UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
_______________
Form
10-K
_______________
For
the fiscal year ended December 31, 2006
Commission
file number 1-13817
_______________
Boots
& Coots
International
Well Control, Inc.
(Name
of
Registrant as specified in Its Charter)
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Delaware
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11-2908692
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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7908
N. Sam Houston Parkway W., Suite 500
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77064
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Houston,
Texas
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(Zip
Code)
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(Address
of Principal Executive Offices)
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281-931-8884
(Issuer's
Telephone Number, Including Area Code)
_______________
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $.00001 par value
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American
Stock Exchange
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Securities
registered under Section 12(g) of the Exchange Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities act. Yes ¨
No x
Indicate
by check mark whether the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K ¨.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Exchange Act
Rule
(12b-2))
|
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the act. Yes ¨
No x
The
aggregate market value of common stock held by non-affiliates as of June
30,
2006 was $56,215,000
The
number of shares of the issuer's common stock, par value $.00001, outstanding
on
March 22, 2007 was 59,489,830.
DOCUMENTS
INCORPORATED BY REFERENCE
FORM
10-K
ANNUAL
REPORT
For
the Year Ended December 31, 2006
TABLE
OF CONTENTS
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Page
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PART
I
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3
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Item
1.
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3
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Item
1A.
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10
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Item
1B.
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16
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Item
2.
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16
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Item
3.
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16
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Item
4.
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17
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PART
II
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17
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Item
5.
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17
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Item
6.
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18
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Item
7.
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20
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Item
7A.
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28
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Item
8
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28
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Item
9.
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28
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Item
9A.
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28
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Item
9B.
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29
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PART
III
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29
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Item
10.
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29
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Item
11.
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33
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Item
12.
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48
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Item
13.
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49
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PART
IV
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50
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Item
14.
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49
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Item
15.
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50
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53
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CERTIFICATIONS
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FINANCIAL
STATEMENTS
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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PART
I
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included
and incorporated by reference in this Form 10-K are certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements, other than statements of historical facts, included
or incorporated by reference in this Form 10-K that address activities, events
or developments that we expect or anticipate will or may occur in the future
are
forward-looking statements, including statements regarding our future financial
position, growth strategy, budgets, projected costs, and plans and objectives
of
management for future operations. We use the words "may," "will," "expect,"
"anticipate," "estimate," "believe," "continue," "intend," "plan," "budget"
and
other similar words to identify forward-looking statements. You should read
statements that contain these words carefully and should not place undue
reliance on these statements. Although we believe our expectations reflected
in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations or assumptions will prove
to have
been correct. Important factors that could cause actual results to differ
materially from the expectations reflected in the forward-looking statements
include, but are not limited to, the following factors and the other factors
described in this Form 10-K under the caption "Risk Factors":
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•
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competition;
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•
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changes
in economic or political conditions in the markets in which we
operate;
and
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•
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the
inherent risks associated with our operations, such as equipment
defects,
malfunctions and natural disasters.
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We
believe that it is important to communicate our expectations of future
performance to our investors. However, events may occur in the future that
we
are unable to accurately predict or that we are unable to control. We do
not
undertake any obligation to update or revise publicly any forward-looking
statements. When considering our forward-looking statements, you should keep
in
mind the risk factors and other cautionary statements in this Form 10-K.
Item
1. Business.
General
We
provide a suite of integrated pressure control and related services to onshore
and offshore oil and gas exploration and development companies, principally
in
North America, South America, North Africa, West Africa and the Middle East.
Our
well intervention segment consists of services that are designed to enhance
production for oil and gas operators and to reduce the number and severity
of
critical events such as oil and gas well fires, blowouts, or other losses
of
control at the well. Our well intervention segment includes services performed
by hydraulic workover and snubbing units that are used to enhance production
of
oil and gas wells. These units may be used for underbalanced drilling, workover,
well completions and plugging and abandonment services. This segment also
includes training, contingency planning, well plan reviews, audits, inspection
services and engineering services. Our response segment consists of personnel,
equipment and emergency services utilized during a critical well
event.
We
have a
long history in the oil and gas industry and are widely recognized for our
emergency response services. On March 3, 2006, we acquired the hydraulic
well
control business (HWC) of Oil States International, Inc. Our acquisition
of HWC
has significantly expanded and enhanced our pressure control services
capabilities and further emphasizes our strategy of complementing our response
service line with services routinely needed by oil and gas exploration and
development companies.
We
increased our revenues to $97.0 million in the year 2006 from $29.5 million
in
the year 2005. During the same period, diluted earnings per share increased
to
$0.21 from $0.06.
Credit
Facility
In
conjunction with the acquisition of HWC, we entered into a new credit facility
with Wells Fargo Bank, National Association, which established a revolving
credit facility of $10,300,000, subject to a borrowing base initially set
at
$5,993,189, and a term credit facility of $9,700,000. The term credit facility
is due and payable in full on March 3, 2010, subject to extension 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 these credit facilities to repay amounts outstanding under previous
credit
facilities, and to repurchase all of our outstanding shares of preferred
stock
and for other corporate purposes.
SafeGuard
Algeria
On
November 9, 2004, we announced a significant expansion of the scope of our
services in Algeria with the signing of two SafeGuard contracts totaling
$23.3
million, a substantial portion of which we expect to realize during the first
three years of the agreement. On July 24, 2006, we announced another significant
expansion of the contracts to $35.2 million. Under the terms of both SafeGuard
contracts, we are providing training, risk analyses, contingency planning
and
well inspections, as well as the prevention and control of blowouts and the
mitigation of risk related to installations. The work under these contracts
began in January 2005 and is expected to continue at a minimum through 2008.
History
of Boots & Coots
Boots &
Coots International Well Control, Inc. was incorporated in Delaware in
April 1988, and remained largely inactive until acquiring IWC
Services, Inc., a Texas corporation ("IWC Services"), on July 29,
1997. IWC Services was a global-response oil and gas well control service
company that specialized in responding to and controlling oil and gas well
emergencies, including blowouts and well fires. IWC Services was organized
in
June 1995 by six former key employees of the Red Adair
Company.
On
July 31, 1997, we acquired substantially all of the operating assets of
Boots & Coots, L.P., a Colorado limited partnership, and the stock of
our subsidiary corporations, Boots & Coots Overseas, Ltd., and
Boots & Coots de Venezuela, S.A. Boots & Coots, L.P. and our
subsidiaries were engaged in oil well fire fighting, snubbing and blowout
control services. Boots & Coots, L.P. was organized by Boots Hansen and
Coots Matthews, two former employees of the Red Adair Company who, like the
founders of IWC Services, left that firm to form an independent company,
which
was a primary competitor of IWC Services. As a consequence of the acquisition
of
Boots & Coots, L.P., we became a leader in the worldwide oil well
firefighting and blowout control industry, reuniting many of the former
employees of the Red Adair Company.
On
March 3, 2006, we acquired HWC, which provides hydraulic units for pressure
well control situations (snubbing) and provides various hydraulic well control
solutions involving workover, well drilling, well completion, and plugging
and
abandonment to the oil and gas industry. We provide our workover products
and
services primarily to customers in the United States, Venezuela, the Middle
East, North Africa and West Africa, for both onshore and offshore applications.
Workover products and services are used in operations on a producing well
to
restore or increase production. Workover services are typically used during
the
development, production and abandonment stages of the well. Our hydraulic
workover/snubbing units are used for workover operations and snubbing operations
in pressure situations.
A
hydraulic workover/snubbing 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 not producing or for working on wells under
pressure. These units may be used for underbalanced drilling and workover
and
also in well control applications. When a unit is snubbing, it is pushing
pipe
or tubulars into the well bore against well bore pressures. Because of their
small size and ability to work on wells under pressure, hydraulic workover
units
offer some advantages over larger workover rigs and conventional drilling
rigs.
However, most wells where we perform workovers service are wells with no
pressure.
Our
business is primarily dependent on the condition of the oil and gas industry
and, in particular, the level of capital expenditures by oil and gas companies
for workover and drilling services in our operating areas, which directly
affects demand for our pre-event planning, prevention, engineering, workover
and
other non-event related products and services, and may indirectly impact
the
longer-term prospects for our well control and other event-driven services.
These expenditures are influenced by prevailing oil and gas prices, expectations
about future demand and prices, the cost of exploring, producing and developing
oil and gas reserves, the discovery rates of new oil and gas reserves, political
and economic conditions, governmental regulation and the availability and
cost
of capital.
Business
Strategy. The
market for well control response services is finite, with services dependent
upon the occurrence of blowouts that cannot be reasonably predicted.
Accordingly, we have endeavored to build upon our demonstrated strengths
in risk
management by increasing our more predictable revenues from our well
intervention services. During 2006, we were successful in growing these
additional services primarily in international markets by utilizing our existing
business platform. The acquisition of HWC represents a significant expansion
of
our strategy to include the acquisition of assets
that support our business strategy. We intend to continue to seek complementary
business acquisitions that would enable us to attain more predictable levels
of
income, broaden our pressure control service capabilities and increase our
geographic presence.
Executive
Offices. Our
principal offices are located at 7908 N. Sam Houston Parkway W., Suite 500,
Houston, Texas 77064, and our telephone number is (281) 931-8884. Our
website is located at www.boots-coots.com.
Business
Segments
Well
Intervention
History. In
1999, we began to offer well intervention services in an effort to reduce
the
uncertainty of revenue in the response business. Well intervention services
began with the introduction of SafeGuard services in Alaska. We expanded
our
SafeGuard services into Venezuela in late 1999 and into Algeria in 2001.
The
SafeGuard operations in Algeria were significantly expanded in 2004 when
we
entered into new long-term contracts with Algeria's national oil and gas
company, Sonatrach, and ENSP, one of the Algeria national oil and gas service
providers.
WELLSURE®
also began in 1999 as the first group of customers joined the program which
provides oil and gas operators and insurance underwriters a medium for effective
management of well control insurance costs. WELLSURE® expanded internationally
into Canada in 2003 and Indonesia in 2004.
The
most
substantial increase in well intervention services resulted from our
March 3, 2006 acquisition of HWC. HWC significantly expanded our pressure
control services offerings with the addition of hydraulic workover/snubbing
operations.
Description. Our
well intervention segment consists of services that are designed to enhance
production for oil and gas operators and reduce the number and severity of
critical well events such as oil and gas well fires, blowouts, or other losses
of control at the well. This segment includes services performed by hydraulic
workover/snubbing units that are used to enhance production of oil and gas
wells. These units are used for underbalanced drilling, workover, well
completions and plugging and abandonment services. This segment also includes
services that are designed to reduce the number and severity of critical
well
events offered through our SafeGuard program, including training, contingency
planning, well plan reviews, audits, inspection services and engineering
services. These services typically generate revenue on a contractual basis
dependent upon the breadth, scope, and duration of services performed. Customers
of SafeGuard services include, but are not limited to, British Petroleum,
Sonatrach, ONGC, Pemex, Petrobras, and EnCana. All of these services are
performed onshore and offshore, and both domestically and internationally.
Domestically, the company generates revenue from these services on a "call-out"
basis and charges a day rate for equipment and personnel. This structure
enables
us to increase day rate prices without going through contractual pricing
issues
when the market for these services is tight. Call out services range in duration
from less than a week for a single well cleanout procedure to more than one
year
for a multi-well plugging and abandonment campaign. Internationally, revenue
is
typically generated on a contractual basis, with contracts ranging between
six
months and three years in duration.
Trends. In
the United States and Gulf Coast regions, the increased recognition of the
importance of risk management services, training and emergency preparedness
is
having a profound impact on the oil and gas services industry. Instead of
waiting for a blowout, fire or other disaster to occur, oil and gas producers
now seek proactive preparedness and incident prevention programs. These trends
are expanding the market for our well intervention services. Underwriting
syndicates continue to seek firm renewal rates and higher quality risks in
the
"Control of Well" segment of the energy insurance market. We believe these
factors enhance the viability of proven alternative risk transfer programs
such
as WELLSURE®,
a proprietary insurance program in which we provide both pre-event and loss
management services.
In
the
international markets, national oil and gas companies and large international
operators are becoming aware of the risks associated with older poorly
maintained wells and wellheads, internal competency levels among core employees
and service vendors and societal risks from fields positioned in high population
areas. This awareness is leading to increased demand for well intervention
services to assess the magnitude of exposure, prevent catastrophic failures
and
mitigate damages in the event a loss occurs. We have a proven ability to
provide
these risk management services in the form of training, risk analyses,
contingency planning, audit programs and well inspections, as well as the
prevention and control of blowouts and the mitigation of risks related to
installations. These services are typical of those provided under our SafeGuard
programs in Algeria and Venezuela.
In
the
hydraulic workover/snubbing market, the advancement of underbalanced drilling
techniques and well completion methods is unlocking the potential in
unconventional resource plays. Underbalanced drilling can reduce lost
circulation, minimize differential sticking, increase drilling rates, and
most
importantly, create more productive wells by avoiding formation damage.
Similarly, completion techniques have also advanced to drive the economics
of
these unconventional resource plays.
Our
principal products and services for our well intervention business segment
include:
Hydraulic
Workover/Snubbing. We
provide various well intervention solutions involving workovers, well drilling,
well completions and plugging and abandonment services. Hydraulic units may
be
used for both routine and emergency well control situations in the oil and
gas
industry. Our hydraulic workover units are specially designed for moving
tubulars in and out of a wellbore using hydraulic pressure. These units may
also
be used for snubbing operations, servicing wells that are under pressure.
We
operate a fleet of 29 hydraulic workover rigs and four hot tap/valve drilling
units, 27 of which we own and 2 of which we operate on behalf of a
customer.
SafeGuard. Through
our SafeGuard program, developed specifically for international producers
and
operators, we provide dedicated risk management and emergency response services.
These services include risk assessment, loss mitigation, contingency planning
and continuous training, and education in all aspects of well management.
The
growth of our SafeGuard business reflects an industry trend moving operators
towards a higher level of preventative measures to protect against critical
well
events.
WELLSURE®
Program. We
and Global Special Risks, Inc., a managing general insurance agent located
in Houston, Texas, and New Orleans, Louisiana, have formed an alliance that
offers oil and gas exploration and production companies, through retail
insurance brokers, a program known as "WELLSURE®," which combines traditional
well control and blowout insurance with our post-event response services
and
well control preventative services including company-wide and/or well specific
contingency planning, personnel training, safety inspections and engineering
consultation. Insurance provided under WELLSURE® has been arranged with leading
London insurance underwriters. WELLSURE® program participants are provided with
the full benefit of having us as a safety and prevention partner. We generate
service fees based upon the scope of prevention activity required.
Engineering
Services. With
greater engineering capabilities than our competitors, we provide pre-event
engineering services that include consultation, well planning, dynamic kill
modeling and intervention planning.
Firefighting
Equipment Sales and Service. In
this service line, we sell complete firefighting equipment packages, together
with maintenance, monitoring, updating of equipment and ongoing consulting
services.
Specialized
Drilling Engineering. We
have a highly specialized in-house engineering staff which provides engineering
services, including planning and design of relief well drilling (trajectory
planning, directional control and equipment specifications, and on-site
supervision of drilling operations); planning and design of production
facilities which are susceptible to well capping or other control procedures;
and mechanical and computer aided designs for well control
equipment.
Inspections. A
cornerstone of our strategy of providing preventive well control services
involves on-site inspection services for drilling and workover rigs, production
platforms and field production facilities.
Training. We
provide specialized training in well control procedures for drilling,
exploration and production personnel for both U.S. and international operators.
Additionally, we provide competency programs, blowout drills and evaluations
as
well as incident command training.
Response
History. The
emergency response segment of the oil and gas services industry traces its
roots
to the late 1930's when Myron Kinley organized the Kinley Company, the first
oil
and gas well firefighting specialty company. Shortly after organizing the
Kinley
Company, Mr. Kinley took on an assistant named Red Adair who learned the
firefighting business under Mr. Kinley's supervision and remained with the
Kinley Company until Mr. Kinley's retirement. When Mr. Kinley retired
in the late 1950's, Mr. Adair organized the Red Adair Company and
subsequently hired Boots Hansen, Coots Matthews and Raymond Henry as members
of
his professional firefighting staff. Mr. Adair later added Richard
Hatteberg, Danny Clayton, Mike Foreman and Juan Moran to his staff, and the
international reputation of the Red Adair Company grew to the point where
it was
a subject of popular films and the dominant competitor in the industry. Boots
Hansen and Coots Matthews remained with the Red Adair Company until 1978
when
they split off to organize Boots & Coots, an independent firefighting,
snubbing and blowout control company.
The
1990's represented a period of rapid change in the oil and gas well control
and
firefighting business. The hundreds of oil well fires that were started by
Iraqi
troops during their retreat from Kuwait spurred the development of new
firefighting techniques and tools that have now become industry standards.
Moreover, after extinguishing the Kuwait fires, the entrepreneurs who created
the oil and gas well firefighting industry, including Red Adair, Boots Hansen
and Coots Matthews, retired, leaving our senior staff as the most experienced
active oil and gas well firefighters in the world.
Historically,
the well control emergency response segment of the oil and gas services industry
has been reactive, rather than proactive, and a small number of companies
have
dominated the market. As a result, if an operator in West Africa, for example,
experienced a well blowout and fire, he would likely call a well control
emergency response company in Houston, Texas that would take the following
steps:
•
immediately
dispatch a control team to the well location to assess the damage, supervise
debris removal, local equipment mobilization and site preparation;
•
gather
and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;
•
develop
or implement a detailed fire suppression and well-control plan;
•
mobilize
additional well-control and firefighting equipment in Houston, Texas;
•
transport
equipment by air freight from Houston, Texas to the blowout location;
•
extinguish
the fire and bring the well under control; and
•
transport
the control team and equipment back to Houston, Texas.
Description. Our
response services consist of personnel, equipment and emergency services
utilized during a critical well event, such as an oil and gas well fire,
blowout, or other loss of control at the well. These services also include
snubbing and pressure control services provided during a response which are
designed to minimize response time, mitigate damage, and maximize safety.
Revenue is generated through personnel time and material. Personnel time
consists of day rates charged for working crews usually consisting of a team
of
four personnel. Day rates charged for personnel time vary widely depending
up
the perceived technical, political, and security risks inherent in a project.
Critical events are typically covered by our customers' insurance, lowering
the
risk of non-payment.
Our
principal products and services for response segment include:
Well
Control. This
service segment is divided into two distinct levels. Critical event response
is
ordinarily reserved for well control projects where hydrocarbons are escaping
from a well bore, regardless of whether a fire has occurred. Non-critical
event
response, on the other hand, is intended for the more common sub-surface
operating problems that do not involve escaping hydrocarbons.
•
Critical
events. Critical
events frequently result in explosive fires, loss of life, destruction of
drilling and production facilities, substantial environmental damage and
the
loss of significant amounts of money per day in production revenue. Since
critical events ordinarily arise from equipment failures or human error,
it is
impossible to accurately predict the timing or scope of our critical event
work.
Critical events of catastrophic proportions can result in significant revenues
to us in the year of the incident. Our professional firefighting staff has
over
300 years of combined industry experience in responding to critical events,
oil well fires and blowouts.
•
Non-critical
events. Non-critical
events frequently occur in connection with workover operations or the drilling
of new wells into high pressure reservoirs. In most non-critical events,
the
blowout prevention equipment and other safety systems on the drilling rig
function according to design and in those instances, we are called upon to
supervise and assist in the well control effort so that drilling operations
can
resume as promptly as safety permits. While non-critical events do not
ordinarily have the revenue impact of a critical event, they are more common.
Non-critical events can escalate into critical events.
Firefighting
Equipment Rentals. This
service includes the rental of specialty well control and firefighting equipment
primarily for use in conjunction with Critical Events, including firefighting
pumps, pipe racks, athey wagons, pipe cutters, crimping tools and deluge
safety
systems. We charge this equipment out on a per diem basis. Rentals typically
average approximately 40% of the revenues associated with a Critical
Event.
WELLSURE®
Program. Under
the WELLSURE® insurance program, we serve as the emergency response provider in
the event of a well blowout, as well as project manager for control and
restoration of wells covered under the program.
Snubbing
Services. We
provide hydraulic workover/snubbing units for emergency well control situations
to the oil and gas industry. A hydraulic workover/snubbing unit is a specially
designed rig used for moving tubulars in and out of a wellbore using hydraulic
pressure. When a unit is snubbing, it is pushing pipe or tubulars into the
well
bore against well bore pressures. These units may also be used for underbalanced
drilling and workover.
Dependence
upon Customers
The
emergency response business is by nature episodic and unpredictable. A customer
that accounted for a material amount of business as a result of an oil well
blow-out or similar emergency may not account for a material amount of business
after the emergency is over. While well intervention services in general
are
generated from a base of several hundred customers, a significant portion
of the
total revenue in recent years has been generated by less than five international
clients. Approximately 33% of our consolidated revenues during the year ended
December 31, 2006 were derived from two key customers. Unless we are able
to
retain our existing customers or secure new customers, if we lose one or
more of
our significant customers, our revenue and results of operations would be
adversely affected.
Regulation
Our
operations are affected by numerous federal, state, and local laws and
regulations relating, among other things, to workplace health and safety
and the
protection of the environment. The technical requirements of these laws and
regulations are becoming increasingly complex and stringent, and compliance
is
becoming increasingly difficult and expensive. However, we do not believe
that
compliance with current laws and regulations is likely to have a material
adverse effect on our business or financial statements. Nevertheless, we
are
obligated to exercise prudent judgment and reasonable care at all times and
the
failure to do so could result in liability under any number of laws and
regulations.
Certain
environmental laws provide for “strict liability” for remediation of spills and
releases of hazardous substances and some provide liability for damages to
natural resources or threats to public health and safety. Sanctions for
noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible
that
changes in the environmental laws and enforcement policies hereunder, or
claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to us. Our insurance policies
provide liability coverage for sudden and accidental occurrences of pollution
and/or clean-up and containment of the foregoing in amounts which we believe
are
comparable to companies in the industry. To date, we have not been subject
to
any fines or penalties for violations of governmental or environmental
regulations and have not incurred material capital expenditures to comply
with
environmental regulations.
Research
and Development
We
are
not directly involved in activities that will require the expenditure of
substantial sums on research and development.
Competition
The
emergency response segment of the oil and gas services business is a dynamic
market in which new technical developments could afford a service company
a
significant advantage. At present, the principal competitors in the oil and
gas
well firefighting business are Wild Well Control, Inc., a subsidiary of Superior
Energy Services, Inc., and Cudd Pressure Control, a subsidiary of RPC, Inc.
We
believe that our SafeGuard expansion strategy along with the
WELLSUREÒ
program
and the recent acquisition of HWC have strengthened our competitive position
in
the industry by expanding both the scope of services that we offer to our
customers as well as our geographic presence.
Although
we have a strong market share position in workover products and services,
the
market is highly fragmented. Our main competitors in hydraulic workover include
Halliburton Co., Cudd
Pressure Control, a subsidiary of RPC, Inc.,
and
International Snubbing Services, a subsidiary of Superior Energy Services,
Inc.
Our
competitors may succeed in developing new techniques, products and services
that
are more effective than any that have been or are being developed by us or
that
render our techniques, products and services obsolete or noncompetitive.
Our
competitors may also succeed in obtaining patent protection or other
intellectual property rights that might hinder our ability to develop, produce
or sell competitive products or the specialized equipment used in our
business.
Employees
As
of
January 31, 2007, we and our operating subsidiaries collectively had 392
full-time employees, and 7 part-time personnel. In addition, we have several
part-time consultants and also employ part-time contract personnel who remain
on-call for certain emergency response projects. We are not subject to any
collective bargaining agreements and consider our relations with our employees,
consultants and contract personnel to be good.
Reliance
upon Officers, Directors and Employees
Our
services require highly specialized skilled personnel. Because of the unique
nature of the industry and the small number of persons who possess the requisite
skills and experience, we are highly dependent upon the personal efforts
and
abilities of our employees. In seeking qualified personnel, we may be required
to compete with companies having greater financial and other resources than
us.
Our future success will be dependent upon our ability to attract and retain
qualified personnel, and the inability to do so, or the loss of personnel,
could
have a material adverse impact on our business.
Contractual
Obligations to Customers; Indemnification
We
customarily enter into service contracts which contain provisions that hold
us
liable for various losses or liabilities incurred by the customer in connection
with our activities, including, without limitation, losses and liabilities
relating to claims by third parties, damage to property, violation of
governmental laws, regulations or orders, injury or death to persons, and
pollution or contamination caused by substances in our possession or control.
We
may be responsible for any such losses or liabilities caused by contractors
retained by us in connection with the provision of services. In addition,
such
contracts generally require us, our employees, agents and contractors to
comply
with all applicable laws, rules and regulations (which may include the laws,
rules and regulations of various foreign jurisdictions) and to provide
sufficient training and educational programs to such persons in order to
enable
them to comply with applicable laws, rules and regulations. In the case of
emergency response services, we frequently enter into agreements with customers
which limit our exposure to liability and/or require the customer to indemnify
us for losses or liabilities incurred by us in connection with such services,
except in the case of gross negligence or willful misconduct. There can be
no
assurance, however, that such contractual provisions limiting our liability
will
be enforceable in whole or in part under applicable law.
Item
1A. Risk
Factors.
In
addition to the other information set forth elsewhere or incorporated by
reference in this report, the following factors relating to us and our common
stock should be considered carefully.
Risks
Relating to Our Business
Demand
for our services and products depends on oil and natural gas industry activity
and expenditure levels that are directly affected by trends in oil and natural
gas prices.
Demand
for our products and services is particularly sensitive to the level of
exploration, development, and production activity of, and the corresponding
capital spending by, oil and natural gas companies, including national oil
companies. Prices for oil and natural gas are subject to large fluctuations
in
response to relatively minor changes in the supply of, and demand for, oil
and
natural gas, market uncertainty, and a variety of other factors that are
beyond
our control. Any prolonged reduction in oil and natural gas prices will depress
the immediate levels of exploration, development, and production activity,
often
reflected as changes in rig counts. Perceptions of longer-term lower oil
and
natural gas prices by oil and gas companies may result in the reduction or
deferral of major expenditures given the long-term nature of many large-scale
development projects. Lower levels of activity result in a corresponding
decline
in the demand for our services that could have a material adverse effect
on our
revenue and profitability. Many factors affect the supply and demand for
oil and
natural gas and therefore influence product prices, including:
•
the
level of production;
•
the
levels of oil and natural gas inventories;
•
domestic and worldwide demand for oil and natural gas;
•
the
expected cost of developing new reserves;
•
the
actual cost of finding and producing oil and natural gas;
•
the
availability of attractive oil and gas field prospects, which may be affected
by
governmental actions and regulations or environmental activists;
•
the
availability of transportation infrastructure and refining capacity;
•
the
level of drilling activity;
•
global
weather conditions and natural disasters;
•
worldwide political, military, and economic conditions and economic activity,
including growth in underdeveloped countries;
•
national government political objectives, including the ability of the
Organization of Petroleum Exporting Countries (OPEC) to set and maintain
production levels and prices for oil;
•
the
cost and timing of the development of alternate energy sources; and
•
tax
policies.
If
demand
for drilling services or drilling rig utilization rates decrease significantly
then demand for our services will decrease, which will adversely affect our
results of operations.
We
may not successfully integrate the businesses we acquire or achieve the benefits
we are seeking from acquisitions.
As
part
of our business strategy, we intend to evaluate potential acquisitions of
other
businesses or assets. However, there can be no assurance that we will be
successful in consummating any such acquisitions. Successful acquisition
of
businesses or assets will depend on various factors, including, but not limited
to, our ability to obtain financing and the competitive environment for
acquisitions. In addition, we may not be able to successfully integrate any
business or assets that we acquire in the future. The integration of acquired
businesses is likely to be complex and time consuming and may place a
significant strain on management resources.
Disruptions
in the political and economic conditions of the foreign countries in which
we
operate expose us to risks that may have a material adverse effect on our
business.
We
derive
a significant portion of our revenue from our operations outside of the United
States, which exposes us to risks inherent in doing business in each of the
countries in which we transact business. Our operations in countries other
than
the United States accounted for approximately 74% of our consolidated revenues
during the year ended December 31, 2006. Our operations in Venezuela and
Algeria
accounted for approximately 21% and 24%, respectively, of our consolidated
revenues during the year ended December 31, 2006. We anticipate that our
revenues from foreign operations will increase in the future as a consequence
of
our acquisition of HWC during the first quarter of 2006. Operations in countries
other than the United States are subject to various risks peculiar to each
country. With respect to any particular country, these risks may
include:
•
expropriation and nationalization of our assets or those of our customers
in
that country;
•
political and economic instability;
•
civil
unrest, acts of terrorism, force majeure, war, or other armed conflict;
•
natural
disasters, including those related to earthquakes and flooding;
•
inflation;
•
currency fluctuations, devaluations, conversion and expropriation restrictions;
•
confiscatory taxation or other adverse tax policies;
•
governmental activities that limit or disrupt markets, restrict payments,
or
limit the movement of funds;
•
governmental activities that may result in the deprivation of contract rights;
and
•
trade
restrictions and economic embargoes imposed by the United States and other
countries.
Due
to
the unsettled political conditions in many oil-producing countries, our revenue
and profits are subject to the adverse consequences of war, the effects of
terrorism, civil unrest, strikes, currency controls, and governmental actions,
which could impact the supply and pricing for oil and natural gas, disrupt
our
operations, and increase our costs for security worldwide. International
areas
where we operate that have significant amounts of political risk include
parts
of Africa, South America and the Middle East. Operations in these areas increase
our exposure to the foregoing risks.
For
instance, the Venezuelan National Assembly recently raised royalties on certain
crude oil projects and Venezuelan President Hugo Chavez has threatened to
nationalize the country's key industries and indicated his intention is to
seize
certain oil producing regions unless foreign oil companies surrender control
to
the Venezuelan national oil company. These actions have created uncertainty
in
the future business and investment activities of foreign oil and natural
gas
companies in Venezuela. To the extent that these actions adversely affect
our
customers' activities in this region, they may adversely affect our revenues
and
profits.
We
are subject to foreign exchange and currency risks, particularly with respect
to
Venezuela.
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 December 31, 2006, we had $1,754,000 of cash and $15,823,000
in
accounts receivable attributable to our Venezuelan operations. Of this cash,
$1,209,000 was denominated in U.S. dollars and resided in a U.S. bank; the
remaining $545,000 was denominated in Venezuelan bolívares and resided in a
Venezuelan bank. Of the total Venezuela accounts receivable balance. $7,509,000
was denominated in Venezuelan bolívares and are subject to market risks. The
remaining $8,314,000 was denominated in U.S. dollars..
Effective
March 1, 2005, the exchange rate in Venezuela devalued from 1,920 to 2,150
Venezuelan bolívares to the U.S. dollar. We have taken charges to equity under
the caption "foreign currency translation loss" of $361,000 during the year
ended December 31, 2005 to reflect devaluation of the Venezuelan bolívar for
that period. There was no currency gain or loss attributable to Venezuela
during
the year ended December 31, 2006. The Venezuelan government implemented a
foreign currency control regime on February 5, 2003. This has resulted in
currency controls that restrict the conversion of the Venezuelan currency,
the
Venezuelan bolívar, to U.S. Dollars. A subsidiary of ours has registered with
the control board (CADIVI) in order to have a portion of total receivables
paid
in U.S. dollars directly to a United States bank account. Venezuela is also
on
the U.S. government's "watch list" for highly inflationary economies. Management
continues to monitor the situation closely.
We
must successfully compete for the services of highly trained technical
personnel.
Many
of
the services that we provide are complex and require a high level of expertise
and often must be performed in harsh conditions. Our success depends in part
upon our ability to employ and retain technical personnel with the ability
to
provide and enhance these services. In addition, our ability to expand our
operations depends in part on our ability to increase our skilled labor force.
The demand for skilled workers is high and the supply is limited. A significant
increase in the wages paid by competing employers could result in a reduction
of
our skilled labor force, increases in the wage rates that we must pay, or
both.
If these events were to occur, our cost structure could increase, our margins
could decrease, and our growth potential could be impaired.
Our
hydraulic workover/snubbing business is susceptible to seasonal earnings
volatility and may be adversely affected by severe weather.
Our
hydraulic workover/snubbing operations are directly affected by seasonal
differences in weather in the areas in which we operate, most notably in
the
Gulf of Mexico and the Gulf Coast region. Weather conditions in the Gulf
of
Mexico and the Gulf Coast region generally result in higher activity in the
spring, summer and fall months, with the lowest activity in the winter months.
In addition, summer and fall drilling activity and, therefore, the demand
for
our hydraulic workover/snubbing services can be restricted due to hurricanes
and
other storms prevalent in the Gulf of Mexico and along the Gulf Coast.
Repercussions of severe weather conditions may include:
•
evacuation of personnel and curtailment of services;
•
weather-related damage to offshore equipment resulting in suspension of
operations;
•
weather-related damage to our facilities;
•
increase in insurance cost and reduction in its availability;
•
inability to deliver men or materials to jobsites; and
•
loss
of
productivity.
For
example, during 2005 HWC suffered the loss of one workover unit as a consequence
of severe weather in the Gulf of Mexico.
We
have borrowed, and may in the future borrow, money to fund our operations
and
growth, which exposes us to certain risks that may materially impact our
operations.
As
of
December 31, 2006, we had outstanding subordinated promissory notes totaling
approximately $21.2 million, the outstanding amount under our bank term
credit facility was $8.3 million, the outstanding amount under our bank
revolving credit facility was $1.9 million, and we had approximately $5.8
million in remaining borrowing capacity under our bank revolving credit
facility. The borrowing base limitation under our revolving credit facility
is
subject to redetermination periodically at the discretion of the lender.
Upon a
redetermination, we could be required to repay a portion of our bank debt.
We
may not have sufficient funds to make such repayments, which could result
in a
default under the terms of the loan agreement and an acceleration of the
loan.
We intend to finance our operating expenses, capital expenditures and
acquisitions with cash flow from operations, and borrowings under our credit
facility. In addition, we may significantly alter our capitalization in order
to
make future acquisitions. These changes in capitalization may significantly
increase our level of debt. If we incur additional debt for these or other
purposes, the related risks that we face could intensify. A higher level
of debt
also increases the risk that we may default on our debt obligations. Our
ability
to meet our debt obligations and to reduce our level of debt depends on our
future performance which is affected by general economic conditions and
financial, business and other factors. Many of these factors are beyond our
control. Our level of debt affects our operations in several important ways,
including the following:
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•
|
a
significant portion of our cash flow from operations must be used
to pay
interest on borrowings and is therefore not available to re-invest
in our
business;
|
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•
|
the
covenants contained in the agreements governing our debt limit
our ability
to borrow additional funds, pay dividends, make capital expenditures,
dispose of assets and issue shares of preferred stock and otherwise
may
affect our flexibility in planning for, and reacting to, changes
in
business conditions;
|
|
•
|
a
high level of debt may impair our ability to obtain additional
financing
in the future for working capital, capital expenditures, acquisitions,
or
general corporate or other purposes;
|
|
•
|
a
highly leveraged financial position would make us more vulnerable
to
economic downturns and could limit our ability to withstand competitive
pressures; and
|
|
•
|
any
debt that we incur under our term credit facility or revolving
credit
facility will be at variable rates which makes us vulnerable to
increases
in interest rates.
|
Our
ability to finance our business activities will require us to generate
substantial cash flow.
Our
business activities require substantial capital. We intend to finance our
operations and growth in the future through cash flows from operations, the
incurrence of additional indebtedness and/or the issuance of additional equity
securities. We cannot be sure that our business will continue to generate
cash
flow at or above current levels.
If
we are
unable to generate sufficient cash flow from operations to fund our business
and
service our debt, we may have to obtain additional financing through the
issuance of debt and/or equity. We cannot be sure that any additional financing
will be available to us on acceptable terms. Issuing equity securities to
satisfy our financing requirements could cause substantial dilution to our
existing stockholders.
If
our
revenues were to decrease due to lower demand for our services as a result
of
lower oil and natural gas prices or for other reasons, and if we could not
obtain capital through our revolving credit facility
or otherwise, our ability to operate and grow our business could be materially
adversely affected.
The
loss of one or more of our current customers could adversely affect our results
of operations.
Our
business is dependent not only on securing new customers but also on maintaining
current customers. Approximately 30% of our consolidated revenues during
the
year ended December 31, 2006 were derived from two key customers. Unless
we are
able to retain our existing customers, or secure new customers if we lose
one or
more of our significant customers, our revenue and results of operations
would
be adversely affected.
The
intense competition in our industry could result in reduced profitability
and
loss of market share for us.
In
some
of our business segments, we compete with the oil and natural gas industry's
largest equipment and service providers. Some of these companies have
substantially greater financial resources, and larger operations than we
do.
They may be better able to compete because of their broader geographic
dispersion, or their product and service diversity. As a result, we could
lose
customers and market share to those competitors. These companies may also
be
better positioned than us to successfully endure downturns in the oil and
natural gas industry. Our operations may be adversely affected if our current
competitors or new market entrants introduce new products or services with
better prices, features, performance or other competitive characteristics
than
our products and services. Competitive pressures or other factors also may
result in significant price competition that could harm our revenue and our
business. Additionally, we may face competition in our efforts to acquire
other
businesses.
We
could be subject to substantial liability claims that could harm our financial
condition.
Our
operations involve hazardous activities that involve an extraordinarily high
degree of risk. Hazardous operations are subject to accidents resulting in
personal injury and the loss of life or property, environmental mishaps and
mechanical failures, and litigation arising from such events may result in
our
being named a defendant in lawsuits asserting large claims. We may be held
liable in certain circumstances, including if we fail to exercise reasonable
care in connection with our activities, and we may also be liable for injuries
to agents, employees and contractors who are acting within the course and
scope
of their duties. We currently maintain liability insurance coverage with
aggregate policy limits which we believe to be adequate for our operations.
However:
|
•
|
we
may not be able to continue to obtain insurance on commercially
reasonable
terms;
|
|
•
|
we
may be faced with types of liabilities that will not be covered
by our
insurance, such as damages from environmental contamination; and
|
|
•
|
the
dollar amount of any liabilities may exceed our policy limits.
|
A
successful claim for which we are not fully insured could have a material
adverse effect on us. No assurance can be given that we will not be subject
to
future claims in excess of the amount of insurance coverage which we deem
appropriate to maintain.
Risks
Relating to Our Relationship with Oil States Energy Services, Inc.
Oil
States Energy Services, Inc. owns a significant percentage of common stock
in
our company, which could limit your ability to influence the outcome of
stockholder votes.
Oil
States Energy Services, Inc., a wholly owned subsidiary of Oil States
International, Inc., owns approximately 44.5% of our common stock outstanding
as
of March 15, 2007. In addition, Douglas E. Swanson and Cindy B.
Taylor,
two
current members of our board of directors, are directors of Oil States Energy
Services, Inc. and executive officers of Oil States
International, Inc. In addition, Oil States Energy Services, Inc. had the
ability to designate a third member of our board of directors and has designated
Robert G. Croyle. As a result, Oil States will be able to exercise
significant influence over the outcome of matters requiring a stockholder
vote,
including the election of directors, the adoption or amendment of provisions
in
our charter and bylaws, the approval of mergers and other significant corporate
transactions, including transactions involving a change of control. The
interests of Oil States may differ from yours, and Oil States may vote its
common stock in a manner that may adversely affect you.
We
have renounced any interest in specified business opportunities, and Oil
States
International, Inc. and its director nominees on our board of directors
generally have no obligation to offer us those opportunities.
Pursuant
to our certificate of incorporation, we have renounced any interest or
expectancy in specified business opportunities in which Oil States
International, Inc., any of its affiliates or any of their respective
officers, directors, employees or other agents serving as a member of our
board
of directors (collectively, the "Oil States Group") participates or desires
or
seeks to participate and that involves any aspect of the energy equipment
or
services business or industry. Our certificate of incorporation also provides
that if any such business opportunity is presented to a person who is a member
of the Oil States Group, including any of those individuals who also serves
as a
member of our board of directors:
|
•
|
no
member of the Oil States Group or any of those individuals has
any
obligation to communicate or offer the opportunity to us; and
|
|
•
|
such
entity or individual may pursue the opportunity as that entity
or
individual sees fit,
|
unless:
|
•
|
it
was presented to a member of the Oil States Group who also serves
as a
member of our board of directors solely in that person's capacity
as a
director of our company and no other member of the Oil States Group
independently received notice of or otherwise identified such opportunity;
or
|
|
•
|
the
opportunity was identified solely through the disclosure of information
by
or on behalf of our company.
|
We
may
amend these provisions of our certificate of incorporation only by an
affirmative vote of holders of at least 80% of our outstanding common stock.
As
a result of these charter provisions, our future competitive position and
growth
potential could be adversely affected.
Risks
Relating to Ownership of Our Common Stock
Future
sales of our common stock by our existing stockholders may depress our stock
price.
As
of
March 22, 2007, there were 59,489,830 shares of our common stock outstanding.
We
have previously filed a shelf registration statement registering all of the
shares owned by Oil States Energy Services, Inc. for resale, which would
continue to be available to Oil States Energy Services, Inc. for future
sales. In addition, approximately 9.5 million shares of common stock underlying
certain warrant agreements, employee stock option plans, and director stock
option plans are eligible for immediate sale, and we may register for sale
additional shares underlying these or other plans in the future. All of the
common stock covered by current and any future registration statements may
be
sold by the selling security holders in market transactions from time to
time.
Sales of a substantial number of shares of our common stock in the public
market, or the perception that these sales may occur, could cause the market
price of our common stock to decline.
Trading
volumes of our shares of common stock have been comparatively low and,
therefore, our common stock may suffer from limited liquidity and its prices
will likely be volatile and its value may be adversely affected.
Because
of our relatively low trading volumes, the trading price of our common stock
will likely be subject to significant price fluctuations and limited liquidity.
This may adversely affect the value of your investment. In addition, our
common
stock price could be subject to fluctuations in response to variations in
quarterly operating results, changes in management, future announcements
concerning us, general trends in the industry and other events or factors
as
well as those described above.
We
have not paid, and do not anticipate paying, any dividends on our common
stock
in the foreseeable future.
We
have
never paid any cash dividends on our common stock. We do not expect to declare
or pay any cash or other dividends in the foreseeable future on our common
stock. Our existing revolving and term credit facilities restrict our ability
to
pay cash dividends, and we may also enter into credit agreements or other
borrowing arrangements in the future that further restrict our ability to
declare or pay cash dividends on our common stock.
You
may experience dilution of your ownership interests due to the future issuance
of additional shares of our common stock.
We
may in
the future issue our previously authorized and unissued securities, resulting
in
the dilution of the ownership interests of our present stockholders. We are
currently authorized to issue 125,000,000 shares of common stock and 5,000,000
shares of preferred stock with such designations, preferences and rights
as
determined by our board of directors. As of March 22, 2007, no shares of
our
preferred stock were outstanding, 59,489,830 shares of common stock were
outstanding, and there were approximately 9.5 million shares of common stock
underlying certain warrant agreements, employee stock option plans and director
stock option plans, of which options and warrants to purchase 6.8 million
shares
were outstanding and of these shares, 4.4 million were exercisable within
60
days. The issuance of such additional shares of common stock would dilute
the
interests of our existing stockholders and issuance or potential issuance
of
such shares may create downward pressure on the trading price of our common
stock. We may also issue additional shares of our common stock or other
securities that are convertible into or exercisable for common stock in
connection with the hiring of personnel, future acquisitions, future private
placements of our securities for capital raising purposes, or for other business
purposes. Any such issuances would further dilute the interests of our existing
stockholders.
We
may issue preferred stock, the terms of which could adversely affect the
voting
power or value of our common stock.
Our
certificate of incorporation authorizes us to issue, without the approval
of our
stockholders, one or more classes or series of preferred stock having such
preferences, powers and relative participating, optional and other rights,
including preferences over our common stock respecting dividends and
distributions, as our board of directors may determine. The terms of one
or more
classes or series of preferred stock could adversely impact the voting power
or
value of our common stock. For example, we might afford holders of preferred
stock the right to elect some number of our directors in all events or on
the
happening of specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences
we
might assign to holders of preferred stock could affect the residual value
of
our common stock.
The
ownership interest of Oil States Energy Services, Inc., the Rights
Agreement by and between us and American Stock Transfer & Trust Company
dated November 17, 2001 ("Rights Agreement"), provisions contained in our
certificate of incorporation and bylaws and provisions of Delaware law could
discourage a takeover attempt, which may reduce or eliminate the likelihood
of a
change of control transaction and, therefore, your ability to sell your shares
for a premium.
The
significant ownership position of Oil States Energy Services, Inc., our
Rights Agreement, provisions contained in our certificate of incorporation
and
bylaws and provisions of Delaware law could make it more difficult for a
third
party to acquire control of our company. We have entered into a Rights Agreement
that would cause extreme dilution to any person or group (other than Oil
States
Energy Services, Inc., its affiliates and certain of its direct
transferees) who attempts to acquire a significant interest in us without
advance approval of our board of directors. Our certificate of incorporation
and
bylaws include provisions for a classified board, limitations on the removal
of
directors and on stockholder proposals at meetings of stockholders and
limitations on the right of stockholders to call special meetings. Our
certificate of incorporation also authorizes our board of directors to issue
preferred stock without stockholder approval. In addition, Section 203 of
the Delaware General Corporation Law imposes restrictions on mergers and
other
business combinations between us and any holder of 15% or more of our
outstanding common stock. Each of these factors could increase the difficulty
for a third party to acquire us and therefore delay or prevent a change of
control transaction, even if that change would be beneficial to our
stockholders, which could affect the value of our common stock and reduce
or
eliminate your ability to sell your shares of common stock at a
premium.
Lack
of effective internal control over financial reporting could result in an
inability to accurately report our financial results that could lead to a
loss
of investor confidence in our financial reports and have an adverse effect
on
our stock price.
Effective
internal control over financial reporting is essential for us to produce
reliable financial reports. If we cannot provide reliable financial information
or prevent fraud, our business and operating results could be harmed. We
have in
the past discovered, and may in the future discover, deficiencies in our
internal control over financial reporting. In connection with the audit of
our
consolidated financial statements for the year ended December 31, 2004, our
independent auditors, UHY Mann Frankfort Stein and Lipp CPAs, LLP, issued
a
letter to our audit committee noting certain matters in our Venezuelan
subsidiary that they considered to be material weaknesses in internal control.
The matters listed in the letter 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. The same material
weaknesses were identified in connection with the audit of our consolidated
financial statements for the year ended December 31, 2005.
We
enacted changes in policies and procedures during 2006 designed to remediate
the
material weaknesses identified in our internal control over financial reporting
and at December 31, 2006 such material weaknesses were remediated. However,
there can be no assurance that in the future other material weakness will
not
arise and failure to successfully implement and maintain effective internal
control over financial reporting, including any ineffectiveness of the
corrective actions that may be needed to address the control deficiencies,
could
result in a material misstatement of our financial statements or otherwise
cause
us to fail to meet our financial reporting obligations. This, in turn, could
result in a loss of investor confidence in the accuracy and completeness
of our
financial reports, which could have an adverse effect on our stock
price.
Item
1B. Unresolved
Staff Comments.
None.
Item
2.
Properties.
We
own a
facility in northwest Houston, Texas, at 11615 N. Houston-Rosslyn Road, that
includes approximately 2 acres of land, a 4,000 square foot office building
and
a 12,000 square foot manufacturing and warehouse building. We also own
approximately 6.3 acres of land and a 62,470 square foot office for hydraulic
workover services along with approximately 1.8 acres of land and a 9,000
square
foot training facility in Houma, Louisiana. Additionally, we have leased
office
and equipment storage facilities in Houston, Algeria, Republic of Congo,
Egypt,
Dubai and Venezuela. (See “Note I” Commitment and Contingencies in the footnotes
to the financial statements.) We believe that these facilities will be adequate
for our anticipated needs.
Item
3. 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
liabilities resulting from any such proceedings will have a material adverse
effect on our operations or financial position.
Item
4. Submission
of Matters to a Vote of Security
Holders.
No
matters were submitted to the shareholders during the fourth quarter of 2006.
PART
II
Item
5. Market
for Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our
common stock is listed on the American Stock Exchange (AMEX) under the symbol
“WEL.” The following table sets forth the high and low sales prices per share of
our common stock for each full quarterly period within the two most recent
fiscal years as reported on the AMEX:
High
and Low Sales Prices
|
2006
|
2005
|
||||||||||||
|
|
High
|
Low
|
High
|
Low
|
|||||||||
|
First
Quarter
|
$
|
1.86
|
$
|
1.08
|
$
|
1.15
|
$
|
0.81
|
|||||
|
Second
Quarter
|
2.45
|
1.58
|
1.14
|
0.89
|
|||||||||
|
Third
Quarter
|
1.97
|
1.56
|
1.61
|
1.02
|
|||||||||
|
Fourth
Quarter
|
2.25
|
1.55
|
1.24
|
0.90
|
|||||||||
On March
21,
2007 the last reported sales price of our common stock as reported on AMEX
was $
2.34 per share.
As
of
March 15, 2007, our
common stock was held by approximately 258 holders of record. We estimate
that
we have a larger number of beneficial stockholders and much of our common
stock
is held by broker-dealers in street name for their customers.
We
have
not paid any cash dividends on our common stock to date. Our current policy
is
to retain earnings, if any, to provide funds for the operation and expansion
of
our business. Our credit facilities prohibit paying cash dividends.
PERFORMANCE
OF COMMON STOCK
The
following graph compares our total stockholder return on an investment of
$100
in our common stock at December 31, 2001 for the years ended December 31,
2002,
2003, 2004, 2005 and 2006 as compared to the Standard & Poors' 500 Stock
Index, the Standard & Poors' Energy Composite Index and the PHLX Oil Service
Sector over the same period.
|
|
12/01
|
12/02
|
12/03
|
12/04
|
12/05
|
12/06
|
|||||||||||||
|
Boots
& Coots International Well Control
|
100.00
|
32.00
|
63.00
|
45.50
|
52.00
|
112.00
|
|||||||||||||
|
S
& P 500
|
100.00
|
77.90
|
100.24
|
111.15
|
116.61
|
135.03
|
|||||||||||||
|
S
& P Energy
|
100.00
|
88.87
|
111.65
|
146.87
|
192.93
|
239.63
|
|||||||||||||
|
PHLX
Oil Service Sector
|
100.00
|
91.27
|
105.49
|
142.69
|
214.08
|
242.69
|
|||||||||||||
Copyright
©
2007, Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. All rights reserved.
www.
researchdatagroup.com/S&P.htm
Item
6.
Selected Financial Data.
The
following table sets forth certain historical financial data as of and for
the
years ended December 31, 2006, 2005, 2004, 2003, and 2002 which has been
derived
from our audited consolidated financial statements. The results of operations
of
ITS, Baylor Company, Abasco and Special Services are presented as discontinued
operations. The data should be read in conjunction with the consolidated
financial statements, including the notes, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in
this Form 10-K.
|
Years
Ended December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(in
thousands except per share amounts)
|
||||||||||||||||
|
INCOME
STATEMENT DATA:
|
||||||||||||||||
|
Revenues
|
$
|
97,030
|
$
|
29,537
|
$
|
24,175
|
$
|
35,935
|
$
|
14,102
|
||||||
|
Operating
income (loss)
|
19,892
|
4,563
|
1,066
|
10,234
|
(1,539
|
)
|
||||||||||
|
Income
(loss) from continuing operations
|
11,165
|
2,779
|
(290
|
)
|
6,609
|
(2,525
|
)
|
|||||||||
|
Income
(loss) from discontinued operations, net of income taxes
|
—
|
—
|
42
|
482
|
(6,179
|
)
|
||||||||||
|
(Loss)
from sale of discontinued operations, net of income taxes
|
—
|
—
|
—
|
—
|
(476
|
)
|
||||||||||
|
Net
income (loss)
|
11,165
|
2,779
|
(248
|
)
|
7,091
|
(9,180
|
)
|
|||||||||
|
Net
income (loss) attributable to common stockholders
|
11,781
|
1,905
|
(996
|
)
|
5,868
|
(12,292
|
)
|
|||||||||
|
BASIC
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.22
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.25
|
$
|
(0.53
|
)
|
||||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
0.02
|
$
|
(0.61
|
)
|
|||||
|
Net
income (loss)
|
$
|
0.22
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.27
|
$
|
(1.14
|
)
|
||||
|
Weighted
average common shares outstanding -Basic
|
53,772
|
29,507
|
28,142
|
21,878
|
10,828
|
|||||||||||
|
DILUTED
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||
|
Continuing
operations
|
$
|
0.21
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.24
|
$
|
(0.53
|
)
|
||||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
0.02
|
$
|
(0.61
|
)
|
|||||
|
Net
income (loss)
|
$
|
0.21
|
$
|
0.06
|
$
|
(0.04
|
)
|
$
|
0.26
|
$
|
(1.14
|
)
|
||||
|
Weighted
average common shares outstanding - Diluted
|
55,036
|
31,374
|
28,142
|
22,218
|
10,828
|
|||||||||||
|
As
of December 31,
|
||||||||||||||||
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
BALANCE
SHEET DATA:
|
||||||||||||||||
|
Total
assets
|
$
|
101,017
|
$
|
14,767
|
$
|
18,393
|
$
|
19,726
|
$
|
7,036
|
||||||
|
Long-term
debt and notes payable, including current maturities (1)
|
31,432
|
6,448
|
7,680
|
12,398
|
15,000
|
|||||||||||
|
Working
capital (deficit) (2) …
|
25,512
|
3,565
|
2,553
|
9,375
|
(16,994
|
)
|
||||||||||
|
Stockholders'
equity (deficit) (3)…
|
38,422
|
3,795
|
1,180
|
380
|
(13,988
|
)
|
||||||||||
|
Common
shares outstanding….
|
59,186
|
29,594
|
29,439
|
27,300
|
11,216
|
|||||||||||
|
(1)
|
The
improvement in long-term debt and notes payable including current
maturities and working capital from 2003 to 2004 is a result of
restructuring our obligations with Prudential in 2004. The increase
in
long term debt from 2005 to 2006 is a result of debt issued to
Oil States
Energy Services, Inc. and the credit agreement with Wells Fargo
entered
into in conjunction with the HWC
acquisition.
|
|
(2)
|
Working
capital is the dollar amount of current assets less current liabilities.
The change in working capital from 2002 to 2003 is a result of
increased
business activities in 2003 which resulted in higher levels of
cash and
receivables and payments on long term debt and reclassifying subordinated
debt from current to long term debt. The increase in working capital
from
2005 to 2006 is a result of the HWC
acquisition.
|
|
(3)
|
The
change in equity from 2002 to 2003 is a result of net income in
2003, a
short swing profit contribution and various issuances of common
stock. The
increase in Stockholders’ equity from 2005 to 2006 is a result of the HWC
acquisition.
|
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results
of Operations.
Results
of Operations
The
following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto and the other financial
information contained in our periodic reports previously filed with the
Securities and Exchange Commission and incorporated herein by
reference.
Summary
consolidated operating results for the fiscal years ended December 31, 2006,
2005 and 2004:
|
Years
Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
$
|
97,030
|
$
|
29,537
|
$
|
24,175
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of sales
|
52,281
|
14,488
|
11,929
|
|||||||
|
Operating
expenses
|
15,597
|
7,098
|
6,921
|
|||||||
|
Selling,
general and administrative
|
4,118
|
2,674
|
3,370
|
|||||||
|
Other
operating expense
|
259
|
—
|
—
|
|||||||
|
Depreciation
and amortization
|
4,883
|
714
|
889
|
|||||||
|
Operating
income
|
19,892
|
4,563
|
1,066
|
|||||||
|
Interest
expense and other, net
|
2,860
|
655
|
864
|
|||||||
|
Income
tax expense
|
5,867
|
1,129
|
492
|
|||||||
|
Income
(loss) from continuing operations…
|
11,165
|
2,779
|
(290
|
)
|
||||||
|
Income
from discontinued operations, net of income taxes
|
—
|
—
|
42
|
|||||||
|
Net
income (loss)
|
11,165
|
2,779
|
(248
|
)
|
||||||
|
Stock
and warrant accretion
|
—
|
—
|
(13
|
)
|
||||||
|
Preferred
dividends accrued
|
616
|
(874
|
)
|
(735
|
)
|
|||||
|
Net
income (loss) attributable to common stockholders
|
$
|
11,781
|
$
|
1,905
|
$
|
(996
|
)
|
|||
We
operate in two business segments: Well Intervention and Response. Intercompany
transfers between segments were not material. Our accounting policies of
the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, operating expenses
and
depreciation and amortization have been charged to each segment based upon
specific identification of expenses and a pro rata allocation of remaining
non-segment specific expenses are assigned between segments based upon relative
revenues. Selling, general and administrative and corporate expenses have
been
allocated between segments in proportion to their relative revenue. Business
segment operating data from continuing operations is presented for purposes
of
management discussion and analysis of operating results.
While
cost of sales expenses are variable based upon the type of revenue generated,
most of our operating expenses represent fixed costs for base labor charges,
rent and utilities. Consequently, operating expenses increase only slightly
as a
result of responding to a critical event. During periods of extremely high
response activity, we utilize third party consultants to support our response
staff and costs of sales will rise more significantly. In the past, during
periods of few critical events, resources dedicated to emergency response
were
underutilized or, at times, idle, while the fixed costs of operations continued
to be incurred, contributing to significant operating losses. To mitigate
these
consequences, we are actively seeking to expand our non-event services. These
services primarily utilize existing personnel to maximize utilization with
only
slight increases in fixed operating costs.
Our
well
intervention segment consists of services that are designed to enhance
production for oil and gas operators and reduce the number and severity of
critical well events such as oil and gas well fires, blowouts, or other losses
of control at the well. This segment includes services performed by hydraulic
workover/snubbing units that are used to enhance production of oil and gas
wells. These units are used for underbalanced drilling, workover, well
completions and plugging and abandonment services. This segment also includes
services that are designed to reduce the number and severity of critical
well
events offered through our SafeGuard and WELLSURE® risk management programs,
including training, contingency planning, well plan reviews, audits, inspection
services and engineering 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 also include snubbing and pressure control services
provided during a response which are designed to minimize response time and
mitigate damage while maximizing safety. Information concerning operations
in
our two different business segments for the years ended December 31, 2006,
2005
and 2004 is presented below. Certain reclassifications have been made to
the
prior periods to conform to the current presentation.
|
|
Year
Ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Revenues
|
||||||||||
|
Well
Intervention
|
$
|
76,653
|
$
|
13,860
|
$
|
8,050
|
||||
|
Response
|
20,377
|
15,677
|
16,125
|
|||||||
|
$
|
97,030
|
$
|
29,537
|
$
|
24,175
|
|||||
|
Cost
of Sales
|
||||||||||
|
Well
Intervention
|
$
|
46,562
|
$
|
6,226
|
$
|
4,216
|
||||
|
Response
|
5,719
|
8,262
|
7,713
|
|||||||
|
$
|
52,281
|
$
|
14,488
|
$
|
11,929
|
|||||
|
Operating
Expenses (1)
|
||||||||||
|
Well
Intervention
|
$
|
10,104
|
$
|
3,531
|
$
|
2,676
|
||||
|
Response
|
5,493
|
3,567
|
4,245
|
|||||||
|
$
|
15,597
|
$
|
7,098
|
$
|
6,921
|
|||||
|
Selling,
General and Administrative (2)
|
||||||||||
|
Well
Intervention
|
$
|
3,514
|
$
|
1,255
|
$
|
1,122
|
||||
|
Response
|
863
|
1,419
|
2,248
|
|||||||
|
$
|
4,377
|
$
|
2,674
|
$
|
3,370
|
|||||
|
Depreciation
and Amortization (1)
|
||||||||||
|
Well
Intervention
|
$
|
4,637
|
$
|
310
|
$
|
261
|
||||
|
Response
|
246
|
404
|
628
|
|||||||
|
$
|
4,883
|
$
|
714
|
$
|
889
|
|||||
|
Operating
Income
|
||||||||||
|
Well
Intervention
|
$
|
11,835
|
$
|
2,538
|
$
|
(225
|
)
|
|||
|
Response
|
8,057
|
2,025
|
1,291
|
|||||||
|
$
|
19,892
|
$
|
4,563
|
$
|
1,066
|
|||||
|
(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.
|
Comparison
of the Year ended December 31, 2006 with the Year ended December 31,
2005
Revenues
Well
Intervention revenues were $76,653,000 for the year ended December 31, 2006,
compared to $13,860,000 for the year ended December 31, 2005, representing
an
increase of $62,793,000, or 453.1% in the current year. The increase was
primarily the result of the inclusion of $53,826,000 of HWC’s snubbing and
hydraulic workover revenues for ten of the twelve months ended December 31,
2006. Safeguard revenues increased $6,298,000 or 88.1% during the year due
to an
increase in international revenues primarily in Algeria. The remaining increase
in revenue for the year ended December 31, 2006 was primarily due to remediation
work in the Gulf of Mexico.
Response
revenues were $20,377,000 for the year ended December 31, 2006, compared
to
$15,677,000 for the year ended December 31, 2005, an increase of $4,700,000,
or
30.0% in the current year. This increase was due to international activity
which
included extended jobs in Africa and Indonesia during the quarter ending
December 31, 2006.
Cost
of Sales
Well
Intervention cost of sales were $46,562,000 for the year ended December 31,
2006, compared to $6,226,000 for the year ended December 31, 2005, an increase
of $40,336,000, or 647.9% in the current year. The increase was primarily
the
result of inclusion of $36,581,000 of HWC’s snubbing and hydraulic workover cost
of sales for ten of the twelve months ended December 31, 2006. The remaining
cost increase of $3,755,000 during the twelve months of 2006 compared to
the
same period in 2005 was primarily due to increases in activity attributable
to
our Safeguard international business (primarily in Algeria).
Response
cost of sales were $5,719,000 for the year ended December 31, 2006, compared
to
$8,262,000 for the year ended December 31, 2005, a decrease of $2,543,000,
or
30.8% in the current year. This decrease was the result of reduced subcontractor
costs for third party field personnel security which were $5,087,000 during
2005. For the current year, cost of sales was 28.1% of revenue which is more
typical of direct costs associated with international response revenue.
Operating
Expenses
Consolidated
operating expenses were $15,597,000 for the year ended December 31, 2006,
compared to $7,098,000 for the year ended December 31, 2005, an increase
of
$8,499,000, or 119.7% in the current year. This increase was primarily the
result of inclusion of $3,951,000 related to support personnel and facility
expense of the snubbing and hydraulic workover service line for ten of the
twelve months ended December 31, 2006. The remaining operating cost increase
during the twelve months ended December 31, 2006 was primarily due to business
development expense associated with increased international business activities,
incentive compensation expense and administrative costs. The current twelve
month period includes expense of $976,000 related to stock option expense
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 were $4,377,000 for the year
ended
December 31, 2006, compared to $2,674,000 for the year ended December 31,
2005,
an increase of $1,703,000, or 63.7% in the current year. This increase was
primarily due to professional service fees, incentive compensation expense
and
$312,000 of 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. During the twelve months ended December 31, 2006, SG&A expense
represented 4.5% of consolidated revenues compared to 9.1% of revenues in
the
prior year.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense increased by $4,169,000 for the year
ended
December 31, 2006 compared to the 2005 period, due to the inclusion of
depreciation expense of $4,363,000 associated with the snubbing and hydraulic
workover service line for ten of the twelve months ended December 31, 2006.
Interest
Expense and Other, Net
The
increase in interest and other expenses, net, of $2,205,000 for the year
ended
December 31, 2006 as compared to the prior year is set forth in the table
below:
|
For
the Years Ended December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
(in
thousands)
|
|||||||
|
Interest
expense - senior debt
|
9
|
53
|
|||||
|
Interest
on subordinated notes
|
102
|
666
|
|||||
|
Interest
credit related to December 2000 subordinated debt restructuring
|
(598
|
)
|
(332
|
)
|
|||
|
Interest
expense - Term Note and Revolver
|
829
|
—
|
|||||
|
Interest
expense - Subordinated Debt
|
1,752
|
—
|
|||||
|
Amortization
of deferred finance cost on credit facility
|
41
|
—
|
|||||
|
Amortization
of deferred finance cost on subordinated debt
|
809
|
202
|
|||||
|
Interest
expense on financing agreements
|
85
|
56
|
|||||
|
Interest
income on cash investments
|
(177
|
)
|
(49
|
)
|
|||
|
Gain
(loss) on foreign exchange
|
—
|
(14
|
)
|
||||
|
Legal
settlements and other
|
8
|
73
|
|||||
|
Total
Interest and Other, Net
|
$
|
2,860
|
$
|
655
|
|||
Income
Tax Expense
Income
taxes for the year ended December 31, 2006 were $5,867,000, or 34.45% of
pre-tax
income compared to the year ended December 31, 2005 of $1,129,000, or 28.9%
of
pre-tax income. 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 are limited
to
utilizing approximately $3.2 million of U.S. net operating losses (NOL) to
offset U.S. taxable income generated during the tax year ended December 31,
2006
and expect lower dollar limits in future years until our U.S. NOL’s are either
completely used or expire. In 2005, the tax expense was due to taxable income
in
foreign jurisdictions. All 2005 U.S. tax expense was offset by utilization
of
NOL’s.
Comparison
of the Year ended December 31, 2005 with the Year ended December 31,
2004
Revenues
Well
Intervention revenues were $13,860,000 for the year ended December 31, 2005,
compared to $8,050,000 for the year ended December 31, 2004, representing
an
increase of $5,810,000, or 72.2% in the current year. The increase was primarily
the result of work performed under Safeguard agreements in Algeria and a
moderate increase in service fees generated from the WELLSURE®
program.
These increases were offset by a reduction in Venezuelan activity.
Response
revenues were $15,677,000 for the year ended December 31, 2005, compared
to
$16,125,000 for the year ended December 31, 2004, a decrease of $448,000,
or
2.8% in the current year. This decrease was the result of lower revenues
from
response to critical well events in Iraq of $1,963,000, of which, $1,301,000
was
a reduction of third party subcontractor pass-through revenue for field
personnel security, offset by increased domestic activity in the Gulf of
Mexico.
Cost
of Sales
Well
Intervention cost of sales were $6,226,000 for the year ended December 31,
2005,
compared to $4,216,000 for the year ended December 31, 2004, an increase
of
$2,010,000, or 47.7% in the current year. The increase is due to the increased
variable expense associated with the related increased revenue in Algeria
and
the WELLSURE®
program;
partially offset by decreased variable expense in the Venezuelan operation.
Response
cost of sales were $8,262,000 for the year ended December 31, 2005, compared
to
$7,713,000 for the year ended December 31, 2004, an increase of $---549,000,
or
7.1% in the current year. This increase was the result of subcontractor costs
of
$5,087,000 for field personnel security related to Iraq response activities
as
compared to $3,848,000 expensed during 2004. The subcontractor costs were
third
party pass-through charges. Excluding these pass-through charges, response
cost
of sales would have been $2,921,000 and $3,673,000 for the year ended December
31, 2005 and 2004, respectively.
Operating
Expenses
Consolidated
operating expenses were $7,098,000 for the year ended December 31, 2005,
compared to $6,921,000 for the year ended December 31, 2004, an increase
of
$177,000, or 2.6% in the current year. This increase is due to increased
business development expense, and administrative costs associated with
international business activities.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative expenses were $2,674,000 for the year
ended
December 31, 2005, compared to $3,370,000 for the year ended December 31,
2004,
a decrease of $696,000, or 20.7% from the prior year. 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.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense decreased by $175,000 for the year
ended
December 31, 2005 compared to the 2004 period, as a result of certain assets
being fully depreciated by year end 2004.
Interest
Expense and Other, Net,
The
reduction in interest and other expenses, net, of $209,000 for the year ended
December 31, 2005 as compared to the prior year is set forth in the table
below:
|
For
the Years Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
(in
thousands)
|
|||||||
|
Financing
fees
|
—
|
190
|
|||||
|
Interest
expense - senior debt
|
53
|
74
|
|||||
|
Interest
on subordinated notes
|
666
|
1,084
|
|||||
|
Interest
credit related to December 2000 subordinated debt restructuring
|
(332
|
)
|
(829
|
)
|
|||
|
Deferred
interest on subordinated debt
|
202
|
76
|
|||||
|
Interest
income on cash investments
|
(49
|
)
|
(25
|
)
|
|||
|
Gain
(loss) on foreign exchange
|
(14
|
)
|
(94
|
)
|
|||
|
Legal
settlements and other
|
129
|
388
|
|||||
|
Total
Interest and Other, Net
|
$
|
655
|
$
|
864
|
|||
Income
Tax Expense
Income
taxes for the year ended December 31, 2005 and 2004 were $1,129,000 and
$492,000, respectively, and are a result of comparative taxable income in
foreign operations and changes in the foreign tax laws. Algeria activity
starting in 2005 accounted for most of the increase in income tax
expense.
Liquidity
and Capital Resources
Liquidity
At
December 31, 2006, we had working capital of $25,512,000, including a cash
balance of $5,033,000. We ended the year with stockholders’ equity of
$38,422,000. For the year, we generated operating income of $19,892,000 and
net
cash provided by operating activities was $4,400,000. Capital expenditures
were
$6,882,000 and $306,000 during the years ended December 31, 2006 and 2005,
respectively. Net cash used in investing activities was $1,687,000. During
the
year we utilized our credit facility with Wells Fargo Bank, borrowing
$10,850,000 to retire our 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 $10,368,000
effective March 1, 2006.
We
generate our revenues from well intervention and emergency response services.
Response services are generally associated with a specific well control
emergency or critical “event” whereas well intervention 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 industry activity indicators such as commodity
pricing, activity forecasts, E&P operating budgets and resulting response
revenues. Well Intervention services provide a more predictable base of
revenues. Historically we have relied upon event driven services as the primary
source of our operating revenues, but more recently our strategy has been
to
achieve greater contribution from well intervention service revenues. Our
acquisition of HWC combined with organic growth in our well intervention
service
and product offerings has significantly reduced the volatility of our revenues,
however, our profitability is still significantly affected by event driven
services.
On
December 31, 2006, we had $1,754,000 of cash and $15,823,000 in accounts
receivable attributable to our Venezuelan operations. Of this cash, $1,209,000
was denominated in U.S. Dollars and resided in a U.S. bank. The remaining
$545,000 was denominated in Bolivars and resided in a Venezuelan bank. Of
the
total Venezuela accounts receivable balance. $7,509,000 was denominated in
Venezuelan bolívares and are subject to market risks. The remaining $8,314,000
was denominated in U.S. dollars. Effective February 5, 2004, the exchange
rate
in Venezuela changed from 1,600 to 1,920 Bolivars to the U.S. dollar and
effective March 1, 2005, the exchange rate in Venezuela further 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” for 0 and $361,000 during
the years ended December 31, 2006 and 2005, respectively, to reflect the
devaluation of the Bolivar. We have registered with the control board (CADIVI)
in order to have a portion of total receivables in U.S. dollar payments
made directly to a United States bank account. 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.
Management continues to monitor the situation closely.
Disclosure
of on and off balance sheet debts and commitments:
Our
known
contractual obligations at December 31, 2006 are reflected in the table
below.
|
Future
commitments (000’s)
|
||||||||||||||||
|
Description
|
TOTAL
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
After
5 years
|
|||||||||||
|
Long
and short term debt and notes payable
|
||||||||||||||||
|
Term
loan
|
$
|
8,349
|
$
|
1,940
|
$
|
3,880
|
$
|
2,529
|
$
|
—
|
||||||
|
Revolving
credit facility
|
$
|
1,917
|
$
|
—
|
$
|
—
|
$
|
1,917
|
$
|
—
|
||||||
|
Subordinated
debt
|
$
|
21,166
|
$
|
—
|
$
|
—
|
$
|
21,166
|
$
|
—
|
||||||
|
Future
minimum lease Payments
|
$
|
4,174
|
$
|
470
|
$
|
760
|
$
|
768
|
$
|
2,176
|
||||||
|
Total
commitments
|
$
|
35,606
|
$
|
2,410
|
$
|
4,640
|
$
|
26,380
|
$
|
2,176
|
||||||
Credit
Facilities/Capital Resources
On
August
13, 2004, we restructured our subordinated debt facility with Prudential.
The
principal balance of $9,635,000 would have been due on December 30, 2005.
Under
the amended terms, we paid principal of $2,000,000 on August 13, 2004 plus
accrued interest of $28,667. We were also required to pay down approximately
$1,635,000 of principal on December 15, 2004. The December 31, 2005 remaining
balance of $5,100,000 was to be paid in equal quarterly installments over
the
next four years with a final maturity of December 31, 2009. This restructuring
also extended the amortization period of the remaining troubled debt
restructuring related credit over the life of the restructured facility.
In
connection with the restructuring, Prudential also exchanged its remaining
582
shares of Series E preferred stock for 55,429 shares of common stock and
surrendered its warrants to purchase 2,418,000 shares of common stock, and
we
issued Prudential 1,250,000 shares of common stock valued at $1,088,000 as
well
as 524,206 shares of common stock to pay accrued and unpaid dividends owed
on
Series E and Series G preferred stock.
In
conjunction with the acquisition of HWC on March 3, 2006, we and our wholly
owned subsidiary, IWC Services, LLC, entered into a Credit Agreement (the
“Credit Agreement”) with Wells Fargo Bank, National Association, which
established a revolving credit facility of $10.3 million, subject to an initial
borrowing base of $6.0 million, and a term credit facility of $9.7 million.
The
term credit facility is due and 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 totaling $10.6 million
under
the credit facilities to repay the then outstanding senior and subordinated
debt
in full and repurchase all of our outstanding shares of preferred stock and
for
other corporate purposes. The $9.7 million credit facility is payable monthly
over sixty months. Interest is accrued and payable monthly for both
agreements.
The
Credit Agreement is secured by substantially all of our assets. Unused line
fees
are due monthly on the revolving credit facility 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. At our option, borrowings under
the
Credit Agreement bear interest at either (i) Wells Fargo’s prime commercial
lending rate, or (ii) the Inter-Bank Market Offered Rate plus a margin
ranging, as to the revolving credit facility, from 0.50% to 1.50% 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 rates for the
revolving credit facility and the term credit facility were 8.25% and 8.75%,
respectively at March 22, 2006.
The
Credit Agreement, as amended, 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 $25,000,000, 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) notice within five (5) business days of making any capital expenditure
exceeding $500,000; (4) limitation on the incurrence of additional
indebtedness except for indebtedness arising under subordinated notes in
the
aggregate amount of $21,166,000 owing to Oil States Energy Services, Inc.,
indebtedness existing on the date of the Credit Agreement, and indebtedness
existing between us and our subsidiaries that is unsecured and subordinated
to
the indebtedness arising under the Credit Agreement. Substantially all of
our
assets are pledged as collateral under the debt agreements. We were in
compliance with these covenants at December 31, 2006 and through the date
of
this report.
The
$21,166,000 owing to Oil States Energy Services, Inc. is an unsecured
subordinated debt which bears interest at a rate of 10% per annum, with a
one
time principal payment on September 9, 2010. Interest is accrued monthly
and payable quarterly.
Critical
accounting policies
In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure about Critical Accounting Policies,” we have identified the
accounting principles which we believe are most critical to the reported
financial statements by considering accounting policies that involve the
most
complex or subjective decisions or assessment. We have identified our most
critical accounting policies to be those related to revenue recognition,
allowance for doubtful accounts and income taxes.
Revenue
Recognition -
Revenue
is recognized on our service contracts primarily on the basis of contractual
day
rates as the work is completed. Revenue and cost from product and equipment
sales is recognized upon customer acceptance and contract
completion.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, related workman’s
compensation insurance, supplies, tools, repairs and depreciation costs.
General
and administrative costs are charged to expense as incurred. Fixed assets
are
depreciated over their useful lives. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
We
recognize 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 our predetermined day rates and sub-contracted
work as
incurred.
Allowance
for Doubtful Accounts
- We
perform ongoing evaluations of our customers and generally do not require
collateral. We assess our credit risk and provide an allowance for doubtful
accounts for any accounts which we deem doubtful of collection.
Income
Taxes
- We
account 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
our 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. The domestic tax liabilities are offset
by the
usage of our net domestic operating loss carry forwards. The provision for
tax
expense includes foreign income taxes from Algeria and Venezuela and a minimal
amount of domestic alternative minimum tax liability (See “Note G” Income Taxes
to the consolidated financial statements).
Share-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.
Recent
Accounting Pronouncements
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 year beginning after December 15, 2006.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new
fair
value measurements. However, for some entities, the application of this
Statement will change current practice. The Company has not yet determined
the
estimated impact on its financial condition or results of operations, if
any, of
adopting SFAS No. 157, which becomes effective for the fiscal years beginning
after November 15, 2007.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115.” SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement, which is consistent with the
Board’s long-term measurement objectives for accounting for financial
instruments. The Company has not yet determined the estimated impact on its
financial condition or results of operations, if any, of adopting SFAS No.
159,
which becomes effective for the fiscal years beginning after November 15,
2007.
Item
7A. 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 year 2006, foreign revenues were 74% of total
revenue. Revenue generated by Venezuela and Algeria during the year 2006
was 21%
and 24%, respectively. Revenue generated by Venezuela and Algeria during
the
year 2005 was 12% and 21%, respectively.
See “-
Liquidity and Capital Resources” for more information regarding our foreign
currency risks.
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 our fixed-rate
debt
instruments, are subject to interest-rate risk. We have performed sensitivity
analyses on the variable-interest rate debt to assess the impact of this
risk
based on a hypothetical 10% increase in market interest rates.
We
have a
term loan and a revolving line of credit that are subject to the risk of
loss
associated with movements in interest rates. As of December 31, 2006, we
had
floating rate obligations totaling approximately $10.3 million. See
“Liquidity and Capital Resources” for more information. 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 was
to
increase by 10% from the December 31, 2006 levels, our interest expense would
increase by a total of approximately $97,000 annually.
Item
8. Financial
Statements and Supplementary Data.
Attached
following the Signature Pages and Exhibits.
Item
9. Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item
9A. Controls
and Procedures.
Under
the
supervision and with the participation of our management, including our Chief
Executive Officer and 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 December 31,
2006. Our Chief Executive Officer and Chief Financial Officer concluded,
based
upon their evaluation, that our disclosure controls and procedures are effective
to ensure that the information required to be disclosed in reports that we
file
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms.
In
connection with the audit of our consolidated financial statements for the
two
years ended December 31, 2005, our independent auditors, UHY LLP, issued
letters
to our audit committee, dated March 21, 2005 and March 27, 2006, noting certain
matters in our Venezuelan subsidiary that they considered 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.
During
2005 and 2006, we made 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 intended to appropriately address the
matters referred to in the letters. These changes included:
|
-
|
hiring
a CFO with an International background and Sarbanes Oxley implementation
experience;
|
|
-
|
revising
and implementing the existing policies and procedures of the
subsidiary;
|
|
-
|
restructuring
the accounting department of the subsidiary and enhancing our corporate
reporting requirements;
|
|
-
|
utilizing
the HWC in-country accounting manager to support the implementation
of the
HWC integrated accounting system. The HWC accounting manager is
responsible for local internal controls and policies and
procedures.
|
Based
on
these improvements, the material weaknesses were remediated as of December
31,
2006.
Item
9B. Other
Information.
None.
PART
III
Item
10. Directors,
Executive Officers and Corporate
Governace.
The
following table lists the names and ages of each of our directors and/or
executive officers, as well as those persons expected to make a significant
contribution to us as of the date of this Form 10-K. There are no family
relationships between any director and any other director or executive
officer.
|
NAME
|
AGE
|
POSITION
|
||
|
Douglas
E. Swanson
|
68
|
Chairman
of the Board
|
||
|
Jerry
L. Winchester
|
47
|
President,
Chief Executive Officer and Director
|
||
|
Gabe
Aldape
|
47
|
Chief
Financial Officer
|
||
|
Dewitt
H. Edwards
|
48
|
Executive
Vice President
|
||
|
Don
B. Cobb
|
50
|
Executive
Vice President
|
||
|
W.
Richard Anderson (1)(2)
|
53
|
Director
|
||
|
E.
J. DiPaolo (1)(2)
|
54
|
Director
|
||
|
Robert
S. Herlin (1)(2)
|
51
|
Director
|
||
|
Kirk
Krist
|
48
|
Director
|
||
|
Cindy
B. Taylor (2)
|
45
|
Director
|
||
|
Robert
G. Croyle
|
64
|
Director
|
||
|
(1)
|
Member
of our audit committee.
|
|
(2)
|
Member
of our compensation committee.
|
BIOGRAPHIES
OF EXECUTIVE OFFICERS AND DIRECTORS
Douglas
E. Swanson has served as a Class III director since March 2006. Mr. Swanson
serves as a class III director for a term that will expire on the date of
our
annual meeting of stockholders in 2009. Mr. Swanson was elected Chairman
of the
board by our board of directors on November 6, 2006. Mr. Swanson is the current
Chief Executive Officer of Oil States International Inc., and until May 2006
was
the President of Oil States International, Inc. Oil States International,
Inc.,
a diversified oilfield services company, that is a leading manufacturer of
products for deepwater production facilities and subsea pipelines, and is
a
leading supplier of a broad range of services to the oil and gas industry,
including production-related rental tools, work force accommodations and
logistics, oil country tubular goods distribution and land drilling services.
Oil States is a publicly traded company on the New York Stock Exchange under
the
symbol “OIS”. Douglas E. Swanson has served as president and chief executive
officer of Oil States since January 2000. Prior to joining Oil States, Mr.
Swanson served as president and chief executive officer of Cliffs Drilling
Company, a contract drilling company, from January 1992 to August 1999. He
holds
a bachelor’s degree from Cornell College and is a Certified Public
Accountant.
Jerry
Winchester has served as our President, Class II Director and Chief Operating
Officer since 1998. In July of 2002 he assumed the position of chief executive
officer. Mr.
Winchester serves as a Class II Director for a term that will expire on the
date
of our annual meeting of stockholders scheduled in 2008. Prior
to
joining us in 1998, Mr. Winchester was employed by Halliburton Energy Services
since 1981 in positions of increasing responsibility, most recently as Global
Manager - Well Control, Coil Tubing and Special Services. He received his
B.S.
in Engineering Technology from Oklahoma State University in 1982 and is an
active member of the Society of Petroleum Engineers and the International
Association of Drilling Contractors.
Gabriel
Aldape was appointed our Chief Financial Officer March 3, 2006. From July
1998
to February 2006, Mr. Aldape served as Vice President-Finance of Hydraulic
Well
Control, LLC and in such capacity was responsible for directing investment
analysis, cost analysis, general accounting, and finance management, including
cash management and business planning, for Oil States land drilling operation,
for Capstar Drilling. Mr. Aldape also managed the Sarbanes-Oxley compliance
effort for Hydraulic Well Control, LLC and Capstar Drilling. While at Hydraulic
Well Control, LLC, Mr. Aldape directed the financial start up efforts in
Dubai,
the Republic of the Congo, Algeria and Egypt. Prior to that, his international
experience includes five years as finance manager and controller of Hydraulic
Well Control, LLC in Mexico and Venezuela. Mr. Aldape has spent 21 years
in
accounting and management in the oil field service industry.
Dewitt
H.
Edwards has served as Executive Vice President since June 30, 2006. From
April
2005 to June 2006, Mr. Edwards served as Senior Vice President—Finance and
Principal Financial Officer. His primary responsibilities include the delivery
of our services and the business development and geographic management of
our
domestic businesses. Prior to his employment, Mr. Edwards served as a consultant
to the Company from May 2002 to April 2005. In that capacity, he had been
engaged to work on initiatives to refinance our debt and improve our overall
capital structure and liquidity. Prior to that time, Mr. Edwards had been
employed by us as Executive Vice President since September 1998. Before joining
us, Mr. Edwards had been employed by Halliburton Energy Services for 19 years
where he served in positions of increasing authority, including Mid-Continent
area manager and North America resource
manager.
Don
B.
Cobb was appointed Executive Vice President February 5, 2007. Mr. Cobb had
served as President of Hydraulic Well Control since 1998. During that period,
HWC expanded from a domestic based service provider into an international
company with continuing international operations in the Republic of Congo,
Algeria, United Arab Emirates, Venezuela and Egypt. While employed by HWC,
Mr.
Cobb was also involved in the senior management of Oil States International,
Inc.’s U.S. land drilling business, Capstar Drilling, L.P. and Elenburg
Exploration. Prior to his employment with HWC, Mr. Cobb was employed for
22
years by Baker Hughes, Inc., where he served in various management and technical
positions of increasing authority in the U.S. and internationally, including
Area Manager of Indonesia, Regional Manager Western U.S., and Alaska, Regional
Manager of Latin America and Manager of Multi-Lateral Operations.
W.
Richard Anderson has served as a Class I director since August 1999. Mr.
Anderson also serves as chairman of the Audit Committee and is a member of
the
compensation committee. Mr. Anderson serves as a Class I Director for a term
that will expire on the date of the annual meeting of stockholders scheduled
for
calendar year 2007. Mr.
Anderson is the President, Chief Financial Officer and a director of Prime
Natural Resources, a closely-held exploration and production company. Prior
to
his employment at Prime in January 1999, he was employed by Hein &
Associates LLP, a certified public accounting firm, where he served as a
partner
from 1989 to January 1995 and as a managing partner from January 1995 until
October 1998. Mr. Anderson also serves on the boards of directors of Global
Santa Fe Corporation and Calibre Energy, Inc.
E.
J.
DiPaolo served as a director from May 1999 to December 4, 2002 then was
reappointed on September 30, 2003. Mr. DiPaolo serves as a Class II Director
for
a term that will expire on the date of our annual meeting of stockholders
in
2008. Mr. DiPaolo also serves on the audit and compensation committees. Since
August of 2003, Mr. DiPaolo has provided consulting services to Growth Capital
Partners, L.P., a company engaged in investments and merchant banking. Mr.
DiPaolo was the Senior Vice President, Global Business Development of
Halliburton Energy Services, having had responsibility for all worldwide
business development activities until his retirement in 2002. Mr. DiPaolo
was
employed at Halliburton Energy Services from 1976 until his retirement in
progressive positions of responsibility.
Robert
S.
Herlin was appointed a Class I director on September 30, 2003. Mr. Herlin
serves
on the Audit Committee and chairs the compensation committee. Mr. Herlin
serves
as a Class I Director for a term that will expire on the date of the annual
meeting of stockholders scheduled for calendar year 2007. Since
2003, Mr. Herlin has served as the President, CEO and a Director of Evolution
Petroleum Corporation, a private company involved in the acquisition and
redevelopment of oil and gas properties. Since 2003, Mr. Herlin has served
as a
partner with Tatum Partners, a service company that provides principal executive
and accounting officers to clients on a contract basis. Prior to his employment
at Evolution Petroleum Corporation, Mr. Herlin was CFO of Intercontinental
Tower
Corporation, a wireless telecom infrastructure operation in South America
from
2000 to 2003. Mr. Herlin earned his MBA from Harvard and engineering degrees
from Rice University.
K.
Kirk
Krist has served as a Class III director since our acquisition of IWC Services
on July 29, 1997. Mr. Krist’s term as a class III director will expire on the
date of our annual meeting of stockholders in 2009. Mr. Krist served as Chairman
of the Board form December 2002 to December 2006. Mr. Krist is a graduate
of the
University of Texas with a B.B.A. in Business. He has been a self-employed
oil
and natural gas investor and venture capitalist since 1982.
Cindy
B.
Taylor became a Class II director on March 3, 2006 for a term that will expire
on the date of our annual meeting of stockholders in 2008. Mrs. Taylor also
serves on the compensation committee. Since May 2006, Mrs. Taylor has served
as
President and Chief Operating Officer of Oil States International, Inc. Mrs.
Taylor served as Senior Vice President — Chief Financial Officer and Treasurer
of Oil States International Inc. from May 2000 to May 2006. Prior to joining
Oil
States, Mrs. Taylor served as the Chief Financial Officer of L.E. Simmons
&
Associates, Incorporated from August 1999 to May 2000, the Vice
President-Controller of Cliffs Drilling Company from July 1992 to August
1999
and in various positions with Ernst & Young LLP, a public accounting firm,
from January 1984 to July 1992. She received a bachelor’s degree of business
administration from Texas A&M University and is a Certified Public
Accountant.
Robert
G.
Croyle became a Class I director on January 1, 2007 for a term that will
expire
on the date of the annual meeting of stockholders scheduled for calendar
year
2007. Since 2002, Mr. Croyle has served as vice chairman and Chief
Administrative Officer at Rowan Companies, Inc., a major international offshore
and land drilling contractor traded on the New York Stock Exchange. Mr. Croyle
has held various positions with Rowan Companies, Inc. since 1973, including
serving as director since 1998. From 1993 to 2002, he served as Executive
Vice
President with management responsibility for Rowan’s aviation and manufacturing
divisions.
Security
Holder Communications.
Security
holder communications intended for the board of directors or for particular
directors (other than stockholder proposals submitted pursuant to Exchange
Act
Rule 14a-8 and communications made in connection with such proposals) may
be
sent in care of the Company's Secretary at Boots & Coots International Well
Control, Inc., 7908 N. Sam Houston Parkway W., Suite 500, Houston, Texas
77064.
The Secretary will forward all such communications to the board of directors
or
to particular directors as directed without
screening such communications.
Code
of Business Conduct and Ethics:
We have
adopted a Code of Business Conduct and Ethics that covers all employees,
directors, and officers that relates to the honest and ethical conduct in
all
business dealings, full, fair, accurate, timely and understandable disclosures
in all reports filed by the us with or submitted to the Securities and Exchange
Commission and in other public communications, compliance with applicable
governmental rules and regulations, and avoidance of conflicts of interest.
The
Code of Business Conduct and Ethics is available on the ‘Investor Relations’
link at www.boots-coots.com.
Copies
of the Code of Business Conduct and Ethics may also be obtained upon written
request of our corporate Secretary at our principal executive office
address.
Audit
Committee Independence and Financial Experts:
The
Audit Committee reviews our financial reporting processes, system of internal
controls, and the audit process for monitoring compliance with laws and
regulations. In addition, the committee reviews, with our auditors, the scope
of
the audit procedures to be applied in the conduct of the annual audit, as
well
as the results of that audit. Our board has determined that each of the Audit
Committee members is independent, in accordance with the audit committee
requirements of the American Stock Exchange and the Securities and Exchange
Commission. Our board has also determined that Messrs. Anderson and Herlin
are
financial experts within the meaning of Item 401 (h) of Regulation S-K
promulgated by the Securities and Exchange Commission.
Item
11. Executive
Compensation.
The
following discussion of executive compensation contains descriptions of various
employment-related agreements and employee benefit plans. These descriptions
are
qualified in their entirety by reference to the full text of the referenced
agreements and plans, which have been included as exhibits to our periodic
reports on Forms 10-K, 10-Q and 8-K filed with the U.S. Securities and Exchange
Commission.
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction
The
following discussion provides an overview of the compensation committee of
our
board of directors, the background and objectives of our compensation programs
for our executive management, and the material elements of the compensation
of
each of the executive officers identified in the following table, whom we
refer
to as our “named executive officers”:
|
Named
Executive Officers
|
Title
|
|
|
Jerry
Winchester
|
President
and Chief Executive Officer (our principal executive
officer)
|
|
|
Dewitt
Edwards
|
Executive
Vice President
|
|
|
Gabriel
Aldape
|
Chief
Financial Officer (our principal financial officer)
|
|
|
Don
B. Cobb
|
Executive
Vice President
|
Overview
of the compensation committee
The
compensation committee of our board of directors is comprised entirely of
independent directors in accordance with Section 121 of the American Stock
Exchange rules governing listed companies. Until our acquisition of HWC on
March
12, 2006, our compensation committee was composed of three members: E.J.
DiPaolo, Robert S. Herlin and W. Richard Anderson. Upon our acquisition of
HWC,
our board of directors appointed Cindy B. Taylor, the President and Chief
Operating Officer of Oil States International, Inc., to our compensation
committee.
The
primary duties and responsibilities of our compensation committee are to
establish and implement our compensation policies and programs for our executive
management and employees, including compensation provided to the named executive
officers. Our compensation committee has the authority to engage the services
of
outside advisors, experts and others to assist it and has done so from time
to
time. During 2006, our compensation committee engaged Longnecker &
Associates to advise us with respect to director compensation and compensation
for our chief executive officer in 2007.
The
compensation committee works with our Secretary of the board of directors
to
establish an agenda for each meeting of the compensation committee. Our chief
executive officer, general counsel and other members of our management and
outside advisors may be invited to attend all or a portion of a compensation
committee meeting depending on the nature of the matters to be discussed.
Only
members of the compensation committee vote on items before the committee;
however, the compensation committee and board of directors often solicit
the
views of the chief executive officer on compensation matters, including as
they
relate to the compensation of other executives, including the other named
executive officers.
Objectives
of our compensation program
Our
success depends on the continued contributions of our executive management
and
other key employees. Our compensation program is intended to attract, motivate
and retain experienced and qualified personnel by providing compensation
that is
competitive in relation to our peers while recognizing overall business results
and individual merit, and which supports the attainment of our strategic
objectives by tying the interests of management and employees to those of
our
stockholders through the use of performance-based cash incentives and
equity-based compensation.
Design
of our compensation program
Our
compensation program for executive management, including the named executive
officers, is designed to:
|
·
|
provide
compensation that is competitive with our compensation peer
group;
|
|
·
|
balance
short-term and long-term goals through the use of annual cash incentives
and grants of long-term equity incentives;
and
|
|
·
|
deliver
a mix of fixed and at-risk compensation that directly relates to
increasing stockholder value and our overall
performance.
|
Each
element of compensation is reviewed and considered with the other elements
of
compensation to ensure that it is consistent with the goals and objectives
of
both that particular element of compensation and our overall compensation
program. In designing the compensation program and in determining senior
management compensation, including the compensation of the named executive
officers, we also consider the following:
|
·
|
the
competitive challenges affecting our ability to attract and retain
strong
management;
|
|
·
|
our
operating and financial performance compared with targeted
goals;
|
|
·
|
each
individual’s contributions to our overall results;
and.
|
|
·
|
our
size and performance relative to companies in our compensation
peer group;
and our available resources
|
In
establishing compensation, we utilize compensation data (“Survey Data”)
regarding the practices of other companies, including our compensation peer
group. During 2006, we engaged Longnecker & Associates to provide us with
Survey Data regarding director compensation, which we utilized to establish
director compensation for 2006. We also utilized survey data prepared by
Longnecker & Associates in connection with establishing compensation for our
chief executive officer in 2007. Longnecker & Associates provides no other
services to us and is otherwise independent. We utilize Survey Data to ensure
that our compensation programs are competitive with our compensation peer
group.
The Survey Data is a compilation of compensation and other data based upon
the
compensation consultants’ review of our compensation peer group and other
companies that participate in industry surveys.
In
developing our compensation structure, we review the compensation and benefit
practices, as well as levels of pay, of a compensation peer group of companies
drawn from oil field service companies of a similar size. While we periodically
review, evaluate and update our compensation peer group, for the compensation
structure developed for 2006 the compensation peer group consisted of the
following companies:
|
·
|
Allis-Chalmers
Energy, Inc.
|
|
·
|
Basic
Energy Services, Inc.
|
|
·
|
Ecology
and Environment, Inc.
|
|
·
|
Gulfmark
Offshore, Inc.
|
|
·
|
Infinity,
Inc.
|
|
·
|
Mark
West Energy Partners, L.P.
|
|
·
|
OMNI
Energy Services Corp.
|
|
·
|
Pioneer
Drilling Company
|
|
·
|
RPC,
Inc.
|
|
·
|
Superior
Well Services, Inc.
|
|
·
|
SYNERGX
Systems, Inc.
|
|
·
|
T-3
Energy Services, Inc.
|
We
target
total compensation for our management that falls at the 50th percentile of
our
compensation peer group, allowing for the fact that we are one of the smallest
companies in our peer group.. We believe compensation at this level is required
for us to attract and retain talented management in a competitive environment.
For 2006, we also considered the compensation practices of HWC, which we
acquired in March 2006, in connection with the hiring of Messrs. Aldape and
Cobb, both of whom served as executive officers of HWC at the time of the
acquisition.
2006
compensation program
Elements
of compensation
The
principal elements of our executive compensation program are base salary,
annual
performance-based cash incentives, long-term equity incentives in the form
of
stock options and restricted stock grants and post-termination severance
(under
certain circumstances), as well as other benefits and perquisites, consisting
of
life and health insurance benefits, a qualified 401(k) savings plan, and
the
reimbursement of automobile expenses for our chief executive officer and
chief
financial officer.
Base
salary
We
review
base salaries for our chief executive officer and other executives annually
to
determine if a change is appropriate. In reviewing base salaries, we consider
several factors, including a comparison to base salaries paid for comparable
positions in our compensation peer group as reflected in the Survey Data,
the
relationship among base salaries paid to executive officers within our company
and each executive’s individual experience and contributions to our business.
Our intent is to fix base salaries at levels that we believe are consistent
with
our objective of attracting, motivating and retaining individuals in a
competitive environment.
Base
salaries for our named executive officers in 2006 were as follows:
|
Name
|
2006
Base Salary
|
|||
|
Jerry
Winchester
|
$
|
250,000(1
|
)
|
|
|
Dewitt
Edwards
|
$
|
220,000
|
||
|
Gabriel
Aldape
|
$
|
165,000
|
||
|
Don
B. Cobb
|
$
|
200,000
|
||
(1) Mr.
Winchester’s base salary for 2007 was increased effective January 1, 2007 to
$335,000. See the discussion following this table for additional
information.
We
have
entered into employment agreements with Messrs. Winchester, Edwards and Aldape.
Messrs. Edwards and Aldape entered into their employment agreements in April
2006 and March 2006, respectively. Mr. Winchester’s employment agreement was
originally entered into on October 1, 2003 and on October 1, 2006 our
compensation committee elected to renew the agreement for an additional two
year
period. For more information regarding the terms of these agreements see
“Employment contracts, termination of employment and change-in-control
arrangements” below.
During
2006, Mr. Winchester’s employment agreement provided for a base salary of
$250,000 per year and an automobile allowance of $18,000 per year. These
amounts
remained unchanged from October 1, 2003 until March 1, 2007, when we approved
an
increase in Mr. Winchester’s 2007 base salary to $335,000 per year and Mr.
Winchester agreed to forego his automobile allowance, resulting in a net
base
salary increase of $67,000 per year (25%), all effective as of January 1,
2007.
Our compensation committee approved this adjustment to Mr. Winchester’s base
salary so as to maintain this component of his compensation at the median
of our
compensation peer group based upon the Survey Data and the analysis of our
compensation consultant.
Messrs.
Edwards, Aldape and Cobb each commenced employment with us during 2006. Mr.
Edwards was hired by us in April 2006 and had previously been engaged by
us as a
consultant to assist us with our then proposed acquisition of HWC and related
financing transactions. Mr. Edwards’ base salary was established through mutual
negotiations while taking into consideration the rates that we had been paying
for his services as a consultant. Messrs. Aldape and Cobb were hired by us
in
March 2006 in connection with our acquisition of HWC. The base salaries for
Messrs. Aldape and Cobb were also established through mutual negotiations
while
taking into consideration the salary paid to them by HWC at the time of our
acquisition, the increased demands on their time associated with the integration
of HWC with us and the increased responsibilities they would undertake as
executive officers of a publicly-held company.
Annual
cash incentives
Annual
cash incentive compensation is intended to focus and reward executives and
other
key employees for meeting performance objectives tied to increasing stockholder
value. To further this objective for 2006 and 2007, we have implemented an
annual performance-incentive plan, or APIP. The annual performance-incentive
plan provides for cash incentive payments tied to consolidated earnings before
interest, taxes, depreciation and amortization (“EBITDA”) targets established
for each plan year, which are adjusted as necessary to account for the effects
of acquisitions or dispositions of businesses and unusual events.
We
believe that EBITDA is a key indicator of our financial and operational success
and is the principal measure of performance utilized by investors in valuing
our
company and our competitors and in assessing the effectiveness of our
management. We establish specific EBITDA threshold, goal and stretch targets
under the APIP at the beginning of each fiscal year, as well as the award
level,
as a percentage of base salary, that may be earned by certain employees
including the named executives if performance exceeds the threshold, goal
or
stretch targets. Performance must satisfy the threshold level before any
incentive compensation is earned. EBITDA at or in excess of the threshold
amount, but less than the APIP goal amount, entitles the executive to a pro
rata
percentage of the goal award. EBITDA at or in excess of the goal or stretch
amount entitles the executive to compensation at the goal award percentage
or
the stretch award percentage, as applicable. Amounts earned, if any, are
generally paid during March of the following year, when our results for the
prior year become available upon completion of our annual audit.
EBITDA
targets are set at levels that reflect our internal, confidential business
plan
at the time the awards were established. The threshold target is 80% of our
EBITDA goal as reflected in our business plan. The stretch target is 120%
of our
EBITDA goal. The EBITDA goal and stretch target are intended to be challenging
but achievable. For 2006, our consolidated EBITDA exceeded the stretch goal.
The
award levels (as a percentage of base salary) for Messrs. Winchester, Edwards,
Aldape and Cobb were 55-110%, 50-100%, 50-100%, and 50-100%, respectively.
We
believe that establishing specific attainable goals for management that are
consistent with our business plan and that offer the executive the opportunity
for meaningful additional cash compensation is the best method to incentivize
management to achieve and exceed our business objectives.
The
annual cash incentives awarded to the named executive officers for fiscal
year
2006 performance are included in the Summary Compensation Table below. The
table
reflects awards for 2006 performance that were paid during March 2007.
Long-term
incentives
Long-term
incentives comprise a significant portion of an executive’s compensation
package. Long-term incentives are intended to align the interests of our
executives with our stockholders and retain the executives through the term
of
the awards. Long-term incentives are also consistent with our objective of
providing an “at-risk” component of compensation. In establishing long-term
incentive awards we endeavor to remain consistent with the Survey Data while
taking into account each individual’s performance.
At
times,
our compensation committee has utilized both stock options and restricted
stock
to provide long-term incentives, each of which is discussed in more detail
below. For 2006, our compensation committee utilized only stock options to
provide long-term incentives. Our compensation committee approves the individual
grants for each executive. Grants are generally made at the time of employment
and during March of each year in accordance with procedures established by
our
compensation committee, which provide that awards are priced based upon the
market price on the date of grant. The amounts granted vary each year and
are
based on management’s performance, the Survey Data and management’s total
compensation package. Previous awards and grants, whether vested or unvested,
may be considered by our compensation committee in establishing the current
year’s awards and grants but generally do not limit the size of the award that
may be received, as we do not wish to create any disincentive for an executive
to hold shares of our common stock.
Equity
Incentive Plans
We
may
make awards to executives under our 2000 Long Term Incentive Plan (the “2000
Plan”) or our 2004 Long Term Incentive Plan (the “2004 Plan”). The 2000 Plan was
approved by our stockholders on October 25, 2000, and the 2004 Plan was approved
by our stockholders on April 8, 2004. On March 1, 2006, our stockholders
approved an amendment to our 2004 Plan in conjunction with our acquisition
of
HWC that increased the number of shares available under it to 8,000,000.
We
refer to the 2000 Plan and the 2004 Plan collectively as the “Plans.”
Subject
to certain adjustments that may be required from time to time to prevent
dilution or enlargement of the rights of participants under the Plans, as
of
December 31, 2006, approximately 2.6 million shares were available for new
grants under the Plans, and there were approximately 7.2 million shares subject
to outstanding benefits under these and predecessor plans.
The
Plans
facilitate the issuance of future long-term incentive awards as part of our
comprehensive compensation structure and are administered by a committee
of
non-employee directors of our board of directors, currently our compensation
committee. The Plans permit the granting of awards in the form of options
to
purchase our common stock, shares of restricted stock, as well as shares
of
phantom stock that are settled in cash and cash bonuses. The grant of a cash
bonus does not reduce the number of shares of common stock with respect to
which
awards may be granted pursuant to the Plans.
Our
compensation committee from time to time designates the employees and
consultants who are granted awards and the amount and type of such award.
Our
compensation committee has full authority to administer the Plans, including
authority to interpret and construe any provision of Plans and the terms
of any
awards issued under it and to adopt such rules and regulations for
administering the Plans as the compensation committee may deem necessary.
Our
compensation committee may accelerate the date on which any option granted
becomes exercisable, extend the date on which any option granted ceases to
be
exercisable, accelerate the vesting date or issue date of a restricted stock
grant, or waive any condition imposed under the Plans with respect to any
share
of restricted stock granted under the Plans, and accelerate the vesting date
or
waive any condition imposed under the Plan with respect to any share of phantom
stock granted under the Plan. No person is permitted to receive in any year
stock options for more than 1,000,000 shares. The 2004 Plan will expire and
no
awards may be made after March 25, 2014. The 2000 Plan will expire and no
awards
may be made after September 2, 2010. Awards outstanding under the Plans at
the
time of termination of the Plans will remain outstanding until they expire
under
the terms of the agreement governing the award, which is not longer than
ten
years from the date of grant.
The
long-term incentive information related to the named executive officers during
fiscal year 2006 is included in the Summary Compensation Table below. Additional
information relating to long-term incentive awards is shown in the Grants
of
Plan Based Awards Table and the Outstanding Equity Awards at Fiscal Year-End
Table below.
Stock
Options
An
important objective of the long-term incentive program is to strengthen the
relationship between the long-term value of our stock price and the potential
financial gain for employees. Stock options provide executive management
and key
employees with the opportunity to purchase our common stock at a price fixed
on
the grant date regardless of future market price. A stock option becomes
valuable only if our common stock price increases above the option exercise
price and the holder of the option remains employed during the period required
for the option to vest, thus providing an incentive for an option holder
to
remain employed by us. Stock options link a portion of the option holder’s
compensation to stockholders’ interests by providing an incentive to increase
the market price of our stock.
Option
grants to senior management are generally considered annually, at the same
time
as grants are considered for the general eligible employee population, in
March,
after our year-end results become publicly available. Our practice is that
the
exercise price for each stock option is the market value on the date of grant,
which is normally the date that our compensation committee approves the award
at
a meeting of the compensation committee. Generally, market value means the
closing price for a share of common stock on the day of grant or, if such
date
is not a trading day, the last trading day preceding the day of the grant,
as
reported by the American Stock Exchange. With respect to employees who are
not
executive officers, the compensation committee may delegate its authority
to
make such grants to our chief executive officer by specifying the total number
of shares that may be subject to grants and the circumstances under which
grants
may be made. All proposed stock options to new-hire employees are required
to be
approved by our compensation committee or chief executive officer pursuant
to
delegated authority. The grant date in this instance is the later date between
the hire date and date of award.
The
Plans
provide that stock options may be either incentive stock options (“ISOs”) or
nonqualified stock options (“NSOs”). We refer to NSOs and ISOs collectively as
“stock options.” The term of a stock option may not exceed 10 years. Consultants
are not entitled to receive ISOs. The exercise price of any NSO granted
under the Plans is not permitted to be less than 50% of the fair market value
of
a share of common stock on the date on which such NSO is granted or the price
required by law, if higher. The exercise price of any ISO may not be less
than
100% of the fair market value of a share of common stock on the date on which
such ISO is granted. Although the Plans permit otherwise, as a matter of
practice we grant NSO’s only at the fair market value of a share of common stock
on the date of grant.
Stock
options generally vest and become exercisable in annual increments after
the
original grant date. Our recent grants have included three year vesting periods.
Different vesting periods may be utilized depending on the magnitude of the
grant, the terms of the executives’ employment agreement, if any, the Survey
Data and our compensation objectives. Under certain circumstances stock options
may vest on an accelerated basis, such as in the event that we engage in
a
transaction that effects a change in the control of our company. In this
event,
all stock options held by the executive may automatically vest and become
exercisable in accordance with the terms outlined in the stock option award
agreement.
The
exercise prices of the stock options granted to the named executive officers
during fiscal year 2006 are shown in the Grants of Plan-Based Awards Table
on
page 45. Additional information on these grants, including the number of
shares
subject to each grant, also is shown in the Grants of Plan-Based Awards Table.
Restricted
Stock Awards
During
2006, we did not grant any restricted stock awards to our named executive
officers or other key employees though we have in the past ,and may in the
future determine that it is necessary or useful to use these awards either
separately or in conjunction with stock options. Restricted stock awards
are
shares of our common stock that are awarded with the restriction that the
executive remain with us through certain “vesting” dates. Prior to the
restrictions thereon lapsing, the executive may not sell, transfer, pledge,
assign or take any similar action with respect to the shares of restricted
stock
which he owns. Once the restrictions lapse with respect to shares of restricted
stock, the executive owning such shares will hold freely-transferable shares,
subject only to any restrictions on transfer contained in our certificate
of
incorporation, bylaws and insider trading policies, as well as any applicable
federal or state securities laws. Despite the restrictions, each executive
will
have full voting rights and will receive any dividends or other distributions,
if any, with respect to the shares of restricted stock which the executive
owns.
Restricted
stock awards to senior management are generally considered annually, in March,
after our year-end results become available, and at the same time as grants
to
the general eligible employee population are considered.
Restricted
stock awards provide the opportunity for capital accumulation and more
predictable long-term incentive value. The purpose of granting restricted
stock
awards is to encourage ownership, encourage retention of our executive
management and to provide an incentive for business decisions that increase
value to our shareholders. Recognizing that our business is subject to
significant cyclical fluctuations that may cause the market value of our
common
stock to fluctuate, we also intended the awards to provide an incentive for
executive management to remain with us throughout business cycles.
Restricted
stock awards generally vest one-fourth annually after the original award
date.
As a consequence, the recipients do not become unconditionally entitled to
retain any of the shares of restricted stock until one year following the
date
of grant, subject to certain exceptions related to acceleration of vesting
in
the event we engage in a change-in-control transaction. Under this circumstance
all restricted stock awards held by the executive may automatically vest
in
accordance with the terms of the restricted stock award agreement. Any unvested
restricted stock awards generally are forfeited if the executive terminates
employment with us.
Change
in Control Provisions
Upon
the
occurrence of a change in control, all options under the Plans vest and the
restrictions on all shares of restricted stock outstanding on the date on
which
the change in control occurs automatically terminate. This provision is intended
to ensure that executives are not unduly influenced by a potential loss of
unvested awards during evaluation and negotiation of a potential strategic
transaction.
For
purposes of the Plans, the term “change in control” means that term as it is
defined in the federal securities laws; or the occurrence of any of the
following events:
|
·
|
any
person becomes, after the effective date of the Plans the “beneficial
owner” (as defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934), directly or indirectly, of 20% or more of
the
combined voting power of our then outstanding securities; provided,
that
the acquisition of additional voting securities, after the effective
date
of the Plans, by any person who is, as of the effective date of
the Plans,
the beneficial owner, directly or indirectly, of 50.1% or more
of the
combined voting power of our then outstanding securities, will
not
constitute a “change in control” for purposes of the
Plans;
|
|
·
|
a
majority of individuals who are nominated by our board of directors
for
election to the board of directors on any date, fail to be elected
to our
board of directors as a direct or indirect result of any proxy
fight or
contested election for positions on the board of directors;
or
|
|
·
|
the
sale, lease, transfer or other disposition of all or substantially
all of
our assets (other than to one of our wholly owned subsidiaries).
|
The
acquisition of our common stock by Oil States Energy Services, Inc., and
its
affiliates in connection with our acquisition of HWC did not constitute a
change
in control and therefore did not trigger vesting of awards outstanding at
that
time.
Retirement
benefits
We
do not
maintain a defined benefit pension plan or retiree medical program that covers
our other executive officers. Retirement benefits to our executive officers,
are
currently provided through a tax-qualified profit sharing and 401(k) plan
(our
“Savings Plan”), in which eligible salaried employees may participate. Pursuant
to the Savings Plan, employees may elect to reduce their current annual
compensation up to the lesser of 15% or the statutorily prescribed limit
of
$15,000 in calendar year 2006 ($15,500 in 2007), plus up to an additional
$5,000
in the form of “catch-up” contributions for participants near retirement age,
and have the amount of any reduction contributed to the Savings Plan. Our
Savings Plan is intended to qualify under sections 401(a) and 401(k) of the
Internal Revenue Code, so that contributions by us or our employees to the
Savings Plan and income earned on contributions are not taxable to employees
until withdrawn from the Savings Plan and so that contributions will be
deductible by us when made. We match 50% of the initial 6% contributed by
an
employee to the Savings Plan, subject to a 15% maximum based on the employee’s
compensation as defined in the Savings Plan. Executives participate in the
Savings Plan on the same basis as other employees.
The
Savings Plan provides for 14 different investment options, for which the
participant has sole discretion in determining how both the employer and
employee contributions are invested. The independent trustee of the Savings
Plan
then invests the assets of the Savings Plan as directed by participants.
The
Savings Plan does not provide our employees the option to invest directly
in our
securities. The Savings Plan offers in-service withdrawals in the form of
after-tax account distributions and age 59.5 distributions.
We
believe that the Savings Plan supports the objectives of our compensation
structure, including the ability to attract and retain senior and experienced
mid- to late-career executives for critical positions within our
organization.
We
also
assumed the HWC 401(k) plan in connection with the acquisition of HWC. Mr.
Cobb
and Mr. Aldape were covered under the HWC 401(k) plan for 2006. The HWC Plan
operates on similar terms to our Savings Plan except that employees may elect
to
reduce their current annual compensation up to the lesser of 50% or the
statutorily prescribed limit of $15,000 in calendar year 2006 ($15,500 in
2007),
plus up to an additional $5,000 in the form of “catch-up” contributions for
participants near retirement age, and we match 100% of the initial 4% and
50% of
the next 2% contributed by an employee to the Savings Plan, subject to the
Plan
prescribed limits.
Perquisites
During
2006, our chief executive officer and chief financial officer received
automobile allowances for the use of their personal vehicles while on company
business. Our use of perquisites as an element of compensation is limited
and is
largely based on historical practices and, in the case of our chief financial
officer, because we require that he commute on a regular basis from his home
in
Louisiana to our corporate headquarters in Houston, Texas. We do not view
perquisites as a significant element of our compensation structure but do
believe that they can be used in conjunction with executive compensation
packages to motivate and retain qualified individuals in a competitive
environment. The compensation committee annually reviews the perquisites
provided to determine if they are appropriate and if any adjustments are
warranted. Subsequent to year end 2006, our chief executive officer agreed
to
terminate his automobile allowance.
Employment
contracts, termination of employment and change-in-control
arrangements
On
October 1, 2003, we entered into an employment agreement with Jerry Winchester,
which was renewed October 1, 2006. Effective March 1, 2006, we entered into
an
employment agreement with Gabriel Aldape, and on April 1, 2006, we entered
into
an employment agreement with Dewitt Edwards. The employment agreement with
Mr.
Aldape was negotiated in conjunction with our acquisition of HWC on March
3,
2006. Under certain circumstances, and particularly during periods when we
are
engaged in transactions that may significantly alter the nature and composition
of our business, board of directors and stock ownership, we believe that
employment agreements and change of control arrangements may be useful in
allowing an executive to continue to focus his attention on our business
objectives without undue regard for the consequences the attainment of those
objectives may have on his individual compensation or role with our company.
We
do not currently have an employment agreement or any change-in-control
arrangement with Mr. Cobb.
Term
of Employment Agreements
The
initial term of Mr. Winchester’s employment agreement was three years, with
automatic extensions of two years unless either party provides written notice
six months prior to expiration of the initial term or any extension. Mr.
Winchester’s employment was automatically extended for an additional two years
on October 1, 2006. Mr. Edwards’s employment agreement provides for an initial
term of two years, with automatic extensions of two years unless either party
provides written notice three months prior to expiration of the initial term
or
any extension. Mr. Aldape’s employment agreement provides for an initial term of
one year, with automatic extensions of one year unless either party provides
written notice three months prior to expiration of the initial term or any
extension.
Compensation
and Benefits
The
salary payable to each of the named executives is the amount set forth under
the
heading “2006
Base Salary”
in
the
table above. The salary of each executive is subject to periodic review and
may
be increased from time to time by our compensation committee. Each executive
is
eligible to receive grants of stock options, restricted stock or other equity
awards as determined in the discretion of our compensation committee from
time
to time. Each executive is entitled to participate in the APIP, to the extent
that our compensation committee approves an APIP and subject to the targets
established by our compensation committee and the award percentage established
for each executive. Each of the executives is also entitled to reimbursement
for
reasonable business expenses and to participate in our medical, life, and
disability insurance programs, and all other employee benefit plans which
we
may, from time to time, make available. Mr. Winchester’s agreement requires that
we pay premiums on life insurance coverage with a benefit of not less than
$1,500,000.
In
conjunction with the initial execution of his employment agreement on October
1,
2003, Mr. Winchester received an option to purchase 500,000 shares of our
common
stock at an exercise price of $1.20 per share which vested immediately upon
award on October 1, 2003. At that time Mr. Winchester also received a grant
of
300,000 shares of restricted common stock, 60,000 shares of which were issued
to
him upon his execution of the agreement and the remainder of which were issued
to him in four equal annual installments on each succeeding anniversary of
the
agreement. These grants were made under the 2000 and 2004 Plans. Mr. Winchester
was not awarded any equity compensation during 2006. On March 1, 2007, our
compensation committee approved an award to Mr. Winchester of 145,632 shares
of
restricted common stock under the 2004 Plan, the amount of shares approximately
equal to $300,000 of value as of the date of the award. The restricted stock
will vest in four equal installments on each one-year anniversary of the
date of
grant, provided that Mr. Winchester has been continuously employed by us
through
each such anniversary date.
In
conjunction with Mr. Edwards’s execution of his employment agreement on April 1,
2006, Mr. Edwards received an option to purchase 120,000 shares of our common
stock at an exercise price of $1.71 per share, vesting in three equal annual
installments. Mr. Edwards also holds an option to purchase 300,000 shares
of
common stock at $1.13 per share, which he received in October 2005 as a
consequence of the services he performed on our behalf as a consultant. This
option vests as to 50% on the first anniversary of the grant date and as
to 25%
on each of the two succeeding anniversaries of the grant date. These grants
were
made under the 2004 Plan.
In
conjunction with Mr. Aldape’s execution of his employment agreement, on March 2,
2006, Mr. Aldape received an option to purchase 150,000 shares of our common
stock at an exercise price of $1.43 per share, vesting in three equal annual
installments. This grant was made under the 2004 Plan.
Termination
Provisions and Severance Payments
We
may
terminate each executive’s employment upon his death or disability, or for cause
or without cause. Cause is defined to mean generally that the executive has
engaged in gross negligence or willful misconduct in the performance of his
duties; has refused to perform his duties; has materially breached his
employment agreement; commits or is arrested or charged with any felony or
crime
involving moral turpitude which would impair his ability to perform his duties
or impair our business reputation; or misappropriates any of our funds or
property. Each executive may terminate his employment based on uncured material
breaches of the material provisions of his employment agreement by us, a
substantial and material reduction in the scope of his office, duties or
responsibilities, or the assignment to him of duties or responsibilities
that
are materially inconsistent with his office.
Additionally,
Messrs. Winchester and Aldape may each terminate employment within twelve
months
following a change in control of our company, which is defined to include
a
merger, consolidation or reorganization in which we are not the surviving
entity
(other than a transaction involving our wholly-owned subsidiaries); any sale,
lease, exchange or other transfer of all or substantially all of our assets;
our
dissolution or liquidation; or the acquisition of 30% or more of our voting
securities by any person or group (as contemplated in Section 13(d)(3) of
the
Securities Exchange Act of 1934) or a contested election in which persons
who
were directors prior to such election cease to constitute a majority of our
board of directors.
If
the
employment of any of the executives is terminated by us for cause, such
executive is not entitled to any further pay or benefits from us.
If
the
employment of any executive, with the exception of Mr. Cobb, is terminated
by us
without cause or if we fail to renew such employment agreement at the expiration
of the initial term or any renewal term, or if such executive terminates
his
employment with good reason or following a change of control, such executive
will be entitled to a lump sum payment equal to the initial term of his
agreement (i.e., two years for Mr. Winchester, one years for Mr. Edwards
and one
year for Mr. Aldape) multiplied by his then current base salary; a payment
equal
to any bonus which he would have been eligible to receive in the year in
which
termination occurs, and the continuation of his participation in our health
insurance plans, at our expense, for a time period per his agreement (i.e.
twelve months for Mr. Winchester and Mr. Edwards and six months for Mr. Aldape)
or (if earlier) the date on which he secures coverage under another plan
providing comparable coverage. In addition, Mr. Winchester and Mr. Aldape
each
is entitled to receive a payment equal to six months of the automobile allowance
provided under his employment agreement.
Had
each
of these executives terminated employment as set forth above as of December
31,
2006, they would have received payments totaling $662,000, $345,000 and
$261,000, respectively. In the event that we were to have terminated these
executives without cause on such date, each would have also been entitled
to
receive the full amount of his payment under the APIP plan for
2006.
Each
employment agreement provides that for a period of one year after termination
the executive will not, directly or indirectly, solicit or induce our employees,
customers, or suppliers to terminate their relationships with us. Further,
each
executive agrees not to directly or indirectly employ any person who was
employed by us during the two years preceding the date of termination and
who
possesses or is reasonably likely to possess confidential information belonging
to us.
In
our
view, having the change of control and severance protections helps to maintain
the named executive officer’s objectivity in decision-making and provides
another vehicle to align the interests of our named executive officer with
the
interests of our stockholders.
Indemnification
Agreements
We
have
entered into an indemnification agreement with each of our directors and
senior
executives, including the named executive officers. These agreements provide
for
us to, among other things, indemnify such persons against certain liabilities
that may arise by reason of their status or service as directors or officers,
to
advance their expenses incurred as a result of a proceeding as to which they
may
be indemnified and to cover such person under any directors’ and officers’
liability insurance policy we choose, in our discretion, to maintain. These
indemnification agreements are intended to provide indemnification rights
to the
fullest extent permitted under applicable indemnification rights statutes
in the
State of Delaware and are in addition to any other rights such person may
have
under our Certificate of Incorporation, Bylaws and applicable law. We believe
these indemnification agreements enhance our ability to attract and retain
knowledgeable and experienced executives and independent, non-management
directors.
Tax
deductibility
Section
162(m) of the Internal Revenue Code limits the deductibility of compensation
in
excess of $1 million paid to our chief executive officer and our four other
highest-paid executive officers unless certain specific and detailed criteria
are satisfied. We believe that it is often desirable and in our best interests
to deduct compensation payable to our executive officers. However, we also
believe that there are circumstances where our interests are best served
by
maintaining flexibility in the way compensation is provided, even if it might
result in the non-deductibility of certain compensation under the Code. In
this
regard, we consider the anticipated tax treatment to our company and our
executive officers in the review and establishment of compensation programs
and
payments; however, we may from time to time pay compensation to our executives
that may not be deductible, including discretionary bonuses or other types
of
compensation outside of our plans. Our goal is for compensation paid to our
executive officers to be fully deductible under the code.
Although
equity awards may be deductible for tax purposes by us, the accounting rules
pursuant to FAS 123(R) require that the portion of the tax benefit in excess
of
the financial compensation cost be recorded to paid-in-capital.
COMPENSATION
COMMITTEE REPORT
The
compensation committee of the Company has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of Regulation
S-K
with management and, based on such review and discussions, the Compensation
Committee recommended to the Board that the Compensation Discussion and Analysis
be included in this Form 10-K.
|
Respectfully
submitted,
|
|
|
THE
COMPENSATION COMMITTEE
|
|
|
W.
Richard Anderson
|
|
|
E.
J. DiPaolo
|
|
|
Cindy
B. Taylor
|
|
|
Robert
S. Herlin, Chairman
|
Compensation
Committee Interlocks and Insider Participation
In
the
period covered by this report, none of our executive officers served as a
board
member or member of a compensation committee or similar body for another
company
that had an executive officer serving as a member of our board of directors
or
compensation committee.
Summary
Compensation Table
The
Summary Compensation Table below sets forth certain summary information
concerning the compensation earned by our named executive officers during
the
year ended December 31, 2006.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards (1)($)
|
Non-Equity
Incentive Plan Compensation Earnings (2)($)
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
All
Other Compensation (4)($)
|
Total
(%)($)
|
|||||||||||||||||||
|
Jerry
Winchester President and Chief Executive Officer
|
2006
|
250,000
|
275,000
|
25,135
|
550,135
|
|||||||||||||||||||||||
|
Dewitt
Edwards Executive Vice President
|
2006
|
216,250
|
171,323
|
222,000
|
6,668
|
616,151
|
||||||||||||||||||||||
|
Gabriel
Aldape Chief Financial Officer
|
2006
|
137,769(3
|
)
|
126,127
|
165,000
|
16,977
|
445,873
|
|||||||||||||||||||||
|
Don
B. Cobb Executive Vice President
|
2006
|
151,439(3
|
)
|
252,253
|
180,000
|
21,245(5
|
)
|
604,937
|
||||||||||||||||||||
________________________________________
|
(1)
|
Please
see the discussion of the assumptions made in the valuation of
these
awards in the financial statements and footnotes to the financial
statements. We adopted the fair value recognition provisions of
SFAS No.
123(R) effective January 1, 2006. Under the SFAS No. 123(R), we
recorded
compensation expense in our Audited Consolidated Financial Statements
for
the year ended December 31, 2006 with respect to the awards included
in
this table. See “Note B Summary of Significant Accounting Policies" in the
financial statements for further discussion of the accounting treatment
for these options.
|
|
(2)
|
These
amounts represent cash payments under the 2006
APIP.
|
|
(3)
|
Mr.
Aldape and Mr. Cobb joined the Company on March 3, 2006, and the
salary
amounts represent pro rated
service.
|
|
(4)
|
Includes
car allowances, life insurance premiums and matching contributions
to
401(k)plans.
|
|
(5)
|
Includes
$9,798 Algerian payroll taxes.
|
Grants
of Plan Based Awards
The
table
below sets forth information regarding grants of plan-based awards made to
our
named executive officers during 2006.
|
Estimated
Future Payouts Under Equity Incentive Plan Awards
|
|||||||||||||||||||||||||
|
Name
|
Grant
Date
|
Threshold
(#)
|
Target
(#)
|
Maxi-mum
(#)
|
All
Other Stock Awards: Number of Shares of Stock or
Units
(#)
|
All
Other Option Awards: Number of Securities Underlying
Options
(#)
|
Exercise
or Base Price of Option Awards
(1)($
/ Sh)
|
Grant
Date Fair Value of Option Awards
(2)($)
|
|||||||||||||||||
|
Jerry
Winchester
|
|||||||||||||||||||||||||
|
Dewitt
Edwards (3)
|
5/22/06
|
120,000
|
120,000
|
$
|
1.71
|
164,538
|
|||||||||||||||||||
|
Gabriel
Aldape (4)
|
3/02/06
|
150,000
|
150,000
|
$
|
1.43
|
168,169
|
|||||||||||||||||||
|
Don
B. Cobb (5)
|
3/02/06
|
300,000
|
300,000
|
$
|
1.43
|
336,338
|
|||||||||||||||||||
_____________________________________________________________
|
(1)
|
Represents
closing market price of our common stock on the American Stock
Exchange on
the date of the grant.
|
|
(2)
|
We
adopted the fair value recognition provisions of SFAS No. 123(R)
effective
January 1, 2006. Accordingly, the grant date fair value for awards
made in
2006 are calculated in accordance with SFAS
123(R).
|
|
(3)
|
Effective
May 22, 2006, Mr. Edwards received an option to purchase 120,000
shares of
common stock, pursuant to the 2004 Long Term Incentive Plan, vesting
over
three years, 33% on each grant anniversary date in each of 2007,
2008, and
2009..
|
|
(4)
|
Effective
March 2, 2006, Mr. Aldape received an option to purchase 150,000
shares of
common stock pursuant to the 2004 Long Term Incentive Plan vesting
over
two years, with 33% vesting immediately and 33% on each grant anniversary
date in each of 2007 and 2008.
|
|
(5)
|
Effective
March 2, 2006, Mr. Cobb received an option to purchase 300,000
shares of
common stock pursuant to the 2004 Long Term Incentive Plan vesting
over
two years, with 33% vesting immediately and 33% on each grant anniversary
date in each of 2007 and 2008.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table summarizes the number of securities underlying outstanding
plan
awards for each named executive officer as of December 31, 2006.
|
Option
Awards
|
Stock
Awards
|
|||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares of Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not
Vested
(#)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other Rights That Have Not Vested
($)
|
|||||||||||||||||||
|
Jerry
Winchester (3)
|
500,000
|
1.20
|
10/01/13
|
60,000(1
|
)
|
134,400(2
|
)
|
|||||||||||||||||||||
|
37,500
|
3.00
|
02/15/10
|
||||||||||||||||||||||||||
|
Dewitt
Edwards
|
150,000
|
150,000(3
|
)
|
1.13
|
10/12/11
|
|||||||||||||||||||||||
|
120,000(4
|
)
|
1.71
|
5/22/12
|
|||||||||||||||||||||||||
|
Gabriel
Aldape
|
50,000
|
100,000(5
|
)
|
1.43
|
3/3/12
|
|||||||||||||||||||||||
|
Don
Cobb
|
100,000
|
200,000(6
|
)
|
1.43
|
3/3/12
|
|||||||||||||||||||||||
|
(1)
|
Effective
October 1,2003, Mr. Winchester received a restricted stock award
of
1,200,000 pre four to one split shares of common stock, pursuant
to the
2000 Long Term Incentive Plan, with 20% vesting immediately and
20% on
each grant anniversary date in each of 2004, 2005, 2006 and
2007.
|
|
(2)
|
Market
value calculation is the number of shares times the closing market
value
on the last day of the year.
|
|
(3)
|
75,000
shares will vest on October 12,2007 and 75,000 shares will vest
on October
12, 2008.
|
|
(4)
|
40,000
shares will vest on May 22, 2007, 40,000 shares will vest on May
22, 2008,
and 40,000 shares will vest on May 22,
2009.
|
|
(5)
|
50,000
shares vested on March 3, 2007, and 50,000 shares will vest on
March 3,
2008.
|
|
(6)
|
100,000
shares vested on March 3, 2007, and 100,000 shares will vest on
March 3,
2008.
|
Option
exercises and stock vested
The
following table summarizes stock option exercises by our named executive
officers in 2006. There were no options exercise by our named executive officers
in 2006.
|
Stock
Awards
|
|||||||
|
Name
|
Number
of Shares Acquired on Vesting
(#)
|
Value
Realized on Vesting
(1)($)
|
|||||
|
Jerry
Winchester
|
60,000
|
134,400
|
|||||
|
Dewitt
Edwards
|
|||||||
|
Gabriel
Aldape
|
|||||||
|
Don
B. Cobb
|
|||||||
_______________________________________________
|
(1)
|
Value
realized calculation is the number of shares times the closing
market
value on the last day of the year.
|
Equity
Compensation Plan Information
The
following table sets forth certain information as of December 31, 2006 with
respect to compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance.
|
Plan
Category
|
Number
of Securities to be Issued
Upon Exercise
of Outstanding Options,
Warrants and
Rights(a)
|
Weighted- Average Exercise Price
of Outstanding Options, Warrants
and Rights(b)
|
Number
of Securities
Remaining Available
for Future Issuance Under
Equity Compensation Plans
(Excluding Securities Reflected
in Column(a))(c)
|
|||||||
|
Equity
compensation plans approved by security holders(1)
|
6,435,000
|
$
|
1.27
|
2,564,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
||||||||||
|
Total
|
6,435,000
|
$
|
1.27
|
2,564,000
|
||||||
_______________
|
(1)
|
Represents
shares under the Boots & Coots 2004 Long Term Incentive Plan, 2006
Non-Employee Director Stock Incentive Plan, 2000 Long Term Incentive
Plan
and Outside Directors Option Plan.
|
DIRECTOR
COMPENSATION
2006
Director Compensation
The
table
below sets forth certain information concerning the compensation earned in
2006
by our non-employee directors who served in 2006.
|
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive Plan Compensation
|
All
Other Compensation
|
Total
|
|||||||||||||
|
Douglas
Swanson(1)
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Cindy
Taylor(1)
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
K.
Kirk Krist
|
$
|
176,250
|
$
|
30,000
|
—
|
—
|
—
|
$
|
206,250
|
||||||||||
|
Richard
Anderson
|
$
|
52,000
|
$
|
30,000
|
—
|
—
|
—
|
$
|
82,000
|
||||||||||
|
Robert
Herlin
|
$
|
48,250
|
$
|
30,000
|
—
|
—
|
—
|
$
|
78,250
|
||||||||||
|
E.J.
DiPaolo
|
$
|
44,500
|
$
|
30,000
|
—
|
—
|
—
|
$
|
74,500
|
||||||||||
______________________
|
(1)
|
Mr.
Swanson and Mrs. Taylor have declined to receive payment for service
on
the board during 2006.
|
|
(2)
|
Mr.
Krist was compensated under a consulting agreement for his services
as non
executive chairman until July 15,
2006.
|
COMPENSATION
OF DIRECTORS
Directors
who are also employed by us do not generally receive a retainer or fees for
service on the board or any committees. During 2005 and through March 31,
2006,
the Chairman of the Board and directors who were not employed by us were
entitled to receive a fee of $5,000 for attendance at each meeting of the
board,
$2,500 per committee chaired and $2,500 for each special committee meeting.
Both
employee and non-employee directors are reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the board or committees and for
other
reasonable expenses related to the performance of their duties as directors.
On
May
31, 2006, the Board of Directors approved a plan for outside directors that
compensates each non-employee director with an annual retainer of $20,000,
plus
$30,000 of our common stock awarded annually, $5,000 for each board meeting
attended and $1,000 for each special board meeting and committee meeting
attended. In addition, the Chairman of the Board will receive an additional
$25,000 annual fee, the Chairman of the Audit Committee will receive an
additional $10,000 annual fee and the Chairman of the Compensation Committee
will receive an additional $5,000 annual fee. The plan became effective as
of
the second quarter of 2006; however, the award of $30,000 worth of common
stock
was not made until following shareholder approval of the 2006 Non-Employee
Director Stock Incentive Plan on September 19, 2006. Mr. Swanson and Mrs.
Taylor
elected not to receive compensation for their board service for
2006
Non-Employee
Director Option Plan.
On
November 12, 1997, our board of directors adopted the Nonemployee Director
Stock
Option Plan (the "Directors' Plan") and our stockholders approved such plan
on
December 8, 1997. The Directors' Plan provides for the issuance each year
of an
option to purchase 3,750 shares of common stock to each member of the board
of
directors who is not an employee. The purpose of the Directors' Plan is to
encourage the continued service of outside directors and to provide them
with
additional incentive to assist us in achieving our growth objectives. Options
may be exercised over a five-year period with the initial right to exercise
starting one year from the date of the grant, provided the director has not
resigned or been removed for cause by the board of directors prior to such
date.
After one year from the date of the grant, options outstanding under the
Directors' Plan may be exercised regardless of whether the individual continues
to serve as a director. Options granted under the Directors' Plan are not
transferable except by will or by operation of law. Options to purchase 48,000
shares of common stock have been granted under the Directors' Plan at an
exercise price of $3.00 per share. In addition, each outside director was
granted an option for 100,000 shares of common stock at fair market value
on
September 30, 2003 ($1.24). These options vested over a two-year period
beginning on September 30, 2003. Through December 31, 2006, options covering
an
aggregate of 454,750 shares of common stock have been granted under the
Non-Employee Director Option Plan and there were 415,000 shares underlying
options outstanding under the plan. In 2006 stcokholders approved the 2006
Non-Employee Director Stock Incentive Plan which amends and restates the
plan to
permit the issuance of restricted stock as a component of the compensation
for
outside directors.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The
following table sets forth, as of March 9, 2007, information regarding the
ownership of our common stock owned by (i) each person (or "group" within
the
meaning of Section 13(d)(3) of the Security Exchange Act of 1934) known by
us to
own beneficially more than 5% of common stock; (ii) each or our directors,
(iii)
each of our named executive officers and (iv) all of our executive officers
and
directors of the Company as a group.
|
Name
and Address of Beneficial
Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||
|
Oil
States Energy Services, Inc. 333 Clay Street, Suite 4620 Houston,
Texas
77002
|
26,462,137
(2
|
)
|
44.5
|
%
|
|||
|
Officers
and Directors:
|
|||||||
|
Douglas
E. Swanson
|
--
|
*
|
|||||
|
Jerry
L. Winchester
|
923,132
(3
|
)
|
1.5
|
%
|
|||
|
W.
Richard Anderson
|
176,912
(4
|
)
|
*
|
||||
|
E.
J. DiPaolo
|
134,109
(5
|
)
|
*
|
||||
|
Robert
S. Herlin
|
134,109
(5
|
)
|
*
|
||||
|
K.
Kirk Krist
|
321,609
(6
|
)
|
*
|
||||
|
Cindy
B. Taylor
|
--
|
*
|
|||||
|
Robert
G. Croyle
|
13,216
(7
|
)
|
*
|
||||
|
Gabriel
Aldape
|
100,000
(8
|
)
|
*
|
||||
|
Dewitt
H. Edwards
|
190,000
(9
|
)
|
*
|
||||
|
Don
B. Cobb
|
247,500
(10
|
)
|
*
|
||||
|
All
executive officers and directors as a group (eleven people)
|
2,240,587
(11
|
)
|
3.7
|
%
|
|||
________________
|
*
|
less
than 1%
|
|
(1)
|
Unless
otherwise noted, the business address for purposes hereof for each
person
listed is 7908
N. Sam Houston Parkway W., Suite 500, Houston, Texas 77064.
Beneficial owners have sole voting and investment power with respect
to
the shares unless otherwise noted.
|
|
(2)
|
Oil
States Energy Services Inc. is a wholly owned subsidiary of Oil
States
International, Inc., which may be deemed to have shared voting
and
investment power over such shares.
|
|
(3)
|
Includes
options to purchase 537,500 shares of common stock exercisable
within 60
days and 145,632 shares of restricted
stock.
|
|
(4)
|
Includes
options to purchase 141,250 shares of common stock exercisable
within 60
days and of 30,359 shares of restricted
stock.
|
|
(5)
|
Consists
of options to purchase 103,750 shares of common stock exercisable
within
60 days and of 30,359 shares of restricted
stock.
|
|
(6)
|
Consists
of options to purchase 291,250 shares of common stock exercisable
within
60 days and of 30,359 shares of restricted
stock.
|
|
(7)
|
Consists
of 13,216 shares of restricted common
stock.
|
|
(8)
|
Consists
of options to purchase 100,000 shares of common stock exercisable
within
60 days.
|
|
(9)
|
Consists
of options to purchase 190,000 shares of common stock exercisable
within
60 days.
|
|
(10)
|
Consists
of options to purchase 200,000 shares of common stock exercisable
within
60 days.
|
|
(11)
|
Consists
of options to purchase 1,627,500 shares of common stock exercisable
within
60 days and 134,652 shares of restricted common
stock.
|
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section
16(a) of the Securities and Exchange Act of 1934 requires our officers and
directors to file reports of ownership and changes in ownership of our common
stock with the Securities and Exchange Commission and the American Stock
Exchange.
Based upon a review of the Forms 3, 4, and 5 presented to it, the company
believes that all reports were filed on a timely basis except as
follows:
Mr.
Aldape was late filing a Form 3 upon joining us on March 3, 2006 as Chief
Financial Officer and in reporting the grant in connection with his employment
of an option to purchase 150,000 shares of common stock pursuant to our 2004
Long Term Incentive Plan. The Form 3 was filed on July 17,
2006.
Item
13. Certain
Relationships and Related Transactions, and Director
Independence.
In
connection with the HWC acquisition, we issued a $15 million unsecured
subordinated debt to Oil States Energy Services, Inc., adjusted to $21.2
million
after a $6.2 million working capital adjustment. The note bears interest
at a
rate of 10% per annum, and requires a one-time principal payment on September
9,
2010.
Item
14. Principal
Accounting Fees and Services.
During
2006 and 2005, we incurred the following fees for services performed by UHY
LLP
(“UHY”):
|
Fee
Type
|
2006
|
2005
|
|||||
|
Audit
Fees
|
$
|
351,000
|
$
|
190,000
|
|||
|
Audit
Related fees
|
32,000
|
46,000
|
|||||
|
Tax
Fees
|
—
|
—
|
|||||
|
Other
Fees
|
149,000
|
16,000
|
|||||
|
Total
Fees
|
$
|
532,000
|
$
|
252,000
|
|||
AUDIT
FEES
Audit
fees represent the aggregate fees for professional services rendered by UHY
for
the audit of our annual financial statements for the fiscal years ended December
31, 2006 and December 31, 2005, and the reviews of our financial statements
included in our Forms 10-Q for all quarters of fiscal 2006 and
2005.
Audit
Related Fees - Audit-related
fees include professional services rendered by UHY for audits of our employee
benefit plans.
Tax
Fees - We
use an
independent consultant other than UHY to perform all tax related consulting
work.
All
Other Fees -Other
fees paid to UHY during 2006 and 2005 were related to the acquisition of
HWC,
including the acquisition audit of HWC for the year ended December 31, 2005
that
was performed in 2006 and fees for various registration statements during
2006.
Pre
Approval Policies and Procedures - The
Audit
Committee has established written pre-approval policies that require the
approval by the Audit Committee of all services provided by UHY as the principal
independent accountants and all audit services provided by other independent
accountants. All of the services described above provided by UHY to us were
approved in accordance with the policy.
Work
Performed by Principal Accountant’s Full Time, Permanent Employees
- The
firm
of UHY LLP ("UHY") acts as our principal independent registered public
accounting firm. Through December 31, 2006, UHY had a continuing relationship
with UHY Advisors, Inc. (“Advisors”) from which it leased auditing staff who
were full time, permanent employees of Advisors and through which UHY’s partners
provide non-audit services. UHY has no full time employees and therefore,
none
of the audit services performed were provided by permanent full-time employees
of UHY. UHY manages and supervises the audit services and audit staff, and
is
exclusively responsible for the opinion rendered in connection with its
examination.
The
Selection of Auditors - The
Board
of Directors appointed UHY as principal independent accountants to audit
the
financial statements of us for the years ending December 31, 2006, 2005,
and
2004. The appointment was made upon the recommendation of the Audit Committee.
UHY has advised that neither the firm nor any member of the firm has any
direct
financial interest or any material indirect interest in us. Also, during
at
least the past three years, neither the firm nor any member of the firm has
had
any connection with us in the capacity of promoter, underwriter, voting trustee,
Director, officer or employee.
PART
IV
Item
15. Exhibits,
Financial Statement Schedules.
(a) 1.
Consolidated
financial statements for the three years in the period ended December 31,
2006,
included after signature page.
|
2.
|
Financial
statement schedules included in consolidated financial
statements.
|
|
3.
|
Exhibit
Index
|
|
(a)
|
Exhibits
|
|
Exhibit
No.
|
|
Document
|
|
3.01
|
—
|
Amended
and Restated Certificate of Incorporation (Incorporated herein
by
reference to exhibit 3.2 of Form 8-K filed August 13,
1997.)
|
|
3.02
|
—
|
Amendment
to Certificate of Incorporation (Incorporated herein by reference
to
exhibit 3.3 of Form 8-K filed August 13, 1997.)
|
|
3.02(a)
|
—
|
Amendment
to Certificate of Incorporation (Incorporated herein by reference
to
exhibit 3.02(a) of Form 10-Q filed November 14, 2001.)
|
|
3.03
|
—
|
Amended
Bylaws ( Incorporated herein by reference to exhibit 3.4 of Form
8-K filed
August 13, 1997.)
|
|
3.03
|
—
|
Amendment
to Certificate of Incorporation ( Incorporated herein by reference
to
exhibit 3.1 of Form 8-K filed March 3, 2006.)
|
|
4.01
|
—
|
Specimen
Certificate for the Registrant’s Common Stock (Incorporated herein by
reference to exhibit 3.4 of Form 8-K filed August 13,
1997.)
|
|
4.02
|
—
|
Certificate
of Designation of 10% Junior Redeemable Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.08 of Form 10-QSB
filed May
19, 1998.)
|
|
4.03
|
—
|
Certificate
of Designation of Series A Cumulative Senior Preferred Stock (Incorporated
herein by reference to exhibit 4.07 of Form 10-K filed July 17,
2000.)
|
|
4.04
|
—
|
Certificate
of Designation of Series B Convertible Preferred Stock (Incorporated
herein by reference to exhibit 4.08 of Form 10-K filed July 17,
2000.)
|
|
4.05
|
—
|
Certificate
of Designation of Series C Cumulative Convertible Junior Preferred
Stock
(Incorporated herein by reference to exhibit 4.09 of Form 10-K
filed July
17, 2000.)
|
|
Exhibit
No.
|
Document
|
|
|
4.06
|
—
|
Certificate
of Designation of Series D Cumulative Junior Preferred Stock (Incorporated
herein by reference to exhibit 4.10 of Form 10-K filed July 17,
2000.
)
|
|
4.07
|
—
|
Certificate
of Designation of Series E Cumulative Senior Preferred Stock (Incorporated
herein by reference to exhibit 4.07 of Form 10-K filed April 2,
2001.)
|
|
4.08
|
—
|
Certificate
of Designation of Series F Convertible Senior Preferred Stock
(Incorporated herein by reference to exhibit 4.08 of Form 10-K
filed April
2, 2001.)
|
|
4.09
|
—
|
Certificate
of Designation of Series G Cumulative Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.09 of Form 10-K
filed April
2, 2001.)
|
|
4.10
|
—
|
Certificate
of Designation of Series H Cumulative Convertible Preferred Stock
(Incorporated herein by reference to exhibit 4.10 of Form 10-K
filed April
2, 2001.)
|
|
4.11
|
—
|
Registration
Rights Agreement dated March 3, 2006 between Boots & Coots
International Well Control, Inc. and HWC Energy Services, Inc.
(Incorporated herein by reference to exhibit 4.1 to the Current
Report on
Form 8-K filed March 9, 2006.)
|
|
10.01
|
—
|
1997
Incentive Stock Plan (Incorporated herein by reference to exhibit
10.33 of
Form 10-Q filed August 16, 1999.)
|
|
10.02
|
—
|
Outside
Directors’ Option Plan (Incorporated herein by reference to exhibit 10.4
of Form 8-K filed August 13, 1997.)
|
|
10.03
|
—
|
Halliburton
Center Sublease (Incorporated herein by reference to exhibit 10.17
of Form
10-KSB filed March 31, 1998.)
|
|
10.04
|
—
|
Executive
Employment Agreement of Jerry Winchester (Incorporated herein by
reference
to exhibit 10.13 of Form 10-K filed March 30, 2004.)
|
|
10.05
|
—
|
Form
of Warrant issued to Specialty Finance Fund I, LLC and to Turner,
Voelker,
Moore (Incorporated herein by reference to exhibit 10.47 of Form
10-Q
filed November 14, 2000.)
|
|
10.06
|
—
|
2000
Long Term Incentive Plan (Incorporated herein by reference to exhibit
4.1
of Form 8-K filed April 30, 2001.)
|
|
10.07
|
—
|
2004
Long Term Incentive Plan (Incorporated herein by reference to exhibit
4.1
of Form S-8 filed September 28, 2004.)
|
|
10.08
|
—
|
2004
Long Term Incentive Plan (Incorporated herein by reference to exhibit
4.1
of Form S-8 filed September 28, 2004.)
|
|
10.09
|
—
|
Credit
and Security Agreement dated March 3, 2006 by and between Boots
&
Coots International Well Control, Inc. and Wells Fargo Bank, National
Association. (Incorporated herein by reference to exhibit 10.10
of Form
8-K filed March 9, 2006.)
|
|
10.10
|
―
|
Transaction
Agreement by and among Boots & Coots International Well Control, Inc.,
HWC Acquisition, LLC, HWC Merger Corporation, Hydraulic Well Control,
LLC
and HWC Energy Services, Inc. dated as of November 21, 2005 (Incorporated
herein by reference to exhibit 2.1 to the Current Report on Form
8-K filed
March 9, 2006.)
|
|
10.11
|
―
|
Subordinated
Note Agreement with HWC Energy Services dated March 3, 2006 (Incorporated
herein by reference to exhibit 4.1 to the Current Report on Form
8-K filed
March 9, 2006.)
|
|
10.12
|
―
|
Executive
Employment Agreement of Gabriel Aldape (Incorporated herein by
reference
to exhibit 10.1 on Form 10-Q filed August 14, 2006.)
|
|
10.13
|
―
|
Executive
Employment Agreement of Dewitt H. Edwards (Incorporated herein
by
reference to exhibit 10.1 on Form 8-K filed July 7, 2006.)
|
|
10.14
|
―
|
2004
Long Term Incentive Plan 2,000,000 Share Registration (Incorporated
herein
by reference to exhibit 4.1 of Form S-8 filed November 14, 2006.)
|
|
10.15
|
—
|
2006
Non-Employee Directors Stock Incentive Plan (Incorporated herein
by
reference to exhibit 4.1 of Form S-8 filed November 14, 2006.).
|
|
Exhibit
No.
|
Document
|
|
|
10.16
|
Amendment
to Executive Employment Agreement of Jerry Winchester (Incorporated
herein
by reference to item 5.02 on Form 8-K filed March 7, 2007.)
|
|
|
*10.17
|
—
|
Amendment
1 to the Credit and Security Agreement dated March 3, 2006 by and
between
Boots & Coots International Well Control, Inc. and Wells Fargo Bank,
National Association.
|
|
*10.18
|
—
|
|
|
*10.19
|
—
|
|
|
*21.01
|
—
|
|
|
*23.1
|
―
|
Consent
of UHY
LLP
|
|
*31.1
|
―
|
|
|
*31.2
|
―
|
|
|
*32.1
|
―
|
|
|
*32.2
|
―
|
*Filed
herewith
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
BOOTS
& COOTS INTERNATIONAL WELL
|
||
|
CONTROL,
INC.
|
||
|
By:
|
/s/
Jerry Winchester
|
|
|
Jerry
Winchester
|
||
|
Chief
Executive Officer
|
||
Date: March
23, 2007
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on
the
date indicated.
|
Signature
|
Title
|
Date
|
||
|
By:
/s/ DOUGLAS E. SWANSON
|
Chairman
of the Board of Directors
|
March
23, 2007
|
||
|
Douglas
E. Swanson
|
|
|||
|
By:
/s/ JERRY WINCHESTER
|
Chief
Executive Officer and Director
|
March
23, 2007
|
||
|
Jerry
Winchester
|
|
|||
|
By:
/s/ GABRIEL ALDAPE
|
Chief
Financial Officer
|
March
23, 2007
|
||
|
Gabriel
Aldape
|
||||
|
By:
/s/ ROBERT HERLIN
|
Director
|
March
23, 2007
|
||
|
Robert
Stevens Herlin
|
||||
|
By:
/s/ E.J. DIPAOLO
|
Director
|
March
23, 2007
|
||
|
E.J.
DiPaolo
|
||||
|
By:
/s/ W. RICHARD ANDERSON
|
Director
|
March
23, 2007
|
||
|
W.
Richard Anderson
|
||||
|
By:
/s/ K. KIRK KRIST
|
Director
|
March
23, 2007
|
||
|
K.
Kirk Krist
|
||||
|
By:
/s/ CINDY B. TAYLOR
|
Director
|
March
23, 2007
|
||
|
Cindy
B. Taylor
|
||||
|
By:
/s/ ROBERT G. CROYLE
|
Director
|
March
23, 2007
|
||
|
Robert
G. Croyle
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
Boots
& Coots International Well Control, Inc.
We
have
audited the accompanying consolidated balance sheets of Boots & Coots
International Well Control, Inc. and subsidiaries (the “Company”) as of December
31, 2006 and 2005, and the related consolidated statements of operations,
cash
flows and stockholders' equity for each of the three years in the period
ended
December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Boots &
Coots International Well Control, Inc. and subsidiaries as of December 31,
2006
and 2005, and the consolidated results of their operations and their cash
flows
for each of the three years in the period ended December 31, 2006, in conformity
with accounting principles generally accepted in the United States of America.
As
discussed in Note B to the consolidated financial statements, effective January
1, 2006 the Company changed its method of accounting for share based
compensation.
/s/
UHY
LLP
Houston,
Texas
March
23,
2007
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands except share and per share amounts)
ASSETS
|
|
December
31,
2006
|
December
31,
2005
|
|||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
5,033
|
$
|
2,564
|
|||
|
Restricted
cash
|
303
|
30
|
|||||
|
Receivables
— net of allowance for doubtful accounts of $356 and $345 at
December 31,
2006 and 2005
|
41,319
|
6,142
|
|||||
|
Inventory
|
965
|
—
|
|||||
|
Prepaid
expenses and other current assets
|
4,727
|
1,862
|
|||||
|
Total
current assets
|
52,347
|
10,598
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
43,790
|
2,462
|
|||||
|
GOODWILL
|
4,393
|
—
|
|||||
|
OTHER
ASSETS
|
487
|
1,707
|
|||||
|
Total
assets
|
$
|
101,017
|
$
|
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
|
7,475
|
376
|
|||||
|
Foreign
income tax payable
|
5,020
|
585
|
|||||
|
Accrued
liabilities
|
12,400
|
3,563
|
|||||
|
Total
current liabilities
|
26,835
|
7,033
|
|||||
|
LONG-TERM
DEBT AND NOTES PAYABLE, net of current maturities……
|
29,492
|
3,600
|
|||||
|
ACCRUED
INTEREST, net of current portion
|
—
|
339
|
|||||
|
DEFERRED
TAXES
|
4,520
|
—
|
|||||
|
OTHER
LIABILITIES
|
1,748
|
—
|
|||||
|
Total
liabilities
|
62,595
|
10,972
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
—
|
—
|
|||||
|
STOCKHOLDERS'
EQUITY:
|
|||||||
|
Preferred
stock ($.00001 par value, 5,000,000 shares authorized, 0 and
53,000 shares
issued and outstanding at December 31, 2006 and 2005,
respectively)
|
—
|
—
|
|||||
|
Common
stock ($.00001 par value, 125,000,000 shares authorized, 59,186,000
and
29,594,000 shares issued and outstanding at December 31, 2006
and 2005,
respectively)
|
1
|
—
|
|||||
|
Additional
paid-in capital
|
94,479
|
71,859
|
|||||
|
Deferred
Compensation
|
—
|
(225
|
)
|
||||
|
Accumulated
other comprehensive loss
|
(1,234
|
)
|
(1,234
|
)
|
|||
|
Accumulated
deficit
|
(54,824
|
)
|
(66,605
|
)
|
|||
|
Total
stockholders' equity
|
38,422
|
3,795
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
101,017
|
$
|
14,767
|
|||
See
accompanying notes to consolidated financial statements.
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands except per share and share amounts)
|
|
Year
Ended December
31,
2006
|
Year
Ended December
31,
2005
|
Year
Ended December
31,
2004
|
|||||||
|
REVENUES
|
$
|
97,030
|
$
|
29,537
|
$
|
24,175
|
||||
|
COST
OF REVENUES, excluding depreciation and amortization
|
52,281
|
14,488
|
11,929
|
|||||||
|
Gross
Margin
|
44,749
|
15,049
|
12,246
|
|||||||
|
OPERATING
EXPENSES
|
15,597
|
7,098
|
6,921
|
|||||||
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
4,118
|
2,674
|
3,370
|
|||||||
|
FOREIGN
CURRENCY TRANSLATION
|
259
|
—
|
—
|
|||||||
|
DEPRECIATION
AND AMORTIZATION
|
4,883
|
714
|
889
|
|||||||
|
24,857
|
10,486
|
11,180
|
||||||||
|
OPERATING
INCOME
|
19,892
|
4,563
|
1,066
|
|||||||
|
INTEREST
EXPENSE & OTHER, NET
|
2,860
|
655
|
864
|
|||||||
|
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
17,032
|
3,908
|
202
|
|||||||
|
INCOME
TAX EXPENSE
|
5,867
|
1,129
|
492
|
|||||||
|
INCOME
(LOSS) FROM CONTINUING OPERATIONS
|
$
|
11,165
|
$
|
2,779
|
$
|
(290
|
)
|
|||
|
INCOME
FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
|
—
|
—
|
42
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
11,165
|
$
|
2,779
|
$
|
(248
|
)
|
|||
|
STOCK
AND WARRANT ACCRETIONS
|
—
|
—
|
(13
|
)
|
||||||
|
PREFERRED
DIVIDEND REQUIREMENTS
|
616
|
(874
|
)
|
(735
|
)
|
|||||
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$
|
11,781
|
$
|
1,905
|
$
|
(996
|
)
|
|||
|
BASIC
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||
|
Continuing
operations
|
$
|
0.22
|
$
|
0.06
|
$
|
(0.04
|
)
|
|||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Net
income (loss)
|
$
|
0.22
|
$
|
0.06
|
$
|
(0.04
|
)
|
|||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING BASIC
|
53,772,000
|
29,507,000
|
28,142,000
|
|||||||
|
DILUTED
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||
|
Continuing
operations
|
$
|
0.21
|
$
|
0.06
|
$
|
(0.04
|
)
|
|||
|
Discontinued
operations
|
$
|
—
|
$
|
—
|
$
|
—
|
||||
|
Net
income (loss)
|
$
|
0.21
|
$
|
0.06
|
$
|
(0.04
|
)
|
|||
|
WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING DILUTED
|
55,036,000
|
31,374,000
|
28,142,000
|
|||||||
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years
Ended December 31, 2006, 2005 and 2004
(in
Thousands)
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||
|
Preferred
Stock
|
CommonStock
|
Additional
Paid in
|
Accumulated
|
Other
Comprehensive
|
Deferred
|
Stockholder’s
|
||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Compensation
|
Equity
|
||||||||||||||||||||
|
BALANCES
at December 31, 2003
|
53
|
$
|
—
|
27,300
|
$
|
—
|
$
|
68,603
|
$
|
(67,514
|
)
|
$
|
(439
|
)
|
$
|
(270
|
)
|
$
|
380
|
|||||||||
|
Common
stock options issued for services
|
—
|
—
|
—
|
—
|
72
|
—
|
—
|
—
|
72
|
|||||||||||||||||||
|
Common
stock issued for debt refinancing
|
—
|
—
|
1,250
|
—
|
1,088
|
—
|
—
|
—
|
1,088
|
|||||||||||||||||||
|
Common
stock issued for services
|
—
|
—
|
250
|
—
|
237
|
—
|
—
|
—
|
237
|
|||||||||||||||||||
|
Restricted
common stock issued
|
—
|
—
|
60
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock conversion to common stock
|
—
|
—
|
579
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock dividends accrued
|
—
|
—
|
—
|
—
|
735
|
(735
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Warrant
discount accretion
|
—
|
—
|
—
|
—
|
13
|
(13
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Deferred
compensation
|
—
|
—
|
—
|
—
|
140
|
—
|
—
|
(140
|
)
|
—
|
||||||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
85
|
85
|
|||||||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(248
|
)
|
—
|
—
|
(248
|
)
|
|||||||||||||||||
|
Foreign
currency translation loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(434
|
)
|
—
|
(434
|
)
|
|||||||||||||||||
|
Comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
(682
|
)
|
||||||||||||||||||
|
BALANCES
at December 31, 2004
|
53
|
$
|
—
|
29,439
|
$
|
—
|
$
|
70,888
|
$
|
(68,510
|
)
|
$
|
(873
|
)
|
$
|
(325
|
)
|
$
|
1,180
|
|||||||||
|
Common
stock options exercised
|
—
|
—
|
35
|
—
|
23
|
—
|
—
|
—
|
23
|
|||||||||||||||||||
|
Restricted
common stock issued
|
—
|
—
|
120
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Preferred
stock dividends accrued
|
—
|
—
|
—
|
—
|
874
|
(874
|
)
|
—
|
—
|
—
|
||||||||||||||||||
|
Stock
Options and restricted stock grant expense
|
—
|
—
|
—
|
—
|
74
|
—
|
—
|
—
|
74
|
|||||||||||||||||||
|
Amortization
of deferred compensation
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
100
|
100
|
|||||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
2,779
|
—
|
—
|
2,779
|
|||||||||||||||||||
|
Foreign
currency translation loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(361
|
)
|
—
|
(361
|
)
|
|||||||||||||||||
|
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
2,418
|
|||||||||||||||||||
|
BALANCES
at December 31, 2005
|
53
|
$
|
—
|
29,594
|
$
|
—
|
$
|
71,859
|
$
|
(66,605
|
)
|
$
|
(1,234
|
)
|
$
|
(225
|
)
|
$
|
3,795
|
|||||||||
|
Common
stock options exercised
|
—
|
—
|
836
|
—
|
639
|
—
|
—
|
—
|
639
|
|||||||||||||||||||
|
Warrants
exercised
|
—
|
—
|
64
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||
|
Restricted
common stock issued
|
—
|
—
|
129
|
—
|
120
|
—
|
—
|
—
|
120
|
|||||||||||||||||||
|
Common
stock issued for services
|
—
|
—
|
15
|
—
|
21
|
—
|
—
|
—
|
21
|
|||||||||||||||||||
|
Common
stock issued for acquisition ofbusiness
|
—
|
—
|
26,462
|
1
|
26,461
|
—
|
—
|
—
|
26,462
|
|||||||||||||||||||
|
Preferred
stock dividends reversed
|
—
|
—
|
—
|
—
|
(616
|
)
|
616
|
—
|
—
|
—
|
||||||||||||||||||
|
Reversal
of deferred compensation with adoptionof SFAS 123(R)
|
—
|
—
|
—
|
—
|
(225
|
)
|
—
|
—
|
225
|
—
|
||||||||||||||||||
|
Stock
based compensation
|
—
|
—
|
150
|
—
|
1,519
|
—
|
—
|
—
|
1,519
|
|||||||||||||||||||
|
Redemption
of preferred stock and conversion ofpreferred stock to
common
stock
|
(53
|
)
|
—
|
1,936
|
—
|
(5,299
|
)
|
—
|
—
|
—
|
(5,299
|
)
|
||||||||||||||||
|
Net
income
|
—
|
—
|
—
|
—
|
—
|
11,165
|
—
|
—
|
11,165
|
|||||||||||||||||||
|
BALANCES
at December 31, 2006
|
$
|
—
|
$
|
—
|
59,186
|
$
|
1
|
$
|
94,479
|
$
|
(54,824
|
)
|
$
|
(1,234
|
)
|
$
|
—
|
$
|
38,422
|
|||||||||
See
accompanying notes to consolidated financial
statements.
BOOTS
&
COOTS
INTERNATIONAL WELL CONTROL,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year
Ended December
31,
2006
|
Year
Ended December
31,
2005
|
Year
Ended December
31,
2004
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||
|
Net
income (loss)
|
$
|
11,165
|
$
|
2,779
|
$
|
(248
|
)
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided operating
activities
|
||||||||||
|
Depreciation
and amortization
|
4,883
|
714
|
889
|
|||||||
|
Deferred
tax provision (credit)
|
(590
|
)
|
98
|
—
|
||||||
|
Stock
based compensation
|
1,519
|
—
|
—
|
|||||||
|
Bad
debt expense (recovery)
|
(230
|
)
|
(144
|
)
|
108
|
|||||
|
Troubled
debt restructuring interest accrual
|
(598
|
)
|
—
|
—
|
||||||
|
Amortization
of deferred loan cost
|
809
|
202
|
75
|
|||||||
|
Other
non-cash charges
|
143
|
174
|
85
|
|||||||
|
Gain
on sale of assets
|
(516
|
)
|
(14
|
)
|
(9
|
)
|
||||
|
Equity
issued for services and settlements
|
—
|
—
|
309
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Receivables
|
(20,842
|
)
|
4,342
|
2,787
|
||||||
|
Inventory
|
(128
|
)
|
—
|
—
|
||||||
|
Prepaid
expenses and current assets
|
(2,782
|
)
|
(42
|
)
|
(308
|
)
|
||||
|
Other
assets
|
412
|
(368
|
)
|
(789
|
)
|
|||||
|
Accounts
payable and accrued liabilities
|
11,155
|
(5,077
|
)
|
1,712
|
||||||
|
Change
in net operating assets of discontinued operations
|
—
|
—
|
(206
|
)
|
||||||
|
Net
cash provided by operating activities
|
4,400
|
2,664
|
4,405
|
|||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||
|
Cash
acquired in connection with acquisition
|
4,366
|
—
|
—
|
|||||||
|
Property
and equipment additions
|
(6,882
|
)
|
(306
|
)
|
(491
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
829
|
16
|
40
|
|||||||
|
Net
cash used in investing activities
|
(1,687
|
)
|
(290
|
)
|
(451
|
)
|
||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||
|
Payments
of senior debt
|
(750
|
)
|
—
|
—
|
||||||
|
Payment
of subordinated debt
|
(5,100
|
)
|
(900
|
)
|
(3,635
|
)
|
||||
|
Payments
of term loan
|
(1,351
|
)
|
—
|
—
|
||||||
|
Revolving
credit borrowings
|
1,917
|
—
|
—
|
|||||||
|
Proceeds
from term loan
|
9,700
|
—
|
—
|
|||||||
|
Redemption
of preferred stock
|
(5,299
|
)
|
—
|
—
|
||||||
|
Common
stock options exercised
|
639
|
23
|
—
|
|||||||
|
Net
cash used in financing activities
|
(244
|
)
|
(877
|
)
|
(3,635
|
)
|
||||
|
Impact
of foreign currency on cash
|
—
|
(361
|
)
|
(434
|
)
|
|||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
2,469
|
1,136
|
(115
|
)
|
||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
2,564
|
1,428
|
1,543
|
|||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$
|
5,033
|
$
|
2,564
|
$
|
1,428
|
||||
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
||||||||||
|
Cash
paid for interest
|
$
|
2,874
|
$
|
593
|
$
|
1,421
|
||||
|
Cash
paid for income taxes
|
4,593
|
170
|
1,379
|
|||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||
|
Stock
and warrant accretions
|
—
|
—
|
13
|
|||||||
|
Deferred
Compensation
|
—
|
—
|
140
|
|||||||
|
Preferred
stock dividends accrued (reversed)
|
(616
|
)
|
874
|
735
|
||||||
|
Common
stock issued for debt modification
|
—
|
—
|
1,088
|
|||||||
|
Common
stock issued for acquisition of business
|
26,462
|
—
|
—
|
|||||||
|
Conversion
of preferred stock
|
1,936
|
—
|
—
|
|||||||
|
Long-term
notes issued for acquisition of business
|
21,166
|
—
|
—
|
|||||||
See
accompanying notes to consolidated financial statements.
BOOTS
& COOTS INTERNATIONAL WELL CONTROL,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A. Business
and
Organization
Boots
& Coots International Well Control, Inc. and subsidiaries (the “Company”),
is a global-response oil and gas service company that specializes in responding
to and controlling oil and gas well emergencies, including blowouts and well
fires. Through our participation in the proprietary insurance program
WELLSURE®,
we also
provide lead contracting and high-risk management services, under critical
loss
scenarios, to the program’s insured clients. Additionally, the
WELLSURE®
program
designates that we provide certain pre-event prevention and risk mitigation
services defined under the program. We also provide snubbing and other high-risk
well control management services, including pre-event planning, training
and
consulting.
In
the
past, during periods of low critical events, resources dedicated to emergency
response were underutilized or, at times, idle, while the fixed costs of
operations continued to be incurred, contributing to significant operating
losses. To mitigate these consequences, we began to actively expand our
non-event service capabilities, with particular focus on well intervention
services. Well intervention services include engineering activities, well
plan
reviews, site audits, and rig inspections. More specifically, we developed
the
WELLSUREÒ
program,
which is now providing more predictable and increasing service fee income,
and
began marketing our SafeGuard program, which provides a full range of prevention
services domestically and internationally.
B. Significant
Accounting Policies
Consolidation
-
The
accompanying consolidated financial statements include the financial
transactions and accounts of us and our subsidiaries. All significant
intercompany accounts and transactions are eliminated in
consolidation.
Cash
and Cash Equivalents - We
consider all unrestricted highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. At December
31,
2006, restricted cash totaled $303,000 and relates to letters of
credit.
Revenue
Recognition -
Revenue
is recognized on our service contracts primarily on the basis of contractual
day
rates as the work is completed. Revenue and cost from product and equipment
sales is recognized upon delivery, customer acceptance and contract
completion.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, related workman’s
compensation insurance, supplies, tools, repairs and depreciation costs.
General
and administrative costs are charged to expense as incurred. Fixed assets
are
depreciated over their useful lives. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
We
recognize 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 our predetermined day rates and sub-contracted
work as
incurred.
Allowance
for Doubtful Accounts
- We
perform ongoing evaluations of our customers and generally do not require
collateral. We assess our credit risk and provide an allowance for doubtful
accounts for any accounts which we deem doubtful of collection.
Property
and Equipment
-
Property
and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the respective assets
as
follows: buildings and improvements (15-31 years), well control and firefighting
equipment (8 years), shop and other equipment (8 years), vehicles (5 years)
and
office equipment and furnishings (5 years).
Expenditures
for repairs and maintenance are charged to expense when incurred. Expenditures
for major renewals and betterments, which extend the useful lives of existing
equipment, are capitalized and depreciated over the remaining useful life
of the
equipment. Upon retirement or disposition of property and equipment, the
cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of
operations.
Impairment
of Long Lived Assets -
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”, we evaluate
the recoverability of property and equipment, and other long-lived assets,
if
facts and circumstances indicate that any of those assets might be impaired.
If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset’s carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Based on the Company’s review, no such
impairment indicators exist for the periods presented.
Goodwill
-
In
accordance with the requirements of SFAS No. 142, “Goodwill and Other Intangible
Assets”, goodwill is not being amortized, but is being reviewed at least
annually for impairment or more often if changes in facts and circumstances
indicate a loss in value may have occurred. Goodwill is entirely associated
with
the March 2006 acquisition of the hydraulic well control business (HWC) of
Oil
States International, Inc. and is further described in Note E. The goodwill
has
been assigned to the Well Intervention segment which is deemed the reporting
unit for this review. Fair value of the reporting unit is determined based
on
internal management estimates using a combination of discounted cash flows
and
market comparable companies. We perform the annual review for possible
impairment in the fourth calendar quarter of each year. No goodwill
impairment was recognized based on the evaluations performed.
Foreign
currency—Effective
January 1, 2006, and related to our acquisition of the hydraulic well control
business of Oil States International, Inc. (see “Note E—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. 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. 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.
Income
Taxes
- We
account 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
our 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. The domestic tax liabilities are offset
by the
usage of our net domestic operating loss carry forwards. The provision for
tax
expense includes foreign income taxes from Algeria and Venezuela and a minimal
amount of domestic alternative minimum tax liability (See Note G.).
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. Diluted
income (loss) per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the period increased
by the number of additional common shares that would have been outstanding
if
the potential common shares had been issued.
The
weighted average number of shares used to compute basic and diluted earnings
per
share for the three years ended December 31, 2006, 2005 and 2004 is illustrated
below:
|
|
Years
Ended December 31
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Numerator:
|
||||||||||
|
For
basic and diluted earnings per share:
|
||||||||||
|
Net
income (loss) attributable to common stockholders
|
$
|
11,781
|
$
|
1,905
|
$
|
(996
|
)
|
|||
|
Denominator:
|
||||||||||
|
For
basic earnings per share- Weighted-average shares
|
53,772
|
29,507
|
28,142
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Convertible
Preferred stock
|
—
|
—
|
—
|
|||||||
|
Stock
options and warrants
|
1,264
|
1,867
|
—
|
|||||||
|
Denominator:
|
||||||||||
|
For
diluted earnings per share - Weighted-average shares
|
55,036
|
31,374
|
28,142
|
|||||||
For
the
year ended December 31, 2004 we incurred a net loss attributable to common
stockholders. As a result, the potential dilutive effect of stock options,
stock
warrants and convertible securities was not included in the calculation of
diluted earnings per share because to do so would have been antidilutive
for
2004.
The
exercise price of our stock options and stock warrants varies from $0.67
to
$3.00 per share. Assuming that the exercises and conversions are made at
the
lowest price provided under the terms of their agreements, the maximum number
of
potentially dilutive securities at December 31, 2006, 2005 and 2004 would
include: (1) 6,435,200, 5,814,690 and 5,202,440 common shares respectively,
issuable upon exercise of stock options, (2) 713,245, 2,582,033 and 3,067,355,
common shares respectively, issuable upon exercise of stock purchase warrants,
(3) 60,000, 270,000 and 330,000 shares of stock to be issued as compensation
over a four year vesting period as earned, (4) zero, 98,067 and 88,867 common
shares, respectively, issuable upon conversion of convertible preferred stock.
The actual numbers may be substantially less depending on the market price
of
our common stock at the time of conversion.
Share-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 grant date 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. 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 year ended December 31, 2006 is
illustrated below:
|
Year
Ended December 31, 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
|
$
|
18,320
|
$
|
1,288
|
$
|
17,032
|
||||
|
Provision
for income taxes
|
5,867
|
—
|
5,867
|
|||||||
|
Preferred
dividends
|
(616
|
)
|
—
|
(616
|
)
|
|||||
|
Net
income attributable to common stockholders
|
13,069
|
1,288
|
11,781
|
|||||||
|
Earnings
per share:
|
||||||||||
|
Basic
|
0.24
|
0.02
|
0.22
|
|||||||
|
Diluted
|
0.23
|
0.02
|
0.21
|
|||||||
The
pro
forma effect on net earnings (loss) and net 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 year ended December 31, 2005 is
illustrated below:
|
Year
ended
December
31, 2005
|
Year
ended
December
31, 2004
|
||||||
|
Net
income (loss) attributable to common stockholders as
reported
|
$
|
1,905
|
$
|
(996
|
)
|
||
|
Less
total stock based employee compensation expense determined under
fair
value based method for all awards, net of tax related
effects
|
(929
|
)
|
(382
|
)
|
|||
|
Pro
forma net (loss) attributable to common stockholders
|
$
|
976
|
$
|
(1,378
|
)
|
||
|
Basic
net income (loss) per share:
|
|||||||
|
As
reported
|
$
|
0.06
|
$
|
(0.04
|
)
|
||
|
Pro
forma
|
$
|
0.03
|
$
|
(0.05
|
)
|
||
|
Diluted
net income (loss) per share:
|
|||||||
|
As
reported
|
$
|
0.06
|
$
|
(0.04
|
)
|
||
|
Pro
forma
|
$
|
0.03
|
$
|
(0.05
|
)
|
||
We
used
the Black-Scholes option pricing model to estimate the fair value of options
on
the date of grant. The following weighted average assumptions were applied
in
determining the fair values of option grants:
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Risk-free
interest rate
|
4.64
|
%
|
3.6
|
%
|
3.4
|
%
|
||||
|
Expected
dividend yield
|
―
|
―
|
―
|
|||||||
|
Expected
option life
|
6.3
yrs
|
3.0
yrs
|
3.0
yrs
|
|||||||
|
Expected
volatility
|
96.8
|
%
|
79.3
|
%
|
62.4
|
%
|
||||
|
Weighted
average fair value of options granted at market value
|
$
|
1.19
|
$
|
0.56
|
$
|
0.33
|
||||
|
Forfeiture
rate
|
3.04
|
%
|
0.0
|
%
|
0.0
|
%
|
||||
Fair
Value of Financial Instruments -
The
Company’s financial instruments consist of cash and cash equivalents,
receivables, payables, and debt. The carrying amounts of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the short term nature of those instruments. We use available market
rates to estimate the fair value of debt.
Use
of Estimates
-
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires our management to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and accompanying
notes. Significant estimates made by management include the allowance for
doubtful accounts, the valuation allowance for deferred tax assets and
assumptions used in share based compensation valuation models.
Reclassifications
-
Certain
reclassifications have been made to the prior period consolidated financial
statements to conform to the current year presentation.
C. Recently
Issued Accounting Standards
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 year beginning after December 15, 2006.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP), and expands disclosures
about
fair measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new
fair
value measurements. However, for some entities, the application of this
Statement will change current practice. The Company has not yet determined
the
estimated impact on its financial condition or results of operations, if
any, of
adopting SFAS No. 157, which becomes effective for the fiscal years beginning
after November 15, 2007.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115.” SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting
by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. This Statement is expected
to expand the use of fair value measurement, which is consistent with the
Board’s long-term measurement objectives for accounting for financial
instruments. The Company has not yet determined the estimated impact on its
financial condition or results of operations, if any, of adopting SFAS No.
159,
which becomes effective for the fiscal years beginning after November 15,
2007.
|
D.
|
Detail
of Certain Balance Sheet
Accounts:
|
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
Accounts
receivable, net:
|
|||||||
|
Trade
|
$
|
27,301
|
$
|
4,676
|
|||
|
Unbilled
Revenue
|
13,656
|
1,772
|
|||||
|
Other
|
718
|
39
|
|||||
|
Allowance
for doubtful accounts
|
(356
|
)
|
(345
|
)
|
|||
|
$
|
41,319
|
$
|
6,142
|
||||
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Property
and equipment, net:
|
|||||||
|
Land
|
$
|
571
|
$
|
136
|
|||
|
Leasehold
|
2,895
|
734
|
|||||
|
Equipment
|
35,840
|
114
|
|||||
|
Firefighting
equipment
|
5,841
|
6,115
|
|||||
|
Furniture,
fixtures and office
|
1,316
|
970
|
|||||
|
Computer
systems
|
568
|
568
|
|||||
|
Vehicles
|
1,308
|
612
|
|||||
|
Construction
in progress
|
5,995
|
−
|
|||||
|
Total
property and equipment
|
54,334
|
9,249
|
|||||
|
Less:
Accumulated depreciation
|
(10,544
|
)
|
(6,787
|
)
|
|||
|
|
$
|
43,790
|
$
|
2,462
|
|||
Depreciation
expense was $4,883,000, $714,000 and $889,000 for the years ended December
31,
2006, 2005 and 2004, respectively.
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
Prepaid
expenses and other assets:
|
|||||||
|
Prepaid
taxes
|
$
|
1,509
|
$
|
203
|
|||
|
Prepaid
insurance
|
1,794
|
546
|
|||||
|
Other
prepaid expenses and current assets
|
1,424
|
1,113
|
|||||
|
|
$
|
4,727
|
$
|
1,862
|
|||
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
Accrued
liabilities:
|
|||||||
|
Accrued
compensation and benefits
|
$
|
4,914
|
$
|
860
|
|||
|
Accrued
insurance
|
1,046
|
-
|
|||||
|
Accrued
taxes, other than foreign income tax
|
2,617
|
706
|
|||||
|
Other
accrued liabilities
|
3,823
|
1,997
|
|||||
|
|
$
|
12,400
|
$
|
3,563
|
|||
|
E.
|
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
were
recorded at the date of acquisition at their respective fair values. In
connection with the acquisition,
we
engaged a valuation firm to assist in
the 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 $4.4 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
condensed 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)
|
$
|
15,298
|
||
|
Property
and equipment
|
$
|
39,645
|
||
|
Goodwill
|
$
|
4,393
|
||
|
Total
assets acquired
|
$
|
59,336
|
||
|
Current
liabilities
|
$
|
9,572
|
||
|
Deferred
taxes
|
$
|
5,110
|
||
|
Total
liabilities assumed
|
$
|
14,682
|
||
|
Net
assets acquired
|
$
|
44,654
|
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.
|
|
Year
Ended
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
(unaudited)
|
|||||||
|
Revenue
|
$
|
105,571
|
$
|
69,654
|
|||
|
Operating
Income
|
$
|
21.556
|
$
|
10,354
|
|||
|
Net
Income
|
$
|
12,097
|
$
|
3,925
|
|||
|
Basic
Earnings Per Share
|
$
|
0.21
|
$
|
0.07
|
|||
|
Diluted
Earnings Per Share
|
$
|
0.20
|
$
|
0.07
|
|||
|
Basic
Shares Outstanding
|
58,569
|
58,505
|
|||||
|
Diluted
Shares Outstanding
|
59,833
|
60,372
|
|||||
|
F.
|
Long-Term
Debt and Notes Payable:
|
Long-term
debt and notes payable consisted of the following:
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
U.S.
revolving credit facility, with available commitments up to $10.3
million,
a borrowing base of $7.9 million and an average interest rate of
8.1% for
the year ended December 31, 2006
|
$
|
1,917
|
$
|
−
|
|||
|
U.S.
term credit facility with initial borrowings of $9.7 million, payable
over
60 months and an average interest rate of 8.6% for the year ended
December
31, 2006
|
8,349
|
−
|
|||||
|
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
|
31,432
|
5,850
|
|||||
|
Less:
current maturities
|
(1,940
|
)
|
(2,250
|
)
|
|||
|
Total
long-term debt
|
$
|
29,492
|
$
|
3,600
|
|||
In
December 2000, the refinancing of our debt with Prudential qualified as a
troubled debt restructuring under the provisions of SFAS 15. As a result
of the
application of this accounting standard, the total indebtedness due to
Prudential, inclusive of accrued interest, was reduced by the cash and fair
market value of securities (determined by independent appraisal) issued by
us,
and the residual balance of the indebtedness was recorded as the new carrying
value of the subordinated note due to Prudential. Consequently, the $7,200,000
face value of the 12.0% Senior Subordinated Note with an initial maturity
date
of 2005 was recorded on our balance sheet at $11,520,000. The additional
carrying value of the debt effectively represented an accrual of future interest
due on the face value of the subordinated note due to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain in 2000.
On
August
13, 2004, we restructured our subordinated facility with Prudential. The
principal balance of $9,635,000 would have been due on December 30, 2005.
Under
the amended terms, we paid principal of $2,000,000 on August 13, 2004 plus
accrued interest of $28,667. We were also required to pay down approximately
$1,635,000 of principal on December 15, 2004. The December 31, 2005 remaining
balance of $5,100,000 was to be paid in equal quarterly installments over
the
next four years with a final maturity of December 31, 2009. This restructuring
also extended the amortization period of the remaining troubled debt
restructuring related credit over the life of the restructured facility.
In
connection with our amended loan agreement, Prudential also exchanged its
remaining 582 shares of our Series E preferred stock for 55,429 shares of
our
common stock and surrendered its warrants to purchase 2,418,000 shares of
common
stock, and we issued Prudential 1,250,000 shares of our common stock valued
at
$1,088,000 as well as 524,206 shares of common stock to pay accrued and unpaid
dividends owed on Series E and Series G preferred stock.
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 December 31, 2006 was $8.3
million on the term credit facility and $1.9 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
December 31, 2006 was 8.25% and 8.75%, respectively. Interest is accrued
and
payable monthly for both agreements. 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) notice within five (5) business days of making any capital expenditure
exceeding $500,000, and
(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 December 31,
2006
and through 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. Interest is accrued monthly and payable
quarterly.
|
G.
|
Income
Taxes
|
The
amounts of income (loss) before income taxes attributable to domestic and
foreign operations are as follows:
|
Year
Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(in
thousands)
|
||||||||||
|
Domestic
|
11,487
|
3,171
|
(1,302
|
)
|
||||||
|
Foreign
|
5,545
|
737
|
1,504
|
|||||||
|
|
$
|
17,032
|
$
|
3,908
|
$
|
202
|
||||
The
provision (benefit) for income taxes shown in the consolidated statements
of
operations is made up of current and deferred taxes as follows:
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Current
|
||||||||||
|
Domestic
|
$
|
1,533
|
$
|
—
|
$
|
—
|
||||
|
State
|
412
|
—
|
—
|
|||||||
|
Foreign
|
4,512
|
1,031
|
492
|
|||||||
|
Deferred
|
||||||||||
|
Domestic
|
(590
|
)
|
98
|
—
|
||||||
|
Foreign
|
—
|
—
|
—
|
|||||||
|
$
|
5,867
|
$
|
1,129
|
$
|
492
|
|||||
The
provision (benefit) for income taxes differs from the amount that would be
computed if the income (loss) from continuing operations before income taxes
were multiplied by the federal income tax rate (statutory rate) as
follows:
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(in
thousands)
|
||||||||||
|
Income
tax provision at statutory rates
|
$
|
5,961
|
$
|
1,328
|
$
|
69
|
||||
|
State
tax expense, net of federal benefits
|
267
|
—
|
—
|
|||||||
|
Net
change in foreign tax rates
|
(446
|
)
|
—
|
—
|
||||||
|
Return
to provision adjustment
|
1,559
|
—
|
—
|
|||||||
|
Foreign
income tax rate differential
|
(806
|
)
|
80
|
103
|
||||||
|
Adjustment
to net operating loss from continuing operations
|
—
|
(978
|
)
|
—
|
||||||
|
Nondeductible
expenses
|
950
|
28
|
29
|
|||||||
|
Change
in valuation allowance
|
(1,618
|
)
|
671
|
291
|
||||||
|
Net
income tax provision
|
$
|
5,867
|
$
|
1,129
|
$
|
492
|
||||
As
of
December 31, 2006, 2005 and 2004, we had net domestic operating loss carry
forwards of approximately $37,685,000, $43,308,000 and $41,351,000,
respectively, expiring in various amounts beginning in 2011 and ending in
2026.
The net operating loss carry forwards, along with the other timing differences,
generate a net deferred tax asset in each year.
The
Financial Accounting Standards Board (“FASB”) issued the revised SFAS No. 123,
Share-Based Payment (“SFAS No. 123(R)”). SFAS 123(R) is a revision of SFAS No.
123 and supersedes APB No. 25. The revised provisions of SFAS No. 123(R)
were
effective January 1, 2006. For companies that have NOL carryforwards, SFAS
No.
123R affects the manner in which stock-based compensation tax deductions
are
treated for financial reporting purposes. We may claim stock-based compensation
deductions in our federal corporate income tax returns in an amount equal
to the
related income that is included in our employees’ reported federal taxable
income subject to any other applicable limitations. Under SFAS No. 123R,
tax
benefits generated in 2006 and subsequent reporting periods related to the
excess of tax deductible stock-based compensation over the amount recognized
for
financial accounting purposes, may not be recorded to additional paid-in-capital
(“APIC”) for financial reporting purposes until the stock-based compensation
deductions actually reduce our cash income tax liability. Any tax benefits
attributable to these deductions will not be recorded to APIC for financial
reporting purposes until such time as all existing and future NOL carryforwards
have been fully utilized. As a result of the provisions of SFAS No. 123R,
at
December 31, 2006, we have excluded $891,400 of stock-based compensation
deductions from our NOL carryforwards for financial reporting
purposes
In
addition, prior to the effective date of SFAS No. 123R, the Company was
permitted to record the tax benefit associated with the excess of tax deductible
stock-based compensation over the amount recognized for financial accounting
purposes in its financial statement NOL, subject to SFAS No. 109’s realization
criteria. Accordingly, the tax return reporting and financial statement NOL
carryforward amounts described above include excess tax benefits recognized
in
2005 and prior years related to the exercise of non-qualified employee stock
options and vested stock awards. The full amount of the related tax benefits
have been offset through our deferred tax asset valuation allowance. The
associated excess tax benefits will be charged to equity upon the reversal
of
the associated valuation allowances in future periods.
In
each
period, the Company assesses the likelihood that its deferred taxes will
be
recovered from the existing deferred tax liabilities or future taxable income
in
each jurisdiction. To the extent that the Company believes that it does not
meet
the test that recovery is “more likely than not,” it established a valuation
allowance. We have recorded valuation allowances for the net deferred tax
assets
since management believes it is more likely than not that these assets will
not
be realized.
Due
to
the acquisition of HWC, there was a change in control of the Company pursuant
to
IRC section 382. Under these rules the Company will be limited in the future
use
of its preacquisition NOL.
The
temporary differences representing deferred tax assets and liabilities are
as
follows:
|
December
31,
|
|||||||
|
|
2006
|
2005
|
|||||
|
(in
thousands)
|
|||||||
|
Deferred
tax assets
|
|||||||
|
Net
operating loss carry forward
|
$
|
12,878
|
$
|
14,630
|
|||
|
Depreciation
|
—
|
389
|
|||||
|
Allowance
for doubtful accounts
|
124
|
117
|
|||||
|
Merger
and acquisition costs
|
—
|
—
|
|||||
|
Share
based compensation
|
461
|
—
|
|||||
|
Accruals
|
40
|
27
|
|||||
|
Foreign
tax credit
|
2,176
|
1,957
|
|||||
|
Alternative
minimum tax credit
|
98
|
118
|
|||||
|
Total
gross deferred tax assets
|
$
|
15,777
|
$
|
17,238
|
|||
|
Deferred
tax liabilities
|
|||||||
|
Depreciation
|
59
|
—
|
|||||
|
Merger
and acquisition costs
|
98
|
—
|
|||||
|
Property
and equipment, purchase accounting
|
4,520
|
—
|
|||||
|
Total
gross deferred tax liabilities
|
4,677
|
—
|
|||||
|
Net
deferred tax assets
|
11,100
|
17,238
|
|||||
|
Valuation
allowance
|
$
|
(15,620
|
)
|
$
|
(17,238
|
)
|
|
|
Net
deferred income tax asset(liability)
|
$
|
(
4,520
|
)
|
$
|
—
|
||
The
Company has not provided deferred taxes on the unremitted earnings of its
foreign subsidiaries as it considers these amounts to be permanently reinvested.
The FASB adopted FIN 48 “Accounting for Uncertainty in Income Taxes” effective
for years beginning after December 15, 2006. The Company is currently evaluating
the effect of FIN 48, if any, on the financial statements for the fiscal
year
beginning 2007.
|
H.
|
Stockholders’
Equity
|
Common
and Preferred Stock
Under
our
Amended and Restated Certificate of Incorporation, the board of directors
has
the power, without further action by the holders of common stock, to designate
the relative rights and preferences of our preferred stock, when and if issued.
Such rights and preferences could include preferences as to liquidation,
redemption and conversion rights, voting rights, dividends or other preferences,
over shares of common stock. The board of directors may, without further
action
by our stockholders , issue shares of preferred stock which it has designated.
The rights of holders of common stock will be subject to, and may be adversely
affected by or diluted by, the rights of holders of preferred
stock.
On
April
15, 1999, we completed the sale of 50,000 shares of $.00001 par value per
share
with a face value of $100 of Series A Cumulative Senior Preferred Stock ("Series
A Stock") to Halliburton Energy Services, Inc. ("Halliburton"), a wholly-owned
subsidiary of Halliburton Company. The Series A Stock had a dividend requirement
of 6.25% per annum payable quarterly until the fifth anniversary at the date
of
issuance, whereupon the dividend requirement increased to the greater of
prime
plus 6.25% or 14% per annum, which was subject to adjustment for stock splits,
stock dividends and certain other events. At December 31, 2005 there were
50,000
shares of our Series A preferred stock issued and outstanding. This preferred
stock was paid in full in connection with closing the HWC
acquisition.
On
April
28, 2000, we adopted the Certificate of Designation of Rights and Preferences
of
the Series B Preferred Stock, which designates this issue to consist of 100,000
shares of $.00001 par value per share with a face value of $100 per share;
have
a dividend requirement of 10% per annum, payable semi-annually at the election
of us in additional shares of our Series B Preferred Stock in lieu of cash;
have
voting rights equivalent to 100 votes per share; and, may be converted at
the
election of us into shares of our common stock on the basis of a $3.00 per
share
conversion rate. Since year ended December 31, 2005 there have been no shares
of
series B preferred stock issued and outstanding.
On
May
30, 2000 we adopted the Certificate of Designation of Rights and Preferences
of
the Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”)
that designates this issue to consist of 50,000 shares of $.00001 par value
per
share with a face value of $100 per share; have a dividend requirement of
10%
per annum, payable quarterly at the election of us in additional shares of
our
Series C Preferred Stock in lieu of cash; have voting rights excluding the
election of directors equivalent to one vote per share of common stock into
which preferred shares are convertible, and may be converted at the election
of
us into shares of our common stock on the basis of a $3.00 per share conversion
rate. After eighteen months from the issuance date a holder of Series C
Preferred Stock may elect to have future dividends paid in cash. At December
31,
2005 there were 2,943, shares of series C preferred stock issued and
outstanding. This preferred stock was paid in full in connection with closing
the HWC acquisition.
On
December 29, 2000, we adopted the Certificate of Designation of Rights and
Preferences of Series H Cumulative Convertible Preferred Stock (“Series H
Preferred Stock”) that designates this issue to consist of 89,117 shares of
$.00001 par value per share with a face value of $100 per share; have a dividend
requirement of 10% per annum compounded, payable semi-annually at the election
of the us in additional shares of our Series H Preferred Stock in lieu of
cash;
have voting rights excluding the election of directors equivalent to one
vote
per share of common stock into which preferred shares are convertible, and
may
be converted at the election of us into shares of our common stock on the
basis
of a $3.00 per share conversion rate. Since year ended December 31, 2005
there
have been no shares of series H preferred stock outstanding.
For
the
years ended December 31, 2006, 2005 and 2004, we accrued $(616,000), $874,000
and $735,000, respectively, for dividends relating to all series of preferred
stock. All 5,000,000 shares of the authorized Preferred stock are available
for
any future issue in any class of preferred stock.
Stockholder
Rights Plan:
On
November 29, 2001 we adopted a stockholder rights plan in order to provide
protection for the stockholders in the event of an attempted potential
acquisition of us. Under the plan, we have declared a dividend of one right
on
each share of our common stock. Each right will entitle the holder to purchase
one one-hundredth of a share of a new Series I Junior Participating Preferred
Stock of us at an exercise price of $20.00. The rights are not currently
exercisable and will become exercisable only after a person or group acquires
15% or more of the outstanding common stock of us or announces a tender offer
or
exchange offer which would result in ownership of 15% or more of the outstanding
common stock. The rights are subject to redemption by us for $0.001 per right
at
any time, subject to certain limitations. In addition, the Board of Directors
is
authorized to amend the Rights plan at any time prior to the time the rights
become exercisable. The rights will expire on December 17, 2011.
If
the
rights become exercisable, each right will entitle its holder (other than
such
person or members of such group) to purchase, at the right’s then current
exercise price, a number of our shares of common stock having a market value
of
twice such price or, if we are acquired in a merger or other business
combination, each right will entitle its holder to purchase, at the right’s then
current exercise price, a number of the acquiring Company’s shares of common
stock having a market value of twice such price. Prior to an acquisition
of
ownership of 50% or more of the common stock by a person or group, the Board
of
Directors may exchange the rights (other than rights owned by such person
or
group, which will have become null and void and nontransferable) at an exchange
ratio of one share of common stock (or one one-hundredth of a share of Series
I
Preferred Stock) per right. The Board of Directors waived this requirement
for
the HWC acquisition.
A
summary
of warrants outstanding as of December 31, 2006 is as follows:
|
Expiration
Date
|
Exercise
Price Per
Share
|
Number
of
Shares
|
|||||
|
04/25/2007
|
1.44
|
32,462
|
|||||
|
06/30/2007
|
1.44
|
43,283
|
|||||
|
07/18/2008
|
1.40
|
37,500
|
|||||
|
10/03/2008
|
0.88
|
600,000
|
|||||
|
713,245
|
|||||||
In
connection with closing of the HWC acquisition, 1,464,213 warrants priced
at
$2.35 were eliminated.
Stock
Options:
A
summary
of stock option plans under which stock options remain outstanding as of
December 31, 2006 follows:
1997
Incentive Stock Plan authorizing
the Board of Directors to provide key employees with incentive compensation
commensurate with their positions and responsibilities. The 1997 Incentive
Stock
Plan permits the grant of incentive equity awards covering up to 368,750
shares
of common stock. Grants may be in the form of qualified or non qualified
stock
options, restricted stock, phantom stock, stock bonuses and cash bonuses.
As of
December 31, 2006, stock options covering an aggregate of 368,750 shares
of
common stock have been made under the 1997 Incentive Stock Plan. Such options
vest ratably over a five-year period from the date of grant. These incentive
stock options are exercisable for a period of 10 years from the original
date of
grant at an exercise price of ranging from $1.72 to $3.00 per share. As of
December 31, 2006, there were 6,725 stock options outstanding under the
plan.
1997
Outside Directors’ Option Plan authorizing
the issuance each year of an option to purchase 3,750 shares of common stock
to
each member of the Board of Directors who is not an employee. The purpose
of the
Directors’ Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist us in achieving our growth
objectives. Options may be exercised over a five-year period with the initial
right to exercise starting one year from the date of the grant, provided
the
director has not resigned or been removed for cause by the Board of Directors
prior to such date. After one year from the date of the grant, options
outstanding under the Directors’ Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors’ Plan are not transferable except by will or by operation of law.
Through December 31, 2006, grants of stock options covering an aggregate
of
454,750 shares of common stock have been made under the 1997 Outside Directors’
Option Plan. At December 31, 2006, there were 415,000 stock options outstanding
under the plan.
2000 Long-Term
Incentive Plan
authorizes the Board of Directors to provide full time employees and consultants
(whether full or part time) with incentive compensation in connection with
their
services to us. The plan permits the grant of incentive equity awards covering
up to 1,500,000 shares of common stock. Grants may be in the form of qualified
or non qualified stock options, restricted stock, phantom stock, stock bonuses
and cash bonuses. As of the date hereof, stock option grants covering an
aggregate of 783,125 shares of common stock have been made under the 2000
Long-Term Incentive Plan. Such options vest ratably over a five-year period
from
the date of grant. Options granted to consultants are valued using the Black
Scholes pricing model and expensed over the vesting period. At December 31,
2006, there were 595,850 stock options outstanding under the plan.
In
April
2000, we voided stock options covering an aggregate of 752,000 shares of
common
stock by agreement with the option holders with the understanding that the
stock
options would be repriced and reissued. During the third quarter of 2000,
options covering an aggregate of 710,250 shares of common stock were reissued
at
an exercise price of $3.00. No compensation expense was required to be recorded
at the date of issue. However, the reissuance of these options was accounted
for
as a variable plan, and we were subject to recording compensation expense
if our
stock price rose above $3.00. In April 2001, Messrs. Ramming, Winchester
and
Edwards agreed to voluntarily surrender 522,000 of these options at the request
of the Compensation Committee of the Board, because of the potential variable
plan accounting associated with these options. In October 2001 these individuals
received fully vested options to purchase 522,000 shares at an exercise price
of
$2.20 per share. As of December 31, 2006, options to purchase 58,350 shares
pursuant to the reissuance in the third quarter of 2000 remain subject to
variable plan accounting.
On
October 1, 2003 we granted 500,000 options at market price on that day, vesting
immediately, as a result of the new employment agreement with our Chief
Executive Officer. We also granted 300,000 shares of restricted stock at
no
cost, vested over a four year period with 20% vesting immediately. This resulted
in a compensation expense of $72,000 in 2006, 2005 and 2004
On
July
15, 2004 we granted 400,000 options at market price on that day, of which
250,000 vested immediately and the remaining 150,000 vested over a two year
period, as a result of the new contract agreement with our Chairman of the
Board. We also granted 300,000 shares of restricted stock at no cost with
150,000 shares vesting on August 13, 2004 and the remainder to be vested
over a
four year period conditioned upon continued consulting at the time of each
vesting. This resulted in a compensation expense of $102,000, $58,000 and
$81,000 in 2006, 2005 and 2004, respectively.
2004 Long-Term
Incentive Plan
authorizes the Board of Directors to provide full time employees and consultants
(whether full or part time) with incentive compensation in connection with
their
services to us. The plan permits the grant of incentive equity awards covering
up to 6,000,000 shares of common stock. Grants may be in the form of qualified
or non qualified stock options, restricted stock, phantom stock, stock bonuses
and cash bonuses. As of the date hereof, stock option grants covering an
aggregate of 5,812,000 shares of common stock have been made under the 2004
Long-Term Incentive Plan. Such options vest ratably over a five-year period
from
the date of grant. Options granted to consultants are valued using the Black
Scholes pricing model and expensed over the vesting period. At December 31,
2006, there were 5,165,750 stock options outstanding under the plan. An
additional 2,000,000 of our stock options were authorized by the Board of
Directors and approved by a majority vote of the stockholders on March 1,
2006.
In connection with the acquisition of HWC on March 3, 2006, an additional
895,000 of our stock options, priced at $1.50 per option were approved to
be
issued to employees of HWC.
Stock
option activity for the years ended December 31, 2006, 2005 and 2004 was
as
follows:
|
|
Number
of
Shares (in thousands)
|
Weighted
Average Exercise Price Per
Share
|
|||||
|
Outstanding
December 31, 2003
|
823
|
$
|
1.96
|
||||
|
Granted
|
4,434
|
0.75
|
|||||
|
Exercised
|
—
|
—
|
|||||
|
Cancelled
|
(55
|
)
|
3.84
|
||||
|
Outstanding
December 31, 2004
|
5,202
|
$
|
0.90
|
||||
|
Granted
|
873
|
1.10
|
|||||
|
Exercised
|
(35
|
)
|
0.67
|
||||
|
Cancelled
|
(225
|
)
|
1.34
|
||||
|
Outstanding
December 31, 2005
|
5,815
|
$
|
1.02
|
||||
|
Granted
|
1,630
|
1.57
|
|||||
|
Exercised
|
(836
|
)
|
0.77
|
||||
|
Cancelled
|
(174
|
)
|
1.01
|
||||
|
Outstanding
December 31, 2006
|
6,435
|
$
|
1.09
|
||||
Summary
information about our stock options outstanding at December 31,
2006:
|
Outstanding
|
Exercisable | |||||||||||||||
|
Range
of Exercise
Prices
|
Number
Outstanding at
December 31, 2006 (in
thousands)
|
Weighted
Average Remaining Contractual Life
in Years
|
Weighted
Average Exercise
Price
|
Number
Exercisable
At December 31, 2006 (in
thousands)
|
Weighted
Average Exercise
Price
|
|||||||||||
|
$0.67
|
2,811
|
3.84
|
$
|
0.67
|
1,987
|
$
|
0.67
|
|||||||||
|
$0.92
|
15
|
3.38
|
$
|
0.92
|
15
|
$
|
0.92
|
|||||||||
|
$0.93
|
150
|
2.64
|
$
|
0.93
|
150
|
$
|
0.93
|
|||||||||
|
$1.04
|
100
|
4.52
|
$
|
1.04
|
50
|
$
|
1.04
|
|||||||||
|
$1.08
|
50
|
5.01
|
$
|
1.08
|
—
|
$
|
1.08
|
|||||||||
|
$1.11
|
50
|
4.79
|
$
|
1.11
|
25
|
$
|
1.11
|
|||||||||
|
$1.13
|
300
|
4.78
|
$
|
1.13
|
150
|
$
|
1.13
|
|||||||||
|
$1.20
|
500
|
6.76
|
$
|
1.20
|
500
|
$
|
1.20
|
|||||||||
|
$1.24
|
400
|
1.75
|
$
|
1.24
|
400
|
$
|
1.24
|
|||||||||
|
$1.26
|
300
|
4.67
|
$
|
1.26
|
99
|
$
|
1.26
|
|||||||||
|
$1.43
|
450
|
5.17
|
$
|
1.43
|
150
|
$
|
1.43
|
|||||||||
|
$1.45
|
445
|
5.18
|
$
|
1.45
|
—
|
$
|
1.45
|
|||||||||
|
$1.60
|
150
|
5.75
|
$
|
1.60
|
—
|
$
|
1.60
|
|||||||||
|
$1.63
|
100
|
5.49
|
$
|
1.63
|
—
|
$
|
1.63
|
|||||||||
|
$1.71
|
120
|
5.39
|
$
|
1.71
|
—
|
$
|
1.71
|
|||||||||
|
$1.72
|
2
|
.42
|
$
|
1.72
|
2
|
$
|
1.72
|
|||||||||
|
$1.94
|
315
|
5.95
|
$
|
1.94
|
—
|
$
|
1.94
|
|||||||||
|
$3.00
|
177
|
2.77
|
$
|
3.00
|
177
|
$
|
3.00
|
|||||||||
|
$0.67-$3.00
|
6,435
|
4.35
|
$
|
1.09
|
3,705
|
$
|
1.00
|
|||||||||
|
I.
|
Employee
Benefit Plans
|
401(k)
Plan:
We
sponsor a 40l (k) Plan adopted in 2000 for eligible employees having six
months
of service and being at least twenty-one years of age. Employees can make
elective contributions of 1% to 15% of compensation, as defined. Employees
over
fifty years old may contribute an additional $4,000 and $5,000 in 2005 and
2006,
respectively. During the years ended December 31, 2006, 2005 and 2004, we
contributed approximately $401,000, $88,000 and $72,000, respectively, under
the
Plan.
|
J.
|
Commitments
and Contingencies
|
Leases
We
lease
vehicles, equipment, office and storage facilities under operating leases
with
terms in excess of one year.
At
December 31, 2006, future minimum lease payments, under these non-cancelable
operating leases are as follows:
|
Year
Ending December 31,
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2007
|
$
|
470
|
||
|
2008
|
377
|
|||
|
2009
|
383
|
|||
|
2010
|
380
|
|||
|
2011
|
388
|
|||
|
Thereafter
|
2,176
|
|||
|
$
|
4,174
|
|||
Rent
expense for the years ended December 31, 2006, 2005 and 2004 was approximately
$418,000, $32,000 and $50,000, respectively.
Litigation
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
liabilities resulting from any such proceedings will have a material adverse
effect on its operations or financial position.
|
K.
|
Business
Segment Information, Revenues from Major Customers and Concentration
of
Credit Risk
|
Segments:
Our
current business segments are Well Intervention and Response. Intercompany
transfers between segments were not material. The accounting policies of
the
operating segments are the same as those described in the summary of significant
accounting policies. For purposes of this presentation, operating
expenses and depreciation and amortization have been charged to each segment
based upon specific identification of expenses and a pro-rata allocation
of
remaining non segment specific expenses are assigned to segments based upon
relative revenues. Selling, general and corporate expenses have
been allocated between segments pro rata based on relative revenues. Special
Services and Abasco are presented as discontinued operations in the condensed
consolidated financial statements and are therefore excluded from the segment
information for all periods presented.
Our
well
intervention segment consists of services that are designed to enhance
production for oil and gas operators and reduce the number and severity
of
critical well events such as oil and gas well fires, blowouts, or other
losses
of control at the well. This segment includes services performed by hydraulic
workover/snubbing units that are used to enhance production of oil and
gas
wells. These units are used for underbalanced drilling workover, well
completions and plugging and abandonment services. This segment also includes
services that are designated to reduce the number and severity of critical
well
events offered through our SafeGuard and WELLSURE® risk management programs,
including training, contingency planning, well plan reviews, audits, inspection
services and engineering 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 also include snubbing and pressure control services
provided during a response which are designed to minimize response time
and
mitigate damage while maximizing safety. Information concerning operations
in
our two different business segments for the years ended December 31, 2006,
2005
and 2004 is presented below. Certain reclassifications have been made to
the
prior periods to conform to the current presentation.
Information
concerning operations in the two business segments for the years ended December
31, 2006, 2005 and 2004 is presented below. General and corporate are included
in the calculation of identifiable assets and are included in the Well
Intervention and Response segments.
|
|
Well
Intervention
|
Response
|
Consolidated
|
|||||||
|
Year
Ended December 31, 2006
|
||||||||||
|
Net
operating revenues
|
$
|
76,653
|
$
|
20,377
|
$
|
97,030
|
||||
|
Operating
income
|
11,835
|
8,057
|
19,892
|
|||||||
|
Identifiable
operating assets
|
89,334
|
11,683
|
101,017
|
|||||||
|
Capital
expenditures
|
6,279
|
603
|
6,882
|
|||||||
|
Depreciation
and amortization
|
4,637
|
246
|
4,883
|
|||||||
|
Interest
expense
|
2,398
|
638
|
3,036
|
|||||||
|
Year
Ended December 31, 2005
|
||||||||||
|
Net
operating revenues
|
$
|
13,860
|
$
|
15,677
|
$
|
29,537
|
||||
|
Operating
income
|
2,538
|
2,025
|
4,563
|
|||||||
|
Identifiable
operating assets
|
6,929
|
7,838
|
14,767
|
|||||||
|
Capital
expenditures
|
—
|
306
|
306
|
|||||||
|
Depreciation
and amortization
|
310
|
404
|
714
|
|||||||
|
Interest
expense
|
274
|
310
|
584
|
|||||||
|
Year
Ended December 31, 2004
|
||||||||||
|
Net
operating revenues
|
$
|
8,050
|
$
|
16,125
|
$
|
24,175
|
||||
|
Operating
income (loss)
|
(225
|
)
|
1,291
|
1,066
|
||||||
|
Identifiable
operating assets
|
6,125
|
12,268
|
18,393
|
|||||||
|
Capital
expenditures
|
—
|
491
|
491
|
|||||||
|
Depreciation
and amortization
|
261
|
628
|
889
|
|||||||
|
Interest
expense
|
148
|
295
|
443
|
|||||||
Revenue
from major customers and concentration of credit risk:
During
the years presented below, the following customers represented significant
concentrations of consolidated revenues:
|
Year
Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Customer
A
|
—
|
45
|
%
|
36
|
%
|
|||||
|
Customer
B
|
14
|
%
|
12
|
%
|
—
|
|||||
|
Customer
C
|
19
|
%
|
11
|
%
|
21
|
%
|
||||
Our
revenues are generated geographically as follows:
|
Year
Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
United
States
|
26
|
%
|
19
|
%
|
35
|
%
|
||||
|
Foreign
|
74
|
%
|
81
|
%
|
65
|
%
|
||||
The
nature of our revenue stream is cyclical from year to year such that this
history of geographic split does not represent any trend, but is more related
to
where the response related events occur during any one year. Of the 2006
Foreign
revenues presented above, 24% and 21% were generated from Algeria and
Venezuela, respectively. Of the 2005 Foreign revenues presented above, 41%
and
12% were generated from Iraq and Venezuela, respectively. Of the 2004 Foreign
revenues presented above, 32% and 28% were generated from Iraq and
Venezuela, respectively.
Accounts
Receivable:
Three
of
our customers at December 31, 2006 accounted for 71% of outstanding accounts
receivable. Three of our customers at December 31, 2005 accounted for 64%
of
outstanding accounts receivable. One customer at December 31, 2004 accounted
for
68% of the outstanding accounts receivable.
Cash:
We
maintain deposits in banks which may exceed the amount of federal deposit
insurance available. Management believes that any possible deposit loss is
minimal. In connection with the acquisition on March 3, 2006, all of our
investments were used as a source of cash for the credit agreement so we
no
longer have a material sum on deposit in banks earning interest
income.
|
L.
|
Quarterly
Financial Data (Unaudited)
|
The
table
below summarizes the unaudited quarterly results of operations for 2006 and
2005:
|
Quarter
Ended
|
|||||||||||||
|
2006
|
March
31, 2006
|
June
30, 2006
|
September
30, 2006
|
December
31, 2006
|
|||||||||
|
Revenues
|
$
|
11,520
|
$
|
23,472
|
$
|
28,293
|
$
|
33,745
|
|||||
|
Income
from continuing operations
|
678
|
2,632
|
3,369
|
4,486
|
|||||||||
|
Net
income
|
678
|
2,632
|
3,369
|
4,486
|
|||||||||
|
Net
income attributable tocommon stockholders
|
1,294
|
2,632
|
3,369
|
4,486
|
|||||||||
|
Net
income per common share:
|
|||||||||||||
|
Basic
|
0.03
|
0.05
|
0.06
|
0.08
|
|||||||||
|
Diluted
|
0.03
|
0.04
|
0.05
|
0.07
|
|||||||||
|
Quarter
Ended
|
|||||||||||||
|
2005
|
March
31, 2005
|
June
30, 2005
|
September
30, 2005
|
December
31, 2005
|
|||||||||
|
Revenues
|
$
|
14,290
|
$
|
4,762
|
$
|
4,612
|
$
|
5,873
|
|||||
|
Income
(loss) from continuing operations
|
2,473
|
(663
|
)
|
(469
|
)
|
1,438
|
|||||||
|
Net
income (loss)
|
2,473
|
(663
|
)
|
(469
|
)
|
1,438
|
|||||||
|
Net
income (loss) attributable to common stockholders
|
2,262
|
(879
|
)
|
(691
|
)
|
1,213
|
|||||||
|
Net
income (loss) per common share:
|
|||||||||||||
|
Basic
|
0.08
|
(0.03
|
)
|
(0.02
|
)
|
0.04
|
|||||||
|
Diluted
|
0.07
|
(0.03
|
)
|
(0.02
|
)
|
0.04
|
|||||||
Basic
and
diluted earnings (loss) per common share for each of the quarters presented
above is based on the respective weighted average number of common and dilutive
potential common shares outstanding for each period and the sum of the quarters
may not necessarily be equal to the full year basic and diluted earnings
(loss)
per common share amounts.
|
M.
|
Subsequent
Events
|
On
Tuesday, March 20, 2007, we amended our Credit and Security Agreement with
Wells
Fargo Bank. The amendment was effective as of December 31, 2006, and it amended
certain administrative covenants including capital expenditures, travel
advances, and prepaid limits.
F-22