<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
---------------------
COMMISSION FILE NUMBER 1-13817
BOOTS & COOTS INTERNATIONAL
WELL CONTROL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-2908692
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 POST OAK BOULEVARD, SUITE 800
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
</TABLE>
(713) 621-7911
Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock, par value $.00001
per share, outstanding at May 14, 1999, was 33,165,517.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PART I
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PAGE
----
<S> <C> <C>
Item 1. Financial Information....................................... 3
Consolidated Balance Sheets................................. 3
Consolidated Statements of Operations....................... 4
Consolidated Statements of Shareholders' Equity............. 5
Consolidated Statements of Cash Flows....................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations...................................
PART II
Item 5. Other Information...........................................
Item 6. Exhibits and Reports on Form 8-K............................ 14
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................
</TABLE>
2
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENTS ASSETS:
Cash...................................................... $ 4,213,000 $ 2,349,000
Receivables -- net........................................ 24,721,000 20,265,000
Inventories............................................... 14,819,000 15,133,000
Prepaid expenses and other current assets................. 987,000 3,068,000
----------- -----------
Total current assets.............................. 44,740,000 40,815,000
----------- -----------
PROPERTY AND EQUIPMENT -- net............................... 28,114,000 28,999,000
OTHER ASSETS:
Deferred financing costs and other assets -- net.......... 5,637,000 5,964,000
Goodwill -- net........................................... 19,094,000 18,870,000
----------- -----------
Total assets...................................... $97,585,000 $94,648,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $14,014,000 $14,810,000
Accrued liabilities and customer advances................. 8,329,000 7,154,000
Long-term debt and notes payable -- current portion....... 4,584,000 2,505,000
----------- -----------
Total current liabilities......................... 26,927,000 24,469,000
----------- -----------
DEFERRED INCOME TAXES AND OTHER............................. 1,346,000 1,346,000
LONG-TERM DEBT AND NOTES PAYABLE -- net of current
portion................................................... 49,076,000 50,738,000
COMMITMENTS AND CONTINGENCIES...............................
SHAREHOLDERS' EQUITY:
Preferred stock ($.00001 par, 5,000,000 shares authorized,
140,000 and 122,000 issued and outstanding at December
31, 1998 and March 31, 1999, respectively)............. -- --
Common stock ($.00001 par, 50,000,000 shares authorized,
33,044,000 and 33,165,000 shares issued and outstanding
at December 31, 1998 and March 31, 1999,
respectively).......................................... -- --
Additional paid-in capital................................ 25,154,000 24,954,000
Accumulated deficit....................................... (4,918,000) (6,859,000)
----------- -----------
Total shareholders' equity........................ 20,236,000 18,095,000
----------- -----------
Total liabilities and shareholders' equity........ $97,585,000 $94,648,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES.................................................... $11,959,000 $22,289,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses...................... 8,095,000 17,250,000
Selling, General and Administrative....................... 2,572,000 4,497,000
Depreciation and Amortization............................. 311,000 1,012,000
----------- -----------
10,978,000 22,759,000
----------- -----------
OPERATING INCOME (LOSS)..................................... 981,000 (470,000)
OTHER EXPENSES, PRIMARILY INTEREST.......................... 567,000 1,438,000
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES........................... 414,000 (1,908,000)
INCOME TAXES -- FOREIGN..................................... 258,000 19,000
----------- -----------
NET INCOME (LOSS)........................................... 156,000 (1,927,000)
PREFERRED DIVIDEND REQUIREMENTS -- 90,000
----------- -----------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS.......... $ 156,000 $(2,017,000)
=========== ===========
BASIC EARNINGS (LOSS) PER COMMON SHARE...................... $ .01 $ (.06)
=========== ===========
DILUTED EARNINGS (LOSS) PER COMMON SHARE.................... $ .01 $ (.06)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING -- BASIC...................................... 30,228,000 33,084,000
=========== ===========
-- DILUTED............................ 30,638,000 33,084,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<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, December 31,
1998................ 140,000 $ -- 33,044,000 $ -- $25,154,000 $(4,918,000) $20,236,000
Preferred stock
dividends......... -- -- -- -- -- (14,000) (14,000)
Preferred stock
conversion to
common stock...... (10,000) -- 121,000 -- -- -- --
Preferred stock
redemption........ (8,000) -- -- -- (200,000) -- (200,000)
Net (Loss).......... -- -- -- -- -- (1,927,000) (1,927,000)
------- ---- ---------- ---- ----------- ----------- -----------
BALANCES, March 31,
1999................ 122,000 $ -- 33,165,000 $ -- $24,954,000 $(6,859,000) $18,095,000
======= ==== ========== ==== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 156,000 $(1,927,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 311,000 1,012,000
Non-cash charges associated with warrant costs............ 332,000 74,000
Bad debt expense.......................................... 9,000 63,000
Changes in assets and liabilities, net of acquisitions:
Receivables............................................ (6,830,000) 4,393,000
Inventories............................................ (2,486,000) (314,000)
Prepaid expenses and other current assets.............. (77,000) (830,000)
Deferred financing costs and other assets (not
current).............................................. (80,000) (2,015,000)
Accounts payable....................................... 5,419,000 838,000
Accrued liabilities and customer advances.............. 2,330,000 (1,196,000)
----------- -----------
Net cash provided by (used in) operating
activities...................................... (916,000) 98,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, including transaction costs,
net of cash acquired................................... (6,570,000) --
Property and equipment additions.......................... (353,000) (1,268,000)
----------- -----------
Net cash used in investing activities............. (6,923,000) (1,268,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised............................ 39,000 --
Proceeds from issuance of debt and warrants............... 8,250,000 --
Borrowings under line of credit........................... -- 1,550,000
Debt repayments........................................... (1,702,000) (2,030,000)
Preferred stock dividends................................. -- (14,000)
Preferred stock redemption................................ -- (200,000)
----------- -----------
Net cash provided by (used in) financing activities....... 6,587,000 (694,000)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS................. (1,252,000) (1,864,000)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,718,000 4,213,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 466,000 $ 2,349,000
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 220,000 $ 2,117,000
Cash paid for income taxes................................ $ -- $ --
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for acquisition of business........... $ 2,282,000 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
6
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Boots &
Coots International Well Control, Inc. (the "Company") have been prepared in
accordance with Generally Accepted Accounting Principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. They do not include all information and notes required by Generally
Accepted Accounting Principles for complete financial statements. The
accompanying consolidated financial statements include all adjustments,
including normal recurring accruals, which, in the opinion of management, are
necessary in order to make the consolidated financial statements not be
misleading.
The accompanying consolidated financial statements should be read in
conjunction with the Audited Consolidated Financial Statements and the notes
thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The results of operations for the three-month period ended March 31, 1998
and 1999 are not necessarily indicative of the results to be expected for the
full year.
NOTE B -- BUSINESS ACQUISITIONS
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 procurement,
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). This transaction was accounted for as a
purchase and the acquired assets and liabilities were valued at fair market
value as of January 2, 1998 resulting in goodwill of $4,551,000 which is
amortized over 40 years.
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 were valued at fair market value on a
preliminary basis resulting in goodwill of $4,064,000 which is amortized over 40
years.
On July 23, 1998, the Company completed the acquisition of all of the 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
7
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired net assets and liabilities of Baylor were valued at fair market value
on a preliminary basis resulting in goodwill of $7,336,000 which is 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 were valued on a preliminary basis at
fair market value resulting in goodwill of $1,413,000 which is amortized over 40
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.
The operations of the acquired entities are included in the Company's
consolidated operations from their respective acquisition dates. The 1998 first
quarter revenues, net income available to common shareholders, and net earnings
per share on an unaudited pro forma basis, assuming that the ITS, B & C Special
Services, Baylor and HAZ-TECH acquisitions occurred on January 1, 1998 would be
as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C>
Revenues................................................ $24,726,000
Net Income Available to Common Shareholders............. 791,000
Basic Earnings Per Common Share......................... .03
Diluted Earnings Per Common Share....................... .03
</TABLE>
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. The Company was not in compliance with one financial covenant and
obtained a waiver from the lender at December 31, 1998.
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 loan agreement relating to the Comerica Loan Agreement imposes certain
restrictions on the Company's activities, including a prohibition, unless
permitted, 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 on 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
8
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 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 the first
quarter of 1999, world-wide oil and gas prices and related activity hit new
lows, on an inflation adjusted basis, for the past several decades, impacting
the Company and its competitors. Although oil and gas prices have since
recovered somewhat, there is no assurance that such increases will be sustained
or that they will result in increased operational activity by the Company's
customers.
The Company has grown rapidly since 1997, primarily through acquisitions.
Many of the acquisitions have been made through debt financing; long-term debt
has increased from $1.7 million to $50.7 million and interest expense has
increased to $1.4 million for the quarter ended March 31, 1999. 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. 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. 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 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 $4.00 per share.
9
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE C -- COMMITMENTS AND CONTINGENCIES
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.
NOTE D -- BUSINESS SEGMENT INFORMATION
Information concerning operations in different business segments at March
31, 1998 and 1999, and for the three-month periods 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, 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 PROGRAMS MANUFACTURING
RESPONSE AND AND AND
RESTORATION SERVICES DISTRIBUTION CONSOLIDATED
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 1999
Net Operating Revenues................ $10,266,000 $ 2,297,000 $ 9,726,000 $22,289,000
Operating Income (Loss)............... (429,000) (630,000) 589,000 (470,000)
Identifiable Operating Assets......... 31,739,000 14,414,000 48,495,000 94,648,000
Investments in Affiliates............. -- -- 1,760,000 1,760,000
Capital Expenditures.................. 887,000 90,000 287,000 1,264,000
Depreciation and Amortization......... 516,000 74,000 422,000 1,012,000
Interest Expense...................... 1,417,000 44,000 3,000 1,464,000
Three Months Ended December 31, 1998
Net Operating Revenues................ $ 5,196,000 $ 6,031,000 $ 732,000 $11,959,000
Operating Income (Loss)............... 458,000 469,000 54,000 981,000
Identifiable Operating Assets......... 19,067,000 14,932,000 2,578,000 36,577,000
Capital Expenditures.................. 220,000 124,000 9,000 353,000
Interest Expense...................... 490,000 -- -- 490,000
Depreciation and Amortization......... 204,000 83,000 24,000 311,000
</TABLE>
For the three-month periods ended March 31, 1998 and 1999, the Company's
revenues were substantially consistent with those for the year ended December
31, 1998 (domestic -- 47%, foreign -- 53%).
10
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
NOTE E -- EVENTS SUBSEQUENT TO MARCH 31, 1999
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.
11
<PAGE> 12
ITEM 2. 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 filed herewith and those
previously filed with the Commission.
As discussed herein, the Company completed the acquisitions of 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 accompanying
consolidated Statement of Operations and the condensed Business Segment
operating data set forth hereinafter from their respective dates of acquisitions
through the reporting period end.
Business Segment Operating Data is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES
Emergency Response and Restoration...................... $ 5,196,000 $10,266,000
Programs and Services................................... 6,031,000 2,297,000
Manufacturing and Distribution.......................... 732,000 9,726,000
----------- -----------
$11,959,000 $22,289,000
=========== ===========
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration...................... 2,892,000 $ 8,828,000
Programs and Services................................... 4,756,000 1,889,000
Manufacturing and Distribution.......................... 447,000 6,533,000
----------- -----------
$ 8,095,000 $17,250,000
=========== ===========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Emergency Response and Restoration...................... $ 1,642,000 $ 1,351,000
Programs and Services................................... 723,000 964,000
Manufacturing and Distribution.......................... 207,000 2,182,000
----------- -----------
$ 2,572,000 $ 4,497,000
=========== ===========
DEPRECIATION AND AMORTIZATION
Emergency Response and Restoration...................... $ 204,000 $ 516,000
Programs and Services................................... 83,000 74,000
Manufacturing and Distribution.......................... 24,000 422,000
----------- -----------
$ 311,000 $ 1,012,000
=========== ===========
OPERATING INCOME (LOSS)
Emergency Response and Restoration...................... $ 458,000 $ (429,000)
Programs and Services................................... 469,000 (630,000)
Manufacturing and Distribution.......................... 54,000 589,000
----------- -----------
$ 981,000 $ (470,000)
=========== ===========
</TABLE>
12
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 WITH THE THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED)
REVENUES
The increase in Emergency Response and Restoration revenues of $5,070,000
from the 1998 to 1999 quarter is due to the full quarter effect during 1999 of
Boots & Coots Special Services acquired on February 20, 1998 ($788,000), with
the balance of the increase ($4,282,000) primarily the result of a well control
project in which the Company served as lead contractor with a larger revenue
base for rebilled subcontractor costs.
The decrease in Programs and Services Revenues of $3,734,000 from the 1998
to 1999 quarter is primarily the result of substantially lower international
customer outsource purchasing and reduced sales of artificial lift systems in
South America. This was the result of sharply curtailed industry activities
continuing in 1999 due to low oil and gas prices.
The increase in Manufacturing and Distribution Revenues of $8,994,000 for
the 1998 to 1999 quarter is primarily the result of the acquisition of Baylor
Company on July 23, 1998.
COST OF SALES AND OPERATING EXPENSES
The increase in Emergency Response and Restoration Cost of Sales and
Operating Expenses of $5,936,000 for the 1998 to 1999 quarter is the result of
the acquisition of Boots & Coots Special Services acquired on February 20, 1998
($971,000), with the balance of the increase ($4,965,000) primarily the result
of a well control project in the 1999 quarter when the Company served as lead
contractor with a larger cost base of subcontractor costs. This resulted in a
substantially lower operating margin (10%) than usual (65%).
The decrease in Programs and Services Cost of Sales and Operating Expenses
of $2,867,000 from the 1998 to 1999 quarter is primarily the result of
substantially lower international customer outsource purchasing and reduced
sales of artificial lift systems in South America. This was the result of
sharply curtailed activities continuing in 1999 due to low oil and gas prices.
Also included in the 1999 quarter is $129,000 in development costs related to
the Company's proprietary cost management programs, WELLSURE(SM) and
HAZSURE(SM).
The increase in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $6,086,000 from the 1998 to 1999 quarter is primarily the result of
the acquisition of the Baylor Company on July 23, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The decrease in Emergency Response and Restoration Selling, General and
Administrative Expenses of $291,000 from the 1998 to 1999 quarter primarily
results from the allocation to added business units of an increased overhead
base for additional corporate investments in personnel, systems and
infrastructure necessary to support the expanded scope of operations and new
marketing and advertising programs to increase market share.
The increase in Programs and Services, Selling, General and Administrative
Expenses from the 1998 to 1999 quarter is primarily due to development and
marketing costs of the Company's WELLSURE(SM) and HAZSURE(SM) Risk Management
Progress.
The increase in Manufacturing and Distribution Selling, General and
Administrative Expenses of $1,975,000 for the 1998 to 1999 quarter is primarily
the result of the acquisition of Baylor Company on July 23, 1998.
DEPRECIATION AND AMORTIZATION
The increase in Emergency Response and Restoration Depreciation and
Amortization of $312,000 for the 1998 to 1999 quarter is the result of the
acquisition of Boots & Coots Special Services acquired on
13
<PAGE> 14
February 20, 1998 ($137,000) with the balance of the increase ($175,000)
primarily the result of an increased asset base.
Depreciation and Amortization in Programs and Services was comparable
between the 1998 and 1999 quarters.
The increase in Manufacturing and Distribution Depreciation and
Amortization of $394,000 from the 1998 to 1999 quarter is primarily due to the
acquisition of Baylor Company on July 23, 1998.
Other expense (primarily interest expense) of $567,000 for the three months
ended March 31, 1998 increased to $1,438,000 for the three months ended March
31, 1999. The increase is primarily from interest expense on increased debt
incurred for business acquisitions.
Income taxes for the three months ended March 31, 1998 and 1999 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. As of December 31, 1998, the Company was not in compliance with one
financial covenant and obtained a waiver from the lender.
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 loan agreement relating to the Comerica Loan Agreement imposes certain
restrictions on the Company's activities, including a prohibition, unless
permitted, 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 on 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
14
<PAGE> 15
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 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 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 the first
quarter of 1999, world-wide oil and gas prices and related activity hit new
lows, on an inflation adjusted basis, for the past several decades, impacting
the Company and its competitors. Although oil and gas prices have since
recovered somewhat, there is no assurance that such increases will be sustained
or that they will result in increased operational activity by the Company's
customers.
The Company has grown rapidly since 1997, primarily through acquisitions.
Many of the acquisitions have been made through debt financing; long-term debt
has increased from $1.7 million to $50.7 million and interest expense has
increased to $1.4 million for the quarter ended March 31, 1999. 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. 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. A significant equity infusion could have a
substantially dilutive impact on existing shareholders.
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 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 $4.00 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.
15
<PAGE> 16
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.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q 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-K, 10-Q and 8-K, and its Annual Report to
Stockholders.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*27.01 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
(b) Reports on Form 8-K.
The Company reported on Form 8-K filed January 21, 1999, that it had
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.
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.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BOOTS & COOTS INTERNATIONAL WELL
CONTROL, INC.
By: /s/ THOMAS L. EASLEY
----------------------------------
Thomas L. Easley
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Date: May 14, 1999
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*27.01 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,349,000
<SECURITIES> 0
<RECEIVABLES> 20,265,000
<ALLOWANCES> 0
<INVENTORY> 15,133,000
<CURRENT-ASSETS> 40,815,000
<PP&E> 32,348,000
<DEPRECIATION> 3,349,000
<TOTAL-ASSETS> 94,648,000
<CURRENT-LIABILITIES> 24,469,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 18,095,000
<TOTAL-LIABILITY-AND-EQUITY> 94,648,000
<SALES> 0
<TOTAL-REVENUES> 22,289,000
<CGS> 0
<TOTAL-COSTS> 22,759,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,438,000
<INCOME-PRETAX> (1,908,000)
<INCOME-TAX> 19,000
<INCOME-CONTINUING> (1,927,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,927,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
