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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
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(Mark One)
[_]ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[X]TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM JUNE 30, 1997 TO DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-20843
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BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 11-2908692
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5151 SAN FELIPE, SUITE 450
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
713-621-7911
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered under Section 12(b) of the Exchange Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.00001 par value American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [_]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [X].
State issuer's revenues for its most recent fiscal year: $2,564,087
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on March 23, 1998, based on the
closing sales price on that date was $98,176,625.
The number of shares of the issuer's common stock outstanding on March 23,
1998 was 30,578,798.
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FORM 10-KSB
ANNUAL REPORT
FOR THE TRANSITION PERIOD FROM JULY 1, 1997 TO DECEMBER 31, 1997
TABLE OF CONTENTS
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PAGE
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PART I.................................................................... 1
Item 1. Description of Business......................................... 1
Item 2. Description of Property......................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security-Holders............. 11
PART II................................................................... 12
Item 5. Market for Common Equity and Related Stockholder Matters........ 12
Item 6. Management's Discussion and Analysis or Plan of Operation....... 13
Item 7. Financial Statements............................................ 15
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 15
PART III.................................................................. 16
Item 13. Exhibits List and Reports on Form 8-K.......................... 16
SIGNATURES................................................................ 18
FINANCIAL STATEMENTS
Independent Auditor's Report............................................ F-1
Consolidated Balance Sheets............................................. F-2
Consolidated Statements of Operations................................... F-3
Consolidated Statements of Shareholder's Equity......................... F-4
Consolidated Statements of Cash Flows................................... F-5
Notes to Consolidated Financial Statements.............................. F-6
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On December 8, 1997, the Board of Directors of the registrant approved a
change in the registrant's fiscal year end from June 30 to December 31.
Consequently, the registrant is filing this transition report on Form 10-KSB
for the six month period commencing July 1, 1997, and ending December 31,
1997.
FORWARD-LOOKING STATEMENTS. This transition report on Form 10-KSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ from those projected in any
forward- looking statements for the reasons detailed below as well as in other
sections of this report on Form 10-KSB. The forward-looking statements
contained herein are made as of the date of this report and the Company
assumes no obligation to update such forward-looking statements, or to update
the reasons why actual results could differ from those projected in such
forward-looking statements. Investors should consult the information set forth
from time to time in the Company's reports on Forms 10-QSB, 8-K, 10-KSB and
Annual Report to Stockholders.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY OF THE COMPANY
GENERAL. Boots & Coots International Well Control, Inc. (the "Company"),
formerly known as Havenwood Ventures, Inc. ("Havenwood"), was incorporated in
Delaware in April 1988. Havenwood was originally formed to serve as a blind
pool investment fund, and in July 1988 Havenwood raised $499,500 in an initial
public offering of its common stock, par value $.00001 per share ("Common
Stock"). After completing its initial public offering, Havenwood expended its
available resources in the development of a business enterprise which it
ultimately divested, thereafter remaining inactive, with no material assets or
liabilities, until it entered into a business combination with IWC Services,
Inc. a Texas corporation ("IWC Services") on July 29, 1997.
ACQUISITION OF IWC SERVICES, INC. The Company acquired IWC Services on July
29, 1997, in a "reverse triangular merger" in which it issued shares of Common
Stock to the stockholders of IWC Services in exchange for all of the issued
and outstanding common stock of IWC Services and issued options and warrants
to purchase Common Stock of the Company in exchange for all of the options and
warrants to purchase common stock of IWC Services then outstanding. As a
result of the merger, IWC Services became a wholly-owned subsidiary of the
Company, the stockholders of IWC Services became the beneficial holders of
approximately 93% of the post-merger issued and outstanding shares of Common
Stock and the board of directors and management of IWC Services took over the
management of the Company.
IWC Services is a global-response oil and gas well control service company
that specializes in responding to and controlling oil and gas well
emergencies, including blowouts and well fires. In addition, IWC Services
provides snubbing and other non-critical well control services. IWC Services
was organized in June 1995 by six former key employees of the Red Adair
Company who resigned their positions after Mr. Adair retired and sold his
business.
ACQUISITION OF THE ASSETS OF BOOTS & COOTS, L.P. On July 31, 1997, the
Company completed the acquisition of substantially all of the operating assets
of Boots & Coots, L.P., a Colorado limited partnership ("Boots & Coots") an
oil well firefighting, snubbing and blowout control services company. In
connection with the acquisition of Boots & Coots, the Company acquired all
interests of Boots & Coots in its subsidiary corporations, Boots & Coots
Overseas, Ltd., and Boots & Coots de Venezuela, S.A. (collectively referred to
herein as "Boots & Coots"). The consideration paid consisted of (i) $369,432
cash, (ii) $680,568 placed in escrow to pay certain debts of Boots & Coots,
(iii) the issuance of secured promissory notes of the Company in the aggregate
principal amount of $4,760,977 and (iv) 259,901 shares of Common Stock of the
Company. The Company also granted registration rights for the shares of Common
Stock issued to Boots & Coots in the transaction.
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Boots & Coots was organized by Boots Hansen and Coots Mathews, two former
employees of the Red Adair Company who, like the founders of IWC Services,
left that firm to form an independent company, which was a primary competitor
of IWC Services. As a consequence of the acquisition of Boots & Coots, the
Company became a leader in the worldwide oil well firefighting and blowout
control industry, reuniting many of the former employees of the Red Adair
Company.
ACQUISITION OF ABASCO, INC. On September 25, 1997, the Company completed the
acquisition of all of the capital stock of ABASCO, INC. ("ABASCO") which had
acquired the operating assets of American Boat and Skimmer Company, a
recognized leader in the design and manufacture of a comprehensive line of
rapid-response oil and chemical spill containment and reclamation equipment
and products since 1975. ABASCO's products and services include mechanical
skimmers, containment booms and boom reels, dispersant sprayers, agent
absorbents, response vessels, oil and chemical spill industrial products,
spill response packages, oil and chemical spill ancillary products and waste
oil recovery and remediation services. The Company acquired ABASCO for
aggregate consideration consisting of approximately $1,590,000 cash and
300,000 shares of Common Stock.
ACQUISITION OF ITS SUPPLY CORPORATION. On January 2, 1998, the Company
completed the funding of the acquisition, effective as of December 31, 1997,
of all of the capital stock of ITS Supply Corporation ("ITS") for aggregate
consideration of $6,000,000. Financing for the acquisition of ITS was provided
from working capital ($500,000); and proceeds from the issuance of 10% Senior
Secured Promissory Notes ($4,500,000) and short-term bridge financing from the
seller ($1,000,000).
ITS is an ISO 9002 certified materials and equipment procurement,
transportation and logistics company that serves the energy industry
worldwide, with offices in Houston, Venezuela, Peru, Dubai (UAE) and the
United Kingdom.
ACQUISITION OF CODE 3, INC. On February 20, 1998, the Company completed the
acquisition of all of the capital stock of Code 3, Inc. ("Code 3").
Consideration for the acquisition of Code 3, with an effective date for
audited purchase price adjustments of December 31, 1997, was (i) $570,568
cash, (ii) the repayment of corporate secured debt and interest thereon of
approximately $1,250,000 through closing, and (iii) the issuance of 488,136
shares of the Company's Common Stock, of which 158,646 shares were delivered
into escrow to secure the indemnification obligations of the stockholders of
Code 3 for claims that may arise as a consequence of a breach by such
stockholders or Code 3 of the representations, warranties and covenants
contained in the definitive agreements.
Code 3, originally headquartered in Harlingen, Texas, provides containment
and remediation of hazardous material and oil spills for the railroad,
transportation and shipping industries, as well as various state and federal
governmental agencies. Code 3 also specializes in the transfer of hazardous
materials and high and low pressure liquids and industrial fire fighting and
provides in-plant remedial plan implementation, hazardous waste management,
petroleum tank management, industrial hygiene, environmental and occupational,
health and safety services. Through December 31, 1997, Code 3 operated out of
facilities in Harlingen, El Paso, Laredo, San Antonio and Houston, Texas.
Current expansion plans for additional emergency response facilities and
equipment include Ft. Worth, Texas, and Denver, Colorado.
HALLIBURTON ALLIANCE. The Company also conducts business in a global
strategic alliance with the Halliburton Energy Services division of
Halliburton Company. The alliance operates under the name "WELLCALLSM" and
draws on the expertise and abilities of both companies to offer a total well
control solution for oil and gas producers worldwide. The Halliburton Alliance
provides a complete range of well control services including pre-event
troubleshooting and contingency planning, snubbing, pumping, blowout control,
debris removal, firefighting, relief and directional well planning, and other
specialized services. See "Business--Halliburton Alliance."
EXECUTIVE OFFICES. The Company's principal executive office is located at
5151 San Felipe, Suite 450, Houston, Texas, 77056, telephone (713) 621-7911.
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BUSINESS
INDUSTRY OVERVIEW
The oil and gas industry has enjoyed a sustained resurgence over the last
several years due to improved market conditions. The fundamental supply and
demand balance for oil and gas products began to shift in late 1992 and has
continued to improve with increased global demand for petroleum products.
Historically, the oil and gas cycle has been characterized by alternating
"boom" and "bust" periods that typically last for 12 to 14 years. The last
down cycle began in 1981 and continued through 1992, when signs of recovery
began, and by 1995, the current recovery cycle had been confirmed. Although
oil and natural gas prices have recently softened, management believes that
the fundamental market statistics and trends strongly suggest that the oil and
gas business cycle, though not likely to be at a historical "boom" level, will
be favorable over the next 10 years.
The three major segments on the production side of the oil and gas industry
have generally experienced the effects of the "boom" and "bust" cycle in
distinctly different time frames. The first group to experience the effects of
cycle changes consists of exploration and production companies who plan their
drilling and development activities on the basis of current and anticipated
oil and gas prices. The next group to experience the effects of cycle changes
consists of oil and gas service providers, including seismic companies,
contract drilling companies, and other companies that provide pipe and drill
bits, together with logging, cementing, and other services. The last group to
experience the effects of cycle changes consists of equipment manufacturers
who are usually the last to recover when oil and gas prices increase and the
first to decline when oil and gas prices decline. During the past two years,
for the first time since 1982, plans were announced for the construction of a
meaningful number of new offshore drilling rigs.
Drilling activity increased in 1996 and in 1997, which, combined with
increased drilling activities since 1993, equates to increased numbers of
wells coming on line. Although drilling technology has improved in recent
years, thereby reducing the likelihood of a major well control event, several
industry conditions tend to offset this factor. Relatively old drilling
equipment (although generally well maintained) continues to be used. There
have been few new land or offshore drilling rigs constructed since 1981
because rig rental rates have been insufficient to justify the required
capital investment. Current worldwide utilization rates for offshore drilling
rigs are at substantially full capacity for marketable rigs and utilization
for land drilling rigs is increasing. Several contract drilling companies are
experiencing problems hiring experienced crews, prices for new drill pipe have
increased significantly and delivery schedules have been extended. These
factors together with an increased number of producing wells requiring
workover operations, tend to increase the likelihood of a major well control
event. In addition, existing environmental constraints in the U.S. and
increasing awareness of environmental issues in developing countries will
require operators to emphasize training, safety and contingency planning for
potential blowout or other well control events.
THE EMERGENCY RESPONSE SEGMENT OF THE OIL AND GAS SERVICE INDUSTRY
History. The emergency response segment of the oil and gas services industry
traces its roots to the late 1930's when Myron Kinley organized the Kinley
Company, the first oil and gas well firefighting specialty company. Shortly
after organizing the Kinley Company, Mr. Kinley took on an assistant named Red
Adair who learned the firefighting business under Mr. Kinley's supervision and
remained with the Kinley Company until Mr. Kinley's retirement. When Mr.
Kinley retired in the late 1950's, Mr. Adair organized the Red Adair Company
and subsequently hired Boots Hansen, Coots Mathews and Raymond Henry as
members of his professional firefighting staff. Mr. Adair added Richard
Hatteberg, Danny Clayton, Brian Krause, Mike Foreman and Juan Moran to his
professional firefighting 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 Mathews
remained with the Red Adair Company until 1978 when they split off to organize
Boots & Coots, an independent firefighting, snubbing and blowout control
company.
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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 Houston-based companies have dominated the market. As a result, if an
operator in Indonesia, for example, experienced a well blowout and fire, he
would likely call a well control emergency response company in Houston that
would take the following steps:
. Immediately dispatch a control team to the well location to 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;
. Air freight equipment from Houston to the blowout location;
. Extinguish the fire and bring the well under control; and
. Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.
The 1990's have been a period of rapid change in the oil and gas well
control and firefighting business. The hundreds of oil well fires that were
started by Iraqi troops during their retreat from Kuwait spurred the
development of new firefighting techniques and tools that have become industry
standards. Moreover, after extinguishing the Kuwait fires, the entrepreneurs
who created the oil and gas well firefighting industry, including Red Adair,
Boots Hansen and Coots Mathews retired, leaving the Company's senior staff as
the most experienced active oil and gas well firefighters in the world. At
present, the principal competitors in the oil and gas well firefighting
business are the Company, Wild Well Control, Inc., and Cudd Pressure Control,
Inc.
Emerging Trends. Corporate downsizing and outsourcing of services, when
coupled with increased recognition of the importance of training,
environmental protection and emergency preparedness, are having a profound
impact on the emergency response segment of the oil and gas services industry.
Instead of waiting for a blowout, fire or other disaster to occur, major oil
producers are coming to the Company for proactive preparedness and incident
prevention programs, together with pre-event consultation on matters relating
to well control training, blowout contingency planning, on-site safety
inspections and formal fire drills.
In addition to seeking pre-event consulting services, a number of major oil
and gas producers have come to the realization that servicing the worldwide
firefighting and well control market from Houston is inefficient: the response
time is too long and the cost of transporting equipment by air freight is
prohibitive. As a result, the Company has recently entered into an agreement
to establish and maintain an industry supported "Fire Station" on the North
Slope of Alaska. Under the terms of the agreement, the Company has sold to a
consortium of producers the equipment required to respond to a blowout or oil
or gas well fire, and has agreed to maintain the equipment and conduct on-site
safety inspections and emergency response drills. Over the next five years,
the Company plans to establish a worldwide network of Company owned Fire
Stations and to use this global presence as the foundation to seek to
establish a preeminent position in the oil and gas well firefighting business.
VOLATILITY OF FIREFIGHTING REVENUES. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company. While the demand for firefighting and
blowout control services ordinarily follows predictable trends in the oil and
gas industry, extraordinary events such as the Bay Marchand and Piper Alpha
disasters have historically occurred only every four to six years. Wars, acts
of terrorism and other unpredictable factors may increase the need for oil and
gas well firefighting and blowout control services from time to time. As a
result, the Company can expect to experience large fluctuations in its
revenues from oil and gas well firefighting and blowout control services.
While the
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Company believes that its acquisitions of ABASCO, ITS and Code 3 and
anticipated revenues from the WELLSURESM program and from the Company's
consulting, snubbing, training and industrial and marine firefighting services
will help to provide an expanded and predictable revenue and earnings base in
the future, there can be no assurance that the Company will be successful in
further developing these acquired businesses and added services. Accordingly,
the Company expects that its revenues and operating performance may vary
considerably from year to year for the foreseeable future.
SERVICES PROVIDED BY THE COMPANY
The Company is a global-response oil and gas service company that
specializes in responding to and controlling oil and gas well emergencies,
including blowouts and well fires. In connection with such services, the
Company has the capacity to supply the equipment, expertise and personnel
necessary to contain the oil and hazardous materials spills and discharges
associated with such oil and gas well emergencies, to remediate affected sites
and to restore affected oil and gas wells to production. In addition to
providing emergency response services, the Company provides snubbing, well
plugging and abandonment and other non-critical well control services,
including pre-event planning, training and consulting services. The Company
also manufactures and markets oil and hazardous materials spill containment
and recovery equipment. The Company provides environmental remediation
services to the chemical manufacturing and transportation industries, as well
as to various state and federal agencies, and also provides materials and
equipment procurement, transportation and logistics services to the energy
industry. The Company's principal services lines include:
Well Control. This service line is divided into two distinct service levels:
(1) "Critical Event" response is ordinarily reserved for well control projects
where hydrocarbons are escaping from a well bore, regardless of whether a fire
has occurred. (2) "Non-critical Event" response, on the other hand, is
intended for the more common operating problems that do not involve escaping
hydrocarbons.
Critical Events. Critical Events frequently result in explosive fires, the
loss of life, the destruction of drilling and production facilities,
substantial environmental damage and the loss of hundreds of thousands of
dollars per day in production revenue. Since Critical Events ordinarily arise
from equipment failures or human error, it is impossible to accurately predict
the timing or scope of the Company's Critical Event work. Notwithstanding the
foregoing, a Critical Event of catastrophic proportions could result in
revenues to the Company well in excess of $5,000,000 in the year of the
incident. The Company's professional firefighting staff has more than 220
years of aggregate industry experience in responding to Critical Events, oil
and gas well fires and blowouts.
Non-critical Events. Non-critical Events frequently occur in connection with
the drilling of new wells into high pressure reservoirs. In most Non- critical
Events, the blowout preventers and other safety systems on the drilling rig
function according to design and the Company is then called upon to supervise
and assist in the well control effort so that drilling operations can resume
as promptly as safety permits. While Non-critical Events do not ordinarily
have the revenue impact of a Critical Event, they are much more common and
predictable.
Equipment Rentals. This service line includes the rental of specialty well
control and firefighting equipment by the Company primarily for use in
conjunction with Critical Events. Such equipment includes, but is not limited
to, firefighting pumps, pipe-racks, Athey Wagons, pipe cutters, crimping tools
and deluge safety systems. The Company charges this equipment out on a per
diem basis. Past experience indicates that rentals can be expected to average
approximately 40% of the revenues associated with a Critical Event.
Equipment Sales and Service. This service line involves the sale of complete
firefighting equipment packages, together with maintenance, monitoring,
updating of equipment and ongoing consulting services. A typical example of
this service line is the industry supported Fire Station that the Company has
established on the North Slope of Alaska. The establishment of this Fire
Station, completed during the six month period ended December 31, 1997,
included the sale of approximately $485,000 in equipment. The Company has also
entered into a long-term agreement to provide ongoing consulting services
relating to the Fire Station, including training, contingency planning, safety
inspections and emergency response drills. The Company believes that the
follow-on revenue from the North Slope Fire Station may approximate $100,000
per year.
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Snubbing Operations. A snubbing unit is a high pressure workover rig that
permits an operator to repair or change-out damaged casing, production tubing
and down-hole production equipment in a high pressure environment. Using a
series of highly sophisticated blowout prevention devices, a snubbing unit
makes it possible to remove and replace down-hole equipment in a pressurized
well. Since snubbing is a very hazardous process that entails a high risk of
flash fire or explosion, the snubbing segment of the oil and gas services
industry is concentrated in a few competitors who have the experience and
knowledge required to safely and efficiently perform such services.
Industrial and Marine Firefighting. This service line is divided into two
distinct elements: pre-event consulting and Critical Event management. The
pre- event services offered in the industrial and marine firefighting business
include complete on-site inspection services, safety audits and pre-event
planning. Based on these pre-event services, the Company can recommend the
equipment, facilities and manpower resources that a client should have
available in order to effectively respond to a fire. The Company can also
consult with the client to insure that the equipment and services required by
the client will be available when needed. If a Critical Event subsequently
occurs, the Company is ready to respond at a client's facility with
experienced firefighters and auxiliary equipment.
Oil and Chemical Spill Containment and Reclamation Equipment. The Company is
a leader in the design and manufacture of a comprehensive line of rapid
response oil and chemical spill containment and reclamation equipment and
products, including mechanical skimmers, containment booms and boom reels,
dispersant sprayers, dispersal agents, absorbents, response vessels, oil and
chemical spill industrial products, spill response packages, oil and chemical
spill ancillary products and waste oil recovery and reclamation products.
Oil and Chemical Spill Containment and Remediation Services. The Company's
ABASCO business unit provides containment and remediation of oil and chemical
spills for the oil and gas, petrochemical, railroad, transportation and
shipping industries, as well as various state and federal governmental
agencies. Code 3 specializes in the transfer of high and low pressure liquids
and hazardous materials and industrial fire fighting. Code 3 also provides in-
plant remedial plan implementation, hazardous waste management, petroleum tank
management, industrial hygiene, environmental and occupational, health and
safety services.
Supply, Transportation and Logistics. The Company's ITS business unit is ISO
9002 certified and provides material and equipment procurement, transportation
and logistics services to the energy industry worldwide.
Consulting; Drilling Engineering. The Company has the ability to provide
through its highly-specialized in-house engineering staff, supplemented if
necessary by outside engineering consultants and the Halliburton Energy
Services division, engineering services for such areas as: (1) planning and
design of relief well drilling (trajectory planning, directional control and
equipment specifications, and on-site supervision of the drilling operations),
(2) planning and design of production facilities which are susceptible to well
capping or other control procedures, and (3) mechanical and computer aided
designs for well control equipment.
Consulting; Inspections. A cornerstone of the Company's strategy of
providing preventive well control services involves on-site inspection
services for drilling and workover rigs, drilling and production platforms,
and field production facilities. Since these inspection services will be
offered as a standard option in Halliburton's field service programs, the
Company anticipates that inspection services will become an important source
of revenue.
Consulting; Training. The Company provides specialized training in well
control procedures for drilling, exploration and production personnel. To date
such training programs have been provided for both U.S. and international
operators. Since the Company's training services will be offered in
conjunction with ongoing educational programs sponsored by Halliburton, the
Company believes the training segment of its business offers considerable
potential for growth.
Strategic Event Planning (S.T.E.P.). A key element of the services offered
by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator
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to control a blowout. This planning process incorporates organizational
structures, action plans, specifications, people and equipment mobilization
plans with engineering details for well firefighting, capping, relief well and
kill operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of
services, it is easily modified to suit the particular needs of a specific
client.
Regional Fire Stations. The Company, in conjunction with Halliburton, plans
to pre-position in selected geographic locations throughout the world complete
complements of specialty firefighting equipment and ancillary tools and
equipment ("Fire Stations"). The equipment for these proposed Fire Stations
will either be purchased by the Company for its own account, using cash flow,
if any, from operations, or purchased by a consortium of local producers who
will then contract with the Company for maintenance and consulting services.
The Company currently has Fire Stations in Houston, Texas, Duncan, Oklahoma,
and Anaco, Venezuela, and maintains an industry supported Fire Station on the
North Slope of Alaska. The Company plans to deploy at least one Fire Station
per year over the next five years. It is believed these Fire Stations, once
established, will place the Company and its Wellcall Alliance with Halliburton
in an unique competitive position within the industry and allow the alliance
to gain market share by reducing the mobilization time and costs traditionally
involved in controlling major blowout events.
WELLSURESM Program. On February 6, 1998, the Company announced the formation
of an alliance with Global Special Risks, Inc., a managing general insurance
agent located in Houston, Texas, and New Orleans, Louisiana. The alliance
offers oil and gas exploration and production companies, through retail
insurance brokers, a new program known as "WELLSURESM," which combines
traditional well control and blowout insurance with the Company's post-event
response services and well control preventative services including company-
wide and/or well specific contingency planning, personnel training, safety
inspections and engineering consultation. Insurance provided under WELLSURESM
has been arranged with leading London insurance underwriters. WELLSURESM
program participants will be provided with the full benefit of having the
Company as a safety and prevention partner. In the event of well blowouts, the
Company will serve as the integrated emergency response service provider, as
well as function as lead contractor and project manager for control and
restoration of wells covered under the program.
HALLIBURTON ALLIANCE
In response to ongoing changes in the emergency response segment of the oil
and gas service industry, the Company entered into a global strategic alliance
with Halliburton Energy Services. Halliburton is widely recognized as an
industry leader in the pumping, cementing, snubbing, production enhancement,
coiled tubing and related services segment of the oil field services industry.
This alliance, "WELLCALLSM", draws on the expertise and abilities of both
companies to offer a total well control solution for oil and gas producers
worldwide. The Halliburton Alliance provides a complete range of well control
services including pre-event troubleshooting and contingency planning,
snubbing, pumping, blowout control, debris removal, firefighting, relief and
directional well planning and other specialized services. The specific
benefits that WELLCALLSM provides to an operator include:
. Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week;
. A full-time team of experienced well control specialists that are
dedicated to safety;
. Specialized equipment design, rental, and sales;
. Contingency planning consultation where WELLCALLSM specialists meet with
customers, identify potential problems, and help develop a comprehensive
contingency plan; and
. A single-point contact to activate a coordinated total response to well
control needs.
7
<PAGE>
Operators contracting with WELLCALLSM receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is region-
specific, reservoir-specific, site-specific and well-specific. The S.T.E.P.
plan provides the operator with a written, comprehensive and coordinated
action plan that incorporates historical data, pre-planned call outs of
Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. Thereafter, in the event of a blowout, WELLCALLSM
provides the worldwide engineering and well control equipment capabilities of
Halliburton and the firefighting expertise of the Company through an
integrated contract with the operator.
As a result of the Halliburton Alliance, the Company is directly involved in
Halliburton's well control projects that require firefighting expertise,
Halliburton is a primary service vendor to the Company and the Company has
exclusive rights to use certain firefighting technologies developed by
Halliburton. It is anticipated that most of the Company's Fire Stations will
be established at existing Halliburton facilities and that maintenance of the
Fire Station equipment will be performed by Halliburton employees. The
Halliburton Alliance also gives the Company access to Halliburton's global
communications and currency management systems, capabilities that could prove
invaluable in connection with the Company's international operations.
Consistent with the Halliburton Alliance, the Company's focus has evolved to
meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many
engineering services, the Company has developed a proactive menu of services
to meet their needs. These services emphasize pre-event planning and training
to minimize the likelihood of a blowout and minimize damages in the event of
an actual blowout. The Company provides comprehensive advance training,
readiness, preparation, inspections and mobilization drills which allow client
companies to pursue every possible preventive measure and to react in the most
cohesive manner possible when an event occurs. The Halliburton Alliance
stresses the importance of safety, environmental protection and cost control,
along with asset protection and liability minimization.
The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provides that it will remain in effect for an
indefinite period of time and may be terminated prior to September 15, 2000,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination is limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either
party, (iii) the failure of the Alliance to generate economically viable
business, or (iv) the failure of either party to engage in good faith dealing.
While the Company considers its relationship with Halliburton to be good,
there can be no assurance that the Alliance Agreement will not be terminated
by Halliburton. The termination of the Alliance Agreement could have a
material adverse effect on the Company's future operating performance.
BUSINESS STRATEGY
Over the next few years, the Company intends to continue to expand its
operations and to build upon its demonstrated strengths while increasing
revenues from its consulting, equipment sales, environmental containment and
remediation services and Non-critical Event activities. Recognizing that the
well control services business is a finite market whose upside potential is
dependent upon the occurrence of blowouts which cannot be reasonably
predicted, the Company's business strategy is to market its pre-event services
on a global basis and expand its range of services to establish a diversified
and expanded revenue base. The Company intends to accomplish its objectives by
promoting the Halliburton Alliance and the WELLSURESM program, continuing to
integrate the businesses of Boots & Coots, ABASCO, ITS and Code 3, increasing
the geographical scope of its training and consulting programs, and
establishing additional Company-owned Fire Stations at locations outside the
United States. Like the Company owned Fire Stations in Houston, Texas, and
Duncan, Oklahoma, the industry supported Fire Station on the North Slope of
Alaska and the Fire Station in Anaco, Venezuela, the proposed Company-owned
Fire Stations would include the equipment required to respond to a well
blowout or fire. In general, the Company plans to offer a broader range of
services to oil and gas producers worldwide, increasing both the scope of its
target and its market share.
8
<PAGE>
The Company hopes to expand its service capabilities through a combination
of internal growth, additional acquisitions, joint ventures and strategic
alliances. Because of the fragmented nature of the oil and gas services
industry, the Company believes a number of attractive acquisition
opportunities exist in the pressure control, emergency response and
environmental services segments of the business. The oil and gas services
business in general, and the emergency response and environmental remediation
segments in particular, are characterized by a small number of dominant global
competitors and a significant number of locally oriented businesses, many of
which tend to be viable acquisition targets. The Company believes that the
owners of locally oriented companies may be willing to consider becoming part
of a larger organization.
Management has recently commenced preliminary discussions with a number of
companies engaged in complementary businesses to explore the potential for
mutually beneficial business arrangements. While none of these discussions has
progressed to the point where the Company believes a particular transaction is
probable, management believes that additional acquisitions, joint ventures and
strategic alliances are likely.
RESEARCH AND DEVELOPMENT
The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.
COMPETITION
The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a
rapid pace. The Company believes that the Halliburton Alliance, the WELLSURESM
program, and its recent acquisitions of Boots & Coots, Abasco, ITS and Code 3
will strengthen its competitive position in the industry by expanding the
scope of services that the Company offers to its customers. However, the
Company's ability to compete depends upon, among other factors, increasing
industry awareness of the variety of services the Company offers, expanding
the Company's network of Fire Stations and further expanding the breadth of
its available services. Competition from other emergency response companies,
some of which may have greater financial resources than the Company, is
intense and is expected to increase as the industry undergoes additional
anticipated change. The Company's competitors may also succeed in developing
new techniques, products and services that are more effective than any that
have been or are being developed by the Company or that render the Company's
techniques, products and services obsolete or noncompetitive. The Company's
competitors may also succeed in obtaining patent protection or other
intellectual property rights that might hinder the Company's ability to
develop, produce or sell competitive products or the specialized equipment
used in its business.
EMPLOYEES
As of March 23, 1998, the Company and its operating subsidiaries
collectively had 183 full-time employees. In addition, the Company has several
part-time consultants and also employs part-time contract personnel who remain
on-call for certain emergency response projects. The Company is not subject to
any collective bargaining agreements and it considers its relations with its
employees to be good.
OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE; LITIGATION
The Company's operations involve ultra-hazardous activities that involve an
extraordinarily high degree of risk. Such operations are subject to accidents
resulting in personal injury and the loss of life or property, environmental
mishaps and mechanical failures, and litigation arising from such events may
result in the Company being named a defendant in lawsuits asserting large
claims. The Company may be held liable in certain circumstances, including if
it fails to exercise reasonable care in connection with its activities, and it
may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their
9
<PAGE>
duties. The Company and its subsidiaries presently maintain liability
insurance coverage with aggregate policy limits which are believed to be
adequate for their respective operations. However, it is generally considered
economically unfeasible in the oil and gas service industry to maintain
insurance sufficient to cover large claims. Accordingly, there can be no
assurance that the Company's insurance will be sufficient or effective under
all circumstances or against all hazards to which the Company may be subject.
A successful claim for which the Company is not fully insured could have a
material adverse effect on the Company. No assurance can be given that the
Company will not be subject to future claims in excess of the amount of
insurance coverage which the Company deems appropriate and feasible to
maintain.
RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's emergency response services require highly specialized skills.
Due to the unique nature of the industry and the small number of persons who
possess the requisite skills and experience, the Company is highly dependent
upon the personal efforts and abilities of its officers, directors and key
employees. In seeking qualified personnel, the Company will be required to
compete with companies having greater financial and other resources than the
Company. Since the future success of the Company will be dependent upon its
ability to attract and retain qualified personnel, the inability to do so, or
the loss of personnel, could have a material adverse impact on the Company's
business.
CONTROL OF THE COMPANY BY SIGNIFICANT STOCKHOLDERS
The Company's current officers and directors own beneficially, on a combined
basis, 10,943,473 shares of Common Stock, including currently exercisable
options to purchase Common Stock. The shares of Common Stock owned by the
Company's current officers and directors represent, in the aggregate,
approximately 35.79% of the issued and outstanding Common Stock. As a result,
the current officers and directors of the Company collectively have
significant and perhaps controlling influence in the election of the Company's
Board of Directors and with respect to the determination and authorization of
corporate actions for an indefinite period of time. Further, in May 1995,
Brian Krause, the Company's President, Raymond Henry, the Company's Director
of Well Control Operations, Richard Hatteberg, the Company's Senior Vice
President, Well Control, and Danny Clayton, the President of IWC de Venezuela,
entered into a Voting Trust Agreement that gives Larry H. Ramming, the
Company's Chairman and Chief Executive Officer, and Mr. Henry, as co-trustees,
the absolute right to vote all shares of Common Stock now owned or hereafter
acquired by Messrs. Krause, Henry, Hatteberg and Clayton during the five-year
period ending December 31, 2000 (the "Voting Trust Agreement"); provided, that
twenty percent of the shares subject to such agreement are eligible for
release therefrom on each one year anniversary date of the Voting Trust
Agreement upon the written request of the party owning such shares. In the
event that Messrs. Ramming and Henry are unable to reach an agreement
respecting the voting of such shares, the Voting Trust Agreement designates
Charles T. Phillips, attorney at law, as the tiebreaker.
CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION
The Company customarily enters into service contracts with its customers
which frequently contain provisions that hold the Company liable for various
losses or liabilities incurred by the customer in connection with the
activities of the Company, including, without limitation, losses and
liabilities relating to claims by third parties, damage to property, violation
of governmental laws, regulations or orders, injury or death to persons, and
pollution or contamination caused by substances in the Company's possession or
control. The Company may be responsible for any such losses or liabilities
caused by contractors retained by the Company in connection with the provision
of its services. In addition, such contracts generally require the Company,
its employees, agents and contractors to comply with all applicable laws,
rules and regulations (which may include the laws, rules and regulations of
various foreign jurisdictions) and to provide sufficient training and
educational programs to such persons in order to enable them to comply with
applicable laws, rules and regulations. Consequently, the Company may be
exposed to substantial liabilities in connection with its services. In the
case of emergency response services, the Company frequently enters into
agreements with customers which limit the Company's exposure to liability
and/or require the customer to indemnify the Company for losses or liabilities
incurred by
10
<PAGE>
the Company in connection with such services, except in the case of willful
misconduct by the Company. There can be no assurance, however, that such
contractual provisions limiting the liability of the Company will be
enforceable in whole or in part under applicable law.
ITEM 2. DESCRIPTION OF PROPERTY.
REAL PROPERTY
The Company leases a 7,000 square foot office in the Halliburton Center,
Houston, Texas. This space is rented from an unaffiliated landlord through May
2002 for an average monthly rental of $7,000. The Company leases an 11,000
square foot Fire Station facility in Anaco, Venezuela, which space is rented
through January 2000 for a monthly rental of $4,476. The Company owns a
facility in northwest Houston, Texas, that includes approximately 2 acres of
land, a 4,000 square foot office building and a 12,000 square foot
manufacturing and warehouse building. The Company's ITS business unit leases
approximately 10,000 square feet of office space in the Camac Plaza, Houston,
Texas, through June 30, 1999, for an average monthly rental of $9,400.
Additionally, ABASCO, ITS and Code 3 have leased office and equipment storage
facilities in various other cities within the United States, Venezuela, the
United Kingdom and Peru. The future commitments on such leases are immaterial.
The Company believes that these facilities will be adequate for its
anticipated needs.
EQUIPMENT
The Company is well-equipped for its current operations. In the fields of
oil and gas well blowout control and firefighting specifically, the Company
owns five complete sets of oil-well firefighting equipment, including Athey
wagons, pumps, water lines, monitors and nozzles. These equipment sets are
presently located at Company-owned Fire Stations in Houston, Texas, Duncan,
Oklahoma and Anaco, Venezuela, and are in good condition. In addition, the
Company has the in-house capacity to assemble additional firefighting and pump
equipment packages as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceeding, nor is its
property the subject of a pending legal proceeding, which is not routine
litigation incidental to its business or in which the amount involved,
exclusive of interest and costs, exceeds ten percent of the current assets of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The annual meeting (the "Meeting") of the stockholders of the Company was
held on December 8, 1997. At the Meeting, the stockholders voted upon a number
of proposals, each of which is summarized below, along with the votes cast for
and against each such proposal and the withheld or abstaining therefrom.
ELECTION OF DIRECTORS. At the Meeting, the stockholders elected the
following persons to the board of directors of the Company until the date of
the annual stockholders meeting in the calendar year set forth opposite the
name of each such person:
<TABLE>
<CAPTION>
VOTES
NAME TERM VOTES FOR AGAINST ABSTAINING
---- ---- ---------- ------- ----------
<S> <C> <C> <C> <C>
Larry Ramming.......................... 1998 16,807,720 0 0
Jerry Winchester....................... 1999 16,807,720 0 0
Doug Johnson........................... 1999 16,807,720 0 0
Brian Krause........................... 2000 16,807,720 0 0
K. Kirk Krist.......................... 2000 16,807,720 0 0
</TABLE>
On March 25, 1998, subsequent to the Meeting, the Board of Directors elected
Thomas L. Easley, the Chief Financial Officer and Secretary to the Board of
Directors for a term expiring on the date of the annual stockholders' meeting
to be held in calendar year 1998.
11
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION. At the Meeting, the stockholders
of the Company voted on and approved an amendment to clarify Article V,
Subsection (c) of the Certificate of Incorporation of the Company regarding
the timing of notice required of stockholders for the proposal of business to
be conducted at any annual or special meeting of stockholders. The
stockholders voted 16,804,757 shares for such amendment and 2,963 shares were
voted against or withheld, with 0 shares abstaining or not voting.
1997 INCENTIVE STOCK PLAN. At the Meeting, the stockholders of the Company
voted on and approved the 1997 Incentive Stock Plan of the Company, attached
hereto as Exhibit 10.14 and incorporated herein by reference (the "1997
Incentive Plan"). The 1997 Incentive Plan authorizes the board of directors to
grant, in the aggregate, up to 1,475,000 shares of common stock and to issue
options to purchase, in the aggregate, up to 920,000 shares of common stock of
the Company to full-time employees not eligible to receive awards under the
Company's Executive Compensation Plans or subsequently adopted incentive
plans, unless such plan expresses provides otherwise. The stockholders voted
16,537,091 shares for such proposal and 270,629 shares were voted against or
withheld, with 0 shares abstaining or not voting.
EXECUTIVE COMPENSATION PLANS. At the Meeting, the stockholders of the
Company voted on and approved a resolution authorizing the Compensation
Committee of the board of directors to develop and implement one or more
executive compensation plans that will authorize such committee to equity
awards for a maximum of 1,475,000 shares of Common Stock without the necessity
of obtaining any further stockholder approval. The stockholders voted
16,305,850 shares for such proposal and 266,666 shares were voted against or
withheld, with 230,000 shares abstaining or not voting.
OUTSIDE DIRECTORS' OPTION PLAN. At the Meeting, the stockholders of the
Company voted on and approved the Proposed Outside Directors' Option Plan of
the Company, attached hereto as Exhibit 10.15 and incorporated herein by
reference (the "Outside Directors' Plan"). The Outside Directors' Plan
provides for the issuance of an option to purchase 15,000 shares of Common
Stock to each member of the board of directors who is not an employee of the
Company for each year of service. The aggregate shares available under the
Outside Directors' Plan is 150,000 shares of Common Stock. The stockholders
voted 16,306,591 shares for such proposal and 271,129 shares were voted
against or withheld, with 230,000 shares abstaining or not voting.
RATIFICATION OF INDEPENDENT AUDITORS. At the Meeting, the stockholders of
the Company voted on and approved a resolution ratifying the selection of Hein
+ Associates LLP, as the Company's auditors for the fiscal year ending
December 31, 1997. The stockholders voted 16,374,387 shares for such proposal
and 100,000 shares were voted against or withheld, with 333,333 shares
abstaining or not voting.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the AMEX under the symbol "WEL."
Prior to January 30, 1998, the Company's Common Stock was traded on the NASD's
OTC Electronic Bulletin Board under the symbol "BCWC". Significant trading in
the Company's Common Stock has occurred only since August 1997. The following
table sets forth the high and low bid and asked prices per share of the Common
Stock as reported for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------------- -------------
BID ASKED BID ASKED
------ ------ ------ ------
<S> <C> <C> <C> <C>
Quarter ended September 30, 1997:............ $ 5.50 $ 8.00 $ 1.50 $1.625
Quarter ended December 31, 1997:............. $5.625 $5.875 $3.625 $3.875
</TABLE>
On March 23, 1998, the last reported sale price of the Common Stock as
reported on AMEX was $5.00 per share.
12
<PAGE>
The bid information has been provided by National Quotation Bureau, Inc.,
and reflects inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. As of March 20, 1998
the Company's Common Stock was held by approximately 255 holders of record.
The Company estimates that it has a significantly larger number of
shareholders because a substantial number of the Company's shares are held of
record by broker-dealers for their customers in street name.
The Company has not paid any cash dividends on its Common Stock to date. The
Company's current policy is to retain earnings to provide funds for the
operation and expansion of its business. Additionally, subsequently to
December 31, 1997, the Company obtained short-term secured financing in the
aggregate amount of $7,250,000, which comes due between May 2, 1998 and June
15, 1998 (the "Senior Notes"). The Company is prohibited from paying cash
dividends as long as the Senior Notes remain outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
RESULTS OF OPERATIONS
As discussed in Note B--Significant Accounting Policies in Notes to
Consolidated Financial Statements, the Company elected to change its fiscal
year from June 30 to December 31. A summary of operating results is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------- ---------------------
1996 1997 1996 1997
---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................. $1,662,121 $2,564,087 $ 743,040 $5,389,137
Costs and Expenses:
Operating Expenses...... 1,320,702 1,459,640 730,890 3,785,787
General and
Administrative......... 772,626 1,061,259 370,694 1,535,890
Depreciation and
Amortization........... 49,893 111,469 37,000 499,616
Operating Loss.......... (481,100) (68,281) (395,544) (432,156)
Loss on Debt
Extinguishment......... -- -- -- (193,333)
Other Income (Expenses). 4,216 (62,774) (1,104) (91,973)
Income Taxes (Benefit).. (137,818) 24,569 12,662 41,370
Net Loss................ (339,066) (155,624) (409,310) (758,832)
</TABLE>
Comparison of Year Ended June 30, 1996 with Year Ended June 30, 1997
Revenues were $1,662,121 for the year ended June 30, 1996 ("fiscal 1996")
compared to $2,564,087 for the year ended June 30, 1997 ("fiscal 1997"). This
increase was the result of increased market share from diversification of IWC
Service's client base.
Operating expenses were $1,320,702 for fiscal 1996, compared to $1,459,640
for fiscal 1997. The increase was the result of expanded operations in the
fourth quarter of fiscal 1997 due to expanded business activity.
General and administrative expenses were $772,626 for fiscal 1996, compared
to $1,061,259 for fiscal 1997. The increase was primarily the result of
investments in expanded corporate infrastructure and expanded marketing and
advertising to increase market share and diversify the Company's client base.
Depreciation and amortization expense increased from $49,893 for fiscal
1996, compared to $111,469 for fiscal 1997, primarily as the result of a full
year of depreciation on equipment additions made in fiscal 1996.
Other income (expenses) was $4,216 for fiscal 1996, compared to a net
expense of ($62,774) for fiscal 1997, resulting primarily from higher interest
expense on financed equipment purchases made during the 1996 period and
interest expense on the 12% Senior Subordinated Notes sold through June 30,
1997.
13
<PAGE>
Income taxes for fiscal 1996, includes a credit for the reversal of a
deferred federal income tax provision of $139,000 for the 1995 start-up
period. Substantially all of the balance of income taxes for both fiscal 1996
and fiscal 1997 represents foreign taxes withheld on various international
projects.
IWC Services sustained a net loss of $339,066 for fiscal 1996, compared to a
net loss of $155,624 for the comparable period in 1997 as a result of the
revenue and expense variations discussed above.
Comparison of Six Months Ended December 31, 1996 with Six Months Ended
December 31, 1997
Revenues were $743,040 for the six months ended December 31, 1996 ("1996
Interim Period") compared to $5,389,137 for the six months ended December 31,
1997 ("1997 Interim Period"). This increase principally resulted from: (1)
product sales from the ABASCO acquisition completed in September 1997
($971,538); (2) sales of two fire fighting equipment packages in the 1997
Interim Period ($907,933); and, (3) increased market share for the Company's
Well Control business unit.
Operating expenses were $730,890 for the 1996 Interim Period compared to
$3,785,787 for the 1997 Interim Period. This increase principally resulted
from: $3,785,787 for the 1997 Interim Period. This increase principally
resulted from: (1) cost of sales and operating expenses from the ABASCO
acquisition completed in September 1997; ($632,176); (2) costs associated with
the sales of two fire fighting equipment packages in the 1997 Interim Period
($685,837); (3) personnel and equipment mobilizations costs incurred in
connection with an international well control incident in October 1997
($540,000); and, (4) costs associated with an increase in personnel and
support facilities resulting from the July 31, 1997 acquisition of the Boots &
Coots operating assets and growth in the Company's Well Control business unit.
General and administrative expenses were $370,694 for the 1996 Interim
Period compared to $1,535,890 for the 1997 Interim Period. This increase
principally resulted from: (1) expenses associated from the ABASCO acquisition
completed in September 1997 ($246,040); and, (2) expenses associated with an
increase in personnel and other overhead to support the Company's increased
operational level in Well Control.
Depreciation and amortization expenses increased from $37,000 for the 1996
Interim Period compared to $499,616 for the 1997 Interim Period due to the
significant increase in property and equipment acquired with the July 31, 1997
acquisition of the Boots & Coots operating assets.
The loss of debt extinguishment of $193,333 resulted from the early
conversion to common stock of $2,900,000 in face amount of the Company's 12%
Senior Subordinated Notes during the 1997 Interim Period.
The increase in other expenses from $1,104 during the 1996 Interim Period to
$91,973 during the 1997 Interim Period is principally due to interest expense
on the Company's 12% Senior Subordinated Notes.
Income taxes of $12,662 during the 1996 Interim Period and $41,370 during
the 1997 Interim Period results from foreign taxes incurred on Well Control
projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash expenditures in connection with the acquisitions of
Abasco, ITS and Code 3 required a substantial portion of the Company's cash
reserves. Further, the terms upon which Abasco, ITS and Code 3 were acquired
allowed the sellers to retain most or all of the working capital of such
companies. To date, the Company has funded its operations and acquisitions
from: equity capital contributed by its officers, directors and principal
stockholders; proceeds from the sale in July 1997 of $3,000,000 of the
Company's 12% Senior Subordinated Notes due December 31, 2000 (the
"Subordinated Notes") (of which $2,900,000 has been converted into 3,866,653
shares of Common Stock); $6,481,000 in net proceeds from the private
placement, in September 1997, of 7,475,000 shares of Common Stock (the
"September Private Placement"); $4,500,000 in net proceeds from the private
placement, in January 1998, of the Company's 10% Senior Secured Notes due
14
<PAGE>
May 2, 1998 (the "Senior Notes"); $2,250,000 in net proceeds from the private
placement, in March 1998, of additional Senior Notes due June 15, 1998
("Additional Senior Notes"); and seller financing in the aggregate principal
amount of $5,760,977, of which approximately $1,500,000 remains outstanding as
of the date hereof.
Accordingly, the Company currently needs additional working capital to fund
its existing operations and to repay indebtedness in the aggregate principal
amount of $8,750,000 which comes due between March 31 and June 15, 1998. The
Company is exploring various financing alternatives to enable it to retire all
of the outstanding Senior Notes, Additional Senior Notes, seller notes and to
finance future acquisitions by the Company. Such financing alternatives
include: (1) the sale, currently underway through private placement on a best-
effort basis, of $10,000,000 of 10% Junior Redeemable Convertible Preferred
Stock; (2) consideration for the offering through private placement on a best-
efforts basis of a Convertible Preferred Stock Offering; (3) discussions with
certain commercial banks for a secured debt facility; and, (4) discussions
regarding the possible private placement of Subordinated Notes. Although these
financing efforts are in process and not yet completed, Management believes
these actions, together with cash flows from operations, will provide adequate
funding to the Company. In the event that one or more of these financing
alternatives under consideration are not accomplished, the Company could be
required to restructure current indebtedness, sell assets to repay
indebtedness, curtail expansion plans and fund business activities from only
internally generated funds. There can be no assurance, however, that the
Company will be successful in obtaining financing through alternative means on
acceptable terms.
ITEM 7. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
15
<PAGE>
PART III
Pursuant to Instruction E.3 to Form 10-KSB, the information in Items 9-12 is
incorporated by reference from the Company's definitive proxy statement which
will be filed with the Commission pursuant to Regulation 14A on or about April
30, 1998; if such proxy statement is not filed by such date, this Form 10-KSB
will be amended to include Items 9-12 on or before April 30, 1998.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
------- ----------- --------
<C> <S> <C>
3.01 Amended and Restated Certificate of Exhibit 3.02 of Form 8-K
Incorporation filed August 13, 1997
3.02 Amendment to Certificate of Incorporation Exhibit 3.03 of Form 8-K
filed August 13, 1997
3.03 Amended Bylaws Exhibit 3.04 of Form 8-K
filed August 13, 1997
4.01 Specimen Certificate for the Registrant's Exhibit 4.01 of Form 8-K
Common Stock filed August 13, 1997
4.02 Form of 12% Senior Subordinated Notes due Exhibit 4.02 of Form 8-K
December 31, 2000 filed August 13, 1997
4.03 Form of Noteholders' Warrants to Purchase Exhibit 4.03 of Form 8-K
$3,000,000 of Common Stock filed August 13, 1997
4.04 Form of Employees Options to Purchase Exhibit 4.04 of Form 8-K
690,000 Shares of Common Stock filed August 13, 1997
4.05 Form of Contractual Options to Purchase Exhibit 4.05 of Form 8-K
1,265,000 Shares of Common Stock filed August 13, 1997
4.06 Note Purchase Agreement with Main Exhibit 4.06 of Form
Street/Geneva 10-KSB filed on March 31,
1998
4.07 First Amendment to Note Purchase Agreement Exhibit 4.07 of Form
with Main Street/Geneva 10-KSB filed on March 31,
1998
9.01 Voting Trust Agreement between Larry H. Exhibit 9.01 of Form
Ramming, Raymond Henry, Richard Hatteberg, 10-KSB filed on March 31,
Danny Clayton and Brian Krause (as amended) 1998
10.01 Alliance Agreement between IWC Services, Exhibit 10.01 of Form 8-K
Inc. and Halliburton Energy Services, a filed August 13, 1997
division of Halliburton Company
10.02 Executive Employment Agreement of Larry H. Exhibit 10.02 of Form 8-K
Ramming filed August 13, 1997
10.03 Executive Employment Agreement of Raymond Exhibit 10.03 of Form 8-K
Henry filed August 13, 1997
10.04 Executive Employment Agreement of Brian Exhibit 10.04 of Form 8-K
Krause filed August 13, 1997
10.05 Executive Employment Agreement of Richard Exhibit 10.05 of Form 8-K
Hatteberg filed August 13, 1997
10.06 Executive Employment Agreement of Danny Exhibit 10.06 of Form 8-K
Clayton filed August 13, 1997
10.07 Security Agreement and Financing Statement Exhibit 10.07 of Form
with Main Street/Geneva 10-KSB filed on March 31,
1998
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION LOCATION
------- ----------- --------
<C> <S> <C>
10.08 First Amendment to Security Agreement Exhibit 10.08 of Form
10-KSB filed on March 31,
1998
10.09 Stock Pledge Agreement with Main Exhibit 10.09 of Form
Street/Geneva 10-KSB filed on March 31,
1998
10.10 First Amendment to Stock Pledge Agreement Exhibit 10.10 of Form
10-KSB filed on March 31,
1998
10.11 Form of Warrant issued to Main Exhibit 10.11 of Form
Street/Geneva 10-KSB filed on March 31,
1998
10.12 Form of Registration Rights Agreement Exhibit 10.12 of Form
with Main Street/Geneva 10-KSB filed on March 31,
1998
10.13 Form of First Amendment to Registration Exhibit 10.13 of Form
Rights Agreement 10-KSB filed on March 31,
1998
10.14 1997 Incentive Stock Plan Exhibit 10.14 of Form
10-KSB filed on March 31,
1998
10.15 Proposed Outside Directors' Option Plan Exhibit 10.15 of Form
10-KSB filed on March 31,
1998
10.16 Proposed Executive Compensation Plan Exhibit 10.16 of Form
10-KSB filed on March 31,
1998
10.17 Halliburton Center Sublease Exhibit 10.17 of Form
10-KSB filed on March 31,
1998
10.18 Camac Plaza Sublease Exhibit 10.18 of Form
10-KSB filed on March 31,
1998
11.01 Computation of Per Share Earnings Exhibit 11.01 of Form
10-KSB filed on March 31,
1998
21.01 List of subsidiaries Exhibit 21.01 of Form
10-KSB/A filed December 5,
1997
27.01 Financial Data Schedule Exhibit 27.01 of Form
10-KSB filed on March 31,
1998
</TABLE>
On December 23, 1997, the Company filed a report on Form 8-K reporting a
change in its fiscal year end from June 30, 1997 to December 31, 1997.
17
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(D) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED.
Boots & Coots International Well Control, Inc.
/s/ Larry H. Ramming
By:________________________________ Date: April 8, 1998
Larry H. Ramming, Chief Executive
Officer
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.
<TABLE>
<S> <C>
</TABLE>
SIGNATURE TITLE DATE
By:/s/ Larry H. Ramming Chief Executive April 8, 1998
-------------------------------- Officer and
Larry H. Ramming Director
By:/s/ Thomas L. Easley Chief Financial April 8, 1998
-------------------------------- Officer and
Thomas L. Easley Director
By:/s/ David G. Williams Controller April 8, 1998
--------------------------------
David G. Williams
By:/s/ Brian Krause President and April 8, 1998
-------------------------------- Director
Brian Krause
By:/s/ Kirk Krist Director April 8, 1998
--------------------------------
Kirk Krist
By:/s/ Doug Johnson Director April 8, 1998
--------------------------------
Doug Johnson
By:/s/ Jerry Winchester Director April 8, 1998
--------------------------------
Jerry Winchester
18
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. and subsidiaries as of June 30, 1997
and December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended June 30, 1997 and for
the six-month period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Boots &
Coots International Well Control, Inc. and subsidiaries as of June 30, 1997
and December 31, 1997, and the results of their operations and their cash
flows for the year ended June 30, 1997 and for the six-month period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Hein + Associates LLP
-------------------------------------
Hein + Associates LLP
Houston, Texas
March 27, 1998
F-1
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER
ASSETS 1997 31, 1997
------ ---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash................................................ $ 701,321 $ 1,718,060
Receivables--net of allowance for doubtful accounts
of $7,000 at December 31, 1997..................... 1,380,570 2,765,581
Inventories......................................... 288,265 1,131,011
Prepaid expenses and other current assets........... 49,754 427,160
---------- -----------
Total current assets.............................. 2,419,910 6,041,812
PROPERTY, PLANT AND EQUIPMENT, net.................... 390,706 6,948,809
OTHER ASSETS:
Deferred financing costs and other assets--net of
accumulated amortization of $14,731 and $16,712 at
June 30 and December 31, 1997, respectively........ 443,448 87,128
Goodwill--net of accumulated amortization of $25,677
and $45,856 at June 30 and December 31, 1997,
respectively....................................... 170,272 983,624
---------- -----------
Total assets...................................... $3,424,336 $14,061,373
========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.................................... $ 666,458 $ 1,679,242
Accrued liabilities and customer advances........... 496,175 486,450
Notes payable--current portion...................... 22,211 1,564,928
---------- -----------
Total current liabilities......................... 1,184,844 3,730,620
---------- -----------
NOTES PAYABLE--net of current portion................. 14,338 9,207
12% SENIOR SUBORDINATED NOTES......................... 1,399,500 90,000
COMMITMENTS AND CONTINGENCIES (Note I)
SHAREHOLDERS' EQUITY:
Preferred stock ($.00001 par, 5,000,000 shares
authorized, no shares issued or outstanding)....... -- --
Common stock ($.00001 par, 50,000,000 shares
authorized, 14,187,368 and 29,998,662 shares issued
and outstanding at June 30 and December 31, 1997,
respectively)...................................... 142 300
Additional paid-in capital.......................... 1,048,118 11,212,684
Accumulated deficit................................. (222,606) (981,438)
---------- -----------
Total shareholders' equity........................ 825,654 10,231,546
---------- -----------
Total liabilities and shareholders' equity........ $3,424,336 $14,061,373
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED ENDED
JUNE 30, DECEMBER
1997 31, 1997
----------- -----------
<S> <C> <C>
REVENUES:............................................ $ 2,564,087 $ 5,389,137
COSTS AND EXPENSES:
Operating expenses................................. 1,459,640 3,785,787
General and administrative......................... 1,061,259 1,535,890
Depreciation and amortization...................... 111,469 499,616
----------- -----------
2,632,368 5,821,293
----------- -----------
Operating Loss....................................... 68,281 (432,156)
Loss on Debt Extinguishment.......................... -- 193,333
Other Expenses, primarily interest................... 62,774 91,973
----------- -----------
Loss Before Income Taxes............................. (131,055) (717,462)
Income Tax Expense................................... 24,569 41,370
----------- -----------
Net Loss............................................. $ (155,624) $ (758,832)
=========== ===========
Basic Earnings (Loss) Per Common Share............... $ (0.01) $ (0.03)
=========== ===========
Diluted Earnings (Loss) Per Common Share............. $ (0.01) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING. 12,191,171 23,864,069
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997 AND
SIX-MONTH PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996.. 11,500,000 $115 $ 800,645 $ (66,982) $ 733,778
Common stock options
issued for services
rendered............. -- -- 46,000 -- 46,000
Common stock issued
for services
rendered............. 230,000 2 9,998 -- 10,000
Common stock issued... 2,457,368 25 (25) -- --
Common stock issued as
compensation......... 36,000 -- 36,000
Sale of common stock
warrants............. -- -- 155,500 -- 155,500
Net loss.............. -- -- -- (155,624) (155,624)
---------- ---- ----------- --------- -----------
BALANCES, June 30, 1997
....................... 14,187,368 142 1,048,118 (222,606) 825,654
Common stock issued... 1,314,632 13 (13) -- --
Exchange conversion
with Havenwood
reverse merger....... 1,173,168 12 (12) -- --
Common stock issued to
acquire Boots & Coots
L.P.................. 259,901 3 999,997 -- 1,000,000
Sale of common stock
warrants............. -- -- 144,500 -- 144,500
Common stock issued to
extinguish debt...... 3,866,653 39 2,447,251 -- 2,447,290
Sale of common stock,
net of offering
costs................ 7,475,000 75 6,238,025 -- 6,238,100
Common stock issued to
purchase ABASCO,
Inc.................. 300,000 3 239,997 -- 240,000
Common stock issued
for services
rendered............. 100,000 1 79,999 -- 80,000
Common stock issued
upon exercise of
options.............. 1,287,440 12 (12) -- --
Common stock issued
upon exercise of
options.............. 34,500 -- 14,834 -- 14,834
Net loss.............. -- -- -- (758,832) (758,832)
---------- ---- ----------- --------- -----------
BALANCES, December 31,
1997................... 29,998,662 $300 $11,212,684 $(981,438) $10,231,546
========== ==== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED ENDED
JUNE 30, DECEMBER
1997 31, 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (155,624) $ (758,832)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 74,480 451,139
Amortization....................................... 36,989 48,477
Common stock issued as compensation................ 36,000 --
Bad debt expense................................... -- 7,000
Loss on debt extinguishment........................ -- 193,333
Changes in operating assets and liabilities, net of
assets acquired:
Receivables...................................... (1,075,542) (1,392,011)
Inventories and supplies......................... (288,265) 337,846
Prepaid expenses................................. (43,304) (380,084)
Deferred costs and other assets (not current).... (33,950) --
Accounts payable................................. 601,442 1,012,784
Accrued liabilities and customer advances........ 496,175 (9,727)
----------- -----------
Net cash used in operating activities............ (351,599) (490,075)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Boots & Coots, L.P.................. -- $(1,221,130)
Acquisition of ABASCO, Inc......................... -- (1,652,795)
Property and equipment additions................... (122,882) (188,154)
Disposition of assets.............................. 4,010 38,909
Acquisition of business and others................. (44,983) --
----------- -----------
Net cash used in investing activities............ (163,855) (3,023,170)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised..................... -- 14,835
Proceeds for issuance of debt and warrants......... 1,555,000 1,445,000
Deferred financing costs........................... (321,132) (210,144)
Debt repayments.................................... (71,050) (3,222,607)
Proceeds from sales of common stock................ -- 6,502,900
----------- -----------
Net cash provided by financing activities........ 1,162,818 4,529,984
----------- -----------
NET INCREASE (DECREASE) IN CASH...................... 647,364 1,016,739
CASH, beginning of year.............................. 53,957 701,321
----------- -----------
CASH, end of year.................................... $ 701,321 $ 1,718,060
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest............................. $ 53,427 $ 65,543
Cash paid for income taxes......................... $ 22,996 $ 41,370
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock and options issued in exchange for
property and equipment and services rendered...... $ 56,000 $ 80,000
Conversion of subordinated debt and warrants to
common stock...................................... -- $ 3,000,000
Issuance of common stock in acquisitions........... -- $ 1,240,000
Write-off of deferred placement and debt costs..... -- $ 540,843
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION:
Boots & Coots International Well Control, Inc. (the "Company"), formerly
known as Havenwood Ventures, Inc. ("Havenwood"), was incorporated in Delaware
in April 1988. Havenwood was originally formed to serve as a blind pool
investment fund, and in July 1988 Havenwood raised $499,500 in an initial
public offering of its Common Stock. After completing its initial public
offering, Havenwood expended its available resources in the development of a
business enterprise which it ultimately divested, thereafter remaining
inactive, with no material assets or liabilities, until it entered into a
business combination with IWC Services Inc. on July 29, 1997.
The Company acquired IWC Services, Inc. ("IWC Services") on July 29, 1997,
in a "reverse triangular merger" in which it issued shares of Common Stock to
the stockholders of IWC Services in exchange for all of the issued and
outstanding common stock of IWC Services and issued options and warrants to
purchase Common Stock of the Company in exchange for all of the options and
warrants to purchase common stock of IWC Services then outstanding. As a
result of the merger, IWC Services became a wholly-owned subsidiary of the
Company, the stockholders of IWC Services became the beneficial holders of
approximately 93% of the post-merger issued and outstanding shares of Common
Stock and the board of directors and management of IWC Services took over the
management of the Company.
IWC Services, incorporated in Texas on June 27, 1995, was formed with the
issuance of 100,000 shares of no par common stock (increased to 5,000,000
pursuant to a 50-to-one stock split discussed in Note G) in exchange for cash
of $549,000, property and equipment valued at $108,925 assigned by Buckingham
Capital Corporation, and services performed by certain other shareholders. IWC
Services had no operations prior to its acquisition of Hell Fighters, Inc.
(Hell Fighters). The shareholders of Hell Fighters, a Texas corporation,
incorporated on May 4, 1995, contributed to IWC Services all of their
outstanding common shares of Hell Fighters, which then became a wholly-owned
subsidiary of IWC Services.
Under the plan of merger between Havenwood and IWC Services, (i) the
outstanding voting securities of the Company were reverse split in the ratio
of one post-split share for every 135 pre-split shares held by a shareholder,
provided, however, that no single shareholder's share ownership was reduced to
fewer than 100 post-split shares; (ii) certain principal shareholders of the
Company surrendered a total of 740,740 post-split shares to the Company for
cancellation, leaving a total of 1,173,074 shares of common stock issued and
outstanding on the closing date; (iii) each issued and outstanding share of
common stock of IWC Services was converted into 2.30 post-merger shares of the
Company's common stock, amounting to approximately 15,502,000 post-merger
shares in the aggregate (all share amounts herein have been adjusted to
reflect this 2.30 for 1 split; (iv) outstanding options and warrant to
purchase shares of the authorized and unissued common stock of IWC Services
were converted into substantially similar options and warrants to purchase
shares of the Company's authorized and unissued common stock, and (v) IWC
Services became a wholly-owned subsidiary of the Company with the former IWC
Services shareholders, as a group, acquiring shares representing approximately
92% of the resulting capitalization of the Company. Following the completion
of the transactions, there were approximately 16,675,168 shares of the
Company's common stock issued and outstanding, on a fully diluted basis.
Immediately after the merger, all the officers and directors of the Company
resigned and were replaced by representatives of IWC. The business combination
was accounted for as a merger. No goodwill arose from this transaction. As IWC
Services obtained a controlling interest in the Company, the transaction was
accounted for as a reverse merger. Therefore, for financial statement
purposes, IWC Services was considered the acquiror. The consolidated financial
statements reflect the historical operations and cost basis of IWC Services
since its inception.
On July 31, 1997, IWC acquired all of the operating assets, including stock
of its foreign services subsidiaries, of Boots & Coots, L.P. ("Boots &
Coots"), an oil and gas well control firefighting, snubbing and
F-6
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
industrial and marine firefighting company. The consideration paid consisted
of (I) $369,432 cash payable to Boots & Coots, (ii) $680,568 placed in escrow
to pay certain debts of Boots & Coots, (iii) the issuance of secured
promissory notes of the Company in the aggregate principal amount of
$4,760,977 and (iv) 259,901 shares of Common Stock of the Company. The
promissory notes are secured by the acquired assets of Boots & Coots, and have
been paid, with the exception of approximately $1,544,000 outstanding at
December 31, 1997 pending final determination of foreign tax obligations which
is anticipated to be resolved during the quarter end June 30, 1998. This
transaction was accounted for as a purchase and the acquired assets of Boots &
Coots were revalued at fair market value as of July 31, 1997 resulting in
goodwill of $50,000 which will be amortized over 15 years.
After completion of the merger and the Boots & Coots acquisition, the name
of Havenwood was changed to Boots & Coots International Well Control, Inc.
On September 25, 1997, the Company formed a wholly-owned subsidiary company,
ABASCO, Inc. ("ABASCO") to purchase the assets of ITS Environmental, a
manufacturer and distributor of rapid response oil and chemical spill
containment and reclamation equipment and products since 1975. The Company
paid $1,590,000 cash and issued 300,000 shares of common stock to acquire the
manufacturing equipment, inventory and customer lists. This transaction was
accounted for as a purchase and the acquired assets of ABASCO were revalued at
fair market value effective as of September 12, 1997 resulting in goodwill of
approximately $749,000 which will be amortized over 25 years.
The operations of the two acquired entities are included in the Company's
consolidated operations from the respective acquisition dates. The Company's
revenues, net loss applicable to common shareholders, and net loss per share
on an unaudited pro forma basis, assuming that Boots & Coots and ABASCO
acquisitions occurred on July 1, 1996 would be as follows:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
1997 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.............................................. $17,390,000 $6,627,000
Net Earnings (Loss)................................... $ 1,011,000 $ (444,000)
Net Earnings (Loss) per Share......................... $ .08 $ (.02)
</TABLE>
Through December 31, 1997 the Company's core business unit was in the oil
and natural gas well control segment of the oil and gas services industry,
providing services on a global basis in oil and gas well blowout control
and/or firefighting, specialized industrial firefighting and well control
equipment rental and sales, consulting engineering services, drilling rig and
production facilities inspection, safety training courses and blowout
contingency planning.
B. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation--The accompanying consolidated financial statements include
the financial transactions and accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions are eliminated in
consolidation.
Revenue Recognition--Revenue is recognized on the Company's service
contracts either as earned on the basis of day work completed or, for turnkey
contracts, on the percentage-of-completion method based upon costs incurred to
date and estimated total contract costs. Revenue and cost from equipment sales
is recognized upon contract completion.
F-7
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Inventories--Inventories consist primarily of equipment, parts and supplies
in work-in-progress. Inventories are valued at the lower of cost or market
using the average cost method.
Property and Equipment--Property and equipment is stated at cost.
Depreciation is provided principally using the straight-line method over the
estimated useful lives of the respective assets as follows: buildings and
improvements (15 years), well control and fire -fighting equipment (8 years),
shop and other equipment (8 years), vehicles (5 years) and office equipment
and furnishings (5 years). Office leasehold improvements are amortized over
the remaining primary lease terms.
Goodwill--The Corporation amortizes costs in excess of fair value of net
assets of businesses acquired using the straight-line method over periods
ranging from 15 to 25 years. Recoverability is reviewed annually or sooner if
events or changes in circumstances indicate that the carrying amount may
exceed fair value. Recoverability is then determined by comparing the
undiscounted net cash flows of the assets to which the goodwill applies to the
net book value including goodwill of those assets. Goodwill shown in the
consolidated financial statements relates to the Company's acquisitions of
IWC, Boots & Coots LP, and ABASCO, and Hell Fighters.
Amortization expense was 13,063 for the year ended June 30, 1997 and $20,179
for the six-month period ended December 31, 1997.
Foreign Currency Translation--The functional currency of the Company's
foreign operations is the U.S. dollar. All customer invoices and vendor
payments are denominated in U.S. currency. Revenues and expenses from foreign
operations are remeasured into U.S. dollars on the respective transaction
dates and foreign currency transaction gains or losses are included in the
Consolidated Statements of Operations.
Income Taxes--The Company accounts for income taxes pursuant to the
liability method, which requires recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Under this method, 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
carryforwards.
Earnings Per Share--Basic and diluted earnings (loss) per share was computed
by dividing net income (loss) by the weighted average common shares
outstanding during the year ended June 30, 1997 and the six-month period ended
December 31, 1997. Options to purchase shares of common stock were outstanding
during the year ended June 30, 1997 and six-month period ended December 31,
1997 but were not included in the computation of diluted earnings (loss) per
share, either because the option price was greater than the average market
price of the common stock or were anti-dilutive.
Recent Accounting Pronouncements--The Financial Accounting Standards Board
(FASB) issued SFAS No. 121, Accounting for the Impairment of Long- Lived
Assets and for Long-Lived Assets to be Disposed of, which is effective for
fiscal years beginning after December 15, 1995. This pronouncement specifies
certain events and circumstances which indicate the cost of an asset or assets
may be impaired, the method by which the evaluation should be performed, and
the method by which writedowns, if any, of the asset or assets are to be
determined and recognized. The adoption of this pronouncement did not have a
material impact on the Company's financial condition or operating results upon
implementation.
The FASB issued SFAS No. 123, Accounting for Stock Based Compensation, which
is effective for fiscal years beginning after December 15, 1995. This
pronouncement allows companies to choose to adopt the statement's new rules
for accounting for employee stock-based compensation plans. For those
companies who choose not to adopt the new rules, the statement requires
disclosures as to what earnings would have been if the new rules had been
adopted. Management adopted the disclosure requirements of this statement in
the fiscal year ended June 30, 1997; see Note D--Capital Stock for further
discussion.
F-8
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The FASB issued SFAS No. 128, Earnings Per Share, effective for financial
statements issued after December 31, 1997, including interim periods, that
establishes standards for computing and presenting earnings per share. The new
statement requires retroactive restatement of all prior-period per share data
presented. The Company adopted the disclosure requirements of this statement
and has restated its 1997 amounts to reflect the adoption retroactively.
The FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information. SFAS
No. 130 establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that displays these items with the same prominence as
other financial statements. SFAS No. 131 supercedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. SFAS No. 131 establishes
standards on the way that public companies report financial information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the Company
management in deciding how to allocate resources and in assessing performance.
SFAS Nos. 130 and 131 are effective for financial statements presented for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Because of the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any,
the standards may have on the future financial statement disclosures. Results
of operations and financial position, however, will be unaffected by
implementation of these standards.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from these estimates.
Cash Flow Information--The Company considers all unrestricted, highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.
Change in Fiscal Year--Effective December 8, 1997, the Company changed its
fiscal year from June 30 to December 31. The consolidated financial statements
include presentation of the transition period beginning on July 1, 1997 and
ending December 31, 1997.
Unaudited pro forma data for the six-month period ended December 31, 1996
consisted of the following:
<TABLE>
<S> <C>
Revenues......................................................... $743,040
Operating loss................................................... 396,648
Income tax expense............................................... 12,662
Net loss......................................................... 409,310
Basic loss per share............................................. .04
Diluted loss per share........................................... .04
</TABLE>
F-9
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
C. INVENTORIES:
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Raw material and supplies........................... $288,265 $ 239,172
Work in process..................................... -- 34,502
Finished goods...................................... -- 857,337
-------- ----------
$288,265 $1,131,011
======== ==========
</TABLE>
D. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Land............................................... $ -- $ 140,000
Buildings and improvements......................... 68,853 561,350
Well control and firefighting equipment............ 151,442 5,992,856
Shop and other equipment........................... 157,014 380,191
Vehicles........................................... 27,697 134,263
Office equipment and furnishings................... 96,176 301,764
-------- ----------
Accumulated depreciation and amortization.......... (110,476) (561,615)
-------- ----------
Net.............................................. $390,706 $6,948,809
======== ==========
</TABLE>
E. INCOME TAXES:
The Company and its wholly-owned domestic subsidiaries file a consolidated
federal income tax return. The provision for income taxes shown in the
Consolidated Statements of Operations differs from the amount that would be
computed if the loss before income taxes were multiplied by the federal income
tax rate (statutory rate) as follows:
<TABLE>
<CAPTION>
YEAR SIX-MONTH
ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Tax benefit at statutory rate...................... $(44,559) $(258,003)
Foreign taxes...................................... 24,569 41,370
Unrecognized net operating assets.................. 44,559 258,003
-------- ---------
Provision (benefit) for income taxes............. $ 24,569 $ 41,370
======== =========
</TABLE>
The approximate tax effect of significant temporary differences representing
deferred tax assets and liabilities are as follows as of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Net operating loss carryforwards................... $ 74,000 332,000
Valuation allowance................................ (74,000) (332,000)
-------- --------
Net deferred tax asset, net...................... $ -- $ --
======== ========
</TABLE>
F-10
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance increased $44,000 and $258,000 in the year ended
June 30, 1997 and the six-month period ended December 31, 1997, respectively,
because of net operating loss carryforwards generated in those years. There
were no other significant temporary differences as of June 30, 1997 and
December 31, 1997.
As of December 31, 1997, the Company has net operating loss carryforwards of
approximately $980,000 expiring in various amounts beginning in 2011.
F. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Vehicle and equipment notes bearing interest at rates
from 9.25% to 12.25%, payable in monthly installments,
through April 1999 and collateralized by vehicles and
equipment.............................................. $36,549 $30,215
</TABLE>
Also see Note A regarding the note payable to Boots & Coots, L.P.
In January 1997, the Company commenced an offering for up to $5,000,000 of
debt financing on a "best-efforts" basis through a Private Placement
Memorandum providing for the issuance of a minimum of 500 and a maximum of
5,000 Investment Units at a price of $1,000 per Unit with a minimum investment
of 25 Units. Each Unit consisted of a 12% Senior Subordinated Note (the
"Notes") of the Company in the principal amount of $1,000 with a warrant to
purchase under certain circumstances shares of the Company's common stock at a
discounted price. Management estimated the fair value of the proceeds
applicable to the warrants issued through June 30, 1997 to be $155,000 and
during July 1997 to be $145,000, which amounts have been reflected as a
discount on the Notes and an increase to additional paid-in capital. Interest
on the Notes at the rate of 12% per annum (13.3% effective interest rate based
on reduced note balances) is payable semi- annually commencing July 1, 1997
with maturity date for the Notes on December 31, 2000, subject to extension
for up to two periods of six months each with an increase in the interest rate
to 14%. Net proceeds, after sales commissions and offering expenses, (deferred
and amortized over term of notes) from this financing were utilized for
working capital and business expansion purposes. Through June 30, 1997
subscriptions for $1,555,000 were received and funded. Subsequent to June 30,
1997 the Company received additional subscription agreements of $1,445,000
though termination of the offering in July 1997.
Effective September 12, 1997, holders of the Company's 12% Senior
Subordinated Notes were offered the election to exercise the warrants into
common stock of the Company at an exchange rate of $.75 per share with payment
accomplished through surrender and retirement of their notes. An aggregate
face amount of $2,900,000 of Notes were converted into an aggregate of
3,866,653 shares of common stock with $193,000 recognized as a charge to
operations for early extinguishment of indebtedness. The carrying amount, net
of costs associated with debt offering, was transferred to equity at time of
conversion .
G. SHAREHOLDERS' EQUITY:
At June 30, 1996, the Company authorized 1,000,000 shares of no par common
stock of which 100,000 shares were issued and outstanding. Effective December
17, 1996, the Company amended its Articles of Incorporation and By-Laws
increasing its authorized capital stock to 50,000,000 shares of $0.01 par
value common stock by effecting a 50-to-1 stock split and 5,000,000 shares of
$0.00001 par value preferred stock, which may be issued at the discretion of
the Board of Directors. At June 30, 1997 and December 31, 1997, a total of
14,187,368 shares and 29,998,662 shares, respectively, of common stock were
issued and outstanding.
F-11
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As discussed in Note A, on July 29, 1997 the Company completed a merger with
Havenwood Ventures, Inc. and the par value of the common stock became $.00001
per share. All references herein have been restated to reflect the amended
amounts.
On September 18, 1997, Boots & Coots/IWC closed a private placement offering
for the sale of 7,475,000 shares of common stock at $1 per share for a total of
$7,475,000. Proceeds to the Company after placement agents' fees and expenses
of the offering were approximately $6,323,000 and were used for payment on the
Boots & Coots, L.P. acquisition notes and for working capital. Additionally,
the placement agents were awarded 748,000 warrants at an exercise price of
$1.20, which are exercisable for a period of four years from grant date.
In November 1996, the Board of Directors approved the 1996 Incentive Stock
Plan which allowed the Board of Directors to grant up to 1,500,000 incentive
stock options to eligible employees. These options are exercisable by the
holders thereof for a period of 10 years from the date of grant.
In November 1997, the Board of Directors approved the 1997 Incentive Stock
Plan, which will allow the Company to grant an additional 1,475,000 incentive
stock options to eligible employees. The terms of the 1997 plan are
substantially the same as the 1996 plan discussed above.
Also in November 1997, the Board of Directors adopted the Outside Directors'
Option Plan (the "Director's Plan"). The Directors' Plan provides for the
issuance an option to purchase 15,000 shares per year to each member of the
Board of Directors who is not an employee of the Company. 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 thereto. After one year
from the date of the grant, options outstanding under the Director' 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. 45,000 options have been granted under the
Directors Plan as of December 31, 1997.
The Board of Directors also approved an Executive Compensation Plan, which
will allow the Company to grant additional options covering 1,475,000 shares of
the Company's common stock. The terms of this plan are substantially the same
as the two incentive plans.
Activity in these option plans for the year ended June 30, 1997 and December
31, 1997 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- --------------
<S> <C> <C>
Outstanding June 30, 1996....................... -- $ --
Granted....................................... 690,000 0.43
Exercised..................................... -- --
Expired....................................... -- --
--------- -----
Outstanding June 30, 1997....................... 690,000 0.43
Granted....................................... 525,000 2.58
Exercised..................................... (161,000) 0.43
Cancelled..................................... (11,500) 0.43
--------- -----
Outstanding December 31, 1997................... 1,042,500 1.41
========= =====
</TABLE>
As of December 31, 1997, 349,000 ($.43) options are currently exercisable and
the remaining options vest over a period of five years from date of grant.
F-12
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1996 and April 1997, the Company issued a total of 1,265,000
contractual stock options to five persons, including 460,000 options issued to
certain officers and directors and 350,000 options issued to two attorneys.
These contractual stock options have a two-year term beginning on the original
date of grant, are fully vested and are immediately exercisable by the holders
thereof at a price of $0.43 per share. During the six months ended December
31, 1997, the Company allowed the exercise of these options through the
redemption of common shares owned by the option holders. These shares had been
owned for a period adequate to place the option holders at risk for market
fluctutation; therefore, no compensation expense has been recorded by the
Company for the shares issued pursuant to this option exercise.
In December 1997, the Company granted 50,000 options to a consultant at an
exercise price of $3.66 per share. These options are excercisable upon grant
and remain exercisable for a period of five years from the grant date.
In September 1997, the Company granted 80,000 options to two consultants at
an exercise price of $2 per share. These options are exercisable upon grant
and remain excercisable for a period of four years from the grant date.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation expense for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method of SFAS No. 123, the Company's
reported net loss and net loss per common share would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR PERIOD
ENDED ENDED
JUNE 30, DECEMBER
1997 31, 1997
--------- -----------
<S> <C> <C> <C>
Net loss............................. As reported $(155,624) $ (758,832)
Pro forma $(219,724) $(1,028,832)
Net loss per common share............ As reported $ (0.01) $ (0.03)
Pro forma $ (0.02) $ (0.04)
</TABLE>
The fair value of each option grant was estimated on the date of grant using
Black-Scholes option pricing model with the following assumptions: risk-free
rate of 6%, volatility of 97%, no assumed dividend yield and expected lives of
one to three years.
H. RELATED PARTY TRANSACTIONS:
The Company shares certain administrative facilities and services including
corporate office space, administrative personnel and office support equipment
with Buckingham Capital Corporation, an affiliate of the Company's controlling
shareholder. For the year ended June 30, 1997 and six-month period ended
December 31, 1997, the Company paid approximately $236,000 and $186,000,
respectively, to Buckingham Capital Corporation for such services. Management
believes such charges are comparable to what would have been paid to outside
parties for such facilities and services.
During the year ended June 30, 1997 and the six-month period ended December
31, 1997, the Company incurred $155,500 and $144,500, respectively, in
financial consulting fees for services rendered by Buckingham Capital
Corporation in connection with the Company's private offering of $3,000,000
principal amount of 12% Senior Subordinated Notes. Such amounts were included
with deferred financing costs in the consolidated balance sheet and amortized
over the term of the Notes, $2,900,000 of which were converted to equity in
September 1997 (see Note F).
F-13
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
I. COMMITMENTS AND CONTINGENCIES:
The Company leases shop and equipment storage facilities under operating
leases with terms in excess of one year.
At December 31, 1997, future minimum lease payments under these
noncancellable operating leases are approximately:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
------------------------- --------
<S> <C>
1998............................................................. $131,000
1999............................................................. 128,000
2000............................................................. 75,000
2001............................................................. 75,000
2002............................................................. 75,000
Thereafter....................................................... 50,000
--------
$534,000
========
</TABLE>
Rent expense for the year ended June 30, 1997 and the six-month period ended
December 31, 1997, was approximately $77,000 and $140,000, respectively.
J. REVENUES FROM MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
During the periods presented below, the following customers represented
significant concentrations of consolidated revenues:
<TABLE>
<CAPTION>
YEAR SIX-MONTH
ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
1997 1997
-------- ------------
<S> <C> <C>
Customer A.......................................... $385,002 $ --
Customer B.......................................... 757,375 --
Customer C.......................................... 416,011 --
Customer D.......................................... -- 1,453,655
Customer E.......................................... -- 568,407
</TABLE>
The Company's revenues are generated geographically as follows:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED
JUNE 30, DECEMBER 31,
1997 1997
---------- ------------
<S> <C> <C>
Domestic customers................................ 71% 61%
Foreign customers................................. 29% 39%
</TABLE>
Four of the Company's customers (each in excess of 10%) collectively
accounted for 86% of outstanding accounts receivable at June 30, 1997. Two of
the Company's customers collectively accounted for 27% of outstanding accounts
receivable at December 31, 1997. The Company believes that future accounts
receivable with these companies will continue to be collected under normal
credit terms based on previous experience. The Company performs ongoing
evaluations of its customers and generally does not require collateral. The
Company assesses its credit risk and provides an allowance for doubtful
accounts for any accounts which it deems doubtful of collection.
F-14
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes that any possible
deposit loss is minimal.
K. EVENTS SUBSEQUENT TO DECEMBER 31, 1997:
On January 2, 1998, the Company completed the funding of the acquisition,
effective as of December 31, 1997, of all of the capital stock of ITS Supply
Corporation ("ITS") for aggregate consideration of $6,000,000. Financing for
the acquisition of ITS was provided from working capital ($500,000); proceeds
from the issuance of 10% Senior Secured Notes due May 21, 1998 ($4,500,000);
and short-term bridge financing from the seller ($1,000,000).
In connection with the sale through private placement of the 10% Senior
Secured Notes on January 2, 1998, the Company entered into a financial
advisory arrangement pursuant to which the note holders are to provide a
certain level of financial, merger and acquisition advisory services over a
three-year period in consideration of an advance cash consulting fee of
$500,000, all of which was added to the principal balance of the Senior
Secured Notes. The commitment for the Senior Secured Notes by the note holders
also required the payment by the Company of a $50,000 commitment fee. The note
holders were also issued warrants exercisable over a six year term to purchase
an aggregate of 2,000,000 shares of the Company's Common Stock at a price of
$2.62 per share.
The ITS seller obligation of $1,000,000 bears interest at the rate of 10%
per annum is payable on March 31, 1998.
For its most recent fiscal year ended March 31, 1997, ITS contributed
revenues of approximately $41,000,000 and pre-tax operating income of
approximately $1,000,000 to the consolidated operating results of its former
parent company (unaudited). The above pre-tax operating income is prior to
allocations of a portion of the former parent company's corporate overhead
expenses to ITS. Such corporate overhead expense allocations are not
considered to be indicative of incremental costs, if any, to be incurred by
the Company as a result of its ownership of ITS.
On February 20, 1998, the Company completed the acquisition of all of the
stock of Code 3, Inc. ("Code 3"). Consideration for the acquisition of Code 3,
with an effective date for audited purchase price adjustments of December 31,
1997, was $570,568 cash; the repayment of corporate secured debt and interest
thereon of approximately $1,250,000; and the issuance of 488,136 shares of the
Company's Common Stock, of which 158,646 shares were delivered into escrow to
secure the indemnification obligations of the stockholders of Code 3. Code 3
reported unaudited revenues of approximately $4,800,000 and pre-tax income of
approximately $296,000 for its fiscal year ended December 31, 1997.
On March 5, 1998, the Company sold through private placement to the note
holders an additional $2,250,000 of 10% Senior Secured Notes due June 15,
1998. In addition, these note holders were issued warrants, exercisable over a
six year term, to purchase an additional 500,000 shares of the Company's
common stock at a price of $4.50 per share.
Management has undertaken steps to finance its working capital and expansion
plan. Such financing alternatives include: (1) the sale, currently underway
through private placement on a best-effort basis, of $10,000,000 of 10% Junior
Redeemable Convertible Preferred Stock; (2) consideration for the offering
through private placement on a best-efforts basis of a Convertible Preferred
Stock Offering; (3) discussions with certain commercial banks for a secured
debt facility; and, (4) discussions regarding the possible private placement
of Subordinated Notes. Although these financing efforts are in process and not
yet completed, Management believes these actions, together with cash flows
from operations, will provide adequate funding to the Company.
F-15
