UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
_______________
Form
10-K
_______________
For
the fiscal year ended December 31, 2008
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
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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7908
N. Sam Houston Parkway W., 5th
Floor
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Houston,
Texas
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77064
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(Address
of principal executive offices)
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(Zip
Code)
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281-931-8884
(Registrant'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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NYSE
Alternext US
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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 x
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Non-Accelerated
Filer ¨
|
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,
2008 was $166,477,000.
The
number of shares of the issuer's common stock, par value $.00001, outstanding on
March 11, 2009 was 77,083,199.
DOCUMENTS
INCORPORATED BY REFERENCE
ANNUAL
REPORT
For
the Year Ended December 31, 2008
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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16
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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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19
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Item
7.
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Item
7A.
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Item
8.
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30
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Item
9.
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30
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Item
9A.
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Item
9B.
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30
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PART
III
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31
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Item
10.
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31
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Item
11.
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33
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Item
12.
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49
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Item
13.
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Item
14.
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50
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PART
IV
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51
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Item
15.
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51
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54
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CERTIFICATIONS
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FINANCIAL
STATEMENTS
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55
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56
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57
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58
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59
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60
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61
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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":
•
competition;
• changes
in economic or political conditions in the markets in which we operate;
and
• the
inherent risks associated with our operations, such as equipment defects,
malfunctions and natural disasters.
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
control. We do not undertake any obligation to publicly 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.
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, Asia, North Africa, South America, West Africa and the Middle
East. Our customers include major and independent oil and gas
companies in the U.S. market and major international and foreign national oil
and gas producers as well as other oilfield service companies. Our
service lines are organized into three business segments: Pressure Control, Well
Intervention and Equipment Services. Our Pressure Control segment
consists of prevention and risk management services designed to reduce the
number and severity of critical events such as oil and gas well fires, blowouts
or other incidences due to loss of control at the well, and 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. Our Well Intervention segment consists
of services that are designed to enhance production for oil and gas operators
and consists primarily of hydraulic workover and snubbing services. Our
Equipment Services segment, designed for safer and more efficient production
under high pressure situations, consists primarily of pressure control equipment
rentals and services.
Executive
Offices. Our principal offices are located at 7908
N. Sam Houston Parkway W., 5th Floor,
Houston, Texas 77064, and our telephone number is (281) 931-8884. Our
website is located at www.boots-coots.com.
History
of Boots & Coots
In July 1997, Boots & Coots
International Well Control, Inc. became a worldwide leader in the oil well
firefighting and blowout control industry by re-uniting many of the former
employees of the Red Adair Company through its acquisitions of IWC Services,
Inc, which was organized in June 1995 by six former key employees of the Red Adair Company, and
Boots & Coots, L.P., which 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.
On
March 3, 2006, we acquired the hydraulic well control business (HWC) of Oil
States International, Inc. through which we acquired hydraulic workover and
snubbing equipment and significantly expanded and enhanced our pressure control
services capabilities.
On July
31, 2007, we acquired Rock Springs, Wyoming-based StassCo Pressure Control, LLC
(StassCo) which performed snubbing services in the Cheyenne basin, Wyoming and
operated four hydraulic rig assist units. This acquisition marked our
entry into the Rockies pressure control market, a key to our strategy to expand
North America land operations.
Our
Industry
Our
business is primarily dependent on the conditions of the global oil and gas
industry. Demand for our services is cyclical and dependent upon the
level of capital expenditures by oil and gas companies for Well Intervention and
Equipment Services in our operating areas. 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. Demand for oilfield products and services may indirectly
impact the longer-term prospects for our well control and other event-driven
services.
Business Strategy
We have endeavored to
build upon our demonstrated strengths in providing pressure control services by
growing more predictable revenues from our Well Intervention and Equipment
Services businesses. During 2008, we successfully expanded our
pressure control equipment rentals service line in the Gulf Coast, central Texas
and international areas, and we plan to further expand this business into other
operating areas where we provide pressure control services, including
international markets where we are able to secure contract commitments from our
customers. We intend to continue to seek complementary business
acquisitions that position us to attain more predictable levels of income,
broaden our pressure control service capabilities and increase our geographic
presence. For example, we expanded our prevention services in North
Africa with two new Safeguard contracts. The technology and
experience associated with the John Wright acquisition will enhance our
Safeguard service offerings, strengthen our leadership position in risk
management and give us a competitive edge for growth in that service
line. The market for well control response services is finite, with
services dependent upon the occurrence of blowouts that cannot be reasonably
predicted; however, as we expand our other services, we anticipate
our response business will benefit from our Well Intervention business
development efforts and increased geographic presence in the U.S. and
international markets.
Business
Segments
Pressure
Control
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 hired Paul “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 LP, 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.
In 1999,
we began to offer prevention and risk management services in an effort to reduce
the uncertainty of revenue in the response business. These services began with
the introduction of our “Safeguard” prevention and risk management services in
Alaska. We expanded these 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.
Description. Our
Pressure Control segment consists of prevention and risk management services
provided by personnel and equipment utilized primarily under a contractual basis
and our response services provided by 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. Response services also
include snubbing and other pressure control services provided during a response
which are designed to minimize response time, mitigate damage, and maximize
safety. Response services may lead to our provision of prevention and risk
management services in the future. Revenue is generated through personnel time
and material. For emergency response services, 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 upon 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. The emergency response business is by nature episodic and
unpredictable.
In the
international markets, national oil and gas companies and large international
operators are 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 creates demand for prevention and risk management services to assess
the magnitude of exposure, prevent catastrophic failures and mitigate damages in
the event a loss occurs.
Our
principal products and services for the Pressure Control segment
include:
Safeguard.
Our Safeguard program includes services that are designed to reduce the number
and severity of critical well events by providing dedicated prevention and risk
management services. Safeguard was specifically designed for
international producers and operators, including foreign national oil and gas
companies, through dedicated prevention and risk management services. These
services include training, contingency planning, well plan reviews, audits,
inspection services and engineering services. Our Safeguard business
reflects an industry trend moving operators towards a higher level of
preventative and risk mitigation measures to protect against critical well
events. These services typically generate revenue on a contractual
basis dependent upon the breadth, scope, and duration of services
performed. We provide these services primarily to customers in the
United States, Venezuela, the Middle East and North Africa, for both onshore and
offshore applications.
We
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 revenues generated under our
Safeguard programs to foreign national and international oil and gas
companies.
Well
Control. We offer two distinct levels of service
depending on the nature of the well control event. A critical event
response refers to a well control situation in which hydrocarbons are escaping
from a well bore, regardless of whether a fire has occurred. Such an
event frequently results in explosive fires, loss of life, damage to or
destruction of drilling and production facilities, substantial environmental
damage and the loss of significant production revenue. Because 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 onetime 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 event response, on the
other hand, is intended to address more common sub-surface operating problems
that do not involve escaping hydrocarbons. These events typically
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 frequent. Non-critical events, particularly when
responded to by insufficiently trained third parties can escalate into critical
events.
Firefighting Equipment
Rentals. We rent 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 for this equipment on a per diem
basis.
Snubbing
Services. We provide hydraulic snubbing units for
emergency well control situations to the oil and gas industry. A hydraulic
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 pressures. These units may also be
used for blowout control and pipe recovery during a response event.
Engineering
Services. Utilizing our extensive pressure control
engineering capabilities, we provide pre-event engineering services that include
consultation, well planning, dynamic kill modeling and intervention
planning.
Firefighting Equipment Sales and
Services. 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.
Well
Intervention
History. In
March 2006, we acquired the hydraulic workover and snubbing services
business of Oil States International, which included a fleet of 26 hydraulic
workover and snubbing units. The acquisition significantly expanded
our pressure control services to include hydraulic workover and snubbing
operations and expanded our geographic presence in key international oil and
natural gas markets. In 2007, we further expanded into the Rockies
pressure control market with our acquisition of Wyoming-based StassCo, which
included four hydraulic rig assists units.
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
incidents due to loss of control at the well. These services are
available for both onshore and offshore operations for U.S. and international
customers.
Domestically, we generate revenue from these services on a
"call-out" basis and charge a day rate for equipment and
personnel. This contracting structure permits dynamic pricing based
on market conditions, which are primarily driven by the price of oil and natural
gas. Call out services range in duration from less than a week in the
case of 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. The
advancement of under-balanced drilling techniques and well completion methods is
being utilized to unlock the potential in unconventional resource recovery and
is driving demand for hydraulic snubbing equipment. Underbalanced drilling can
reduce lost circulation, minimize differential sticking, decrease time, and most
importantly, complete more productive wells by avoiding formation damage.
Similarly, completion techniques utilizing snubbing services have also advanced
to drive the economics of these unconventional natural gas resource
plays. This trend has gained acceptance in the North American shale
resource play and we expect these techniques to expand into international
natural gas producing markets.
In the long-term, demand for natural
gas is expected to rise; driven by its cleaner burning property and by economics
when compared to oil. As investments in LNG infrastructure continue
to be made, natural gas is transformed from a regional resource to a commodity
that is readily traded and transported globally, increasing its commercial value
in underdeveloped emerging markets of West Africa and the Middle
East. We expect to benefit from increased international gas drilling
as these wells typically have higher wellbore pressure and require hydraulic
workover and snubbing services. In the near term, domestic natural
gas drilling activity has been contracting, but the Haynesville, Fayetteville
and Marcellus Shales are the primary areas still with substantial ongoing
drilling. We have successfully positioned a significant portion of
our domestic operations and assets to service and participate in these
areas.
Our
principal products and services for the Well Intervention segment
include:
Hydraulic
Workover/Snubbing. This service line includes
those services performed by hydraulic workover and snubbing units primarily to
enhance production of oil and gas wells. We provide our hydraulic
workover and snubbing units and services in various Well Intervention solutions
involving workovers, well drilling, well completions, plugging and abandonment
services and snubbing operations in pressure situations. Hydraulic
units may be used for both routine and emergency well control situations in the
oil and gas industry. Our hydraulic workover and snubbing units are
specially designed for moving tubulars in and out of a wellbore using hydraulic
pressure. When snubbing, the unit is pushing pipe or tubulars into
the well bore against well bore pressures. Due to their small size
and ability to work on wells under pressure, hydraulic units offer some
advantages over larger conventional workover and drilling rigs in onshore and
offshore applications, especially when performing workover services on wells
with pressure.
We
currently operate a fleet of 37 hydraulic workover and snubbing units; 30 of
which are “stand alone” units and 7 are rig assist units. We own all
of the units except two of the “stand alone” units, which we operate on behalf
of a customer. In 2007, we assembled a unit at our Louisiana facility
and refurbished three underutilized snubbing units, which were deployed
internationally and to U.S. onshore operations. Our units are
currently deployed in various markets; in the Mid Continent and Rockies regions,
in the Gulf Coast, in the North East, three in Venezuela, in Africa and in the
Middle East. The utilization rate for our total fleet of hydraulic
units was 50.0 % in 2008 compared to 36.7% in 2007. Utilization rates
are impacted by the regional demand for hydraulic workover and snubbing units,
the capabilities of the units in the region relative to the specific
applications and capabilities desired by customers, and the nature of our
contractual arrangements with customers. Our utilization rates are
particularly affected by the concentration of our fleet in the U.S., where we
are typically unable to obtain contractual utilization commitments from
customers, our continuing efforts to upgrade and redeploy certain units to
better position our fleet for opportunities in the U.S. gas drilling market, and
the fact that we are required to stage units in
specific international markets to service our regional customer base
due to the particular application and capacity required. Utilization
may increase as underutilized units in the U.S. are redeployed and we continue
to expand internationally, where service contracts typically have terms of six
months to three years. In 2008, we assembled a new hydraulic unit in
order to supplement our most highly utilized unit class and to service our
expanding international business.
Equipment
Services
History.
In 2007, we commenced offering pressure control equipment rental and related
services primarily in the Gulf Coast, Central and East Texas
regions.
Description. Our
Equipment Services segment consists of renting pressure control equipment and
providing services that are designed to enhance production and safety
for oil and gas operators drilling under high pressure, high temperature
circumstances. These services are available for both onshore and offshore
operations for U.S. and international customers. Domestically,
we generate revenue from these services on a "call-out" basis and charge a day
rate for equipment and personnel. This contracting structure permits
dynamic pricing based on market conditions, which are primarily driven by the
price of oil and natural gas.
Trends. In
the long-term, demand for natural gas is expected to rise; driven by its cleaner
burning property and by economics when compared to oil. As
investments in LNG infrastructure continue to be made, natural gas is being
transformed from a regional resource to a commodity that is readily traded and
transported globally, increasing its commercial value in underdeveloped emerging
markets of West Africa and the Middle East. We expect to benefit from
increased international gas drilling as these wells typically have higher
wellbore pressure and require pressure control services such as pressure control
equipment rental and services.
Our
principal products and services for the Equipment Services segment involve
rental of equipment, such as high pressure flow iron, valves, manifolds and
chokes. Typically one or two technicians assemble, operate and maintain our
equipment during the rental phase. We provide these services on a day
rental and service basis with rates varying based on the type of equipment and
length of time of rental and service. This business is currently operating
in the Gulf Coast and Central and East Texas regions. We plan to expand
this business into other operating areas where we provide Well Intervention
services such as in the Rockies, North Texas and Oklahoma, including
international markets where we are able to secure contractual commitments from
our customers.
Customers
Our
customers include major and independent oil and gas companies in the U.S.
market, major international and foreign national oil and gas producers, as well
as other oilfield service companies. While the Company’s 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 31% of our consolidated
revenues during the year ended December 31, 2008 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. We
have a dedicated business development team in place to market our suite of
pressure control services. In the U.S., services are primarily
provided on a “call out” basis, with short lead time between ordering equipment
and services and providing service and delivering equipment. In
international markets, services and equipment are delivered based on service
contracts with a term ranging six months to three years.
Regulation
Our operations are affected by numerous
foreign, federal, state, and local laws and regulations relating to, among other
things, workplace health and safety and the protection of the environment. Changes in these laws,
including more stringent regulations and increased levels of enforcement of
these laws and regulations, could significantly affect our business. We cannot
predict changes in the level of enforcement of existing laws and regulations or
how these laws and regulations may be interpreted or the effect changes in these
laws and regulations may have on us or our future operations or earnings. We
also are not able to predict whether additional laws and regulations will be
adopted.
Our
operations are subject to numerous foreign, federal, state and local
environmental laws and regulations governing the release and/or discharge of
materials into the environment or otherwise relating to environmental
protection. Numerous governmental agencies issue regulations to implement and
enforce these laws, for which compliance is often costly and difficult. The
violation of these laws and regulations may result in the denial or revocation
of permits, issuance of corrective action orders, modification or cessation of
operations, assessment of administrative and civil penalties, and even criminal
prosecution. Certain environmental laws provide for “strict liability” resulting
from 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. We believe that we are in substantial compliance with
applicable environmental laws and regulations. Further, we do not anticipate
that compliance with existing environmental laws and regulations will have a
material effect on our consolidated financial statements. However, there can be
no assurance that substantial costs for compliance or penalties for
non-compliance will not be incurred in the future. 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.
We
generate wastes, including hazardous wastes that are subject to the federal
Resource Conservation and Recovery Act, or RCRA, and comparable state statutes.
The United States Environmental Protection Agency, or EPA, and state agencies
have limited the approved methods of disposal for some types of hazardous and
nonhazardous wastes. Some wastes handled by us in our field service activities
that currently are exempt from treatment as hazardous wastes may in the future
be designated as “hazardous wastes” under RCRA or other applicable statutes.
This would subject us to more rigorous and costly operating and disposal
requirements. With regard to our U.S. operations, the federal Comprehensive
Environmental Response, Compensation, and Liability Act, or CERCLA, also know as
the “Superfund” law, and comparable state statutes impose liability, without
regard to fault or legality of the original conduct, on classes of persons that
are considered to have contributed to the release of a hazardous substance into
the environment. These persons include the owner or operator of the disposal
site or the site where the release occurred and companies that transported,
disposed of, or arranged for the disposal of the hazardous substances at the
site where the release occurred. Under CERCLA, these persons may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment. We currently
have operations in the United States on properties where activities involving
the handling of hazardous substances or wastes may have been conducted prior to
our operations on such properties or by third parties whose operations were not
under our control. These properties may be subject to CERCLA, RCRA and analogous
state laws. Under these laws and related regulations, we could be required to
remove or remediate previously discarded hazardous substances and wastes or
property contamination that was caused by these third parties. These laws and
regulations may also expose us to liability for our acts that were in compliance
with applicable laws at the time the acts were performed.
Our
operations outside of the United States are potentially subject to similar
foreign governmental controls relating to protection of the environment. We
believe that, to date, our operations outside of the United States have been in
substantial compliance with existing requirements of these foreign governmental
bodies and that such compliance has not had a material adverse effect on our
operations. However, this trend of compliance may not continue in the future or
the cost of such compliance may become material.
Research
and Development
Our
acquisition of John Wright Company (JWC) provides us with technology that
includes proprietary processes, software and expertise designed to assist
operators, drilling contractors, and integrated service companies to define and
manage their well control risks in a systematic way. JWC has defined
management criterions which together make up an integrated 'Well Control
Management System.'
Competition
We
operate in highly competitive markets within the oilfield services
industry. We compete with large and small oilfield industry
competitors including larger integrated oilfield service providers in all three
business segments. Although we have
a strong market share position in our service lines providing hydraulic workover
and snubbing and prevention and risk management services, these markets are
highly fragmented. Our main competitors include Halliburton Company, Cudd
Pressure Control, a subsidiary of RPC, Inc., International Snubbing Services
(ISS) and Warrior Energy Services (Bobcat) which are both subsidiaries of
Superior Energy Services, Inc., and a number of local and regional oilfield
service businesses.
The
emergency response 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. We believe that our growth in our other pressure
control service lines has 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. However, 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
December 31, 2008, we and our operating subsidiaries collectively had 693
full-time employees and 4 part-time personnel. In addition, we have several
part-time consultants and also employ part-time contract personnel who remain
on-call for certain Well Intervention and 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 also 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.
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. Recently, commodity prices
have been extremely volatile and have declined substantially. Current
commodity prices as well as expectations about future prices and price
volatility are important in determining the future spending levels of our
customers and associated demand for our products and services. Any
prolonged reduction in oil and natural gas prices will depress 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:
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the
level of production and production
capability;
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the
levels of oil and natural gas
inventories;
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domestic
and worldwide demand for oil and natural
gas;
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the
expected cost of developing new
reserves;
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the
actual cost of finding and producing oil and natural
gas;
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the
availability of attractive oil and gas field prospects, which may be
affected by governmental actions and regulations or environmental
activists;
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the
availability of transportation infrastructure and refining
capacity;
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the
level of drilling activity;
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global
weather conditions and natural
disasters;
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worldwide
political, military, and economic conditions and economic activity,
including growth in underdeveloped
countries;
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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;
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the
cost and timing of the development of alternate energy sources;
and
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tax
policies.
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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.
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 78% of our consolidated revenues during the year ended December
31, 2008. Our operations in Venezuela and Algeria accounted for approximately
12% and 13%, respectively, of our consolidated revenues during the year ended
December 31, 2008. We anticipate that our revenues from foreign operations will
increase in the future due to our international presence in key oil and gas
markets. 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:
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expropriation
and nationalization of our assets or those of our customers in that
country;
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political
and economic instability;
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strikes
or work stoppages, civil unrest, acts of terrorism, force majeure, war or
other armed conflict;
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natural
disasters, including those related to earthquakes and
flooding;
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inflation;
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currency
fluctuations, devaluations, conversion and expropriation
restrictions;
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confiscatory
taxation or other adverse tax
policies;
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governmental
activities that limit or disrupt markets, restrict or reduce payments, or
limit the movement of funds;
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governmental
activities that may result in the deprivation of contract rights;
and
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trade
restrictions and economic embargoes imposed by the United States and other
countries.
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Due to the unsettled political
conditions in many oil-producing areas in which we operate, including parts of
Africa, South America and the Middle East, our revenue and profits are subject
to increased risk of the foregoing risks, which could impact the supply and
pricing for oil and natural gas, disrupt our operations, and increase our costs
for security worldwide.
For instance, the Venezuelan National
Assembly has approved a system governing how the state oil company, Petróleos de
Venezuela, could gain operating control of oil producing
projects. Subsequently, the Venezuelan national oil company has
seized control of at least a 60 percent stake in oil production projects where
foreign oil companies previously had a majority stake and operated the
production project. These actions have created uncertainty in the
future business and investment activities of foreign oil and natural gas
companies in Venezuela and have resulted in some companies withdrawing or
curtailing activities in Venezuela. To the extent that these actions adversely
affect our customers' activities in this region, they may adversely affect our
revenues and profits.
Additionally, in some jurisdictions we
are subject to foreign governmental regulations favoring or requiring the
awarding of contracts to local contractors or requiring foreign contractors to
employ citizens of, or purchase supplies from, a particular
jurisdiction. These regulations may adversely affect our ability to
compete.
Our international business operations
also include projects in countries where governmental corruption has been known
to exist and where our competitors who are not subject to United States laws and
regulations, such as the Foreign Corrupt Practices Act, can gain competitive
advantages over us by securing business awards, licenses or other preferential
treatment in those jurisdictions using methods that United States law and
regulations prohibit us from using. For example, our non-U.S.
competitors are not subject to the anti-bribery restrictions of the Foreign
Corrupt Practices Act, which make it illegal to give anything of value to
foreign officials or employees or agents of nationally owned oil companies in
order to obtain or retain any business or other advantage. We may be
subject to competitive disadvantages to the extent that our competitors are able
to secure business, licenses or other preferential treatment by making payment
to government officials and others in positions of influence.
Violations of these laws could result
in monetary and criminal penalties against us or our subsidiaries and could
damage our reputation and, therefore, our ability to do business.
Our
customers may be adversely impacted by the recent declines in oil and natural
gas prices and the current deterioration in the credit and capital
markets.
Many of
our customers finance their activities through cash flow from operations, the
incurrence of debt or the issuance of equity. Recently, commodity prices have
declined substantially and there has been a significant decline in the capital
markets and the availability of credit. Additionally, many of our
customers' equity values have substantially declined. The combination
of a reduction of cash flow resulting from declines in commodity prices, a
reduction in borrowing bases under reserve-based credit facilities and the lack
of availability of debt or equity financing may result in our customers reducing
capital expenditure budgets, curtailing operations, failing to meet their
obligations as they come due and delaying payment of, or renegotiating the terms
and amount of, amounts owing to us. A material reduction in or curtailment of,
the operations or growth of our customer base as a whole and demand for our
products and services, or any failure of our customers to meet or continue their
contractual obligations with us could have a material adverse effect on our
revenues, results of operations and financial condition.
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.
On
February 10, 2009, we entered into a new $54.4 million credit agreement,
providing for a term loan in the principal amount of $34.4 million and a
revolving credit line in the principal amount of up to $20 million. The term
loan facility requires regularly scheduled quarterly principal payments of $1.72
million. Interest on the term and revolving credit lines is paid quarterly. The
term loan and the revolving credit line each mature on February 10,
2012. We initially borrowed approximately $40.5 million under the
credit agreement and have, the ability to borrow an additional $8.2
million. Additionally, we have outstanding a subordinated promissory
note totaling approximately $3.0 million. The borrowing base limitation
under our revolving credit facility is subject to re-determination at the
discretion of the lender if we fail to deliver the borrowing base certificate.
Upon a re-determination, we could be required to repay a portion of our bank
debt. Any failure by us to pay when due any amounts owing under the credit
agreement or outstanding subordinated promissory note could result in a default
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 agreement. 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;
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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;
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a
leveraged financial position would make us more vulnerable to economic
downturns and could limit our ability to withstand competitive pressures;
and
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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.
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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 through cash flows from operations and borrowings under our credit
facilities; however, we cannot be sure that our business will continue to
generate cash flow at or above current levels or in an amount sufficient to fund
our future business activities and service our debt. 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 borrowings
under our credit facilities and the issuance of debt and/or equity securities.
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 impacted.
Deterioration
of the credit and capital markets may hinder or prevent our access to capital,
making it more expensive and difficult for us to meet future capital
needs.
Global
financial markets and economic conditions have been, and continue to be,
disrupted and volatile, which has caused a substantial deterioration in the
credit and capital markets. In particular, the cost of raising money in the debt
and equity capital markets has increased substantially while the availability of
funds from those markets generally has diminished significantly. Also, as a
result of concerns about the stability of financial markets generally and the
solvency of counterparties specifically, the cost of obtaining money from the
credit markets has increased as many lenders and institutional investors have
increased interest rates, enacted tighter lending standards, refused to
refinance existing debt at maturity at all or on comparable terms to existing
debt, and reduced and, in some cases, ceased to provide new funding to
borrowers.
Due to
these factors, we cannot be certain that funding from credit and capital markets
will be available if needed and, to the extent required, on acceptable
terms. If funding is not available when needed or on unfavorable
terms, we may be unable to meet our obligations as they come due or may be
required to reduce our capital expenditures and, therefore, be unable to expand
our existing business, complete acquisitions or otherwise take advantage of
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on our revenues and results of
operations.
The
loss of one or more of our current customers could adversely affect our results
of operations.
Our business is dependent upon a few
large customers. Approximately 31% of our consolidated revenues during the year
ended December 31, 2008 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.
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, 2008, we had a net working capital
balance denominated in Venezuelan currency (Bolivars) and subject to market
risks of $3,898,000.
The
Venezuelan government implemented a foreign currency control regime on
February 5, 2003 that has restricted the conversion of the Bolivars 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.
The
intense competition in our industry could result in reduced profitability and
loss of market share for us.
We
compete with larger equipment and service providers in the oil and natural gas
industry. 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 we 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
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:
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evacuation
of personnel and curtailment of
services;
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weather-related
damage to offshore equipment resulting in suspension of
operations;
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weather-related
damage to our facilities;
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increase
in insurance cost and reduction in its
availability;
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inability
to deliver men or materials to jobsites;
and
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loss
of productivity.
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For
example, during 2005 one hydraulic workover unit was lost as a consequence of
severe weather in the Gulf of Mexico.
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. However:
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we
may not be able to secure insurance coverage for all of the claims or
damages to which we are exposed or such coverage may not be available on
terms we consider commercially
reasonable;
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we
may be faced with types of liabilities that will not be covered by any
insurance coverage that we do obtain, such as damages from environmental
contamination; and
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the
dollar amount of any damages may exceed our policy
limits.
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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 that are not covered by or are in excess of the amount of
insurance coverage which we deem appropriate to maintain.
The
cyclical nature of, or a prolonged downturn in, our industry, could affect the
carrying value of our goodwill and negatively impact our earnings.
As of
December 31, 2008, we had $9,150,000 of goodwill or 4.9% of total
assets. We have recorded goodwill because we paid more for some our
businesses than the fair market value of the tangible and measurable intangible
net assets of those businesses. Upon our annual review of our
goodwill balance, if management determines that the carrying value of our
equipment may not be recoverable, our goodwill could be reduced and therefore
adversely impact our earnings.
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.
Risks
Relating to Ownership of Our Common Stock
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 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 11, 2009, no shares of our
preferred stock were outstanding, 77,083,199 shares of common stock were
outstanding, and there were approximately 4.9 million shares of common stock
underlying certain outstanding stock options, of which 4.2 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
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
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 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.
If
we fail to maintain the adequacy of our internal controls, our ability to
provide accurate financial statements and comply with the requirements of the
Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price
to decrease substantially.
Effective
internal control over financial reporting is essential for us to produce
reliable financial reports. Pursuant to Section 404 of the Sarbanes-Oxley Act of
2002, we are required to furnish a report by our management on our internal
control over financial reporting. That report must contain, among other matters,
an assessment of the design and operating effectiveness of our internal controls
over financial reporting as of the end of the fiscal year and disclosure of any
material weaknesses in our internal control over financial reporting identified
by management. That report must also contain a statement that our independent
registered public accounting firm has issued an attestation report on the
effectiveness of our system of internal accounting controls over financial
reporting and our independent registered public accounting firm is required to
provide such a report. If in the future we cannot provide reliable financial
information or prevent fraud or we are unable to assert that our internal
control over financial reporting is effective as of the end of the then current
fiscal year (or, if our independent registered public accounting firm is unable
to issue an unqualified report as to the effectiveness of our internal
controls), we could lose investor confidence in the accuracy and completeness of
our financial reports, which would have a negative effect on our stock price and
our ability to raise capital.
Item 1B.
Unresolved Staff Comments.
None.
We own or
lease approximately 10 offices including operations facilities. The
Company believes its current operating facilities are suitable and adequate to
meet current and reasonably anticipated future needs although as our business
continues to grow we are evaluating the need for additional
facilities. Descriptions of the major facilities used in our
operations are as follows:
Owned
Locations
Houston, Texas – Office, manufacturing
and warehouse building
Houma, Louisiana – Office, operations,
fabrication and equipment storage facility
Leased Locations
Houston, Texas – Administrative
office
Rock Springs, Wyoming – Office,
operations and equipment storage facility
Longview,
Texas – Office, operations and equipment storage facility
Franklin,
Texas – Office, operations and equipment storage facility
Shreveport,
Louisiana – Office, operations and equipment storage
facility
Broussard,
Louisiana – Office, operations and equipment storage facility
Algeria – Office, operations, and
equipment storage facility
Libya -
Office
Republic of Congo – Office, operations,
and equipment storage facility
Egypt – Office, operations, and
equipment storage facility
Dubai – Office, operations, and
equipment storage facility
Venezuela – Office, operations, and
equipment storage facility
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
2008.
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
NYSE Alternext US (Alternext US) 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 Alternext US:
|
High
and Low Sales Prices
|
||||||||||||||||
|
2008
|
2007
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 1.79 | $ | 1.27 | $ | 2.77 | $ | 1.98 | ||||||||
|
Second
Quarter
|
2.48 | 1.75 | 2.90 | 1.70 | ||||||||||||
|
Third
Quarter
|
3.15 | 1.90 | 1.73 | 1.21 | ||||||||||||
|
Fourth
Quarter
|
1.83 | 0.95 | 1.64 | 1.20 | ||||||||||||
On March 11, 2008 the last
reported sales price of our common stock as reported on Alternext US was $1.09
per share.
As of March 11, 2008, our common stock was
held by approximately 200 holders of record. 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
agreement contains covenants prohibiting the payment of
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, 2003 for the years ended December 31,
2004, 2005, 2006, 2007 and 2008 as compared to the Standard & Poors' 500,
the PHLX Oil Service Sector and the DJ Wilshire MicroCap Oil Equipment
& Services indices over the same period.
| 12/03 | 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | |||||||||||||||||||
|
Boots
& Coots International Well Control
|
100.00 | 72.22 | 82.54 | 177.78 | 129.37 | 92.86 | ||||||||||||||||||
|
S&P
500
|
100.00 | 110.88 | 116.33 | 134.70 | 142.10 | 89.53 | ||||||||||||||||||
|
PHLX
Oil Service Sector
|
100.00 | 131.78 | 195.68 | 220.88 | 322.32 | 132.62 | ||||||||||||||||||
|
DJ
Wilshire MicroCap Oil Equipment & Services Index
|
100.00 | 177.48 | 371.15 | 348.30 | 377.64 | 104.77 |
Item 6.
Selected Financial Data.
The
following table sets forth certain historical financial data as of and for the
years ended December 31, 2008, 2007, 2006, 2005 and 2004 which has been derived
from our audited consolidated financial statements. The results of
operations of 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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands except per share amounts)
|
||||||||||||||||||||
|
INCOME
STATEMENT DATA:
|
||||||||||||||||||||
|
Revenues
|
$ | 209,237 | $ | 105,296 | $ | 97,030 | $ | 29,537 | $ | 24,175 | ||||||||||
|
Operating
income
|
29,820 | 12,692 | 19,892 | 4,563 | 1,066 | |||||||||||||||
|
Income
(loss) from continuing operations, net of income taxes
|
21,819 | 7,891 | 11,165 | 2,779 | (290 | ) | ||||||||||||||
|
Income
from discontinued operations, net of income
taxes
|
— | — | — | — | 42 | |||||||||||||||
|
Net
income (loss)
|
21,819 | 7,891 | 11,165 | 2,779 | (248 | ) | ||||||||||||||
|
Net
income (loss) attributable to common stockholders
|
21,819 | 7,891 | 11,781 | 1,905 | (996 | ) | ||||||||||||||
|
BASIC
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.29 | $ | 0.11 | $ | 0.22 | $ | 0.06 | $ | (0.04 | ) | |||||||||
|
Discontinued
operations
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Net
income (loss)
|
$ | 0.29 | $ | 0.11 | $ | 0.22 | $ | 0.06 | $ | (0.04 | ) | |||||||||
|
Weighted
average common shares outstanding –Basic
|
75,845 | 70,039 | 53,772 | 29,507 | 28,142 | |||||||||||||||
|
DILUTED
INCOME (LOSS) PER COMMON SHARE:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | 0.28 | $ | 0.11 | $ | 0.21 | $ | 0.06 | $ | (0.04 | ) | |||||||||
|
Discontinued
operations
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
Net
income (loss)
|
$ | 0.28 | $ | 0.11 | $ | 0.21 | $ | 0.06 | $ | (0.04 | ) | |||||||||
|
Weighted
average common shares
outstanding - Diluted
|
78,040 | 72,114 | 55,036 | 31,374 | 28,142 | |||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
BALANCE
SHEET DATA:
|
||||||||||||||||||||
|
Total
assets (1)
|
$ | 184,973 | $ | 136,415 | $ | 101,017 | $ | 14,767 | $ | 18,393 | ||||||||||
|
Long-term
debt and notes payable, including current maturities
(2)
|
31,698 | 28,091 | 31,432 | 6,448 | 7,680 | |||||||||||||||
|
Working
capital (3)
|
40,169 | 34,712 | 25,512 | 3,565 | 2,553 | |||||||||||||||
|
Stockholders'
equity (4)
|
101,761 | 77,043 | 38,422 | 3,795 | 1,180 | |||||||||||||||
|
Common
shares outstanding
|
77,075 | 75,564 | 59,186 | 29,594 | 29,439 | |||||||||||||||
|
(1)
|
The
increase in total assets during 2008 was primarily due to
the increase in receivables which resulted from substantial
increase in revenue in the fourth quarter 2008 compared to fourth quarter
2007. It was also a result of an increase in property, plant
and equipment due to higher capital expenditures to support our higher
volume of revenue in 2008.
|
|
(2)
|
The
increase in long term debt from 2005 to 2006 is a result of debt
issued and the credit agreement with Wells Fargo entered into,
in conjunction with the HWC
acquisition.
|
|
(3)
|
Working
capital is the dollar amount of current assets less current
liabilities. The working capital increased from 2007 to 2008
primarily due to an increase in accounts receivable offset by an increase
in accounts payable and accrued liabilities, both of which were due to
substantial increase in 2008 revenue activity. The increase in
working capital from 2005 to 2006 is a result of the HWC
acquisition. In 2007, accounts receivable increased due to
higher fourth quarter revenue in 2007 compared to 2006: additionally,
foreign prepaid tax and prepaid expenses
increased.
|
|
(4)
|
The
increase in stockholders’ equity from 2005 to 2006 is a result of the 26.5
million shares issued for the purchase of HWC valued at $26.5
million. The increase from 2006 to 2007 is due to our April
2007 underwritten public offering of 14.95 million shares of our common
stock which netted $28.8 million. The increase from 2007 to
2008 is primarily due to net income attributable to common
shareholders.
|
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.
Our
summary consolidated operating results for the fiscal years ended December 31,
2008, 2007 and 2006 were:
|
Years Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
$ | 209,237 | $ | 105,296 | $ | 97,030 | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Cost
of sales
|
129,018 | 62,581 | 52,281 | |||||||||
|
Operating
expenses
|
30,599 | 17,792 | 15,597 | |||||||||
|
Selling,
general and administrative
|
10,304 | 5,904 | 4,118 | |||||||||
|
Other
operating expense
|
189 | 276 | 259 | |||||||||
|
Depreciation
and amortization
|
9,307 | 6,051 | 4,883 | |||||||||
|
Operating
income
|
29,820 | 12,692 | 19,892 | |||||||||
|
Interest
expense
|
2,546 | 2,584 | 3,036 | |||||||||
|
Other
(income) and expense, net
|
3 | (532 | ) | (176 | ) | |||||||
|
Income
tax expense
|
5,452 | 2,749 | 5,867 | |||||||||
|
Net
income
|
21,819 | 7,891 | 11,165 | |||||||||
|
Preferred
dividends accrued
|
— | — | 616 | |||||||||
|
Net
income attributable to common stockholders
|
$ | 21,819 | $ | 7,891 | $ | 11,781 | ||||||
Our operating segments are our service
lines which we aggregate into three reporting segments. Previously,
we presented two reporting segments, response services and well
intervention services. During the fourth quarter of fiscal 2008, we
reassessed the level at which the Statement of Financial Accounting Standards
(SFAS) No. 131 operating segment criteria is met, and as a result, changed our
operating segments. As a result of this change, the composition of
our reporting segments was also revised. All prior year segment
information has been restated to conform to the fiscal 2008
presentation. These reporting segments are Pressure Control, Well
Intervention and Equipment Services.
We operate in three business segments:
Pressure Control, Well Intervention and Equipment
Services. 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. 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. 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.
The
Pressure Control segment consists of personnel, equipment and services which are
designed to reduce the number and severity of critical well events offered
through our prevention and risk management programs, including training,
contingency planning, well plan reviews, audits, inspection services and
engineering services. This segment also consists of personnel, equipment and
services provided during a critical well event. These services
can include snubbing and pressure control rental equipment provided
during a response which are designed to minimize response time and mitigate
damage while maximizing safety. 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 and 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.
The
Equipment Services segment includes our pressure control equipment rental and
service business, which began as an expansion of the Company’s existing services
in 2007. We expect our Equipment Services segment to continue to benefit as a
result of cross selling of our other services by our business development team
and our expanded geographic presence.
Information
concerning operations in our three different business segments for the years
ended December 31, 2008, 2007 and 2006 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Revenues
|
||||||||||||
|
Pressure
Control
|
$ | 92 ,804 | $ | 36, 845 | $ | 43,204 | ||||||
|
Well
Intervention
|
97,167 | 66,580 | 53,826 | |||||||||
|
Equipment
Services
|
19,266 | 1,871 |
−
|
|||||||||
| $ | 209,237 | $ | 105,296 | $ | 97,030 | |||||||
|
Cost
of Sales
|
||||||||||||
|
Pressure
Control
|
$ | 50,432 | $ | 16,719 | $ | 15,700 | ||||||
|
Well
Intervention
|
67,271 | 45,349 | 36,581 | |||||||||
|
Equipment
Services
|
11,315 | 513 |
−
|
|||||||||
| $ | 129,018 | $ | 62,581 | $ | 52,281 | |||||||
|
Operating
Expenses (1)
|
||||||||||||
|
Pressure
Control
|
$ | 15,664 | $ | 9,017 | $ | 11,646 | ||||||
|
Well
Intervention
|
12,290 | 7,966 | 3,951 | |||||||||
|
Equipment
Services
|
2,645 | 809 |
−
|
|||||||||
| $ | 30,599 | $ | 17,792 | $ | 15,597 | |||||||
|
Selling,
General and Administrative (2)
|
||||||||||||
|
Pressure
Control
|
$ | 4,499 | $ | 2,080 | $ | 1,830 | ||||||
|
Well
Intervention
|
5,035 | 4,006 | 2,547 | |||||||||
|
Equipment
Services
|
959 | 94 |
−
|
|||||||||
| $ | 10,493 | $ | 6,180 | $ | 4,377 | |||||||
|
Depreciation
and Amortization (1)
|
||||||||||||
|
Pressure
Control
|
$ | 1,032 | $ | 663 | $ | 520 | ||||||
|
Well
Intervention
|
6,796 | 5,239 | 4,363 | |||||||||
|
Equipment
Services
|
1,479 | 149 |
−
|
|||||||||
| $ | 9,307 | $ | 6,051 | $ | 4,883 | |||||||
|
Operating
Income
|
||||||||||||
|
Pressure
Control
|
$ | 21,177 | $ | 8,366 | $ | 13,508 | ||||||
|
Well
Intervention
|
5,775 | 4,020 | 6,384 | |||||||||
|
Equipment
Services
|
2,868 | 306 |
−
|
|||||||||
| $ | 29,820 | $ | 12,692 | $ | 19,892 | |||||||
|
|
(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, 2008 with the Year ended December 31,
2007
Revenues
Pressure
Control revenues were $92,804,000 for the year ended December 31, 2008, compared
to $36,845,000 for the year ended December 31, 2007, representing an increase of
$55,959,000, or 151.9% in the current year. The largest increase resulted from
revenue of $41,050,000 from a prevention and risk management international
project which was completed in the fourth quarter. The remaining
increase was primarily due to a higher level of high risk, international
emergency response activity.
Well
Intervention revenues were $97,167,000 for the year ended December 31, 2008,
compared to $66,580,000 for the year ended December 31, 2007, representing an
increase of $30,587,000, or 45.9% in the current year. The increase
was due to higher utilization resulting from growth in our domestic and
international hydraulic workover and snubbing services.
Equipment
service revenues were $19,266,000 for the year ended December 31, 2008, compared
to $1,871,000 for the year ended December 31, 2007, an increase of $17,395,000,
or 929.7% in the current year. This increase is due to the domestic
and international expansion of our equipment rental and services which began in
August 2007.
Cost
of Sales
Pressure
Control cost of sales was $50,432,000 for the year ended December 31, 2008,
compared to $16,719,000 for the year ended December 31, 2007, an increase of
$33,713,000, or 201.6% in the current year. For the year ended
December 31, 2008, cost of sales represented 54.3% of revenues compared to 45.4%
of revenues for the year ended December 31, 2007. The increase in cost of sales
is generally attributable to increased revenues, while the percentage increase
was primarily due to a higher proportion of revenue with related third party
costs in 2008 in relation to 2007.
Well
Intervention cost of sales was $67,271,000 for the year ended December 31, 2008,
compared to $45,349,000 for the year ended December 31, 2007, an increase of
$21,922,000, or 48.3% in the current year. For the year ended
December 31, 2008, cost of sales represented 69.2% of revenues compared to 68.1%
of revenues for the year ended December 31, 2007. The increase in cost of sales
is generally attributable to the increased revenue volume.
Equipment Services cost of sales was
$11,315,000 for the year ended December 31, 2008, compared to $513,000 for the
year ended December 31, 2007, an increase of $10,802,000, or 2105.7% in the
current year. For the current year, cost of sales was 58.7% of
revenue compared to 27.4% of revenue in the prior year. The increase
in cost of sales is generally attributable to increased revenues, while the
percentage increase was primarily due to being more fully operational in 2008 as
contrasted with a higher component of start up costs incurred in
2007.
Operating
Expenses
Consolidated
operating expenses were $30,599,000 for the year ended December 31, 2008,
compared to $17,792,000 for the year ended December 31, 2007, an increase of
$12,807,000, or 72.0% in the current year. During the current year,
operating expenses represented 14.6% of revenues compared to 16.9% of revenues
in the prior year. The increase in operating expenses on an actual basis was
primarily due to increases in salaries and benefits, incentive bonus, bad debt
expense, travel and entertainment, tools and supplies, and professional fees as
a result of the geographic expansion of all segments and the ramp up of our
pressure control equipment rental services business. Operating expenses were
also lower in 2007 due to a gain on disposal of assets during the year which did
not recur in the year ended December 31, 2008. The percentage of
revenue decrease is primarily due to higher revenues in relation to increases in
expenses due to the component of such expenses that are fixed and semi
fixed.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative (SG&A) expenses were $10,493,000 for the
year ended December 31, 2008, compared to $6,180,000 for the year ended December
31, 2007, an increase of $4,313,000, or 69.8% in the current
year. During the year ended December 31, 2008, SG&A expense
represented 5.0% of consolidated revenues compared to 5.9% of revenues in the
prior year. The increase in actual SG&A expense is primarily due to higher
salaries, incentive bonus, benefits, and marketing related expenses associated
with the higher level of revenues and operating income exceeding
plan.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense increased by $3,256,000, or 53.8% between
the years ended December 31, 2008 and 2007. The increase was
primarily due to the depreciation increase of $2,959,000 resulting from an
increase in capitalized assets in 2008. Additionally, amortization of
intangible assets, related to our acquisition of StassCo Pressure Control
LLC in August 2007, for the full year in 2008 compared to five months in 2007
was $512,000 and $215,000, respectively. The intangible assets
consist of customer relationships being amortized over a 13 year period and
management non-compete agreements being amortized over 5.5 and 3.5 year
periods.
Interest
Expense
Interest
expenses decreased by $38,000 in the year ended December 31, 2008 compared to
the prior year period. The interest expense decrease was primarily
due to a lower average interest rate and a lower balance on our term loan
borrowings offset by an increase in our average revolver balance.
Other
(Income) and Expense, Net
Other income and expenses increased by
$535,000 in the year ended December 31, 2008 compared to the prior year
period. The net
expense increase was primarily a result of the decrease in interest income of
$515,000 from the prior year period which was due to a reduction in funds
available for investment in 2008.
Income
Tax Expense
Income
taxes for the year ended December 31, 2008 were $5,452,000, or 19.99% of pre-tax
income compared to the year ended December 31, 2007 of $2,749,000, or 25.8% of
pre-tax income. We 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 $2.1 million of U.S. net operating losses (NOL) to
offset U.S. taxable income generated during the tax year ended December 31, 2008
and expect similar dollar limits in future years until our U.S. NOL’s are either
completely used or expire. In 2008, the tax expense as a percent of
pretax income was lower due to taxable income in foreign jurisdictions with
lower tax rates compared to the U.S. and a tax benefit related to the
utilization of future Net Operating Losses (NOL's) against taxable income in
future years which was partially offset by FIN 48 related penalty and
interest. All 2008 U.S. current tax expense was offset by utilization
of NOL’s and Foreign Tax Credits.
Comparison
of the Year ended December 31, 2007 with the Year ended December 31,
2006
Revenues
Pressure
Control revenues were $36,845,000 for the year ended December 31, 2007, compared
to $43,204,000 for the year ended December 31, 2006, representing a decrease of
$6,359,000, or 14.7% in 2007. The decrease in revenue was primarily
due to a lower level of high risk, international emergency response
activity.
Well
Intervention revenues were $66,580,000 for the year ended December 31, 2007,
compared to $53,826,000 for the year ended December 31, 2006, representing an
increase of $12,754,000, or 23.7% in 2007. The increase of $5,309,000
in revenue is due to the inclusion of a full year of hydraulic workover revenue
in the current year compared to 10 months in the year 2006, and $2,965,000 in
revenue is due to the one time rig assist unit contract settlement in Qatar. The
remaining increase in revenue is due to growth initiatives in our
hydraulic workover and snubbing services in Wyoming, North Texas, the Middle
East and Egypt which was offset by lower activity in the Gulf of Mexico and
Venezuela.
Equipment
service revenues were $1,871,000 for the year ended December 31, 2007, compared
to no revenue for the year ended December 31, 2006, an increase of $1,871,000,
or 100.0% in 2007. The increase was due to our start up and entry
into the rental tool equipment and services business in August
2007.
Cost
of Sales
Pressure
Control cost of sales were $16,719,000 for the year ended December 31, 2007,
compared to $15,700,000 for the year ended December 31, 2006, an increase of
$1,019,000, or 6.5% in 2007. For the year ended December 31, 2007,
cost of sales was 45.4% of revenue compared to 36.3% of revenue in the prior
year. The increase as a percentage of revenue is primarily
due to the lower level of favorable international response activity
during 2007 as well as the reduction of non-recurring low cost Gulf of Mexico
remediation work from the prior year period.
Well
Intervention cost of sales were $45,349,000 for the year ended December 31,
2007, compared to $36,581,000 for the year ended December 31, 2006, an increase
of $8,768,000, or 24.0% in 2007. The increase was primarily the
result of an additional cost of sales of $7,197,000 due to the inclusion of a
full year of hydraulic workover cost of sales in 2007 compared to ten months in
the prior year.
Equipment service cost of sales were
$513,000 for the year ended December 31, 2007, compared to no cost of sales for
the year ended December 31, 2006, an increase of $513,000, or 100.0% in
2007. The increase was due to our start up and entry into the rental
tool equipment and services business in August 2007.
Operating
Expenses
Consolidated
operating expenses were $17,792,000 for the year ended December 31, 2007,
compared to $15,597,000 for the year ended December 31, 2006, an increase of
$2,195,000, or 14.1% in 2007. During 2007, operating expenses
represented 16.9% of revenues compared to 16.1% of revenues in the prior year.
The increase was primarily the result of an additional $1,418,000 due to the
inclusion of a full year of hydraulic workover operating expense in 2007
compared to ten months in the prior year as well as additional support personnel
costs which include start up expenses of $1,054,000 for our equipment services,
our prevention and risk management business in the Middle East and North Africa,
and our hydraulic workover and snubbing business in North Texas and the Middle
East. The percentage of revenue increase from 2006 to 2007 is
primarily due to the start up expenses incurred in 2007.
Selling,
General and Administrative Expenses
Consolidated
selling, general and administrative (SG&A) expenses were $6,180,000 for the
year ended December 31, 2007, compared to $4,377,000 for the year
ended December 31, 2006, an increase of $1,803,000, or 41.2% in
2007. The increase in total SG&A expense is primarily due to
salaries, benefits, and marketing related expenses. The increases
were offset by a decrease in incentive bonus expense. During the
twelve months ended December 31, 2007, SG&A expense represented 5.9% of
consolidated revenues compared to 4.5% of revenues in the prior
year.
Depreciation
and Amortization
Consolidated
depreciation and amortization expense increased by $1,168,000 between the years
ended December 31, 2007 and 2006. The increase was primarily due to
an additional $704,000 resulting from the inclusion of a full year of hydraulic
workover depreciation in 2007 compared to ten months of hydraulic workover
depreciation in the prior year, depreciation of current year property and
equipment additions and the amortization of intangible assets related to the
acquisition of StassCo Pressure Control, LLC.
Interest
Expense
Interest
expense decreased by $452,000 in the year ended December 31, 2007 compared to
the prior year period. The interest expense decrease was primarily
due to the increase in capitalized interest expense in 2007 which resulted in a
credit of $376,000 for the year ended December 31, 2007.
Other
(Income) and Expense, Net
Other income and expenses decreased by
$356,000 in the year ended December 31, 2007 compared to the prior year
period. The
interest expense decrease was primarily due to the interest income increase of $375,000
provided by earnings from funds received from the underwritten public offering
of 14.95 million shares of our common stock in April 2007.
Income
Tax Expense
Income
taxes for the year ended December 31, 2007 were $2,748,769 or 25.83% of pre-tax
income compared to the year ended December 31, 2006 of $5,867,000, or 34.45% 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 $2.1 million of U.S. net
operating losses (NOL) to offset U.S. taxable income generated during the tax
year ended December 31, 2007 and expect similar dollar limits in future years
until our U.S. NOL’s are either completely used or expire. In 2007,
the tax expense as a percent of pretax income was lower due to taxable income in
foreign jurisdictions with lower tax rates compared to the U.S., a tax benefit
related to the utilization of future Net Operating Losses (NOL's) against
taxable income in future years which was partially offset by further FIN 48
assessments and related penalty and interest. All 2007 U.S. current
tax expense was offset by utilization of NOL’s.
Liquidity
and Capital Resources
Liquidity
At
December 31, 2008, we had working capital of $40,169,000 compared to $34,712,000
at December 31, 2007. Our cash balance at December 31, 2008 was
$6,220,000 compared to $6,501,000 for the prior year. We ended the
year with stockholders’ equity of $101,761,000 which increased $24,718,000
compared to $77,043,000 in the prior year primarily due to 2008 net income of
$21,819,000. Our primary liquidity needs are working capital, capital
expenditures such as assembling hydraulic units, expanding our pressure control
fleet of equipment and replacing support equipment for our hydraulic workover
and snubbing service line, debt service and acquisitions. Our primary
sources of liquidity are cash flows from operations and borrowings under the
revolver credit facility.
We
generated cash from operating activities in fiscal year 2008 of $22,906,000
compared to cash generated by operating activities of $2,146,000 in
2007. Cash was provided by operations primarily through net income of
$21,819,000, increases in accounts payable and accrued liabilities of
$20,377,000, and non-cash charges of $12,474,000. Accounts payable
and accrued liabilities increased primarily due to increases in third party
charges related to a larger revenue volume in the latter part of the year as
well as an increase in accrued bonus and accrued agent
commissions. Non-cash charges were comprised primarily of $9,307,000
depreciation and amortization, bad debt provision of $2,177,000, and stock based
compensation of $1,397,000. These positive cash flows were offset by
increases in receivables of $28,073,000, increases in inventory of $1,361,000,
increases in prepaid expenses and other current assets of $2,005,000, a gain on
sale/disposal of assets of $215,000 and increases in other assets of
$110,000. Receivables increased due to greater revenue volume in the
final quarter of 2008 compared to the same period in 2007. Inventory
increased as a result of supporting the increased revenue activity, and prepaid
expenses and other current assets increased primarily due to an increase in
prepaid taxes during 2008.
Cash used
in investing activities during the years ended December 31, 2008 and 2007 was
$28,120,000 and $27,065,000, respectively. Capital expenditures,
including capitalized interest, totaled $28,537,000 and $21,309,000 during the
years ended December 31, 2008 and 2007, respectively. Capital
expenditures in 2008 and 2007 consisted primarily of purchases of assets for our
hydraulic workover and snubbing services and our pressure control rental
equipment services. We received proceeds on sale or disposal of
equipment generating cash of $417,000 in 2008 compared to $4,938,000 in
2007. In 2007, we realized insurance proceeds on two claims related
to loss of hydraulic units lost offshore, one claim was related to a Gulf of
Mexico claim incurred in 2005 during the Katrina hurricane which generated cash
of $1,040,000 and the second claim generated cash of $3,565,000 resulting from
our claim on the loss of a hydraulic unit operating offshore of the Republic of
Congo, which resulted in a gain of $1,830,000 in the current
year. Our cost to replace the equipment was approximately $2,500,000,
which is included in our 2007 capital expenditures.
On
March 3, 2006, we acquired the hydraulic well control business (HWC) of Oil
States International, Inc. As consideration for HWC, we issued
approximately 26.5 million shares of our common stock and subordinated
promissory notes of $21,200,000, while the transaction netted cash to our
company of $4,366,000. At the time of acquisition, this service line
was operating in the Louisiana Gulf Coast, Venezuela, North Africa, West Africa
and Middle East oil and gas markets.
On July
31, 2007, we acquired Rock Springs, Wyoming-based StassCo Pressure Control, LLC
(StassCo) for cash consideration of $10,694,000, net of cash acquired and
including transaction costs but excluding a payable to the former owners of
$500,000. This transaction was funded utilizing cash proceeds
available from our underwritten public offering of common stock in April
2007. StassCo performed snubbing services in the Cheyenne basin,
Wyoming and operated four hydraulic rig assist units.
We increased our net cash by $4,933,000 due
to financing activities during the year ended December 31, 2008 primarily as a
result of borrowings under our revolving line of credit and proceeds from
exercise of stock options offset by payments under our term loan.
During
2007, we received $2,965,000 from a customer in Qatar settlement of the
customer’s contractual obligations to reimburse our costs for procuring and
transporting a rig assist unit. We also retained ownership of the
unit as part of the settlement.
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, 2008, we had cash of $628,000 denominated
in Bolivars and residing in a Venezuelan bank. Venezuela trade
accounts receivables of $7,884,000 were denominated in Bolivars and included
along with cash in net working capital denominated in Bolivars of $3,898,000 and
subject to market risks.
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 Bolivar, to U.S. Dollars. The Company
has 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. Management continues to monitor the situation
closely.
Effective January 1, 2006, and related to our
acquisition of the hydraulic well control business of Oil States International,
Inc., 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.
Credit
Facilities/Capital Resources
On March, 2006, we entered into a
Credit Agreement with Wells Fargo Bank, National Association, which established
a revolving credit facility capacity totaling $10.3 million, and a term credit
facility totaling $9.7 million. The loan balance
outstanding on December 31, 2008 was $3.9 million on the term credit facility
and $6.4 million on the revolving credit facility. This line
was replaced with a new facility described below.
On
February 10, 2009, we entered into a new $54.4 million syndicated credit
agreement with Wells Fargo Bank, National Association, Royal Bank of Canada and
Bank of America, N.A.(the “Credit Agreement”) The Credit Agreement
replaced our existing term and revolving credit facilities. The Credit Agreement
provides for a term loan in the principal amount of $34.4 million and a
revolving credit line in the principal amount of up to $20 million. The term
loan facility requires regularly scheduled quarterly payments of principal and
interest. Quarterly principal payments on the term facility are $1.72
million and commence June 30, 2009. Amounts repaid under the term loan cannot be
re-borrowed. The term loan and the revolving credit line each mature
on February 10, 2012.
Interest
under the Credit Agreement accrues at a base rate (which is the greatest of the
Federal Funds Rate plus 1.50%, Well’s Fargo’s prime rate, or the daily one-month
London Interbank Offered Rate plus 1.50%) plus a margin ranging from 4.25% to
4.75% per annum or, at our option, at a Eurodollar base rate plus a margin
ranging from 5.25% to 5.75% per annum. We will also pay a commitment
fee on the unused portion of the revolving credit line ranging from 1.30% to
1.40% per annum. The commitment fee and the margin applicable to
advances under the Credit Agreement increase within the applicable range if the
ratio of our debt to adjusted EBITDA rises above 1.50.
The
Credit Agreement is unconditionally guaranteed by all of our current and future
domestic subsidiaries (collectively, the “Guarantors”) and secured by
substantially all of our assets and those of the Guarantors, including a pledge
of all of the capital stock of our direct and indirect domestic subsidiaries and
66% of the capital stock of our first-tier foreign subsidiaries. We have not
entered into any interest rate hedges with respect to the Credit Agreement but
may elect do so in the future.
The
Credit Agreement contains covenants that limit our ability and the Guarantors
ability to, among other things, incur or guarantee additional indebtedness;
create liens; pay dividends on or repurchase stock; make certain types of
investments; sell stock of our subsidiaries; restrict dividends or other
payments from our subsidiaries; enter into transactions with affiliates; sell
assets, merge with other companies, and spend in excess of $30 million per year
on capital expenditures. The Credit Agreement also requires compliance with
certain financial covenants, including, commencing with the quarter ending March
31, 2009, (1) the maintenance of a minimum tangible net worth of not less than
85% of its tangible net worth as of March 31, 2009, plus an amount equal to 50%
of consolidated net income for each succeeding fiscal quarter plus 100% of
future net proceeds from the sale of equity securities, (2) a maximum ratio of
funded debt to adjusted EBITDA for the preceding four fiscal quarters of 2.25 to
1.00, and (3) a minimum ratio of adjusted EBITDA to fixed charges of 1.50 to
1.00. We expect to be in compliance with these covenants through
January 1, 2010.
We
utilized initial borrowings of approximately $40 million under the Credit
Agreement to repay all amounts outstanding under our existing credit facilities,
repay all of the $21.2 million of senior subordinated notes held by Oil States
International and to fund our purchase of John Wright Company. We
believe that cash on hand, cash from operations and amounts available under our
credit facilities will be sufficient to meet our liquidity needs in the coming
twelve months.
Disclosure
of on and off balance sheet debts and commitments:
Our known
contractual obligations at December 31, 2008 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
|
$ | 5,483 | $ | 5,483 | $ | — | $ | — | $ | — | ||||||||||
|
Revolving
credit Facility
|
$ | 4,876 | $ | — | $ | 4,876 | $ | — | $ | — | ||||||||||
|
Subordinated
debt
|
$ | 21,166 | $ | — | $ | 21,166 | $ | — | $ | — | ||||||||||
|
Capital
lease payments (including
interest)
|
$ | 196 | $ | 50 | $ | 100 | $ | 46 | $ | — | ||||||||||
|
Future
minimum lease Payments
|
$ | 6,437 | $ | 1,411 | $ | 1,943 | $ | 1,361 | $ | 1,722 | ||||||||||
|
Total
commitments
|
$ | 38,158 | $ | 6,944 | $ | 28,085 | $ | 1,407 | $ | 1,722 | ||||||||||
Off-Balance
Sheet Arrangements
As of December 31, 2008 we had no
off-balance sheet arrangements as defined in item 303(a) (4) of Regulation
S-K.
Tax
Matters
Our primary deferred tax assets at
December 31, 2008 are related to $27.27 million in available federal net
operating loss carry forwards (NOL’s) and $.1 million of foreign tax
credits. The foreign tax credits will expire in 2017. The
NOL’s will expire in varying amounts during the years 2019 through 2024 if they
are not first used to offset taxable income that we generate. Our
ability to utilize a significant portion of the available NOL’s are currently
limited due to a change in control that occurred during 2006. Our
ability to utilize the foreign tax credit is limited by the use of the
NOL’s.
Our income tax provision for the year
ended December 31, 2008 totaled $5.5 million, or 19.99% of pretax
income. Our income tax provision for the year ended December 31, 2007
totaled $2.7 million, or 25.8% of pretax income.
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, share-based compensation 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.
Cost of sales includes 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. Operating expense includes
costs related to service line management and support, including business
development and delivery expenses. 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. WELLSURE revenues represented approximately 1% of our total
revenues in 2008.
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.
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 effective January 1, 2006. 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.
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, Congo and Venezuela (See “Note I” Income Taxes to the consolidated
financial statements).
Effective
January 1, 2007, we adopted FASB Interpretation Number 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), which is intended to clarify the
accounting for income taxes by prescribing a minimum recognition threshold for a
tax position before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. In accordance with the requirements of FIN 48, the Company evaluated
all tax years still subject to potential audit under state, federal and foreign
income tax law in reaching its accounting conclusions. As a result,
the Company concluded it did not have any unrecognized tax benefits or any
additional tax liabilities after applying FIN 48 as of the January 1, 2007
adoption date or as of and for the years ended December 31, 2008 and
2007. During 2007, the Company recorded a charge of $616,000 relating
to unrecognized tax benefits under FIN48. During 2008, the Company
recorded a charge of 206,000 related to penalties and interest
associated with the unrecognized tax benefits under FIN 48 in 2007. Tax
years subsequent to 2005 remain open to examination by U.S. federal and state
tax jurisdictions, tax years subsequent to 2004 remain open in Venezuela, tax
years subsequent to 2004 remain open in Algeria, and tax tears subsequent to
2004 remain open in the Congo.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 (SFAS 157), “Fair Value Measurements,” which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB
Staff Position (FSP) 157-2, “Effective Date of FASB Statement
No. 157,” which defers the effective date of Statement 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually), to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. Earlier adoption is permitted,
provided the company has not yet issued financial statements, including for
interim periods, for that fiscal year. We have adopted those provisions of SFAS
157 that were unaffected by the delay in the first quarter of 2008. Such
adoption has not had a material effect on our consolidated statement of
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” SFAS 141(R) established
revised principles and requirements for how the Company will recognize and
measure assets and liabilities acquired in a business combination. The objective
of this statement is to improve the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects.
The statement is effective for business combinations completed on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, which begins January 1, 2009 for the Company. The adoption
of SFAS 141(R) is not expected to have a material impact on the Company’s
results from operations or financial position.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS
160 establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. The objective
of this statement is to improve the relevance, comparability, and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting
standards. The statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008,
which begins January 1, 2009 for the Company. The adoption of SFAS
160 is not expected to have a material impact on the Company’s results from
operations or financial position.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133". SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, which begins January 1, 2009 for the
Company. The adoption of SFAS 161 is not expected to have a material
impact on the Company’s results from operations or financial
position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB as
opposed to the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The effective date of
this statement is November 15, 2008. The adoption of SFAS 162 is not
expected to have a material impact on the Company’s results from operations or
financial position.
In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial
Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.”
Diversity exists in practice in accounting for financial guarantee insurance
contracts by insurance enterprises under FASB Statement No. 60, Accounting
and Reporting by Insurance Enterprises. This results in inconsistencies in the
recognition and measurement of claim liabilities. This Statement requires that
an insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation. This Statement requires expanded disclosures
about financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. The Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008, which begins January 1, 2009 for the Company. The adoption of
FASB 163 will not have a material impact on the Company’s results from
operations or financial position.
In
June 2008, the FASB issued FASB Staff Position (FSP) Emerging Issues
Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities.” Under the
FSP, unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years, and is not expected to have a material impact on the
Company’s results from operations or financial position.
In
October 2008, the FASB issued FASB Staff Position (FSP) No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active.” This FSP clarifies the application of FASB Statement No. 157,
Fair Value Measurements, in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. This FSP shall be
effective upon issuance, including prior periods for which financial statements
have not been issued. Such adoption has not had a material effect on
our consolidated statement of financial position, results of operations or cash
flows.
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 2008, foreign revenues were 78% of total
revenue. Revenue generated by Venezuela and Algeria during the year 2008 was 12%
and 13%, respectively. Revenue generated by Venezuela and Algeria
during the year 2007 was 19% and 20%, respectively. Remaining foreign revenues
for 2008 were primarily generated in the Republic of Congo, Nigeria, Dubai,
Bangladesh, India, Qatar and Egypt, with India projects representing over 20% of
total revenues for the period. 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, 2008,
we had floating rate obligations totaling approximately $10.4
million. See “Liquidity and Capital Resources” for more
information. If the floating interest rate was to increase by 10%
from the December 31, 2008 levels, our interest expense would increase by a
total of approximately $51,000 annually.
Attached
following the Signature Pages and Exhibits.
None.
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, 2008. 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.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting identified
in conjunction with our management’s evaluation of such control that occurred
during our fourth fiscal quarter ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining effective internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control Integrated Framework. Based on this assessment, our
management concluded that, as of December 31, 2008, our internal control
over financial reporting is effective based on those criteria.
UHY LLP, the Company’s independent
registered public accounting firm, has issued an attestation report on the
effectiveness of our internal control over financial reporting as of
December 31,
2008, as stated in their
report which appears herein.
None.
PART
III
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 U.S. Securities and Exchange Commission and the NYSE Alternext
US. Based upon a review of the Forms 3, 4, and 5 presented to
us, we believe that all reports were filed on a timely basis except as
follows:
Mr. Croyle
was late filing a Form 4 after purchasing 5000 shares of the Company’s common
stock on the open market on May 13, 2008. Mr. Winchester was
late filing a Form 4 after 25,500 previously granted restricted shares of the
Company’s common stock were withheld by the Company on July 21, 2008 to satisfy
tax withholding obligations in connection with the vesting of restricted common
stock.
The following table lists the name,
age, and office of each of our directors and executive
officers. There are no family relationships between any director and
any other director or executive officer.
|
NAME
|
AGE
|
POSITION
|
||
|
Douglas E. Swanson
|
70
|
Chairman
of the Board
|
||
|
Jerry L. Winchester
|
49
|
President,
Chief Executive Officer and Director
|
||
|
Cary
Baetz
|
44
|
Chief
Financial Officer
|
||
|
Dewitt H. Edwards
|
50
|
Chief
Operating Officer
|
||
|
Allen C. Duke
|
42
|
Sr.
Vice President, Global Business Development and
Delivery
|
||
|
|
||||
|
John K. Hebert
|
55
|
Sr.
Vice President, Resource Management
|
||
|
W.
Richard Anderson (1)
|
55
|
Director
|
||
|
E.
J. DiPaolo (1)(2)
|
56
|
Director
|
||
|
Robert S. Herlin
(1)
|
53
|
Director
|
||
|
K.
Kirk Krist
|
50
|
Director
|
||
|
Robert G. Croyle
(2)
|
66
|
Director
|
_____________________________
(1)
Member of the Audit and Compensation Committees.
(2)
Member of the Nominating and Corporate Governance 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
was appointed as President and Chief Executive Officer of Oil States
International, Inc. in January 2000. He resigned his position as
President of Oil States in May 2006, and he resigned his position as Chief
Executive Officer of Oil States in April 2007. Oil States
International, Inc., a diversified oilfield services company, 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”. Mr. Swanson remains a
director of Oil States. 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. Mr. Swanson is a director for Flint Energy Services, LTD
(Toronto: FES.TO) a Canadian integrated midstream oil and gas production
services provider.
Jerry Winchester has served
as our President, Class II Director and Chief Operating Officer since
1998. In July 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
2011. 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.
Cary Baetz was appointed to
the position of Chief Financial Officer on August 1, 2008. From 2005
to 2008, Mr. Baetz, served as Vice President of Finance, Treasurer, and
Assistant Secretary of Chaparral Steel Company ("Chaparral"), one of the largest
suppliers of structural steel products in North America, where he was
responsible for strategic planning, treasury, investor and public relations, and
risk management. Prior to joining Chaparral, Mr. Baetz had been employed
since 1996 with Chaparral's parent company, Texas Industries Inc., a supplier of
heavy construction materials. From 2002 to 2005, he served as Director of
Corporate Finance of Texas Industries Inc. and was responsible for banking,
investment banking and rating agency relationships, as well as overseeing
credit, and developing and monitoring financial strategy. From 1993 to 1996,
Mr. Baetz served as Relationship Manager and Assistant Vice President for
Wells Fargo.
Dewitt H. Edwards has served as Chief
Operating Officer since June 1, 2008. From June 2006 to June 2008,
Mr. Edwards served as Executive Vice President, and 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.
John (Kelly) Hebert has
served as Senior Vice President, Resource Management since October 16,
2007. Mr. Hebert’s primary responsibilities include the health,
safety and quality control activities as well as human resources and technology
support. Prior to joining Boots & Coots, he was employed by Halliburton
Energy Services since 1977, beginning his career at Halliburton as Service
Supervisor. In 1988, Mr. Hebert moved into the health, safety
and environmental field and held various positions of increasing authority,
including Senior Human Resource Supervisor, Field Service Quality Coordinator
and District Manager. Most recently he served as Region HSE/Q Manager for
Halliburton’s southern region.
Allen Duke has served as
Senior Vice President, Global Business Development and Delivery since November of 2008.
Prior to that, he was Vice President of Safeguard and Prevention since its
inception in 1997 and was instrumental in the growth of this service
line. Mr. Duke has over 20 years of progressive emergency response,
safety, industrial hygiene and prevention experience in the oil and gas
industry. He is a certified master facilitator in risk management with an
emphasis on Bowtie methodology. Mr. Duke has developed emergency management
plans for several of the international oil companies as well as for domestic
fire department companies. He has also published several articles on well
integrity and risk management. Mr. Duke began his career at CET Environmental as
a chemist and industrial hygienist and worked at Garner Environmental as Safety
and Industrial Hygiene Manager prior to joining Boots & Coots.
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
2010. He is currently the Chief Financial Officer for Eurasia
Drilling Company Limited—the largest land drilling company in
Russia. Prior to May 2007, Mr. Anderson was the President, Chief
Executive 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
Transocean Ltd. and Vanguard Natural Resources, LLC.
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
2011. Mr. DiPaolo also serves on the Audit, Compensation, and
Nominating & Corporate Governance 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. Mr. DiPaolo
also serves on the boards of directors of Superior Well Services, Inc.
Evolution Petroleum Corporation, and various privately held
companies.
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 2010.
Since 2003, Mr. Herlin has served as the President, CEO and a Director of
Evolution Petroleum Corporation, a public company involved in the acquisition
and redevelopment of oil and gas properties. Mr. Herlin was
elected Chairman of the Board of Directors of Evolution in January,
2009. 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 from 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.
Robert G. Croyle became a Class I
Director on January 1, 2007. He chairs the Nominating & Corporate
Governance Committee. Mr. Croyle’s term as a Class I Director
will expire on the date of the annual meeting of stockholders scheduled for
calendar year 2010. From 2002 until December 31, 2006, when he
retired, Mr. Croyle served as Vice Chairman and Chief Administrative Officer of
Rowan Companies, Inc., a major international offshore and land drilling
contractor traded on the New York Stock Exchange. Mr. Croyle held various
positions with Rowan Companies, Inc. beginning in 1973, and was elected as a
director of Rowan in 1998. From 1993 to 2002, he served as Executive Vice
President with management responsibility for Rowan’s aviation and manufacturing
divisions. Mr. Croyle is a director of Rowan Companies, Inc. and Magellan
Midstream Holdings, GP, LLC.
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: Corporate
Secretary, Boots & Coots International Well Control, Inc.,
7908 N. Sam Houston Parkway West, 5th Floor,
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, and that relates to the
honest and ethical conduct in all business dealings, full, fair, accurate,
timely and understandable disclosures in all reports filed by us with, or
submitted to, the U.S. 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 ‘Company Info’ 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.
Director Independence and Financial
Experts. Our board has determined that each of
Messrs. Swanson, Anderson, DiPaolo, Herlin, and Croyle is independent under
Rule 803 of the NYSE Alternext US rules. In addition, our
board has determined that each of the Audit Committee members is independent, in
accordance with the audit committee requirements of the
NYSE Alternext US and the Securities and Exchange Commission. 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 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. Our Compensation Committee and Nominating and Corporate
Governance Committee are also composed entirely of independent
directors.
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, which we refer to as our “named executive
officers”:
|
Named
Executive Officers
|
Title
|
|
|
Jerry
Winchester
|
President
and Chief Executive Officer (our principal executive
officer)
|
|
|
Cary
Baetz
|
Chief
Financial Officer (our principal financial officer)
|
|
|
Dewitt
Edwards
|
Chief
Operating Officer
|
|
|
Allen
Duke
|
Senior
Vice President, Global Business Development and
Delivery
|
|
|
John
Hebert
|
Senior
Vice President, Resource Management
|
|
|
Gabriel
Aldape
|
Interim
Chief Financial Officer (resigned May
2008)
|
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 rules governing listed companies on the NYSE Alternext US.
Our Compensation Committee is composed of three members: E.J. DiPaolo, Robert S.
Herlin and W. Richard Anderson.
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.
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 reasonably 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 annually 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 and
2008, we engaged Longnecker & Associates to provide us with Survey Data
regarding director compensation, which we utilized to establish director
compensation. We utilized Survey Data prepared by Longnecker &
Associates in connection with establishing compensation for our Chief Executive
Officer in 2007, and we utilized survey data prepared by Longnecker &
Associates in connection with establishing or evaluating compensation for our
Chief Executive Officer, Chief Operating Officer and Chief Financial Officer in
2008. 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.
The
Compensation Committee receives data on total compensation for named executive
officers, which incorporates all three components of base pay, short term
incentive pay and long term stock-based compensation. The
Committee also compares total compensation of named executive officers and their
relationship to other members of management, taking into consideration
responsibilities, expertise, qualifications, past performance and expectations.
Named executive officer compensation is not based upon a multiple or range
of specified employee compensation. Total compensation to named executive
officers is allocated across components of base pay, short term incentive pay,
and long term stock-based compensation. The intent of the Committee is to
weight compensation for executive management more towards annual incentive pay
and long-term compensation in comparison to other employees in order to better
align executive pay with corporate goals and shareholder interests.
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. We periodically review, evaluate and update our
compensation peer group. For the compensation structure developed for 2008, our
compensation peer group consisted of the following companies, based upon the
universe of oil field service companies with comparable market capitalization
and revenues:
|
|
·
|
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 smaller 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.
2008
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, including life and health insurance benefits,
and a qualified 401(k) savings plan.
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 2008 were as follows:
|
Name
|
2008
Base Salary
|
|||
|
Jerry
Winchester
|
$ | 370,000 | ||
|
Cary
Baetz
|
$ | 275,000 | ||
|
Dewitt
Edwards
|
$ | 270,000 | ||
|
Allen
Duke
|
$ | 223,500 | ||
|
John
Hebert
|
$ | 191,360 | ||
|
Gabriel
Aldape (resigned May 2008)
|
$ | 193,250 | ||
We have entered into employment
agreements with Messrs. Winchester and Edwards. Mr. Edwards entered
into their employment agreement in April 2006. Mr. Winchester’s employment
agreement was originally entered into on October 1, 2003 and was renewed for an
additional two year period on October 1, 2006 and again on October 1, 2008. Mr.
Baetz has entered into a severance agreement with us in August 2008 that
provides him with certain post-termination compensation and benefits. Messrs.
Duke and Hebert are employed “at will”. Mr. Aldape’s compensation during 2008
and his post-termination compensation and benefits were paid out following his
resignations in May 2008, pursuant to an employment agreement we entered into
with him during March 2006. 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 the Compensation Committee approved an
increase in Mr. Winchester’s 2007 base salary to $335,000 per year and Mr.
Winchester agreed to forego his automobile allowance all effective as of January
1, 2007. Mr. Winchester’s base salary was increased to $370,000 per
year, effective June 1, 2008. 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.
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. Mr. Aldape was hired by us in March 2006 in
connection with our acquisition of HWC. The base salary for Mr. Aldape was also
established through mutual negotiations while taking into consideration the
salary paid to him by HWC at the time of our acquisition, the increased demands
on his time associated with the integration of HWC with us and the increased
responsibilities he would undertake as an executive officer of a publicly-held
company. Mr. Baetz commenced employment with us in August 2008. The base salary
for Mr. Baetz was established through mutual negotiations. Mr. Duke commenced
employment with us in May 1998. Mr. Hebert commenced employment with us in
October 2007.
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, we implemented an annual performance-incentive plan, or APIP, in 2006
and annually thereafter. 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. Every employee
that meets a minimum three month length of service participates in the APIP,
although on a prorated basis if service is less than one year.
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 groups of employees, including the named
executives. Awards are earned 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 February or 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. The award levels (as a percentage of base
salary) for Messrs. Winchester, Edwards, Baetz, Duke, Hebert and Aldape were
60-120%, 50-100%, 50-100%, 30-60%, 30-60%, and 50-100%, respectively
for 2008. 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. EBITDA threshold, goal and stretch target include the
expense for the amount of APIP awarded at such levels. We do not
disclose EBITDA targets for a variety of business and other reasons wherein such
disclosure could be harmful to our business and competitive
position.
In
addition to the APIP, the Compensation Committee may award cash bonuses either
during or after the fiscal year to reward individual performance or the
achievement of other company goals. In 2007, the Compensation
Committee, awarded discretionary cash bonuses to the three most senior named
executives totaling $100,000 for initiating and implementing growth initiatives,
such as start up of a rental equipment service line, geographic expansion of the
Company’s markets and completion of a public offering of the Company’s equity
securities. In 2008, there were no discretionary cash bonuses awarded
to the named executives.
The annual cash incentives awarded to
the named executive officers for fiscal years 2006, 2007 and 2008 are included
in the Summary Compensation Table below. The table reflects awards for 2006
performance that were paid under the APIP during March 2007, discretionary
bonuses for 2007 performance that were paid during February 2008, and awards for
2008 performance that will be paid under the APIP during March
2009.
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.
Our compensation committee utilizes
stock options, stock appreciation rights and restricted stock to provide
long-term incentives, each of which is discussed in more detail below. For 2006,
our Compensation Committee utilized stock options to provide long-term
incentives to executives.
During
2007, similar to many companies including several in our compensation peer
group, utilized only restricted stock, not options, as long-term incentives
during 2007. This was partly in response to the compensation
practices of peers as reflected in the Survey Data and partly the result of
judgments about the most effective method of utilizing the limited number of
shares available for grants under our equity incentive plans, as discussed
below. In 2008, the named executive officers received either, or
both, restricted stock and stock settled stock appreciation rights.
Our
Compensation Committee approves the individual grants for each executive and the
Long Term Incentive Plan for all employees. 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 valued
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, 2008, approximately 0.6
million shares were available for new grants under the Plans, and there were
approximately 6.4 million shares subject to outstanding awards 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 years 2006, 2007 and 2008
is included in the Summary Compensation Table. 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.
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 NYSE
Alternext US. 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
NSOs only at the fair market value of a share of common stock.
Stock options generally vest and become
exercisable in annual increments after the original grant date. Our recent
grants have included four-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 2008 are
shown in the Grants of Plan-Based Awards Table below. 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.
Stock
Appreciation Rights
A Stock Appreciation Right grants the
recipient the right to be paid an amount equal to the difference between the
values of the company’s underlying stock price on the date of the grant and on
the date of exercise. In the case of Stock-Settled Stock Appreciation Rights,
this amount is paid in the form of shares in the company stock. In
the event the exercise is settled with stock, the recipient may elect to a net
exercise in which the number of common shares issued to the recipient is reduced
equivalent to the amount of tax withholding required and paid by the
company. Stock Appreciation Rights may be exercised by the recipient
at any time on or after the vesting through the term of the Stock Appreciation
Right.
Restricted Stock Awards
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. Vesting of restricted stock generally results in taxable income
to the recipient in the tax year that the vesting occurs.
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:
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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 50.1% 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;
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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
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the
sale, lease, transfer or other disposition of all or substantially all of
our assets (other than to one of our wholly owned
subsidiaries).
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The acquisition of our common stock by
Oil States Energy Services, Inc., and its affiliates in connection with our
acquisition of HWC in March 2006 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 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 all
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 $15,500 in calendar year 2008
($16,500 in 2009), 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 100% of
the initial 4% contributed and 50% of the next 2% 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.
Comparative
Pay
For the
years 2006, 2007 and 2008, we have compared total compensation of our Chief
Executive Officer to the second most highly compensated employee and to the
lowest fulltime salaried employee. For the year 2008, according to the
Longnecker & Associates report, the first ratio for us at 1.83 compares
favorably to our peer group 50th
percentile ratio of 1.72 and range of 0.9 to 11.2.
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2008
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2007
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2006
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CEO
Compensation
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1,369,564 | 689,421 | 550,135 | |||||||||
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2nd
Highest Compensation
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748,010 | 392,682 | 616,241 | |||||||||
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Ratio
of CEO to 2nd
Highest
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1.83 | 1.76 | 0.89 | |||||||||
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Lowest
Compensation to fulltime salaried employees
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45,524 | 39,378 | 24,716 | |||||||||
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Ratio
of CEO to Lowest Compensation
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30.08 | 17.51 | 22.26 | |||||||||
Perquisites
During 2006, 2007 and part of 2008, our
interim chief financial officer received an automobile allowance for the use of
his personal vehicle 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 interim chief financial officer, because we required
that he commute on a regular basis from his home in Louisiana to our corporate
headquarters in Houston, Texas. Our Chief Executive Officer received
an automobile allowance for use of his personal vehicle while on company
business during 2006 and two months of 2007 when he agreed to terminate his
automobile allowance. 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.
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
and again on October 1, 2008. 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. Effective August 1, 2008, we entered into a severance agreement with Cary
Baetz. 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.
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 and again
on October 1, 2008. 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.
Compensation and Benefits
The salary payable to each of the named
executives is the amount set forth under the heading “2008 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, 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. On June 1, 2008, Mr. Winchester received 150,000
shares of restricted common stock under the 2004 Plan, the amount of shares
approximately equal to $324,000 of value as of the date of the award. On August
1, 2008, Mr. Winchester received an award of stock settled stock appreciate
rights (SSSARs) with 150,000 underlying shares under the 2004 Plan, the amount
of shares approximately equal to $387,000 of value as of the date of the
award.
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. On May 3, 2007, Mr. Edwards received 22,222 shares of restricted
common stock under the 2004 Plan which will vest in four equal installments on
each one-year anniversary of the date of grant. On June 1, 2008, Mr. Edwards
received 50,000 shares of restricted common stock under the 2004 Plan which will
vest in four equal installments on each one-year anniversary of the date of
grant. On August 1, 2008, Mr. Edwards received an award of SSSARs with 100,000
underlying shares under the 2004 Plan which will vest in four equal installments
on each one-year anniversary of the date of grant.
In conjunction with Mr. Baetz’s
acceptance of employment, on August 1, 2008, Mr. Baetz received a grant of
150,000 shares of restricted common stock under the 2004 Plan which will vest in
four equal installments on each one-year anniversary of the date of grant,
provided that Mr. Baetz has been continuously employed by us through each such
anniversary date.
On May 3, 2007, Mr. Duke received a
grant of 6,667 shares of restricted common stock under the 2004 Plan which will
vest in four equal installments on each one-year anniversary of the date of
grant, provided that Mr. Duke has been continuously employed by us through each
such anniversary date. On May 16, 2008, Mr. Duke received a grant of 12,000
shares of restricted common stock under the 2004 Plan which will vest in four
equal installments on each one-year anniversary of the date of grant, provided
that Mr. Duke has been continuously employed by us through each such anniversary
date.
In conjunction with Mr. Hebert’s
acceptance of employment, on October 16, 2007, Mr. Hebert received a grant of
20,000 shares of restricted common stock under the 2004 Plan which will vest in
four equal installments on each one-year anniversary of the date of grant,
provided that Mr. Hebert has been continuously employed by us through each such
anniversary date. On May 16, 2008, Mr. Hebert received a grant of 12,000 shares
of restricted common stock under the 2004 Plan which will vest in four equal
installments on each one-year anniversary of the date of grant, provided that
Mr. Hebert has been continuously employed by us through each such anniversary
date.
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. On May 3, 2007, Mr. Aldape received 22,222 shares of
restricted common stock under the 2004 Plan which will vest in four equal
installments on each one-year anniversary of the date of grant. The
unvested 16,666 shares of restricted common stock were forfeited upon Mr.
Aldape’s resignation.
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, Mr. Winchester may
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 Mr. Winchester or
Mr. Edwards 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 current term of his agreement (i.e., two years for Mr. Winchester and one
year for Mr. Edwards) 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) or (if earlier) the date
on which he secures coverage under another plan providing comparable
coverage.
If the
employment of Mr. Baetz is terminated by us without cause, Mr. Baetz will be
entitled to a lump sum payment equal to 6 months salary; a pro rata percentage
of 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 extending until the earliest
of (i) first anniversary of termination date, (ii) date on which Mr. Baetz
secures full-time employment that affords equivalent coverage, or (iii) date on
which Mr. Baetz ceases to be eligible for continuation of coverage under COBRA.
If the same employment is terminated by Mr. Baetz with good reason or following
a change in control, Mr. Baetz will be entitled to a lump-sum payment equal to
one-year’s salary; a pro rata percentage of any bonus to 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 extending until the earliest of (i) first anniversary of
termination date, (ii) date on which Mr. Baetz secures full-time employment that
affords equivalent coverage, or (iii) date on which Mr. Baetz ceases to be
eligible for continuation of coverage under COBRA.
On
November 3, 2008, we amended our severance policy to increase the lump sum
payments to 2.5 years of base pay plus earned APIP for Mr. Winchester, 2 years
of base pay plus earned APIP for Mr. Edwards and Mr. Baetz, and one year of base
pay plus earned APIP for other named executives
Had each of these executives terminated
employment as set forth above as of December 31, 2008, Mr. Winchester, Mr.
Edwards and Mr. Baetz would have received minimum payments totaling $925,000,
$540,000 and $550,000, 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 2008.
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 Annual Report on
Form 10-K.
|
Respectfully
submitted,
|
|
|
THE
COMPENSATION COMMITTEE
|
|
|
W.
Richard Anderson
|
|
|
E.
J. DiPaolo
|
|
|
Robert S. Herlin,
Chairman
|
Compensation
Committee Interlocks and Insider Participation
Robert S. Herlin,
W. Richard Anderson, and E. J. DiPaolo served on
our Compensation Committee for all of 2008. There were no
Compensation Committee interlocks or insider (employee) participation during
2008.
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, 2008, 2007 and 2006.
|
Name and Principal Position
|
Year
|
Salary
|
Bonus (1)
|
Stock Awards (2)
|
Option Awards (2)
|
Non-Equity Incentive Plan Compensation Earnings
(3)
|
All Other Compensation (4)
|
Total
|
|||||||||||||||||||||||
|
Jerry
Winchester
President
and
Chief
Executive Officer
|
2008
2007
2006
|
$
|
370,000
335,000
250,000
|
$
|
0
49,731
0
|
$
|
324,000
300,000
0
|
$
|
207,000
0
0
|
$
|
444,000
0
275,000
|
$
|
24,564
4,690
25,135
|
$
|
1,369,564
689,42
550,135
|
||||||||||||||||
|
Dewitt
Edwards
Chief
Operating
Officer
|
2008
2007
2006
|
270,000
233,100
216,250
|
0
28,837
0
|
108,000
45,777
0
|
74,700
76,476
171,323
|
270,000
0
222,000
|
25,310
8,492
6,668
|
748,010
392,682
616,241
|
|||||||||||||||||||||||
|
Cary
Baetz
Chief
Financial Officer
|
2008
|
114,583 | (5) | 0 | 387,450 | 0 | 114,521 | 11,071 | 627,625 | ||||||||||||||||||||||
|
Allen
Duke
Sr.
VP, Global Business
Development
and Delivery
|
2008
|
198,174 | (8) | 0 | 25,200 | 0 | 134,100 | 13,945 | 371,419 | ||||||||||||||||||||||
|
John
Hebert
Sr.
VP, Resource
Management
|
2008
|
171,573 | 0 | 25,200 | 0 | 114,816 | 10,734 | 322,323 | |||||||||||||||||||||||
|
Gabriel
Aldape
Interim
Chief
Financial
Officer (6)
|
2008
2007
2006
|
249,615
173,250
137,769
|
(7) |
0
21,433
0
|
0
45,777
0
|
0
30,317
126,127
|
72,469
0
165,000
|
33,692
29,083
16,977
|
355,776
299,860
445,873
|
||||||||||||||||||||||
|
(1)
|
For
a discussion of the bonus compensation awarded to the named executive
officers see “Compensation Discussion and Analysis – Annual Cash
Incentives”.
|
|
(2)
|
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 years ended December 31, 2008, 2007, and 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. Option awards
include SSARS.
|
|
(3)
|
These
amounts represent the annual incentive performance plan
(APIP).
|
|
(4)
|
Includes
car allowances, life insurance premiums, moving expense and matching
contributions to 401(k) plans.
|
|
(5)
|
Mr.
Baetz joined the company on August 1, 2008, and the salary amount
represents pro rata service.
|
|
(6)
|
Mr.
Aldape resigned in May 2008.
|
|
(7)
|
Mr.
Aldape joined the company on March 3, 2006, and the 2006 salary amounts
represent pro rata service.
|
|
(8)
|
This
amount includes $7,812 in site pay bonus in
2008.
|
Grants
of Plan Based Awards
The table below sets forth
information
regarding grants of plan-based awards made to our named executive officers
during 2008.
|
Estimated Future Payouts Under Equity Incentive
Plan Awards
|
All Other Stock Awards: Number of Shares of Stock
or Units (#)
|
All Other Option Awards: Number of Securities
Underlying Options (2) (#)
|
Exercise or Base Price of Option
Awards
($ / Sh)
|
Grant Date Fair Value of Stock and Option Awards
(1) ($)
|
|||||||||||||||||||
|
Name
|
Grant Date
|
Threshold
(#)
|
Target
(#)
|
Maxi-mum
(#)
|
|
||||||||||||||||||
|
Jerry
Winchester (3)
|
5/21/08
8/1/08
|
150,000 |
150,000
|
2.58 |
324,000
207,000
|
||||||||||||||||||
|
Dewitt
Edwards (4)
|
5/21/08
8/1/08
|
50,000 | 100,000 | 2.58 |
108,000
74,700
|
||||||||||||||||||
|
Cary
Baetz (5)
|
8/1/08
|
150,000 | 387,450 | ||||||||||||||||||||
|
Allen
Duke (6)
|
5/16/08
|
12,000 | 25,200 | ||||||||||||||||||||
|
John
Hebert (7)
|
5/16/08
|
12,000 | 25,200 | ||||||||||||||||||||
|
(1)
|
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
2008 are calculated in accordance with SFAS
123(R).
|
|
(2)
|
All
Other Option Awards includes SSARs.
|
|
(3)
|
Effective
May 21, 2008, Mr. Winchester received an award of 150,000 restricted
shares, pursuant to the 2004 Long Term Incentive Plan, vesting over four
years, 25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012. Effective August 1, 2008, Mr. Winchester received an award of SSARs
with 150,000 underlying shares, pursuant to the 2004 Long Term Incentive
Plan, vesting over four years, 25% on each grant anniversary date in each
of 2009, 2010, 2011 and 2012.
|
|
(4)
|
Effective
May 21, 2008, Mr. Edwards received an award of 50,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and 2012.
Effective August 1, 2008, Mr. Edwards received an award of SSARs with
100,000 underlying shares, pursuant to the 2004 Long Term Incentive Plan,
vesting over four years, 25% on each grant anniversary date in each of
2009, 2010, 2011 and 2012.
|
|
(5)
|
Effective
August 1, 2008, Mr. Baetz received an award of 150,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
|
(6)
|
Effective
May 16, 2008, Mr. Duke received an award of 12,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
|
(7)
|
Effective
May 16, 2008, Mr. Hebert received an award of 12,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
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, 2008.
|
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
($) (1)
|
Equity Incentive Plan Awards: Number of Unearned
Shares, Units or Other Rights That Have Not Vested
(#)
|
Equity Incentive Plan Awards: Market or Payout
Value of Unearned Shares, Units or Other Rights That Have Not
Vested
($)
|
||||||||||||||||
|
Jerry
Winchester
|
500,000
37,500
|
150,000 | (2) |
1.20
3.00
2.58
|
10/01/13
02/15/10
7/31/14
|
72,816
150,000
|
(3)
(4)
|
85,195
175,500
|
|||||||||||||||||
|
Dewitt
Edwards
|
300,000
80,000
|
40,000
100,000
|
(5)
(2)
|
1.13
1.71
2.58
|
10/12/11
5/22/12
7/31/14
|
16,667
50,000
|
(6)
(7)
|
19,500
58,500
|
|||||||||||||||||
|
Cary
Baetz
|
150,000 | (8) | 175,500 | ||||||||||||||||||||||
|
Allen
Duke
|
4,000
175,000
100,000
|
3.00
0.67
1.04
|
2/14/10
11/1/10
7/7/11
|
5,000
12,000
|
(9)
(10)
|
5,850
14,040
|
|||||||||||||||||||
|
John
Hebert
|
15,000
12,000
|
(11)
(12)
|
17,550
14,040
|
||||||||||||||||||||||
|
(1)
|
Market
value calculation is the number of shares times the closing market value
on the last trading day of 2008, which was
$1.17.
|
|
(2)
|
Shares
underlying SSARs.
|
|
(3)
|
Effective
March 1, 2007, Mr. Winchester received a restricted stock award of 145,632
shares of common stock, pursuant to the 2004 Long Term Incentive Plan, of
which 25% vest on each grant anniversary date in each of 2008, 2009, 2010
and 2011.
|
|
(4)
|
Effective
June 1, 2008, Mr. Winchester received a restricted stock award of 150,000
hares of common stock, pursuant to the 2004 Long Term Incentive Plan, of
which 25% vest on each grant anniversary date in each of 2009, 2010, 2011
and 2012.
|
|
(5)
|
Will
vest as to 40,000 shares on May 22,
2009.
|
|
(6)
|
Effective
May 3, 2007, Mr. Edwards received an award of 22,222 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2008, 2009, 2010 and
2011.
|
|
(7)
|
Effective
June 1, 2008, Mr. Edwards received an award of 50,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
|
(8)
|
Effective
August 1, 2008, Mr. Baetz received an award of 150,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four years,
25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
|
(9)
|
Effective
May 3, 2007, Mr. Duke received an award of 6,667 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four
years, 25% on each grant anniversary date in each of 2008, 2009, 2010 and
2011.
|
|
(10)
|
Effective
May 16, 2008, Mr. Duke received an award of 12,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four
years, 25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
|
(11)
|
Effective
October 16, 2007, Mr. Hebert received an award of 20,000 restricted
shares, pursuant to the 2004 Long Term Incentive Plan, vesting over four
years, 25% on each grant anniversary date in each of 2008, 2009, 2010 and
2011.
|
|
(12)
|
Effective
May 16, 2008, Mr. Hebert received an award of 12,000 restricted shares,
pursuant to the 2004 Long Term Incentive Plan, vesting over four
years, 25% on each grant anniversary date in each of 2009, 2010, 2011 and
2012.
|
Option
exercises and stock vested
The following table summarizes options
exercised and stock vested in 2008.
|
Option Awards
|
Stock Awards
|
|||||||||||
|
Name
|
Number of Shares
Acquired on Exercise
(#)
|
Value Realized
on Exercise
(1)($)
|
Number of Shares
Acquired on Vesting
(#)
|
Value Realized
on Vesting
(2)($)
|
||||||||
|
Jerry
Winchester
|
36,408 | 53,520 | ||||||||||
|
Dewitt
Edwards
|
5,556 | 11,779 | ||||||||||
|
Cary
Baetz
|
— | — | ||||||||||
|
Allen
Duke
|
1,667 | 3,534 | ||||||||||
|
John
Hebert
|
5,000 | 8,150 | ||||||||||
|
Gabriel
Aldape
|
150,000
|
328,500
|
5,556 | 11,779 | ||||||||
(1) Value
realized calculation is the number of shares times the closing market value on
the date of exercise.
(2) Value
realized calculation is the number of shares times the closing market value on
the date of vesting.
DIRECTOR
COMPENSATION
2008
Director Compensation
The table below sets forth certain
information concerning the compensation earned in 2008 by our non-employee
directors who served in 2008.
|
Name
|
Fees
Earned
or
Paid
in
Cash
|
Stock
Awards
|
Option
Awards
|
Non-Equity
Incentive
Plan
Compensation
|
All
Other
Compensation
|
Total
|
||||||||||||||||||
|
Douglas
Swanson
|
$ | 69,000 | $ | 40,000 | — | — | — | $ | 109,000 | |||||||||||||||
|
Robert
Croyle
|
$ | 49,000 | $ | 40,000 | — | — | — | $ | 89,000 | |||||||||||||||
|
K.
Kirk Krist
|
$ | 44,000 | $ | 40,000 | — | — | — | $ | 84,000 | |||||||||||||||
|
Richard
Anderson
|
$ | 64,000 | $ | 40,000 | — | — | — | $ | 104,000 | |||||||||||||||
|
Robert
Herlin
|
$ | 59,000 | $ | 40,000 | — | — | — | $ | 99,000 | |||||||||||||||
|
E.J.
DiPaolo
|
$ | 54,000 | $ | 40,000 | — | — | — | $ | 94,000 | |||||||||||||||
COMPENSATION
OF DIRECTORS
On May 31, 2006, the Board of Directors
approved a compensation plan for outside directors that compensates each
non-employee director with an annual retainer of $20,000, plus $40,000 of our
common stock awarded annually under the Non-Employee Director stock incentive
plan, $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 receives 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 and the Chairman of the Nominating & Corporate
Governance Committee each receive an additional $5,000 annual
fee. Mr. Swanson elected not to receive compensation for his board
service prior to May 1, 2007. He elected to begin receiving
compensation for his board service commencing May 1, 2007 after his retirement
from Oil States. On May 21, 2008, after reviewing a study of the Company’s
independent director compensation compared to our peer group prepared by
Longnecker & Associates, which indicated that the annual retainer, annual
stock grant and Board Chairman retainer were substantially below the 50% level
of our peer group, the Compensation Committee elected to increase the annual
stock award for outside directors from $30,000 to $40,000 of our common stock,
effective as of the 2008 award. Although an increase in the
Chairman’s annual retainer was found to be justified and appropriate based upon
the Longnecker report, Mr. Swanson elected to forego any increase.
Non-Employee Director Stock
Incentive Plan. In 2006, our board of directors adopted and our
shareholders approved the amended Non-Employee Director Stock Incentive Plan
(the "Directors' Plan"). 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. Shares of restricted stock are granted on an annual basis
and vest in full on the first anniversary of issuance. As indicated
above, our current compensation plans for non-employee directors utilizes annual
restricted stock awards. Through December 31, 2008, there were
111,114 shares of restricted stock outstanding under the Directors
Plan.
The Directors’ Plan also permits us to
issue stock options. Options issued under the Director’s Plan 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, 2008, there were 211,250
shares underlying options outstanding under the plan and 628,358 shares
remaining available for issuance under the plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Equity
Compensation Plan Information
The following table sets forth certain
information as of December 31, 2008 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)
|
4,898,000 | $ | 1.10 | 608,619 | ||||||||
|
Equity
compensation plans not approved by security holders
|
||||||||||||
|
Total
|
4,898,000 | $ | 1.10 | 608,619 | ||||||||
|
(1)
|
Represents
shares under the Boots & Coots 2004 Long Term Incentive Plan, as
amended, 2006 Non-Employee Director Stock Incentive Plan, 2000 Long Term
Incentive Plan and Outside Directors Option
Plan.
|
The
following table sets forth, as of March 12, 2008 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
|
|||||
|
Officers
and Directors:
|
||||||||
|
Douglas
E. Swanson
|
39,645 | (2) | * | |||||
|
Jerry
L. Winchester
|
1,127,443 | (3) | 1.4 | % | ||||
|
W.
Richard Anderson
|
195,431 | (4) | * | |||||
|
E.
J. DiPaolo
|
152,628 | (5) | * | |||||
|
Robert
S. Herlin
|
152,628 | (5) | * | |||||
|
K.
Kirk Krist
|
56,019 | (6) | * | |||||
|
Robert
G. Croyle
|
41,735 | (2) | * | |||||
|
Cary
Baetz
|
200,000 | (7) | * | |||||
|
Dewitt
H. Edwards
|
452,222 | (8) | * | |||||
|
Allen
C. Duke
|
297,667 | (9) | * | |||||
|
John
K. Hebert
|
32,000 | (10) | * | |||||
|
All
executive officers and directors as a group (eleven
people)
|
2,747,418 | (11) | 3.5 | % | ||||
________________
* less
than 1%
|
(1)
|
Unless
otherwise noted, the business address for purposes hereof for each person
listed is 7908 N. Sam Houston Parkway W., 5th
Floor, Houston, Texas 77064. Beneficial owners have sole voting and
investment power with respect to the shares unless otherwise
noted.
|
|
(2)
|
Includes
18,519 shares of restricted stock.
|
|
(3)
|
Includes
options to purchase 537,500 shares of common stock exercisable within 60
days and 222,816 shares of restricted
stock.
|
|
(4)
|
Includes
options to purchase 41,250 shares of common stock exercisable within 60
days and 18,519 shares of restricted
stock.
|
|
(5)
|
Includes
options to purchase 103,750 shares of common stock exercisable within 60
days and 18,519 shares of restricted
stock.
|
|
(6)
|
Consists
of options to purchase 37,500 shares of common stock exercisable within 60
days and 18,519 shares of restricted
stock.
|
|
(7)
|
Includes
150,000 shares of restricted stock.
|
|
(8)
|
Includes
options to purchase 380,000 shares of common stock exercisable within 60
days and 66,666 shares of restricted
stock.
|
|
(9)
|
Includes
options to purchase 279,000 shares of common stock exercisable within 60
days and 17,000 shares of restricted
stock
|
|
(10)
|
Includes
27,000 shares of restricted stock
|
|
(11)
|
Includes
options to purchase 1,482,750 shares of common stock exercisable within 60
days and 594,596 shares of restricted common
stock.
|
In connection with our acquisition of
the hydraulic well control business of Oil States International, Inc. in March
2006, we issued a $21.2 million unsecured subordinated promissory note to Oil
States Energy Services, Inc., a subsidiary of Oil States International,
Inc. The note bears interest at a rate of 10% per annum, and requires
a one-time principal payment on September 9, 2010. During 2008, we
paid interest due on the note in the amount of approximately $2,117,000.
The note was repaid in full on February 10, 2009.
The information set forth under the
heading “Director Independence and Financial Experts” under Item 10 is
incorporated herein by reference.
During
2008 and 2007, we incurred the following fees for services performed by UHY LLP
(“UHY”):
|
Fee Type
|
2008
|
2007
|
||||||
|
Audit
Fees
|
$ | 884,000 | $ | 907,000 | ||||
|
Tax
Fees
|
— | — | ||||||
|
Other
Fees
|
— | — | ||||||
|
Total
Fees
|
$ | 884,000 | $ | 907,000 | ||||
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, 2008 and December 31, 2007, and the reviews of our financial statements
included in our Forms 10-Q for all quarters of fiscal 2008 and
2007.
Tax Fees - We use an
independent consultant other than UHY to perform all tax related consulting
work.
All Other Fees – No
other fees were paid to UHY during the year ending December 31,
2008.
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, 2008, 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, 2008,
2007, and 2006. 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
|
(a)
|
1.
Consolidated financial statements for the three years in the period ended
December 31, 2008, included after signature
page.
|
|
|
2.
|
Financial
statement schedules included in consolidated financial
statements.
|
|
|
3.
|
Exhibit
Index
|
|
(b)
|
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.)
|
|
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
|
—
|
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.)
|
|
10.09
|
―
|
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.)
|
|
10.10
|
―
|
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.)
|
|
10.11**
|
―
|
Executive
Employment Agreement of Gabriel Aldape (Incorporated herein by reference
to exhibit 10.1 on Form 10-Q filed August 14,
2006.)
|
|
10.12**
|
―
|
Executive
Employment Agreement of Dewitt H. Edwards (Incorporated herein by
reference to exhibit 10.1 on Form 8-K filed July 7,
2006.)
|
|
10.13**
|
―
|
2004
Long Term Incentive Plan 2,000,000 Share amendment (Incorporated herein by
reference to exhibit 4.1 of Form S-8 filed November 14,
2006.)
|
|
10.14**
|
—
|
2006
Non-Employee Directors Stock Incentive Plan (Incorporated herein by
reference to exhibit 4.1 of Form S-8 filed November 14,
2006.).
|
|
10.15**
|
Amendment
to Executive Employment Agreement of Jerry Winchester (Incorporated herein
by reference to item 5.02 on Form 8-K filed March 7,
2007.)
|
|
|
10.16
|
—
|
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. (Incorporated herein by reference to exhibit 10.17
on Form 10-K filed March 23, 2007.)
|
|
10.17
|
—
|
Amendment
2 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. (Incorporated herein by reference to exhibit 10.18
on Form 10-K filed March 23, 2007.)
|
|
10.18
|
—
|
Amendment
3 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. (Incorporated herein by reference to exhibit 10.19
on Form 10-K filed March 23, 2007.)
|
|
10.19
|
—
|
Amendment
4 to the Credit and Security Agreement dated October 31,2007 by and
between Boots & Coots International Well Control, Inc. and Wells Fargo
Bank, National Association (Incorporated herein by reference to exhibit
10.20 on Form 10-K filed
March 12, 2008.)
|
|
10.20
|
―
|
Severance
Agreement dated August 1, 2008 by and between Boots & Coots
Services,
LLC. And Cary Baetz. (Incorporated herein by reference to exhibit 10.1 of
Form 8-K filed August 5, 2008.)
|
|
10.21**
|
— |
2004
Long Term Incentive Plan (amended and restated as of August 1, 2008)
(Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
6, 2008)
|
|
10.22**
|
— |
Form
of Stock Appreciation Rights Agreement under 2004 Long Term Incentive Plan
(Incorporated herein by reference to exhibit 10.2 of Form 8-K filed August
6, 2008)
|
|
10.23
|
―
|
Credit
and Security Agreement dated February 10, 2009 by and between Boots &
Coots International Well Control, Inc. and Wells Fargo Bank,
National Association. (Incorporated herein by reference to exhibit 10.01
of Form 8-K filed February 17,
2009.)
|
|
*10.24
|
―
|
Subordinated
Note Agreement between Boots & Coots International Well Control, Inc.
and John
Wright Company dated February 10, 2009.
|
|
*21.01
|
—
|
List
of subsidiaries of the company.
|
|
*23.1
|
―
|
Consent
of UHY
LLP
|
|
*31.1
|
―
|
§302
Certification by Jerry Winchester
|
|
*31.2
|
―
|
§302
Certification by Cary Baetz
|
|
*32.1
|
―
|
§906
Certification by Jerry Winchester
|
|
*32.2
|
―
|
§906
Certification by Cary
Baetz
|
*Filed
herewith
**Indicates
management compensation plan filed pursuant to Item 608(b)(10) of Regulation
S-K.
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 12, 2009
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
12, 2009
|
||
|
Douglas
E. Swanson
|
||||
|
By: /s/ JERRY WINCHESTER
|
Chief
Executive Officer and Director
|
March
12, 2009
|
||
|
Jerry
Winchester
|
||||
|
By: /s/ CARY BAETZ
|
Chief
Financial Officer
|
March
12, 2009
|
||
|
Cary
Baetz
|
|
|||
|
By: /s/ ROBERT HERLIN
|
Director
|
March
12, 2009
|
||
|
Robert
Stevens Herlin
|
||||
|
By: /s/ E.J. DIPAOLO
|
Director
|
March
12, 2009
|
||
|
E.J.
DiPaolo
|
||||
|
By: /s/ W. RICHARD ANDERSON
|
Director
|
March
12, 2009
|
||
|
W.
Richard Anderson
|
|
|||
|
By: /s/ K. KIRK KRIST
|
Director
|
March
12, 2009
|
||
|
K.
Kirk Krist
|
||||
|
By: /s/ ROBERT G. CROYLE
|
Director
|
March
12, 2009
|
||
|
Robert
G. Croyle
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of
Boots & Coots International Well Control, Inc.:
We have
audited Boots & Coots International Well Control, Inc. (“the Company”)
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in Part
II, Item 9A of this Form 10-K. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Boots & Coots International Well Control, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Boots &
Coots International Well Control, Inc. as of December 31, 2008 and 2007, and the
related consolidated statements of income, stockholders’ equity and cash flows
for each of the three years in the period ended December 31, 2008, and our
report, dated March 12, 2009, expressed an unqualified opinion on those
consolidated financial statements.
|
/s/ UHY
LLP
|
Houston,
Texas
March 12,
2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Boots & Coots International Well Control, Inc.:
We have
audited the accompanying consolidated balance sheets of Boots & Coots
International Well Control, Inc. (“the Company”) as of December 31, 2008 and
2007, and the related consolidated statements of income, stockholders’ equity
and cash flows for each of the three years in the period ended December 31,
2008. 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. as of December 31, 2008 and 2007,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Boots & Coots
International Well Control, Inc. internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 12, 2009 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
|
/s/ UHY LLP
|
Houston,
Texas
March 12,
2009
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands except share and per share amounts)
ASSETS
|
December 31,
2008
|
December 31,
2007
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 6,220 | $ | 6,501 | ||||
|
Receivables,
net
|
70,940 | 45,044 | ||||||
|
Inventory
|
2,746 | 1,385 | ||||||
|
Prepaid
expenses and other current assets
|
10,801 | 8,796 | ||||||
|
Total
current assets
|
90,707 | 61,726 | ||||||
|
PROPERTY
AND EQUIPMENT, net
|
80,469 | 60,753 | ||||||
|
GOODWILL
|
9,150 | 8,886 | ||||||
|
INTANGIBLE ASSETS,
net
|
3,960 | 4,472 | ||||||
|
OTHER
ASSETS
|
687 | 578 | ||||||
|
Total
assets
|
$ | 184,973 | $ | 136,415 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 5,523 | $ | 1,940 | ||||
|
Accounts
payable
|
19,988 | 12,020 | ||||||
|
Income
tax payable
|
5,649 | 3,161 | ||||||
|
Accrued
liabilities
|
19,378 | 9,922 | ||||||
|
Total
current liabilities
|
50,538 | 27,043 | ||||||
|
LONG-TERM
DEBT, net of current maturities
|
5,009 | 4,985 | ||||||
|
RELATED
PARTY LONG-TERM DEBT
|
21,166 | 21,166 | ||||||
|
DEFERRED
TAXES
|
5,799 | 5,658 | ||||||
|
OTHER
LIABILITIES
|
700 | 520 | ||||||
|
Total
liabilities
|
83,212 | 59,372 | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS'
EQUITY:
|
||||||||
|
Preferred
stock ($.00001 par value, 5,000,000 shares authorized, zero shares issued
and outstanding at December 31, 2008 and 2007)
|
— | — | ||||||
|
Common
stock ($.00001 par value, 125,000,000 shares authorized, 76,648,000 and
74,950,000 shares issued and outstanding at December 31, 2008 and 2007,
respectively)
|
1 | 1 | ||||||
|
Additional
paid-in capital
|
128,108 | 125,209 | ||||||
|
Accumulated
other comprehensive loss
|
(1,234 | ) | (1,234 | ) | ||||
|
Accumulated
deficit
|
(25,114 | ) | (46,933 | ) | ||||
|
Total
stockholders' equity
|
101,761 | 77,043 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 184,973 | $ | 136,415 | ||||
See accompanying notes to consolidated
financial statements.
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share and share amounts)
|
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
Year
Ended
December 31,
2006
|
||||||||||
|
REVENUES
|
$ | 209,237 | $ | 105,296 | $ | 97,030 | ||||||
|
COST
OF SALES, excluding depreciation and amortization
|
129,018 | 62,581 | 52,281 | |||||||||
|
OPERATING
EXPENSES
|
30,599 | 17,792 | 15,597 | |||||||||
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
10,304 | 5,904 | 4,118 | |||||||||
|
FOREIGN
CURRENCY TRANSLATION
|
189 | 276 | 259 | |||||||||
|
DEPRECIATION
AND AMORTIZATION
|
9,307 | 6,051 | 4,883 | |||||||||
| 50,399 | 30,023 | 24,857 | ||||||||||
|
OPERATING
INCOME
|
29,820 | 12,692 | 19,892 | |||||||||
|
INTEREST
EXPENSE
|
2,546 | 2,584 | 3,036 | |||||||||
|
OTHER
(INCOME) AND EXPENSE, net
|
3 | (532 | ) | (176 | ) | |||||||
|
INCOME
BEFORE INCOME TAXES
|
27,271 | 10,640 | 17,032 | |||||||||
|
INCOME
TAX EXPENSE
|
5,452 | 2,749 | 5,867 | |||||||||
|
NET
INCOME
|
21,819 | 7,891 | 11,165 | |||||||||
|
PREFERRED
DIVIDEND REQUIREMENTS
|
— | — | 616 | |||||||||
|
NET
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
$ | 21,819 | $ | 7,891 | $ | 11,781 | ||||||
|
EARNINGS
PER SHARE:
|
||||||||||||
|
Basic
|
$ | 0.29 | $ | 0.11 | $ | 0.22 | ||||||
|
Diluted
|
$ | 0.28 | $ | 0.11 | $ | 0.21 | ||||||
|
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
||||||||||||
|
Basic
|
75,845,000 | 70,039,000 | 53,772,000 | |||||||||
|
Diluted
|
78,040,000 | 72,114,000 | 55,036,000 | |||||||||
See accompanying notes to consolidated
financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years
Ended December 31, 2008, 2007 and 2006
(in
Thousands)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||
|
Preferred Stock
|
Common Stock
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||||||||||||||||
|
Paid
in
|
Accumulated
|
Comprehensive
|
Deferred
|
Treasury
Stock
|
Stockholders’
|
|||||||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Compensation
|
Shares
|
Amount
|
Equity
|
||||||||||||||||||||||||||||||||||
|
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 of business
|
— | — | 26,462 | 1 | 26,461 | — | — | — | — | — | 26,462 | |||||||||||||||||||||||||||||||||
|
Preferred
stock dividends reversed
|
— | — | — | — | (616 | ) | 616 | — | — | — | — | — | ||||||||||||||||||||||||||||||||
|
Reversal
of deferred compensation with adoption of SFAS 123(R)
|
— | — | — | — | (225 | ) | — | — | 225 | — | — | — | ||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
— | — | 150 | — | 1,519 | — | — | — | — | — | 1,519 | |||||||||||||||||||||||||||||||||
|
Redemption
of preferred stock and conversion of preferred 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 | |||||||||||||||||||||||
|
Common
stock options exercised
|
— | — | 727 | — | 607 | — | — | — | — | — | 607 | |||||||||||||||||||||||||||||||||
|
Restricted
common stock issued
|
— | — | 701 | — | 443 | — | — | — | — | — | 443 | |||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
— | — | — | — | 833 | — | — | — | — | — | 833 | |||||||||||||||||||||||||||||||||
|
Issuance
of common stock, net of offering costs
|
— | — | 14,950 | — | 28,847 | — | — | — | — | — | 28,847 | |||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | 7,891 | — | — | — | — | 7,891 | |||||||||||||||||||||||||||||||||
|
BALANCES, December 31,
2007
|
— | $ | — | 75,564 | $ | 1 | $ | 125,209 | $ | (46,933 | ) | $ | (1,234 | ) | $ | — | — | $ | — | $ | 77,043 | |||||||||||||||||||||||
|
Common stock
options exercised
|
— | — | 1,444 | — | 1,274 | — | — | — | — | — | 1,274 | |||||||||||||||||||||||||||||||||
|
Restricted
common stock issued
|
— | — | 131 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
|
Restricted
common stock forfeited
|
— | — | (39 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
— | — | — | — | — | — | — | — | (25 | ) | (37 | ) | (37 | ) | ||||||||||||||||||||||||||||||
|
Cancellation
of treasury stock
|
— | — | (25 | ) | — | (37 | ) | — | — | — | 25 | 37 | — | |||||||||||||||||||||||||||||||
|
Excess
tax benefit for FAS 123R
|
— | — | — | — | 265 | — | — | — | — | — | 265 | |||||||||||||||||||||||||||||||||
|
Stock
based compensation
|
— | — | — | — | 1,397 | — | — | — | — | — | 1,397 | |||||||||||||||||||||||||||||||||
|
Net
income
|
— | — | — | — | — | 21,819 | — | — | — | — | 21,819 | |||||||||||||||||||||||||||||||||
|
BALANCES, December 31,
2008
|
— | $ | — | 77,075 | $ | 1 | $ | 128,108 | $ | (25,114 | ) | $ | (1,234 | ) | $ | — | — | $ | — | $ | 101,761 | |||||||||||||||||||||||
BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
Year
Ended
December 31,
2008
|
Year
Ended
December 31,
2007
|
Year
Ended
December 31,
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
|
$ | 21,819 | $ | 7,891 | $ | 11,165 | ||||||
|
Adjustments
to reconcile net income to net cash provided
operating activities
|
||||||||||||
|
Depreciation
and amortization
|
9,307 | 6,051 | 4,883 | |||||||||
|
Deferred
tax provision (benefit)
|
121 | (878 | ) | (590 | ) | |||||||
|
Stock
based compensation
|
1,397 | 1,276 | 1,519 | |||||||||
|
Bad
debt provision (recovery)
|
2,177 | (109 | ) | (230 | ) | |||||||
|
Excess
tax benefit from FAS 123R
|
(265 | ) | — | — | ||||||||
|
Reversal
of troubled debt restructuring interest accrual
|
— | — | (598 | ) | ||||||||
|
Amortization
of deferred loan cost
|
— | — | 809 | |||||||||
|
Other
non-cash charges
|
(263 | ) | — | 143 | ||||||||
|
Gain
on sale or disposal of assets
|
(215 | ) | (2,449 | ) | (516 | ) | ||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Receivables
|
(28,073 | ) | (3,353 | ) | (20,842 | ) | ||||||
|
Inventory
|
(1,361 | ) | (420 | ) | (128 | ) | ||||||
|
Prepaid
expenses and current assets
|
(2,005 | ) | (4,069 | ) | (2,509 | ) | ||||||
|
Other
assets and goodwill
|
(110 | ) | (504 | ) | 412 | |||||||
|
Accounts
payable and accrued liabilities
|
20,377 | (1,290 | ) | 11,155 | ||||||||
|
Net
cash provided by operating activities
|
22,906 | 2,146 | 4,673 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Cash
acquired (spent) in connection with acquisition
|
— | (10,694 | ) | 4,366 | ||||||||
|
Equipment
additions
|
(28,537 | ) | (21,309 | ) | (6,882 | ) | ||||||
|
Insurance
proceeds from disposal of property and equipment
|
— | 4,605 | — | |||||||||
|
Proceeds
from sale or disposal of property and equipment
|
417 | 333 | 829 | |||||||||
|
Net
cash used in investing activities
|
(28,120 | ) | (27,065 | ) | (1,687 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Payments
of senior debt
|
— | — | (750 | ) | ||||||||
|
Payment
of subordinated debt
|
— | — | (5,100 | ) | ||||||||
|
Payments
of term loan
|
(1,940 | ) | (2,482 | ) | (1,351 | ) | ||||||
|
Revolving
credit borrowings, net
|
5,374 | (859 | ) | 1,917 | ||||||||
|
Principal
payment under capital lease obligations
|
(3 | ) | — | — | ||||||||
|
Proceeds
from term loan
|
— | — | 9,700 | |||||||||
|
Purchase
of Treasury Stock
|
(37 | ) | — | — | ||||||||
|
Excess
tax benefit from FAS 123R
|
265 | — | — | |||||||||
|
Redemption
of preferred stock
|
— | — | (5,299 | ) | ||||||||
|
Net
proceeds from issuance of common stock
|
— | 28,847 | — | |||||||||
|
Decrease
(Increase) in restricted cash
|
— | 274 | (273 | ) | ||||||||
|
Proceeds
from exercise of stock options
|
1,274 | 607 | 639 | |||||||||
|
Net
cash provided by (used in) financing activities
|
4,933 | 26,387 | (517 | ) | ||||||||
|
Impact
of foreign currency on cash
|
— | — | — | |||||||||
|
NET
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(281 | ) | 1,468 | 2,469 | ||||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
6,501 | 5,033 | 2,564 | |||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$ | 6,220 | $ | 6,501 | $ | 5,033 | ||||||
|
SUPPLEMENTAL
CASH FLOW DISCLOSURES:
|
||||||||||||
|
Cash
paid for interest
|
$ | 2,758 | $ | 2,916 | $ | 2,874 | ||||||
|
Cash
paid for income taxes
|
4,876 | 6,769 | 4,593 | |||||||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||||||
|
Reversal
of preferred stock dividends accrued
|
— | — | (616 | ) | ||||||||
|
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 | |||||||||
|
Capital
lease obligations for equipment additions
|
$ | 177 | — | — | ||||||||
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”),
provides 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 customers include major and independent oil and gas
companies in the U.S. market and major international and foreign national oil
and gas producers as well as other oilfield service companies. Our
service lines are organized into three business segments: pressure control, Well
Intervention and Equipment Services. . Our Pressure
Control 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. Our Well Intervention segment consists of services that are
designed to enhance production for oil and gas operators and consists primarily
of hydraulic workover and snubbing services. Our Equipment Services segment,
designed for safer and more efficient production under high pressure situations,
consists primarily of pressure control equipment rentals and
services.
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, 2008, restricted cash totaled $61,000
compared to restricted cash of $29,000 at December 31, 2007, and both relate to
letters of credit and were included in other assets.
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.
Cost of sales 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, and
repairs. 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 costs associated with
sub-contracted work as performed. WELLSURE revenues represented
approximately 1% of our total revenues in 2008.
Receivables and Concentration of
Credit Risk – Based on the nature of its customer base, the Company does
not believe that it has any significant concentrations of credit risk other than
its concentration in the oil and gas industry and as disclosed in Note
M. The Company evaluates the credit-worthiness of its major new and
existing customers’ financial condition and, generally, the Company does not
require collateral, but may require letters of credit for certain international
customers.
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. If a
trade receivable is deemed to be uncollectible, such receivable is charged off
against the allowance for doubtful accounts.
Inventories -
Inventories consist of spare parts and commodities and are carried at the lower
of cost or market. The cost of inventories is determined on an
average cost or specific-identification method.
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 leasehold improvements (5-31 years),
equipment (3-15 years), firefighting equipment (3-8 years), furniture, fixtures
and office furnishing (3-5 years) and vehicles (3-5 years). Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
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 associated with the March 2006 acquisition
of the hydraulic well control business (HWC) of Oil States International, Inc.
and with the July 2007 acquisition of Stassco Pressure Control LLC (StassCo) and
as is further described in Note F. 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.
Intangible Assets - The
Company amortizes intangible assets over their estimated useful
lives. The intangible assets consist of customer relationships of
$3,600,000 being amortized over a 13 year period and management non-compete
agreements of $1,085,000 being amortized over 5.5 and 3.5 year
periods.
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.
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 Bolivar, to U.S. Dollars. The Company
has 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.
Capitalized Interest -
Interest costs for the construction of certain long-term assets are capitalized
and amortized over the related assets' estimated useful lives. For
the year ended December 31, 2008, $261,000 was capitalized as compared to
$376,000 for the year ended December 31, 2007. No interest was
capitalized in 2006.
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 loss 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, Congo, and Venezuela (See Note I.).
Effective
January 1, 2007, we adopted FASB Interpretation Number 48, “Accounting for
Uncertainty in Income Taxes” (FIN 48), which is intended to clarify the
accounting for income taxes by prescribing a minimum recognition threshold for a
tax position before being recognized in the financial statements. FIN
48 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. In accordance with the requirements of FIN 48, the Company evaluated
all tax years still subject to potential audit under state, federal and foreign
income tax law in reaching its accounting conclusions. The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense. Tax years subsequent to 2005 remain open to examination
by U.S. federal and state tax jurisdictions, tax years subsequent to 2004 remain
open in Venezuela, tax years subsequent to 2004 remain open in Algeria, and tax
tears subsequent to 2004 remain open in the Congo. During 2007,
the Company recorded a charge of $616,000 relating to unrecognized tax benefits
under FIN48. During 2008, the Company recorded a charge
of 206,000 related to penalties and interest associated with the
unrecognized tax benefits under FIN 48 in 2007.
Earnings Per Share -
Basic and diluted income per common share is computed by dividing net income
attributable to common stockholders by the weighted average common shares
outstanding. Diluted income 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 years ended December 31, 2008, 2007 and 2006 is illustrated
below:
|
Years Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in thousands)
|
||||||||||||
|
Numerator:
|
||||||||||||
|
For
basic and diluted earnings per share:
|
||||||||||||
|
Net
income attributable to common stockholders
|
$ | 21,819 | $ | 7,891 | $ | 11,781 | ||||||
|
Denominator:
|
||||||||||||
|
For
basic earnings per share- Weighted-average shares
|
75,845 | 70,039 | 53,772 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options and warrants (1)
|
2,195 | 2,075 | 1,264 | |||||||||
|
Denominator:
|
||||||||||||
|
For
diluted earnings per share – Weighted-average shares
|
78,040 | 72,114 | 55,036 | |||||||||
(1) Excludes
the effect of outstanding stock options and warrants that have an anti-dilutive
effect on earnings per share.
The
exercise price of our stock options and stock warrants varies from $0.67 to
$3.00 per share. The maximum number of potentially dilutive
securities at December 31, 2008, 2007 and 2006 would include: (1) 4,898,000,
5,647,000 and 6,435,200 common shares, respectively, issuable upon exercise of
stock options, and (2) zero, 637,500 and 713,245, common shares, respectively,
issuable upon exercise of stock purchase warrants.
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 used
the Black-Scholes option pricing model to estimate the fair value of options on
the date of grant. The
expected market price volatility of our common stock is based on an estimate
made by us that considers the historical and implied volatility of our common
stock. The following weighted average assumptions were applied in
determining the fair values of option grants:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Risk-free
interest rate
|
3.23 | % | 4.60 | % | 4.64 | % | ||||||
|
Expected
dividend yield
|
― | ― | ― | |||||||||
|
Expected
option life
|
4.11
yrs
|
3.9
yrs
|
6.3
yrs
|
|||||||||
|
Expected
volatility
|
53.3 | % | 60.5 | % | 96.8 | % | ||||||
|
Weighted
average fair value of options granted at market
value
|
$ | 1.38 | $ | 0.96 | $ | 1.19 | ||||||
|
Forfeiture
rate
|
6.67 | % | 6.94 | % | 3.04 | % | ||||||
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 which approximated the
carrying value at December 31, 2008.
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
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 (SFAS 157), “Fair Value Measurements,” which defines fair value,
establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not require any new fair value
measurements but rather eliminates inconsistencies in guidance found in various
prior accounting pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB
Staff Position (FSP) 157-2, “Effective Date of FASB Statement
No. 157,” which defers the effective date of Statement 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in an entity’s financial statements on a recurring basis
(at least annually), to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years. Earlier adoption is permitted,
provided the company has not yet issued financial statements, including for
interim periods, for that fiscal year. We have adopted those provisions of SFAS
157 that were unaffected by the delay in the first quarter of 2008. Such
adoption has not had a material effect on our consolidated statement of
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.” SFAS 141(R) established
revised principles and requirements for how the Company will recognize and
measure assets and liabilities acquired in a business combination. The objective
of this statement is to improve the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects.
The statement is effective for business combinations completed on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008, which begins January 1, 2009 for the Company. Since SFAS
141R will be adopted prospectively, it is not possible to determine the effect,
if any, on the Company’s results from operations or financial
position.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51". SFAS
160 establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. The objective
of this statement is to improve the relevance, comparability, and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting
standards. The statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15, 2008,
which begins January 1, 2009 for the Company. The adoption of SFAS
160 is not expected to have a material impact on the Company’s results from
operations or financial position.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133". SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, which begins January 1, 2009 for the
Company. The adoption of SFAS 161 is not expected to have a material
impact on the Company’s results from operations or financial
position.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB as
opposed to the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” The effective date of
this statement is November 15, 2008. The adoption of SFAS 162 is not
expected to have a material impact on the Company’s results from operations or
financial position.
In
May 2008, the FASB issued SFAS No. 163, “Accounting for Financial
Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.”
Diversity exists in practice in accounting for financial guarantee insurance
contracts by insurance enterprises under FASB Statement No. 60, Accounting
and Reporting by Insurance Enterprises. This results in inconsistencies in the
recognition and measurement of claim liabilities. This Statement requires that
an insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation. This Statement requires expanded disclosures
about financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. The Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
December 15, 2008, which begins January 1, 2009 for the Company. The adoption of
FASB 163 will not have a material impact on the Company’s results from
operations or financial position.
In
June 2008, the FASB issued FASB Staff Position (FSP) Emerging Issues
Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities.” Under the
FSP, unvested share-based payment awards that contain rights to receive
non-forfeitable dividends (whether paid or unpaid) are participating securities,
and should be included in the two-class method of computing EPS. The FSP is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those years, and is not expected to have a material impact on the
Company’s results from operations or financial position.
D.
Detail of Certain Balance Sheet Accounts (in thousands):
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accounts
receivable, net:
|
(in
thousands)
|
|||||||
|
Trade
|
$ | 52,007 | $ | 33,136 | ||||
|
Unbilled
revenue
|
19,298 | 12,011 | ||||||
|
Federal
income tax receivable
|
1,215 | 805 | ||||||
|
Other
|
2,020 | 144 | ||||||
|
Allowance
for doubtful accounts
|
(2,385 | ) | (247 | ) | ||||
| $ | 70,940 | $ | 45,044 | |||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Property
and equipment, net:
|
(in
thousands)
|
|||||||
|
Land
|
$ | 571 | $ | 571 | ||||
|
Building
and leasehold improvements
|
3,579 | 3,631 | ||||||
|
Equipment
|
76,771 | 52,909 | ||||||
|
Furniture,
fixtures and office
|
2,701 | 2,234 | ||||||
|
Vehicles
|
3,912 | 2,455 | ||||||
|
Capital
leases
|
177 | − | ||||||
|
Construction
in progress
|
11,811 | 9,954 | ||||||
|
Total
property and equipment
|
99,522 | 71,754 | ||||||
|
Less: Accumulated
depreciation
|
(19,053 | ) | (11,001 | ) | ||||
| $ | 80,469 | $ | 60,753 | |||||
Depreciation
expense was $8,792,000, $5,836,000 and $4,883,000 for the years ended December
31, 2008, 2007 and 2006, respectively.
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Prepaid
expenses and other current assets:
|
(in
thousands)
|
|||||||
|
Prepaid
taxes
|
$ | 4,604 | $ | 3,528 | ||||
|
Prepaid
insurance
|
2,010 | 2,092 | ||||||
|
Other
|
4,187 | 3,176 | ||||||
| $ | 10,801 | $ | 8,796 | |||||
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Accrued
liabilities:
|
(in
thousands)
|
|||||||
|
Accrued
compensation and benefits
|
$ | 9,325 | $ | 3,244 | ||||
|
Accrued
insurance
|
1,092 | 392 | ||||||
|
Accrued
taxes, other than income tax
|
4,278 | 2,929 | ||||||
|
Other
|
4,683 | 3,357 | ||||||
| $ | 19,378 | $ | 9,922 | |||||
On March
3, 2006, we acquired the hydraulic well control business (HWC) of Oil States
International, Inc. The transaction was effective for accounting and financial
purposes as of March 1, 2006. As consideration for HWC, we issued
approximately 26.5 million shares 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 April 2007, Oil States
International, Inc. sold 14.95 million shares of our common stock and owns
approximately 15% of our common stock outstanding as of the date of this
report.
On July
31, 2007, we acquired StassCo Pressure Control, LLC (StassCo) for cash
consideration of $10,694,000, net of cash acquired and including transaction
costs plus a payable to the former owners of $500,000. StassCo performs snubbing
services in the Cheyenne Basin, Wyoming and operates four hydraulic rig assist
units based in Rock Springs, Wyoming. The transaction was effective
for accounting and financial purposes as of August 1, 2007.
In
accordance with SFAS No. 141, “Business Combinations”, we
used the purchase method to account for our acquisitions of HWC and
StassCo. Under the purchase method of accounting, the assets acquired
and liabilities assumed from HWC and StassCo were recorded at the date of
acquisition at their respective fair values.
For HWC,
the purchase price, including direct acquisition costs, exceeded the fair value
of acquired assets and assumed liabilities, resulting in the recognition of
goodwill of approximately $4.3 million. The total purchase price,
including direct acquisition costs of $1.4 million and less cash acquired of
$4.4 million, was $44.7 million. The operating results of HWC are
included in the consolidated financial statements subsequent to the March 1,
2006 effective date.
The fair
values of the assets acquired and liabilities assumed effective March 1, 2006
were as follows (in thousands):
|
Current
assets (excluding cash)
|
$ | 15,299 | ||
|
Property
and equipment
|
39,645 | |||
|
Goodwill
|
4,326 | |||
|
Total
assets acquired
|
59,270 | |||
|
Current
liabilities
|
9,505 | |||
|
Deferred
taxes
|
5,110 | |||
|
Total
liabilities assumed
|
14,615 | |||
|
Net
assets acquired
|
$ | 44,655 |
For
StassCo, 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 $4.6 million. The total
purchase price, including direct acquisition costs of $0.1 million, a $0.5
million payable earned as contingent consideration by the former owners, less
cash acquired of $0.8 million, was $11.2 million. The operating
results of StassCo are included in the consolidated financial statements
subsequent to the August 1, 2007 effective date. The intangible
assets consist of customer relationships of $3,600,000 being amortized over a 13
year period and management non-compete agreements of $1,086,000 being amortized
over 5.5 and 3.5 year periods.
The fair
values of the assets acquired and liabilities assumed effective August 1, 2007
were as follows (in thousands):
|
Current
assets (excluding cash)
|
$ | 744 | ||
|
Property
and equipment
|
3,491 | |||
|
Goodwill
|
4,823 | |||
|
Intangible
assets
|
4,686 | |||
|
Total
assets acquired
|
13,744 | |||
|
Current
liabilities
|
270 | |||
|
Deferred
taxes
|
2,017 | |||
|
Total
liabilities assumed
|
2,287 | |||
|
Net
assets acquired
|
$ | 11,457 |
The
following unaudited pro forma financial information presents the combined
results of operations of the Company and StassCo as if the acquisitions 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,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Revenue
|
$ | 209,237 | $ | 108,101 | ||||
|
Operating
Income
|
$ | 29,820 | $ | 13,881 | ||||
|
Net
Income
|
$ | 21,819 | $ | 8,312 | ||||
|
Basic
Earnings Per Share
|
$ | 0.29 | $ | 0.12 | ||||
|
Diluted
Earnings Per Share
|
$ | 0.28 | $ | 0.11 | ||||
|
Basic
Shares Outstanding
|
75,845 | 70,039 | ||||||
|
Diluted
Shares Outstanding
|
78,040 | 72,114 | ||||||
F.
Intangible assets
Intangible
assets were obtained in conjunction with the StassCo acquisition on July 31,
2007, and there were no intangible assets in prior years.
|
December 31,
2008
|
December 31,
2007
|
|||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Gross
Carrying
|
Accumulated
|
Gross
Carrying
|
Accumulated
|
|||||||||||||||||||||
|
Amount
|
Amortization
|
Net
|
Amount
|
Amortization
|
Net
|
|||||||||||||||||||
|
Intangible
assets
|
(in
thousands)
|
(in
thousands)
|
||||||||||||||||||||||
|
Customer
relationships
|
$ | 3,600 | $ | 392 | $ | 3,208 | $ | 3,600 | $ | 115 | $ | 3,485 | ||||||||||||
|
Non-compete
agreements
|
1,085 | 333 | 752 | 1,085 | 98 | 987 | ||||||||||||||||||
| $ | 4,685 | $ | 725 | $ | 3,960 | $ | 4,685 | $ | 213 | $ | 4,472 | |||||||||||||
Amortization
expense on intangible assets for the years ended December 31, 2008 and 2007
was (in thousands) $512 and $213, respectively. Total amortization expense is
expected to be (in thousands) $512, $512, $417and $408 in 2009, 2010,
2011, and 2012, respectively.
G.
Long-Term Debt
Long-term
debt and notes payable consisted of the following:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
U.S.
revolving credit facility, with available commitments up to $10.3 million,
a borrowing base of $10.3 million and an average interest rate of 5.1% for
the year ended December 31, 2008, and a borrowing base of $10.3 million
and an average interest rate of 8.1% for the year ended December 31,
2007
|
$ | 6,432 | $ | 1,058 | ||||
|
U.S.
term credit facility with initial borrowings of $9.7 million, payable over
60 months and average interest rates of 5.6% for the years ended December
31, 2008 and 2007
|
3,927 | 5,867 | ||||||
|
Capital
lease obligations
|
173 | − | ||||||
|
Total
debt
|
10,532 | 6,925 | ||||||
|
Less:
current maturities
|
(5,523 | ) | (1,940 | ) | ||||
|
Total
long-term debt
|
$ | 5,009 | $ | 4,985 | ||||
Scheduled
maturities of long-term debt as of December 31, 2008 are as follows(based
upon new payment terms for refinance – See Note O):
|
Year Ending December 31,
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2009
|
$ | 5,523 | ||
|
2010
|
4,918 | |||
|
2011
|
46 | |||
|
2012
|
45 | |||
|
2013
|
- | |||
|
Thereafter
|
- | |||
| $ | 10,532 | |||
In
conjunction with the acquisition of HWC on March 3, 2006, we entered into a
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 loan balance outstanding on December 31, 2008 was
$3.9 million on the term credit facility and $6.4 million on the revolving
credit facility.
On
February 10, 2009, we entered into a new $54.4 million syndicated credit
agreement with Wells Fargo Bank, National Association, Royal Bank of Canada and
Bank of America, N.A.(the “Credit Agreement”) The Credit Agreement
replaced our existing term and revolving credit facilities. The Credit Agreement
provides for a term loan in the principal amount of $34.4 million and a
revolving credit line in the principal amount of up to $20 million. The term
loan facility requires regularly scheduled quarterly payments of principal and
interest. Quarterly principal payments on the term facility are $1.72
million and commence June 30, 2009. Amounts repaid under the term loan cannot be
re-borrowed. The term loan and the revolving credit line each mature
on February 10, 2012.
Interest
under the Credit Agreement accrues at a base rate (which is the greatest of the
Federal Funds Rate plus 1.50%, Well’s Fargo’s prime rate, or the daily one-month
London Interbank Offered Rate plus 1.50%) plus a margin ranging from 4.25% to
4.75% per annum or, at our option, at a Eurodollar base rate plus a margin
ranging from 5.25% to 5.75% per annum. We will also pay a commitment
fee on the unused portion of the revolving credit line ranging from 1.30% to
1.40% per annum. The commitment fee and the margin applicable to
advances under the Credit Agreement increase within the applicable range if the
ratio of our debt to adjusted EBITDA rises above 1.50.
The
Credit Agreement is unconditionally guaranteed by all of our current and future
domestic subsidiaries (collectively, the “Guarantors”) and secured by
substantially all of our assets and those of the Guarantors, including a pledge
of all of the capital stock of our direct and indirect domestic subsidiaries and
66% of the capital stock of our first-tier foreign subsidiaries. We have not
entered into any interest rate hedges with respect to the Credit Agreement but
may elect do so in the future.
The
Credit Agreement contains covenants that limit our ability and the Guarantors
ability to, among other things, incur or guarantee additional indebtedness;
create liens; pay dividends on or repurchase stock; make certain types of
investments; sell stock of our subsidiaries; restrict dividends or other
payments from our subsidiaries; enter into transactions with affiliates; sell
assets, merge with other companies, and spend in excess of $30 million per year
on capital expenditures. The Credit Agreement also requires compliance with
certain financial covenants, including, commencing with the quarter ending March
31, 2009, (1) the maintenance of a minimum tangible net worth of not less than
85% of its tangible net worth as of March 31, 2009, plus an amount equal to 50%
of consolidated net income for each succeeding fiscal quarter plus 100% of
future net proceeds from the sale of equity securities, (2) a maximum ratio of
funded debt to adjusted EBITDA for the preceding four fiscal quarters of 2.25 to
1.00, and (3) a minimum ratio of adjusted EBITDA to fixed charges of 1.50 to
1.00. We expect to be in compliance with these covenants through January 1,
2010.
We
utilized initial borrowings of approximately $40 million under the Credit
Agreement to repay all amounts outstanding under our existing credit facilities,
repay all of the $21.2 million of senior subordinated notes held by Oil States
International and to fund our purchase of John Wright Company. We
believe that cash on hand, cash from operations and amounts available under our
credit facilities will be sufficient to meet our liquidity needs in the coming
twelve months.
H.
Related Party Debt
A related
party note of $15 million in unsecured subordinated debt was issued to Oil
States Energy Services, Inc. in connection with the HWC acquisition and 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. The interest expense on the
note was $2,117,000 and $2,117,000 for the years ended December 31, 2008 and
2007, respectively. This debt was repaid in conjunction with the new
credit agreement entered into on February 10, 2009 (see Note O Subsequent
Events).
I.
Income Taxes
The
amounts of income before income taxes attributable to domestic and foreign
operations are as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Domestic
|
$ | 18,101 | $ | 458 | $ | 11,487 | ||||||
|
Foreign
|
9,170 | 10,182 | 5,545 | |||||||||
| $ | 27,271 | $ | 10,640 | $ | 17,032 | |||||||
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Current
|
||||||||||||
|
Domestic
|
$ | 518 | $ | — | $ | 1,533 | ||||||
|
State
|
345 | (121 | ) | 412 | ||||||||
|
Foreign
|
4,504 | 3,570 | 4,512 | |||||||||
|
Total
|
$ | 5,367 | $ | 3,449 | $ | 6,457 | ||||||
|
Deferred
|
||||||||||||
|
Domestic
|
(121 | ) | (1,316 | ) | (590 | ) | ||||||
|
Unrecognized
Tax Benefits
|
206 | 616 | — | |||||||||
| $ | 5,452 | $ | 2,749 | $ | 5,867 | |||||||
The
provision for income taxes differs from the amount that would be computed if net
income before income taxes were multiplied by the federal income tax rate
(statutory rate) as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Income
tax provision at statutory
rates
|
$ | 9,545 | $ | 3,724 | $ | 5,961 | ||||||
|
State
tax expense benefit, net of federal benefits
|
224 | (79 | ) | 267 | ||||||||
|
Net
change in foreign tax rates
|
— | — | (466 | ) | ||||||||
|
Return
to provision adjustment
|
198 | 657 | 1,559 | |||||||||
|
Foreign
income tax rate differential
|
(2,806 | ) | (2,612 | ) | (806 | ) | ||||||
|
Adjustment
to net operating loss from continuing
operations
|
— | — | — | |||||||||
|
Nondeductible
expenses
|
1,598 | 614 | 950 | |||||||||
|
Repatriation
of certain foreign earnings
|
— | 90 | — | |||||||||
|
Foreign
withholding tax
|
359 | — | — | |||||||||
|
Unrecognized
Tax Benefits
|
0 | 616 | 0 | |||||||||
|
Change
in valuation allowance
|
(3,666 | ) | (261 | ) | (1,598 | ) | ||||||
|
Net
income tax provision
|
$ | 5,452 | $ | 2,749 | $ | 5,867 | ||||||
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
carry forwards, SFAS No. 123R affects the manner in which stock-based
compensation tax deductions are treated for financial reporting
purposes. We may claim share-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 share-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 carry forwards
have been fully utilized. As a result of the provisions of SFAS No.
123R, at December 31, 2008, we have excluded $1,840,752 of share-based
compensation deductions from our NOL carry forwards 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.
We have
determined that as a result of the acquisition of HWC we have experienced a
change of control pursuant to limitations set forth in Section 382 of the IRS
rules and regulations. As a result, we will be limited to
utilizing approximately $2.1 million of U.S. net operating losses (“NOL’s”) to
offset taxable income generated by us during the tax year ended December 31,
2008 and expect similar dollar limits in future years until our U.S. NOL’s are
either completely used or expire.
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 certain net deferred tax
assets since management believes it is more likely than not that these
particular assets will not be realized. The Company has determined
that a portion of its deferred tax asset related to the U.S. NOL’s will be
realized. Accordingly in 2008, $1.4 million of valuation allowance
was released, which represents two years of the company’s NOL limitation ($4.2
million). As of December 31, 2008, we had net domestic
operating loss carry forwards of approximately $27,265,000 expiring in various
amounts beginning in 2019 and ending in 2024. The net operating loss carry
forwards, along with the other timing differences, generate a net deferred tax
asset in each year. The foreign tax credits will expire in
2017.
The
temporary differences representing deferred tax assets and liabilities are as
follows:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
(in
thousands)
|
||||||||
|
Deferred
tax assets
|
||||||||
|
Net
operating loss carry forward
|
$ | 9,543 | $ | 9,757 | ||||
|
Allowance
for doubtful accounts
|
150 | 87 | ||||||
|
Share
based compensation
|
883 | 80 | ||||||
|
Accruals
|
51 | 40 | ||||||
|
Foreign
tax credit
|
37 | 3,613 | ||||||
|
Alternative
minimum tax credit
|
0 | 141 | ||||||
|
Deferred
Revenue
|
203 | 0 | ||||||
|
Intercompany
transfers
|
198 | 170 | ||||||
|
Total
gross deferred tax assets
|
$ | 11,065 | $ | 13,888 | ||||
|
Deferred
tax liabilities
|
||||||||
|
Depreciation
|
1,232 | 85 | ||||||
|
Merger
and acquisition costs
|
98 | 98 | ||||||
|
Repatriation
of foreign earnings
|
0 | 90 | ||||||
|
Section
481a Adjustments
|
151 | 0 | ||||||
|
Prepaid
Insurance
|
685 | 0 | ||||||
|
Property
and equipment, purchase accounting
|
6,597 | 6,548 | ||||||
|
Total
gross deferred tax liabilities
|
8,763 | 6,821 | ||||||
|
Net
deferred tax assets
|
2,302 | 7,067 | ||||||
|
Valuation
allowance
|
$ | (8,101 | ) | $ | (12,725 | ) | ||
|
Net
deferred income tax liabilities
|
$ | (5,799 | ) | $ | (5,658 | ) | ||
The
Company has not provided deferred taxes on the unremitted earnings of its
foreign subsidiaries, other than $2.5 million of earnings from its Venezuela
subsidiary, as it considers all other amounts to be permanently
reinvested.
Accounting
for Uncertainty in Income Taxes
On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Interpretation FIN No. 48, “Accounting for Uncertainty in Income Taxes
– an interpretation of FASB Statement No. 109 (FIN No. 48)”. Fin No.
48 requires application of a more likely than not threshold to the recognition
and derecognition of uncertain tax positions. FIN No. 48 requires the
recognition of the amount of unrecognized tax benefit that has a greater than 50
percent likelihood of being ultimately realized upon settlement. It
further requires that a change in judgment related to the expected ultimate
resolution of uncertain tax positions be recognized in earnings in the quarter
of such changes. As a result of adoption, the Company recognized no
charge in the liability for unrecognized tax benefits related to tax positions
taken in accumulated deficit.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
|
2008
|
2007
|
|||||||
|
Balance
as of January 1
|
$ | 616 | $ | − | ||||
|
Additions
based on tax positions related to current year
|
− | − | ||||||
|
Additions
for tax positions of prior years
|
206 | 616 | ||||||
|
Balance
as of December 31
|
$ | 822 | $ | 616 | ||||
All
additions or reductions to the above liability affect the Company’s effective
tax rate in the respective period of change. The Company accounts for
any applicable interest and penalties on uncertain tax positions as a component
of income tax expense which were $206,000 and $185,000 for the years ended
December 31, 2008 and 2007, respectively.
The
following table summarizes the tax years that remain subject to examination by
major tax jurisdiction:
|
Country
of Operation
|
|
Open Tax Years
|
|
Algeria
|
|
2005
- 2008
|
|
Venezuela
|
|
2005 -
2008
|
|
Congo
|
|
2005
- 2008
|
|
United
States
|
2006
- 2008
|
J.
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.
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 company 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.
For the
years ended December 31, 2008, 2007 and 2006, we accrued $0, $0 and $(616,000),
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.
In April
2007, we increased our common stock by 14.95 million shares as a result of an
underwritten public offering, netting cash proceeds totaling approximately
$28,847,000, net of underwriting discounts and offering
expenses.
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.
As of
December 31, 2008 there were no warrants outstanding. All warrants outstanding
at year end December 31, 2007 were exercised during 2008.
Stock Options:
A summary
of stock option plans under which stock options remain outstanding as of
December 31, 2008 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, 2007, stock options covering an aggregate of 368,750 shares of
common stock have been granted 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, 2008, there were no 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, 2008, grants of stock options covering an aggregate of
454,750 shares of common stock have been granted under the 1997 Outside
Directors’ Option Plan. At December 31, 2008, there were 211,250
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
granted 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, 2008, there were
595,025 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.
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 $0 in 2008,
$54,000 in 2007 and $72,000 in 2006.
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, 37,500 shares vesting on in 2005
pursuant to the vesting schedule and the remaining balance vesting upon the
acquisition of HWC in March of 2006. This resulted in a compensation expense of
$0, $0 and $102,000 in 2008, 2007 and 2006, 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, 2008, there were
4,015,000 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, 2008, 2007 and 2006 was as
follows:
|
Number
of Shares
(in thousands)
|
Weighted
Average
Exercise
Price
Per Share
|
|||||||
|
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 | |||||
|
Granted
|
386 | 1.92 | ||||||
|
Exercised
|
(727 | ) | 0.86 | |||||
|
Cancelled
|
(447 | ) | 1.51 | |||||
|
Outstanding
December 31, 2007
|
5,647 | $ | 1.16 | |||||
|
Granted
|
275 | 2.58 | ||||||
|
Exercised
|
(950 | ) | 1.01 | |||||
|
Cancelled
|
(74 | ) | 1.91 | |||||
|
Outstanding
December 31, 2008
|
4,898 | $ | 1.10 | |||||
Summary
information about our stock options outstanding at December 31, 2008
follows:
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||
|
Number
|
Number
|
|||||||||||||||||||||
|
Outstanding
|
Weighted
|
Exercisable
|
||||||||||||||||||||
|
at
|
Average
Remaining
|
Weighted
|
At
|
Weighted
|
||||||||||||||||||
|
Range
of
|
December
31, 2008
|
Contractual
|
Average
|
December
31, 2008
|
Average
|
|||||||||||||||||
|
Exercise Prices
|
(in thousands)
|
Life in Years
|
Exercise Price
|
(in thousands)
|
Exercise Price
|
|||||||||||||||||
| $ | 0.25 - 0.69 | 1,942 | 1.83 | $ | 0.67 | 1,942 | $ | 0.67 | ||||||||||||||
| $ | 0.70 – 1.14 | 461 | 2.69 | $ | 1.10 | 461 | $ | 1.10 | ||||||||||||||
| $ | 1.15 – 1.59 | 1,268 | 3.49 | $ | 1.31 | 1,045 | $ | 1.27 | ||||||||||||||
| $ | 1.60 – 2.04 | 560 | 3.77 | $ | 1.80 | 373 | $ | 1.80 | ||||||||||||||
| $ | 2.05 – 3.00 | 667 | 3.96 | $ | 2.52 | 226 | $ | 2.77 | ||||||||||||||
| $ | 0.25 -$3.00 | 4,898 | 2.85 | $ | 1.26 | 4,047 | $ | 1.10 | ||||||||||||||
Share-based
compensation pre-tax expense recognized under SFAS 123R in the year ended
December 31, 2008 totaled $1,397,000, or $0.02 per basic and diluted
share. Share-based compensation pre-tax expense recognized under
SFAS 123R in the year ended December 31, 2007 totaled $833,000, or
$0.01 per basic and diluted share. Stock based compensation pre-tax expense
recognized under SFAS 123R in the year ended December 31, 2006 totaled
$1,288,000, or $0.02 per basic and diluted share. At December 31, 2008,
$495,000 of compensation cost related to unvested stock options and restricted
stock awards attributable to future performance had not yet been
recognized.
A summary of restricted stock activity
for the year ended December 31, 2008 is as follows:
|
Shares
|
Weighted
Average
Grant
Date Fair Value
|
|||||||
|
Outstanding
December 31, 2007
|
878 | $ | 1.79 | |||||
|
Granted
|
893 | 2.20 | ||||||
|
Vested
|
(240 | ) | 1.76 | |||||
|
Cancelled
|
(27 | ) | 2.08 | |||||
|
Outstanding
December 31, 2008
|
1,504 | $ | 2.04 | |||||
A summary
of stock appreciation rights activity for the year ended December 31, 2008 is as
follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||
|
Outstanding
December 31, 2007
|
0 | $ | 0.00 | |||||
|
Granted
|
275 | 2.58 | ||||||
|
Vested
|
0 | 0.00 | ||||||
|
Cancelled
|
0 | 0.00 | ||||||
|
Outstanding
December 31, 2008
|
275 | $ | 2.58 | |||||
K. Employee
Benefit Plans
401(k)
Plan:
The
Company sponsors a 401(k) Plan adopted in 2007 for eligible employees being at
least eighteen years of age. Employees can make elective
contributions of 1% to 50% of compensation up to 15,500 for the year ending
December 31, 2008. Employees over fifty years old may contribute an
additional $5,000, $5,000 and $4,000 in 2008, 2007, and 2006,
respectively. During the years ended December 31, 2008, 2007 and
2006, we contributed approximately $1,243,000, $632,000 and $401,000,
respectively, under the Plan.
L. 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, 2008, future minimum lease payments, under these non-cancelable
operating leases are as follows:
|
Year Ending December 31,
|
Amount
|
|||
|
(in
thousands)
|
||||
|
2009
|
$ | 1,411 | ||
|
2010
|
1,029 | |||
|
2011
|
914 | |||
|
2012
|
715 | |||
|
2013
|
646 | |||
|
Thereafter
|
1,722 | |||
| $ | 6,437 | |||
Rent
expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$1,386,000, $904,000 and $418,000, 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.
Employment
Contracts
We have
employment contracts with executives and other key employees with contract terms
that include lump sum payments up to two years of compensation including salary,
benefits and incentive pay upon termination of employment or following a change
in control.
M. Business
Segment Information, Revenues from Major Customers and Concentration of Credit
Risk
Segments:
Our
operating segments are our service lines which we aggregate into three reporting
segments. Previously, we presented two reporting segments, response
services and well intervention services. During the fourth quarter of
fiscal 2008, we reassessed the level at which the Statement of Financial
Accounting Standards (SFAS) No. 131 operating segment criteria is met, and as a
result, changed our operating segments. As a result of this change,
the composition of our reporting segments was also revised. All prior
year segment information has been restated to conform to the fiscal 2008
presentation. These reporting segments are pressure control, well
intervention and equipment services.
We operate in three business
segments: Pressure Control, Well Intervention and Equipment
Services. 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. 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. 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.
The
Pressure Control segment consists of personnel, equipment and services provided
during a critical well event. 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. These
services primarily utilize existing personnel to maximize utilization with only
slight increases in fixed operating costs. This segment also includes services
that are designed to reduce the number and severity of critical well events
offered through our prevention and risk management programs, including training,
contingency planning, well plan reviews, audits, inspection services and
engineering services.
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 and 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.
The
Equipment Services segment includes our pressure control equipment rental and
service business, which began as an expansion of the Company’s existing services
in 2007. We expect our Equipment Services segment to continue to benefit as a
result of cross selling of our other services by our business
development team and our expanded geographic presence.
Information
concerning operations in our three different business segments for the years
ended December 31, 2008, 2007 and 2006 is presented below. Certain
reclassifications have been made to the prior periods to conform to the current
presentation.
|
Pressure Control
|
Well
Intervention
|
Equipment
Services
|
Consolidated
|
|||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
As
of and for the year Ended December 31, 2008
|
||||||||||||||||
|
Net
operating revenues
|
$ | 92,804 | $ | 97,167 | $ | 19,266 | $ | 209,237 | ||||||||
|
Operating
income
|
21,177 | 5,775 | 2,868 | 29,820 | ||||||||||||
|
Identifiable
operating assets
|
43,225 | 117,795 | 23,953 | 184,973 | ||||||||||||
|
Capital
expenditures
|
1,371 | 17,605 | 9,564 | 28,540 | ||||||||||||
|
Depreciation
and amortization
|
1,032 | 6,796 | 1,479 | 9,307 | ||||||||||||
|
As
of and for the year Ended December 31, 2007 Net operating
revenues
|
$ | 36,845 | $ | 66,580 | $ | 1,871 | $ | 105,296 | ||||||||
|
Operating
income
|
8,366 | 4,020 | 306 | 12,692 | ||||||||||||
|
Identifiable
operating assets
|
21,333 | 107,441 | 7,641 | 136,415 | ||||||||||||
|
Capital
expenditures
|
4,546 | 10,829 | 5,934 | 21,309 | ||||||||||||
|
Depreciation
and amortization
|
663 | 5,239 | 149 | 6,051 | ||||||||||||
|
As
of and for the year Ended December 31, 2006 Net operating
revenues
|
$ | 43,204 | $ | 53,826 | $ | − | $ | 97,030 | ||||||||
|
Operating
income
|
13,508 | 6,384 | − | 19,892 | ||||||||||||
|
Identifiable
operating assets
|
24,771 | 76,246 | − | 101,017 | ||||||||||||
|
Capital
expenditures
|
603 | 6,279 | − | 6,882 | ||||||||||||
|
Depreciation
and amortization
|
520 | 4,363 | − | 4,883 | ||||||||||||
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,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Customer
A
|
20 | % | — | 1 | % | |||||||
|
Customer
B
|
11 | % | 18 | % | 18 | % | ||||||
|
Customer
C
|
6 | % | 19 | % | 19 | % | ||||||
Our
revenues are generated geographically as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
United
States
|
22 | % | 24 | % | 26 | % | ||||||
|
Foreign
|
78 | % | 76 | % | 74 | % | ||||||
We
attribute revenue to various countries based on the location services are
performed or destination of the sale of equipment. Of the 2008 foreign revenues
presented above, 13% and 12% were generated from Algeria and Venezuela,
respectively. Remaining foreign revenues
for the first nine months of 2008 were primarily generated in the Republic of
Congo, Nigeria, Dubai, Bangladesh, India, Qatar and Egypt, with India
representing over 20% of total revenues for the period. Of the 2007 foreign
revenues presented above, 20% and 19% were generated from Algeria and Venezuela,
respectively. Of the 2006 foreign revenues presented above, 24% and 21% were
generated from Algeria and Venezuela, respectively.
Accounts
Receivable:
One of
our customers at December 31, 2008 accounted for 27% of outstanding accounts
receivable. Three of our customers at December 31, 2007 accounted for 51% of
outstanding accounts receivable.
Cash:
We
maintain deposits in banks which may exceed the amount of federal deposit
insurance available. Management believes the risk of any possible deposit loss
is minimal.
N. Quarterly
Financial Data (Unaudited)
The table below summarizes the
unaudited quarterly results of operations for 2008 and 2007 (in thousands,
except for per share data):
|
|
||||||||||||||||
| Quarter Ended | ||||||||||||||||
|
2008
|
March 31,
2008
|
June 30,
2008
|
September 30,
2008
|
December 31,
2008
|
||||||||||||
|
Revenues
|
$ | 45,028 | $ | 51,891 | $ | 56,452 | $ | 55,866 | ||||||||
| Gross Profit* | 18,539 | 19,169 | 20,294 | 22,217 | ||||||||||||
|
Net
income
|
5,144 | 6,086 | 5,448 | 5,141 | ||||||||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
0.07 | 0.08 | 0.07 | 0.07 | ||||||||||||
|
Diluted
|
0.07 | 0.08 | 0.07 | 0.07 | ||||||||||||
|
Quarter
Ended
|
||||||||||||||||
|
2007
|
March 31,
2007
|
June 30,
2007
|
September 30,
2007
|
December 31,
2007
|
||||||||||||
|
Revenues
|
$ | 22,257 | $ | 21,955 | $ | 24,973 | $ | 36,111 | ||||||||
| Gross Profit* | 8,262 | 8,117 | 10,197 | 16,139 | ||||||||||||
|
Net
income
|
464 | 274 | 1,331 | 5,822 | ||||||||||||
|
Net
income per common share:
|
||||||||||||||||
|
Basic
|
0.01 | 0.00 | 0.02 | 0.08 | ||||||||||||
|
Diluted
|
0.01 | 0.00 | 0.02 | 0.08 | ||||||||||||
*Represents "revenues"
less "cost of sales" included in the Company's Consolidated Statement of
Income.
The
fourth quarter of 2008 results include a one-time bad debt expense of $2.0
million attributed to one customer contract. Basic and diluted
earnings 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 per common
share amounts.
O. Subsequent
Events
On
February 10, 2009, we entered into a new $54.4 million syndicated credit
agreement with Wells Fargo Bank, National Association, Royal Bank of Canada and
Bank of America, N.A. The Credit Agreement replaced our existing term
and revolving credit facilities. Wells Fargo was the sole lead arranger under
the Credit Agreement, as well as Administrative Agent, an Issuing Lender and the
Swing Line Lender. We utilized initial borrowings of approximately
$40 million under the Credit Agreement to repay all amounts outstanding under
our existing credit facilities, repay all of the $21.2 million of senior
subordinated notes held by Oil States International and to fund our purchase of
John Wright Company.
The
Credit Agreement provides for a term loan in the principal amount of $34.4
million and a revolving credit line in the principal amount of up to $20
million. The term loan facility requires regularly scheduled quarterly payments
of principal and interest. Quarterly principal payments on the term
facility are $1.72 million and commence June 30, 2009. Amounts repaid under the
term loan cannot be re-borrowed. The term loan and the revolving
credit line each mature on February 10, 2012.
Interest
under the Credit Agreement accrues at a base rate (which is the greatest of the
Federal Funds Rate plus 1.50%, Well’s Fargo’s prime rate, or the daily one-month
London Interbank Offered Rate plus 1.50%) plus a margin ranging from 4.25% to
4.75% per annum or, at our option, at a Eurodollar base rate plus a margin
ranging from 5.25% to 5.75% per annum. We will also pay a commitment
fee on the unused portion of the revolving credit line ranging from 1.30% to
1.40% per annum. The commitment fee and the margin applicable to
advances under the Credit Agreement increase within the applicable range if the
ratio of our debt to adjusted EBITDA rises above 1.50.
The
Credit Agreement is unconditionally guaranteed by all of our current and future
domestic subsidiaries (collectively, the “Guarantors”) and secured by
substantially all of our assets and those of the Guarantors, including a pledge
of all of the capital stock of our direct and indirect domestic subsidiaries and
66% of the capital stock of our first-tier foreign subsidiaries. We have not
entered into any interest rate hedges with respect to the Credit Agreement but
may elect do so in the future.
The
Credit Agreement contains covenants that limit our ability and the Guarantors
ability to, among other things, incur or guarantee additional indebtedness;
create liens; pay dividends on or repurchase stock; make certain types of
investments; sell stock of our subsidiaries; restrict dividends or other
payments from our subsidiaries; enter into transactions with affiliates; sell
assets, merge with other companies, and spend in excess of $30 million per year
on capital expenditures. The Credit Agreement also requires compliance with
certain financial covenants, including, commencing with the quarter ending March
31, 2009, (1) the maintenance of a minimum tangible net worth of not less than
85% of its tangible net worth as of March 31, 2009, plus an amount equal to 50%
of consolidated net income for each succeeding fiscal quarter plus 100% of
future net proceeds from the sale of equity securities, (2) a maximum ratio of
funded debt to adjusted EBITDA for the preceding four fiscal quarters of 2.25 to
1.00, and (3) a minimum ratio of adjusted EBITDA to fixed charges of 1.50 to
1.00. We expect to be in compliance with these covenants through
January 1, 2010.
On
February 10, 2009, we purchased John Wright Company (JWC) for approximately $10
million in a combination of cash and subordinated debt. Based in Houston, JWC
provides a suite of relief well drilling and risk management services to the oil
and gas industry worldwide. We intend to integrate the company’s proprietary
technology into our Safeguard program, which is currently our fastest growing
service line.
EXHIBIT
INDEX
|
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.)
|
|
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
|
—
|
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.)
|
|
10.09
|
―
|
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.)
|
|
10.10
|
―
|
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.)
|
|
10.11**
|
―
|
Executive
Employment Agreement of Gabriel Aldape (Incorporated herein by reference
to exhibit 10.1 on Form 10-Q filed August 14,
2006.)
|
|
10.12**
|
―
|
Executive
Employment Agreement of Dewitt H. Edwards (Incorporated herein by
reference to exhibit 10.1 on Form 8-K filed July 7,
2006.)
|
|
10.13**
|
―
|
2004
Long Term Incentive Plan 2,000,000 Share amendment (Incorporated herein by
reference to exhibit 4.1 of Form S-8 filed November 14,
2006.)
|
|
10.14**
|
—
|
2006
Non-Employee Directors Stock Incentive Plan (Incorporated herein by
reference to exhibit 4.1 of Form S-8 filed November 14,
2006.).
|
|
10.15**
|
Amendment
to Executive Employment Agreement of Jerry Winchester (Incorporated herein
by reference to item 5.02 on Form 8-K filed March 7,
2007.)
|
|
|
10.16
|
—
|
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. (Incorporated herein by reference to exhibit 10.17
on Form 10-K filed March 23, 2007.)
|
|
10.17
|
—
|
Amendment
2 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. (Incorporated herein by reference to exhibit 10.18
on Form 10-K filed March 23, 2007.)
|
|
10.18
|
—
|
Amendment
3 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. (Incorporated herein by reference to exhibit 10.19
on Form 10-K filed March 23, 2007.)
|
|
10.19
|
—
|
Amendment
4 to the Credit and Security Agreement dated October 31,2007 by and
between Boots & Coots International Well Control, Inc. and Wells Fargo
Bank, National Association(Incorporated herein by reference to exhibit
10.20 on Form 10-K filed March 12, 2008.)
|
|
10.20
|
―
|
Severance
Agreement dated August 1, 2008 by and between Boots & Coots Services,
LLC. And Cary Baetz. (Incorporated herein by reference to exhibit 10.1 of
Form 8-K filed August 5, 2008.)
|
|
10.21**
|
— |
2004
Long Term Incentive Plan (amended and restated as of August 1, 2008)
(Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
6, 2008)
|
|
10.22**
|
— |
Form
of Stock Appreciation Rights Agreement under 2004 Long Term Incentive Plan
(Incorporated herein by reference to exhibit 10.2 of Form 8-K filed August
6, 2008)
|
|
10.23
|
―
|
Credit
and Security Agreement dated February 10, 2009 by and between Boots &
Coots International Well Control, Inc. and Wells Fargo Bank, National
Association. (Incorporated herein by reference to exhibit 10.01 of Form
8-K filed February 17, 2009.)
|
|
―
|
Subordinated
Note Agreement between Boots & Coots International Well Control, Inc.
and John Wright Company dated February 10, 2009.
|
|
|
—
|
List
of subsidiaries of the company.
|
|
|
―
|
Consent
of UHY
LLP
|
|
|
―
|
§302
Certification by Jerry Winchester
|
|
|
―
|
§302
Certification by Cary Baetz
|
|
|
―
|
§906
Certification by Jerry Winchester
|
|
|
―
|
§906
Certification by Cary
Baetz
|
*Filed
herewith
**Indicates
management compensation plan filed pursuant to Item 608(b)(10) of Regulation
S-K.
81