466
|
|
|
3,563
|
|
Total
current liabilities
|
|
|
16,375
|
|
|
7,033
|
|
LONG
TERM DEBT AND NOTES PAYABLE, net of current maturities
|
|
|
29,742
|
|
|
3,600
|
|
ACCRUED
INTEREST, net of current portion
|
|
|
—
|
|
|
339
|
|
DEFERRED
TAXES
|
|
|
5,110
|
|
|
—
|
|
OTHER
LIABILITIES
|
|
|
1,561
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
52,788
|
|
|
10,972
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (See Note F)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Preferred
stock ($.00001 par value, 5,000,000 shares authorized, 0 and 53,000
shares
issued and outstanding at June 30, 2006 and December 31, 2005,
respectively)
|
|
|
—
|
|
|
—
|
|
Common
stock ($.00001 par value, 125,000,000 shares authorized, 58,529,000
and
29,594,000 shares issued and outstanding at June 30, 2006 and December
31,
2005, respectively)
|
|
|
—
|
|
|
—
|
|
Additional
paid-in capital
|
|
|
93,202
|
|
|
71,859
|
|
Deferred
compensation
|
|
|
—
|
|
|
(225
|
)
|
Accumulated
other comprehensive loss
|
|
|
(1,234
|
)
|
|
(1,234
|
)
|
Accumulated
deficit
|
|
|
(62,679
|
)
|
|
(66,605
|
)
|
Total
stockholders' equity
|
|
|
29,289
|
|
|
3,795
|
|
Total
liabilities and stockholders' equity
|
|
$
|
82,077
|
|
$
|
14,767
|
|
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
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
23,472
|
|
$
|
4,762
|
|
$
|
34,992
|
|
$
|
19,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES, excluding depreciation and amortization
|
|
|
12,808
|
|
|
2,088
|
|
|
18,108
|
|
|
10,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
10,664
|
|
|
2,674
|
|
|
16,884
|
|
|
8,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
3,461
|
|
|
2,001
|
|
|
6,331
|
|
|
3,980
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
1,000
|
|
|
662
|
|
|
1,818
|
|
|
1,327
|
|
OTHER
OPERATING EXPENSES
|
|
|
94
|
|
|
—
|
|
|
112
|
|
|
—
|
|
DEPRECIATION
AND AMORTIZATION
|
|
|
1,456
|
|
|
219
|
|
|
2,028
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME (LOSS)
|
|
|
4,653
|
|
|
(208
|
)
|
|
6,595
|
|
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE AND OTHER, net
|
|
|
792
|
|
|
276
|
|
|
1,349
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE
INCOME TAXES
|
|
|
3,861
|
|
|
(484
|
)
|
|
5,246
|
|
|
2,193
|
|
INCOME
TAX EXPENSE
|
|
|
1,229
|
|
|
179
|
|
|
1,936
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
2,632
|
|
|
(663
|
)
|
|
3,310
|
|
|
1,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
DIVIDEND REQUIREMENTS AND ACCRETIONS
|
|
|
—
|
|
|
216
|
|
|
(616
|
)
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS
|
|
$
|
2,632
|
|
$
|
(879
|
)
|
$
|
3,926
|
|
$
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) per Common Share:
|
|
$
|
0.05
|
|
$
|
(0.03
|
)
|
$
|
0.08
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Basic
|
|
|
58,436,000
|
|
|
29,499,000
|
|
|
48,667,000
|
|
|
29,495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings (Loss) per Common Share:
|
|
$
|
0.04
|
|
$
|
(0.03
|
)
|
$
|
0.08
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding - Diluted
|
|
|
62,259,000
|
|
|
29,499,000
|
|
|
51,879,000
|
|
|
31,103,000
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
Six
Months Ended June 30, 2006
(Unaudited)
(000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
|
|
|
|
Other
|
|
|
|
Total
|
|
|
|
|
|
|
|
Paid
- in
|
|
Accumulated
|
|
Comprehensive
|
|
Deferred
|
|
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Compensation
|
|
Equity
|
|
BALANCES,
December 31, 2005
|
|
|
53
|
|
$
|
—
|
|
|
29,594
|
|
$
|
—
|
|
$
|
71,859
|
|
$
|
(66,605
|
)
|
$
|
(1,234
|
)
|
$
|
(225
|
)
|
$
|
3,795
|
|
Common
stock options exercised
|
|
|
—
|
|
|
—
|
|
|
308
|
|
|
—
|
|
|
206
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
206
|
|
Warrants
exercised
|
|
|
—
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common
stock issued for services
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Common
stock issued for acquisition of business
|
|
|
—
|
|
|
—
|
|
|
26,462
|
|
|
—
|
|
|
26,462
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,462
|
|
Preferred
stock dividends reversed
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(616
|
)
|
|
616
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reversal
of deferred compensation with adoption of SFAS 123(R)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(225
|
)
|
|
—
|
|
|
—
|
|
|
225
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
—
|
|
|
—
|
|
|
150
|
|
|
—
|
|
|
794
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
794
|
|
Conversion
of preferred stock to common stock
|
|
|
(53
|
)
|
|
—
|
|
|
1,936
|
|
|
—
|
|
|
(5,299
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,299
|
)
|
Net
income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,310
|
|
|
—
|
|
|
—
|
|
|
3,310
|
|
BALANCES,
June 30, 2006
|
|
|
—
|
|
$
|
—
|
|
|
58,529
|
|
$
|
—
|
|
$
|
93,202
|
|
$
|
(62,679
|
)
|
$
|
(1,234
|
)
|
$
|
—
|
|
$
|
29,289
|
|
See
accompanying notes to condensed consolidated financial statements.
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000’s)
(Unaudited)
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
3,310
|
|
$
|
1,810
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,028
|
|
|
440
|
|
Stock
based compensation
|
|
|
794
|
|
|
—
|
|
Recovery
of bad debt
|
|
|
(230
|
)
|
|
—
|
|
Troubled
debt restructuring interest accrual
|
|
|
(598
|
)
|
|
—
|
|
Amortization
of deferred loan costs
|
|
|
809
|
|
|
—
|
|
Other
non-cash charges
|
|
|
11
|
|
|
109
|
|
Changes
in operating assets and liabilities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,327
|
)
|
|
2,451
|
|
Inventory
|
|
|
(9
|
)
|
|
—
|
|
Prepaid
expenses and current assets
|
|
|
(2,618
|
)
|
|
686
|
|
Other
assets
|
|
|
301
|
|
|
235
|
|
Accounts
payables and accrued liabilities
|
|
|
1,218
|
|
|
(5,163
|
)
|
Net
cash provided by operating activities
|
|
|
3,689
|
|
|
568
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Cash
acquired in connection with the acquisition
|
|
|
4,366
|
|
|
—
|
|
Property
and equipment additions
|
|
|
(802
|
)
|
|
(88
|
)
|
Proceeds
from sale of property and equipment
|
|
|
12
|
|
|
—
|
|
Net
cash provided by (used in) investing activities
|
|
|
3,576
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Payments
of senior debt
|
|
|
(750
|
)
|
|
—
|
|
Payments
of subordinated debt
|
|
|
(5,100
|
)
|
|
(600
|
)
|
Payments
of term loan
|
|
|
(324
|
)
|
|
—
|
|
Revolving
credit borrowings
|
|
|
1,140
|
|
|
—
|
|
Proceeds
from term loan
|
|
|
9,700
|
|
|
—
|
|
Redemption
of preferred stock
|
|
|
(5,299
|
)
|
|
—
|
|
Stock
options exercised
|
|
|
206
|
|
|
—
|
|
Net
cash used in financing activities
|
|
|
(427
|
)
|
|
(600
|
)
|
Impact
of foreign currency on cash
|
|
|
—
|
|
|
(361
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
6,838
|
|
|
(481
|
)
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
2,564
|
|
|
1,428
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
9,402
|
|
$
|
947
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
1,251
|
|
$
|
377
|
|
Cash
paid for income taxes
|
|
|
2,775
|
|
|
66
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Preferred
stock dividends accrued (reversed)
|
|
|
(616
|
)
|
|
427
|
|
Common
stock issued for acquisition of business
|
|
|
26,462
|
|
|
—
|
|
Conversion
of preferred stock
|
|
|
1,936
|
|
|
—
|
|
Long
term notes issued for acquisition of business
|
|
|
21,614
|
|
|
—
|
|
See
accompanying notes to condensed consolidated financial
statements.
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements 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 our annual report on Form 10-K for the year ended December 31,
2005, and those reports filed previously with the Securities and Exchange
Commission (“SEC”). The results of operations for the three and six month
periods ended June 30, 2006 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.
SIGNIFICANT ACCOUNTING POLICIES
Stock
Based Compensation
- We
have adopted Statement of Financial Accounting Standards No. 123 (revised
2004),
“Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to
employees, consultants and directors; including employee stock options, based
on
estimated fair values. SFAS No. 123R supersedes our previous accounting under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005,
the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
No. 123R. We have applied the provisions of SAB 107 in our adoption of SFAS
No.
123R.
We
adopted SFAS No. 123R using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the
first day of our fiscal year 2006. Our condensed consolidated financial
statements as of and for the three and six months ended June 30, 2006 reflect
the impact of SFAS No. 123R. In accordance with the modified prospective
transition method, our Consolidated Financial Statements for prior periods
have
not been restated to reflect, and do not include, the impact of SFAS No.
123R.
Foreign
currency
-
Effective January 1, 2006, and related to our acquisition of the hydraulic
well
control business of Oil States International, Inc. (see ”Note C - Business
Combination” for more information), we changed our functional currency in
Venezuela from the Venezuelan Bolivar to the U.S. Dollar. This change allows
us
to have one consistent functional currency after the acquisition. Accumulated
other comprehensive loss reported in the consolidated statements of
stockholders’ equity before January 1, 2006 totaled $1.2 million and consisted
solely of the cumulative foreign currency translation adjustment in Venezuela
prior to changing our functional currency. The accounts of foreign subsidiaries
have been translated into U.S. Dollars in accordance with SFAS No. 52, “Foreign
Currency Translation.” Accordingly, foreign currency is translated to U.S.
dollars for financial purposes by using the U.S. Dollar as the functional
currency and exchange gains and losses, as well as translation gains and
losses,
are reported in income and expenses. These currency gains or losses are reported
as other operating expenses. Monetary balance sheet accounts are translated
using the current exchange rate in effect at the balance sheet date for assets
and liabilities, and for non-monetary items, the accounts are translated
at the
historical exchange rate in effect when acquired. Revenues and expenses are
translated at the average exchange rate for the period.
C.
DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
|
|
June
30,
2006
|
|
December
31,
2005
|
|
Accounts
receivable, net:
|
|
|
|
|
|
Trade
|
|
|
11,142
|
|
|
4,676
|
|
Unbilled
Revenue
|
|
|
9,352
|
|
|
1,772
|
|
Other
|
|
|
734
|
|
|
39
|
|
Allowance
for doubtful accounts
|
|
|
(115
|
)
|
|
(345
|
)
|
|
|
|
21,113
|
|
|
6,142
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
Land
|
|
|
571
|
|
|
136
|
|
Leasehold
|
|
|
2,801
|
|
|
734
|
|
Equipment
|
|
|
36,710
|
|
|
114
|
|
Firefighting
equipment
|
|
|
6,171
|
|
|
6,115
|
|
Furniture,
fixtures & office
|
|
|
1,206
|
|
|
970
|
|
Computer
systems
|
|
|
568
|
|
|
568
|
|
Vehicles
|
|
|
1,090
|
|
|
612
|
|
Construction
in progress
|
|
|
569
|
|
|
−
|
|
|
|
|
|
|
|
|
|
Total
property, plant and equipment
|
|
|
49,686
|
|
|
9,249
|
|
Less:
Accumulated depreciation
|
|
|
(8,807
|
)
|
|
(6,787
|
)
|
|
|
|
40,879
|
|
|
2,462
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
Prepaid
expenses and other assets:
|
|
|
|
|
|
Prepaid
Taxes
|
|
|
1,287
|
|
|
203
|
|
Prepaid
Insurance
|
|
|
2,290
|
|
|
546
|
|
Other
prepaid expenses and current assets
|
|
|
1,056
|
|
|
1,113
|
|
|
|
|
4,633
|
|
|
1,862
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
Accounts
payable:
|
|
|
|
|
|
Trade
accounts payable
|
|
|
3,053
|
|
|
376
|
|
Accrued
payables
|
|
|
1,369
|
|
|
−
|
|
|
|
|
4,422
|
|
|
376
|
|
|
|
June
30,
2006
|
|
December
31,
2005
|
|
Accrued
liabilities:
|
|
|
|
|
|
Accrued
compensation and benefits
|
|
|
2,637
|
|
|
860
|
|
Accrued
insurance
|
|
|
1,211
|
|
|
-
|
|
Accrued
taxes, other than foreign income tax
|
|
|
1,491
|
|
|
706
|
|
Other
accrued liabilities
|
|
|
3,127
|
|
|
1,997
|
|
|
|
|
8,466
|
|
|
3,563
|
|
D.
BUSINESS COMBINATION
On
March
3, 2006, we acquired the hydraulic well control business (HWC) of Oil States
International, Inc. (NYSE: OIS). The transaction was effective for accounting
and financial purposes as of March 1, 2006. As consideration for the
acquisition, we issued approximately 26.5 million shares, or approximately
45%,
of our common stock and subordinated promissory notes with an aggregate balance
of $15 million, adjusted to $21.2 million during the quarter ended June 30,
2006
to reflect a $6.2 million adjustment for working capital acquired.
In
accordance with SFAS No. 141, “Business
Combinations”,
we
used the purchase method to account for this transaction. Under the purchase
method of accounting, the assets acquired and liabilities assumed from HWC
are
recorded at the date of acquisition at their respective fair values. In
connection with the acquisition we engaged a valuation firm to assist in
determination of the fair value of certain assets and liabilities of HWC.
The
purchase price, including direct acquisition costs, exceeded the fair value
of
acquired assets and assumed liabilities, resulting in the recognition of
goodwill of approximately $4.3 million. The total purchase price, including
direct acquisition costs of $1.4 million less cash acquired of $4.4 million,
was
$44.7 million. The total purchase price decreased by $0.4 million in the
quarter
ended June, 30 2006 due to the settlement of the working capital adjustment,
pursuant to the purchase agreement. The operating results of HWC are included
in
the consolidated financial statements subsequent to the March 1, 2006 effective
date.
The
fair
values of the assets acquired and liabilities assumed effective March 1,
2006
were as follows:
Current
assets (excluding cash)
|
|
$
|
15,014
|
|
Property
and equipment
|
|
$
|
39,645
|
|
Goodwill
|
|
$
|
4,304
|
|
Total
assets acquired
|
|
$
|
58,963
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
9,198
|
|
Deferred
taxes
|
|
$
|
5,110
|
|
Total
liabilities assumed
|
|
$
|
14,308
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
44,655
|
|
In
accordance with the requirements of SFAS No. 142, “Goodwill and Other Intangible
Assets”, the goodwill associated with the acquisition will not be amortized, but
will be reviewed at least annually for impairment.
The
following unaudited pro forma financial information presents the combined
results of operations of the Company and HWC as if the acquisition had occurred
as of the beginning of the periods presented. The unaudited pro forma financial
information is not necessarily indicative of what our consolidated results
of
operations actually would have been had we completed the acquisition at the
dates indicated. In addition, the unaudited pro forma financial information
does
not purport to project the future results of operations of the combined
company.
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue
|
|
$
|
23,472
|
|
$
|
15,634
|
|
$
|
43,533
|
|
$
|
38,414
|
|
Operating
Income
|
|
$
|
4,653
|
|
$
|
1,711
|
|
$
|
8,259
|
|
$
|
4,460
|
|
Net
Income
|
|
$
|
2,632
|
|
$
|
(316
|
)
|
$
|
4,242
|
|
$
|
1,476
|
|
Basic
Earning Per Share
|
|
$
|
0.05
|
|
$
|
(0.01
|
)
|
$
|
0.07
|
|
$
|
0.03
|
|
Diluted
Earnings Per Share
|
|
$
|
0.04
|
|
$
|
(0.01
|
)
|
$
|
0.07
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Shares Outstanding
|
|
|
58,436
|
|
|
57,897
|
|
|
58,232
|
|
|
57,893
|
|
Diluted
Shares Outstanding
|
|
|
62,259
|
|
|
59,559
|
|
|
59,521
|
|
|
59,501
|
|
E.
RECENTLY ISSUED ACCOUNTING STANDARDS
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments.” which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial instruments that contain an embedded derivative
that
would otherwise require bifurcation to irrevocably be accounted for at fair
value, with changes in fair value recognized in the statement of income.
The
fair value election may be applied on an instrument-by-instrument basis.
SFAS
No. 155 also eliminates a restriction on the passive derivative instruments
that
a qualifying special purpose entity may hold. SFAS No. 155 is effective for
those financial instruments acquired or issued after September 15, 2006.
At
adoption, any difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial instrument and the
fair
value of the combined hybrid financial instrument will be recognized as a
cumulative-effect adjustment to beginning retained earnings. We do not expect
the new standard to have any material impact on our financial position and
results of operations.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets, an amendment of FASB Statement No. 140.” SFAS No. 156 requires all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value, if practicable. The standard permits an entity to
subsequently measure each class of servicing assets or servicing liabilities
at
fair value and report changes in fair value in the statement of income in
the
period in which the changes occur. SFAS No. 156 is effective for the Company
as
of January 1, 2007. We do not expect the new standard to have any material
impact on our financial position and results of operations.
In
July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“
FIN48”), an
interpretation of FASB Statement No. 109. FIN48
establishes the threshold for recognizing the benefits of tax-return positions
in the financial statements as more-likely-than-not to be sustained by the
taxing authorities, and prescribes a measurement methodology for those positions
meeting the recognition threshold. The Company has not yet determined the
estimated impact on its financial condition or results of operations, if
any, of
adopting FIN48
which becomes effective for the fiscal years beginning after December 15,
2006.
F.
LONG-TERM DEBT AND NOTES PAYABLE
In
conjunction with the acquisition of HWC on March 3, 2006, we entered into
a
Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association, which established a revolving credit facility capacity totaling
$10.3 million, subject to an initial borrowing base of $6.0 million, and
a term
credit facility totaling $9.7 million. The term credit facility is payable
monthly over a period of sixty months and is payable in full on March 3,
2010,
subject to extension under certain circumstances to March 3, 2011. The revolving
credit facility is due and payable in full on March 3, 2010, subject to a
year
to year renewal thereafter. We utilized initial borrowings under the Credit
Agreement totaling $10.5 million to repay senior and subordinated debt in
full
and to repurchase all of our outstanding shares of preferred stock and for
other
transaction related expenses. The loan balance outstanding on June 30, 2006
was
$9.4
million on the term credit facility and $1.1 million
on the revolving credit facility.
At
our
option, borrowings under the Credit Agreement bear interest at either
(i) Wells Fargo’s prime commercial lending rate plus a margin ranging, as
to the revolving credit facility up to 1.00%, and, as to the term credit
facility from 0.50% to 1.50% or (ii) the London Inter-Bank Market Offered
Rate plus a margin ranging, as to the revolving credit facility, from 2.50%
to
3.00% per annum, and, as to the term credit facility, from 3.00% to 3.50%,
which
margin increases or decreases based on the ratio of the outstanding principal
amount under the Credit Agreement to our consolidated EBITDA. The interest
rate
applicable to borrowings under the revolving credit facility and the term
credit
facility at June 30, 2006 was 8.25% and 8.75%, respectively. Fees on unused
commitments under the revolving credit facility are due monthly and range
from
0.25% to 0.50% per annum, based on the ratio of the outstanding principal
amount
under the Credit Agreement to our consolidated EBITDA.
Substantially
all of our assets are pledged as collateral under the Credit Agreement. The
Credit Agreement contains various restrictive covenants and compliance
requirements, including: (1) maintenance of a minimum book net worth
through December 31, 2006 equal to 90% of the pro forma book net worth
calculated on March 1, 2006, but in no event less than $25 million, or, for
each
fiscal year thereafter, equal to the greater of the minimum book net worth
required for the preceding fiscal year or 85% of book net worth on the last
day
of the preceding fiscal year (for these purposes “book net worth” means the
aggregate of our common and preferred stockholders’ equity on a consolidated
basis); (2) maintenance of a minimum ratio of our consolidated EBITDA less
unfinanced capital expenditures to principal and interest payments required
under the Credit Agreement, on a trailing twelve month basis, of 1.50 to
1.00;
(3) limitation on capital expenditures of $3 million in the aggregate
during any fiscal year; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under the subordinated promissory
notes issued in connection with the HWC acquisition. We were in compliance
with
these covenants at June 30, 2006 and as of the date of this report.
The
$15
million of unsecured subordinated debt issued to Oil States Energy Services,
Inc., in connection with the HWC acquisition has been adjusted to $21.2 million
after a $6.2 million adjustment for working capital acquired. The note bears
interest at a rate of 10% per annum, and requires a one-time principal payment
on September 9, 2010.
As
of
June 30, 2006 and December 31, 2005 , long-term debt consisted of the following
(in thousands):
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
(Unaudited)
|
|
|
|
U.S.
revolving credit facility, with available commitments up to $10.3
million,
a borrowing base of $5.2 million and an average interest rate of
7.9% for
the six month period ended June 30, 2006
|
|
$
|
1,140
|
|
$
|
−
|
|
U.S.
term credit facility with initial borrowings of $9.7 million, payable
over
60 months and an average interest rate of 8.4% for the six month
period
ended June 30, 2006
|
|
|
9,376
|
|
|
−
|
|
Subordinated
unsecured debt issued to Oil States Energy Services, Inc. with
a fixed
interest rate of 10%
|
|
|
21,166
|
|
|
−
|
|
Senior
secured debt with Specialty Finance Fund I, LLC, which was acquired
by San
Juan Investments with a fixed interest rate of 7%
|
|
|
-
|
|
|
750
|
|
Subordinated
unsecured notes payable with Prudential with a fixed interest rate
of
12%
|
|
|
−
|
|
|
5,100
|
|
Total
debt
|
|
|
31,682
|
|
|
5,850
|
|
Less:
current maturities
|
|
|
(1,940
|
)
|
|
(2,250
|
)
|
Total
long-term debt
|
|
$
|
29,742
|
|
$
|
3,600
|
|
G.
COMMITMENTS AND CONTINGENCIES
We
are
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 our operations or financial position.
H.
EARNINGS PER SHARE
Basic
and
diluted income(loss) per common share is computed by dividing net income
attributable to common stockholders by the weighted average common shares
outstanding. The weighted average number of shares used to compute basic
and
diluted earnings(loss) per share for the three and six months ended June
30,
2006 and 2005 are illustrated below (in thousands):
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
For
basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
income(loss) attributable to common stockholders
|
|
$
|
2,632
|
|
$
|
(879
|
)
|
$
|
3,926
|
|
$
|
1,383
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
basic earnings(loss) per share-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
58,436
|
|
|
29,499
|
|
|
48,667
|
|
|
29,495
|
|
Effect
of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and warrants
|
|
|
3,823
|
|
|
—
|
|
|
3,212
|
|
|
1,608
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
diluted earnings(loss) per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
62,259
|
|
|
29,499
|
|
|
51,879
|
|
|
31,103
|
|
The
exercise price of our stock options and stock warrants varies from $0.67
to
$3.00 per share. The maximum number of potentially dilutive securities at
June
30, 2006, and 2005 would include: (1) 6,635,000 and 5,660,000 common shares
respectively, issuable upon exercise of stock options, (2) 733,952 and
2,695,000, common shares respectively, issuable upon exercise of stock purchase
warrants, (3) 120,000 and 330,000 shares of common stock, respectively, to
be
issued as compensation over a four year vesting period as earned, and (4)
zero
and 93,000 common shares, respectively, issuable upon conversion of convertible
preferred stock.
I.
EMPLOYEE “STOCK BASED” COMPENSATION
We
have
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to
employees, consultants and directors; including employee stock options based
on
estimated fair values. SFAS No. 123R supersedes our previous accounting under
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) for periods beginning in fiscal 2006. In March 2005,
the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS
No. 123R. We have applied the provisions of SAB 107 in our adoption of SFAS
No.
123R.
We
adopted SFAS No. 123R using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the
first day of our fiscal year 2006. Our condensed consolidated financial
statements as of and for the three and six months ended June 30, 2006 reflect
the impact of SFAS No. 123R. In accordance with the modified prospective
transition method, our condensed consolidated financial statements for prior
periods have not been restated to reflect, and do not include, the impact
of
SFAS No. 123R. The balance previously reflected as deferred compensation
was
eliminated against additional paid-in capital upon adoption of SFAS No. 123R.
The effect on our net earnings and earnings per share before and after
application of the fair value recognition provision of SFAS No. 123R to
stock-based employee compensation for the three and six months ended June
30,
2006 is illustrated below:
|
|
Three
Months Ended
June
30, 2006
(amounts
in thousands, except per share data)
|
|
|
|
Net
Earnings Before Application of SFAS No. 123R
|
|
Effect
of Stock-Based Compensation Expense
|
|
Net
Earnings as Reported
|
|
Income
before income taxes
|
|
$
|
4,118
|
|
$
|
257
|
|
$
|
3,861
|
|
Provision
for income taxes
|
|
|
1,229
|
|
|
—
|
|
|
1,229
|
|
Preferred
dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
income attributable to common stockholders
|
|
|
2,889
|
|
|
257
|
|
|
2,632
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.05
|
|
|
0.00
|
|
|
0.05
|
|
Diluted
|
|
|
0.04
|
|
|
0.00
|
|
|
0.04
|
|
|
|
Six
Months Ended
June
30, 2006
(amounts
in thousands, except per share data)
|
|
|
|
Net
Earnings Before Application of SFAS No. 123R
|
|
Effect
of Stock-Based Compensation Expense
|
|
Net
Earnings as Reported
|
|
Income
before income taxes
|
|
$
|
5,855
|
|
$
|
609
|
|
$
|
5,246
|
|
Provision
for income taxes
|
|
|
1,936
|
|
|
—
|
|
|
1,936
|
|
Preferred
dividends
|
|
|
(616
|
)
|
|
—
|
|
|
(616
|
)
|
Net
income attributable to common stockholders
|
|
|
4,535
|
|
|
609
|
|
|
3,926
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.09
|
|
|
0.01
|
|
|
0.08
|
|
Diluted
|
|
|
0.09
|
|
|
0.01
|
|
|
0.08
|
|
The
pro
forma effect on net earnings(loss) and earnings(loss) per share as if we
had
applied the fair value recognition provision of SFAS No. 123R, to Stock-based
employee compensation for the three and six months ended June 30, 2005 is
illustrated below:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2005
|
|
June
30, 2005
|
|
Net
income (loss) attributable to common stockholders as
reported
|
|
$
|
(879
|
)
|
$
|
1,383
|
|
Less
total stock based employee compensation expense determined under
fair
value based method for all awards, net of tax related
effects
|
|
|
282
|
|
|
492
|
|
Pro
forma net income (loss) attributable to common
stockholders
|
|
$
|
(1,161
|
)
|
$
|
891
|
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.03
|
)
|
$
|
0.05
|
|
Pro
forma
|
|
$
|
(0.04
|
)
|
$
|
0.03
|
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.03
|
)
|
$
|
0.04
|
|
Pro
forma
|
|
$
|
(0.04
|
)
|
$
|
0.03
|
|
We
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:
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Risk-free
interest rate
|
|
|
4.61%
|
|
|
3.4%
|
|
|
4.59%
|
|
|
3.4%
|
|
Expected
dividend yield
|
|
|
―
|
|
|
―
|
|
|
―
|
|
|
―
|
|
Expected
option life
|
|
|
6.5
yrs
|
|
|
3
yrs
|
|
|
6.5
yrs
|
|
|
3
yrs
|
|
Expected
volatility
|
|
|
95.7
%
|
|
|
72.2%
|
|
|
95.5
%
|
|
|
72.2%
|
|
Weighted
average fair value of options granted at market value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture
rate
|
|
|
2.59%
|
|
|
0.0%
|
|
|
2.59%
|
|
|
0.00%
|
|
J.
BUSINESS SEGMENT INFORMATION
Effective
January 1, 2006, we redefined the segments in which we operate as a result
of
the acquisition of HWC. Our current business segments are “Well Intervention”
and “Response”. Intercompany transfers between segments were not material. Our
accounting policies for the operating segments are the same as those described
in Note A, “Basis of Presentation”. Operating expenses and
depreciation and
amortization 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. For purposes
of
this presentation, selling, general and administrative and corporate expenses
have been allocated between segments in proportion to their relative revenue.
HWC’s results from and after March 1, 2006 are included in our consolidated
operating results.
The
Well
Intervention segment consists of services that are designed to reduce the
number
and severity of critical well events and enhance production for oil and gas
operators. The scope of these services includes training, contingency planning,
well plan reviews, audits, inspection services and engineering services offered
through our Safeguard programs and services offered in conjunction with our
WELLSURE® risk management program. This segment also includes services performed
by hydraulic workover and snubbing units that are used to enhance production
of
oil and gas wells. These units may also be used for underbalanced drilling,
workover, completions and plug and abandonment services. A hydraulic unit
is a
specially designed rig used for moving tubulars in and out of a wellbore
using
hydraulic pressure. These units may be used for servicing wells that are
under
pressure (snubbing). When a unit is snubbing, it is pushing pipe or tubulars
into the wellbore against wellbore pressures.
The
Response segment consists of personnel, equipment and services provided during
an emergency response such as a critical well event or a hazardous material
response. These services include snubbing and other workover services provided
during a response. These services are designed to minimize response time
and
mitigate damage while maximizing safety.
Information
concerning segment operations for the three and six months ended June 30,
2006
and 2005 is presented below. Certain reclassifications have been made to
the
prior periods to conform to the current presentation.
|
|
Well
Intervention
|
|
Response
|
|
Consolidated
|
|
Three
Months Ended June 30, 2006:
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
22,806
|
|
$
|
666
|
|
$
|
23,472
|
|
Operating
Income(1)
|
|
|
4,475
|
|
|
178
|
|
|
4,653
|
|
Identifiable
Operating Assets
|
|
|
80,569
|
|
|
1,508
|
|
|
82,077
|
|
Capital
Expenditures
|
|
|
514
|
|
|
93
|
|
|
607
|
|
Depreciation
and Amortization(1)
|
|
|
1,440
|
|
|
16
|
|
|
1,456
|
|
Interest
Expense and Other, net
|
|
|
790
|
|
|
2
|
|
|
792
|
|
Segment
profit (loss)(2)
|
|
|
2,457
|
|
|
175
|
|
|
2,632
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended June 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,127
|
|
$
|
635
|
|
$
|
4,762
|
|
Operating
Income (loss)(1)
|
|
|
749
|
|
|
(957
|
)
|
|
(208
|
)
|
Identifiable
Operating Assets
|
|
|
5,384
|
|
|
8,804
|
|
|
14,188
|
|
Capital
Expenditures
|
|
|
15
|
|
|
24
|
|
|
39
|
|
Depreciation
and Amortization(1)
|
|
|
108
|
|
|
111
|
|
|
219
|
|
Interest
Expense and Other, net
|
|
|
126
|
|
|
150
|
|
|
276
|
|
Segment
profit (loss)(2)
|
|
|
589
|
|
|
(1,252
|
)
|
|
(663
|
)
|
|
|
Well
Intervention
|
|
Response
|
|
Consolidated
|
|
Six
Months Ended June 30, 2006:
|
|
|
|
|
|
|
|
Operating
Revenues
|
|
$
|
32,837
|
|
$
|
2,155
|
|
$
|
34,992
|
|
Operating
Income(1)
|
|
|
5,881
|
|
|
714
|
|
|
6,595
|
|
Identifiable
Operating Assets
|
|
|
80,569
|
|
|
1,508
|
|
|
82,077
|
|
Capital
Expenditures
|
|
|
635
|
|
|
167
|
|
|
802
|
|
Depreciation
and Amortization(1)
|
|
|
1,985
|
|
|
43
|
|
|
2,028
|
|
Interest
Expense and Other, net
|
|
|
1,274
|
|
|
75
|
|
|
1,349
|
|
Segment
profit (loss)(2)
|
|
|
2,671
|
|
|
639
|
|
|
3,310
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,230
|
|
$
|
11,822
|
|
$
|
19,052
|
|
Operating
Income(1)
|
|
|
1,732
|
|
|
899
|
|
|
2,631
|
|
Identifiable
Operating Assets
|
|
|
5,384
|
|
|
8,804
|
|
|
14,188
|
|
Capital
Expenditures
|
|
|
33
|
|
|
55
|
|
|
88
|
|
Depreciation
and Amortization(1)
|
|
|
153
|
|
|
287
|
|
|
440
|
|
Interest
Expense and Other, net
|
|
|
150
|
|
|
288
|
|
|
438
|
|
Segment
profit (loss)(2)
|
|
|
1,349
|
|
|
461
|
|
|
1,810
|
|
|
(1)
|
Operating
expenses and depreciation and amortization 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)
|
Segment
profit (loss) does not include preferred dividends requirements,
which
where zero and ($616,000) in the three and six months ended June
30,2006,
respectively; and $216,000 and $427,000 in the three and six months
ended
June 30, 2005, respectively.
|
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 actual events and results
of
operations may differ materially from expectations because of inaccurate
assumptions we make or by known or unknown risks and uncertainties. As a
result,
no forward-looking information can be guaranteed.
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
We
provide a suite of integrated oilfield services centered on the prevention,
emergency response and restoration of blowouts and well fires around the
world,
and have significant operations in the United States, Venezuela, the Middle
East
and Africa. Our proprietary risk management program, WELLSURE®,
combines traditional well control insurance with post-event response as well
as
preventative services, giving oil and gas operators and insurance underwriters
a
medium for effective management of well control insurance policies. Our
SafeGuard program, developed for international producers and operators, provides
dedicated emergency response and risk management services including risk
assessment, prevention, loss mitigation, contingency planning and continuous
training and education in all aspects of critical well management.
On
March
3, 2006, we acquired the hydraulic well control business (HWC) of Oil States
International, Inc. As a consequence of the acquisition, we also provide
hydraulic units for emergency well control situations (snubbing) and various
hydraulic well control solutions involving workovers, well drilling, well
completions and plug and abandonment services. Hydraulic units may be used
for
both non-critical and emergency well control situations in the oil and gas
industry. A hydraulic workover unit is a specially designed rig used for
moving
tubulars in and out of a wellbore using hydraulic pressure. These units may
be
used for servicing wells that are under pressure (snubbing). When a unit
is
snubbing, it is pushing pipe or tubulars into the wellbore against wellbore
pressures. The transaction was effective for accounting and financial purposes
as of March 1, 2006. As consideration for HWC, we issued approximately 26.5
million shares, or approximately 45%, of our common stock and subordinated
promissory notes with an aggregate balance of $15 million, adjusted to $21.2
million during the quarter ended June 30, 2006, after a $6.2 million adjustment
for working capital acquired.
The
market for emergency well control services, or critical well events, is highly
volatile due to factors beyond our control, 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 such services from time to time. As
a
result, we experience large fluctuations in our revenues from these services.
Non-critical services provide more stable revenues and our strategy has been,
and continues to be, to expand our product and service offerings to mitigate
the
revenue and earnings volatility associated with critical well event
services.
Segment
Information
Effective
January 1, 2006, we redefined the segments in which we operate as a result
of
our acquisition of HWC. Our current business segments are “Well Intervention”
and “Response”.
The
Well
Intervention segment consists of services that are designed to reduce the
number
and severity of critical well events and enhance production for oil and gas
operators. The scope of these services includes training, contingency planning,
well plan reviews, audits, inspection services and engineering services offered
through our Safeguard programs and services offered in conjunction with our
WELLSURE® risk management program. This segment also includes services,
performed by hydraulic workover and snubbing units that are used to enhance
production of oil and gas wells. These units may also be used for underbalanced
drilling, workover, completions and plug and abandonment
services.
The
Response segment consists of personnel, equipment and services provided during
an emergency response such as a critical well event or a hazardous material
response. These services include snubbing and other workover services provided
during a response. These services are designed to minimize response time
and
mitigate damage while maximizing safety.
Intercompany
transfers between segments were not material. Our accounting policies for
the
operating segments are the same as those described in Note A, “Basis of
Presentation”. Operating expenses and depreciation and amortization 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. For purposes of this presentation, selling,
general and administrative and corporate expenses have been allocated between
segments in proportion to their relative revenue. Business segment operating
data from continuing operations is presented for purposes of management
discussion and analysis of operating results. HWC’s operating results from and
after March 1, 2006 are included in our consolidated operating
results.
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 our
periodic reports previously filed with the SEC.
Information
concerning operations in different business segments for the three and six
months ended June 30, 2006 and 2005 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
22,806
|
|
$
|
4,127
|
|
$
|
32,837
|
|
$
|
7,230
|
|
Response
|
|
|
666
|
|
|
635
|
|
|
2,155
|
|
|
11,822
|
|
|
|
$
|
23,472
|
|
$
|
4,762
|
|
$
|
34,992
|
|
$
|
19,052
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
12,663
|
|
$
|
1,811
|
|
$
|
17,672
|
|
$
|
3,168
|
|
Response
|
|
|
145
|
|
|
277
|
|
|
436
|
|
|
7,506
|
|
|
|
$
|
12,808
|
|
$
|
2,088
|
|
$
|
18,108
|
|
$
|
10,674
|
|
Operating
Expenses(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
3,140
|
|
$
|
1,100
|
|
$
|
5,481
|
|
$
|
1,673
|
|
Response
|
|
|
321
|
|
|
901
|
|
|
850
|
|
|
2,307
|
|
|
|
$
|
3,461
|
|
$
|
2,001
|
|
$
|
6,331
|
|
$
|
3,980
|
|
Selling,
General and Administrative Expenses(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
1,088
|
|
$
|
359
|
|
$
|
1,818
|
|
$
|
504
|
|
Response
|
|
|
6
|
|
|
303
|
|
|
112
|
|
|
823
|
|
|
|
$
|
1,094
|
|
$
|
662
|
|
$
|
1,930
|
|
$
|
1,327
|
|
Depreciation
and Amortization(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
1,440
|
|
$
|
108
|
|
$
|
1,985
|
|
$
|
153
|
|
Response
|
|
|
16
|
|
|
111
|
|
|
43
|
|
|
287
|
|
|
|
$
|
1,456
|
|
$
|
219
|
|
$
|
2,028
|
|
$
|
440
|
|
Operating
Income(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
4,475
|
|
$
|
749
|
|
$
|
5,881
|
|
$
|
1,732
|
|
Response
|
|
|
178
|
|
|
(957
|
)
|
|
714
|
|
|
899
|
|
|
|
$
|
4,653
|
|
$
|
(208
|
)
|
$
|
6,595
|
|
$
|
2,631
|
|
Segment
Profit(Loss)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well
Intervention
|
|
$
|
2,457
|
|
$
|
589
|
|
$
|
2,671
|
|
$
|
1,349
|
|
Response
|
|
|
175
|
|
|
(1,252
|
)
|
|
639
|
|
|
461
|
|
|
|
$
|
2,632
|
|
$
|
(663
|
)
|
$
|
3,310
|
|
$
|
1,
810
|
|
|
(1)
|
Operating
expenses and depreciation and amortization 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 and includes foreign exchange
translation gains and losses.
|
|
(3)
|
Segment
profit (loss) does not include preferred dividends requirements,
which
where zero and ($616,000) in the three and six months ended June
30,2006,
respectively; and $216,000 and $427,000 in the three and six months
ended
June 30, 2005, respectively.
|
Comparison
of the Three Months Ended June 30, 2006 with the Three Months Ended June
30,
2005
Revenues
Well
Intervention revenues were $22,806,000 for the quarter ended June 30, 2006,
compared to $4,127,000 for the quarter ended June 30, 2005, representing
an
increase of $18,679,000, or 452.6%, in the current quarter. The increase
was
primarily the result of the inclusion of $17,916,000 of revenues related
to our
acquisition of HWC for the quarter ended June 30, 2006. For the quarter ended
June 30, 2006 Safeguard revenue increased $1,226,000, or 71.2%, compared
to the
quarter ended June 30, 2005.
Response
revenues were $666,000 for the quarter ended June 30, 2006, compared to $635,000
for the quarter ended June 30, 2005, an increase of $31,000, or 4.9% in the
current quarter.
Cost
of Sales
Well
Intervention cost of sales were $12,663,000 for the quarter ended June 30,
2006,
compared to $1,811,000 for the quarter ended June 30, 2005, an increase of
$10,852,000, or 599.2%, in the current quarter. The increase was primarily
the
result of the inclusion of HWC cost of $10,598,000 for the quarter ended
June
30, 2006.
Response
cost of sales were $145,000 for the quarter ended June 30, 2006, compared
to
$277,000 for the quarter ended June 30, 2005, a decrease of $132,000, or
47.7%,
due to decreased contract service expense in the current quarter.
Operating
Expenses
Consolidated
operating expenses were $3,461,000 for the quarter ended June 30, 2006, compared
to $2,001,000 for the quarter ended June 30, 2005, an increase of $1,460,000,
or
73.0%, in the current quarter. This increase is primarily due to fixed personnel
and facility expenses related to HWC of $992,000 and an increase of $280,000
due
to increased accrued incentive expense and business development expense,
associated with an increase in our international business in the second quarter
of 2006. The current quarter includes expense of $188,000
related
to stock option expense in the current year pursuant to our adoption of SFAS
No.
123R which requires the expensing of stock options beginning January 1,
2006.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses (SG&A) and other operating
expenses were $1,094,000 for the quarter ended June 30, 2006, compared to
$662,000 for the quarter ended June 30, 2005, an increase of $432,000, or
65.3%,
in the current quarter. During the current quarter, SG&A and other operating
expenses represented 4.7% of revenues compared to 13.9% of revenues in the
prior
year quarter. The increase in total SG&A expense was primarily due to
increases in wages and benefits, incentive plan expense, professional fees
and a
$69,000 stock option expense in the current year pursuant to our adoption
of
SFAS No. 123R “Stock Compensation.”
Depreciation
and Amortization
Consolidated
depreciation and amortization expense increased by $1,237,000 in the quarter
ended June 30, 2006 compared to the quarter ended June 30, 2005 due to the
inclusion of HWC depreciation expense of $1,321,000, for the quarter ended
June
30, 2006, offset by certain assets being fully depreciated prior to the end
of
the second quarter of 2006.
Interest
Expense and Other Expenses, net,
The
change in interest and other expenses, net of $516,000 for the quarter ended
June 30, 2006, as compared to the quarter ended June 30, 2005 is set forth
in
the table below (in thousands):
|
|
For
the Three Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Interest
expense - senior debt
|
|
$
|
—
|
|
$
|
13
|
|
Interest
on subordinated notes
|
|
|
—
|
|
|
171
|
|
Interest
credit related to December 2000 subordinated debt restructuring
|
|
|
—
|
|
|
(85
|
)
|
Interest
expense - Credit Facility
|
|
|
249
|
|
|
—
|
|
Interest
expense - Term Note
|
|
|
525
|
|
|
—
|
|
Deferred
finance cost on credit facility
|
|
|
18
|
|
|
—
|
|
Deferred
finance cost on subordinated Debt
|
|
|
—
|
|
|
51
|
|
Interest
expense on financing agreements
|
|
|
37
|
|
|
19
|
|
Interest
income on cash investments
|
|
|
(16
|
)
|
|
(12
|
)
|
Gain
(loss) on foreign exchange
|
|
|
—
|
|
|
(9
|
)
|
Other
|
|
|
(21
|
)
|
|
128
|
|
Total
Interest and Other
|
|
$
|
792
|
|
$
|
276
|
|
Income
Tax Expense
Income
taxes for the quarter ended June 30, 2006 totaled $1,229,000, or 31.8% of
pre-tax income compared to the quarter ending June 30, 2005 total of $179,000
on
a pre-tax loss of $484,000. The increase in tax expense for the quarter ended
June 30, 2006 compared to the three months ended June 30, 2005 is due to
an
increase in the percentage of our consolidated pretax income sourced in taxable
foreign jurisdictions. The tax expense in the quarter ended June 30, 2005
was
due to foreign tax in Venezuela. We have determined that as a result of the
acquisition of HWC we have experienced a change of control pursuant to
limitations set forth in Section 382 of the IRS rules and regulations. As
a
result, we will be limited to utilizing approximately $1.8 million of U.S.
net
operating losses (NOL) to offset taxable income generated by us during the
tax
year ended December 31, 2006 and in future years until our U.S. NOL’s are either
completely used or expire. All U.S. tax expense in 2005 was offset by
utilization of NOL’s.
Comparison
of the Six Months Ended June 30, 2006 with the Six Months Ended June 30,
2005
Revenues
Well
Intervention revenues were $32,837,000 for the six months ended June 30,
2006,
compared to $7,230,000 for the six months ended June 30, 2005, an increase
of
$25,607,000, or 354.2% in the current period. The increase was primarily
the
result of the inclusion of $22,323,000 of HWC revenues for four of the six
months ended June 30, 2006. Safeguard revenues increased $2,715,000, or 93.6%,
in the first six months of 2006 compared to the same period in 2005, due
to an
increase in international revenues.
Response
revenues were $2,155,000 for the six months ended June 30, 2006, compared
to
$11,822,000 for the six months ended June 30, 2005, a decrease of $9,667,000,
or
81.8%, in the current period. The decrease was primarily due to work performed
in northern Iraq during the prior year period. The Iraq revenue includes
subcontractor services of $5,341,000 related to low margin third party
pass-through charges for field personnel security. The result of this pass
through revenue reduced operating margins for the first six months of 2005
as
compared to normalized operating levels.
Cost
of Sales
Well
Intervention cost of sales were $17,672,000 for the six months ended June
30,
2006, compared to $3,168,000 for the six months ended June 30, 2005, an increase
of $14,504,000, or 457.8%, in the current period. The increase was primarily
the
result of the inclusion of HWC cost of $13,403,000 for four of the six months
ended June 30, 2006. A cost increase of $1,101,000 in the first six months
of
2006 compared to the same period in 2005 was primarily due to a cost increase
attributable to our Safeguard international activity.
Response
cost of sales were $436,000 for the six months ended June 30, 2006, compared
to
$7,506,000 for the six months ended June 30, 2005, a decrease of $7,070,000,
or
94.2%, in the current period. The decrease is primarily related to lower
margin
subcontractor services related to work in northern Iraq of $5,074,000 for
the
prior year period. The additional decrease of $1,996,000 was primarily due
to
the completion of response work in Iraq during 2005.
Operating
Expenses
Consolidated
operating expenses were $6,331,000 for the six months ended June 30, 2006,
compared to $3,980,000 for the six months ended June 30, 2005, an increase
of
$2,351,000, or 59.1% in the current period. This increase is due to additional
fixed personnel and facility expenses related to HWC of $1,333,000 and an
increase of $569,000 in the first six months of 2006 due to increased accrued
incentive expense and business development expense, associated with an increase
in our international business in the first six months of 2006. The current
six
months includes expense of $422,000 related to stock options expense in the
current year pursuant to our adoption of SFAS No. 123R which requires the
expensing of stock options beginning January 1, 2006.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses (SG&A) were $1,930,000 for the
six months ended June 30, 2006, compared to $1,327,000 for the six months
ended
June 30, 2005, an increase of $603,000, or 45.4%, in the current period.
During
the six months ended June 30, 2006 period SG&A expense represented 5.5% of
revenues compared to 7.0% of revenues in the prior year. This increase in
total
SG&A expense is primarily due to professional service fees and expense
related to $187,000 of stock option expense in the current year pursuant
to our
adoption of SFAS No. 123R which requires the expensing of stock
options.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense increased by $1,588,000 between the
six
months ended June 30, 2006 and 2005 due to the inclusion of HWC depreciation
expense of $1,760,000, for four of the six months ended June 30, 2006, offset
by
certain assets being fully depreciated prior to June 30, 2006.
Interest
Expense and Other Expenses, net,
The
change in net interest and other expenses, of $911,000 for the six months
ended
June 30, 2006, as compared to the prior year period is set forth in the table
below (in thousands):
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2006
|
|
June
30, 2005
|
|
Interest
expense - senior debt
|
|
$
|
9
|
|
$
|
26
|
|
Interest
on subordinated notes
|
|
|
102
|
|
|
351
|
|
Interest
credit related to December 2000 subordinated debt restructuring
|
|
|
(598
|
)
|
|
(175
|
)
|
Interest
expense - Credit Facility
|
|
|
318
|
|
|
—
|
|
Interest
expense - Term Note
|
|
|
693
|
|
|
—
|
|
Deferred
finance cost on credit facility
|
|
|
18
|
|
|
—
|
|
Deferred
finance cost on subordinated debt
|
|
|
809
|
|
|
101
|
|
Interest
expense on financing agreements
|
|
|
50
|
|
|
46
|
|
Interest
income on cash investments
|
|
|
(31
|
)
|
|
(24
|
)
|
Gain
(loss) on foreign exchange
|
|
|
—
|
|
|
(14
|
)
|
Other
|
|
|
(21
|
)
|
|
127
|
|
Total
Interest and Other
|
|
$
|
1,349
|
|
$
|
438
|
|
Income
Tax Expense
Income
taxes for the six months ended June 30, 2006 were $1,936,000, or 36.9% of
pre-tax income compared to the six months ending June 30, 2005 of $383,000,
or
17.5% of pre-tax income. The increase in the effective rate for the six months
ended June 30, 2006 compared to six months ended June 30, 2005 is due to
an
increase in the percentage of our consolidated pre-tax income sourced in
taxable
foreign jurisdictions. We have determined that as a result of the acquisition
of
HWC we have experienced a change of control pursuant to limitations set forth
in
Section 382 of the IRS rules and regulations. As a result, we will be limited
to
utilizing approximately $1.8 million of U.S. net operating losses (NOL) to
offset taxable income generated by us during the tax year ended December
31,
2006 and in future years until our U.S. NOL’s are either completely used or
expire. All U.S. tax expense in 2005 was offset by utilization of NOL’s.
Liquidity
and Capital Resources
Liquidity
At
June
30, 2006, we had working capital of $19,922,000, including a cash balance
of
$9,402,000. We ended the period with stockholders’ equity of $29,289,000. For
the six months ended June 30, 2006, we generated operating income of $6,595,000
and net cash provided by operating activities was $3,689,000 compared to
$568,000 in the six months ended June 30, 2005. Net cash provided by investing
activities was $3,576,000, which included $802,000 in capital expenditures.
During the six months ended June 30, 2006, we utilized our credit facility
with
Wells Fargo Bank, borrowing $10,800,000 to retire senior secured loan facility
of $750,000 and a 12% senior subordinated note of $4,800,000 and to redeem
$5,300,000 in preferred stock. The acquisition of HWC increased our working
capital by $10,182,000, including a cash balance acquired of $4,366,000
effective March 1, 2006.
We
generate our revenues from Well Intervention and emergency Response services.
The market for emergency well control services, or critical well events,
is
highly volatile due to factors beyond our control, 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 such services from time
to
time. As a result, we experience large fluctuations in our revenues from
these
services. Non-critical services provide more stable revenues and our strategy
has been, and continues to be, to expand our product and service offerings
to
mitigate the revenue and earnings volatility associated with critical well
event
services. The addition of HWC will generate additional non-event service
revenue
in key markets and we expect that it will afford us an opportunity to expand
our
presence in the snubbing market.
We
operate internationally, giving rise to exposure to market risks from changes
in
foreign currency exchange rates to the extent that transactions are not
denominated in U.S. Dollars. We typically endeavor to denominate our contracts
in U.S. Dollars to mitigate exposure to fluctuations in foreign currencies.
On
June 30, 2006, we had $5,523,000 of cash and $6,093,000 in accounts receivable
attributable to our Venezuelan operations. Of this cash, $1,427,000 was
denominated in U.S. Dollars and resided in a U.S. bank; the remaining $4,096,000
was denominated in Bolivars and resided in a Venezuelan bank. Trade accounts
receivables of $1,353,000 were denominated in Bolivars and are subject to
market
risks.
Effective
March 1, 2005, the exchange rate in Venezuela devalued from 1,920 to 2,150
Bolivars to the U.S. dollar. We have taken charges to equity under the caption
“foreign currency translation loss” of $361,000 during the six months ended June
30, 2005 to reflect devaluation of the Bolivar for that quarter. There was
no
currency gain or loss attributable to Venezuela during the six months ended
June
30, 2006. The Venezuelan government implemented a foreign currency regime
on
February 5, 2003. This has resulted in currency controls that restrict the
conversion of the Venezuelan currency, the Bolivar, to U.S. Dollars. HWC
has
applied to the control board (CADIVI) for registration and is waiting the
culmination of this registration process in order to have U.S dollar payments
made directly to a United States bank account. We continue to monitor the
situation closely.
Effective
January 1, 2006, and related to the acquisition of HWC, we changed our
functional currency in Venezuela from the Venezuelan Bolivar to the U.S.
Dollar.
This change allows us to have one consistent functional currency after the
acquisition. Venezuela is also on the U.S. government’s “watch list” for highly
inflationary economies. Accumulated other comprehensive loss reported in
the
consolidated statements of stockholders’ equity before January 1, 2006 totaled
$1.2 million and consisted solely of the cumulative foreign currency translation
adjustment in Venezuela prior to changing our functional currency. In accordance
with SFAS No. 52, “Foreign Currency Translation,” the currency translation
adjustment recorded up through the date of the change in functional currency
will only be adjusted in the event of a full or partial disposition of our
investment in Venezuela.
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
|
|
|
|
|
|
|
|
|
|
|
|
Term
loan
|
|
$
|
9,376
|
|
$
|
1,940
|
|
$
|
3,880
|
|
$
|
3,556
|
|
|
—
|
|
Revolving
credit facility
|
|
$
|
1,140
|
|
|
|
|
|
|
|
$
|
1,140
|
|
|
—
|
|
Subordinated
debt (a)
|
|
$
|
21,166
|
|
|
|
|
|
|
|
|
|
|
$
|
21,166
|
|
Future
minimum lease payments
|
|
$
|
263
|
|
$
|
231
|
|
$
|
32
|
|
|
—
|
|
|
—
|
|
Total
commitments
|
|
$
|
31,945
|
|
$
|
2,171
|
|
$
|
3,912
|
|
$
|
4,696
|
|
$
|
21,166
|
|
(a)
Includes $15,000,000 of notes issued to Oil States Energy Services, Inc.
and an
additional $6,166,000 adjustment for working capital acquired at March 1,
2006,
in connection with the acquisition.
Credit
Facilities/Capital Resources
In
conjunction with the acquisition of HWC on March 3, 2006, we entered into
a
Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National
Association, which established a revolving credit facility capacity totaling
$10.3 million, subject to an initial borrowing base of $6.0 million, and
a term
credit facility totaling $9.7 million. The term credit facility is payable
monthly over a period of sixty months and is payable in full on March 3,
2010,
subject to extension under certain circumstances to March 3, 2011. The revolving
credit facility is due and payable in full on March 3, 2010, subject to a
year
to year renewal thereafter. We utilized initial borrowings under the Credit
Agreement totaling $10.6 million to repay senior and subordinated debt in
full
and to repurchase all of our outstanding shares of preferred stock and for
transaction related costs. The loan balance outstanding on June 30, 2006
was
$9.4
million on the term credit facility and $1.1 million
on the revolving credit facility.
At
our
option, borrowings under the Credit Agreement bear interest at either
(i) Wells Fargo’s prime commercial lending rate plus a margin ranging, as
to the revolving credit facility up to 1.00%, and, as to the term credit
facility from 0.50% to 1.50% or (ii) the London Inter-Bank Market Offered
Rate plus a margin ranging, as to the revolving credit facility, from 2.50%
to
3.00% per annum, and, as to the term credit facility, from 3.00% to 3.50%,
which
margin increases or decreases based on the ratio of the outstanding principal
amount under the Credit Agreement to our consolidated EBITDA. The interest
rate
applicable to borrowing under the revolving credit facility and the term
credit
facility at June 30, 2006 was 8.25 % and 8.75%, respectively. Fees on unused
commitments under the revolving credit facility are due monthly and range
from
0.25% to 0.50% per annum, based on the ratio of the outstanding principal
amount
under the Credit Agreement to our consolidated EBITDA.
Substantially
all of our assets are pledged as collateral under the Credit Agreement. The
Credit Agreement contains various restrictive covenants and compliance
requirements, including: (1) maintenance of a minimum book net worth
through December 31, 2006 equal to 90% of the pro forma book net worth
calculated on March 1, 2006, but in no event less than $25 million, or, for
each
fiscal year thereafter, equal to the greater of the minimum book net worth
required for the preceding fiscal year or 85% of book net worth on the last
day
of the preceding fiscal year(for these purposes “book net worth” means the
aggregate of our common and preferred stockholders’ equity on a consolidated
basis); (2) maintenance of a minimum ratio of our consolidated EBITDA less
unfinanced capital expenditures to principal and interest payments required
under the Credit Agreement, on a trailing twelve month basis, of 1.50 to
1.00;
(3) limitation on capital expenditures of $3 million in the aggregate
during any fiscal year; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under the subordinated promissory
notes issued in connection with the HWC acquisition. We were in compliance
with
these covenants at June 30, 2006 and as of the date of this
report.
The
$15
million of unsecured subordinated debt issued to Oil States Energy Services,
Inc., in connection with the HWC acquisition has been adjusted to $21.2 million
after a $6.2 million adjustment for working capital acquired. The note bears
interest at a rate of 10% per annum, and requires a one-time principal payment
on September 9, 2010.
Item
3.
Quantitative
and Qualitative Disclosures about Market Risk
The
nature of our Response revenue stream is unpredictable from quarter to quarter
and from country to country such that any history of geographic split does
not
represent a trend. During the first six months of 2006, foreign revenues
were
64% of total revenue. Revenue generated by Venezuela and Algeria was 24%
and
19%, respectively. Revenue generated by Venezuela and Algeria during the
first
six months of 2005 was 15% and 9%, respectively.
Our
debt
consists of both fixed-interest and variable-interest rate debt; consequently,
our earnings and cash flows, as well as the fair values of its fixed-rate
debt
instruments, are subject to interest-rate risk. We have performed sensitivity
analyses to assess the impact of this risk based on a hypothetical 10% increase
in market interest rates.
We
have
term loan and a revolving line of credit that are subject to the risk of
loss
associated with movements in interest rates. As of June 30, 2006, we had
floating rate obligations totaling approximately $10.5 million. These floating
rate obligations expose us to the risk of increased interest expense in the
event of increases in short-term interest rates. If the floating interest
rate
were to increase by 10% from the June 30, 2006 levels, our interest expense
would increase by a total of approximately $96,600 annually.
Item
4. Controls
and Procedures
Under
the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation
of the
effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) under the Securities
and Exchange Act of 1934, as amended (the “Exchange Act”), as of June 30, 2006.
Our chief executive officer and chief financial officer concluded, based
upon
their evaluation, that our disclosure controls and procedures are effective
and
ensure, in all material respects, 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 within the time periods specified in SEC
rules and forms despite the material weaknesses identified by our independent
auditors as disclosed in the Form 10-K for the year ended December 31, 2005.
Our
chief executive officer and chief financial officer 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.
In
connection with the audits of our consolidated financial statements for the
years ended December 31, 2005 and 2004, our independent auditors, UHY Mann
Frankfort Stein and Lipp, CPAs, LLP, issued letters to our audit committee
noting certain matters in our Venezuelan subsidiary that they consider to
be a
material weakness in internal control. The matters listed in the letters
included the lack of controls to mitigate the risk of fraud and the lack
of
controls over financial reporting; particularly with respect to adjustments
necessary to convert the Venezuelan financial statements from Venezuelan
generally accepted accounting principles to accounting principles generally
accepted in the United States.
We
are
currently making changes in policies and procedures to improve and enhance
internal controls with regard to fraud prevention and detection and with
respect
to financial reporting in Venezuela and believe these improvements will
appropriately address the matters referred to in the letter. These changes
include the following:
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-
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We
have hired a Chief Financial Officer with experience in accounting
controls for companies with international operations as well as
Sarbanes-Oxley implementation
experience;
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-
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We
have restructured the accounting department of the subsidiary and
enhanced
our corporate reporting
requirements;
|
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-
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We
have standardized to a multi-currency, integrated accounting system
in
Venezuela;
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-
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The
HWC financial manager will be responsible for local internal controls
and
policies and procedures;
|
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-
|
We
continue to revise and implement the existing policies and procedures
of
the subsidiary.
|
Changes
in Internal Control
-
Effective March 02, 2006, we hired a Chief Financial Officer to oversee the
accounting and administrative control functions of the Company. Except as
set
forth above, there have been no other changes in internal controls which
have
materially affected our internal control over financial reporting or are
reasonably likely to materially affect our internal control over financial
reporting.
PART
II
Item
1. Legal
Proceedings
We
are
involved in or threatened with various legal proceedings from time to time
arising in the ordinary course of business. We do not believe that any such
proceedings will have a material adverse effect on our operations or financial
position.
See
Risk
Factors under Item 1A included in Form 10-K for the year ended December 31,
2005.
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
(a) Exhibits
Exhibit
No.
|
|
Document
|
|
|
Employment
Agreement with Gabriel Aldape
|
|
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§302
Certification by Jerry Winchester
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|
|
§302
Certification by Gabriel Aldape
|
|
|
§906
Certification by Jerry Winchester
|
|
|
§906
Certification by Gabriel Aldape
|
*Filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
BOOTS
& COOTS INTERNATIONAL
|
|
|
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|
WELL
CONTROL, INC.
|
|
|
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|
|
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|
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By:
|
/s/
JERRY WINCHESTER
|
|
|
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Jerry
Winchester
|
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Gabriel Aldape
|
|
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Gabriel
Aldape
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Chief
Financial Officer
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Principal
Accounting Officer
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Date:
August 14, 2006
27