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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 June 30, 2000
---------------
Commission File Number 1-13817
Boots & Coots International
Well Control, Inc.
(Exact name of registrant as specified in its charter)
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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)
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(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 August 1, 2000, was 30,774,877.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Financial Information ............................... 3
Consolidated Balance Sheets ......................... 3
Consolidated Statements of Operations................ 4
Consolidated Statements of Shareholders' Deficit..... 5
Consolidated Statements of Cash Flows................ 6
Notes to Consolidated Financial Statements........... 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 12-16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 16
PART II
Item 1. Legal Proceedings ................................... 17
Item 2. Changes in Securities and Use of Proceeds ........... 17
Item 3. Defaults Upon Senior Securities ..................... 18
Item 4. Submissions of Matters to a Vote of Security Holders. 19
Item 5. Other Information ................................... 19
Item 6. Exhibits and Reports on Form 8-K .................... 19
</TABLE>
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PART I
FINANCIAL INFORMATION
Item 1.
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
(UNAUDITED)
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ASSETS
CURRENTS ASSETS:
Cash ............................................................. $ 739,000 $ 1,504,000
Receivables -- net ............................................... 8,885,000 7,812,000
Inventories ...................................................... 8,226,000 9,576,000
Prepaid expenses and other current assets ........................ 1,402,000 955,000
------------ ------------
Total current assets ..................................... 19,252,000 19,847,000
------------ ------------
PROPERTY AND EQUIPMENT -- net ...................................... 28,101,000 27,253,000
OTHER ASSETS:
Goodwill -- net .................................................. 10,438,000 10,356,000
Deposits and Other -- net ........................................ 4,457,000 4,834,000
------------ ------------
Total assets ............................................. $ 62,248,000 $ 62,290,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ................................................. $ 14,858,000 $ 14,809,000
Accrued liabilities and customer advances ........................ 8,486,000 8,383,000
Current maturities of long-term debt
Subordinated notes payable net of warrant value................ 28,046,000 28,195,000
Senior Debt-A.................................................. 14,321,000 11,976,000
Senior Debt-B.................................................. -- 6,275,000
All other debt................................................. 864,000 287,000
------------ ------------
Total current liabilities ................................ 66,575,000 69,925,000
------------ ------------
LONG-TERM DEBT AND NOTES PAYABLE -- net of current
maturities ....................................................... -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock ($.00001 par, 5,000,000 shares authorized,
132,000 and 157,088 issued and outstanding at December
31, 1999 and June 30, 2000, respectively) ..................... -- --
Common stock ($.00001 par, 50,000,000 shares authorized,
35,244,000 and 30,775,000 shares issued and outstanding
at December 31, 1999 and June 30, 2000,
respectively) ................................................. -- --
Additional paid-in capital ....................................... 32,951,000 35,293,000
Accumulated deficit .............................................. (37,278,000) (42,928,000)
------------ ------------
Total shareholders' deficit .............................. (4,327,000) (7,635,000)
------------ ------------
Total liabilities and shareholders' deficit .............. $ 62,248,000 $ 62,290,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ -------------
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REVENUES ................................................ $ 17,565,000 $ 8,778,000 $ 37,693,000 $ 22,480,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses .................. 15,636,000 6,312,000 31,019,000 15,834,000
Selling, General and Administrative ................... 4,385,000 2,842,000 8,072,000 5,677,000
Depreciation and Amortization ......................... 930,000 1,060,000 1,868,000 2,110,000
------------ ------------ ------------ -------------
20,951,000 10,214,000 40,959,000 23,621,000
------------ ------------ ------------ -------------
Operating Loss .......................................... (3,386,000) (1,436,000) (3,266,000) (1,141,000)
Interest Expense and Other, net
Interest Expense....................................... 1,420,000 1,837,000 3,016,000 3,220,000
Other, including financing costs....................... 125,000 1,135,000 (36,000) 1,051,000
------------ ------------ ------------ -------------
Loss From Continuing Operations Before Taxes ............ (4,931,000) (4,408,000) (6,246,000) (5,412,000)
Income Tax Expense ...................................... 25,000 -- 44,000 --
------------ ------------ ------------ -------------
Loss From Continuing Operations ......................... (4,956,000) (4,408,000) (6,290,000) (5,412,000)
Loss From Discontinued Operations, Net of Income Taxes... (375,000) -- (968,000) --
------------ ------------ ------------ -------------
Net Loss ................................................ (5,331,000) (4,408,000) (7,258,000) (5,412,000)
Preferred Stock Accretion and Dividend Requirement....... 333,000 119,000 423,000 238,000
------------ ------------ ------------ -------------
Net Loss Attributable to Common Shareholders ............ $ (5,664,000) $ (4,527,000) $ (7,681,000) $ (5,650,000)
============ ============ ============ =============
Basic and Diluted Loss Per Common Share ................. $ (0.16) $ (.13) $ (0.23) $ (0.16)
============ ============ ============ =============
Weighted Average Number Of Common Shares Outstanding..... 34,569,000 33,819,000 33,867,000 34,536,000
============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
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PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
-------------------------- -------------------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------------ ------------ ------------ ------------ ------------ ------------ -------------
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BALANCES, December 31, 1999 ... 132,000 35,244,000 $ 32,951,000 $(37,278,000) $ (4,327,000)
Warrant discount accretion .. -- -- -- -- 18,000 (18,000) --
Preferred stock conversion to
common stock ............. (45,200) -- 1,060,000 -- -- -- --
Preferred stock dividends ... -- -- -- -- 220,000 (220,000) --
Exercise of common stock
options .................. -- -- 12,000 -- -- -- --
Warrants issued for
consulting services....... -- -- -- -- 48,000 -- 48,000
Warrants issued to Tranche B
Debt holders and
investment Services....... -- -- -- -- 942,000 -- 942,000
Preferred stock issued for
financial services ....... 3,000 -- -- -- -- -- --
Common stock issued for
financial services ....... -- -- 147,000 -- 74,000 -- 74,000
Common stock exchanged
for preferred stock ...... 56,888 -- (5,688,000) -- -- -- --
Preferred stock issued in
settlement of liabilities 10,400 -- -- -- 1,040,000 -- 1,040,000
Net Loss .................... -- -- -- -- -- (5,412,000) (5,412,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 2000 ....... 157,088 -- 30,775,000 -- $ 35,293,000 $(42,928,000) $ (7,635,000)
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................. $ (7,258,000) $ (5,412,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Adjustment of asset impairment........................... -- (450,000)
Depreciation and amortization ........................... 1,868,000 2,110,000
Loss on sale of assets .................................. 120,000 --
Non-cash charges associated with warrant costs .......... 149,000 942,000
Common stock and warrants issued in exchange for services -- 122,000
Bad debt expense ........................................ 379,000 130,000
Changes in assets and liabilities, net of acquisitions:
Receivables .......................................... 1,779,000 943,000
Inventories .......................................... (1,681,000) (1,350,000)
Prepaid expenses and other current assets ............ (575,000) 447,000
Deferred financing costs and other assets ............ (792,000) (847,000)
Change in net assets of discontinued operations ...... 3,409,000 --
Accounts payable ..................................... 5,117,000 (49,000)
Accrued liabilities and customer advances ............ (3,833,000) 348,000
------------ ------------
Net cash provided by (used in) operating
Activities .................................... (1,318,000) (3,066,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions ........................ (3,663,000) (260,000)
------------ ------------
Net cash used in investing activities ........... (3,663,000) (260,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit ......................... 10,093,000 12,756,000
Debt repayments ......................................... (14,751,000) (14,940,000)
Proceeds from issuance of redeemable stock and warrants.. 6,807,000 --
Proceeds from convertible debt .......................... -- 6,275,000
Preferred stock dividends ............................... (14,000) --
Preferred stock redemption .............................. (200,000) --
------------ ------------
Net cash provided by (used in) financing activities ..... 1,935,000 4,091,000
------------ ------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS ............... (3,046,000) 765,000
CASH AND CASH EQUIVALENTS, beginning of period ............ 3,930,000 739,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................. $ 884,000 $ 1,504,000
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest .................................. $ 3,422,000 $ 734,000
Cash paid for taxes ..................................... $ -- $ 326,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock accretion ................................ $ -- $ 18,000
Preferred stock dividends accrued ....................... $ -- $ 220,000
</TABLE>
See accompanying notes to consolidated financial statements.
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BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
A. GOING CONCERN
The accompanying consolidated financial statements of Boots & Coots
International Well Control, Inc. (the "Company") have been prepared assuming the
Company will continue as a going concern. The Company receives the majority of
its revenues from customers in the energy industry, which experienced a
significant downturn in the third quarter of 1998 that continued throughout 1999
and early 2000. World-wide oil and gas prices and related activity including
many refined products hit new lows in late 1998 and early 1999. Pricing
improvements have occurred to date in 2000, however, the Company's upstream and
downstream customer base has not to date increased project levels to those
existing in the first half of 1998, impacting the Company and its competitors.
While price improvements have brought the Company increases in the frequency of
high risk work and volume of prevention related projects, the Company's well
control businesses have not yet benefited to a meaningful degree from an
increase in the volume of critical events. The Company's upstream and downstream
customer bases have not, to date, increased project expenditure levels to those
existing in the first half of 1998. The liquidity of the Company must be
considered in light of the significant fluctuations that have been experienced
by oilfield service providers as changes in oil and gas exploration and
production activities changed customers' forecasts and budgets in response to
oil and gas prices. These fluctuations significantly impacted the Company's cash
flows as supply and demand factors impacted the number and size of projects
available.
As a result of the continued reduced levels of capital expenditures in the
industries which the Company serves and the Company's financial position, the
Company's management initiated actions in 1999 which included among others, (a)
downsizing personnel, (b) attempting to improve its working capital, (c) closing
and/or consolidating certain of its field offices, (d) consolidating certain
administrative functions, and (e) evaluating certain business lines to ensure
that the Company's resources are deployed in the more profitable operations. The
Company's initial efforts to rationalize its operations commenced in the first
quarter of 1999. Through 1999 and continuing into 2000, the results of these
efforts were not sufficient to prevent significant operating losses and impaired
trade liquidity. For the six months ended June 30, 2000, the Company incurred an
after-tax loss of $5,412,000 from continuing operations.
As of June 30, 2000, and continuing to date, the Company was not in
compliance with certain provisions of the Comerica Loan Agreement. The Company
has negotiated and entered into interim forbearance agreements with Comerica
which have permitted additional time for seeking alternative financing sources.
Such forbearance agreements currently extend through August 31, 2000, and there
is no assurance such agreements can be further extended. In connection with such
forebearance agreements, the Company has incurred expenses of approximately
$250,000 for the three and six months ended June 30, 2000. Outstanding
borrowings under the Comerica Loan Agreement of $11,976,000 at June 30, 2000,
have been included in current maturities of long-term debt and notes payable in
the accompanying financial statements.
As of June 30, 2000, and continuing to date, the Company was not in
compliance with certain financial covenants of the Prudential Subordinated Note
and Warrant Purchase Agreement including the Company's EBITDA to total
liabilities ratio. Prudential has delivered notice of acceleration to the
Company, accelerating the maturity of the Company's obligations under the
Prudential Subordinated Note and Warrant Purchase Agreement; however, as of the
date of this filing, Prudential has not taken any further steps to exercise its
rights under the Subordinated Note and Warrant Purchase Agreement. Further,
quarterly interest payments due since July 23, 1999, on the Prudential
Subordinated Note have not been made. Accordingly, the Company continues in
default under the terms of the Subordinated Note and Warrant Purchase Agreement.
The Company has been engaged in discussions with Prudential regarding the
restructuring of the $30,000,000 Prudential Subordinated Note and accrued
interest thereon. Based on the uncertain status of the Company's discussions
with Prudential, the outstanding balance of $28,195,000 has been included in
current maturities of long-term debt and notes payable in the accompanying
financial statements. An additional obligation to Prudential of $1,805,000,
representing the remaining note face amount as of June 30, 2000, attributed to
the warrants sold to Prudential, is included in additional paid-in capital and
would also require funding in the event the debt was extinguished, for a total
payment, excluding interest, of $30,000,000.
The Company has continued to negotiate and explore possibilities for new
debt financing and/or equity infusions. As discussed in Part II, Section 2,
through August 1, 2000, approximately $6.9 million in additional funds were
raised through the purchase by an investment group of a new participating
interest in the Company's senior secured credit facility with Comerica. This
participating interest has the option, under certain circumstances, to convert
from secured debt, currently classified as a current maturity, to equity in the
form of an issuance of preferred stock with a provision to convert into common
stock of the Company. In addition, the Company has
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entered into a letter of intent with a subsidiary of National Oilwell, Inc. to
sell the assets of the Baylor Company and subsidiaries. Pending completion of
due diligence, the negotiation of definitive agreements and customary approvals,
the transaction is set to close on or before September 30, 2000.
The new financing obtained to date and any future additional financing
has had and will have a significantly dilutive impact on existing common
shareholders. Further, there can be no assurance that the Company will be able
to obtain additional capital, and if additional capital is obtained, that it
will be on terms favorable to the Company.
Though extensions and negotiations continue, there can be no assurance
that Comerica and Prudential will not seek their remedies under their respective
lending agreements with respect to the continuing defaults under the Comerica
Loan Agreement and the Prudential Subordinated Note and Warrant Purchase
Agreement. These remedies include, among others, an acceleration of the
contractual maturity of the outstanding balances of those loans, and in the
event the Company is unable to repay the then outstanding balances, the possible
foreclosure on the Company's assets. In addition to the defaults under the
agreements with the parties discussed above, the Company's deteriorating
liquidity position subsequent to December 31, 1999, has also resulted in the
inability to pay certain vendors in a timely manner. These vendors may also
assert claims against the Company. Significant uncertainties exist as to the
ability of the Company to resolve its financing issues and attain profitable
operations.
The Company believes that while activity in key business segments is
currently improving, (a) should low demand for the Company's services
persist for a prolonged period, or (b) if management's actions are not effective
in reducing the Company's operating losses and negative cash flows, these
conditions will continue to have a material adverse effect on the Company's
financial position and results of operations and its ability to continue as a
going concern. The Company's consolidated financial statements should be read in
consideration of the foregoing.
B. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of 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, 1999.
The results of operations for the three and six month periods ended June 30,
1999 and 2000 are not necessarily indicative of the results to be expected for
the full year.
As of the current date, the Company has not engaged an independent public
accounting firm to perform an audit of its consolidated financial statements for
the year ended December 31, 2000. Accordingly, an interim review in accordance
with the American Institute of Certified Public Accountants (AICPA) Statement
No. 71 "Interim Financial Information"' has not been performed. The Company will
engage an independent public accounting firm to perform an interim review of its
consolidated financial statements at the earliest practicable time.
C. DISCONTINUED OPERATIONS
The decision was made in December 1999 to sell or in the alternative
discontinue the Company's materials and equipment procurement, transportation
and logistics services conducted through its subsidiary, ITS Supply Corporation
("ITS"). In connection with the decision to sell or in the alternative
discontinue ITS's business operations, an impairment provision of $4,382,000 was
made at December 31, 1999, to write down goodwill associated with the
acquisition of ITS. In April 2000, substantially all productive operations of
ITS ceased and the majority of its employees were terminated. As a result of
ongoing operating losses, a shortage of working capital and the absence of a
currently identified viable purchaser for ITS's operations, on May 18, 2000, ITS
filed in Corpus Christi, Texas for protection under Chapter XI of the U.S.
Bankruptcy Code. ITS foreign subsidiaries operating in Venezuela and Peru were
not included in this filing. As of the filing date, ITS had total liabilities of
approximately $6,900,000. The Company has an outstanding guaranty on ITS debt of
approximately $1,500,000. This guaranty is subordinated to any senior debt and
the obligation to respond is forestalled contractually so long as senior debt is
outstanding. As a result of the bankruptcy filing by ITS, the Company reduced
its net investment in ITS to zero at December 31, 1999. The Company, in
consultation with its counsel, believes it is not
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probable that any creditors of ITS will successfully assert and realize
judgements against the Company. Accordingly, any operating losses incurred by
ITS in excess of the Company's net investment have not been included in the
consolidated results of the Company.
Although the Company anticipates that ITS will develop a plan of
reorganization in connection with the bankruptcy proceeding, management of the
Company can make no assurance that the reorganization of ITS will be successful.
D. 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.
As discussed, ITS filed in Corpus Christi, Texas, for protection under
Chapter XI of the U.S. Bankruptcy Code. The Company has an outstanding guaranty
on ITS debt of approximately $1,500,000. This guaranty is subordinated to senior
debt and the obligation to respond is forestalled contractually so long as
senior debt is outstanding. The Company, in consultation with its counsel,
believes it is not probable that any creditors of ITS will successfully assert
and realize judgements against the Company.
E. BUSINESS SEGMENT INFORMATION
Information concerning operations in different business segments at June 30,
1999 and 2000, and for the six-month periods then ended is presented below (in
thousands). The Company operates in two segments: Emergency Response and
Restoration, 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.
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EMERGENCY MANUFACTURING
RESPONSE AND AND
RESTORATION DISTRIBUTION CONSOLIDATED
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Six Months Ended June 30, 2000
Net Operating Revenues ........ $ 11,375,000 $ 11,105,000 $ 22,480,000
Operating Income (Loss) ....... (389,000) (752,000) (1,141,000)
Identifiable Operating Assets.. 15,057,000 47,781,000 62,838,000
Capital Expenditures .......... -- 260,000 260,000
Depreciation and Amortization.. 1,418,000 773,000 2,191,000
Interest Expense .............. 3,215,000 5,000 3,220,000
Six Months Ended June 30, 1999
Net Operating Revenues ........ $ 16,787,000 $ 20,906,000 $ 37,693,000
Operating Income (Loss) ....... (3,629,000) 588,000 (3,041,000)
Identifiable Operating Assets.. 34,760,000 45,426,000 80,186,000
Capital Expenditures .......... 2,823,000 775,000 3,598,000
Depreciation and Amortization.. 1,045,000 823,000 1,868,000
Interest Expense .............. 2,975,000 5,000 2,980,000
</TABLE>
For the six-month periods ended June 30, 1999 and 2000, geographical
composition of the Company's revenues were substantially consistent with
those for the year ended December 31, 1999 (domestic -- 80%, foreign -- 20%).
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F. SHAREHOLDERS' EQUITY
The Company has undertaken financing initiatives during the six-month period
ended June 30, 2000, directed toward obtaining additional financing for working
capital purposes, the refinancing of the Comerica Senior Secured Loan, and
negotiating a restructuring of the Prudential Subordinated Note. On April 10,
2000, the Company entered into a financial advisory agreement with an Investment
Group (the "Investment Group") to provide financial consulting services in
connection with a proposed $8,000,000 debt and/or equity financing. As
consideration for such services, the Investment Group received warrants to
purchase an aggregate of 3,480,000 shares of common stock. The warrants have a
term of five years and can be exercised by the payment of cash in the amount of
$0.75 per share of common stock.
On April 12, 2000, the Company entered into an agreement with the Investment
Group, as agent for a syndicate that would purchase a participation interest in
Comerica Secured Loan. The group receives, on the basis of 1 warrant for each $1
of participation interest in the Tranche B Revolver, warrants to purchase the
Company's common stock at the rate of $0.625 per share at any time during a five
year period after closing. This participation tranche bears interest at the rate
of prime plus 3% (currently 12%) plus an additional interest factor of 4%. Such
interest is payable, subject to availability of authorized but unissued or
committed shares, in additional shares of the Company's Common Stock on the
basis of $0.625 per share. The participation interest is convertible into a new
issue of the Company's Series B Convertible Preferred Stock ("Series B Preferred
Stock") at the election of the participation interest holder or at the Company's
request upon the satisfactory resolution of default conditions existing under
the Prudential Subordinated Note. The Certificate of Designation of Rights and
Preferences of the Series B Preferred Stock that was adopted on April 28, 2000,
designates this issue to consist of 100,000 shares of $.00001 par value per
share with a face value of $100 per share; has a dividend requirement of 10% per
annum, payable semi-annually at the election of the Company in additional shares
of Series B Preferred Stock in lieu of cash; has voting rights equivalent to 100
votes per share; and, may upon authorization of sufficient additional common
shares at the next meeting of the Company's shareholders, be converted at the
election of the Company into shares of the Company's Common Stock at a $.75 per
share conversion rate. In the event that within 6 months after issuance of the
Series B Preferred Stock, the Company does not have available sufficient common
shares necessary to fulfill conversion requests, then the annual dividend rate
shall be increased to 15% per annum.
With respect to the participation interest holders, Series B Preferred Stock
received in exchange for debt may be converted into shares of the Company's
Common Stock during the period from April 11, 2000, through December 31, 2002,
at a conversion rate based on 85% of the then immediately preceding 90 day
average closing traded price of the Company's Common Stock. Furthermore, the
Series B Preferred Stock issued to the participation interest holders may be
redeemed by the Company at face amount, together with accrued interest, during
the period from October 1, 2000, through December 31, 2001, if the average
closing traded price of the Company's Common Stock for any 30 day period from
October 1, 2000, through December 31, 2001, equals $2.50 per share.
To date, approximately $6.9 million in funds from the purchase of above
participation interests have been received with approximately $1.1 million in
additional funds committed to be raised. In connection with the warrants issued
with the participation interest and the advisory services associated therewith,
a financing cost of $942,000 has been recognized in the current period.
In order for the Company to have available shares of authorized but unissued
or committed shares of Common Stock to accommodate the conversion features for
Series B Preferred Stock and the Common Stock purchase warrants related to this
financing, the Company negotiated during the period from April through June,
2000, with certain of its shareholders to contribute an aggregate of 5,688,650
shares of Common Stock to the Company in exchange for 56,888 share of Series B
Preferred Stock. Certain directors and officers of the Company contributed
2,600,000 shares of Common Stock in exchange for 26,000 shares of Series B
Preferred Stock. In order to provide further additional available shares of
authorized but unissued or committed shares of Common Stock, certain officers,
directors, employees and consultants of the Company holding previously granted
stock options to purchase 3,007,000 shares of Common Stock at exercise prices
ranging from $.625 to $5.00 per share voluntarily contributed such options in
April 2000 to the Company in exchange for a commitment by the Company to issue,
subject to availability of authorized but unissued or committed shares of Common
Stock, replacement options that may be exercised at $.75 per share over a 5 year
term.
On May 30, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") that designates this issue to consist of 50,000
shares of $.00001 par value per share with a face value of $100 per share; with
a dividend requirement of 10% per annum, payable quarterly at the election of
the Company in additional shares of Series C Preferred Stock in lieu of cash;
voting rights, excluding the election of directors equivalent to 1 vote per
share of common stock into which each share of Series C Preferred Stock is
convertible; and, convertible upon authorization of sufficient additional common
shares at the next meeting of the Company's shareholders, at the election of the
Company into shares of the Company's Common Stock on the basis of a $.75 per
share conversion rate. After eighteen months of
10
<PAGE> 11
issuance date a holder of Series C Preferred Stock may elect to have future
dividends paid in cash. Furthermore, in the event that within six months after
issuance, the Company does not have available sufficient common shares necessary
to fulfill conversion requests, the annual dividend rate shall increase to 15%
per annum. To date, 10,400 shares of Series C Preferred Stock have been issued
in exchange for indebtedness owned by the Company, including 9,750 shares issued
to Larry H. Ramming, Chairman and Chief Executive Officer of the Company, in
exchange for a subordinated promissory note and accrued interest owed to Mr.
Ramming at March 31, 2000. In addition, Mr. Ramming was issued, subject to
availability of shares of Common Stock, warrants to purchase 975,000 shares of
the Company's Common Stock at $.75 per share.
On June 20, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series D Cumulative Junior Preferred Stock
("Series D Preferred Stock") that designates this issue to consist of 3,500
shares of $.00001 par value per share with a face value of $100 per share; has a
dividend requirement of 8% per annum, payable quarterly at the election of the
Company in additional shares of Series D Preferred Stock in lieu of cash; has
voting rights; and is redeemable at any time at the election of the Company in
cash or the issuance of Common Stock purchase warrants on a 2 to 1 share basis
at an exercise price of $.75 per share. As part of the advisory fee discussed
above, 3,000 shares of Series D Preferred Stock have been issued to the
Investment Group.
G. EVENTS SUBSEQUENT TO JUNE 30, 2000
On August 1, 2000, the Company announced that it has entered into a letter
of intent with a subsidiary of National Oilwell, Inc. to sell the assets of the
Baylor Company and subsidiaries. Pending completion of due diligence, the
negotiation of definitive agreements and customary approvals, the sale is
set to close on or before September 30, 2000.
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 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. For all periods presented herein,
the operations of ITS have been reclassified as discontinued operations.
Business segment operating data from continuing operations is presented for
purposes of discussion and analysis of operating results. In prior year reports,
the risk management business unit of IWC Services, which encompasses the
WELLSURE(SM) Program, and ITS were included under a business segment, Programs
and Services. As a result of the December 1999 decision to sell or in the
alternative discontinue ITS's business operations, an assessment has been made
that the Company's risk management programs are more appropriately included with
the Company's Emergency Response and Restoration business segment. Accordingly,
business segment disclosures contained herein reflect this classification for
all periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Emergency Response and Restoration ........... $ 6,385,000 $ 4,160,000 $ 16,787,000 $ 11,375,000
Manufacturing and Distribution ............... 11,180,000 4,618,000 20,906,000 11,105,000
------------ ------------ ------------ ------------
$ 17,565,000 $ 8,778,000 $ 37,693,000 $ 22,480,000
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration ........... $ 7,243,000 $ 3,512,000 $ 16,054,000 $ 8,956,000
Manufacturing and Distribution ............... 8,393,000 2,800,000 14,965,000 6,878,000
------------ ------------ ------------ ------------
$ 15,636,000 $ 6,312,000 $ 31,019,000 $ 15,834,000
------------ ------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (1)
Emergency Response and Restoration ........... $ 1,854,000 $ 718,000 $ 3,317,000 $ 1,471,000
Manufacturing and Distribution ............... 2,306,000 2,124,000 4,530,000 4,206,000
------------ ------------ ------------ ------------
$ 4,160,000 $ 2,842,000 $ 7,847,000 $ 5,677,000
------------ ------------ ------------ ------------
DEPRECIATION AND AMORTIZATION
Emergency Response and Restoration ........... $ 529,000 $ 673,000 $ 1,045,000 $ 1,337,000
Manufacturing and Distribution ............... 401,000 387,000 823,000 773,000
------------ ------------ ------------ ------------
$ 930,000 $ 1,060,000 $ 1,868,000 $ 2,110,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS)
Emergency Response and Restoration ........... $ (3,241,000) $ (743,000) $ (3,629,000) $ (389,000)
Manufacturing and Distribution ............... 80,000 (693,000) 588,000 (752,000)
------------ ------------ ------------ ------------
$ (3,161,000) $ (1,436,000) $ (3,041,000) $ (1,141,000)
------------ ------------ ------------ ------------
</TABLE>
----------
(1) Selling, General, Administrative and Corporate expenses have been allocated
pro rata among segments using relative revenues for the basis.
12
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 WITH THE THREE MONTHS ENDED
JUNE 30, 2000 (UNAUDITED)
REVENUES
Emergency Response and Restoration revenues were $4.2 million the quarter
ended June 30, 2000, compared to $6.4 million for the quarter ended June 30,
1999, a decrease of $2.2 million (34%) in the current period. The principal
component of the reduction was a $1.1 million decrease in revenues from the
Company's Risk Management business. The prior year Risk Management revenues
included two WELLSURE(R) events where the Company served as lead contractor on
the projects. The remainder of the decrease resulted from $0.7 million lower
revenues from the Well Control operational component of the previously
referenced WELLSURE(R) events. A decrease of $0.4 million in revenues from the
Special Services hazardous materials remediation operation resulted from
difficulties in gaining adequate subcontractor resources because of the
Company's liquidity situation.
Manufacturing and Distribution revenues were $4.6 million for the three
months ended June 30, 2000, representing a decrease of $6.6 million (59%)
compared to the same period of the prior year. The decrease was primarily
attributable to a significant decline in revenues from Baylor Company, which
fell by $4.7 million when compared to the second quarter of the preceding year.
During the quarter, however, Baylor's backlog of sales and inventory for
shipment significantly increased, highlighting a lag in current shipments of
finished goods. Baylor's results also reflect a lag in market recovery from the
depressed condition of the oil and gas industry experienced in 1999. The
remainder of the decline in Manufacturing and Distribution revenues resulted
from a $1.9 million decrease in ABASCO revenues due to continuing decline in
international revenues and lack of significant orders for fire and protective
equipment packages.
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration Cost of Sales and Operating Expenses
declined by $3.7 million for the quarter ended June 30, 2000, a decrease of 52%
in comparison to the second quarter of last year. This decrease is the result of
lower sales and the result of the Company's initiatives targeted at reducing
operational overhead. As a percentage, Cost of Sales and Operating Expenses
declined more than the corresponding segment revenues, resulting in an improved
contribution margin for Emergency Response and Restoration; a 16% contribution
margin versus a (13)% contribution margin for the quarters ended June 30, 2000
and June 30, 1999, respectively.
The decrease in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $5.6 million (67%) for the quarter ended June 30, 2000, is primarily
the result of lower sales and operating levels at the Baylor Company. The
percentage decline in Manufacturing and Distribution Cost of Sales and Operating
Expenses was more than the percentage decline in revenues, resulting in an
improvement in the contribution margin for the business segment. This
improvement reflects the result of the Company's initiatives targeted at
reducing operational overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses for the Emergency Response and
Restoration segment were $.7 million for the quarter ended June 30, 2000,
compared to $1.9 million for the quarter ended June 30, 1999, a decrease of $1.2
million (63%) from the comparable quarter of the prior year. Selling, General
and Administrative Expenses were reduced in response to cost reduction
initiatives, primarily in Boots & Coots Special Services.
The decrease in Manufacturing and Distribution Selling, General and
Administrative Expenses of $0.2 million (8%) for the quarter ended June 30,
2000, compared to the quarter ended June 30, 1999, is primarily the result of
management's previously referenced cost reduction initiatives at ABASCO.
DEPRECIATION AND AMORTIZATION
The increase in Emergency Response and Restoration Depreciation and
Amortization of $0.1 million for the 1999 to 2000 quarter is primarily the
result of adjustments to the calculation in the current quarter required to
properly state depreciation provisions.
Manufacturing and Distribution Depreciation and Amortization of $0.4 million
for the 2000 quarter is basically unchanged from the prior period.
INTEREST EXPENSE AND OTHER INCLUDING FINANCE COST
The increase of $.4 million in interest expense is primarily due to the
additional senior debt incurred during the quarter. Other expense, including
financing cost, includes $942,000 expenses relating to warrants issued to the
participation interest and advisory services associated therewith, and charges
of $598,000 related to the Comerica debt.
13
<PAGE> 14
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 WITH THE SIX MONTHS ENDED JUNE
30, 2000 (UNAUDITED)
REVENUES
Emergency Response and Restoration revenues were $11.4 for the six month
period ended June 30, 2000, compared $16.8 million for the six month period
ended June 30, 1999, a decrease of $5.4 million (32%) in the current period. The
principal component of the reduction was a $3.4 million decrease in revenues
from the Company's Well Control operations, the timing of which is largely
unpredictable due primarily to the fact that the prior year period included a
large well control project in which the company acted as general contractor. The
remainder of the decrease resulted mostly from lower revenues in the Company's
Risk Management division because the prior period included two WELLSURE(R)
events where the Company served as lead contractor on the projects.
Manufacturing and Distribution revenues were $11.1 million for the six
months ended June 30, 2000, representing a decrease of $9.8 million (47%)
compared to the same period of the prior year. The decrease was primarily
attributable to a significant decline in revenues from Baylor Company, which
fell by $7.4 million when compared to the first six months of the preceding
year. During the period, however, Baylor's backlog of sales and inventory for
shipment significantly increased highlighting a current lag in shipment of
finished goods. Baylor's results also reflect an anticipated lag in market
recovery from the depressed condition of the oil and gas industry experienced in
1999. The remainder of the decline in Manufacturing and Distribution revenues
resulted from sharply lower sales at ABASCO, which fell by $2.4 million due to a
continuing decline in international revenues and lack of significant orders for
fire and protective equipment packages.
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration Cost of Sales and Operating Expenses
declined by $7.1 million for the six month period ended June 30, 2000, a
decrease of 44% in comparison to the first six months of last year. This
decrease is the result of lower sales and the result of the Company's
initiatives targeted at reducing operational overhead. As a percentage, Cost of
Sales and Operating Expenses declined more than the corresponding segment
revenues, resulting in an improved contribution margin for Emergency Response
and Restoration; a 21.3% contribution margin versus a 4.4% contribution margin
for the periods ended June 30, 2000 and June 30, 1999, respectively.
The decrease in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $8.1 million (54%) for the six months ended June 30, 2000, is
primarily the result of lower sales and operating levels at the Baylor Company.
The percentage decline in Manufacturing and Distribution Cost of Sales and
Operating Expenses was more than the percentage decline in revenues, resulting
in an improvement in the contribution margin for the business segment. This
improvement reflects the result of 1999 initiatives targeted at reducing
operational overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses for the Emergency Response and
Restoration segment were $1.5 million for the six month period ended June 30,
2000, compared to $3.3 million for the six months ended June 30, 1999, a
decrease of $1.8 million (55%) from the comparable period of the prior year.
Selling, General and Administrative Expenses were reduced in response to 1999
cost reduction initiatives primarily in Boots & Coots Special Services.
The decrease in Manufacturing and Distribution Selling, General and
Administrative Expenses of $0.3 million (7%) for the six months ended June 30,
2000, compared to the six months ended June 30, 1999, is primarily the result of
management's previously referenced cost reduction initiatives at ABASCO.
DEPRECIATION AND AMORTIZATION
The increase in Emergency Response and Restoration Depreciation and
Amortization of $0.3 million for the 1999 to 2000 period is primarily the result
of adjustments to the calculation in the current period required to properly
state depreciation provisions.
The decrease in Manufacturing and Distribution Depreciation and Amortization of
$0.1 million for the 1999 to 2000 period is primarily due to a reduction in the
asset base of ABASCO.
INTEREST EXPENSE AND OTHER INCLUDING FINANCE COST
The increase of $.2 million in interest expense is primarily due to the
additional senior debt incurred during the period. Other expense, including
financing cost, includes $942,000 expenses relating to warrants issued to the
participation interest and advisory services associated therewith, and charges
of $598,000 related to the Comerica debt.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
The accompanying Consolidated Financial Statements have been prepared
assuming the Company will continue as a going concern. The Company receives the
majority of its revenues from customers in the energy industry, which
experienced a significant downturn in the third quarter of 1998 that continued
throughout 1999. Some improvements have occurred to date in 2000, however the
Company's upstream and downstream customer base have not to date increased
project expenditure levels to those existing in the first half of 1998. Demand
for the Company's products and services has been impacted by the number and size
of projects available as changes in oil and gas exploration and production
activities changed customers' forecasts and budgets. These fluctuations
significantly impacted the Company's cash flows. During 1998 and continuing
throughout 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.
Oil and gas prices recovered beginning in the second quarter of 1999 and
continue to improve. While these price improvements have brought the company
increases in the frequency of high risk work and volume of prevention related
projects, the Company's well control business has not yet benefited to a
meaningful degree from an increase in the volume of critical events.
Furthermore, there is no assurance that the oil and gas commodity price
increases will be sustained or that they will result in increased operational
activity by the Company's customers. As a result of the continued reduced levels
of capital expenditures in the industries which the Company serves and the
Company's financial position, the Company's management initiated actions in 1999
which included among others, (a) downsizing personnel, (b) attempting to improve
its working capital, (c) closing and/or consolidating certain of its field
offices, (d) consolidating certain administrative functions, and (e) evaluating
and discontinuing certain business lines to ensure that the Company's resources
are deployed in the more profitable operations. The Company's initial efforts to
rationalize its operations commenced in the first quarter of 1999. Through 1999
and continuing into 2000, the results of these efforts were not sufficient to
prevent significant operating losses and impaired trade liquidity.
As of December 31, 1999, and continuing to date, the Company was not in
compliance with certain provisions of the Comerica Loan Agreement. The Company
has negotiated and entered into interim forbearance agreements with Comerica
which have permitted additional time for seeking alternative financing sources.
Such forbearance agreements currently extend through August 31, 2000, and there
is no assurance such agreements can be further extended. Outstanding borrowings
under the Comerica Loan Agreement of $11,976,000 at June 30, 2000, have been
included in current maturities of long-term debt and notes payable in the
accompanying financial statements. In connection with such forbearance
agreements, the Company has incurred expenses of approximately $250,000 for the
three and six months ended June 30, 2000.
As of June 30, 2000, and continuing to date, the Company was not in
compliance with certain financial covenants of the Prudential Subordinated Note
and Warrant Purchase Agreement including the Company's EBITDA to total
liabilities ratio. Such financial covenant non-compliance continues through the
date hereof. Further, quarterly interest payments due since July 23, 1999 have
not been made by the Company. Accordingly, the Company continues in default
under the terms of the Subordinated Note and Warrant Purchase Agreement. The
Company has been engaged in discussions with Prudential regarding the
restructuring of its obligations. Based on the uncertain status of the Company's
discussions with Prudential, the $28,195,000 recorded liability balance of the
Prudential obligation has been included in current maturities of long-term debt
and notes payable in the accompanying financial statements. An additional
obligation to Prudential of $1,805,000, representing the remaining note face
amount attributed to the warrants sold Prudential, is included in additional
paid-in capital but would also require funding.
The Company has continued to explore possibilities for new equity infusions
and/or improved debt financing. To date, approximately $6.9 million in
additional funds were raised through the purchase by an investment group of a
new participating interest in the Company's senior secured credit facility with
Comerica. In connection with the warrants issued with the participation interest
and the advisory services associated therewith, a financing cost of $942,000 has
been recognized in the current period. In addition, the Company has entered into
a letter of intent with a subsidiary of National Oilwell, Inc. to sell the
assets of the Baylor Company and subsidiaries. Pending completion of due
diligence, the negotiation of definitive agreements and customary approvals, the
sale is set to close on or before September 30, 2000. Upon completion of the
sale, the Company intends to apply a portion of the cash proceeds toward the
repayment of the Comerica secured loan and the resolution of its defaults
with Prudential. There can be no assurance, however, that a restructuring of the
Prudential Subordinated Note and Warrant Purchase Agreement will occur.
There can be no assurance that Comerica and Prudential will not seek their
remedies under their respective lending agreements with respect to the
continuing defaults under the Comerica Loan Agreement and the Prudential
Subordinated Note and Warrant Purchase Agreement. These remedies include, among
others, an acceleration of the contractual maturity of the outstanding balances
of those loans, and in the event the Company is unable to repay the then
outstanding balances, the possible foreclosure on the Company's assets. In
addition to the defaults under the agreements with the parties discussed above,
the Company's impaired liquidity position subsequent to December 31, 1999, has
also resulted in the inability to pay certain vendors in a timely manner. These
vendors may also assert claims against the Company. Significant uncertainties
exist as to the ability of the Company to resolve its financing issues and
attain profitable operations.
The new financing obtained to date and any future additional financing has
had and will have a significantly dilutive impact on existing common
shareholders. Further, there can be no assurance that the Company will be able
to obtain new capital, and if new capital is obtained, that it will be on terms
favorable to the Company.
15
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the
meaning of 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. At June 30, 2000, the Company had minimal interest rate
risk since the 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.
16
<PAGE> 17
PART II
ITEM 1. LEGAL PROCEEDINGS
There has been no material change in the Company's pending legal proceedings
or the bankruptcy of ITS Supply Corporation since the filing of the Company's
Form 10-Q for the quarter ended March 31, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In order for the Company to have available shares of authorized but unissued
or committed shares of Common Stock to accommodate the conversion features for
its shares of Series B Preferred Stock issues to the participation interest
holders in the Comerica Loan Agreement as well as Common Stock purchase warrants
related to this financing, the Company negotiated during the period from April
through June 2000 with certain of its Common Stock shareholders to contribute an
aggregate of 5,688,650 shares of Common Stock to the Company in exchange for
56,888 shares of Series B Preferred Stock. Certain directors and officers of the
Company contributed 2,600,000 shares of Common Stock they held in exchange for
receipt of 26,000 shares of Series B Preferred Stock. In order to provide
further additional available shares of authorized but unissued or committed
shares of Common Stock, certain officers, directors, employees and consultants
of the Company holding previously granted stock options to purchase 3,246,891
shares of Common Stock at exercise prices ranging from $0.625 to $5.00 per share
voluntarily contributed such options in April 2000 to the Company in exchange
for a commitment by the Company to issue, subject to availability of authorized
but unissued or committed shares of Common Stock, replacement options that may
be exercised at $0.75 per share over a 5 year term.
On May 30, 2000 the Company adopted the Certificate of Designation of Rights
and Preferences of the Series C Cumulative Convertible Preferred Stock ("Series
C Preferred Stock") that designates this issue to consist of 50,000 shares of
$.00001 par Value per share with a face value of $100 per share; has a dividend
requirement of 10% per annum, payable quarterly at the election of the Company
in additional shares of Series C Preferred Stock in lieu of cash; has voting
rights excluding the election of directors equivalent to 1 votes per share of
common stock into which preferred shares are convertible into; and, may upon
authorization of sufficient additional common shares at the next meeting of the
Company's shareholders, be converted at the election of the Company into shares
of the Company's Common Stock on the basis of a $0.75 per share conversion rate.
After 18 months of issuance date a
17
<PAGE> 18
holder of Series C Preferred Stock may elect to have future dividends paid in
cash. Furthermore, in the event that within six months after issuance of such
Series B Preferred Stock, the Company does not have available sufficient common
shares necessary to fulfill conversion requests, then the annual dividend rate
shall be increased to 15% per annum. To date, 10,400 shares of Series C
Preferred Stock have been issued in exchange for indebtedness owed by the
Company, including 9,750 shares issued to Larry H. Ramming, Chairman and Chief
Executive Officer of the Company, in exchange for a subordinated promissory note
and accrued interest owed to Mr. Ramming at December 31, 1999. In addition, Mr.
Ramming was issued, subject to availability of shares of Common Stock, warrants
to purchase 975,000 shares of the Company's Common Stock at $0.75 per share.
On June 20, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series D Cumulative Junior Preferred Stock
("Series D Preferred Stock") that designates this issue to consist of 3,500
shares of $.00001 par Value per share with a face value of $100 per share; has a
dividend requirement of 8% per annum, payable quarterly at the election of the
Company in additional shares of Series D Preferred Stock in lieu of cash; has
voting rights; and is redeemable at any time at the election of the Company in
cash or the issuance of Common Stock purchase warrants on a 2 to 1 share basis
at an exercise price of $0.75 per share. As part of the advisory fee discussed
above, 3,000 shares of Series D Preferred Stock has been issued to the
Investment Group.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Comerica Loan Agreement Default
As of December 31, 1999, and June 30, 2000, the Company was not in
compliance with certain provisions of the Comerica Loan Agreement. The Company
has negotiated and entered into interim forbearance agreements with Comerica
which have permitted additional time for seeking alternative financing sources.
Such forbearance agreements currently extend through August 31, 2000, and there
is no assurance such agreements can be further extended. Outstanding borrowings
under the Comerica Loan Agreement of $11,976,000 at June 30, 2000, have been
included in current maturities of long-term debt and notes payable in the
accompanying financial statements.
Prudential Subordinated Note Default
As of June 30, 2000, and continuing to date, the Company was not in
compliance with certain financial covenants of the Prudential Subordinated Note
and Warrant Purchase Agreement, as amended, including the Company's EBITDA to
total liabilities ratio. Prudential has delivered a notice of acceleration to
the Company, accelerating the maturity of the Company's obligations under the
Prudential Subordinated Note and Warrant Purchase Agreement; however, as of the
date of this filing, Prudential has not taken any further steps to exercise its
rights under the Subordinated Note and Warrant Purchase Agreement. Further,
quarterly interest payments due since July 23, 1999, on the Prudential
Subordinated Note have not been made. Accordingly, the Company continues in
default under the terms of the Subordinated Note and Warrant Purchase Agreement.
The Company has been engaged in discussions with Prudential regarding the
restructuring of the $30,000,000 Prudential Subordinated Note and accrued
interest thereon. Based on the uncertain status of the Company's discussions
with Prudential, the outstanding balance of the Prudential Subordinated Notes
has been included in current maturities of long-term debt and notes payable in
the accompanying financial statements.
There can be no assurance that Comerica and Prudential will not seek their
remedies under their respective lending agreements with respect to the
continuing defaults under the Comerica Loan Agreement and the Prudential
Subordinated Note and Warrant Purchase Agreement. These remedies include, among
others, an acceleration of the contractual maturity of the outstanding balances
of those loans, and in the event the Company is unable to repay the then
outstanding balances, the possible foreclosure on the Company's assets. Although
the accompanying financial statements have been prepared on the basis of a going
concern, significant uncertainties exist as to the ability of the Company to
resolve its financing issues and attain profitable operations.
ITS Bankruptcy Proceedings
As a result of ongoing operating losses, a shortage of working capital and
the absence of a currently identified viable purchaser for ITS' operations, on
May 18, 2000, ITS filed in Corpus Christi, Texas, for protection under Chapter
XI of the U.S. Bankruptcy Code. ITS foreign subsidiaries operating in Venezuela
and Peru were not included in this filing. As of the filing date, ITS had total
liabilities of approximately $6,900,000. The Company has an outstanding guaranty
on ITS debt of approximately $1,500,000. This guaranty is
18
<PAGE> 19
subordinated to any senior debt and the obligation to respond is forestalled
contractually so long as senior debt is outstanding. The Company continues its
current negotiations and discussions with parties indicating interest in
potential purchases of certain of its assets though no certainty of sale can be
defined at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Document
------- --------------------------------------------------------------
<S> <C>
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)
4.07 -- Certificate of Designation of Series A Cumulative Senior
Preferred Stock(8)
4.08 -- Certificate of Designation of Series B Convertible
Preferred Stock(8)
4.09 -- Certificate of Designation of Series C Cumulative
Convertible Junior Preferred Stock(8)
4.10 -- Certificate of Designation of Series D Cumulative Junior
Preferred Stock(8)
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)
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
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)
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)
10.33 -- Executive Employment Agreement of Larry H. Ramming(7)
10.35 -- Forbearance Agreement dated December 21, 1999, between
Boots & Coots International Well Control, Inc. and Comerica
Bank -- Texas(8)
10.36 -- Second Amendment to Forbearance and Extension Agreement
dated April 21, 2000, between Boots & Coots International Well
Control, Inc. and Comerica Bank -- Texas(8)
10.37 -- First Amendment to Forbearance and Extension Agreement
dated June 15, 2000, between Boots & Coots International Well
Control, Inc. and Comerica Bank -- Texas(8)
10.38 -- Third Amendment to Loan Agreement dated April 21, 2000,
between Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas(8)
10.39 -- Fourth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas(8)
10.40 -- Fifth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas(8)
10.41 -- Sixth Amendment to Loan Agreement dated June 15, 2000,
between Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas(8)
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
10.42 -- Preferred Stock and Warrant Purchase Agreement, dated April
15, 1999, between Boots & Coots International Well Control,
Inc. and Halliburton Energy Services, Inc.(8)
10.43 -- Letter of Engagement, dated April 10, 2000, between Boots &
Coots International Well Control, Inc. and Maroon Bells
Capital, Inc.(8)
10.44 -- Warrant to Purchase Common Stock, dated March 20, 2000,
between Boots & Coots International Well Control, Inc. and the
Donald and Shelley Moorehead Charitable Trust.(8)
10.45 -- Settlement Agreement, dated March 20, 2000, between Boots &
Coots International Well Control, Inc. and the Donald and
Shelley Moorehead Charitable Trust.(8)
10.46 -- Third Amendment to Forbearance and Extension Agreement
dated July 31, 2000, between Boots & Coots International Well
Control, Inc. and Comerica Bank -- Texas*
27.01 -- Financial Data Schedule*
</TABLE>
* Filed herewith.
----------
(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.
(7) Incorporated herein by reference to the corresponding exhibit in the
Registrant's Report on Form 10-Q for the quarter ended June 30, 1999, filed
with the Commission on August 12, 1999.
(8) Incorporated herein by reference to the corresponding exhibit in the
registrant's report on Form 10-K for the year ended December 31, 1999, filed
with the Commission on July 17, 2000.
(b) Reports on Form 8-K.
The Company reported on Form 8-K filed May 30, 2000, that its
subsidiary, ITS Supply Corporation ("ITS") had filed in Corpus Christi,
Texas, for protection under Chapter XI of the U.S. Bankruptcy Code. A
decision was made in December 1999 to sell or in the alternative discontinue
the Company's materials and equipment procurement and logistics services
conducted through ITS. In April 2000, substantially all prospective
operations were ceased and the majority of the employees were terminated
pursuant to a reduction in workforce. As a result of ongoing operating
losses, a shortage of working capital and the absence of a viable purchaser
for ITS' operations, on May 18, 2000, ITS filed for protection under Chapter
XI of the U.S. Bankruptcy Code.
21
<PAGE> 22
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/ LARRY H. RAMMING
-----------------------------------------
Larry H. Ramming
Chief Executive Officer
(Principal Financial and Accounting Officer)
Date: August 14, 2000
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------
<S> <C>
*10.46 -- Third Amendment to Forbearance and Extension Agreement
dated July 31, 2000, between Boots & Coots International Well
Control, Inc. and Comerica Bank -- Texas
*27.01 -- Financial Data Schedule
</TABLE>
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* Filed herewith.
