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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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FORM 10-K/A
AMENDMENT NO. 1
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13817
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BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
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DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
777 POST OAK BOULEVARD, SUITE 800 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
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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-K 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 or any amendment to this
Form 10-K [X].
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 April 7, 1999, based on the
closing sales price on that date was $33,824,346.
The number of shares of the issuer's common stock outstanding on April 7,
1999 was 33,415,517.
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This amendment to the Form 10-K filed by the registrant with the Commission on
April 15, 1999, adds the information required by Items 10 through 13 of Part III
of such form in lieu of including such information in a definitive proxy
statement. The entire contents of the Form 10-K, including Items 1 through 9,
and the financial statements and exhibits thereto, none of which are amended
hereby, have been included in this document for the convenience of the reader.
Revisions have also been made to reflect minor typographical corrections.
FORM 10-K/A
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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....................... 12
Item 3. Legal Proceedings............................. 12
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 12
PART II..................................................... 13
Item 5. Market for Common Equity and Related
Stockholder Matters.................................... 13
Item 6. Selected Financial Data....................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk...................................... 21
Item 8. Financial Statements.......................... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ 22
PART III.................................................... 23
Item 10. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section
16(a) of the Exchange Act.................... 23
Item 11. Executive Compensation....................... 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 28
Item 13. Certain Relationships and Related
Transactions........................................... 29
Item 14. Exhibits List and Reports.................... 30
SIGNATURES.................................................. 32
FINANCIAL STATEMENTS
Independent Auditors' Report.............................. F-1
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boots & Coots International Well Control, Inc. (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 emergencies, to
remediate affected sites and restore affected oil and gas wells to production.
In addition to providing emergency response services, the Company provides
snubbing 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 and
a varied line of industrial products for the oil and gas industry, including
drilling rig brakes, controls, and monitors; industrial and marine electrical AC
generators; and marine thrusters and controls. In addition, the Company provides
environmental remediation services to the petrochemical, chemical manufacturing
and transportation industries, as well as to various state and federal agencies,
and provides materials and equipment procurement, transportation and logistics
services to the energy industry.
The Company acts as a holding company for its operating subsidiaries, IWC
Services, Inc., Boots & Coots Special Services, Inc. and Baylor Company. With
the exception of Boots & Coots Special Services, Inc., Baylor Company and
HAZ-TECH Environmental Services, Inc., the assets and businesses acquired as
discussed below have been acquired by the Company through IWC Services, Inc.
These acquisitions have been made with the objective of operating capabilities
in three primary business segments: (1) emergency response and restoration; (2)
programs and services; and (3) manufacturing and distribution.
HISTORY OF COMPANY
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. a Texas corporation ("IWC Services") on July 29, 1997.
Acquisition of IWC Services, Inc. The Company acquired IWC Services on July
29, 1997, pursuant to a merger of a wholly owned subsidiary of the Company with
IWC Services whereby the Company 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 of the Company 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
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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.
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 ABASCO, Inc. ("ABASCO") which had acquired the operating
assets of ITS Environmental, a division of International Tool & Supply 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. The Company acquired ABASCO for aggregate consideration
consisting of approximately $1,590,000 cash and 300,000 shares of common stock.
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.
Acquisition of ITS Supply Corporation. On January 2, 1998, the Company
completed the acquisition of all of the capital stock of ITS Supply Corporation
("ITS") for aggregate consideration of $6,000,000 cash. 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 Boots & Coots Special Services, Inc. On February 20, 1998,
the Company completed the acquisition of all of the capital stock of Boots &
Coots Special Services, Inc. f/k/a Code 3, Inc. ("B & C Special Services").
Consideration for the acquisition of B & C Special Services was (i) $570,568
cash, (ii) the repayment of corporate secured debt and interest thereon of
approximately $1,210,000 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 former stockholders
of B & C Special Services for claims that may arise as a consequence of a breach
by former stockholders of B & C Special Services of the representations,
warranties and covenants contained in the definitive agreements.
B & C Special Services, 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. B & C Special Services 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, B & C Special Services operated out of facilities in Harlingen, El Paso,
Laredo, San Antonio and Houston, Texas. In 1998, additional emergency response
facilities and equipment were added in Ft. Worth, Texas, and Denver, Colorado.
Acquisition of Baylor Company. On July 23, 1998, the Company completed the
acquisition of all of the capital stock of Baylor Company ("Baylor").
Consideration for the acquisition of Baylor was approximately
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$25,000,000 cash, a dividend payment of $2,000,000, and the issuance of 540,443
shares of the Company's common stock, which shares were delivered into escrow to
provide recourse to the Company for claims that may arise as a consequence of a
breach by such stockholder or Baylor of certain of the representations,
warranties and covenants contained in the definitive agreements.
Baylor, headquartered in Houston, Texas, manufactures and markets a varied
line of industrial products, many of them proprietary, for the drilling, marine
and power generation industries. The Company's base line of products include
Elmagco(R) Brakes, brake controls, brake monitors, closed loop cooling systems,
Thyrig(TM) Drive Systems, deepwater thrusters and mooring systems as well as AC
generators sold under the trade names EMD, Delco and Baylor, worldwide.
Acquisition of HAZ-TECH Environmental Services, Inc. Effective as of
November 4, 1998, the Company completed the acquisition, through a merger with B
& C Special Services, of all of the capital stock of HAZ-TECH Environmental
Services, Inc. ("HAZ-TECH"). Consideration for the acquisition of HAZ-TECH was
$315,671 cash, assumption of liabilities and the issuance of 269,150 shares of
the Company's common stock, of which one-half were delivered into escrow to
provide recourse to the Company for claims that may arise as a consequence of a
breach by the sellers of certain representations, warranties and covenants
contained in the definitive agreements.
HAZ-TECH provides a complete range of emergency prevention and response
services, including hazardous materials and waste management, OSHA personnel
training and environmental site audits, surface and groundwater hydrology,
bioremediation and pond dewatering, and water treatment to chemical
manufacturing, railroad and truck transportation companies in Texas, Louisiana,
Oklahoma and Arkansas.
The Company has ongoing discussions with a number of potential acquisition
prospects, none of which are in a binding agreement stage. Completion of future
business acquisitions are subject to many uncertainties, including the
availability of financing under acceptable terms and conditions.
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 "WELLCALL(SM)" 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.
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 Events discussed on page 6
herein. 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
WELLSURE(SM) program, continuing to integrate the businesses of Boots & Coots,
ABASCO, ITS, Boots & Coots Special Services, Baylor and HAZ-TECH, increasing the
geographical scope of its training and consulting programs, and establishing
additional Company-owned Fire Stations discussed on page 5 herein 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.
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
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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.
Executive Offices. The Company's principal executive office is located at
777 Post Oak Boulevard, Suite 800, Houston, Texas, 77056, telephone (713)
621-7911.
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.
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;
- Transport equipment by air freight 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.
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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 established and maintains 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 Company
believes that its acquisitions of ABASCO, ITS and Code 3 and anticipated
revenues from the WELLSURE(SM) 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.
PRODUCTS AND 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 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 and a varied line of industrial
products for the oil and gas industry, including drilling rig brakes, controls
and monitors; industrial and marine electrical generators; and marine thrusters
and controls. The Company provides environmental remediation services to the
petrochemical, 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 products and services for its three principal business
segments include:
Emergency Response and Restoration
The Emergency Response and Restoration business segment includes the
following operating subsidiaries of the Company: IWC Services less its risk
management business unit, Boots & Coots and B & C Special Services.
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Well Control. This service segment is divided into two distinct 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 significant revenues to the Company 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 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.
Fire Fighting Equipment Rentals. This service 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.
Fire Fighting 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 Emergency Response Center
that the Company has established on the North Slope of Alaska. The establishment
of this Emergency Response Center, 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 ten year agreement with renewal clauses to
provide ongoing consulting services relating to the Emergency Response Center,
including training, contingency planning, safety inspections and emergency
response drills.
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 operators, such as Halliburton, who have the experience
and knowledge required to safely and efficiently perform such services.
Industrial and Marine Firefighting. This service 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 ensure 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
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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.
Consulting; Drilling Engineering. The Company provides 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. These inspection services, performed by the Company, are
offered as a standard option in Halliburton's field service programs.
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. The Company's training services are 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 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 Emergency Response Centers. The Company currently has Emergency
Response Centers in Houston, Texas, Duncan, Oklahoma, and Anaco, Venezuela, and
maintains an industry supported Emergency Response Center on the North Slope of
Alaska. The Company plans to deploy at least one Emergency Response Center per
year over the next five years. The equipment for these proposed Emergency
Response Centers will either be purchased by the Company for its own account or
purchased by a consortium of local producers who will then contract with the
Company for maintenance and consulting services. It is believed these Emergency
Response Centers, once established, will place the Halliburton Alliance 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.
Programs and Services
The Programs and Services business segment includes the following operating
subsidiaries and business units of the Company: the risk management business
unit of IWC Services, which encompasses the WELLSURE(SM) Program, and ITS.
Supply, Transportation and Logistics. ITS is ISO 9002 certified and
provides material and equipment procurement, transportation and logistics
services to the energy industry worldwide. ITS also serves as a distributor in
Venezuela and Peru of artificial lift oil recovery systems.
WELLSURE(SM) 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 production companies, through retail
insurance brokers, a new program known as "WELLSURE(SM)," 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 engineer-
7
<PAGE> 10
ing consultation. Insurance provided under WELLSURE(SM) has been arranged with
leading London insurance underwriters. WELLSURE(SM) 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.
Manufacturing and Distribution
The Manufacturing and Distribution business segment includes the following
operating subsidiaries or business units of the Company: Baylor and ABASCO.
Drilling, Marine and Power Generation Equipment. The Company manufactures
and markets a varied line of industrial products, many of them proprietary for
the drilling, marine and power generation industries. The Company's base line of
products include Elmagco(R) Brakes, brake controls, brake monitors, closed loop
cooling systems, Thyrig(TM) Drive Systems, deepwater thrusters and mooring
systems as well as AC generators sold under the trade names EMD, Delco and
Baylor, worldwide.
Oil and Chemical Spill Containment and Remediation Services. The Company
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. The Company specializes in the
transfer of high and low pressure liquids and hazardous materials and industrial
fire fighting. The Company also provides in-plant remedial plan implementation,
hazardous waste management, petroleum tank management, industrial hygiene,
environmental and occupational, health and safety services.
DEPENDENCE UPON CUSTOMERS
The Company is not materially dependent upon a single or a few customers,
although one or a few customers may represent a material amount of business for
a limited period. The emergency response business is by nature episodic and
unpredictable. A customer that accounted for a material amount of business as a
result of an oil well blow-out or similar emergency may not account for a
material amount of business after the emergency is over.
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, "WELLCALL(SM)", 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
WELLCALL(SM) 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 WELLCALL(SM) 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.
Operators contracting with WELLCALL(SM) 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
8
<PAGE> 11
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, WELLCALL(SM)
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.
REGULATION
The operations of the Company are affected by numerous federal, state, and
local laws and regulations relating, among other things, to workplace health and
safety and the protection of the environment. The technical requirements of
these laws and regulations are becoming increasingly complex and stringent, and
compliance is becoming increasingly difficult and expensive. However, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is obligated to exercise prudent judgment
and reasonable care at all times and the failure to do so could result in
liability under any number of laws and regulations.
Certain environmental laws provide for "strict liability" for remediation
of spills and releases of hazardous substances and some provide liability for
damages to natural resources or threats to public health and safety. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible that
changes in the environmental laws and enforcement policies thereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To the date hereof, the
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<PAGE> 12
Company has not been subject to any fines or penalties for violations of
governmental or environmental regulations.
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 WELLSURE(SM)
program, and its recent acquisitions of Boots & Coots, ABASCO, ITS, B & C
Special Services, Baylor and HAZ-TECH 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 31, 1999, the Company and its operating subsidiaries
collectively had 447 full-time employees and 155 part-time personnel available
as needed for emergency response projects. 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
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 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.
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<PAGE> 13
RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's emergency response services require highly specialized
skills. Because of 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. The Company is considering obtaining key man insurance on a selected
basis to partially offset the risk of loss of personnel, but it does not
currently maintain any such insurance and there can be no assurance that it will
be obtained or will be available at a reasonable cost or at all.
CONTROL OF THE COMPANY BY SIGNIFICANT STOCKHOLDERS
The Company's current officers and directors own beneficially, on a
combined basis, 9,361,477 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 28% of the issued and outstanding common stock (without taking
into account the potential conversion of the Redeemable Stock into shares of
common stock or the potential issuance of additional shares of common stock upon
the exercise of options or warrants). 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 President of IWC
Services (Well Control), 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"). 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. The Voting Agreement provides 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. Currently, 1,380,000 shares (representing 4.2% of the
Company's outstanding common stock) are subject to the Voting Trust Agreement.
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 the Company in
connection with such services, except in the case of gross negligence or willful
misconduct by the Company. There can be no assurance, however, that such
11
<PAGE> 14
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 39,000 square foot office at 777 Post Oak Blvd.,
Houston, Texas, from an unaffiliated landlord through August 2005 at a monthly
rental of $64,000. The Company leases an 11,000 square foot Emergency Response
Center facility in Anaco, Venezuela, which space is rented through January 2000
for a monthly rental of $4,000. 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 also owns manufacturing facilities in Sugar Land, Texas, including
190,000 square feet of shop buildings, 22,000 square feet of office space and 24
acres of land. 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, and is subleased on
substantially the same terms. The Company 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 $9,000, which space is subleased on
substantially the same terms. Additionally, the Company has leased office and
equipment storage facilities in various other cities within the United States,
Venezuela, the United Kingdom and Peru. The future commitments on these
additional leases are immaterial. The Company believes that these facilities
will be adequate for its anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Management of the
Company does not believe that any liabilities resulting from any such current
proceedings will have a material adverse effect on its consolidated operations
or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.
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<PAGE> 15
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
tables set forth the high and low bid and asked prices per share of the common
stock as reported for the quarterly periods ended September 30, 1997 and
December 31, 1997, and the high and low sales prices for each quarterly period
within the year ended December 31, 1998. 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.
HIGH AND LOW BID AND ASKED QUOTATION
<TABLE>
<CAPTION>
HIGH LOW
--------------- ---------------
BID ASKED BID ASKED
------ ------ ------ ------
<S> <C> <C> <C> <C>
Quarter ended September 30, 1997:.................. $5.500 $8.000 $1.500 $1.625
Quarter ended December 31, 1997:................... $5.625 $5.875 $3.625 $3.875
</TABLE>
HIGH AND LOW SALES PRICES
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
March 31, 1998.............................................. $5.750 $4.750
June 30, 1998............................................... 7.937 4.750
September 30, 1998.......................................... 6.125 1.375
December 31, 1998........................................... 3.023 2.125
</TABLE>
On April 7, 1999, the last reported sale price of the common stock as
reported on AMEX was $1.50 per share.
As of April 7, 1999 the Company's common stock was held by approximately
300 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. The Company's credit facilities
currently prohibit paying cash dividends.
SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
In January 1998, the Company issued 10% Senior secured promissory notes due
October 1, 1998 ("Senior Notes") in the aggregate principal amount of
$5,000,000, and in March 1998 the Company issued additional 10% Senior secured
promissory notes due October 1, 1998 ("Additional Senior Notes") in the
aggregate principal amount of $2,250,000. In April 1998, the Senior Notes and
Additional Senior Notes were purchased from the original holders thereof by
Larry H. Ramming, the Chief Executive Officer of the Company. The Company issued
warrants to the original holders of the Senior Notes and Additional Senior Notes
representing the right to purchase 2,500,000 shares, in the aggregate, of common
stock, 2,000,000 of which are exercisable at $2.62 per share and 500,000 of
which are exercisable at $4.50 per share. Such warrants are exercisable for a
period of six years and include demand and piggyback registration rights. The
Company used the proceeds from the issuance of the Senior Notes to fund the
purchase of ITS, and the proceeds from the issuance of the Additional Senior
Notes to fund the acquisition of B & C Special Services.
The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), for the issuance of the Senior Notes and Additional Senior
Notes. The Company used no general advertising or
13
<PAGE> 16
solicitation in connection with such issuance, there were a limited number of
purchasers, all of whom were "accredited investors" within the meaning
Regulation D promulgated under the Act, and the Company had reason to believe
that such purchasers did not intend to engage in a distribution of such
securities.
From April 1998 through June 1998, the Company issued 196,000 Units of 10%
Junior Redeemable Convertible Preferred Stock ("Redeemable Preferred"), each
Unit consisting of one share of the Preferred Stock and one Unit Warrant
representing the right to purchase five shares of common stock of the Company at
a price of $5.00 per share. The Redeemable Preferred Stock could be redeemed by
the Company at any time on or before the six month anniversary of the date of
issuance (from October 17, 1998 through December 8, 1998) without prior written
notice in an amount per share equal to $25.00, plus any accrued and unpaid
dividends thereon. After the six month anniversary of the date of issuance of
the Redeemable Preferred Stock and for so long as such shares are outstanding,
the Company could redeem such shares upon fifteen days prior written notice.
In the event shares of Redeemable Preferred Stock were not redeemed by the
Company on or before the six month anniversary of the date of issuance, each
unredeemed share shall thereafter, until the nine month anniversary of the date
of issuance be convertible, at the election of the holder thereof, into such
number of shares of common stock at 85% of the average of the last reported
sales prices of shares of the common stock (or the average of the closing bid
and asked prices if no transactions have been reported), not to exceed $6.00 per
share, for the 10 trading days immediately preceding the receipt by the Company
of written notice from the holder thereof of an election to so convert such
share of Redeemable Preferred Stock. In the event the Company has not redeemed
shares of Redeemable Stock on or before the nine month anniversary of the date
of issuance, each unredeemed share shall become immediately convertible, at the
election of the holder thereof, into such number of shares of common stock as
shall be obtained by dividing $25.00 by $2.75 (proportionately adjusted for
common stock splits, combinations of common stock and dividends paid in shares
of common stock).
The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), and Regulation D for the issuance of the Units. The Company
used no general advertising or solicitation in connection with such issuance,
there were a limited number of purchasers, all of whom were "accredited
investors" within the meaning Regulation D promulgated under the Act, and the
Company had reason to believe that such purchasers did not intend to engage in a
distribution of such securities.
In July 1998, the Company issued $15,000,000 in Senior Secured Notes due
January 6, 1999 (the "Prudential Senior Notes") to The Prudential Insurance
Company of America ("Prudential") and $30,000,000 of 11.28% Senior Subordinated
Notes due July 23, 2006 (the "Prudential Subordinated Notes") to Prudential. The
Prudential Senior Notes were subsequently repaid using proceeds from the
Company's revolving credit facility. In conjunction with the sale of the
Prudential Subordinated Notes, the Company issued to Prudential a warrant to
purchase 3,165,396 shares of common stock at an exercise price of $6.70 per
share (the "Prudential Warrant"), subject to anti-dilution protection and
adjustments under certain circumstances. The Prudential Warrant is not
exercisable until after July 23, 2000 and terminates on the later of July 23,
2008, or six months after the date the Prudential Subordinated Notes are fully
retired. The Company utilized the proceeds of the Prudential Senior Notes and
Prudential Subordinated Notes for working capital and to fund the acquisition of
Baylor.
The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act"), for the issuance of the Prudential Senior Notes and
Prudential Subordinated Notes. The Company used no general advertising or
solicitation in connection with such issuance, the purchaser was an "accredited
investor" within the meaning Regulation D promulgated under the Act, and the
Company had reason to believe that such purchaser did not intend to engage in a
distribution of such securities.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for each of the fiscal years ended as of June 30, 1996 and 1997, the six
months ended December 31, 1996 and 1997, and the years ended December 31, 1997
and 1998, which was derived from the Company's audited consolidated financial
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<PAGE> 17
statements. In the opinion of management of the Company, the unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the financial
data for such period. The results of operations for the six months ended
December 31, 1996 and 1997 are not necessarily indicative of results for a full
fiscal year. The data should be read in conjunction with the Consolidated
Financial Statements (including the Notes thereto) and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
----------------------- ------------------------ -------------------------
1996 1997 1996 1997 1997 1998
---------- ---------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $1,662,000 $2,564,000 $ 743,000 $5,389,000 $ 7,154,000 $76,283,000
Operating income
(loss)............... (481,000) (68,000) (395,000) (432,000) (360,000) 1,466,000
Extraordinary
Item -- Loss on Debt
Extinguishment....... -- -- -- (193,000) -- --
Net loss................ (339,000) (156,000) (409,000) (758,000) (567,000) (2,996,000)
Net loss per share...... (0.03) (0.01) (0.04) (0.03) (0.05) (0.12)
Weighted average common
Shares outstanding... 11,500,000 12,191,000 11,500,000 23,864,000 12,136,000 31,753,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................. $14,062,000 $97,585,000
Long-term debt and notes payable.......................... 1,664,000 53,660,000
Working capital........................................... 2,312,000 17,813,000
Shareholders' equity...................................... 10,232,000 20,236,000
Common shares outstanding................................. 29,999,000 33,044,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Commission and incorporated herein by reference.
As discussed herein, the Company completed the acquisitions of Boots &
Coots, L.P. as of July 31, 1997; ABASCO, Inc. as of September 25, 1997; ITS
Supply Corporation as of January 2, 1998; Boots & Coots Special Services, Inc.
(formerly known as Code 3, Inc.) as of February 20, 1998; Baylor Company as of
July 23, 1998, and HAZ-TECH Environmental Services, Inc. as of November 4, 1998.
The results of operations for such acquisitions are included in the condensed
Statements of Operations set forth hereinafter from the respective dates of
acquisitions through the reporting period end.
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<PAGE> 18
The Company elected in 1997 to change its fiscal year from June 30, 1997,
to December 31, 1997. A summary of operating results for the fiscal years ended
June 30, 1996 and 1997, the six months ended December 31, 1996 and 1997, and the
years ended December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
----------------------- ---------------------- ------------------------
1996 1997 1996 1997 1997 1998
---------- ---------- --------- ---------- ---------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $1,662,000 $2,564,000 $ 743,000 $5,389,000 $7,154,000 $76,283,000
Costs and Expenses:
Operating Expenses........ 1,320,000 1,460,000 732,000 3,786,000 4,619,000 57,782,000
Selling, General and
Administrative......... 773,000 1,061,000 371,000 1,536,000 2,328,000 14,475,000
Depreciation and
Amortization........... 50,000 111,000 37,000 499,000 567,000 2,560,000
Operating Income (Loss)... (481,000) (68,000) (395,000) (432,000) (360,000) 1,466,000
Other Income (Expense).... 4,000 (63,000) (1,000) (92,000) (153,000) (4,239,000)
Extraordinary Item -- Loss
on Debt
Extinguishment......... -- -- -- (193,000) -- --
Income Tax (Expense)
Benefit................ 138,000 (25,000) (13,000) (41,000) (54,000) (223,000)
Net Loss.................... (339,000) (156,000) (409,000) (758,000) (567,000) (2,996,000)
</TABLE>
COMPARISON OF YEAR ENDED JUNE 30, 1996 WITH YEAR ENDED JUNE 30, 1997
Revenues were $1,662,000 for the year ended June 30, 1996 ("fiscal 1996")
compared to $2,564,000 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 $1,320,000 for fiscal 1996, compared to $1,460,000
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 $773,000 for fiscal 1996, compared
to $1,061,000 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 $50,000 for fiscal
1996, compared to $111,000 for fiscal 1997, primarily as the result of a full
year of depreciation on equipment additions made in fiscal 1996.
Other income (expenses) was $4,000 for fiscal 1996, compared to a net
expense of ($63,000) 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.
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 $339,000 for fiscal 1996, compared to
a net loss of $156,000 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 (UNAUDITED) WITH SIX MONTHS
ENDED DECEMBER 31, 1997
Revenues were $743,000 for the six months ended December 31, 1996 ("1996
Interim Period") compared to $5,389,000 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
($972,000); (2) sales of two fire fighting equipment packages in the 1997
Interim Period ($908,000); and, (3) increased market share for the Company's
Well Control business unit.
16
<PAGE> 19
Operating expenses were $732,000 for the 1996 Interim Period compared to
$3,786,000 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 ($632,000); (2) costs associated with the sales of two fire
fighting equipment packages in the 1997 Interim Period ($686,000); (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 $371,000 for the 1996 Interim
Period compared to $1,536,000 for the 1997 Interim Period. This increase
principally resulted from: (1) expenses associated from the ABASCO acquisition
completed in September 1997 ($246,000); 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 $499,000 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 $193,000 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 $1,000 during the 1996 Interim Period
to $92,000 during the 1997 Interim Period is principally due to interest expense
on the Company's 12% Senior Subordinated Notes.
Income taxes of $13,000 during the 1996 Interim Period and $41,000 during
the 1997 Interim Period results from foreign taxes incurred on Well Control
projects.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 WITH THE YEAR ENDED DECEMBER 31,
1997 (UNAUDITED)
As a result of the acquisition program carried out during 1998, the
Company's business strategy of expanding from principally a well control and
fire fighting company into three principal business sets (emergency response and
restoration; programs and services; and manufacturing and distribution) has
evolved.
Revenues were $7,154,000 for the year ended December 31, 1997 compared to
$76,283,000 for the year ended December 31, 1998. This increase was the result
of increased market share from diversification of IWC Services' well control and
fire fighting client-base ($9,630,000) and business acquisitions ($59,499,000).
Operating expenses were $4,619,000 for the year ended December 31, 1997
compared to $57,782,000 for the year ended December 31, 1998. The increase was
the result of expanded well control operations beginning in the fourth quarter
of calendar 1997 ($5,238,000) and business acquisitions ($47,925,000).
Selling, general and administrative expenses were $2,328,000 for the year
ended December 31, 1997 compared to $14,475,000 for the year ended December 31,
1998. The increase resulted from additional investments in personnel, systems
and infrastructure necessary to support the Company's expanded scope of
operations; new marketing and advertising programs to increase market share and
diversify the Company's well control client base, development of and marketing
of the Company's WELLSURE(SM) risk management programs ($5,522,000) and business
acquisitions ($6,625,000).
Depreciation and amortization expense increased from $567,000 for the year
ended December 31, 1997 to $2,560,000 for the year ended December 31, 1998,
primarily as the result of depreciation and amortization relating to property
and equipment obtained in, and goodwill resulting from, business acquisitions.
Interest expense was $184,000 for the year ended December 31, 1997 compared
to $3,977,000 for the year ended December 31, 1998. The increase is primarily
from interest expense on increased debt incurred for business acquisitions.
17
<PAGE> 20
Income taxes for the years ended December 31, 1997 and 1998 represents
foreign taxes on international operations.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The Company's cash expenditures in connection with the acquisitions of
Boots & Coots L.P., ABASCO, ITS and B & C Special Services required a
substantial portion of the Company's then existing cash reserves. Further, the
terms upon which ABASCO, ITS and B & C Special Services 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 3,867,000 shares of common stock; $6,238,000
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 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"); seller financing on the acquired
businesses in the aggregate principal amount of $5,761,000 all of which has been
retired as of the date hereof; and approximately $4,678,000 in net proceeds from
the private placement of 196,000 Units of the Company's 10% Junior Redeemable
Convertible Preferred Stock, each Unit consisting of one share of the Preferred
Stock and one Unit Warrant representing the right to purchase five shares of
common stock of the Company at a price of $5.00 per share.
On July 23, 1998, the Company completed a $45 million private placement to
The Prudential Insurance Company of America ("Prudential") consisting of
$15,000,000 of Senior Secured Notes due January 6, 1999 (the "Prudential Senior
Notes") and $30,000,000 of 11.28% Senior Subordinated Notes due July 23, 2006
(the "Prudential Subordinated Notes"), the proceeds of which were used to fund
the acquisition of Baylor, repay $5,000,000 in bridge financing provided through
Prudential Securities Credit Corporation on July 6, 1998 and to provide working
capital.
On October 28, 1998, the Company entered into a Loan Agreement with
Comerica Bank Texas ("Comerica"), as agent and lender, providing for a
$25,000,000 revolving loan facility (the "Loan Agreement"), subject to a
borrowing base determination. The Company used $15,458,000 of the initial draw
of $20,000,000 from the Comerica loan facility to repay the Prudential Senior
Notes which had provided interim working capital. The balance of funds from the
initial Comerica loan draw was added to working capital. The Company was not in
compliance with one financial covenant and has obtained a waiver from the
lender.
The loan agreement relating to the Comerica Loan Facility imposes certain
restrictions on the Company's activities, including, without limitation, a
prohibition on the payment of cash dividends on the Company's equity securities;
limitations on incurring additional borrowed money indebtedness; limitations on
incurring or permitting liens upon the assets of Company and its subsidiaries;
limitations on making loans or advances to, or investments in, other persons or
entities; limitations the Company or its subsidiaries liquidating, dissolving or
merging with another company; limitations on the disposition of assets by the
Company and its subsidiaries; a prohibition on the Company changing the nature
of its business; and a prohibition of the Company repurchasing its equity
securities. The Subordinated Note and Warrant Purchase Agreement relating to the
Prudential Subordinated Notes imposes restrictions on the Company's activities
which are similar to those imposed by the Loan Agreement. The Loan Agreement and
the Subordinated Note and Warrant Purchase Agreement each require that the
Company meet certain minimum financial tests. Such restrictions may make it
difficult for the Company to acquire businesses and raise the capital necessary
to pursue its business strategy without the consent and cooperation of the
holders of such notes.
Based on the results of operations for the year ended December 31, 1998,
the Company was not in compliance with certain financial covenants in the
Comerica Loan Agreement. Effective April 15, 1999, the Comerica Loan Agreement
was amended to waive compliance with these financial covenants through
18
<PAGE> 21
December 31, 1998 and to modify certain financial accounts, prospectively.
Comerica's commitment under this credit facility was reduced to $20,000,000, the
interest rate was adjusted to a base rate approximating prime plus 1%, and the
maturity date was modified to May 31, 2000.
The Company receives the majority of its revenues from customers in the
energy industry. The liquidity of the Company needs to be considered in light of
the significant fluctuations that are being experienced by oilfield service
providers as changes in oil and gas exploration and production change customer's
forecasts and budgets in response to oil and gas prices. These fluctuations can
rapidly impact the Company's cash flows as supply and demand factors impact the
number and size of projects available. During 1998 and continuing into 1999,
world-wide oil and gas prices and related activity have hit new lows, on an
inflation adjusted basis, for the past several decades, impacting the Company
and its competitors.
The Company has grown rapidly during 1998, primarily through acquisitions;
net assets this past year increased from approximately $14 to $98 million. Many
of the acquisitions have been made through debt financing; long-term debt has
increased from $1.7 million to $53.7 million and interest expense has climbed
from approximately $0.1 million to $4.2 million. Substantially all of the
Company's assets have been pledged to secure existing debt. The Company
curtailed its acquisition strategy in the last half of 1998 in response to the
industry conditions and credit availability. As of December 31, 1998, the
Company was in violation of its loan covenants with its two major lenders.
Management has arranged waivers of past violations and modifications of existing
loan covenants the Company believes will allow it to be in compliance with its
loan agreements for 1999. (April 15, 1999 debt modifications -- See note F)
Management believes the steps it has taken will allow the Company to comply with
loan covenants and provide cash flows to operate, realize its assets and
discharge its liabilities in the normal course of business.
Management's actions include downsizing personnel and operations to meet
market demand and slow down of the cash drain caused in 1998 by acquisitions
made to exploit new market opportunities. As mentioned, the level of
acquisitions will be curtailed unless unusual market opportunities with
favorable financing terms are identified. Each of the operating units is
tightening its working capital requirements, and a very high threshold has been
established for routine capital expenditures. Management is exploring
opportunities for new equity investments or improved financing including an
acquisition line of credit. As yet, none of these opportunities have matured. A
significant equity infusion could have a substantially dilutive impact on
existing shareholders.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes a prolonged
depression in oil and gas prices will have a material adverse effect on the
Company's financial position and results of operations.
On April 15, 1999, the Company completed the sale of $5,000,000 of Series A
Cumulative Senior Preferred Stock ("Series A Stock") to Halliburton Energy
Services, Inc. ("Halliburton"), a wholly-owned subsidiary of Halliburton
Company. The Series A Stock has a dividend requirement of 6.25% per annum
payable quarterly until the fifth anniversary at the date of issuance, whereupon
the dividend requirement increases the greater of prime plus 6.25% or 14% per
annum, which is subject to adjustment for stock splits, stock dividends and
certain other events. In addition, Halliburton received warrants to purchase,
for a 7 year period, 1,250,000 shares of the Company's $.00001 Par Value Common
Stock at $4 per share.
Also in connection with the equity investment, the Company and Halliburton
entered into an expanded Alliance Agreement which effectively broadens the
alliance between the Company and Halliburton that has been in effect since 1995.
RECENT ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal years
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company is currently evaluating what effect, if any, this statement will have on
the Company's financial statements. The Company will adopt this statement no
later than January 1, 2000.
19
<PAGE> 22
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets and eliminates certain
disclosures no longer considered useful. The Company adopted this statement in
the fourth quarter of 1998 and there was no effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in interim and annual financial statements. The Company adopted this
statement in the fourth quarter of 1998 and there was no material effect on the
Company's presentation of segment disclosures.
Also in June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted this statement in
the first quarter of 1998 and there was no effect on the Company's financial
statements as there were no material items of other comprehensive income in any
of the years in the three year period ended December 31, 1998.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes new standards for computing and presenting earnings per share. This
statement was adopted in the fourth quarter of 1997 and had no material effect
on the Company's computation of earnings per share.
YEAR 2000 ISSUES
The Company has assessed issues regarding its computer accounting and other
systems' compliance capabilities to process transactions beginning with "Year
2000." This assessment has been updated to include computer systems utilized by
the Company's acquisitions through and including the November 4, 1998
acquisition of HAZ-TECH.
All computer accounting systems of the Company and its operating
subsidiaries' are "Year 2000" compliant with the exception of one subsidiary.
The upgrade of this operating subsidiary's existing computer accounting software
package to a later generation software version that is "Year 2000" compliant is
estimated to cost approximately $275,000 to $300,000, inclusive of software and
hardware procurement, installation, customization of certain purchase and sales
modules, and user training. Initial program customizations; hardware
modifications; and conversion of historical data have been completed and testing
is in process. It is believed this project will be completed and operational
during the quarter ended June 30, 1999.
The remaining "Year 2000" issue involves a limited number of microprocessor
controlled manufacturing equipment units. The modifications necessary to bring
such control processors into compliance with "Year 2000" requirements are
estimated to cost between $30,000 to $40,000 and will be completed during the
quarter ended June 30, 1999.
The implications to the Company, should such upgrades not be completed, are
projected as follows. With respect to the above noted operating unit's
accounting system, the principal area of exposure would be an inability to
interface with customer and vendor computer systems, a primary driver of the
business of this operating unit. This operating unit was acquired during the
first quarter 1998 and for the year ended December 31, 1998, contributed
revenues of $25,336,000 and operating profits of $230,000. It is expected that
this business unit will continue in its present configuration, therefore the
planned computer system modifications are essential to long-term growth and
profitability.
With regard to the manufacturing equipment microprocessor modifications,
should such changes not be completed timely, the projected impact to the Company
is not deemed to be material and would be limited to potential delays in the
initial set up of such equipment and/or rescheduling production to be processed
on alternative plant equipment.
20
<PAGE> 23
The Company's assessment of the potential implication of broad based
non-compliance with "Year 2000" by its customers and suppliers has not been
completed at this date. A significant number of the Company's customers are
large international and U.S. domestic oil and gas and petrochemical companies
who typically maintain their systems on the leading edge of technology. From
contact with a limited number of customers, the Company believes that "Year
2000" non-compliance should not be a major concern. Isolated problems could
occur for smaller customers as a result of delays in processing the Company's
billings for services and products, the payment for which could conceivably be
delayed and cause isolated cash flow problems.
With regard to "Year 2000" non-compliance by the above noted operating
unit's vendors and suppliers, the requirement to interface with their computer
systems for purchase orders could reasonably present a problem that would result
in procurement orders placed by the Company's operating unit being either
delayed or not processed. This would require clerical intervention, resulting in
reduced margins, the magnitude of which cannot be reasonably quantified at this
point. With respect to a number of other suppliers and vendors to the Company,
there is a diversification of practice between the use of rudimentary computer
systems and manually prepared source documents. It is not expected that a
broad-based scenario of "Year 2000" exceptions would present a material obstacle
to the Company's orderly conduct of its business.
The Company will continue to monitor potential implications from
broad-based non-compliance by customers and vendors.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K 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 in this report. 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-Q and 8-K, and its Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's market sensitive financial
instruments contains "forward looking statements".
Interest Rate Risk. At December 31, 1998, the Company had minimal interest
rate risk since a majority of the Company's long-term debt is fixed-rate and,
therefore, does not expose the Company to a significant risk of earnings loss
due to changes in market interest rates.
The Company operates internationally, giving rise to exposure to market
risks from changes in foreign exchange rates to the extent that transactions are
not denominated in U.S. dollars. The Company typically denominates its contracts
in U.S. dollars to mitigate the exposure to fluctuations in foreign currencies.
ITEM 8. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
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<PAGE> 24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
On January 21, 1999, the "Company" dismissed its independent accountants,
Hein + Associates, LLP (the "Former Accountants") and engaged Arthur Andersen
LLP (the "New Accountants"). The decision to dismiss the Former Accountants and
engage the New Accountants has been approved by the Audit Committee of the
Company's Board of Directors. The reason for the change from the Former
Accountants, who have been the Company's primary auditors to date, was the
growth over the past year of the Company in terms of both revenue and asset base
and significant expansion of the international scope of the Company's
operations.
During each of the transition periods for the Six Months Ended December 31,
1997, the Year Ended June 30, 1997, the Year Ended December 31, 1998, and in the
interim period to the date hereof (i) there were no "reportable events" as such
term is described in Item 304 (a)(1)(v) of Regulation S-K and (ii) the Former or
New Accountants' reports on the financial statements of the Company did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In addition,
management of the Company knows of no disagreements with the Former or New
Accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure in connection with their
reports.
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<PAGE> 25
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following tables list the names and ages of each director and/or
executive officer of the Company, as well as those persons expected to make a
significant contribution to the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry H. Ramming..................... 52 Chairman of the Board of Directors
Chief Executive Officer
Brian Krause......................... 43 Director
President
Thomas L. Easley..................... 53 Director
Vice President & Chief Financial Officer
K. Kirk Krist........................ 40 Director
Jerry L. Winchester.................. 40 Director
President and Chief Operating Officer
Dewitt H. Edwards.................... 40 Executive Vice President
</TABLE>
Doug Johnson resigned from the board of directors of the Company effective
January 31, 1999, to devote more time to other business interests.
Other key officers, technical and operating personnel of the Company and
its principal subsidiaries and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Well Control Business Unit
Raymond Henry...................... 55 Director of Well Control Operations
Richard Hatteberg.................. 59 Senior Vice President, Well Control
Danny Clayton...................... 51 Senior Vice President, President of Boots &
Coots/IWC de Venezuela, S.A.
James Tuppen....................... 41 Senior Vice President, Well Control
Larry Flak......................... 44 Vice President, Engineering Services
Operating Subsidiaries
Charles R. Hipp.................... 61 President, ITS Supply Corporation
C.E. La Bounty..................... 45 President, ABASCO, Inc.
H. B. Payne, Jr.................... 60 President and Chief Executive Officer,
Baylor Company
Timothy Lee Thompson............... 32 President, Boots & Coots Special Services,
Inc.
</TABLE>
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Larry H. Ramming has served as the Chairman of the Board and Chief
Executive Officer of the Company since the acquisition of IWC Services by the
Company on July 29, 1997. Mr. Ramming serves as a Class I Director for a term
that will expire on the date of the next annual meeting of stockholders. Mr.
Ramming also serves on the Audit Committee. Previously Mr. Ramming was actively
involved in mortgage banking and the packaging and resale of mortgage notes,
consumer loans and other debt instruments for over 15 years. In addition, Mr.
Ramming has been an active venture capital investor.
Brian Krause has served as the President of IWC Services, Inc. (Well
Control Business Unit) and as a Director of the Company since the acquisition of
IWC Services by the Company on July 29, 1997. Mr. Krause serves as a Class III
Director for a three year term that will expire on the date of the annual
meeting of stockholders in calendar year 2001. Mr. Krause brings over 19 years
of well control and firefighting experience to the Company. Before joining the
group that founded IWC Services, Mr. Krause was employed for 18 years by the Red
Adair Company, Houston, Texas. Mr. Krause joined the Red Adair Company as a Well
Control Specialist in August 1978, was promoted to Vice President in June 1989
and was again promoted to Vice
23
<PAGE> 26
President & Senior Well Control Specialist in February 1994. During his tenure
with the Red Adair Company, Mr. Krause participated in hundreds of well control
events worldwide. Mr. Krause, along with Messrs. Henry, Hatteberg and Clayton,
resigned from the Red Adair Company in August 1994 and began the independent
business activities that led to the formation of IWC Services in May 1995.
Thomas L. Easley has served as Vice President and Chief Financial Officer
of the Company since the acquisition of IWC Services by the Company on July 29,
1997 and as director since March 25, 1998. Mr. Easley serves as a Class I
Director for a term that will expire on the date of the next annual meeting of
stockholders. From May 1995 through July 1996, Mr. Easley served as Vice
President and Chief Financial Officer of DI Industries, Inc. a publicly held oil
and gas drilling contractor with operations in the U.S., Mexico, Central America
and South America. Previously, from June 1992 through May 1995, he served as
Vice President -- Finance of Huthnance International, Inc., a closely held
offshore oil and gas drilling contractor.
K. Kirk Krist has served as a member of the Company's Board of Directors
since the acquisition of IWC Services by the Company on July 29, 1997. Mr. Krist
serves as a Class III Director for a three year term that will expire on the
date of the annual meeting of stockholders in calendar year 2001. Mr. Krist also
serves on the Audit and Compensation Committees. Mr. Krist has been a
self-employed oil and gas investor and venture capitalist since 1982.
Jerry L. Winchester serves as a Class II Director for a two-year term that
will expire on the date of the annual meeting of the stockholders in calendar
year 2000. Mr. Winchester has served as President and Chief Operating Officer of
the Company since November 1, 1998. Before assuming this position, Mr.
Winchester was employed by Halliburton Energy Services since 1981 in positions
of increasing responsibility, most recently as Global Manager -- Well Control,
Coil Tubing and Special Services.
Dewitt H. Edwards has served as Executive Vice President of the Company
since September 1, 1998. Before assuming this position, Mr. Edwards served in
various supervisory capacities with Halliburton Energy Services from 1979 to
1998, most recently as Operations Manager -- North American Region Resources
Management.
BIOGRAPHIES OF KEY PERSONNEL
Raymond Henry has served as the Director of Well Control Operations of the
Company since the acquisition of IWC Services by the Company on July 29, 1997.
Mr. Henry brings over 34 years of well control and firefighting experience to
the Company. Before joining the group that founded IWC Services, Mr. Henry was
employed for 32 years by the Red Adair Company, Houston, Texas. Mr. Henry joined
the Red Adair Company as a Well Control Specialist in June 1962 and was promoted
to Senior Vice President in June 1979. During his tenure with the Red Adair
Company, Mr. Henry participated in hundreds of well control events worldwide.
Mr. Henry, along with the Messrs. Krause, Hatteberg and Clayton, resigned from
the Red Adair Company in August 1994 and began the independent business
activities that led to the formation of IWC Services in May 1995.
Richard Hatteberg has served as Senior Vice President of the Company since
the acquisition of IWC Services by the Company on July 29, 1997. Mr. Hatteberg
brings over 31 years of well control and firefighting experience to the Company.
Before joining the group that founded the Company, Mr. Hatteberg was employed
for 29 years by the Red Adair Company, Houston, Texas. Mr. Hatteberg joined the
Red Adair Company as a Senior Well Control Specialist in June 1965 and was
promoted to Senior Vice President & Senior Well Control Specialist in February
1994. During his tenure with the Red Adair Company, Mr. Hatteberg participated
in hundreds of well control events worldwide. Mr. Hatteberg, along with Messrs.
Krause, Henry and Clayton, resigned from the Red Adair Company in August 1994
and began the independent business activities that led to the formation of IWC
Services in May 1995.
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<PAGE> 27
Danny Clayton has served as a Senior Vice President of the Company since
the acquisition of IWC Services by the Company on July 29, 1997 and as President
of Boots & Coots Inc. de Venezuela S.A. Mr. Clayton brings over 18 years of well
control and firefighting experience to the Company. Before joining the group
that founded the Company, Mr. Clayton was employed for 18 years by the Red Adair
Company, Houston, Texas. Mr. Clayton joined the Red Adair Company as a Well
Control Specialist in June 1979, was promoted to Vice President in January 1989
and was again promoted to Vice President & Senior Well Control Specialist in
February 1994. During his tenure with the Red Adair Company, Mr. Clayton
participated in hundreds of well control events worldwide. Mr. Clayton, along
with Messrs. Henry, Krause and Hatteberg, resigned from the Red Adair Company in
August 1994 and began the independent business activities that led to the
formation of IWC Services in May 1995.
James Tuppen was partner of Boots & Coots prior to joining the Company, and
is a 20-year well control veteran serving as a lead fire control specialist on
both offshore and onshore blowouts. Mr. Tuppen has controlled blowouts and fires
in North America, South America, Northern Africa, Australia and the Middle East
and recently served as co-manager of the Pedernales Old Well Abandonment Project
in the jungles of Venezuela's lower Orinoco River Delta.
Larry Flak is a registered professional engineer who trained under W.C.
Goins, the father of modern well control, and has devoted more than 20 years to
drilling engineering and well control supervision. During his career, Mr. Flak
has participated in the control of numerous blowouts and has formulated and
implemented kill procedures and relief well plans in field locations worldwide.
Before joining the Company, Mr. Flak served as a consultant to Boots & Coots and
others, including as a special technical consultant to the U.S. Armed Forces
during his service with the Kuwait Oil Company, and he managed the daily
firefighting operations in Kuwait following the Gulf War. In this capacity, Mr.
Flak was personally responsible for the development, implementation and
logistical support for the control of nearly 700 burning wells that were set
ablaze by retreating Iraqi troops.
Charles R. Hipp has served as president of ITS Supply Corporation since its
acquisition by the Company in January 1998. From 1972 through 1997, Mr. Hipp
served in various management positions, including President, of International
Tool & Supply, the predecessor operating company of ITS Supply Corporation.
C.E. "Chuck" La Bounty has served as President of ABASCO, Inc., since its
acquisition by the Company in September 1997. From 1991 through 1997 Mr. La
Bounty served in various management positions, including President, of the
predecessor operating company of ABASCO Inc.
H. B. Payne, Jr. has served as President of Baylor Company since its
acquisition by the Company in June 1998. Prior to the acquisition, Mr. Payne
served as President and Chief Executive Officer of Baylor Company since 1986.
Timothy Lee Thompson has served as President of Boots & Coots Special
Services, Inc. since its acquisition by the Company in February 1998. From 1993
through such date, Mr. Thompson served as President and was a founding
shareholder of Code 3, Inc. Prior to 1993, Mr. Thompson was employed as an
engineer for Halliburton Services and as a municipal firefighter.
ITEM 11. EXECUTIVE COMPENSATION.
Boots & Coots International Well Control, Inc. is a holding company, all of
the business activities of which is conducted by its subsidiaries.
The Summary Compensation Table below sets forth the cash and non-cash
compensation information for the twelve month period ended December 31, 1997,
the six month transition period from July 1, 1997 to December 31, 1997, and the
year ended December 31, 1998, for the Chief Executive Officer and the four other
most highly paid executive officers whose salary and bonus earned for services
rendered to the Company exceeded $100,000 for the twelve month period ended
December 31, 1998. Calendar year annual
25
<PAGE> 28
compensation disclosures reflect amounts paid by the Company and IWC Services,
Inc., prior to its acquisition by the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
----------------- ------------
RESTRICTED ALL
STOCK OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS AWARDS COMPENSATION
--------------------------- ------------ -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry H. Ramming........................... 1998 $287,000 -- -- $ --
Chairman of the Board 1997 98,565 $2,604 -- $ --
and Chief Executive Officer 7/1-12/31/97 59,945 2,604 -- --
Brian Krause............................... 1998 145,000 -- -- --
President, IWC Services, Inc. 1997 95,081
7/1-12/31/97 55,261
Thomas L. Easley........................... 1998 155,833 -- -- --
Vice President and 1997 133,725 -- --
Chief Financial Officer 7/1-12/31/97 92,850 -- --
</TABLE>
There were no stock options grants to, or stock options exercised by, the named
executive officers during 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company in
fiscal year 1998 was composed of K. Kirk Krist and Jerry L. Winchester. Mr.
Winchester joined the Company as President and Chief Executive Officer effective
November 1, 1998. It is anticipated that an independent director will replace
Mr. Winchester on the Compensation Committee during 1999.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.
The Compensation Committee, which is responsible for both the establishment
and administration of the policies that govern both annual compensation and
stock ownership programs for the Company, has furnished the following report of
executive compensation. The Compensation Committee did participate in the
determination of executive officer compensation.
Determination of Executive Officer Compensation. The Compensation Committee
is developing compensation policies designed to align the compensation paid to
the executive officers with the Company's overall business strategy, values and
management initiatives. These policies will be designed to: (i) reward
executives for long-term strategic management which results in the enhancement
of shareholder values; (ii) support a performance-oriented environment which
rewards achievement of both internal Company goals and enhanced Company
performance compared to performance levels of comparable companies in the
industry, and (iii) attract and retain executives whose abilities are critical
to the long-term success and competitiveness of the Company. The Company's
executive officers have been compensated to dater pursuant to the items of their
employment agreements.
Determination of the Chief Executive Officer's Compensation. As Chief
Executive Officer, Mr. Ramming is compensated pursuant to an employment
agreement described under "Employment Agreements" below. Mr. Ramming's
compensation to date has taken into account the growth stage of the Company as
well as completed equity and debt financing and business acquisitions in which
Mr. Ramming played a critical role.
EMPLOYMENT ARRANGEMENTS
Mr. Ramming, the Company's Chairman and Chief Executive Officer, through
1997 was actively involved in a number of independent business activities and
through such date did not devote his full time to the affairs of the Company.
Mr. Ramming executed effective as of August 1, 1997, a one year employment
agreement with the Company which allowed for his outside activities provided
that he devoted such time to the Company's affairs as was reasonably necessary
for the performance of his duties, with such activities not to be competitive
with the Company's business and not to materially adversely affect his
performance as an
26
<PAGE> 29
officer and director of the Company. Through December 31, 1997 Mr. Ramming's
employment arrangement provided for an annual salary of $125,000 and an annual
automobile allowance of $12,000. Effective January 1, 1998 Mr. Ramming agreed
prospectively to curtail all material outside business activities and under this
interim employment arrangement his annual salary was increased to $275,000.
Mr. Winchester serves as President and Chief Operating Officer of the Company.
Mr. Winchester's employment agreement, which was effective as of November 1,
1998, provides for an annual salary of $250,000 and an annual automobile
allowance of $12,000. In addition, Mr. Winchester was granted an option to
purchase up to 1,000,000 shares of common stock of the Company at a per share
price of $1.91 (85% of the last bid price of such common stock on the American
Stock Exchange on the date immediately preceding the contract effectiveness
date). 200,000 of such options vested upon execution of this contract. The
balance vests at the rate of 200,000 options per year at the anniversary date,
conditioned upon continued employment at the time of each vesting.
Mr. Easley served as Chief Financial Officer of the Company during 1996 and
1997 and performed certain other services, including sourcing and conducting due
diligence on certain acquisition prospects and raising debt and equity capital,
pursuant to a consulting arrangement with the Company. Mr. Easley's interim
employment arrangement , which was effective as of March 1, 1998, provided for
an annual salary of $175,000 and an annual automobile allowance of $12,000.
Mr. Edwards serves as Executive Vice President of the Company. Mr. Edwards'
employment agreement, which was effective as of September 1, 1998, provides for
an annual salary of $150,000 and an annual automobile allowance of $12,000. In
addition, Mr. Edwards was granted an option to purchase up to 100,000 shares of
common stock of the Company at a per share price of $3.29 (85% of the last bid
price of such common stock on the American Stock Exchange immediately preceding
the contract effectiveness date). 20,000 of such options vested upon execution
of this contract. The balance vests at the rate of 20,000 options per year at
the anniversary date, conditioned upon continued employment at the time of each
vesting.
In connection with the Company's acquisition of Baylor Company, a five year
employment agreement was completed with H.B. Payne, Jr., President and Chief
Executive Officer, on December 22, 1998. Mr. Payne's employment agreement which
was effective as of July 1, 1998 provides for an annual base salary of $140,000
with provisions for annual incentive bonuses based upon performance of Baylor
Company. In addition, Mr. Winchester was granted an option to purchase up to
100,000 shares of common stock of the Company at a per share price of $2.50.
20,000 of such options vested upon execution of this contract. The balance vests
at the rate of 20,000 options per year at the anniversary date, conditioned upon
continued employment at the time of each vesting.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $250 for their
attendance at each Board of Directors and committee meeting and are reimbursed
for their travel, lodging and out-of-pocket expenses incurred in connection with
attending such meetings.
1997 Outside Directors' Option Plan. On November 12, 1997, the Board of
Directors of the Company adopted the 1997 Outside Directors' Option Plan (the
"Directors' Plan") and the Company's stockholders approved such plan on December
8, 1997. The Directors' Plan provides for the issuance each year 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. The purpose of the Directors' Plan is to
encourage the continued service of outside directors and to provide them with
additional incentive to assist the Company in achieving its growth objectives.
Options may be exercised over a five-year period with the initial right to
exercise starting one year from the date of the grant, provided the director has
not resigned or been removed for cause by the Board of Directors prior to such
date. After one year from the date of the grant, options outstanding under the
Directors' Plan may be exercised regardless of whether the individual continues
to serve as a director. Options granted under the Directors' Plan are not
transferable except by will or by operation of law. As of the date hereof
options to purchase 45,000 shares of Common Stock have been granted under the
Directors' Plan at an exercise price of $4.25 per share.
27
<PAGE> 30
The following graph compares the Company's total stockholder return on its
Common Stock for the one year period ended December 31, 1998 (the only full year
for which trading has occurred) with the Standard & Poors' 500 Stock Index and
the Standard & Poors' Energy Composite Index over the same period.
[CHART]
<TABLE>
<CAPTION>
Boots &
Coots
International S&P Energy
Measurement Period Well Control, S&P 500 Composite
(Fiscal Year Covered) Inc. Index Index
<S> <C> <C> <C>
12/97 100.00 100.00 100.00
12/98 77.40 128.60 100.50
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1999, information regarding
the ownership of Common Stock of the Company owned by (i) each person (or
"group" within the meaning of Section 13(d)(3) of the Security Exchange Act of
1934) known by the Company to own beneficially more than 5% of the Common Stock;
(ii) each director of the Company, (iii) each of the named executive officers
and (iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
<S> <C> <C>
*Larry H. Ramming(2).............................. 6,761,578(3) 20.2%
*Raymond Henry(2)................................. 2,460,300(4) 7.4%
*Brian Krause(2).................................. 1,462,200 4.4%
Jerry L. Winchester............................... 207,000(5) *
K. Kirk Krist..................................... 573,700(6) 1.7%*
Thomas L. Easley.................................. 217,040 *
All executive officers and directors as a group
(six persons)................................... 10,365,118 31.0%
</TABLE>
- ---------------
* less than 1%
(1) Unless otherwise noted, the business address for purposes hereof for each
person listed is 777 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
Beneficial owners have sole voting and investment power with respect to the
shares unless otherwise noted.
(2) In May 1995, Messrs. Krause, Henry, Hatteberg and Clayton entered into the
Voting Trust Agreement which gives Messrs. Ramming and Henry, as
co-trustees, the absolute right to vote all the shares of the Company's
Common Stock now owned or hereafter acquired by Messrs. Krause, Henry,
Hatteberg and Clayton during the five-year period ending December 31, 2000;
provided that twenty percent of such securities may be released therefrom
each year upon the written request of such party. Currently 1,840,000 shares
are subject to the Voting Trust Agreement. 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.
28
<PAGE> 31
(3) Includes 4,921,000 shares owned by Mr. Ramming and members of his immediate
family, including certain family-owned entities. Also includes 1,840,000
shares owned by Messrs. Krause, Henry, Hatteberg and Clayton, which are
subject to the Voting Trust Agreement under which Messrs. Ramming and Henry
serve as co-trustees.
(4) Includes 1,080,300 shares owned by Mr. Henry and 1,840,000 owned by Messrs.
Krause, Hatteberg and Clayton, which are subject to the Voting Trust
Agreement under which Messrs. Ramming and Henry serve as co-trustees.
(5) Includes options to purchase 3,000 shares of common stock.
(6) Includes an options to purchase 3,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH BUCKINGHAM CAPITAL CORPORATION AND LARRY H. RAMMING
On April 30, 1998, The Company's major individual shareholder Chairman and
Chief Executive Officer, Larry H. Ramming, loaned $7,000,000 to the Company to
retire certain bridge financing. As of December 31, 1998, interest (10%) and
extension (2%) expenses aggregating $383,000 and principal payments of
$5,783,000 have been paid to Mr. Ramming. Management believes the terms and
conditions of Mr. Ramming's loan to the Company are favorable to those that
could have been negotiated with outside parties.
In 1998 the Company entered into an agreement with a company controlled by
Mr. Ramming to have available for charter, on a 24 hour per day, 365 days per
year stand-by status, a jet aircraft to be utilized in connection with the
Company's mobilization of personnel and selected equipment for emergency
response well control and spill containment and remediation spills and for other
corporate purposes as needed. During 1998 a total of $399,000 was paid pursuant
to such charter arrangement, based on rates comparable to those available from
third party aircraft charter operators for comparable charter arrangements.
29
<PAGE> 32
PART III
ITEM 14.
Pursuant to Instruction G.3 to Form 10-K, the information in Items 10 to 13
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, 1999; if such proxy statement is not filed by such date, this Form 10-K will
be amended to include Items 10 to 13 on or before April 30, 1999.
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
3.01 -- Amended and Restated Certificate of Incorporation(1)
3.02 -- Amendment to Certificate of Incorporation(1)
3.03 -- Amended Bylaws(1)
4.01 -- Specimen Certificate for the Registrant's Common Stock(1)
4.02 -- Form of 12% Senior Subordinated Notes due December 31,
2000(1)
4.03 -- Form of Noteholders' Warrants to Purchase $3,000,000 of
Common Stock(1)
4.04 -- Form of Employees Options to Purchase 690,000 shares of
Common Stock(1)
4.05 -- Form of Contractual Options to Purchase 1,265,000 shares
of Common Stock(1)
4.06 -- Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(3)
9.01 -- Voting Trust Agreement between Larry H. Ramming, Raymond
Henry, Richard Hatteberg, Danny Clayton and Brian Krause
(as amended)(2)
10.01 -- Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(1)
10.02 -- Executive Employment Agreement of Larry H. Ramming(1)
10.03 -- Executive Employment Agreement of Raymond Henry(1)
10.04 -- Executive Employment Agreement of Brian Krause(1)
10.05 -- Executive Employment Agreement of Richard Hatteberg(1)
10.06 -- Executive Employment Agreement of Danny Clayton(1)
10.07 -- Security Agreement and Financing Statement with Main
Street/Geneva(2)
10.08 -- First Amendment to Security Agreement (assigned to
Prudential)(2)
10.09 -- Stock Pledge Agreement with Main Street/Geneva (assigned
to Prudential)(2)
10.10 -- First Amendment to Stock Pledge Agreement (assigned to
Prudential)(2)
10.11 -- Form of Warrant issued to Main Street/Geneva(2)
10.12 -- Form of Registration Rights Agreement with Main
Street/Geneva(2)
10.13 -- Form of First Amendment to Registration Rights
Agreement(2)
10.14 -- 1997 Incentive Stock Plan(2)
10.15 -- Outside Directors' Option Plan(2)
10.16 -- Executive Compensation Plan(2)
10.17 -- Halliburton Center Sublease(2)
10.18 -- Camac Plaza Sublease(2)
10.19 -- Senior Loan Agreement dated July 6, 1998, between Boots &
Coots International Well Control, Inc., and Prudential
Securities Credit Corporation(4)
10.20 -- First Amendment to Senior Loan Agreement (Bridge
Facility) dated July 23, 1998, between Boots & Coots
International Well Control, Inc., and The Prudential
Insurance Company of America(4)
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
10.21 -- Subordinated Note and Warrant Purchase Agreement dated
July 23, 1998, between Boots & Coots International Well
Control, Inc., and The Prudential Insurance Company of
America(4)
10.22 -- Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc.
and The Prudential Insurance Company of America(4)
10.23 -- Participation Rights Agreement dated July 23, 1998, by
and among Boots & Coots International Well Control, Inc.,
The Prudential Insurance Company of America and certain
stockholders of Boots & Coots International Well Control,
Inc.(4)
10.24 -- Common Stock Purchase Warrant dated July 23, 1998(4)
10.25 -- Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank -- Texas(5)
10.26 -- Security Agreement dated October 28, 1998, between Boots
& Coots International Well Control, Inc. and Comerica
Bank -- Texas(5)
10.27 -- Amendment No. 1 to Subordinated Note and Warrant Purchase
Agreement between Boots & Coots International Well
Control, Inc., and The Prudential Insurance Company of
America(5)
10.28 -- Executive Employment Agreement of H. B. Payne, Jr.(6)
10.29 -- Executive Employment Agreement of Jerry Winchester(6)
10.30 -- Executive Employment Agreement of Dewitt Edwards(6)
10.31 -- Office Lease(6)
21.01 -- List of subsidiaries(6)
24.01 -- Power of Attorney (included on Signature Page)
</TABLE>
- ---------------
(1) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Form 8-K filed with the Commission on August 13, 1997.
(2) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Report on Form 10-KSB for the six-month transition period ended
December 31, 1997 filed with the Commission on March 31, 1998.
(3) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Report on Form 10-QSB for the quarter ended March 31, 1998,
filed with the Commission on May 19, 1998.
(4) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Form 8-K filed with the Commission on August 7, 1998.
(5) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Form 10-Q filed with the Commission on November 16, 1998.
(6) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Report on Form 10-K for the year ended December 31, 1998, filed
with the Commission on April 15, 1999.
31
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ LARRY H. RAMMING
----------------------------------
Larry H. Ramming,
Chief Executive Officer
Date: April 30, 1999
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>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ LARRY H. RAMMING Chief Executive Officer and April 30, 1999
------------------------------------------------- Director
Larry H. Ramming
By: /s/ THOMAS L. EASLEY Chief Financial Officer and April 30, 1999
------------------------------------------------- Director
Thomas L. Easley
By: /s/ BRIAN KRAUSE President and Director April 30, 1999
-------------------------------------------------
Brian Krause
By: /s/ K. KIRK KRIST Director April 30, 1999
-------------------------------------------------
K. Kirk Krist
By: /s/ JERRY WINCHESTER Director April 30, 1999
-------------------------------------------------
Jerry Winchester
</TABLE>
32
<PAGE> 35
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheet of Boots &
Coots International Well Control, Inc. and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides 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 December 31, 1998,
and the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Arthur Andersen LLP
Houston, Texas
April 15, 1999
F-1
<PAGE> 36
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 (as revised, see Note B). 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-2
<PAGE> 37
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 1,718,000 $ 4,213,000
Receivables -- net of allowance for doubtful accounts of
$7,000 and $915,000 at December 31, 1997 and 1998,
respectively........................................... 2,766,000 24,721,000
Inventories............................................... 1,131,000 14,819,000
Prepaid expenses and other current assets................. 427,000 987,000
----------- -----------
Total current assets.............................. 6,042,000 44,740,000
PROPERTY AND EQUIPMENT, net................................. 6,949,000 28,114,000
OTHER ASSETS:
Deferred financing costs and other assets -- net of
accumulated amortization of $17,000 and $448,000 at
December 31, 1997 and 1998, respectively............... 87,000 5,637,000
Goodwill -- net of accumulated amortization of $46,000 and
$560,000 at December 31, 1997 and 1998, respectively... 984,000 19,094,000
----------- -----------
Total assets...................................... $14,062,000 $97,585,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,679,000 $14,014,000
Accrued liabilities and customer advances................. 486,000 8,329,000
Long-term debt and notes payable -- current portion....... 1,565,000 4,584,000
----------- -----------
Total current liabilities......................... 3,730,000 26,927,000
----------- -----------
DEFERRED TAXES AND OTHER.................................... -- 1,346,000
LONG-TERM DEBT AND NOTES PAYABLE -- net of current
portion................................................... 99,000 49,076,000
COMMITMENTS AND CONTINGENCIES (Note I)
SHAREHOLDERS' EQUITY:
Preferred stock ($.00001 par, 5,000,000 shares authorized,
0 and 140,000 shares issued and outstanding at December
31, 1997 and 1998, respectively)....................... -- --
Common stock ($.00001 par, 50,000,000 shares authorized,
29,998,662 and 33,044,091 shares issued and outstanding
at December 31, 1997 and 1998, respectively)........... -- --
Additional paid-in capital................................ 11,213,000 25,154,000
Accumulated deficit....................................... (982,000) (4,918,000)
----------- -----------
Total shareholders' equity........................ 10,232,000 20,236,000
----------- -----------
Total liabilities and shareholders' equity........ $14,062,000 $97,585,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 38
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD
YEAR ENDED ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
REVENUES............................................... $2,564,000 $5,389,000 $76,283,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses................. 1,460,000 3,786,000 57,782,000
Selling, General and Administrative.................. 1,061,000 1,536,000 14,475,000
Depreciation and Amortization........................ 111,000 499,000 2,560,000
---------- ---------- -----------
2,632,000 5,821,000 74,817,000
---------- ---------- -----------
OPERATING INCOME (LOSS)................................ (68,000) (432,000) 1,466,000
OTHER EXPENSES, PRIMARILY INTEREST..................... 63,000 92,000 4,239,000
---------- ---------- -----------
LOSS BEFORE EXTRAORDINARY ITEM AND INCOME TAXES........ (131,000) (524,000) (2,773,000)
INCOME TAX EXPENSE..................................... 25,000 41,000 223,000
---------- ---------- -----------
NET LOSS BEFORE EXTRAORDINARY ITEM..................... $ (156,000) $ (565,000) $(2,996,000)
EXTRAORDINARY ITEM -- LOSS ON DEBT EXTINGUISHMENT...... -- 193,000 --
---------- ---------- -----------
NET LOSS............................................... $ (156,000) $ (758,000) $(2,996,000)
PREFERRED STOCK ACCRETION.............................. -- -- (865,000)
PREFERRED DIVIDENDS ACCRUED............................ -- -- (76,000)
---------- ---------- -----------
NET LOSS TO COMMON SHAREHOLDERS........................ $ (156,000) $ (758,000) $(3,937,000)
========== ========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE................. $ (0.01) $ (0.03) $ (0.12)
========== ========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE............... $ (0.01) $ (0.03) $ (0.12)
========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING............. 12,191,000 23,864,000 31,753,000
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 39
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997, SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 AND
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
---------------- ------------------- PAID-IN ACCUMULATED SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------- ------ ---------- ------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996....................... -- $ -- 11,500,000 $115 $ 801,000 $ (67,000) $ 734,000
Common stock issued for services
rendered................................. -- -- 1,058,000 11 46,000 -- 46,000
Common stock issued as Placement fees...... -- -- -- -- 46,000 -- 46,000
Common stock issued in connection with
equity offering.......................... -- -- 1,629,000 16 -- -- --
Sale of common stock warrants.............. -- -- -- -- 156,000 -- 156,000
Net loss................................... -- -- -- (156,000) (156,000)
------- ---- ---------- ---- ----------- ----------- -----------
BALANCES, June 30, 1997...................... -- -- 14,187,000 142 1,048,000 (223,000) 826,000
Common stock issued in connection with
equity offering.......................... -- -- 1,315,000 13 -- -- --
Exchange conversion with Havenwood reverse
merger................................... -- -- 1,173,000 12 -- -- --
Common stock issued to acquire Boots &
Coots L.P. assets........................ -- -- 260,000 3 1,000,000 -- 1,000,000
Sale of common stock warrants.............. -- -- -- -- 145,000 -- 145,000
Common stock issued to extinguish debt..... -- -- 3,867,000 39 2,447,000 -- 2,447,000
Sale of common stock, net of offering
costs.................................... -- -- 7,475,000 75 6,238,000 -- 6,238,000
Common stock issued to purchase ABASCO,
Inc. .................................... -- -- 300,000 3 240,000 -- 240,000
Common stock issued for services
rendered................................. -- -- 100,000 1 80,000 -- 80,000
Common stock issued upon exercise of
options.................................. -- -- 1,287,000 12 -- -- --
Common stock issued upon exercise of
options.................................. -- -- 35,000 -- 15,000 -- 15,000
Net loss................................... -- -- -- (759,000) (759,000)
------- ---- ---------- ---- ----------- ----------- -----------
BALANCES, December 31, 1997.................. -- -- 29,999,000 300 11,213,000 (982,000) 10,232,000
Common stock issued upon exercise of
options.................................. -- -- 354,000 4 557,000 -- 557,000
Common stock issued in connection with
acquisitions............................. -- -- 500,000 5 650,000 -- 650,000
Common stock issued to acquire Baylor
Company, net of offering costs........... -- -- 540,000 5 2,855,000 -- 2,855,000
Common stock issued to acquire Boots &
Coots Special Services, Inc., net of
offering costs........................... -- -- 488,000 5 2,143,000 -- 2,143,000
Common stock issued to acquire HAZ-TECH
Environmental Services, Inc., net of
offering costs........................... -- -- 269,000 2 695,000 -- 695,000
Preferred stock issued in connection with
equity offering, net of offering costs... 196,000 -- -- -- 4,678,000 -- 4,678,000
Preferred stock dividends accrued.......... -- -- -- -- -- (76,000) (76,000)
Preferred stock accretion.................. -- -- -- -- 865,000 (865,000) --
Preferred stock redemption................. (56,000) -- -- -- (1,400,000) -- (1,400,000)
Sale of common stock warrants.............. -- -- -- -- 2,898,000 -- 2,898,000
Exercise of common stock warrants.......... -- -- 894,000 9 -- -- --
Net loss................................... -- -- -- -- -- (2,996,000) (2,996,000)
------- ---- ---------- ---- ----------- ----------- -----------
BALANCES, December 31, 1998.................. 140,000 $ -- 33,044,000 $330 $25,154,000 $(4,918,000) $20,236,000
======= ==== ========== ==== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 40
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (156,000) $ (758,000) $ (2,996,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 111,000 499,000 2,560,000
Common stock issued as compensation....................... 36,000 --
Bad debt expense.......................................... -- 7,000 634,000
Loss on debt extinguishment, net of tax................... -- 193,000 --
Changes in operating assets and liabilities, net of assets
acquired:
Receivables............................................. (1,076,000) (1,392,000) (12,509,000)
Inventories............................................. (288,000) 338,000 (4,745,000)
Prepaid expenses and other current assets............... (43,000) (380,000) (217,000)
Deferred costs and other assets......................... (34,000) -- (4,405,000)
Accounts payable, accrued liabilities and customer
advances.............................................. 1,098,000 1,004,000 9,352,000
----------- ----------- ------------
Net cash used in operating activities................... (352,000) (490,000) (12,326,000)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, including transaction costs,
net of cash acquired.................................... (45,000) (2,874,000) (29,529,000)
Property and equipment additions.......................... (123,000) (188,000) (4,394,000)
Disposition of assets..................................... 4,000 39,000 --
----------- ----------- ------------
Net cash used in investing activities............... (164,000) (3,023,000) (33,923,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised............................ -- 15,000 557,000
Proceeds from issuance of debt and warrants............... 1,555,000 1,445,000 65,312,000
Borrowings under line of credit........................... -- -- 21,000,000
Deferred financing costs.................................. (321,000) (210,000) (2,605,000)
Debt repayments........................................... (71,000) (3,223,000) (38,722,000)
Proceeds from sales of common stock....................... -- 6,503,000 --
Proceeds from the issuance of redeemable preferred stock
and warrants............................................ -- -- 4,678,000
Preferred stock dividends................................. -- -- (76,000)
Preferred stock redemption................................ -- -- (1,400,000)
----------- ----------- ------------
Net cash provided by financing activities........... 1,163,000 4,530,000 48,744,000
----------- ----------- ------------
NET INCREASE IN CASH........................................ 647,000 1,017,000 2,495,000
CASH AND CASH EQUIVALENTS, beginning of year................ 54,000 701,000 1,718,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 701,000 $ 1,718,000 $ 4,213,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 53,000 $ 66,000 $ 2,581,000
Cash paid for income taxes................................ $ 23,000 $ 41,000 $ 315,000
=========== =========== ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock and common stock options issued in exchange
for property and equipment and services rendered........ $ 56,000 $ 80,000 $ 650,000
Conversion of subordinated debt to common stock........... -- 2,900,000 --
Issuance of common stock in acquisitions.................. -- 1,240,000 6,235,000
Stock offering costs...................................... -- 541,000 587,000
Warrants issued with financings........................... -- -- 2,898,000
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 41
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 $500,000 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 transaction 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 began management of the Company. For accounting purposes this was
treated as an acquisition by IWC Services of Havenwood.
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, prior
to the transaction. 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 to IWC Services, becoming a
wholly-owned subsidiary of IWC Services. IWC Services had no operations prior to
its acquisition of Hell Fighters, Inc. ("Hell Fighters").
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 741,000 post-split shares to the Company for
cancellation, leaving a total of 1,173,000 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 warrants 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 93% of the resulting
capitalization of the Company. Following the completion of the transactions,
there were approximately 16,675,000 shares of the Company's common stock issued
and outstanding. Immediately after the merger, all the officers and directors of
the Company resigned and were replaced by representatives of IWC.
The Company receives the majority of its revenues from customers in the
energy industry. The liquidity of the Company needs to be considered in light of
the significant fluctuations that are being experienced by oilfield service
providers as changes in oil and gas exploration and production change customer's
forecasts and budgets in response to oil and gas prices. These fluctuations can
rapidly impact the Company's cash flows as supply and demand factors impact the
number and size of projects available. During 1998 and continuing into
F-7
<PAGE> 42
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999, world-wide oil and gas prices and related activity have hit new lows, on
an inflation adjusted basis, for the past several decades, impacting the Company
and its competitors.
The Company has grown rapidly during 1998, primarily through acquisitions;
net assets this past year increased from approximately $14 to $98 million. Many
of the acquisitions have been made through debt financing; long-term debt has
increased from $1.7 million to $53.7 million and interest expense has climbed
from approximately $0.1 million to $4.2 million. Substantially all of the
Company's assets have been pledged to secure existing debt. The Company
curtailed its acquisition strategy in the last half of 1998 in response to the
industry conditions and credit availability. As of December 31, 1998, the
Company was in violation of its loan covenants with its two major lenders.
Management has arranged waivers of past violations and modifications of existing
loan covenants to allow the Company to be in compliance with its loan agreements
for 1999 (April 15, 1999 debt modification -- See Note F). Management believes
the steps it has taken will allow the Company to comply with loan covenants and
provide cash flows to operate, realize its assets and discharge its liabilities
in the normal course of business.
Management's actions include downsizing personnel and operations to meet
market demand and slow down of the cash drain caused in 1998 by recent
acquisitions made to exploit new market opportunities. As mentioned, the level
of acquisitions will be curtailed unless unusual market opportunities with
favorable financing terms are identified. Each of the operating units is
tightening its working capital requirements, and a very high threshold has been
established for routine capital expenditures. Management is exploring
opportunities for new equity investments or improved financing including an
acquisition line of credit. As yet, none of these opportunities have matured. A
significant equity infusion could have a substantially dilutive impact on
existing shareholders.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes a prolonged
depression in oil and gas prices will have a material adverse effect on the
Company's financial position and results of operations.
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 product and
equipment sales is recognized upon contract completion.
The Company recognizes profits on long-term manufacturing contracts on the
percentage-of-completion and uses the completed contract methods of accounting
on a contract-per-contract basis. The completed contract method is used when a
lack of dependable estimates and inherent hazards may cause the production of
unreliable data. A contract is considered to be complete when all costs except
insignificant items have been incurred and the installation is operating
according to specifications or has been accepted by the customer.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Costs in excess of amounts billed are classified as current assets and
billings in excess of costs are classified as current liabilities. Contract
retentions are included in accounts receivable.
F-8
<PAGE> 43
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Inventories consist primarily of equipment, parts and
supplies, work-in-progress and finished goods. Inventories are valued at the
lower of cost or market with cost determined using the first-in first-out
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 (15-31.5 years), manufacturing equipment (8-12 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). Facilities
and leasehold improvements are amortized over remaining primary lease terms.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.
Long Lived Assets -- Long-lived assets consist primarily of certain
property and equipment and the excess of cost over net assets of acquired
businesses (goodwill). Management continually evaluates whether events or
circumstances have occurred that indicate the remaining useful life of
intangible assets and other long-lived assets may warrant revision or that
remaining balances may not be recoverable.
Goodwill -- The Company amortizes costs in excess of fair value of net
assets of businesses acquired using the straight-line method over periods
ranging from 15 to 40 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 estimated
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 the
assets of IWC, Boots & Coots LP, ABASCO Inc., ITS Supply Corporation, Boots &
Coots Special Services, Inc. (f/k/a Code 3, Inc.), Baylor Company and HAZ-TECH
Environmental Services, Inc. For business acquisitions made prior to December
31, 1997, goodwill is amortized over 15 years. Management performs a fair market
value computation for each acquisition and the resulting goodwill is amortized
over the appropriate lives, typically 40 years for each acquisition. The
allocations of the purchase prices to the assets acquired and liabilities
assumed of these companies have been recorded based upon preliminary estimates
of fair value and may be adjusted in the year following the acquisition as
additional information becomes available.
Amortization expense of goodwill was $13,000 for the year ended June 30,
1997, $20,000 for the six-month period ended December 31, 1997, and $515,000 for
the year ended December 31, 1998.
Foreign Currency Transactions -- The functional currency of the Company's
foreign operations is the U.S. dollar. Substantially 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 gains or losses are included in the
Consolidated Statements of Operations. The majority of the foreign transactions
have terms that require a reimbursement of the currency fluctuation. This
mitigates the exposure to foreign currency losses. The Company does not enter
into hedge contracts, derivatives or interest rate swaps.
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.
F-9
<PAGE> 44
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Risk Factors -- Risk factors of the Company include, but are not limited
to, liquidity constraints, acquisition financing, acquisition strategy including
the related uncertainty of future profitability, environmental and governmental
regulations, and the ability to generate sufficient cash flows to meet working
capital requirements and to finance its business plan.
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, the six-month period ended
December 31, 1997, and the year ended December 31, 1998. Options and warrants to
purchase shares of common stock were outstanding during the respective periods
but were not included in the computation of diluted earnings (loss) per common
share, because of losses which made the options and warrants anti-dilutive.
Fair Value of Financial Instruments -- The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term maturities of these instruments. Management believes that the
carrying amount of long-term debt approximates fair value as the majority of
borrowings bear interest at current market interest rates for similar debt
structures.
Recent Accounting Pronouncements -- In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. The Company is currently evaluating what effect, if any,
this statement will have on the Company's financial statements. The Company will
adopt this statement no later than January 1, 2000.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets and eliminates certain
disclosures no longer considered useful. The Company adopted this statement in
the fourth quarter of 1998 and there was no effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in interim and annual financial statements. The Company adopted this
statement in the fourth quarter of 1998 and there was no material effect on the
Company's presentation of segment disclosures.
Also in June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components. The Company adopted this statement in
the first quarter of 1998 and there was no effect on the Company's financial
statements as there were no material items of other comprehensive income in any
of the years in the three year period ended December 31, 1998.
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.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1 providing guidance on
accounting for the costs of computer software developed or obtained for internal
use. This statement requires expenditures to be expensed as incurred. The
effective date of the pronouncement is for fiscal years beginning after December
15, 1998. The Company believes its current
F-10
<PAGE> 45
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
policies are materially consistent with the SOP and the impact on the Company's
future results of operations will not be material.
In April 1998, SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
was issued by the AICPA. SOP 98-5 requires that all non-governmental entities
expense costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1, 1999. The Company does not expect
the adoption of SOP 98-5 to have a material effect on its future financial
position or results of operations.
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.
Change in Presentation -- Certain reclassifications have been made in prior
period consolidated financial statements to conform to current year
presentation.
Revision of Prior Period Financial Statements -- The consolidated statement
of operations for the six month period ended December 31, 1997 has been revised
to present the $193,000 loss on extinguishment of debt (see Note F) as an
extraordinary item. The restatement had no effect on the consolidated net loss.
C. BUSINESS ACQUISITIONS:
On July 31, 1997, IWC Services 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
industrial and marine firefighting company. The consideration paid consisted of
(i) $369,000 cash payable to Boots & Coots, (ii) $681,000 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 $4,761,000 and (iv)
260,000 shares of common stock valued at $3.85 per share of the Company. The
promissory notes, secured by the acquired assets of Boots & Coots, were paid in
1998, after the determination of foreign tax obligations. This transaction was
accounted for as a purchase and the acquired assets and liabilities of Boots &
Coots were valued at fair market value as of July 31, 1997 resulting in goodwill
of $1,420,000 which is being amortized over 15 years.
For all acquisitions, the fair value of common stock issued is estimated
using management's and the board of directors' judgment, which is based on
recent transactions, the trading value of Company stock, trading value of
similar investments, discussions with financial advisors, and the negotiations
with sellers.
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 in cash and issued 300,000 shares of common stock valued at $0.80 per
share to acquire the manufacturing equipment, inventory and customer lists. This
transaction was accounted for as a purchase and the acquired assets and
liabilities of ABASCO were valued at fair market value effective as of September
12, 1997 resulting in goodwill of $750,000 which is being amortized over 25
years.
On January 2, 1998, the Company funded the acquisition, effective as of
December 31, 1997, of all of the capital stock of ITS Supply Corporation
("ITS"), an ISO 9002 certified materials and equipment procure-
F-11
<PAGE> 46
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ment, transportation and logistics company that serves the energy industry
worldwide, with offices in Houston, Venezuela, Peru, Dubai (UAE) and the United
Kingdom. ITS also serves as a distributor in Venezuela and Peru of artificial
lift oil recovery systems. Total consideration of $6,000,000 for the acquisition
was provided from working capital ($500,000); proceeds from the issuance of 10%
Senior Secured Notes due May 2, 1998 ($4,500,000); and short-term bridge
financing from the seller ($1,000,000).
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
(subsequently renamed Boot & Coots Special Services, Inc.,) included $571,000
cash; the repayment of Code 3 corporate secured debt and interest thereon of
approximately $1,250,000; the allotment of $550,000 of Code 3 accounts
receivable to the former shareholders; and the issuance of 488,000 shares of the
Company's common stock valued at $5.06 per share, of which 159,000 shares were
delivered into escrow to secure the indemnification obligations of the
stockholders of Code 3. This transaction was accounted for as a purchase and the
acquired underlying net assets of Code 3 have been valued at fair market value
on a preliminary basis resulting in goodwill of $4,064,000 which is being
amortized over 40 years.
On July 23, 1998, the Company completed the acquisition of 100% of the
outstanding shares of common stock of Elmagco, Inc., a Delaware Corporation
("Elmagco") from Begemann, Inc., a Delaware Corporation ("Begemann"). Elmagco
and its subsidiaries conduct business using the tradename Baylor Company
("Baylor"). Baylor is engaged in the design and manufacture of electrical
braking and control equipment predominantly used in the drilling and marine
markets, highly engineered specialty products such as SCR systems and custom
pedestal leg locking systems for the offshore market. Additionally, Baylor
designs and manufactures a broad line of custom AC generators, which are used in
a variety of industrial, commercial and governmental applications.
Consideration for the acquisition of Baylor, with a June 30, 1998 effective
date, was approximately $25,000,000 in cash, a $2,000,000 dividend payment and
the issuance at closing of 540,000 shares of the Company's common stock valued
at $5.63 per share. This transaction was accounted for as a purchase and the
acquired net assets and liabilities of Baylor have been valued at fair market
value on a preliminary basis resulting in goodwill of $7,294,000 which is being
amortized over 40 years.
On November 4, 1998 the Company's wholly-owned subsidiary, Boots & Coots
Special Services, Inc., completed the acquisition through merger of HAZ-TECH
Environmental Services, Inc. ("HAZ-TECH"), an emergency prevention and response
services company with operations in Arkansas, Oklahoma, Louisiana and Northeast
Texas. Consideration for the HAZ-TECH acquisition was $316,000 in cash and the
issuance of 269,000 shares of the Company's common stock valued at $2.69 per
share and assumed liabilities. This transaction was accounted for as a purchase
and the acquired net assets of HAZ-TECH have been valued on a preliminary basis
at fair market value resulting in goodwill of $1,413,000 which is being
amortized over 40 years.
The operations of the acquired entities are included in the Company's
consolidated operations from the respective acquisition dates. The Company's
1997 and 1998 revenues, net income (loss) applicable to common shareholders, and
net earnings (loss) per share on an unaudited pro forma basis, assuming that the
F-12
<PAGE> 47
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IWC, ABASCO, ITS, B & C Special Services, Baylor and HAZ-TECH acquisitions
occurred on January 1, 1997 would be as follows:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues.................................................. $96,997,000 $104,428,000
Net Income (Loss) to Common Shareholders.................. 43,000 (4,481,000)
Basic Earnings (Loss) Per Common Share.................... .00 (.11)
Diluted Earnings (Loss) Per Common Share.................. .00 (.11)
</TABLE>
D. INVENTORIES, PROPERTY AND EQUIPMENT:
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Raw material and supplies.................................. $ 239,000 $ 2,862,000
Work in process............................................ 35,000 4,327,000
Finished goods............................................. 857,000 7,630,000
---------- -----------
$1,131,000 $14,819,000
========== ===========
</TABLE>
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Land..................................................... $ 140,000 $ 2,241,000
Buildings and improvements............................... 561,000 7,544,000
Well control and firefighting equipment.................. 5,993,000 6,902,000
Shop and other equipment................................. 380,000 10,663,000
Vehicles................................................. 134,000 737,000
Office equipment and furnishings......................... 303,000 2,649,000
---------- -----------
Total property and equipment............................. 7,511,000 30,736,000
Less: Accumulated depreciation and
amortization................................... (562,000) (2,622,000)
---------- -----------
Net property and equipment....................... $6,949,000 $28,114,000
========== ===========
</TABLE>
F-13
<PAGE> 48
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1997 1998
-------- ------------ ------------
<S> <C> <C> <C>
Tax benefit at statutory rate..................... $(45,000) $(258,000) $(943,000)
Foreign taxes in excess of statutory rate......... 25,000 41,000 176,000
State income taxes................................ -- -- 47,000
Unrecognized net operating losses................. 45,000 258,000 902,000
Other, primarily meals and entertainment.......... -- -- 41,000
-------- --------- ---------
Provision for income taxes.............. $ 25,000 $ 41,000 $ 223,000
======== ========= =========
</TABLE>
The current provision for income taxes consists primarily of state taxes
and foreign taxes on international operations.
The tax effect of temporary differences representing deferred tax assets
and liabilities are not significant in the year ended June 30, 1997 and the
six-month period ended December 31, 1997 as the net operating loss carryforwards
of $74,000 and $332,000, respectively, carried a full valuation allowance. The
Company records a valuation allowance for deferred tax assets when management
believes it is more likely than not the assets will not be realized. The
deferred tax asset related to the net operating loss carryforwards at December
31, 1998 of $1,205,000 also carries a full valuation allowance.
Other temporary differences representing deferred tax assets and
liabilities at December 31, 1998 include assets related to the allowance for
doubtful accounts ($270,000), inventory (298,000), accruals (329,000), warranty
reserves (244,000) and other assets (33,000) offset by liabilities related to
book depreciation and amortization in excess of tax ($1,181,000). The net
difference is not material.
As of December 31, 1998, the Company has net domestic operating loss
carryforwards of approximately $3,544,000 expiring in various amounts beginning
in 2011.
F-14
<PAGE> 49
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
11.28% Senior Subordinated Note -- Net of Warrant Value
($30,000,000 -- Face)..................................... $ -- $27,748,000
Revolving Loan Agreement.................................... -- 21,000,000
10% Shareholder Note........................................ -- 1,217,000
Subordinated Note to Supplier............................... -- 3,194,000
12% Subordinated Note....................................... 90,000 90,000
Acquisition Note --
Boots & Coots L.P. ....................................... 1,544,000 --
Vehicle and equipment notes bearing interest at rates from
9.25% to 12.25%, payable in monthly installments, through
April 2003 and collateralized by vehicles and equipment... 30,000 411,000
---------- -----------
Total............................................. 1,664,000 53,660,000
Less: current portion of long-term debt and notes
payable......................................... 1,565,000 4,584,000
---------- -----------
Total long-term debt and notes payable............ $ 99,000 $49,076,000
========== ===========
</TABLE>
As of December 31, 1998, the maturities of long-term obligations for the
five years after 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
- ------------------------- -----------
<S> <C>
1999.................................................... $ 4,584,000
2000.................................................... 21,263,000
2001.................................................... 65,000
2002.................................................... 6,000,000
2003.................................................... 6,000,000
Thereafter.............................................. 15,748,000
-----------
$53,660,000
===========
</TABLE>
In January 1997, through a Private Placement Memorandum, the Company issued
Investment Units which consisted of a 12% Senior Subordinated Note (the "Notes")
in the principal amount of $1,000 with a warrant to purchase 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 $156,000 and for the six month period ended December 31, 1997 to be $145,000,
which have been amortized to interest expense over the term of the notes.
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 $3,000,000 in notes sold pursuant to this
financing were utilized for working capital and business expansion purposes.
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 3,867,000 shares of
common stock with $193,000 recognized as an extraordinary charge to
F-15
<PAGE> 50
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operations for early extinguishment of indebtedness. The carrying amount, net of
costs associated with debt offering, was transferred to equity at time of
conversion.
In connection with the acquisition of ITS, the Company sold through private
placement 10% Senior Secured Notes on January 2, 1998, and concurrently 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 which had a scheduled maturity date of May 2, 1998. 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 holders of the 10% Senior Secured Notes
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. Using the Black-Scholes pricing model, an estimated fair value was
attributed to the warrants issued, has been subsequently charged to operations
as interest expense over the term of the 10% Senior Secured Notes. During 1998,
through mutual agreement with the holder of the warrants, the warrants were
converted to 777,000 shares of common stock. Also in connection with the
acquisition of ITS, seller financing of $1,000,000 was obtained. The seller
note, together with interest at the rate of 10% per annum, was repaid during
1998.
In connection with the acquisition of Code 3, on March 5, 1998, the Company
sold through private placement to the note holders providing financing for the
ITS acquisition an additional $2,250,000 of 10% Senior Secured Notes due June
15, 1998. In addition, these note holders were issued attached 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. Using the
Black-Scholes pricing model, an estimated fair value of $516,000 was attributed
to the warrants issued in connection with the 10% Senior Secured Notes and has
been charged to operations as interest expense over the three-month term of the
notes during the year ended December 31, 1998.
The Company's Chairman and Chief Executive Officer, Larry H. Ramming, was
granted a waiver of the lock-up restrictions on his shares of common stock with
respect to a pledge of such shares to secure a loan, the proceeds of which were
used by Mr. Ramming on April 30, 1998 to purchase the $7,000,000 remaining
balance outstanding on the 10% Senior Secured Notes issued by the Company in
connection with the acquisitions of ITS and Code 3. Mr. Ramming agreed to extend
the maturity dates of such notes to October 1, 1998 and thereafter on a
month-to-month basis, in exchange for a fee of 1% of the principal balances of
such note. As of December 31, 1998, the Company had paid Mr. Ramming $5,783,000
to be applied toward the principal balance of the 10% Notes held by Mr. Ramming
and $383,000 in interest and extension fees.
Concurrent with the acquisition of Baylor on July 23, 1998, and to provide
the Company with cash to fund the acquisition and for other corporate purposes,
the Company completed the sale of $15,000,000 of Senior Secured Notes due
January 6, 1999 (the "Senior Notes") and $30,000,000 of 11.28% Senior
Subordinated Notes due July 23, 2006 (the "Subordinated Notes") to The
Prudential Insurance Company of America ("Prudential"). Proceeds from these
financing transactions were used to fund the Baylor acquisition, repay
$5,000,000 in bridge financing provided through Prudential Securities Credit
Corporation on July 6, 1998 and provide working capital.
The Subordinated Note and Warrant Purchase Agreement relating to the
Subordinated Notes imposes restrictions on the Company's activities including,
without limitation, with respect to the payment of dividends or other
distributions on its capital stock; incurring additional indebtedness; granting
liens to secure any other indebtedness; making loans or advances to, or
investments in, other persons or entities; liquidating, dissolving or merging
with another company; dispositions of assets; transactions with affiliates;
changing the nature of its business; and the issuance of additional shares of
preferred stock. Further, the Company is required to meet certain minimum
financial tests so long as the Subordinated Notes are outstanding. The
Subordinated Note
F-16
<PAGE> 51
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and Warrant Purchase Agreement also provide for customary affirmative and
negative covenants. The Company was not in compliance with one financial
covenant and has obtained a waiver from the lender.
In connection with the sale of the Notes, the Company issued to Prudential
a warrant to purchase, commencing on July 23, 2000 and terminating with the
later of July 23, 2008, or six months after the Notes are fully retired,
3,165,000 shares of common stock (the "Warrant") of the Company at an initial
exercise price of $6.70 per share. The Warrant contains anti-dilution and
repricing provisions that may result in downward adjustments to the exercise
price upon the occurrence of certain events and a provision for the "cashless"
exercise of the Warrant. The Company granted Prudential a one-time demand
registration right and unlimited "piggyback" registration rights for the shares
of common stock issuable upon the exercise of the Warrant. The Company and
certain stockholders of the Company also agreed with Prudential that in the
event of significant sales of securities of the Company by the Company or such
stockholders, Prudential would be entitled to participate in such sale. Using
the Black-Scholes pricing model, an estimated fair value of $2,382,000 was
attributed to the warrants issued in connection with the sale of the Notes and
is being periodically charged to interest expense over the term of the Notes.
On October 28, 1998, the Company entered into a Revolving Loan Agreement
with Comerica Bank Texas ("Comerica"), as agent and lender, providing for a
$25,000,000 revolving loan facility (the "Loan Agreement"). The Company, subject
to a borrowing base formula, has drawn through December 31, 1998 $21,000,000
under the Comerica Loan Agreement to repay all of the interim $15,000,000
Prudential Senior Notes. Advances under the Loan Agreement bear interest at the
greater of Comerica's daily prime rate or the federal funds rate plus .5%.
Subject to certain limitations, the Company has the option under the Loan
Agreement to convert to a LIBOR based interest rate calculation. The Company
also pays a commitment fee equal to .25% per annum on the unused portion of the
commitment under the Loan Agreement.
Advances under the Loan Agreement are secured by substantially all of the
assets of the Company and its subsidiaries. The Loan Agreement imposes certain
restrictions on the Company's activities, including, without limitation, a
prohibition on the payment of cash dividends on the Company's equity securities;
limitations on incurring additional borrowed money indebtedness; limitations on
incurring or permitting liens upon the assets of Company and its subsidiaries;
limitations on making loans or advances to, or investments in, other persons or
entities; limitations the Company or its subsidiaries liquidating, dissolving or
merging with another company; limitations on the disposition of assets by the
Company and its subsidiaries; a prohibition on the Company changing the nature
of its business; and a prohibition of the Company repurchasing its equity
securities.
Based on finalized results of operations for the year ended December 31,
1998, the Company was not in compliance with certain financial covenants in the
Comerica Loan Agreement. Effective April 15, 1999, the Comerica Loan Agreement
was amended to waive compliance with these financial covenants through December
31, 1998 and to modify certain financial covenants prospectively. Comerica's
commitment under this credit facility was reduced to $20,000,000, the interest
rate adjusted to a base rate approximating prime plus 1%, and the maturity date
was modified to May 31, 2000.
G. SHAREHOLDERS' EQUITY:
Capital Structure:
At June 30, 1996, IWC Services authorized 1,000,000 shares of no par common
stock of which 100,000 shares were issued and outstanding. Effective December
17, 1996, IWC Services 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 and effected 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 December 31, 1997 and 1998, a total of 29,998,000 shares and
33,044,000 shares, respectively, of common stock were issued and outstanding. In
June
F-17
<PAGE> 52
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, the Company completed the sale through private placement of 196,000 Units
of 10% Junior Redeemable Convertible Preferred Stock ("Redeemable Preferred"),
each Unit consisting of one share of the Preferred Stock and one Unit Warrant
representing the right to purchase five shares of common stock of the Company at
a price of $5.00 per share. The Redeemable Preferred Stock could be redeemed by
the Company at any time on or before the six month anniversary of the date of
issuance (from October 17, 1998 through December 8, 1998) without prior written
notice in an amount per share equal to $25.00, plus any accrued and unpaid
dividends thereon. After the six month anniversary of the date of issuance of
the Redeemable Preferred Stock and for so long as such shares are outstanding,
the Company could redeem such shares upon fifteen days prior written notice.
In the event shares of Redeemable Preferred Stock were not redeemed by the
Company on or before the six month anniversary of the date of issuance, each
unredeemed share shall thereafter, until the nine month anniversary of the date
of issuance be convertible, at the election of the holder thereof, into such
number of shares of common stock at 85% of the average of the last reported
sales prices of shares of the common stock (or the average of the closing bid
and asked prices if no transactions have been reported), not to exceed $6.00 per
share, for the 10 trading days immediately preceding the receipt by the Company
of written notice from the holder thereof of an election to so convert such
share of Redeemable Preferred Stock. In the event the Company has not redeemed
shares of Redeemable Stock on or before the nine month anniversary of the date
of issuance, each unredeemed share shall become immediately convertible, at the
election of the holder thereof, into such number of shares of common stock as
shall be obtained by dividing $25.00 by $2.75 (proportionately adjusted for
common stock splits, combinations of common stock and dividends paid in shares
of common stock).
Using the Black-Scholes pricing model and taking into account the discount
upon conversion, an estimated fair value of $865,000 was attributed to the
warrants issued in connection with the Redeemable Preferred Stock. This amount
was accreted over the six-month redemption period as a charge to net loss to
common shareholders.
Through December 31, 1998, the Company redeemed 56,000 shares of Redeemable
Preferred Stock for $1,400,000 and subsequently retired those shares.
Warrants:
On September 18, 1997, the Company 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.
F-18
<PAGE> 53
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note F, in connection with various short-term interim and
long-term financings, the Company has granted to the lenders warrants to
purchase common stock of the Company. A summary of warrants outstanding as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
- --------------- -------------- ---------
<S> <C> <C>
06/30/00.................................................. $3.84 26,000
12/01/01.................................................. 2.85 300,000
09/18/02.................................................. 1.20 748,000
05/31/03.................................................. 5.00 980,000
01/02/04.................................................. 2.62 800,000
03/07/04.................................................. 4.50 300,000
07/23/08.................................................. 6.70 3,165,000
---------
6,319,000
=========
</TABLE>
Voting Trust Agreement:
In May 1995, certain officers and directors of the Company entered into a
Voting Trust Agreement giving the Company's chairman and director of the Company
the absolute right to vote all shares of common stock owned by certain other
officers of the Company during a five-year period ending December 31, 2000. The
Voting Trust Agreement provides that twenty percent of the shares subject to
such agreement are eligible for release therefrom on each one year anniversary
date of the agreement. Currently, 1,380,000 shares (representing 4.2% of the
Company's outstanding stock) are subject to the Voting Trust Agreement.
401-(k) Plan:
The Company's wholly owned subsidiary, Baylor Company, was sponsor of the
Baylor Company 401-(k) Plan for eligible employees having six months of service
and being at least twenty-one years of age. Employees can make elective
contributions of 1% to 15% of compensation, as defined. Baylor Company matched
50% of participant contributions up to 6% of considered compensation. During the
period from July 23, 1998 (acquisition date) through December 31, 1998, Baylor
Company contributed $73,000 under this plan. Effective February 1, 1999, the
Baylor 401-(k) Plan was renamed the Boots & Coots Group 401-(k) Plan and the
amended Plan was adopted by the Company and its other operating subsidiaries.
Stock Option Plan:
A summary of Stock Option Plans in effect as of December 31, 1998, follows:
1996 Incentive Stock Plan authorizing the Board of Directors to provide a
number of key employees with incentive compensation commensurate with their
positions and responsibilities. The 1996 Plan permitted the grant of incentive
equity awards covering up to 960,000 shares of common stock. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 460,000 shares of common stock to
employees who were the beneficial owners of 200,000 options that were previously
granted by IWC Services. These incentive stock options were exercisable for a
period of 10 years from the original date of grant at an exercise price of $0.43
per share.
1997 Boots & Coots Employee Option Grant, providing for IWC Services to
issue options to purchase a total of 100,000 shares of its common stock at a
price of $1.00 per share to nine employees of Boots & Coots. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 230,000 shares of common stock to the
Boots & Coots employees who were the beneficial owners of the 100,000 options
that were previously granted by IWC Services. These stock
F-19
<PAGE> 54
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options vest at the rate of 20% per year commencing in July 1998 and are
exercisable for a period of 10 years from the original date of grant at an
exercise price of $0.43 per share.
1997 Incentive Stock Plan authorizing the Board of Directors to provide key
employees with incentive compensation commensurate with their positions and
responsibilities. The 1997 Incentive Stock Plan permits the grant of incentive
equity awards covering up to 1,475,000 shares of common stock. Grants may be in
the form of qualified or nonqualified stock options, restricted stock, phantom
stock, stock bonuses and cash bonuses. As of the date hereof, stock options
covering an aggregate of 1,305,000 shares of common stock have been made under
the 1997 Incentive Stock Plan. Such options vest ratably over a five year period
from the date of grant.
1997 Executive Compensation Plan authorizing the Board of Directors to
provide executive officers with incentive compensation commensurate with their
positions and responsibilities. The 1997 Executive Compensation Plan permits the
grant of incentive equity awards covering up to 1,475,000 shares of common
stock. Grants may be in the form of qualified or nonqualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses.
1997 Outside Directors' Option Plan authorizing the issuance each year 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. The purpose of the
Directors' Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist the Company in achieving its
growth objectives. Options may be exercised over a five-year period with the
initial right to exercise starting one year from the date of the grant, provided
the director has not resigned or been removed for cause by the Board of
Directors prior to such date. After one year from the date of the grant, options
outstanding under the Directors' Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors' Plan are not transferable except by will or by operation of law. As
of the date hereof, stock options covering an aggregate of 45,000 shares of
common stock have been made under the 1997 Outside Directors' Option Plan.
Activity in these option plans for the year ended June 30, 1997, six months
ended December 31, 1997, and year ended December 31, 1998 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................................................... 1,920,000 1.14
Exercised................................................. (1,426,000) 0.43
Cancelled................................................. (12,000) 0.43
---------- -----
Outstanding December 31, 1997............................... 1,172,000 1.59
Granted................................................... 1,645,000 2.85
Exercised................................................. (354,000) 0.80
Cancelled................................................. (21,000) 2.00
---------- -----
Outstanding December 31, 1998............................... 2,442,000 $2.55
========== =====
</TABLE>
F-20
<PAGE> 55
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, 756,000 options are currently exercisable at
exercise prices ranging from $0.43 to $6.00 and the remaining options vest over
a period of five years from date of grant.
In December 1996 and May 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 805,000 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.
In September 1997, the Company granted 80,000 options to two consultants at
an exercise price of $2.00 per share. These options are exercisable upon grant
and remain exercisable for a period of four years from the grant date.
In December 1997, the Company granted 50,000 options to a consultant at an
exercise price of $3.62 per share. These options are exercisable upon grant and
remain exercisable for a period of five 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 employee and director 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 ENDED PERIOD ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1997 1998
---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss to common shareholders... As reported $(156,000) $ (759,000) $(3,987,000)
Pro forma $(220,000) $(1,029,000) (5,460,000)
Net loss per common share......... As reported $ (0.01) $ (0.03) $ (0.12)
Pro forma $ (0.02) $ (0.04) $ (0.17)
</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 45%, no assumed dividend yield and expected
lives of one to three years, depending on the term.
H. RELATED PARTY TRANSACTIONS:
Through December 31, 1997, the Company shared 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 major individual shareholder, Chairman and Chief
Executive Officer, Larry H. Ramming. 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 fees were included with deferred financing
costs in the consolidated
F-21
<PAGE> 56
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet and amortized over the term of the Notes, $2,900,000 of which were
converted to common stock in September 1997 (see Note F).
As discussed in Note F, the Company's major individual shareholder Chairman
and Chief Executive Officer, Larry H. Ramming, loaned $7,000,000 to the Company
to retire certain bridge financing. As of December 31, 1998, interest (10%) and
extension (2%) aggregating $383,000 and principal reductions of $5,783,000 have
been paid to Mr. Ramming. Management believes the terms and conditions of Mr.
Ramming's loan to the Company are favorable to those that could have been
negotiated with outside parties.
In 1998 the Company entered into an agreement with a company controlled by
Mr. Ramming to have available for charter, on a 24 hour per day, 365 days per
year stand-by status, a jet aircraft to be utilized in connection with the
Company's mobilization of personnel and selected equipment for emergency
response well control and spill containment and remediation spills and for other
corporate purposes as needed. $399,000 was paid pursuant to such charter
arrangement, based on rates comparable to those available from third party
aircraft charter operators for comparable charter arrangements.
I. COMMITMENTS AND CONTINGENCIES:
The Company leases vehicles, equipment and shop and equipment storage
facilities under operating leases with terms in excess of one year.
At December 31, 1998, future minimum lease payments under these
noncancellable operating leases are approximately:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
- ------------------------- ----------
<S> <C>
1999.................................................... $1,765,000
2000.................................................... 1,580,000
2001.................................................... 1,262,000
2002.................................................... 1,141,000
2003.................................................... 1,209,000
Thereafter.............................................. 868,000
----------
$7,825,000
==========
</TABLE>
Rent expense for the year ended June 30, 1997, the six-month period ended
December 31, 1997, and the year ended December 31, 1998, was approximately
$77,000, $140,000, and $1,158,000, respectively.
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Management of the
Company does not believe that any liabilities resulting from any such current
proceedings will have a material adverse effect on its consolidated operations
or financial position.
J. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND CONCENTRATION
OF CREDIT RISK:
Information concerning operations in different business segments at
December 31, 1998, and for the year then ended is presented below (in
thousands). The Company considers that it operates in three segments: Emergency
Response and Restoration, Programs and Services (Risk Management, outsource
purchasing, manufacturer's representation and services); and Manufacturing and
Distribution. Intercompany transfers between segments were not material. The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies. For purposes of this
presentation, general and corporate expenses have been allocated between
segments on a pro rata basis based on revenue. In addition,
F-22
<PAGE> 57
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
general and corporate are included in the calculation of identifiable assets and
are included in the Emergency Response and Restoration business segment and the
domestic segment.
<TABLE>
<CAPTION>
EMERGENCY MANUFACTURING
RESPONSE AND PROGRAMS AND AND
RESTORATION SERVICES DISTRIBUTION CONSOLIDATED
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Net Operating Revenues................ $28,809,000 $25,526,000 $21,948,000 $76,283,000
Operating Income (Loss)............... (672,000) (368,000) 2,506,000 1,466,000
Identifiable Operating Assets......... 34,509,000 17,103,000 45,973,000 97,585,000
Equity Income (Loss).................. -- -- (105,000) (105,000)
Investments in Affiliates............. -- -- 158,000 158,000
Capital Expenditures.................. 3,703,000 244,000 447,000 4,394,000
Depreciation and Amortization......... 1,402,000 344,000 814,000 2,560,000
Interest expense...................... 2,606,000 73,000 1,702,000 4,381,000
Six Month Period Ended December 31, 1997
Net Operating Revenues................ $ 4,417,000 $ -- $ 972,000 $ 5,389,000
Operating Income (Loss)............... (493,000) -- 61,000 (432,000)
Identifiable Operating Assets......... 11,540,000 -- 2,521,000 14,061,000
Equity Income......................... -- -- -- --
Investments in Affiliates............. -- -- -- --
Capital Expenditures.................. 188,000 -- -- 188,000
Interest expense...................... 117,000 -- -- 117,000
Depreciation and Amortization......... 467,000 -- 33,000 500,000
</TABLE>
For the year ended June 30, 1997, there was only one business
segment -- Emergency Response and Restoration. Thus, the segment information for
this period is presented in the accompanying financial statements.
During the periods presented below, the following customers represented
significant concentrations of consolidated revenues:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Customer A....................................... $385,000 $ -- $--
Customer B....................................... 757,000 -- --
Customer C....................................... 416,000 -- --
Customer D....................................... -- 1,454,000 --
Customer E....................................... -- 568,000 --
</TABLE>
The Company's revenues are generated geographically as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH PERIOD YEAR ENDED
JUNE 30, ENDED DECEMBER 31, DECEMBER 31,
1997 1997 1998
---------- ------------------ ------------
<S> <C> <C> <C>
Domestic customers.......................... 71% 61% 47%
Foreign customers........................... 29% 39% 53%
</TABLE>
Two of the Company's customers collectively accounted for 27% of
outstanding accounts receivable at December 31, 1997. None of the Company's
customers at December 31, 1998 accounted for greater than ten percent of
outstanding accounts receivable. The Company believes that future accounts
receivable will
F-23
<PAGE> 58
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, 1998:
On April 15, 1999, the Company completed the sale of $5,000,000 of Series A
Cumulative Senior Preferred Stock ("Series A Stock") to Halliburton Energy
Services, Inc. ("Halliburton"), a wholly-owned subsidiary of Halliburton
Company. The Series A Stock has a dividend requirement of 6.25% per annum
payable quarterly until the fifth anniversary of the date of issuance, whereupon
the dividend requirement increases to the greater of prime plus 6.25% or 14% per
annum, which is subject to adjustment for stock splits, stock dividends and
certain other events. In addition, Halliburton received warrants to purchase,
for a 7 year period 1,250,000 Shares of the Company's $.00001 Par Value Common
Stock at $4 per share.
Also in connection with the equity investment, the Company and Halliburton
entered into an expanded Alliance Agreement which effectively broadens the
alliance between the Company and Halliburton that has been in effect since 1995.
F-24
