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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 September 30, 2000
_______________
Commission File Number 1-13817
Boots & Coots International
Well Control, Inc.
(Exact name of registrant as specified in its charter)
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)
(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 November 8, 2000, was 31,625,166.
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<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Financial Information . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . . . . . 4
Condensed Consolidated Statements of Shareholders' Deficit. . 5
Condensed Consolidated Statements of Cash Flows . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . 7-12
Item 2. Management's Discussion and Analysis of Financial . . . . . .
Condition and Results of Operations . . . . . . . . . . . . . 13-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 17
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 18
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 18
Item 4. Submissions of Matters to a Vote of Security Holders. . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 20
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1.
<TABLE>
<CAPTION>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENTS ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 222,000 $ 14,937,000
Receivables -(net of allowance for doubtful accounts of $1,686,000
and $1,533,000 at December 31, 1999 and September 30, 2000). . . 5,176,000 5,674,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 882,000 826,000
Prepaid expenses and other current assets . . . . . . . . . . . . . 1,073,000 414,000
Net assets of discontinued operations . . . . . . . . . . . . . . . 29,984,000 --
-------------- ---------------
Total current assets. . . . . . . . . . . . . . . . . . . . 37,337,000 21,851,000
-------------- ---------------
PROPERTY AND EQUIPMENT -- net . . . . . . . . . . . . . . . . . . . . 10,531,000 8,919,000
OTHER ASSETS:
Goodwill -- net . . . . . . . . . . . . . . . . . . . . . . . . . . 3,385,000 3,363,000
Deposits and Other -- net . . . . . . . . . . . . . . . . . . . . . 2,202,000 3,081,000
-------------- ---------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $ 53,455,000 $ 37,214,000
============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,266,000 $ 7,715,000
Accrued liabilities and customer advances . . . . . . . . . . . . . 4,335,000 7,548,000
Current maturities of long-term debt:
Subordinated notes payable, net of warrant value . . . . . . . . 28,046,000 28,269,000
Senior Debt-A. . . . . . . . . . . . . . . . . . . . . . . . . . 14,321,000 -- --
Senior Debt-B. . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,000,000
All other debt . . . . . . . . . . . . . . . . . . . . . . . . . 814,000 128,000
-------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . 57,782,000 51,660,000
-------------- ---------------
LONG TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . -- 1,800,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred stock ($.00001 par, 5,000,000 shares authorized,
132,000 and 141,763 issued and outstanding at December
31, 1999 and September 30, 2000, respectively) . . . . . . . . . -- --
Common stock ($.00001 par, 50,000,000 shares authorized,
35,244,000 and 31,625,166 shares issued and outstanding
at December 31, 1999 and September 30, 2000,
respectively). . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . 32,951,000 36,523,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . (37,278,000) (52,769,000)
-------------- ---------------
Total shareholders' deficit . . . . . . . . . . . . . . . . (4,327,000) (16,246,000)
-------------- ---------------
Total liabilities and shareholders' deficit . . . . . . . . $ 53,455,000 $ 37,214,000
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . $ 7,742,000 $ 5,631,000 $ 27,534,000 $ 17,603,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses . . . . . . . . . 6,421,000 4,953,000 24,940,000 14,556,000
Selling, General and Administrative. . . . . . . . . . 2,798,000 2,572,000 7,692,000 5,350,000
Depreciation and Amortization. . . . . . . . . . . . . 618,000 760,000 1,715,000 2,097,000
------------ ------------ ------------- -------------
9,837,000 8,285,000 34,347,000 22,003,000
------------ ------------ ------------- -------------
Operating Loss . . . . . . . . . . . . . . . . . . . . . (2,095,000) (2,654,000) (6,813,000) (4,400,000)
------------ ------------ ------------- -------------
Interest Expense and Other, net:
Interest Expense . . . . . . . . . . . . . . . . . . . 1,540,000 2,165,000 4,551,000 5,183,000
Other, Including Finance Costs . . . . . . . . . . . . . 17,000 1,428,000 15,000 2,790,000
------------ ------------ ------------- -------------
Loss From Continuing Operations
Before Income Taxes. . . . . . . . . . . . . . . . . . (3,652,000) (6,247,000) (11,379,000) (12,373,000)
Income Tax Expense . . . . . . . . . . . . . . . . . . . 36,000 -- 80,000 --
------------ ------------ ------------- -------------
Loss From Continuing Operations. . . . . . . . . . . . . (3,688,000) (6,247,000) (11,459,000) (12,373,000)
Gain (loss) From Discontinued Operations, Net of Income
Taxes . . . . . . . . . . . . . . . . . . . . . . . . (297,000) (970,000) 216,000 (256,000)
Loss From Sale of Discontinued Operations, Net of Income
Taxes . . . . . . . . . . . . . . . . . . . . . . . . -- (2,505,000) -- (2,505,000)
------------ ------------ ------------- -------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . (3,985,000) (9,722,000) (11,243,000) (15,134,000)
Preferred Stock Accretion and Dividend Requirements. . . 577,000 119,000 1,000,000 357,000
------------ ------------ ------------- -------------
Net Loss Attributable to Common Shareholders . . . . . . $(4,562,000) $(9,841,000) $(12,243,000) $(15,491,000)
============ ============ ============= =============
Basic and Diluted Loss Per Common Share. . . . . . . . . $ (0.13) $ (.31) $ (0.36) $ (0.45)
============ ============ ============= =============
Weighted Average Number Of Common Shares Outstanding . . 35,224,000 32,257,000 34,326,000 34,531,000
============ ============ ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN TOTAL
-------------------- --------------------------- ------------ ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- ---------- ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1999 . . 132,000 $ 35,243,683 $32,951,000 $(37,278,000) $(4,327,000)
Warrant discount accretion. . -- -- -- -- 27,000 (27,000) --
Preferred stock conversion to
common stock . . . . . . . (70,000) -- 1,876,222 -- -- -- --
Preferred stock dividends . . -- -- -- -- 330,000 (330,000) --
Exercise of common stock
options. . . . . . . . . . -- -- 46,853 -- 15,000 -- 15,000
Warrants issued for
consulting services. . . . -- -- -- -- 123,000 -- 123,000
Warrants issued to Tranche B
Debt holders and
investment Services. . . . -- -- -- -- 1,016,000 -- 1,016,000
Preferred stock issued for
financial services . . . . 10,475 -- -- -- 747,000 -- 747,000
Common stock issued for
financial services . . . . -- -- 147,058 -- 74,000 -- 74,000
Common stock exchanged
for preferred stock. . . . 56,888 -- (5,688,650) -- -- -- --
Preferred stock issued in
settlement of liabilities. 12,400 -- -- -- 1,240,000 -- 1,240,000
Net Loss. . . . . . . . . . . -- -- -- -- -- (15,134,000) (15,134,000)
-------- ---------- ------------ ------------- ------------ ------------- -------------
BALANCES, September 30, 2000. . 141,763 -- 31,625,166 -- $36,523,000 $(52,769,000) $(16,246,000)
======== ========== ============ ============= ============ ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $(11,243,000) $(15,134,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 1,715,000 2,097,000
Non-cash charges associated with warrant costs. . . . . . 223,000 1,016,000
Common stock and warrants issued in exchange for services -- 197,000
Preferred stock issued in exchange for services. . . . . -- 747,000
Bad debt expense. . . . . . . . . . . . . . . . . . . . . 172,000 100,000
Other non-cash operating activity . . . . . . . . . . . . -- (450,000)
Changes in assets and liabilities, net of acquisitions:
Receivables. . . . . . . . . . . . . . . . . . . . . . 3,486,000 (598,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . (292,000) 56,000
Prepaid expenses and other current assets. . . . . . . (746,000) 659,000
Deferred financing costs and other assets. . . . . . . (237,000) (632,000)
Change in net assets of discontinued operations. . . . 8,370,000 29,984,000
Accounts payable . . . . . . . . . . . . . . . . . . . 1,052,000 (2,551,000)
Accrued liabilities, customer advances and other . . . (2,674,000) 5,013,000
------------- -------------
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . . . . . . (174,000) 20,504,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions. . . . . . . . . . . . . (3,428,000) (260,000)
------------- -------------
Net cash used in investing activities . . . . . . (3,428,000) (260,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit . . . . . . . . . . . . . 27,916,000 27,317,000
Debt repayments . . . . . . . . . . . . . . . . . . . . . (31,419,000) (42,101,000)
Proceeds from issuance of redeemable stock and warrants . 6,807,000 1,240,000
Proceeds from exercise of common stock options. . . . . . -- 15,000
Proceeds from convertible debt. . . . . . . . . . . . . . -- 8,000,000
Preferred stock dividends . . . . . . . . . . . . . . . . (14,000) --
Preferred stock redemption. . . . . . . . . . . . . . . . (200,000) --
------------- -------------
Net cash provided by (used in) financing activities . . . 3,090,000 (5,529,000)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . (512,000) 14,715,000
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . 1,203,000 222,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . $ 691,000 $ 14,937,000
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest. . . . . . . . . . . . . . . . . . $ 3,847,000 $ 1,125,000
Cash paid for income taxes. . . . . . . . . . . . . . . . $ -- $ 326,000
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock accretion . . . . . . . . . . . . . . . . $ -- $ 27,000
Preferred stock dividends accrued . . . . . . . . . . . . $ -- $ 330,000
</TABLE>
See accompanying notes to condensed 0consolidated financial statements.
6
<PAGE>
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
A. GOING CONCERN
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. Industry conditions have improved in 2000, however the
Company's upstream and downstream customer base has not to date increased
project expenditure levels to those existing in the first half of 1998. Demand
for the Company's products and services is impacted by the number and size of
projects available as changes in oil and gas exploration and production
activities change customers' forecasts and budgets. These fluctuations have a
significant effect on the Company's cash flows.
Oil and gas prices have significantly improved since the downturn in 1998.
While these price improvements have brought the company increases in the
frequency of high risk work and in the 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. Historically, the well
control business has provided the Company with the opportunity for highly
profitable operating activities. However, the timing of critical events is
unpredictable and they occur in irregular cycles. Consequently, the Company's
financial performance has been subject to significant fluctuations.
As a result of the relatively low incidences of critical events over the
last two years and the resultant negative effect on 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.
The Company's impaired liquidity position has resulted in the inability to
pay certain vendors in a timely manner. This has hampered the Company's ability
to hire sub-contractors, obtain materials and supplies, and otherwise conduct
operations in an effective or efficient manner. Moreover, throughout the
current fiscal year, the Company remained in default under its senior secured
debt agreement and its subordinated debt agreement.
To alleviate the Company's liquidity problems and to improve its overall
capital structure, the Company initiated a program to restructure its debt and
equity positions. The program involved a series of steps designed to raise new
funds, sell assets of certain subsidiaries, retire the Company's existing senior
debt, restructure its subordinated debt and increase its shareholders' equity.
Beginning on April 24, 2000 and continuing through September 30, 2000, $8.0
million in additional funds were raised through the purchase by an investment
group, Specialty Finance Fund I, LLC, of a new participating interest in the
Company's senior secured credit facility. This participating interest has the
option to convert from secured debt, classified as a current liability on the
Company's balance sheet, to equity in the form of preferred stock that is
convertible into common stock of the Company. Warrants to purchase 8,000,000
shares of the Company's common stock were issued to the investment group as part
of the transaction. The Company incurred approximately $1.1 million in
transaction costs associated with the new financing.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29 million cash, subject to
post-closing adjustments. Comerica Bank-Texas, the Company's senior secured
lender, was paid in full as a component of the transaction. Specialty Finance
Fund I, LLC, as a participant in the Comerica senior facility, remains as the
senior secured lender and has agreed in principal with the Company to convert a
substantial portion of its secured debt into convertible preferred stock
contingent upon the restructuring of the Company's subordinated debt held by The
Prudential Insurance Company of America.
7
<PAGE>
On October 24, 2000, the Company announced that it had reached agreement in
principal with Prudential Insurance Company of America, in the form of a letter
of intent, regarding the restructuring of the Company's subordinated debt with
Prudential. The Company has been in default under its subordinated note
agreement with Prudential since the second quarter of 1999. The restructuring
agreement is subject to final documentation, and is expected to be executed by
both parties on or before November 20, 2000, or as soon as practicable
thereafter.
The new financing obtained to date, the restructuring of the subordinated
debt 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.
As of September 30, 2000 the Company had cash of $14.9 million,
representing the residual balance of the proceeds received from the sale of the
Baylor Company after repayment of the senior secured debt to Comerica.
Approximately $12 million of cash will be required to complete the Prudential
restructuring agreement discussed above. Absent any new sources of financing,
if the Company does not significantly improve its operating performance, the
Company may not have sufficient cash to meet is current obligations over the
next twelve months.
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 condensed 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 condensed consolidated financial
statements include all adjustments, including normal recurring accruals, which,
in the opinion of management, are necessary in order to make the condensed
consolidated financial statements not be misleading.
The accompanying condensed 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 nine month periods ended
September 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 As a result of the bankruptcy filing by ITS, the
Company reduced its net investment in ITS to zero at December 31, 1999.
8
<PAGE>
The Company has an outstanding subordinated guaranty of ITS' debt of
$1,616,511 to one ITS supplier. This guaranty is subordinated to any senior
debt and the obligation to respond is forestalled contractually so long as
senior debt is outstanding. On September 1, 2000, the holder of the guaranty
filed suit in state district court in Tarrant County, Texas, to enforce the
guaranty. On October 13, 2000, summary judgment was announced by the state
district court in the amount of $1,616,511, plus interest and attorney's fees.
The Company, in consultation with its counsel, believes that it has valid
defenses to the enforcement of the summary judgment and that there are no other
creditors of ITS that have any claim against the Company based upon claims owing
by ITS to its creditors. However, given the interpretation that the court has
made of the documentation underlying the subordinated guaranty, the Company has
made a provision in the financial statements for the amount of the guaranty plus
interest and attorney's fees pending ultimate resolution of the matter, but
operating losses incurred by ITS in excess of the Company's net investment have
not been included in the consolidated results of the Company
On September 28, 2000, the Company announced that it closed the sale of
the assets of the Baylor Company and its subsidiaries to National Oilwell, Inc.
The proceeds from the sale were approximately $29 million cash, subject to
post-closing adjustments. Comerica Bank-Texas, the Company's senior secured
lender, was paid in full as a component of the transaction. Specialty Finance
Fund I, LLC, as a participant in the Comerica senior facility, remains as the
senior secured lender and has agreed in principal with the Company to convert a
substantial portion of its secured debt into convertible preferred stock
contingent upon the restructuring of the Company's subordinated debt held by The
Prudential Insurance Company of America.
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. 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 has an outstanding subordinated guaranty of ITS' debt of
$1,616,511 to one ITS supplier. This guaranty is subordinated to any senior
debt and the obligation to respond is forestalled contractually so long as
senior debt is outstanding. On September 1, 2000, the holder of the guaranty
filed suit in state district court in Tarrant County, Texas, to enforce the
guaranty. On October 13, 2000, summary judgment was announced by the state
district court in the amount of $1,616,511, plus interest and attorney's fees.
The Company, in consultation with its counsel, believes that it has valid
defenses to the enforcement of the summary judgment and that there are no other
creditors of ITS that have any claim against the Company based upon claims owing
by ITS to its creditors. However, given the interpretation that the court has
made of the documentation underlying the subordinated guaranty, the Company has
made a provision in the financial statements for the amount of the guaranty plus
interest and attorney's fees pending ultimate resolution of the matter, but
operating losses incurred by ITS in excess of the Company's net investment have
not been included in the consolidated results of the Company
As stated elsewhere herein, the Company's liquidity problems and loan
covenant defaults have adversely impacted the Company's ability to pay certain
vendors on a timely basis. As a consequence, a number of these vendors have
filed lawsuits against the Company and some have obtained judgments for the
amount of their claims, plus costs. The Company has retained a third party to
negotiate settlements of some of these claims and is actively engaged in
defending or resolving others. The Company expects that it will be able to
resolve these claims in an orderly fashion and does not believe that these suits
or judgments are individually material. However, the Company's business,
financial performance and prospects could be adversely affected if it is unable
to adequately defend, pay or settle its accounts, including as a consequence of
efforts to enforce existing or future judgments.
E. BUSINESS SEGMENT INFORMATION
Information concerning operations in different business segments at
September 30, 1999 and 2000, and for the nine-month periods then ended is
presented below. 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 in the Company's Annual Report on form 10K for the year ended December
31, 1999. 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.
9
<PAGE>
<TABLE>
<CAPTION>
EMERGENCY MANUFACTURING
RESPONSE AND AND
RESTORATION DISTRIBUTION CONSOLIDATED
-------------- --------------- --------------
<S> <C> <C> <C>
Nine Months Ended September 30, 2000
Net Operating Revenues . . . . . . . $ 16,847,000 $ 756,000 $ 17,603,000
Operating loss . . . . . . . . . . . (4,035,000) (365,000) (4,400,000)
Identifiable Operating Assets. . . . 36,548,000 666,000 37,214,000
Capital Expenditures . . . . . . . . 260,000 -- 260,000
Depreciation and Amortization. . . . 2,097,000 -- 2,097,000
Interest Expense . . . . . . . . . . 5,183,000 -- 5,183,000
Nine Months Ended September 30, 1999
Net Operating Revenues . . . . . . . $ 23,477,000 $ 4,057,000 $ 27,534,000
Operating loss . . . . . . . . . . . (6,337,000) (476,000) (6,813,000)
Identifiable Operating Assets. . . . 52,507,000 948,000 53,455,000
Capital Expenditures . . . . . . . . 3,120,000 308,000 3,428,000
Depreciation and Amortization. . . . 1,626,000 89,000 1,715,000
Interest Expense . . . . . . . . . . 4,551,000 -- 4,551,000
</TABLE>
For the nine-month periods ended September 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%).
F. SHAREHOLDERS' EQUITY
The Company has undertaken financing initiatives during the nine-month
period ended September 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 with
a term of five years to purchase an aggregate of 3,480,000 shares of common
stock at $.75 per share or by relinquishing that number of shares subject to the
warrant which, when multiplied by their market price for the ten trading days
preceding exercise, equal the aggregate exercise price.
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 the 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. These warrants may also be
exercised by relinquishing shares subject to the warrant. This participation
tranche bears interest at the rate of prime plus 3% (currently 12.5%) plus an
additional interest factor of 4%. Such interest is payable 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
restructuring of the Prudential subordinated debt. 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 be converted at the
election of the Company into shares of the Company's Common Stock at a $.75 per
share conversion rate.
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 $8 million in funds from the purchase of above
participation interests have been received. In connection with the warrants
issued with the participation interest and the advisory services associated
therewith, a financing cost of $1.1 million has been recognized in the current
period.
10
<PAGE>
To enable the Company to have available shares of authorized but unissued
or committed shares of Common Stock to accommodate the Common Stock purchase
warrants related to this financing, the Company negotiated during the period
from April through September, 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 shares 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 to reserve for the exercise of the warrants, 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
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 for each share of common stock into the Series C Preferred Stock is
convertible; and, convertible at the election of the Company into shares of the
Company's Common Stock at a conversion rate of $.75 per share. After eighteen
months from issuance a holder of Series C Preferred Stock may elect to have
future dividends paid in cash. To date, 19,875 shares of Series C Preferred
Stock have been issued at $100 per share in exchange for services and
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. In
addition, Mr. Ramming was issued 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 SEPTEMBER 30, 2000
On October 24, 2000, the Company announced that it had reached agreement in
principal with Prudential Insurance Company of America, in the form of a letter
of intent, regarding the restructuring of the Company's debt with Prudential.
The Company has been in default under its subordinated note agreement with
Prudential since the second quarter of 1999. The restructuring agreement is
subject to final documentation, and is expected to be executed by both parties
on or before November 20, 2000, or as soon as practicable thereafter.
The Prudential restructuring agreement provides that the aggregate
indebtedness will be resolved by the Company paying: (i) $12 million cash at
closing, (ii) $500,000 cash upon securing a new term loan with a third party
lender, (iii) $7 million of new subordinated debt, (iv) $5 million of Senior
Preferred Stock and (v) $8 million of Convertible Preferred Stock. All interest
payments and dividends are paid in kind and deferred for two years from the date
of closing. Additionally, as a component of this transaction, Prudential will
receive newly issued warrants to purchase 8 million shares of the Company's
Common Stock for $.625 per share and the Company has agreed to re-price the
existing Common Stock purchase warrants held by Prudential to $.625 per share.
The Company will have the right to repurchase after closing, at a discount to
face value, all of the debt, stocks and warrants issued to Prudential for an
agreed upon period.
Pending finalization of the restructuring agreement with Prudential, the
$28.3 million recorded liability balance of the Prudential obligation has been
included in current maturities of long-term debt in the accompanying financial
statements. An additional obligation to Prudential of $1.7 million representing
the remaining note face amount attributed to the warrants sold Prudential, is
included in additional paid-in capital. A provision for accrued interest as of
September 30, 2000 of $4.9 million is recorded in accrued liabilities.
11
<PAGE>
H. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires a company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the hedged
assets, liabilities, or firm commitments are recognized through earnings or in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The effect of the adoption of this statement on the
Company's earnings or statement of financial position has not yet been
finalized.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which summarizes certain of the staff's views
regarding the application of generally accepted accounting principles to revenue
recognition in financial statements. The Company is in the process of analyzing
the requirements of the Bulletin and is required to comply with the Bulletin in
the fourth quarter of 2000. Management believes the ultimate outcome will not
have a significant effect on the Company's consolidated results of operations.
12
<PAGE>
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.
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. For all periods presented
herein, the operations of ITS and Baylor 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 the 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Emergency Response and Restoration. . . . . . $ 6,690,000 $ 5,472,000 $23,477,000 $16,847,000
Manufacturing and Distribution. . . . . . . . 1,052,000 159,000 4,057,000 756,000
------------ ------------ ------------ ------------
$ 7,742,000 $ 5,631,000 $27,534,000 $17,603,000
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration. . . . . . . $ 5,601,000 $ 4,707,000 $21,655,000 $13,663,000
Manufacturing and Distribution. . . . . . . . . 820,000 246,000 3,285,000 893,000
------------ ------------ ------------ ------------
$ 6,421,000 $ 4,953,000 $24,940,000 $14,556,000
------------ ------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES(1)
Emergency Response and Restoration. . . . . . $ 2,382,000 $ 2,476,000 $ 6,533,000 $ 5,122,000
Manufacturing and Distribution. . . . . . . . 416,000 96,000 1,159,000 228,000
------------ ------------ ------------ ------------
$ 2,798,000 $ 2,572,000 $ 7,692,000 $ 5,350,000
------------ ------------ ------------ ------------
DEPRECIATION AND AMORTIZATION
Emergency Response and Restoration. . . . . . $ 581,000 $ 760,000 $ 1,626,000 $ 2,097,000
Manufacturing and Distribution. . . . . . . . 37,000 -- 89,000 --
------------ ------------ ------------ ------------
$ 618,000 $ 760,000 $ 1,715,000 $ 2,097,000
------------ ------------ ------------ ------------
OPERATING LOSS
Emergency Response and Restoration. . . . . . $(1,874,000) $(2,471,000) $(6,337,000) $(4,035,000)
Manufacturing and Distribution. . . . . . . . (221,000) (183,000) (476,000) (365,000)
------------ ------------ ------------ ------------
$(2,095,000) $(2,654,000) $(6,813,000) $(4,400,000)
============ ============ ============ ============
<FN>
__________
(1) Selling, General, Administrative and corporate expenses have been allocated pro rata among
segments using relative revenues for the basis and include financing, consulting and
restructuring costs of $797,000 for the three months and nine months ended September 30, 2000.
</TABLE>
13
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 (UNAUDITED)
REVENUES
Emergency Response and Restoration revenues were $5.5 million for the
quarter ended September 30, 2000, compared to $6.7 million for the quarter ended
September 30, 1999, a decrease of $1.2 million (18%) in the current period. The
decrease resulted from $2.9 million lower revenues from the Special Services
hazardous materials remediation operation offset by a $1.4 million increase in
revenues from the Company's Risk Management and Prevention System business and
$.3 million higher revenues from the Well Control operations. The Special
Services decline primarily resulted from difficulties in securing adequate
subcontracting resources because of the Company's liquidity constraints. The
current year Risk Management revenues include a WELLSURE(R) event where the
Company served as lead contractor.
Manufacturing and Distribution revenues were $.16 million for the three
months ended September 30, 2000, representing a decrease of $.9 million (85%)
compared to the same period of the prior year. The decline in Manufacturing and
Distribution revenues resulted from a $0.9 million decrease in ABASCO revenues
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 $.9 million for the quarter ended September 30, 2000, a decrease of
16% in comparison to the third quarter of last year. This cost decrease is the
result of lower sales, improved contribution margins and the Company's
initiatives targeted at reducing operational overhead.
The decrease in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $0.57 million for the quarter ended September 30, 2000, is directly
related to the decline in international revenues, and the associated related
costs, and lack of significant orders for fire and protective equipment
packages.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses for the Emergency Response and
Restoration segment were $2.4 million for the quarter ended September 30, 2000
and September 30, 1999. The three months ended September 30, 2000 includes
financing and consulting costs of $.8 million.
The decrease in Manufacturing and Distribution Selling, General and
Administrative Expenses of $0.3 million for the quarter ended September 30,
2000, compared to the quarter ended September 30, 1999, is in response to
management's cost reduction initiatives at ABASCO.
INTEREST EXPENSE AND OTHER, INCLUDING FINANCE COST
Interest expense for the three months ended September 30, 2000, was $2.2
million compared to $1.5 million in the comparable period of the prior year.
The increase of $.7 million is primarily due to the additional senior debt
incurred during the quarter.
Other expense, including financing cost, includes $.1 million in expenses
relating to warrants issued to the participation interest and advisory services
associated therewith and approximately $1.2 million in legal settlements and
other financing related costs.
14
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 (UNAUDITED)
REVENUES
Emergency Response and Restoration revenues were $16.8 for the nine month
period ended September 30, 2000, compared $23.5 million for the nine month
period ended September 30, 1999, a decrease of $6.7 million (28%) in the current
period. The reduction included a $3.1 million decrease in revenues from the
Company's well control operations, the timing of which is largely unpredictable.
The prior year period included a large well control project in which the company
acted as general contractor. Revenues from the Special Services hazardous
materials remediation operation decreased by $3.9 million as a result of
difficulties in securing adequate subcontracting resources because of the
Company's liquidity constraints.
Manufacturing and Distribution revenues were $.76 million for the nine
months ended September 30, 2000, representing a decrease of $3.3 million (81%)
compared to the same period of the prior year. The decline in revenues resulted
from sharply lower sales at ABASCO, which fell by $3.3 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 $8.0 million for the nine month period ended September 30, 2000, a
decrease of 37% in comparison to the first nine 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; an 18.9% contribution margin versus a 7.8% contribution margin
for the periods ended September 30, 2000 and September 30, 1999, respectively.
The decrease in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $2.4 million (73%) for the nine months ended September 30, 2000, is
directly related to the continuing decline in international revenues, and the
associated related costs, and lack of significant orders for fire and protective
equipment packages. 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 $5.1 million for the nine month period ended September
30, 2000, compared to $6.5 million for the nine months ended September 30, 1999,
a decrease of $1.4 million (22%) 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 nine
months ended September 30, 2000 includes financing and consulting costs of $.8
million
The decrease in Manufacturing and Distribution Selling, General and
Administrative Expenses of $0.9 million (80%) for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999, is
primarily the result of management's previously referenced cost reduction
initiatives at ABASCO.
INTEREST EXPENSE AND OTHER, INCLUDING FINANCE COST
Interest expense for the nine months ended September 30, 2000 was $5.2
million compared to $4.6 million in the comparable period of the prior year.
The increase of $.6 million in interest expense is primarily due to the
additional senior debt incurred during the period.
Other expense, including financing cost, includes $1.0 million in expenses
relating to warrants issued to the participation interest and advisory services
associated therewith. Other expense also includes approximately $1.8 million in
legal settlements and other financing related costs.
15
<PAGE>
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. Industry conditions have improved in 2000, however the
Company's upstream and downstream customer base has not to date increased
project expenditure levels to those existing in the first half of 1998. Demand
for the Company's products and services is impacted by the number and size of
projects available as changes in oil and gas exploration and production
activities change customers' forecasts and budgets. These fluctuations have a
significant effect on the Company's cash flows.
Oil and gas prices have significantly improved since the downturn in 1998.
While these price improvements have brought the company increases in the
frequency of high risk work and in the 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. Historically, the well
control business has provided the Company with the opportunity for highly
profitable operating activities. However, the timing of critical events is
unpredictable and they occur in irregular cycles. Consequently, the Company's
financial performance has been subject to significant fluctuations.
As a result of the relatively low incidences of critical events over the
last two years and the resultant negative effect on 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.
The Company's impaired liquidity position has resulted in the inability to
pay certain vendors in a timely manner. This has hampered the Company's ability
to hire sub-contractors, obtain materials and supplies, and otherwise conduct
operations in an effective or efficient manner. Moreover, throughout the
current fiscal year, the Company remained in default under its senior secured
debt agreement and its subordinated debt agreement.
To alleviate the Company's liquidity problems and to improve its overall
capital structure, the Company initiated a program to restructure its debt and
equity positions. The program involved a series of steps designed to raise new
funds, sell assets of certain subsidiaries, retire the Company's existing senior
debt, restructure its subordinated debt and increase its shareholders' equity.
Beginning on April 24, 2000 and continuing through September 30, 2000, $8.0
million in additional funds were raised through the purchase by an investment
group, Specialty Finance Fund I, LLC, of a new participating interest in the
Company's senior secured credit facility. This participating interest has the
option to convert from secured debt, classified as a current liability on the
Company's balance sheet, to equity in the form of preferred stock that is
convertible into common stock of the Company. Warrants to purchase 8,000,000
shares of the Company's common stock were issued to the investment group as part
of the transaction. Additionally, the Company incurred approximately $1.1
million in transaction costs associated with the new financing.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29 million cash, subject to
post-closing adjustments. Comerica Bank-Texas, the Company's senior secured
lender, was paid in full as a component of the transaction. Specialty Finance
Fund I, LLC, as a participant in the Comerica senior facility, remains as the
senior secured lender and has agreed in principal with the Company to convert a
substantial portion of its secured debt into convertible preferred stock
contingent upon the restructuring of the Company's subordinated debt held by The
Prudential Insurance Company of America.
On October 24, 2000, the Company announced that it had reached agreement in
principal with Prudential Insurance Company of America, in the form of a letter
of intent, regarding the restructuring of the Company's subordinated debt with
Prudential. The Company has been in default under its subordinated note
agreement with Prudential since the second quarter of 1999. The restructuring
agreement is subject to final documentation, and is expected to be executed by
both parties on or before November 20, 2000, or as soon as practicable
thereafter.
The Prudential restructuring agreement provides that the aggregate
indebtedness will be resolved by the Company paying: (i) $12 million cash at
closing, (ii) $500,000 cash upon securing a new term loan with a third party
lender, (iii) $7 million of new subordinated debt, (iv) $5 million of Senior
Preferred Stock and (v) $8 million of Convertible Preferred Stock. All interest
payments and dividends are paid in kind and deferred for two years from the date
of closing.
16
<PAGE>
Additionally, as a component of this transaction, Prudential will receive newly
issued warrants to purchase 8 million shares of the Company's Common Stock for
$.625 per share and the Company has agreed to re-price the existing Common Stock
purchase warrants held by Prudential to $.625 per share. The Company will have
the right to repurchase after closing, at a discount to face value, all of the
debt, stocks and warrants issued to Prudential for an agreed upon period.
Pending finalization of the restructuring agreement with Prudential, the
$28.3 million recorded liability balance of the Prudential obligation has been
included in current maturities of long-term debt in the accompanying financial
statements. An additional obligation to Prudential of $1.7 million representing
the remaining note face amount attributed to the warrants sold Prudential, is
included in additional paid-in capital. A provision for accrued interest as of
September 30, 2000 of $4.9 million is recorded in accrued liabilities.
The new financing obtained to date, the restructuring of the subordinated
debt 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.
As of September 30, 2000 the Company had cash of $14.9 million,
representing the residual balance of the proceeds received from the sale of the
Baylor Company after repayment of the senior secured debt to Comerica.
Approximately $12.0 million of cash will be required to complete the Prudential
restructuring agreement discussed above. Absent any new sources of financing,
if the Company does not significantly improve its operating performance, the
Company may not have sufficient cash to meet is current obligations over the
next twelve months.
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 September 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.
PART II
ITEM 1. LEGAL PROCEEDINGS
As discussed, ITS filed in Corpus Christi, Texas, for protection under
Chapter XI of the U.S. Bankruptcy Code. 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 has an outstanding subordinated guaranty of ITS' debt of
$1,616,511 to one ITS supplier. This guaranty is subordinated to any senior
debt and the obligation to respond is forestalled contractually so long as
senior debt is outstanding. On September 1, 2000, the holder of the guaranty
filed suit in state district court in Tarrant County, Texas, to enforce the
guaranty. On October 13, 2000, summary judgment was announced by the state
district court in the amount of $1,616,511, plus interest and attorney's fees.
The Company, in consultation with its counsel, believes that it has valid
defenses to the enforcement of the summary judgment and that there are no other
creditors of ITS that have any claim against the Company based upon claims owing
by ITS to its creditors. However, given the interpretation that the court has
made of the documentation underlying the subordinated guaranty, the Company has
made a provision in the financial statements for the amount of the guaranty plus
interest and attorney's fees pending ultimate resolution of the matter, but
operating losses incurred by ITS in excess of the Company's net investment have
not been included in the consolidated results of the Company
17
<PAGE>
As stated elsewhere herein, the Company's liquidity problems and loan
covenant defaults have adversely impacted the Company's ability to pay certain
vendors on a timely basis. As a consequence, a number of these vendors have
filed lawsuits against the Company and some have obtained judgments for the
amount of their claims, plus costs. The Company has retained a third party to
negotiate settlements of some of these claims and is actively engaged in
defending or resolving others. The Company expects that it will be able to
resolve these claims in an orderly fashion and does not believe that these suits
or judgments are individually material. However, the Company's business,
financial performance and prospects could be adversely affected if it is unable
to adequately defend, pay or settle its accounts, including as a consequence of
efforts to enforce existing or future judgments.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As previously disclosed, beginning in April and continuing through June
2000, the Company issued warrants to purchase an aggregate of 3,480,000 shares
of common stock to an investment group in connection with the Tranche B
participation by Specialty Finance Fund I, LLC. These warrants have a term of
five years and an exercise price of $.75 per share. The Company additionally
issued warrants to purchase an aggregate of 8,000,000 shares of common stock at
$.625 per share to Specialty Finance Fund I, LLC. Each offering was structured
as an exempt private placement pursuant to Section 4(2) of the Securities Act of
1933. No public solicitation was used in the offering and the recipients of the
warrants were determined to be both highly sophisticated and able to bear the
risk of an investment in the Company.
In September 2000, the Company issued an aggregate of 4,500 shares of its
Series C Preferred Stock and warrants to purchase an aggregate of 450,000 shares
of common stock at $.75 per share to its outside directors and Larry Ramming as
reimbursement for expenses associated with their service as directors of the
Company. Shares of Series C Preferred Stock have a face value, and liquidation
preference, of $100 per share, pay dividends of 10% per annum and may be
converted into common stock of the Company at $.75 per share. The offering was
structured as an exempt private placement pursuant to Section 4(2) of the
Securities Act of 1933.
In September 2000, the Company also issued 975 shares of its Series C
Preferred Stock to a third party provider of financial advisory services; 2,000
shares of its Series C Preferred Stock to a third party provider of legal
services; and warrants to purchase an aggregate of 300,000 shares at $.75 per
share and 60,000 shares at $1.00 per share to another provider of financial
services. Each offering was structured as an exempt private placement pursuant
to Section 4(2) of the Securities Act of 1933. No public solicitation was used
in the offering and the recipients of the shares were determined to be both
highly sophisticated and able to bear the risk of investment.
Also in September 2000, the Company issued 2,000 shares of its Series C
Preferred Stock to a third party to settle a lawsuit. The offering was
structured as an exempt private placement pursuant to Section 4(2) of the
Securities Act of 1933. No public solicitation was used in the offering and the
recipient of the shares was determined to be both highly sophisticated and able
to bear the risk of investment.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Prudential Subordinated Note Default
On October 24, 2000, the Company announced that it had reached agreement in
principal with Prudential Insurance Company of America, in the form of a letter
of intent, regarding the restructuring of the Company's debt with Prudential.
The Company has been in default under its subordinated note agreement with
Prudential since the second quarter of 1999. The restructuring agreement is
subject to final documentation, and is expected to be executed by both parties
on or before November 20, 2000, or as soon as practicable thereafter.
The Prudential restructuring agreement provides that the aggregate
indebtedness will be resolved by the Company paying: (i) $12 million cash at
closing, (ii) $500,000 cash upon securing a new term loan with a third party
lender, (iii) $7 million of new subordinated debt, (iv) $5 million of Senior
Preferred Stock and (v) $8 million of Convertible Preferred Stock. All interest
payments and dividends are paid in kind and deferred for two years from the date
of closing. Additionally, as a component of this transaction, Prudential will
receive newly issued warrants to purchase 8 million shares of the Company's
Common Stock for $.625 per share and the Company has agreed to re-price the
existing Common Stock purchase warrants held by Prudential to $.625 per share.
The Company will have the right to repurchase after closing, at a discount to
face value, all of the debt, stocks and warrants issued to Prudential for an
agreed upon period.
Pending finalization of the restructuring agreement with Prudential, the
$28.3 million recorded liability balance of the Prudential obligation has been
included in current maturities of long-term debt in the accompanying financial
statements. An additional obligation to Prudential of $1.7 million representing
the remaining note face amount attributed to the
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warrants sold Prudential, is included in additional paid-in capital. A
provision for accrued interest as of September 30, 2000 of $4.9 million is
recorded in accrued liabilities.
ITS Bankruptcy Proceedings
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 has an outstanding subordinated guaranty of ITS' debt of
$1,616,511 to one ITS supplier. This guaranty is subordinated to any senior
debt and the obligation to respond is forestalled contractually so long as
senior debt is outstanding. On September 1, 2000, the holder of the guaranty
filed suit in state district court in Tarrant County, Texas, to enforce the
guaranty. On October 13, 2000, summary judgment was announced by the state
district court in the amount of $1,616,511, plus interest and attorney's fees.
The Company, in consultation with its counsel, believes that it has valid
defenses to the enforcement of the summary judgment and that there are no other
creditors of ITS that have any claim against the Company based upon claims owing
by ITS to its creditors. However, given the interpretation that the court has
made of the documentation underlying the subordinated guaranty, the Company has
made a provision in the financial statements for the amount of the guaranty plus
interest and attorney's fees pending ultimate resolution of the matter, but
operating losses incurred by ITS in excess of the Company's net investment have
not been included in the consolidated results of the Company
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 25, 2000, the Company convened its annual meeting of the
stockholders in Houston, Texas. The meeting was subsequently adjourned to
November 6, 2000, in light of the Company's announcement of an agreement in
principle to restructure the Prudential subordinated debt. The matters voted on
at the meeting were: (1) the election of eight directors of the Company into 3
classes, each serving for a staggered term from one to three years; (2) amending
the Certificate of Incorporation of the Company to (i) increase the authorized
capital stock of the Company to 125,000,000 shares of common stock, and (ii)
repeal provisions of the Certificate of Incorporation that prohibit the issuance
of common stock and preferred stock to directors, officers and 10% or greater
shareholders; and (3) to approve the Company's 2000 Long-Term Incentive Plan.
The voting was as follows for the election of directors:
For Withheld Abstaining
---------- --------- ----------
Larry H. Ramming 33,299,530 2,701,530 --
Thomas L. Easley 33,423,985 2,577,075 --
E.J. "Jed" Dipaolo 33,073,308 2,891,388 --
Jerry Winchester 33,378,382 2,622,678 --
Richard Anderson 33,421,888 2,542,788 --
K. Kirk Krist 33,457,172 2,543,888 --
Tracy Turner 33,227,072 2,773,988 --
Brian Krause 33,247,172 2,753,888 --
Each of the directors was elected by the holders of more than a plurality
of the shares present, in person or by proxy, at the annual meeting.
The voting was as follows for the increase of common stock of the Company
to 125,000,000 shares:
For Withheld Abstaining
---------- --------- ----------
32,036,575 3,565,698 398,787
The proposal to increase the common stock of the Company was passed by the
holders of more than a majority of the shares entitled to vote thereon.
The voting was as follows for the repeal of the provisions of the
Certificate of Incorporation that restrict the issuance of common stock and
preferred stock to directors, officers and 10% or greater stockholders:
For Withheld Abstaining
---------- --------- ----------
21,042,238 3,880,471 889,699
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<PAGE>
The proposal to repeal the provisions of the Certificate of Incorporation
was passed by the holders of more than a majority of the shares entitled to vote
thereon.
The voting was as follows on approving the Company's 2000 Long-Term
Incentive Plan:
For Withheld Abstaining
---------- --------- ----------
21,426,480 3,225,809 1,160,119
The proposal to approve the 2000 Long-Term Incentive Plan was passed by the
holders of more than a majority of the shares present, in person or by proxy, at
the annual meeting.
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)
20
<PAGE>
10.02 -- Executive Employment Agreement of Larry H. Ramming(1)
10.03 -- Executive Employment Agreement of Raymond Henry(1)
10.04 -- Executive Employment Agreement of Brian Krause(1)
10.05 -- Executive Employment Agreement of Richard Hatteberg(1)
10.06 -- Executive Employment Agreement of Danny Clayton(1)
10.07 -- Security Agreement and Financing Statement with Main
Street/Geneva(2)
10.08 -- First Amendment to Security Agreement (assigned to
Prudential)(2)
10.09 -- Stock Pledge Agreement with Main Street/Geneva (assigned
to Prudential)(2)
10.10 -- First Amendment to Stock Pledge Agreement (assigned to
Prudential)(2)
10.11 -- Form of Warrant issued to Main Street/Geneva(2)
10.12 -- Form of Registration Rights Agreement with Main
Street/Geneva(2)
10.13 -- Form of First Amendment to Registration Rights
Agreement(2)
10.14 -- 1997 Incentive Stock Plan(2)
10.15 -- Outside Directors' Option Plan(2)
10.16 -- Executive Compensation Plan(2)
10.17 -- Halliburton Center Sublease(2)
10.18 -- Camac Plaza Sublease(2)
10.19 -- Senior Loan Agreement dated July 6, 1998, between Boots &
Coots International Well Control, Inc., and Prudential
Securities Credit Corporation(4)
10.20 -- First Amendment to Senior Loan Agreement (Bridge Facility)
dated July 23, 1998, between Boots & Coots International Well
Control, Inc., and The Prudential Insurance Company of
America(4)
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)
21
<PAGE>
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)
22
<PAGE>
10.41 -- Sixth Amendment to Loan Agreement dated June 15, 2000,
between Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas(8)
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(9)
10.47 -- Form of Warrant issued to Specialty Finance Group and to
Turner, Volker, Moore*
27.01 -- Financial Data Schedule*
<FN>
* 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.
(9) Incorporated herein by reference to the corresponding exhibit in the Registrant's
Report on Form 10-Q for the quarter ended June 30, 2000, filed with the Commission on
August 14, 2000.
</TABLE>
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(b) Reports on Form 8-K.
None
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: November 14, 2000
24
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