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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13817
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BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
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DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
777 POST OAK BOULEVARD, SUITE 800 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
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713-621-7911
(Issuer's Telephone Number, Including Area Code)
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Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.00001 par value American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ ]
No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in or any amendment to this
Form 10-K [X].
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on April 17, 2000 based on the
last quoted price before trading was halted on such date was $15,171,639.
The number of shares of the issuer's common stock outstanding on July 14,
2000 was 31,174,877.
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FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I...................................................... 3
Item 1. Description of Business......................... 3
Item 2. Description of Properties....................... 15
Item 3. Legal Proceedings............................... 16
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 16
PART II..................................................... 17
Item 5. Market for Common Equity and Related Stockholder
Matters................................................ 17
Item 6. Selected Financial Data......................... 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 19
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................ 26
Item 8. Financial Statements............................ 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial
Disclosure.................................... 27
PART III.................................................... 27
Item 10. Directors, Executive Officers, Promoters and
Control Persons; Compliance
with Section 16(a) of the Exchange Act....... 27
Item 11. Executive Compensation.......................... 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 33
Item 13. Certain Relationships and Related
Transactions........................................... 34
PART IV..................................................... 35
Item 14. Exhibits List and Reports....................... 35
SIGNATURES.................................................. 38
FINANCIAL STATEMENTS
Reports of Independent Public Accountants................. F-1
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit).............................................. F-5
Consolidated Statements of Cash Flows..................... F-7
Notes to Consolidated Financial Statements................ F-8
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boots & Coots International Well Control, Inc. (the "Company"), is a
global-response oil and gas service company that specializes in responding to
and controlling oil and gas well emergencies, including blowouts and well fires.
In connection with such services, the Company has the capacity to supply the
equipment, expertise and personnel necessary to contain the oil and hazardous
materials spills and discharges associated with such oil and gas emergencies, to
remediate affected sites and restore affected oil and gas wells to production.
In addition to providing emergency response services, the Company provides
snubbing and other non-critical well control services, including pre-event
planning, training and consulting services. The Company also manufactures and
markets oil and hazardous materials spill containment and recovery equipment and
a varied line of industrial products for the oil and gas industry, including
drilling rig brakes, controls, and monitors; industrial and marine electrical AC
generators; and marine thrusters and controls. In addition, the Company provides
environmental remediation services to the petrochemical, chemical manufacturing
and transportation industries, as well as to various state and federal agencies.
Through April 2000, the Company was actively engaged in providing materials and
equipment procurement, transportation and logistics services to the energy
industry. (See History of Company -- Acquisition of ITS Supply Corporation,
Products and Services provided by the Company and Note D -- Discontinued
Operations included in the accompanying Consolidated Financial Statements).
The Company acts as a holding company for its operating subsidiaries, IWC
Services, Inc., Boots & Coots Special Services, Inc. and Baylor Company. With
the exception of Boots & Coots Special Services, Inc., Baylor Company and
HAZ-TECH Environmental Services, Inc., the asset and/or business acquisitions
discussed below were acquired by the Company through IWC Services, Inc. These
acquisitions were made with the objective of having operating capabilities in
three primary business segments: (1) emergency response and restoration; (2)
programs and services; and (3) manufacturing and distribution. As discussed
herein under Discontinued Operations and in Note D -- Discontinued Operations
included in the accompanying Consolidated Financial Statements, 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 April 2000,
substantially all prospective operations of ITS were ceased and the majority of
ITS employees were terminated.
In 1998, the Company operated in three (3) business segments: Emergency
Response and Restoration, Programs and Services and Manufacturing and
Distribution. The risk management business unit of IWC Services, which
encompasses the WELLSURE 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, the Company
has determined that its risk management programs are more appropriately included
with the Emergency Response and Restoration business segment. Accordingly, all
business segment disclosures contained herein reflect this classification for
all periods presented.
RECENT FINANCIAL DEVELOPMENTS
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 subordinated to any senior debt and any payment which might
occur is contractually exempted. The Company continues to pursue negotiations
and with parties indicating interest in potential purchases of certain of ITS'
assets but no assurance of any sale can be given at this time.
Comerica Loan Agreement Default. As of June 30 and September 30, 1999, the
Company was not in compliance with certain provisions of the Comerica Loan
Agreement, executed by the Company and
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Comerica Bank -- Texas dated October 28, 1998. Such events of non-compliance
continued to exist through December 1999, at which time the Company negotiated
and entered into interim forbearance agreements with Comerica that have
permitted additional time for seeking alternative financing sources. Such
forbearance agreements currently extend through July 31, 2000, and there is no
assurance such agreements can be further extended. Outstanding borrowings under
the Comerica Loan Agreement of $14,321,000 at December 31, 1999, have been
classified as a current liability in the accompanying financial statements.
Prudential Subordinated Note Default. As of June 30, September 30, and
December 31, 1999, the Company was not in compliance with certain financial
covenants of the Prudential Subordinated Note and Warrant Purchase Agreement, as
amended, executed originally by the Company and the Prudential Insurance Company
of America on July 23, 1998, respecting the Company's EBITDA to total
liabilities ratio. Such financial covenant non-compliance continues through the
date hereof. Prudential has given the Company notice of its intention to
accelerate the obligations of the Company under the Prudential Subordinated
Note; however, as of the date of this filing, Prudential has not taken any
further steps to complete the acceleration of the obligation. Further, quarterly
interest payments due since the quarter ended July 23, 1999, on the Prudential
Subordinated Note 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 modification of certain financial covenants and deferral of the unpaid
quarterly interest payments and other proposals designed to resolve the
subordinated debt and related interest obligations. No resolution has yet been
reached. Based on the status of the Company's discussions with Prudential, the
outstanding balance of the Prudential Subordinated Notes has been classified as
a current liability in the accompanying financial statements.
There can be no assurance that Comerica and Prudential will not exercise
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 securing
those loans. Although the accompanying financial statements for the year ended
December 31, 1999, have been prepared on the basis of the Company continuing as
a going concern, as discussed in Note A to the accompanying consolidated
financial statements, significant uncertainties exist as to the ability of the
Company to resolve its financing issues and attain profitable operations. The
audit opinion issued by Arthur Andersen LLP for the year ended December 31,
1999, includes an explanatory fourth paragraph because of substantial doubt
regarding the Company's ability to continue as a going concern.
Halting of Trading of the Company's Common Stock. On April 20, 2000, the
Company announced that the American Stock Exchange had halted trading in the
common stock of the Company pending the filing of this Annual Report on Form
10-K and the Company's Form 10-Q for the period ended March 31, 2000. Although
management of the Company believes that it has complied with the requests of the
American Stock Exchange, and has scheduled meetings to review compliance and
disclosures which it believes should lead to a lift in the current halt in
trading status, no assurance can be provided that the American Stock Exchange
will lift the halt on the trading of the Company's common stock or that it will
not act to delist the Company from the exchange.
Subsequent Financing Activity. As discussed in Note M to the financial
statements herein, subsequent to March 31, 2000, the Company received
approximately $6.6 million in funds from the purchase of participation interests
in its senior secured credit facility with Comerica. In connection with this
financing, the Company issued 147,058 shares of common stock and warrants to
purchase an aggregate of 8,000,000 shares of common stock of the Company to the
participation interest holders and warrants to purchase an aggregate of
3,480,000 shares of common stock to the investment group that arranged the
financing. In the aggregate, the warrants are currently exercisable for
approximately 9 million shares, with the balance exercisable at such time as the
Company has adequate shares of common stock available. The warrants have a term
of five years and can be exercised by the payment of cash in the amount of
$0.625 per share as to 8,000,000 shares and $0.75 per share as to 3,480,000
shares of common stock, or by relinquishing a number of shares subject to the
warrant with a market value equal to the aggregate exercise price of the portion
of the warrant being exercised.
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HISTORY OF COMPANY
Boots & Coots International Well Control, Inc. (the "Company"), formerly
known as Havenwood Ventures, Inc. ("Havenwood"), was incorporated in Delaware in
April 1988. Havenwood was originally formed to serve as a blind pool investment
fund, and in July 1988 Havenwood raised $500,000 in an initial public offering
of its common stock. After completing its initial public offering, Havenwood
expended its available resources in the development of a business enterprise
which it ultimately divested, thereafter remaining inactive, with no material
assets or liabilities, until it entered into a business combination with IWC
Services, Inc. a Texas corporation ("IWC Services") on July 29, 1997.
Acquisition of IWC Services, Inc. The Company acquired IWC Services on July
29, 1997, pursuant to a merger of a wholly owned subsidiary of the Company with
IWC Services whereby the Company issued shares of common stock to the
stockholders of IWC Services in exchange for all of the issued and outstanding
common stock of IWC Services and issued options and warrants to purchase common
stock of the Company in exchange for all of the options and warrants to purchase
common stock of IWC Services then outstanding. As a result of the merger, IWC
Services became a wholly-owned subsidiary of the Company, the stockholders of
IWC Services became the beneficial holders of approximately 93% of the
post-merger issued and outstanding shares of common stock of the Company and the
board of directors and management of IWC Services took over the management of
the Company.
IWC Services is a global-response oil and gas well control service company
that specializes in responding to and controlling oil and gas well emergencies,
including blowouts and well fires. In addition, IWC Services provides snubbing
and other non-critical well control services. IWC Services was organized in June
1995 by six former key employees of the Red Adair Company who resigned their
positions after Mr. Adair retired and sold his business.
Acquisition of the Assets of Boots & Coots, L.P. On July 31, 1997, the
Company completed the acquisition of substantially all of the operating assets
of Boots & Coots, L.P., a Colorado limited partnership ("Boots & Coots") an oil
well firefighting, snubbing and blowout control services company. In connection
with the acquisition of Boots & Coots, the Company acquired all interests of
Boots & Coots in its subsidiary corporations, Boots & Coots Overseas, Ltd., and
Boots & Coots de Venezuela, S.A. (collectively referred to herein as "Boots &
Coots"). The consideration paid consisted of (i) $369,432 cash, (ii) $680,568
placed in escrow to pay certain debts of Boots & Coots, (iii) the issuance of
secured promissory notes of the Company in the aggregate principal amount of
$4,760,977 and (iv) 259,901 shares of common stock of the Company. The Company
also granted registration rights for the shares of common stock issued to Boots
& Coots in the transaction.
Boots & Coots was organized by Boots Hansen and Coots Mathews, two former
employees of the Red Adair Company who, like the founders of IWC Services, left
that firm to form an independent company, which was a primary competitor of IWC
Services. As a consequence of the acquisition of Boots & Coots, the Company
became a leader in the worldwide oil well firefighting and blowout control
industry, reuniting many of the former employees of the Red Adair Company.
Acquisition of ABASCO, Inc. On September 25, 1997, the Company completed
the acquisition of ABASCO, Inc. ("ABASCO") which had acquired the operating
assets of ITS Environmental, a division of International Tool & Supply Company,
a recognized leader in the design and manufacture of a comprehensive line of
rapid-response oil and chemical spill containment and reclamation equipment and
products since 1975. The Company acquired ABASCO for aggregate consideration
consisting of approximately $1,590,000 cash and 300,000 shares of common stock.
ABASCO's products and services include mechanical skimmers, containment
booms and boom reels, dispersant sprayers, agent absorbents, response vessels,
oil and chemical spill industrial products, spill response packages, oil and
chemical spill ancillary products and waste oil recovery and remediation
services. In
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response to depressed downstream industry conditions existing for a significant
part of 1999 and limitations on capital, the Company has substantially reduced
but not discontinued the operations of ABASCO, including the closure and
consolidation of facilities and reduction in workforce.
Acquisition of ITS Supply Corporation. On January 2, 1998, the Company
completed the acquisition of all of the capital stock of ITS Supply Corporation
("ITS") for aggregate consideration of $6,000,000 cash. Financing for the
acquisition of ITS was provided from working capital ($500,000); and proceeds
from the issuance of 10% Senior Secured Promissory Notes ($4,500,000) and
short-term bridge financing from the seller ($1,000,000). Through April 2000
ITS, operated as an ISO 9002 certified materials and equipment procurement,
transportation and logistics company that serves the energy industry worldwide,
with offices in Houston, Venezuela, Peru, Dubai (UAE) and the United Kingdom.
As discussed above, on May 18, 2000 ITS filed in Corpus Christi, Texas for
protection under Chapter XI of the U.S. Bankruptcy Code.
Acquisition of Boots & Coots Special Services, Inc. On February 20, 1998,
the Company completed the acquisition of all of the capital stock of Boots &
Coots Special Services, Inc. f/k/a Code 3, Inc. ("B & C Special Services").
Consideration for the acquisition of B & C Special Services was (i) $570,568
cash, (ii) the repayment of corporate secured debt and interest thereon of
approximately $1,250,000 through closing, and (iii) the issuance of 488,136
shares of the Company's common stock, of which 158,646 shares were delivered
into escrow to secure the indemnification obligations of the former stockholders
of B & C Special Services for claims that may arise as a consequence of a breach
by former stockholders of B & C Special Services of the representations,
warranties and covenants contained in the definitive agreements.
B & C Special Services, originally headquartered in Harlingen, Texas,
provides containment and remediation of hazardous material and oil spills for
the railroad, transportation and shipping industries, as well as various state
and federal governmental agencies. B & C Special Services also specializes in
the transfer of hazardous materials and high and low pressure liquids and
industrial fire fighting and provides in-plant remedial plan implementation,
hazardous waste management, petroleum tank management, industrial hygiene,
environmental and occupational, health and safety services. Through December 31,
1997, B & C Special Services operated out of facilities in Harlingen, El Paso,
Laredo, San Antonio and Houston, Texas. In 1998, additional emergency response
facilities and equipment were added in Ft. Worth, Texas, and Denver, Colorado.
During 1999, cost reduction steps were initiated that included workforce level
reductions and the closure of field offices located in Harlingen, El Paso,
Laredo, Denver, Garland, Beaumont and Omaha.
Acquisition of Baylor Company. On July 23, 1998, the Company completed the
acquisition of all of the capital stock of Baylor Company ("Baylor").
Consideration for the acquisition of Baylor was approximately $25,000,000 cash,
a dividend payment of $2,000,000, and the issuance of 540,443 shares of the
Company's common stock, which shares were delivered into escrow to provide
recourse to the Company for claims that may arise as a consequence of a breach
by such stockholder or Baylor of certain of the representations, warranties and
covenants contained in the definitive agreements. At December 31, 1999 and July
7, 2000, such common shares remain in escrow.
Baylor, headquartered in Sugarland, Texas, manufactures and markets a
varied line of industrial products, many of them proprietary, for the drilling,
marine and power generation industries. The Company's base line of products
include Elmagco(R) Brakes, brake controls, brake monitors, closed loop cooling
systems, Thyrig(TM) Drive Systems, deepwater thrusters and mooring systems as
well as AC generators sold under the trade names EMD, Delco and Baylor,
worldwide. In 1999 Baylor acquired the Synchronous Motor Product Line of the
former Louis Allis Company.
Acquisition of HAZ-TECH Environmental Services, Inc. Effective as of
November 4, 1998, the Company completed the acquisition, through a merger with B
& C Special Services, of all of the capital stock of HAZ-TECH Environmental
Services, Inc. ("HAZ-TECH"). Consideration for the acquisition of HAZ-TECH was
$315,671 cash, assumption of liabilities and the issuance of 269,150 shares of
the Company's common stock, of which one-half were delivered into escrow to
provide recourse to the Company for claims that may arise as a consequence of a
breach by the sellers of certain representations, warranties and
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covenants contained in the definitive agreements. As of December 31, 1999,
269,150 shares have been released to the selling shareholders of HAZ-TECH.
The HAZ-TECH agreement provided that in the event the Company's common
stock average trading price was less than $5 per share for a stipulated
post-acquisition date window, then additional shares, subject to a designated
floor price of $4 per share, would be issued to the HAZ-TECH selling
shareholders. At December 31, 1999, 67,288 shares of common stock have been
reserved by the Company for issuance pursuant to this provision with such shares
being distributed to the HAZ-TECH selling shareholders in 2000.
HAZ-TECH provided a complete range of emergency prevention and response
services, including hazardous materials and waste management, OSHA personnel
training and environmental site audits, surface and groundwater hydrology,
bioremediation and pond dewatering, and water treatment to chemical
manufacturing, railroad and truck transportation companies in Texas, Louisiana,
Oklahoma and Arkansas.
In 1999, the two former shareholders of HAZ-TECH filed lawsuits against the
Company alleging breach of contract wrongful termination under Employment
Contracts and other claims. See Item 3, Legal Proceedings for further discussion
of this litigation.
Halliburton Alliance. The Company conducts business in a global strategic
alliance with the Halliburton Energy Services division of Halliburton Company.
The alliance operates under the name "WELLCALL(SM)" and draws on the expertise
and abilities of both companies to offer a total well control solution for oil
and gas producers worldwide. The Halliburton Alliance provides a complete range
of well control services including pre-event troubleshooting and contingency
planning, snubbing, pumping, blowout control, debris removal, firefighting,
relief and directional well planning, and other specialized services.
Business Strategy. As a result of defaults under the Company's Senior
Secured Credit Facility and Subordinated Note and Warrant Purchase and operating
losses sustained during 1999, the Company has been forced to operate with a
minimum of working capital. This in turn has restricted operations and forced
the curtailment of certain business acquisition and expansion programs in
process at December 31, 1998. As a result of the conditions, the Company has
curtailed its business expansion program, discontinued the operations of ITS and
has focused its efforts on its remaining two (2) business segments, Emergency
Response and Restoration and Manufacturing and Distribution. Financial
information with respect to the business segments is presented in Footnote L to
the Company's Consolidated Financial Statements. Subject to capital
availability, the Company intends to expand its operations and to build upon its
demonstrated strengths while increasing revenues from its consulting, equipment
sales, environmental containment and remediation services and Non-critical
Events discussed below. Recognizing that the well control services business is a
finite market whose services upside potential is dependent upon the occurrence
of blowouts which cannot be reasonably predicted, the Company's business
strategy is to market its pre-event services on a global basis and expand its
range of services to establish a diversified and expanded revenue base. Subject
to the availability of capital, the Company intends to accomplish its objectives
by promoting the Halliburton Alliance and the WELLSURE(SM) program, continuing
to integrate the businesses of Boots & Coots, ABASCO, Boots & Coots Special
Services, and HAZ-TECH, increasing the geographical scope of its training and
consulting programs, and establishing additional Company-owned or managed Fire
Stations. Like the Company owned Fire Stations in Houston, Texas, and Anaco,
Venezuela and the industry supported Fire Station on the North Slope of Alaska,
the proposed Company-owned Fire Stations would include the equipment required to
respond to a well blowout or fire. In general, the Company plans to offer a
broader range of services to oil and gas producers worldwide, increasing both
the scope of its target and its market share.
Additionally, subject to available capital, the Company hopes to expand its
service capabilities through a combination of internal growth, additional
acquisitions, joint ventures and strategic alliances. Because of the fragmented
nature of the oil and gas services industry, the Company believes a number of
attractive acquisition opportunities exist in the pressure control, emergency
response and environmental services segments of the business. The oil and gas
services business in general, and the emergency response and environmental
remediation segments in particular, are characterized by a small number of
dominant global
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competitors and a significant number of locally oriented businesses, many of
which tend to be viable alliance partners.
Executive Offices. The Company's principal executive office is located at
777 Post Oak Boulevard, Suite 800, Houston, Texas, 77056, telephone (713)
621-7911.
THE EMERGENCY RESPONSE SEGMENT OF THE OIL AND GAS SERVICE INDUSTRY
History. The emergency response segment of the oil and gas services
industry traces its roots to the late 1930's when Myron Kinley organized the
Kinley Company, the first oil and gas well firefighting specialty company.
Shortly after organizing the Kinley Company, Mr. Kinley took on an assistant
named Red Adair who learned the firefighting business under Mr. Kinley's
supervision and remained with the Kinley Company until Mr. Kinley's retirement.
When Mr. Kinley retired in the late 1950's, Mr. Adair organized the Red Adair
Company and subsequently hired Boots Hansen, Coots Mathews and Raymond Henry as
members of his professional firefighting staff. Mr. Adair later added Richard
Hatteberg, Danny Clayton, Brian Krause, Mike Foreman and Juan Moran to his
staff, and the international reputation of the Red Adair Company grew to the
point where it was a subject of popular films and the dominant competitor in the
industry. Boots Hansen and Coots Mathews remained with the Red Adair Company
until 1978 when they split off to organize Boots & Coots, an independent
firefighting, snubbing and blowout control company.
Historically, the well control emergency response segment of the oil and
gas services industry has been reactive, rather than proactive, and a small
number of Houston-based companies have dominated the market. As a result, if an
operator in Indonesia, for example, experienced a well blowout and fire, he
would likely call a well control emergency response company in Houston that
would take the following steps:
- Immediately dispatch a control team to the well location to supervise
debris removal, local equipment mobilization and site preparation;
- Gather and analyze the available data, including drilling history,
geology, availability of support equipment, personnel, water supplies and
ancillary firefighting resources;
- Develop or implement a detailed fire suppression and well-control plan;
- Mobilize additional well-control and firefighting equipment in Houston;
- Transport equipment by air freight from Houston to the blowout location;
- Extinguish the fire and bring the well under control; and
- Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in airfreight costs alone.
The 1990's have been a period of rapid change in the oil and gas well
control and firefighting business. The hundreds of oil well fires that were
started by Iraqi troops during their retreat from Kuwait spurred the development
of new firefighting techniques and tools that have become industry standards.
Moreover, after extinguishing the Kuwait fires, the entrepreneurs who created
the oil and gas well firefighting industry, including Red Adair, Boots Hansen
and Coots Mathews retired, leaving the Company's senior staff as the most
experienced active oil and gas well firefighters in the world. At present, the
principal competitors in the oil and gas well firefighting business are the
Company, Wild Well Control, Inc., and Cudd Pressure Control, Inc.
Emerging Trends. Corporate downsizing and outsourcing of services, when
coupled with increased recognition of the importance of training, environmental
protection and emergency preparedness, are having a profound impact on the
emergency response segment of the oil and gas services industry. Instead of
waiting for a blowout, fire or other disaster to occur, major oil producers are
coming to the Company for proactive
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preparedness and incident prevention programs, together with pre-event
consultation on matters relating to well control training, blowout contingency
planning, on-site safety inspections and formal fire drills.
In addition to seeking pre-event consulting services, a number of major oil
and gas producers have come to the realization that servicing the worldwide
firefighting and well control market from Houston is inefficient: the response
time is too long and the cost of transporting equipment by air freight is
prohibitive. As a result, the Company has established and maintains an industry
supported "Fire Station" on the North Slope of Alaska. Under the terms of the
agreement, the Company has sold to a consortium of producers the equipment
required to respond to a blowout or oil or gas well fire, and has agreed to
maintain the equipment and conduct on-site safety inspections and emergency
response drills. Subject to capital availability, the Company will consider the
establishment of a worldwide network of Company owned or managed Fire Stations
and to use this global presence as the foundation to seek to establish a
preeminent position in the oil and gas well firefighting business.
Volatility of Firefighting Revenues. The market for oil and gas well
firefighting and blowout control services is highly volatile due to factors
beyond the control of the Company. While the demand for firefighting and blowout
control services ordinarily follows predictable trends in the oil and gas
industry, extraordinary events such as the Bay Marchand and Piper Alpha
disasters have historically occurred only every four to six years. Wars, acts of
terrorism and other unpredictable factors may increase the need for oil and gas
well firefighting and blowout control services from time to time. As a result,
the Company can expect to experience large fluctuations in its revenues from oil
and gas well firefighting and blowout control services. While the Company
believes that its acquisitions of ABASCO, Code 3 and Baylor and anticipated
revenues from the WELLSURE(SM) program and from the Company's consulting, and
industrial and marine firefighting services will help to provide an expanded and
predictable revenue and earnings base in the future, there can be no assurance
that the Company will be successful in further developing these acquired
businesses and added services. Accordingly, the Company expects that its
revenues and operating performance may vary considerably from year to year for
the foreseeable future.
PRODUCTS AND SERVICES PROVIDED BY THE COMPANY
The Company is a global-response oil and gas service company that
specializes in responding to and controlling oil and gas well emergencies,
including blowouts and well fires. In connection with such services, the Company
has the capacity to supply the equipment, expertise and personnel necessary to
contain the oil and hazardous materials spills and discharges associated with
such oil and gas well emergencies, to remediate affected sites and to restore
affected oil and gas wells to production. In addition to providing emergency
response services, the Company provides snubbing and other non-critical well
control services, including pre-event planning, training and consulting
services. The Company also manufactures and markets oil and hazardous materials
spill containment and recovery equipment and a varied line of industrial
products for the oil and gas industry, including drilling rig brakes, controls
and monitors; industrial and marine electrical generators; and marine thrusters
and controls. The Company provides environmental remediation services to the
petrochemical, chemical manufacturing and transportation industries, as well as
to various state and federal agencies. As discussed above, the Company through
its ITS operating subsidiary had provided materials and equipment procurement,
transportation and logistics services to the energy industry. Operations were
substantially curtailed in April 2000 and 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.
The Company's principal products and services for its two ongoing principal
business segments include:
Emergency Response and Restoration
The Emergency Response and Restoration business segment includes the
following operating subsidiaries of the Company: IWC Services including its risk
management business unit, B & C Special Services.
Well Control. This service segment is divided into two distinct levels: (1)
"Critical Event" response is ordinarily reserved for well control projects where
hydrocarbons are escaping from a well bore, regardless of
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<PAGE> 10
whether a fire has occurred. (2) "Non-critical Event" response, on the other
hand, is intended for the more common operating problems that do not involve
escaping hydrocarbons.
Critical Events. Critical Events frequently result in explosive fires,
the loss of life, the destruction of drilling and production facilities,
substantial environmental damage and the loss of hundreds of thousands of
dollars per day in production revenue. Since Critical Events ordinarily
arise from equipment failures or human error, it is impossible to
accurately predict the timing or scope of the Company's Critical Event
work. Notwithstanding the foregoing, a Critical Event of catastrophic
proportions could result in significant revenues to the Company in the year
of the incident. The Company's professional firefighting staff has
approximately 225 years of aggregate industry experience in responding to
Critical Events, oil well fires and blowouts.
Non-critical Events. Non-critical Events frequently occur in
connection with the drilling of new wells into high pressure reservoirs. In
most Non-critical Events, the blowout preventers and other safety systems
on the drilling rig function according to design and the Company is then
called upon to supervise and assist in the well control effort so that
drilling operations can resume as promptly as safety permits. While
Non-critical Events do not ordinarily have the revenue impact of a Critical
Event, they are much more common and predictable.
Fire Fighting Equipment Rentals. This service includes the rental of
specialty well control and firefighting equipment by the Company primarily for
use in conjunction with Critical Events. Such equipment includes, but is not
limited to, firefighting pumps, pipe-racks, Athey wagons, pipe cutters, crimping
tools and deluge safety systems. The Company charges this equipment out on a per
diem basis. Past experience indicates that rentals can be expected to average
approximately 40% of the revenues associated with a Critical Event.
Fire Fighting Equipment Sales and Service. This service line involves the
sale of complete firefighting equipment packages, together with maintenance,
monitoring, updating of equipment and ongoing consulting services. A typical
example of this service line is the industry supported Emergency Response Center
that the Company has established on the North Slope of Alaska. The establishment
of this Emergency Response Center, completed during the six-month period ended
December 31, 1997, included the sale of approximately $485,000 in equipment. The
Company has also entered into a ten-year agreement with renewal clauses to
provide ongoing consulting services relating to the Emergency Response Center,
including training, contingency planning, safety inspections and emergency
response drills.
Industrial and Marine Firefighting. This service is divided into two
distinct elements: pre-event consulting and Critical Event management. The
pre-event services offered in the industrial and marine firefighting business
include complete on-site inspection services, safety audits and pre-event
planning. Based on these pre-event services, the Company can recommend the
equipment, facilities and manpower resources that a client should have available
in order to effectively respond to a fire. The Company can also consult with the
client to ensure that the equipment and services required by the client will be
available when needed. If a Critical Event subsequently occurs, the Company is
ready to respond at a client's facility with experienced firefighters and
auxiliary equipment.
Oil and Chemical Spill Containment and Reclamation. B & C Special Services
provides containment and remediation of hazardous material and oil spills for
the railroad, transportation and shipping industries, as well as various state
and federal governmental agencies. B & C Special Services also specializes in
the transfer of hazardous materials and high and low pressure liquids and
industrial fire fighting and provides in-plant remedial plan implementation,
hazardous waste management, petroleum tank management, industrial hygiene,
environmental and occupational, health and safety services.
Consulting; Drilling Engineering. The Company provides through its highly
specialized in-house engineering staff, and the Halliburton Energy Services
division, engineering services for such areas as: (1) planning and design of
relief well drilling (trajectory planning, directional control and equipment
specifications, and on-site supervision of the drilling operations), (2)
planning and design of production
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facilities which are susceptible to well capping or other control procedures,
and (3) mechanical and computer aided designs for well control equipment.
Consulting; Inspections. A cornerstone of the Company's strategy of
providing preventive well control services involves on-site inspection services
for drilling and workover rigs, drilling and production platforms, and field
production facilities. These inspection services, performed by the Company, are
offered as a standard option in Halliburton's field service programs.
Consulting; Training. The Company provides specialized training in well
control procedures for drilling, exploration and production personnel. To date
such training programs have been provided for both U.S. and international
operators. The Company's training services are offered in conjunction with
ongoing educational programs sponsored by Halliburton. The Company believes the
training segment of its business offers considerable potential for growth.
Strategic Event Planning (S.T.E.P.). A key element of the services offered
by the Halliburton Alliance is a strategic and tactical planning process
addressing action steps, resources and equipment necessary for an operator to
control a blowout. This planning process incorporates organizational structures,
action plans, specifications, people and equipment mobilization plans with
engineering details for well firefighting, capping, relief well and kill
operations. It also addresses optimal recovery of well production status,
insurance recovery, public information and relations and safety/environmental
issues. While the S.T.E.P. program includes a standardized package of services,
it is easily modified to suit the particular needs of a specific client.
Regional Emergency Response Centers. The Company currently has Emergency
Response Centers in Houston, Texas, and Anaco, Venezuela, and maintains an
industry supported Emergency Response Center on the North Slope of Alaska.
Subject to availability of capital, the Company plans to deploy at least one
Emergency Response Center per year over a five year period. The equipment for
these proposed Emergency Response Centers would either be purchased by the
Company for its own account or purchased by a consortium of local producers who
would then contract with the Company for maintenance and consulting services. It
is believed these Emergency Response Centers, once established, would place the
Halliburton Alliance in an unique competitive position within the industry and
allow the Alliance to gain market share by reducing the mobilization time and
costs traditionally involved in controlling major blowout events. During 2000,
the Company completed an agreement to sell the equipment and contracted to
establish and manage an industry supported emergency response center in Algeria.
These Emergency Response Centers would be established subject to the
availability of capital or the specific economic commitment of a consortium of
local producers as referenced above.
WELLSURE(SM) Program. On February 6, 1998, the Company announced the
formation of an alliance with Global Special Risks, Inc., a managing general
insurance agent located in Houston, Texas, and New Orleans, Louisiana. The
alliance offers oil and gas exploration production companies, through retail
insurance brokers, a new program known as "WELLSURE(SM)," which combines
traditional well control and blowout insurance with the Company's post-event
response services and well control preventative services including company-wide
and/or well specific contingency planning, personnel training, safety
inspections and engineering consultation. Insurance provided under WELLSURE(SM)
has been arranged with leading London insurance underwriters. WELLSURE(SM)
program participants will be provided with the full benefit of having the
Company as a safety and prevention partner. In the event of well blowouts, the
Company will serve as the integrated emergency response service provider, as
well as function as lead contractor and project manager for control and
restoration of wells covered under the program.
Programs and Services
Previously, the Programs and Services business segment included the
following operating subsidiaries and business units of the Company: the risk
management business unit of IWC Services, which encompasses the WELLSURE(SM)
Program, and ITS. As a result of the December 1999 decision to sell or in the
alternative discontinue ITS' 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
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segment. Accordingly, business segment disclosures contained herein reflect this
classification for all periods presented.
Supply, Transportation and Logistics. Through April 2000, ITS operated as
an ISO 9002 certified and provided material and equipment procurement,
transportation and logistics services to the energy industry worldwide. ITS also
served as a distributor in Venezuela and Peru of artificial lift oil recovery
systems. As discussed herein under History of Company -- Acquisition of ITS
Supply Corporation, Products and Services provided by the Company and in Note
D -- Discontinued Operations included in the accompanying Consolidated Financial
Statements, 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. In April 2000, substantially all
prospective operations were ceased and the majority of employees were terminated
and 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.
Manufacturing and Distribution
The Manufacturing and Distribution business segment includes the following
operating subsidiaries or business units of the Company: Baylor and ABASCO.
Drilling, Marine and Power Generation Equipment. The Company manufactures
and markets a varied line of industrial products, many of them proprietary for
the drilling, marine and power generation industries. The Company's base line of
products include Elmagco(R) Brakes, brake controls, brake monitors, closed loop
cooling systems, Thyrig(TM) Drive Systems, deepwater thrusters and mooring
systems as well as AC generators sold under the trade names EMD, Delco and
Baylor, worldwide.
Oil and Chemical Spill Containment and Remediation Equipment. The Company's
ABASCO unit has been a leader in the design and manufacture of a comprehensive
line of rapid response oil and chemical spill containment and reclamation
equipment and products, including mechanical skimmers, containment booms and
boom reels, dispersant sprayers, dispersal agents, absorbents, response vessels,
oil and chemical spill industrial products, spill response packages, oil and
chemical spill ancillary products and waste oil recovery and reclamation
products. In response to depressed downstream industry conditions existing for a
significant part of 1999 and limitations on capital, the Company has
substantially reduced but not discontinued the operations of ABASCO, including
the closure and consolidation of facilities and reduction in workforce.
DEPENDENCE UPON CUSTOMERS
The Company is not materially dependent upon a single or a few customers,
although one or a few customers may represent a material amount of business for
a limited period as a result of the unpredictable demand for well control and
firefighting services. The emergency response business is by nature episodic and
unpredictable. A customer that accounted for a material amount of business as a
result of an oil well blow-out or similar emergency may not account for a
material amount of business after the emergency is over.
HALLIBURTON ALLIANCE
In response to ongoing changes in the emergency response segment of the oil
and gas service industry, the Company entered into a global strategic alliance
in 1995 with Halliburton Energy Services. Halliburton is widely recognized as an
industry leader in the pumping, cementing, snubbing, production enhancement,
coiled tubing and related services segment of the oil field services industry.
This alliance, "WELLCALL(SM)", draws on the expertise and abilities of both
companies to offer a total well control solution for oil and gas producers
worldwide. The Halliburton Alliance provides a complete range of well control
services including pre-event troubleshooting and contingency planning, snubbing,
pumping, blowout control, debris removal, firefighting,
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<PAGE> 13
relief and directional well planning and other specialized services. The
specific benefits that WELLCALL(SM) provides to an operator include:
- Quick response with a global logistics system supported by an
international communications network that operates around the clock,
seven days a week;
- A full-time team of experienced well control specialists that are
dedicated to safety;
- Specialized equipment design, rental, and sales;
- Contingency planning consultation where WELLCALL(SM) specialists meet
with customers, identify potential problems, and help develop a
comprehensive contingency plan; and
- A single-point contact to activate a coordinated total response to well
control needs.
Operators contracting with WELLCALL(SM) receive a Strategic Event Plan, or
S.T.E.P., a comprehensive contingency plan for well control that is
region-specific, reservoir-specific, site-specific and well-specific. The
S.T.E.P. plan provides the operator with a written, comprehensive and
coordinated action plan that incorporates historical data, pre-planned call outs
of Company and Halliburton personnel, pre-planned call outs of necessary
equipment and logistical support to minimize response time and coordinate the
entire well control effort. Thereafter, in the event of a blowout, WELLCALL(SM)
provides the worldwide engineering and well control equipment capabilities of
Halliburton and the firefighting expertise of the Company through an integrated
contract with the operator.
As a result of the Halliburton Alliance, the Company is directly involved
in Halliburton's well control projects that require firefighting and Risk
Management expertise, Halliburton is a primary service vendor to the Company and
the Company has exclusive rights to use certain firefighting technologies
developed by Halliburton. It is anticipated that future Company-owned Fire
Stations, if developed, will be established at existing Halliburton facilities
and that maintenance of the Fire Station equipment will be performed by
Halliburton employees. The Halliburton Alliance also gives the Company access to
Halliburton's global communications, credit and currency management systems,
capabilities that could prove invaluable in connection with the Company's
international operations.
Consistent with the Halliburton Alliance, the Company's focus has evolved
to meet its clients' needs in a global theater of operations. With the increased
emphasis by operators on operating efficiencies and outsourcing many engineering
services, the Company has developed a proactive menu of services to meet their
needs. These services emphasize pre-event planning and training to minimize the
likelihood of a blowout and minimize damages in the event of an actual blowout.
The Company provides comprehensive advance training, readiness, preparation,
inspections and mobilization drills which allow client companies to pursue every
possible preventive measure and to react in the most cohesive manner possible
when an event occurs. The Halliburton Alliance stresses the importance of
safety, environmental protection and cost control, along with asset protection
and liability minimization.
The agreement documenting the alliance between the Company and Halliburton
(the "Alliance Agreement") provided that it would remain in effect for an
indefinite period of time and could be terminated prior to September 15, 2005,
only for cause, or by mutual agreement between the parties. Under the Alliance
Agreement, cause for termination was limited to (i) a fundamental breach of the
Alliance Agreement, (ii) a change in the business circumstances of either party,
(iii) the failure of the Alliance to generate economically viable business, or
(iv) the failure of either party to engage in good faith dealing. On April 15,
1999, in connection with a $5 million purchase by Halliburton of the Company's
Series A Cumulative Senior Preferred Stock, the Company and Halliburton entered
into an expanded Alliance Agreement which effectively expanded this alliance
relationship. While the Company considers its relationship with Halliburton to
be good and strives to maintain productive communication with its chief Alliance
partner, there can be no assurance that the Alliance Agreement will not be
terminated by Halliburton. The termination of the Alliance Agreement could have
a material adverse effect on the Company's future operating performance.
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REGULATION
The operations of the Company are affected by numerous federal, state, and
local laws and regulations relating, among other things, to workplace health and
safety and the protection of the environment. The technical requirements of
these laws and regulations are becoming increasingly complex and stringent, and
compliance is becoming increasingly difficult and expensive. However, the
Company does not believe that compliance with current laws and regulations is
likely to have a material adverse effect on the Company's business or financial
statements. Nevertheless, the Company is obligated to exercise prudent judgment
and reasonable care at all times and the failure to do so could result in
liability under any number of laws and regulations.
Certain environmental laws provide for "strict liability" for remediation
of spills and releases of hazardous substances and some provide liability for
damages to natural resources or threats to public health and safety. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties, and criminal prosecution. It is possible that
changes in the environmental laws and enforcement policies thereunder, or claims
for damages to persons, property, natural resources, or the environment could
result in substantial costs and liabilities to the Company. The Company's
insurance policies provide liability coverage for sudden and accidental
occurrences of pollution and/or clean-up and containment of the foregoing in
amounts which the Company believes are comparable to companies in the industry.
To the date hereof, the Company has not been subject to any fines or penalties
for violations of governmental or environmental regulations. There have been no
material capital expenditure requirements made to date to comply with
environmental regulations.
RESEARCH AND DEVELOPMENT
The Company is not directly involved in activities that will require the
expenditure of substantial sums on research and development. The Company does,
however, as a result of the Halliburton Alliance, benefit from the ongoing
research and development activities of Halliburton to the extent that new
Halliburton technologies are or may be useful in connection with the Company's
business.
COMPETITION
The emergency response segment of the oil and gas services business is a
rapidly evolving field in which developments are expected to continue at a rapid
pace. The Company believes that the Halliburton Alliance, the WELLSURE(SM)
program, and its acquisitions of Boots & Coots, ABASCO, B & C Special Services,
Baylor and HAZ-TECH has strengthened its competitive position in the industry by
expanding the scope of services that the Company offers to its customers.
However, the Company's ability to compete depends upon, among other factors
capital availability, increasing industry awareness of the variety of services
the Company offers, expanding the Company's network of Fire Stations and further
expanding the breadth of its available services. Competition from other
emergency response companies, some of which may have greater financial resources
than the Company, is intense and is expected to increase as the industry
undergoes additional anticipated change. The Company's competitors may also
succeed in developing new techniques, products and services that are more
effective than any that have been or are being developed by the Company or that
render the Company's techniques, products and services obsolete or
noncompetitive. The Company's competitors may also succeed in obtaining patent
protection or other intellectual property rights that might hinder the Company's
ability to develop, produce or sell competitive products or the specialized
equipment used in its business.
EMPLOYEES
As of June 30, 2000, the Company and its operating subsidiaries
collectively had 286 full-time employees, and 68 part-time personnel, who are
available as needed for emergency response projects. In addition, the Company
has several part-time consultants and also employs part-time contract personnel
who remain on-call for certain emergency response projects. The Company is not
subject to any collective bargaining agreements and considers its relations with
its employees to be good.
OPERATING HAZARDS; LIABILITY INSURANCE COVERAGE
The Company's operations involve ultra-hazardous activities that involve an
extraordinarily high degree of risk. Such operations are subject to accidents
resulting in personal injury and the loss of life or property,
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environmental mishaps and mechanical failures, and litigation arising from such
events may result in the Company being named a defendant in lawsuits asserting
large claims. The Company may be held liable in certain circumstances, including
if it fails to exercise reasonable care in connection with its activities, and
it may also be liable for injuries to its agents, employees and contractors who
are acting within the course and scope of their duties. The Company and its
subsidiaries presently maintain liability insurance coverage with aggregate
policy limits which are believed to be adequate for their respective operations.
However, it is generally considered economically unfeasible in the oil and gas
service industry to maintain insurance sufficient to cover large claims.
Accordingly, there can be no assurance that the Company's insurance will be
sufficient or effective under all circumstances or against all hazards to which
the Company may be subject. A successful claim for which the Company is not
fully insured could have a material adverse effect on the Company. No assurance
can be given that the Company will not be subject to future claims in excess of
the amount of insurance coverage which the Company deems appropriate and
feasible to maintain.
RELIANCE UPON OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's emergency response services require highly specialized
skills. Because of the unique nature of the industry and the small number of
persons who possess the requisite skills and experience, the Company is highly
dependent upon the personal efforts and abilities of its officers, directors and
key employees. In seeking qualified personnel, the Company will be required to
compete with companies having greater financial and other resources than the
Company. Since the future success of the Company will be dependent upon its
ability to attract and retain qualified personnel, the inability to do so, or
the loss of personnel, could have a material adverse impact on the Company's
business. The Company has considered obtaining key man insurance on a selected
basis to partially offset the risk of loss of personnel, however, there is no
assurance that such insurance could be obtained or would be available at a
reasonable cost.
CONTRACTUAL OBLIGATIONS TO CUSTOMERS; INDEMNIFICATION
The Company customarily enters into service contracts with its customers
which frequently contain provisions that hold the Company liable for various
losses or liabilities incurred by the customer in connection with the activities
of the Company, including, without limitation, losses and liabilities relating
to claims by third parties, damage to property, violation of governmental laws,
regulations or orders, injury or death to persons, and pollution or
contamination caused by substances in the Company's possession or control. The
Company may be responsible for any such losses or liabilities caused by
contractors retained by the Company in connection with the provision of its
services. In addition, such contracts generally require the Company, its
employees, agents and contractors to comply with all applicable laws, rules and
regulations (which may include the laws, rules and regulations of various
foreign jurisdictions) and to provide sufficient training and educational
programs to such persons in order to enable them to comply with applicable laws,
rules and regulations. Consequently, the Company may be exposed to substantial
liabilities in connection with its services. In the case of emergency response
services, the Company frequently enters into agreements with customers which
limit the Company's exposure to liability and/or require the customer to
indemnify the Company for losses or liabilities incurred by the Company in
connection with such services, except in the case of gross negligence or willful
misconduct by the Company. There can be no assurance, however, that such
contractual provisions limiting the liability of the Company will be enforceable
in whole or in part under applicable law.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases a 39,000 square foot office at 777 Post Oak Blvd.,
Houston, Texas, from an unaffiliated landlord through August 2005 at a monthly
rental of $64,000. In February 2000, the Company subleased approximately 50% of
this office space on substantially similar terms and conditions as the primary
lease. The Company leases an 11,000 square foot Emergency Response Center
facility in Anaco, Venezuela, which space is rented through January 2000 for a
monthly rental of $4,000. The Company owns a facility in northwest Houston,
Texas, that includes approximately 2 acres of land, a 4,000 square foot office
building and a 12,000 square foot manufacturing and warehouse building. The
Company also owns manufacturing facilities in Sugar Land, Texas, including
190,000 square feet of shop buildings, 22,000 square feet of office space and 24
acres of land. The Company leases a 7,000 square foot office in the Halliburton
Center, Houston, Texas.
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This space is rented from an unaffiliated landlord through May 2002 for an
average monthly rental of $7,000, and is subleased on substantially the same
terms. The Company's ABASCO business unit leased a 61,500 square foot office and
warehouse facility in northwest Houston, Texas, through October 31, 2003 at a
monthly rental of $18,495. This facility was closed in December 1999 and ABASCO
was released from the lease in June 2000. The Company's B & C Special Services
business unit leases a 12,750 square foot office and equipment storage facility
in southeast Houston, Texas, through December 31, 2003 at a monthly rental of
$13,000. Additionally, the Company has leased office and equipment storage
facilities in various other cities within the United States, Venezuela, the
United Kingdom and Peru. The future commitments on these additional leases are
immaterial. The Company believes that these facilities will be adequate for its
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Except as
disclosed under this item, management of the Company does not believe that any
liabilities resulting from any such current proceedings will have a material
adverse effect on its operations or financial position.
The Company and a subsidiary are named in a lawsuit filed in August of 1999
relating to the purchase of Haz-Tech Environmental Services, Inc. ("Haz-Tech")
in November of 1998. The lawsuit is styled James Stephen Gladden and Gerald
Anglin v. Boots & Coots International Well Control, Inc. and Boots & Coots
Special Services, Inc.; Cause No. 1999-39928; in the 80th Judicial District
Court of Harris County, Texas.
This is a lawsuit for breach of the plaintiffs' respective employment
agreements, fraud, and breach of the merger agreement pursuant to which Haz-Tech
was acquired and merged into Boots & Coots Special Services, Inc. ("Special
Services"). Plaintiffs allege that they signed six-year employment agreements
with Special Services which could be terminated only for cause, as defined in
the agreements, and that they were wrongfully terminated without cause pursuant
to a cost-reduction plan. Plaintiffs further allege that Special Services
fraudulently represented its intention to employ them for an extended period at
the time the employment agreements were executed and that the Company breached
the merger agreement by failing to use its best efforts to collect certain
scheduled accounts receivable of Haz-Tech following the acquisition, including
certain Haz-Tech invoices to Code 3, Inc. (n/k/a Boots & Coots Special Services,
Inc.) in the alleged total amount of approximately $93,000, by failing to assign
them any uncollected accounts receivable, by failing to issue additional stock
to plaintiffs pursuant to a price adjustment provision in the merger agreement,
and by failing to release certain Boots & Coots stock which was escrowed
pursuant to the merger agreement. Each plaintiff alleges damages in excess of
$600,000 in connection with their wrongful termination claims as well as
additional damages in connection with their other claims.
The Company disagrees with the contentions made by the plaintiffs and
intends to defend itself accordingly, nevertheless, no assurances can be given
that a favorable outcome will be obtained.
Additionally, in May of 2000, the Company's subsidiary ITS Supply
Corporation ("ITS") filed in Corpus Christi, Texas for protection under Chapter
XI of the U.S. Bankruptcy Code. At the time of the filing, 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. The Company, in consultation with its counsel,
believes that it is not probable that any creditors of ITS may successfully
assert and realize judgements against 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the AMEX under the symbol "WEL." On
April 20, 2000, the Company announced that the American Stock Exchange had
halted trading in the common stock of the Company pending filing of the
Company's Form 10-K for the year ended December 31, 1999 with the Securities and
Exchange Commission and further disclosure regarding the Company's ongoing
efforts to refinance and/or resolve defaults under its senior secured and
subordinated loan agreements. Prior to January 30, 1998, the Company's common
stock was traded on the NASD's OTC Electronic Bulletin Board under the symbol
"BCWC." Significant trading in the Company's common stock has occurred only
since August 1997. The following tables set forth the high and low sales prices
per share of the common stock as reported quarterly within the years ended
December 31, 1998 and 1999. Bid information has been provided by National
Quotation Bureau, Inc., and reflects inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
HIGH AND LOW SALES PRICES
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
March 31........................................... $5.750 $4.750 $2.875 $1.750
June 30............................................ 7.937 4.750 2.188 1.188
September 30....................................... 6.125 1.375 1.250 0.375
December 31........................................ 3.023 2.125 0.750 0.250
</TABLE>
On April 17, 2000, the last reported sale price of the common stock as
reported on AMEX was $0.50 per share.
As of July 14, 2000, the Company's common stock was held by approximately
266 holders of record. The Company estimates that it has a significantly larger
number of shareholders because a substantial number of the Company's shares are
held of record by broker-dealers for their customers in street name.
The Company has not paid any cash dividends on its common stock to date.
The Company's current policy is to retain earnings to provide funds for the
operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash dividends.
SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
On April 15, 1999, the Company completed the sale of $5,000,000 of Series A
Cumulative Senior Preferred Stock ("Series A Stock") to Halliburton Energy
Services, Inc. ("Halliburton"), a wholly-owned subsidiary of Halliburton
Company. The Series A Stock has a dividend requirement of 6.25% per annum
payable quarterly until the fifth anniversary of the date of issuance, whereupon
the dividend requirement increases to the greater of prime plus 6.25% or 14% per
annum, which is subject to adjustment for stock splits, stock dividends and
certain other events. In addition, Halliburton received warrants to purchase,
for a five year period, 1,250,000 shares of the Company's $.00001 par value
Common Stock at $4.00 per share. The agreement also provides for additional
warrants to purchase an additional 1,250,000 shares of the Company's stock which
are contingently issuable if certain revenue targets in the Alliance Agreement
are not met at the end of the three years. Also in connection with the equity
investment, the Company and Halliburton entered into an expanded Alliance
Agreement which effectively broadens and extends the term of the alliance
between the Company and Halliburton that has been in effect since 1995. The
Company relied upon Section 4(2) of the Securities Act of 1933, as amended (the
"Act"), and Regulation D for the issuance of the Units. The Company used no
general advertising or solicitation in connection with such issuance, there were
a limited number of purchasers, all of whom were "accredited investors" within
the meaning Regulation D promulgated under the Act, and the Company had reason
to believe that such purchasers did not intend to engage in a distribution of
such securities.
17
<PAGE> 18
In March 1999, one holder of the Company's 10% Junior Redeemable Preferred
Stock converted 10,000 preferred shares into 121,000 common shares. In April and
May 1999, three unaffiliated investor groups purchased from third parties of
74,000 shares of the Company's outstanding 10% Junior Redeemable Preferred Stock
with a face amount of $1,841,000, plus accrued payment-in-kind dividends
thereon. The Company entered into an agreement with two of the investor groups
to cancel further dividend requirements and to issue 1,167,000 shares of Common
Stock upon conversion of such shares 90 days after closing. The third investor
group entered into an agreement with the Company to convert the preferred shares
into 60,000 shares of Common Stock 90 days after closing and continue the
Preferred Stock dividends until conversion to Common Stock. As of December 31,
1999, 40,000 preferred shares had been converted into 667,000 common shares. The
three investor groups received warrants to purchase, for a five year period,
381,000 shares of Common Stock at $5.00 per share. The Company relied upon
Section 4(2) of the Act, and Regulation D for the issuance of the Units. The
Company used no general advertising or solicitation in connection with such
issuance, there were a limited number of purchasers, all of whom were
"accredited investors" within the meaning Regulation D promulgated under the
Act, and the Company had reason to believe that such purchasers did not intend
to engage in a distribution of such securities.
In May 1999, the Company completed the sale of $2,100,000 of Common Stock
in private placements. In connection with these private placement transactions,
warrants were issued to purchase 420,000 shares of Common Stock for a five year
period at $5.00 per share and 700,000 shares of Common Stock for a four year
period at $4.00 per share. Additional warrants were issued to the investors in
the private placement to purchase 63,000 shares of Common Stock for a five-year
period at $5.00 per share as a penalty for non-registration of the private
placement Common Stock within 150 days of the completion of the sale. The
Company relied upon Section 4(2) of the Act, and Regulation D for the issuance
of the Units. The Company used no general advertising or solicitation in
connection with such issuance, there were a limited number of purchasers, all of
whom were "accredited investors" within the meaning Regulation D promulgated
under the Act, and the Company had reason to believe that such purchasers did
not intend to engage in a distribution of such securities.
In March 31, 2000, the Company received approximately $6.6 million in funds
from the purchase of participation interests in its senior secured credit
facility with Comerica. In connection with this financing, the Company issued
147,058 shares of common stock and warrants to purchase an aggregate of
8,000,000 shares of common stock of the Company to the participation interest
holders and warrants to purchase an aggregate of 3,480,000 shares of common
stock to the investment group that arranged the financing. The Company relied
upon Section 4(2) of the Act for the issuance of the warrants.
In March 2000, in satisfaction of a dispute between the Company and certain
unaffiliated parties the Company agreed to modify the terms of certain warrants
held by such parties to lower the exercise price on 100,000 shares from $5.00
per share to $1.25 per share and to lower the exercise price on 100,000 shares
to $1.50 per share. The Company also agreed to issue an additional 952,153
shares of its common stock upon the conversion of 40,000 shares of its 10%
Junior Redeemable Convertible Preferred Stock held by certain of such
unaffiliated parties and issued a warrant to purchase 456,000 shares of common
stock at an exercise price of $1.25 per share. The Company relied upon Section
4(2) of the Act for the issuance of the warrant. The Company used no general
advertising or solicitation in connection with such issuance, there were a
limited number of parties, all of whom were accredited investors and
sophisticated and the Company had reason to believe that such purchasers did not
intend to engage in a distribution of such securities.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for each of the fiscal years ended as of June 30, 1997, the six months
ended December 31, 1997, and the years ended December 31, 1998 and 1999 which
was derived from the Company's audited consolidated financial statements. In the
opinion of management of the Company, the unaudited consolidated financial
statements for the six months ended December 31, 1996 and the year ended
December 31, 1997 include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial data for such
period. The results of operations for the six months ended December 31, 1996 and
1997 are not necessarily indicative of results for a
18
<PAGE> 19
full fiscal year. 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 April 2000, substantially all prospective
operations were ceased and the majority of 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's operations; on
May 18, 2000, ITS filed in Corpus Christi, Texas for protection under Chapter XI
of the U.S. Bankruptcy Code. The results of operations of ITS are presented as
discontinued operations in Selected Financial Data and in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The data should be read in conjunction with the Consolidated Financial
Statements (including the Notes thereto) and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------- ----------------------------------------
1997 1996 1997 1997 1998 1999
----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................... $ 2,564,000 $ 743,000 $ 5,389,000 $ 7,154,000 $50,947,000 $ 67,565,000
Operating income (loss)..... (68,000) (397,000) (432,000) (360,000) 1,215,000 (16,688,000)
Loss from continuing
operations before
extraordinary item........ (156,000) (411,000) (565,000) (374,000) (2,858,000) (23,288,000)
Loss from discontinued
operations, net of income
taxes..................... -- -- -- -- (138,000) (7,828,000)
Net loss before
extraordinary item........ (156,000) (411,000) (565,000) (374,000) (2,996,000) (31,116,000)
Extraordinary Item -- Loss
on Debt Extinguishment.... -- -- (193,000) (193,000) -- --
Net loss.................... (156,000) (411,000) (758,000) (567,000) (2,996,000) (31,116,000)
Net loss attributable to
common shareholders....... $ (156,000) $ (411,000) $ (758,000) $ (567,000) (3,937,000) (32,360,000)
BASIC AND DILUTED LOSS PER
COMMON SHARE:
Continuing Operations....... $ (0.01) $ (0.04) $ (0.02) $ (0.03) $ (0.12) $ (0.71)
Discontinued Operations..... -- -- -- -- -- (0.23)
Extraordinary Item.......... -- -- (0.01) (0.02) -- --
Net Loss.................... $ (0.01) $ (0.04) $ (0.03) $ (0.05) $ (0.12) $ (0.94)
=========== =========== =========== =========== =========== ============
Weighted average common
Shares outstanding........ 12,191,000 11,500,000 23,864,000 12,136,000 31,753,000 34,352,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................. $89,301,000 $ 62,248,000
Long-term debt and notes payable.......................... 50,449,000 43,231,000
Working capital (deficit)................................. 21,651,000 (47,323,000)
Shareholders' equity (deficit)............................ 20,236,000 (4,327,000)
Common shares outstanding................................. 33,044,000 35,244,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Commission and incorporated herein by reference.
19
<PAGE> 20
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.
The Company elected in 1997 to change its fiscal year from June 30, 1997,
to December 31, 1997. A summary of operating results for the fiscal year ended
June 30, 1997, the six months ended December 31, 1996 and 1997, and the years
ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
JUNE 30, ------------------------ ----------------------------------------
1997 1996 1997 1997 1998 1999
---------- ----------- ---------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $2,564,000 $ 743,000 $5,389,000 $7,154,000 $50,947,000 $ 67,565,000
Costs and Expenses:
Cost of Sales and
Operating
Expenses............ 1,460,000 732,000 3,786,000 4,619,000 36,792,000 55,683,000
Selling, General and
Administrative...... 1,061,000 371,000 1,536,000 2,328,000 10,724,000 19,608,000
Depreciation and
Amortization........ 111,000 37,000 499,000 567,000 2,216,000 4,455,000
Write-down of
long-lived assets... -- -- -- -- -- 4,507,000
Operating Income
(Loss)................ (68,000) (397,000) (432,000) (360,000) 1,215,000 (16,688,000)
Interest (expense) and
other income, net... (63,000) (1,000) (92,000) 40,000 (3,954,000) (6,386,000)
Income Tax Expense.... (25,000) (13,000) (41,000) (54,000) (119,000) (214,000)
Loss from Continuing
Operations before
Extraordinary
Item................ (156,000) (411,000) (565,000) (374,000) (2,858,000) (23,288,000)
Loss from Discontinued
Operations, net of
income taxes........ -- -- -- -- (138,000) (7,828,000)
Net Loss Before
Extraordinary
Item................ (156,000) (411,000) (565,000) (374,000) (2,996,000) (31,116,000)
Extraordinary Loss on
Early Debt
Extinguishment...... -- -- (193,000) (193,000) -- --
Net Loss.............. (156,000) (411,000) (758,000) (567,000) (2,996,000) (31,116,000)
</TABLE>
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.
20
<PAGE> 21
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
REVENUES
Emergency Response and Restoration...................... $28,999,000 $ 28,418,000
Manufacturing and Distribution.......................... 21,948,000 39,147,000
----------- ------------
$50,947,000 $ 67,565,000
=========== ============
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration...................... $21,599,000 $ 27,509,000
Manufacturing and Distribution.......................... 15,193,000 28,174,000
----------- ------------
$36,792,000 $ 55,683,000
=========== ============
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES(1)
Emergency Response and Restoration...................... $ 7,289,000 $ 10,043,000
Manufacturing and Distribution.......................... 3,435,000 9,565,000
----------- ------------
$10,724,000 $ 19,608,000
=========== ============
DEPRECIATION AND AMORTIZATION
Emergency Response and Restoration...................... $ 1,402,000 $ 2,500,000
Manufacturing and Distribution.......................... 814,000 1,955,000
----------- ------------
$ 2,216,000 $ 4,455,000
=========== ============
OPERATING INCOME (LOSS)
Emergency Response and Restoration...................... $(1,291,000) $(15,201,000)
Manufacturing and Distribution.......................... 2,506,000 (1,487,000)
----------- ------------
$ 1,215,000 $(16,688,000)
=========== ============
</TABLE>
---------------
(1) Selling, General, Administrative and Corporate expenses have been allocated
pro rata among segments using relative revenues for the basis.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED) WITH SIX MONTHS
ENDED DECEMBER 31, 1997
During the periods presented, the Company was engaged primarily in one
business segment -- well control and firefighting.
Revenues were $743,000 for the six months ended December 31, 1996 ("1996
Interim Period") compared to $5,389,000 for the six months ended December 31,
1997 ("1997 Interim Period"). This increase principally resulted from: (1)
product sales from the ABASCO acquisition completed in September 1997
($972,000); (2) sales of two fire fighting equipment packages in the 1997
Interim Period ($908,000); and, (3) increased market share for the Company's
Well Control business unit.
Operating expenses were $732,000 for the 1996 Interim Period compared to
$3,786,000 for the 1997 Interim Period. This increase principally resulted from:
(1) cost of sales and operating expenses from the ABASCO acquisition completed
in September 1997 ($632,000); (2) costs associated with the sales of two fire
fighting equipment packages in the 1997 Interim Period ($686,000); (3) personnel
and equipment mobilizations costs incurred in connection with an international
well control incident in October 1997 ($540,000); and, (4) costs associated with
an increase in personnel and support facilities resulting from the July 31, 1997
acquisition of the Boots & Coots operating assets and growth in the Company's
Well Control business unit.
General and administrative expenses were $371,000 for the 1996 Interim
Period compared to $1,536,000 for the 1997 Interim Period. This increase
principally resulted from: (1) expenses associated from the ABASCO acquisition
completed in September 1997 ($246,000); and, (2) expenses associated with an
21
<PAGE> 22
increase in personnel and other overhead to support the Company's increased
operational level in Well Control.
Depreciation and amortization expenses increased from $37,000 for the 1996
Interim Period compared to $499,000 for the 1997 Interim Period due to the
significant increase in property and equipment acquired with the July 31, 1997
acquisition of the Boots & Coots operating assets.
The loss of debt extinguishment of $193,000 resulted from the early
conversion to common stock of $2,900,000 in face amount of the Company's 12%
Senior Subordinated Notes during the 1997 Interim Period.
The increase in other expenses from $1,000 during the 1996 Interim Period
to $92,000 during the 1997 Interim Period is principally due to interest expense
on the Company's 12% Senior Subordinated Notes.
Income taxes of $13,000 during the 1996 Interim Period and $41,000 during
the 1997 Interim Period results from foreign taxes incurred on Well Control
projects.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) WITH THE YEAR ENDED
DECEMBER 31, 1998
As a result of the acquisition program carried out during 1998, the
Company's business expanded from principally a well control and fire fighting
company into two principal business segments, emergency response and restoration
and manufacturing and distribution.
Revenues were $7,154,000 for the year ended December 31, 1997 compared to
$50,947,000 for the year ended December 31, 1998. This increase was the result
of increased market share from diversification of IWC Services' well control and
fire fighting client-base ($9,630,000) and business acquisitions ($34,163,000).
Operating expenses were $4,619,000 for the year ended December 31, 1997
compared to $36,792,000 for the year ended December 31, 1998. The increase was
the result of expanded well control operations beginning in the fourth quarter
of calendar 1997 ($5,238,000) and business acquisitions ($26,935,000).
Selling, general and administrative expenses were $2,328,000 for the year
ended December 31, 1997 compared to $10,724,000 for the year ended December 31,
1998. The increase resulted from additional investments in personnel, systems
and infrastructure necessary to support the Company's expanded scope of
operations; new marketing and advertising programs to increase market share and
diversify the Company's well control client base, development of and marketing
of the Company's WELLSURE(SM) risk management programs ($5,522,000) and business
acquisitions ($2,874,000).
Depreciation and amortization expense increased from $567,000 for the year
ended December 31, 1997 to $2,216,000 for the year ended December 31, 1998,
primarily as the result of depreciation and amortization relating to property
and equipment obtained in, and goodwill resulting from, business acquisitions.
Interest expense was $184,000 for the year ended December 31, 1997 compared
to $3,896,000 for the year ended December 31, 1998. The increase is primarily
from interest expense on increased debt incurred for business acquisitions made
during 1998.
Income taxes for the years ended December 31, 1997 and 1998 represents
foreign taxes on international operations.
Operating results of ITS, acquired as of January 2, 1998, are presented as
discontinued operations for the year ended December 31, 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 WITH THE YEAR ENDED DECEMBER 31,
1999
As a result of the acquisition program carried out during 1998, the
Company's business expanded from principally a well control and fire fighting
company into two principal business segments: emergency response and restoration
and manufacturing and distribution.
The net decrease in Emergency Response and Restoration revenues of $581,000
from 1998 to 1999 resulted from higher revenues in Well Control operations and
risk management ($1,207,000) for 1999 compared to 1998; offset by lower revenues
in Special Services hazardous materials operations ($1,670,000)
22
<PAGE> 23
in 1999. Well Control revenues for 1999 were higher than 1998 primarily as the
result of a 1999 well control project in which the Company served as the lead
contractor with a larger revenue base for rebilled subcontractor costs. A
significant part of 1999 risk management revenues resulted from two WELLSURE(SM)
events during May and June 1999 where the Company served as lead contractor on
the projects. There is a period effect in 1999 of $288,000 in revenues of the
Special Services Hazardous Materials Unit which was acquired February 20, 1998.
However, this effect was more than offset by a net decrease in revenues for 1999
compared to the 1998 period ($1,870,000) due to substantially lower activity in
emergency response out calls and the effect of a large ship fire project
($1,036,000) in 1998.
The net increase in Manufacturing and Distribution revenues of $17,199,000
from 1998 compared to 1999 is primarily the result of the acquisition of Baylor
Company on July 23, 1998 ($15,692,000) and increased sales by ABASCO during the
1999 period ($1,379,000) resulting from second and third quarter 1999 sales of
industrial fire fighting equipment, foam and spill clean-up equipment and
supplies.
Cost of Sales and Operating Expenses
The net increase in Emergency Response and Restoration cost of sales and
operating expenses of $5,910,000 from 1998 to 1999 is the result of increased
operating costs of Well Control operations and risk management, and the Special
Services hazardous materials unit acquired February 20, 1998. Of this increase
in operating expenses, approximately $4,900,000 is attributable to third party
subcontractor costs associated with a well control project during the second
quarter of 1999 in which the Company served as lead contractor and approximately
$1,400,000 is attributable to risk management direct costs for two WELLSURE(SM)
events during May and June 1999 where the Company served as lead contractor on
the projects. The balance of the increase is primarily due to a net increase in
the number of Special Services field office locations in 1999 compared to 1998
together with above average third party subcontractor costs incurred during the
second quarter of 1999 on certain lower margin petrochemical and refinery
maintenance contracts.
The net increase in Manufacturing and Distribution cost of sales and
operating expenses of $12,981,000 from 1998 to 1999 is primarily the result of
the acquisition of the Baylor Company on July 23, 1998 ($12,500,000) with the
balance representing additional costs of sales associated with increased second
quarter 1999 ABASCO sales. Also included in ABASCO costs of sales is an
impairment provision of $613,000 to reduce the carrying value of inventories to
estimated net realizable values.
Selling, General and Administrative Expenses
The net increase in Emergency Response and Restoration selling, general and
administrative expenses of $2,754,000 from 1998 to 1999 reflects the allocation
to additional business units in 1999 of an increased overhead base for
additional corporate investments in personnel, systems and infrastructure
necessary to support the expanded scope of operations, new risk management and
WELLSURE systems and procedures, lead contractor for emergency restoration
capabilities and marketing and advertising programs to increase market share.
Also reflected in 1999 are initial results from cost curtailment initiatives
initiated during the third quarter of 1999.
The net increase in Manufacturing and Distribution selling, general and
administrative expenses of $6,130,000 from the 1998 to 1999 period is primarily
the result of the acquisition of Baylor Company on July 23, 1998.
Included in selling, general and administrative expenses for 1999 are
$1,076,000 of non-recurring charges resulting from the write-off of costs
associated with acquisition screening and cancelled financing projects and
estimated lease abandonment costs; $1,197,000 in additional allowances for bad
debts; and $659,000 in accruals for legal and audit fees.
23
<PAGE> 24
Depreciation and Amortization
The net increase in Emergency Response and Restoration depreciation and
amortization of $1,098,000 from 1998 to 1999 is the result of an increased
depreciable asset base for Well Control and Boots & Coots Special Services.
The net increase in Manufacturing and Distribution depreciation and
amortization of $1,141,000 from 1998 to 1999 is primarily due to the acquisition
of Baylor Company on July 23, 1998.
As a result of the Company's liquidity problems which intensified during
the fourth quarter of 1999 and have continued to date in 2000, a restructuring
of certain of the Company's operating units and extensive workforce reduction
and other cost-reduction programs were initiated. In addition, an extensive
review of long-lived assets was performed. A provision for asset impairment of
$4,507,000 was made at December 31, 1999, to reduce the carrying value of
goodwill ($3,822,000) and property and equipment ($685,000) to estimated
realizable values.
Other
Other expense (primarily interest expense) of $3,954,000 for 1998 increased
to $6,386,000 for 1999. The increase is primarily due to interest expense on
increased debt levels incurred for business acquisitions and higher debt
financing expenses associated with the interim restructuring of the Company's
senior secured credit facility.
Income taxes for 1998 and 1999 represents foreign taxes payable on
international operations which fluctuate based on operational activity levels.
Operating results of ITS, acquired as of January 2, 1998, are presented as
discontinued operations for the years ended December 31, 1998 and 1999. The
results of discontinued operations for 1999 include impairment provisions of
$686,000 to reduce the carrying value of property and equipment to estimated
realizable values and a provision of $4,382,000 to write off the unamortized
goodwill associated with the acquisition of ITS.
LIQUIDITY AND CAPITAL RESOURCES/INDUSTRY CONDITIONS
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 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
into 1999. World-wide oil and gas prices and related activity hit new lows in
late 1998 and early 1999, on an inflation adjusted basis, for the past several
decades, impacting the Company and its competitors. Crude and refined products
pricing have been historically considered cyclical. Some improvements in the
industry have occurred through the first six months of 2000, however to date the
Company's well control businesses have not benefited to a meaningful degree from
price improvements due to the lag time in exploration and production companies
restoring capital and operating budgets that have been materially curtailed
since the third quarter of 1998. 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 in oil and gas
exploration and production activities in response to changes in 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 other
things, (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 were deployed in the more
24
<PAGE> 25
profitable operations. The Company's initial efforts 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. In the
years ended December 31, 1998 and 1999, the Company incurred after-tax losses of
$2,858,000 and $23,288,000, respectively, from continuing operations and
$2,996,000 and $31,116,000 in net losses after consideration of discontinued
operations. A decision was made to discontinue the operations of the Company's
ITS subsidiary and such operation is reported as a discontinued operation in the
accompanying consolidated financial statements. See Note D.
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 July 31, 2000 and there is
no assurance such agreements can be further extended. Outstanding borrowings
under the Comerica Loan Agreement of $14,321,000 at December 31, 1999 have been
included in current maturities of long-term debt and notes payable in the
accompanying financial statements.
As of June 30, September 30, and December 31, 1999, the Company was not in
compliance with certain financial covenants of the Prudential Subordinated Note
and Warrant Purchase Agreement respecting the Company's EBITDA to total
liabilities ratio. Such financial covenant non-compliance continues through the
date hereof. Further, quarterly interest payments due since the quarter ended
July 23, 1999 on the Prudential Subordinated Note 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
$28,046,000 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
$1,954,000, representing the remaining note face amount attributed to the
warrants sold to Prudential, is included in additional paid-in capital but would
also require funding.
The Company has continued to explore possibilities for new improved debt
financing and/or equity infusions. As discussed in Note M to the accompanying
Financial Statements through July 14, 2000, $6,635,000 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. The
Company has received a commitment, expiring on July 31, 2000, for a senior
secured credit facility that would replace the Comerica facility. There are
substantive unresolved issues associated with closing this facility and
negotiations are ongoing with the prospective lender. In addition, the Company
has ongoing discussions regarding the sale of certain assets and operations;
however, there are no definitive agreements in place as of this date.
The new financing obtained to date and future additional financing could
have a dilutive impact on existing common shareholders which could be
significant. 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.
There can be no assurance that Comerica and Prudential will not exercise
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 securing
those loans. 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. Although the accompanying financial statements for the year
ended December 31, 1999 have been prepared on the basis that the Company will
continue as a going concern, as discussed in Note A to the accompanying
consolidated financial statements, significant uncertainties exist as to the
ability of the Company to resolve its financing and liquidity issues and attain
profitable operations. The audit opinion issued by Arthur Andersen LLP for the
year ended December 31, 1999, includes an explanatory fourth paragraph because
of substantial doubt about the Company's ability to continue as a going concern.
25
<PAGE> 26
The Company believes that (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.
RECENT ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument be measured at its fair value, recorded in the
balance sheet as either an asset or liability and that changes in the
derivative's fair value be recognized currently in earnings. SFAS 133, as
amended, is effective for fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet quantified the impacts of adopting SFAS 133 on
its financial statements. The Company did not early adopt SFAS 133, therefore it
will be adopted in 2001.
In December 1999, SEC Staff Accounting Bulletin: No. 101 -- Revenue
Recognition in Financial Statements ("SAB 101") was issued. SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
its accounting practices are consistent with this rule but will complete its
evaluation in the third quarter of 2000.
YEAR 2000 ISSUES
The Company previously assessed and reported on issues regarding its
computer accounting and other systems' compliance capabilities to process
transactions beginning with "Year 2000."
All computer accounting systems of the Company and its operating
subsidiaries' were "Year 2000" compliant with the exception of one subsidiary,
ITS, which is reported in discontinued operations. Charges billed by third
parties for the cost of upgrading the ITS existing computer accounting software
package to a later generation software version that was "Year 2000" compliant
was approximately $275,000, inclusive of software and hardware procurement,
installation, customization of certain purchase and sales modules, and user
training. Due to budgetary constraints, in the fourth quarter of 1999, this
project was suspended and critical accounting processes were transferred to an
existing accounting system that was "Year 2000" compliant. Additionally, charges
from one of the third party service providers has been disputed by ITS.
The remaining "Year 2000" issue involves a limited number of microprocessor
controlled manufacturing equipment units. The modifications necessary to bring
such control processors into compliance with "Year 2000" requirements cost
between $30,000 to $40,000 and were completed during 1999.
Through July 14, the Company has not experienced any notable problems as a
result of "Year 2000" related issues.
FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results could
differ from those projected in any forward-looking statements for the reasons
detailed in this report. The forward-looking statements contained herein are
made as of the date of this report and the Company assumes no obligation to
update such forward-looking statements, or to update the reasons why actual
results could differ from those projected in such forward-looking statements.
Investors should consult the information set forth from time to time in the
Company's reports on Forms 10-Q and 8-K, and its Annual Report to Stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of the Company's market sensitive financial
instruments contains "forward looking statements".
26
<PAGE> 27
The Company's debt consists of both fixed-interest and variable-interest
rate debt; consequently, the Company's earnings and cash flows, as well as the
fair values of its fixed-rate debt instruments, are subject to interest-rate
risk. The Company has performed sensitivity analyses to assess the impact of
this risk based on a hypothetical ten-percent increase in market interest rates.
Market rate volatility is dependent on many factors that are impossible to
forecast, and actual interest rate increases could be more severe than the
hypothetical ten-percent increase.
The Company estimates that if prevailing market interest rates had been ten
percent higher throughout 1998 and 1999, and all other factors affecting the
Company's debt remained the same, pretax earnings would have been lower by
approximately $83,000 in 1998 and approximately $160,000 in 1999. With respect
to the fair value of the Company's fixed-interest rate debt, if prevailing
market interest rates had been ten percent higher at year-end 1998 and 1999, and
all other factors affecting the Company's debt remained the same, the fair value
of the Company's fixed-rate debt, as determined on a present-value basis, would
have been lower by approximately $1,500,000 at December 31, 1998 and 1999,
respectively. Given the composition of the Company's debt structure, the Company
does not, for the most part, actively manage its interest rate risk.
ITEM 8. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following tables list the names and ages of each director and/or
executive officer of the Company, as well as those persons expected to make a
significant contribution to the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry H. Ramming.......................... 53 Chairman of the Board of Directors
Chief Executive Officer
Brian Krause.............................. 44 Director
President of Emergency Services Operations
K. Kirk Krist............................. 41 Director
Jerry L. Winchester....................... 41 Director
President and Chief Operating Officer
Dewitt H. Edwards......................... 41 Executive Vice President -- Administration
Thomas L. Easley.......................... 55 Director (Vice President & Chief Financial
Officer Through February 7, 2000)
E. J. DiPaolo............................. 47 Director
W. Richard Anderson....................... 46 Director
</TABLE>
BIOGRAPHIES OF EXECUTIVE OFFICERS AND DIRECTORS
Larry H. Ramming has served as the Chairman of the Board and Chief
Executive Officer of the Company since the acquisition of IWC Services by the
Company on July 29, 1997. Mr. Ramming serves as a Class I Director for a term
that will expire on the date of the next annual meeting of stockholders. Mr.
Ramming also serves on the Audit Committee. Previously Mr. Ramming was actively
involved in
27
<PAGE> 28
mortgage banking and the packaging and resale of mortgage notes, consumer loans
and other debt instruments for over 15 years. In addition, Mr. Ramming has been
an active venture capital investor.
Brian Krause has served as the President of IWC Services, Inc. (Well
Control Business Unit) and as a Director of the Company since the acquisition of
IWC Services by the Company on July 29, 1997. Mr. Krause serves as a Class III
Director for a three-year term that will expire on the date of the annual
meeting of stockholders in calendar year 2001. Mr. Krause brings over 19 years
of well control and firefighting experience to the Company. Before joining the
group that founded IWC Services, Mr. Krause was employed for 18 years by the Red
Adair Company, Houston, Texas. Mr. Krause joined the Red Adair Company as a Well
Control Specialist in August 1978, was promoted to Vice President in June 1989
and was again promoted to Vice President & Senior Well Control Specialist in
February 1994. During his tenure with the Red Adair Company, Mr. Krause
participated in hundreds of well control events worldwide. Mr. Krause, along
with Messrs. Henry, Hatteberg and Clayton, resigned from the Red Adair Company
in August 1994 and began the independent business activities that led to the
formation of IWC Services in May 1995.
K. Kirk Krist has served as a member of the Company's Board of Directors
since the acquisition of IWC Services by the Company on July 29, 1997. Mr. Krist
serves as a Class III Director for a three-year term that will expire on the
date of the annual meeting of stockholders in calendar year 2001. Mr. Krist also
serves on the Audit and Compensation Committees. Mr. Krist has been a
self-employed oil and gas investor and venture capitalist since 1982.
Jerry L. Winchester serves as a Class II Director for a two-year term that
will expire on the date of the annual meeting of the stockholders in calendar
year 2000. Mr. Winchester has served as President and Chief Operating Officer of
the Company since November 1, 1998. Before assuming this position, Mr.
Winchester was employed by Halliburton Energy Services since 1981 in positions
of increasing responsibility, most recently as Global Manager -- Well Control,
Coil Tubing and Special Services.
Dewitt H. Edwards has served as Executive Vice President of the Company
since September 1, 1998. Before assuming this position, Mr. Edwards served in
various supervisory capacities with Halliburton Energy Services from 1979 to
1998, most recently as Operations Manager -- North American Region Resources
Management.
Thomas L. Easley served as Vice President and Chief Financial Officer of
the Company since the acquisition of IWC Services by the Company on July 29,
1997 through February 7, 2000, at which time he resigned to pursue another
business activity. Mr. Easley has served as a director since March 25, 1998 and
continues to do so. Mr. Easley serves as a Class I Director for a term that will
expire on the date of the next annual meeting of stockholders. From May 1995
through July 1996, Mr. Easley served as Vice President and Chief Financial
Officer of DI Industries, Inc. a publicly held oil and gas drilling contractor
with operations in the U.S., Mexico, Central America and South America.
Previously, from June 1992 through May 1995, he served as Vice
President -- Finance of Huthnance International, Inc., a closely held offshore
oil and gas drilling contractor. Since February 7, 2000, Mr. Easley has served
as Executive Vice President -- Finance & Administration of Grant Geophysical,
Inc., a closely-held seismic data acquisition and processing company.
E. J. "Jed" DiPaolo has served as a director since May 1999. Mr. DiPaolo is
Senior Vice President, Global Business Development of Halliburton Energy
Services, having responsibility for all worldwide business development
activities. Mr. DiPaolo has been employed at Halliburton Energy Services since
1976 in progressive positions of responsibility.
W. Richard Anderson has served as a director since August 1999. Since
October 1998, Mr. Anderson has served as the Executive Vice President, Chief
Financial Officer and a director of Prime Natural Resources, a closely-held
exploration and production company. Prior to his employment at Prime, he was
employed by Hein & Associates LLP, a certified public accounting firm, where he
served as a partner from 1989 to January 1995 and as a managing partner from
January 1995 until October 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company is not aware of any late filed reports.
28
<PAGE> 29
ITEM 11. EXECUTIVE COMPENSATION.
Boots & Coots International Well Control, Inc. is a holding company, all of
the business activities of which is conducted by its subsidiaries.
The Summary Compensation Table below sets forth the cash and non-cash
compensation information for the twelve month period ended December 31, 1997,
the six month transition period from July 1, 1997 to December 31, 1997, and the
years ended December 31, 1998 and 1999, for the Chief Executive Officer and the
four other most highly paid executive officers whose salary and bonus earned for
services rendered to the Company exceeded $100,000 for the years ended December
31, 1998 and 1999. Calendar year annual compensation disclosures reflect amounts
paid by the Company and IWC Services, Inc., prior to its acquisition by the
Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION RESTRICTED ALL
----------------- STOCK OTHER
NAME AND PRINCIPAL POSITION PERIOD SALARY BONUS AWARDS COMPENSATION
--------------------------- ------------- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Larry H. Ramming..................... 1999 $280,624 -- -- --
Chairman of the Board 1998 287,000 -- -- --
and Chief Executive Officer 1997 98,565 $2,604 -- --
7/1-12/31/97 59,945 2,604 -- --
Jerry Winchester..................... 1999 262,000 -- -- --
President, Boots & Coots Group 11/1-12/31/98 43,666 -- -- --
Brian Krause......................... 1999 162,000 -- -- --
President, IWC Services, Inc. 1998 145,000 -- -- --
1997 95,081 -- -- --
7/1-12/31/97 55,261 -- -- --
Dewitt H. Edwards.................... 1999 162,000 -- -- --
Executive Vice President 9/1-12/31/98 54,000 -- -- --
Thomas L. Easley..................... 1999 210,925 -- -- --
Through February 7, 2000,
Vice President and 1998 155,833 -- -- --
Chief Financial Officer 1997 133,725 -- -- --
7/1-12/31/97 92,850 -- -- --
</TABLE>
The following tables sets forth additional information with respect to
stock options granted in 1999 under the Company's Incentive Plan to the named
executive officers.
OPTION GRANTS 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
---- -------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Larry H. Ramming........................... 750,000(1) 60% $1.55 05/03/09
Thomas L. Easley........................... 500,000(2) 40% 1.55 05/03/09
</TABLE>
---------------
(1) As discussed in Note M -- Events Subsequent to December 31, 1999 included in
the accompanying Consolidated Financial Statements, in April 2000, Mr.
Ramming voluntarily contributed these options to the Company in exchange for
the commitment by the Company to issue, subject to availability of
29
<PAGE> 30
authorized but unissued or committed shares of Common Stock, replacement
options that may be exercised at $0.75 per share. This act was taken to make
available additional authorized but unissued and uncommitted shares of the
Company's Common Stock in connection with financing transactions completed
subsequent to December 31, 1999.
(2) As a result of Mr. Easley's resignation as an officer of the Company
effective February 7, 2000, the above options have lapsed.
The following table sets forth information with respect to the unexercised
options to purchase shares of Common Stock which were granted in 1999 or a prior
year to the named executive officers and held by them at December 31, 1999. None
of the named executive officers exercised any stock options during 1999.
AGGREGATED OPTION EXERCISES IN 1999
AND 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTION
OPTIONS AT YEAR-END AT YEAR-END
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Larry H. Ramming.............................. 750,000 -- -- --
Thomas L. Easley.............................. 500,000 -- -- --
Jerry L. Winchester........................... 400,000 600,000 -- --
DeWitt H. Edwards............................. 200,000 80,000 -- --
</TABLE>
As discussed in Note M -- Events Subsequent to December 31, 1999 included
in the accompanying Consolidated Financial Statements, in April 2000 Messrs.
Ramming, Winchester and Edwards each voluntarily contributed these options to
the Company in exchange for the 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. This act was taken
to make available additional authorized but unissued and uncommitted shares of
the Company's Common Stock in connection with financing transactions completed
subsequent to December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company in
fiscal year 1999 was composed of K. Kirk Krist and Jerry L. Winchester. Mr.
Winchester joined the Company as President and Chief Executive Officer effective
November 1, 1998. During 1999, Mr. Krist constituted the Compensation Committee.
In the period covered by this report, none of the Company's executive officers
served as a board member or member of a compensation committee or similar body
for another company that had an executive officer serving as a member of the
Company's Board of Directors or Compensation Committee.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.
The Compensation Committee, which is responsible for both the establishment
and administration of the policies that govern both annual compensation and
stock ownership programs for the Company, has furnished the following report of
executive compensation. The Compensation Committee did participate in the
determination of executive officer compensation.
Determination of Executive Officer Compensation. The Compensation Committee
is developing compensation policies designed to align the compensation paid to
the executive officers with the Company's overall business strategy, values and
management initiatives. These policies will be designed to: (i) reward
executives for long-term strategic management which results in the enhancement
of shareholder values; (ii) support a performance-oriented environment which
rewards achievement of both internal Company goals and enhanced Company
performance compared to performance levels of comparable companies in the
industry, and (iii) attract and retain executives whose abilities are critical
to the long-term success and competitiveness of
30
<PAGE> 31
the Company. The Company's executive officers have been compensated to date
pursuant to the items of their employment agreements.
Determination of the Chief Executive Officer's Compensation. As Chief
Executive Officer, Mr. Ramming is compensated pursuant to an employment
agreement described under "Employment Agreements" below. Mr. Ramming's
compensation to date, including the Employment Contract entered into effective
April 1, 1999, has been based on previously completed equity and debt financing
and business acquisitions in which Mr. Ramming played a critical role, as well
as Mr. Ramming's extensive involvement in financing efforts.
The Compensation Committee:
Jerry L. Winchester
K. Kirk Krist
EMPLOYMENT ARRANGEMENTS
Mr. Ramming, the Company's Chairman and Chief Executive Officer, through
1997 was actively involved in a number of independent business activities and
through such date did not devote his full time to the affairs of the Company.
Mr. Ramming executed effective as of August 1, 1997, a one year employment
agreement with the Company which allowed for his outside activities provided
that he devoted such time to the Company's affairs as was reasonably necessary
for the performance of his duties, with such activities not to be competitive
with the Company's business and not to materially adversely affect his
performance as an officer and director of the Company. Through December 31, 1997
Mr. Ramming's employment arrangement provided for an annual salary of $125,000
and an annual automobile allowance of $12,000. Effective January 1, 1998, Mr.
Ramming agreed to prospectively curtail all material outside business activities
and under this interim employment arrangement, his annual salary was increased
to $275,000. A five-year contract, effective April 1, 1999, was entered into
with Mr. Ramming, which provided for an annual salary of $300,000 and an annual
automobile allowance of $18,000. In August 1999, as a result of the Company's
financial condition, Mr. Ramming voluntarily agreed to a deferral of payment of
25% of his monthly salary and vehicle allowance. Such deferral continued though
May 2000. In connection with the employment contract entered in 1999, Mr.
Ramming was granted an option to purchase up to 750,000 shares of the Company's
Common Stock at a per share price of $1.55 (85% of the last bid price of such
common stock on the American Stock Exchange on the date immediately preceding
the contract effectiveness date). The options vest ratably over five years at
the anniversary date of the employment contract, conditioned upon continued
employment at the time of each vesting and subject to immediate vesting based
upon change of control which occurred.
In May 2000, Mr. Ramming agreed to the cancellation of this option as well
as options related to this loan and financing provided to the company in order
to provide additional available shares of Common Stock for warrants to be issued
in connection with additional financings. The Company agreed to issue Mr.
Ramming an equivalent number of stock options in the future, subject to
availability of authorized and unissued or committed common shares.
Mr. Winchester serves as President and Chief Operating Officer of the
Company. Mr. Winchester's employment agreement, which was effective as of
November 1, 1998, provides for an annual salary of $250,000 and an annual
automobile allowance of $12,000. In addition, Mr. Winchester was granted an
option to purchase up to 1,000,000 shares of common stock of the Company at a
per share price of $1.91 (85% of the last bid price of such common stock on the
American Stock Exchange on the date immediately preceding the contract
effectiveness date). 200,000 of such options vested upon execution of this
contract. The balance vests at the rate of 200,000 options per year at the
anniversary date, conditioned upon continued employment at the time of each
vesting. In May 2000, Mr. Winchester agreed to the cancellation of this option
in order to provide additional available shares of Common Stock for warrants to
be issued in connection with additional financings. The Company agreed to issue
Mr. Winchester an equivalent number of stock options in the future, subject to
availability of authorized and unissued or committed common stock.
31
<PAGE> 32
Mr. Easley served as Chief Financial Officer of the Company during 1996 and
1997 and performed certain other services, including sourcing and conducting due
diligence on certain acquisition prospects and raising debt and equity capital,
pursuant to a consulting arrangement with the Company. Mr. Easley's interim
employment arrangement, which was effective as of March 1, 1998, provided for an
annual salary of $175,000 and an annual automobile allowance of $12,000. A
five-year contract, effective April 1, 1999, was entered into with Mr. Easley,
which provided for an annual salary of $225,000 and an annual automobile
allowance of $18,000. In August 1999, as a result of the Company's financial
condition, Mr. Easley voluntarily agreed to a deferral of payment of the
increased monthly salary from $175,000 to $225,000. Such deferral continued
though the current date hereof. In connection with the employment contract
entered in 1999, Mr. Easley was granted an option to purchase up to 500,000
shares of the Company's common stock at a per share price of $1.55 (85% of the
last bid price of such common stock on the American Stock Exchange on the date
immediately preceding the contract effectiveness date). The options vest ratably
over five years at the anniversary date of the employment contract, conditioned
upon continued employment at the time of each vesting. As a result of Mr.
Easley's resignation, this option has now expired.
Mr. Edwards serves as Executive Vice President of the Company. Mr. Edwards'
employment agreement, which was effective as of September 1, 1998, provides for
an annual salary of $150,000 and an annual automobile allowance of $12,000. In
addition, Mr. Edwards was granted an option to purchase up to 100,000 shares of
common stock of the Company at a per share price of $3.29 (85% of the last bid
price of such common stock on the American Stock Exchange immediately preceding
the contract effectiveness date). 20,000 of such options vested upon execution
of this contract. The balance vests at the rate of 20,000 options per year at
the anniversary date, conditioned upon continued employment at the time of each
vesting. In May 2000, Mr. Edwards agreed to the cancellation of this option in
order to provide additional available shares of Common Stock for warrants to be
issued in connection with additional financings. The Company agreed to issue Mr.
Edwards an equivalent number of stock options in the future, subject to
availability of authorized and unissued or committed common shares.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive $250 for their
attendance at each Board of Directors and committee meeting and are reimbursed
for their travel, lodging and out-of-pocket expenses incurred in connection with
attending such meetings.
1997 Outside Directors' Option Plan. On November 12, 1997, the Board of
Directors of the Company adopted the 1997 Outside Directors' Option Plan (the
"Directors' Plan") and the Company's stockholders approved such plan on December
8, 1997. The Directors' Plan provides for the issuance each year of an option to
purchase 15,000 shares of Common Stock to each member of the Board of Directors
who is not an employee of the Company. The purpose of the Directors' Plan is to
encourage the continued service of outside directors and to provide them with
additional incentive to assist the Company in achieving its growth objectives.
Options may be exercised over a five-year period with the initial right to
exercise starting one year from the date of the grant, provided the director has
not resigned or been removed for cause by the Board of Directors prior to such
date. After one year from the date of the grant, options outstanding under the
Directors' Plan may be exercised regardless of whether the individual continues
to serve as a director. Options granted under the Directors' Plan are not
transferable except by will or by operation of law. Options to purchase 45,000
shares of Common Stock have been granted under the Directors' Plan at an
exercise price of $4.25 per share.
In May 2000, the directors agreed to the cancellation of their options in
order to provide additional available shares of common stock for warrants to be
issued in connection with additional financing. The Company agreed to issue the
directors an equivalent number of stock options in the future, subject to
availability of authorized and issued or committed common shares. The Company
will record compensation expense related to these options when these options are
reissued if and when the market price of the Company's stock exceeds the
exercise price.
32
<PAGE> 33
The following graph compares the Company's total stockholder return on its
Common Stock for the years ended December 31, 1997, 1998 and 1999 with the
Standard & Poors' 500 Stock Index and the Standard & Poors' Energy Composite
Index over the same period.
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
12/97 12/98 12/99
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boots & Coots International Well Control, Inc. 100.00 77.40 11.29
S&P 500 Index 100.00 128.60 153.67
S&P Energy Composite Index 100.00 100.50 118.40
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of July 14, 2000, information regarding
the ownership of Common Stock of the Company owned by (i) each person (or
"group" within the meaning of Section 13(d)(3) of the Security Exchange Act of
1934) known by the Company to own beneficially more than 5% of the Common Stock;
(ii) each director of the Company, (iii) each of the named executive officers
and (iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------- -------------------- ----------------
<S> <C> <C>
*Larry H. Ramming..................................... 590,000 1.2%
*Brian Krause......................................... -- *
Jerry L. Winchester.................................. 4,000(3) *
K. Kirk Krist........................................ 237,400(4) *
Thomas L. Easley..................................... 200 *
E. J. DiPaolo........................................ -- *
W. Richard Anderson.................................. -- *
DeWitt H. Edwards.................................... -- *
Specialty Finance Fund I, LLC........................ 8,147,058(4) 16.4%
Fritz Voelker........................................ 1,560,000(5) 3.1
Paul Moore........................................... 1,860,000(5) 3.7
Tracy Turner......................................... 1,160,000(5) 2.3
All executive officers and directors as a group
(eight persons)..................................... 831,600 1.7%
</TABLE>
---------------
* less than 1%
33
<PAGE> 34
The above table gives effect to the voluntary contribution of stock options
in April 2000 and insofar as Mr. Krist is concerned his contribution of Common
Stock to the Company in exchange for shares of Convertible Preferred Stock, as
discussed in Note M -- Events Subsequent to December 31, 1999 included in the
accompanying Consolidated Financial Statements.
(1) Unless otherwise noted, the business address for purposes hereof for each
person listed is 777 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
Beneficial owners have sole voting and investment power with respect to the
shares unless otherwise noted.
(2) Includes options to purchase 3,000 shares of common stock.
(3) Includes options to purchase 3,000 shares of common stock.
(4) Includes warrants to purchase 8,000,000 shares of common stock acquired
pursuant to a participation interest in the senior secured credit facility.
(5) Includes warrants to purchase 1,160,000 shares of common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Larry H. Ramming
On April 30, 1998, The Company's major individual shareholder Chairman and
Chief Executive Officer, Larry H. Ramming, loaned $7,000,000 to the Company to
retire certain bridge financing. As of December 31, 1999, interest (10%) and
extension (2%) expenses aggregating $337,000 and principal payments of
$6,431,000 have been paid to Mr. Ramming. As further consideration for the
certain bridge financing, Mr. Ramming was eligible to be granted 2,000,000
options to purchase common stock at a per share price of $0.75 subject to
issuance and availability of authorized and unissued or committed common shares
which was voluntarily deferred in exchange for the commitment of the Company to
issue subject to availability of authorized but unissued or committed shares of
common stock in the Company. This act was taken to make available additional
authorized but unissued and uncommitted shares of the Company's Common Stock in
connection with financing transactions completed subsequent to December 31,
1999. At December 31, 1999, the remaining principal balance on this note, which
was voluntarily subordinated to the Company's senior secured debt, is $569,000.
Accrued interest and accrued but unpaid extension fees aggregate $270,000.
Management believes the terms and conditions of Mr. Ramming's loan to the
Company are favorable to those that could have been negotiated with outside
parties.
In 1998 the Company entered into an agreement with a company controlled by
Mr. Ramming to have available for charter, on a 24 hour per day, 365 days per
year stand-by status, a jet aircraft and full time stand-by crew to be utilized
in connection with the Company's mobilization of personnel and selected
equipment for emergency response well control and spill containment and
remediation spills, which in those events are billed to the utilizing customer
at a rate of company cost plus a service fee mark up and for other corporate
purposes as needed. During 1998 and 1999, a total of $399,000 and $128,000,
respectively, was paid pursuant to such charter arrangement, based on rates
comparable to those available from third party aircraft charter operators for
comparable charter arrangements. This arrangement was terminated during the
second quarter of 1999.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements for the year ended December 31,
1999 included after signature page.
2. Financial statement schedules included in consolidated financial
statements.
3. Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
3.01 -- Amended and Restated Certificate of Incorporation(1)
3.02 -- Amendment to Certificate of Incorporation(1)
3.03 -- Amended Bylaws(1)
4.01 -- Specimen Certificate for the Registrant's Common Stock(1)
4.02 -- Form of 12% Senior Subordinated Notes due December 31,
2000(1)
4.03 -- Form of Noteholders' Warrants to Purchase $3,000,000 of
Common Stock(1)
4.04 -- Form of Employees Options to Purchase 690,000 shares of
Common Stock(1)
4.05 -- Form of Contractual Options to Purchase 1,265,000 shares
of Common Stock(1)
4.06 -- Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(3)
4.07 -- Certificate of Designation of Series A Cumulative Senior
Preferred Stock
4.08 -- Certificate of Designation of Series B Convertible
Preferred Stock
4.09 -- Certificate of Designation of Series C Cumulative
Convertible Junior Preferred Stock
4.10 -- Certificate of Designation of Series D Cumulative Junior
Preferred Stock
9.01 -- Voting Trust Agreement between Larry H. Ramming, Raymond
Henry, Richard Hatteberg, Danny Clayton and Brian Krause
(as amended)(2)
10.01 -- Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(1)
10.02 -- Executive Employment Agreement of Larry H. Ramming(1)
10.03 -- Executive Employment Agreement of Raymond Henry(1)
10.04 -- Executive Employment Agreement of Brian Krause(1)
10.05 -- Executive Employment Agreement of Richard Hatteberg(1)
10.06 -- Executive Employment Agreement of Danny Clayton(1)
10.07 -- Security Agreement and Financing Statement with Main
Street/Geneva(2)
10.08 -- First Amendment to Security Agreement (assigned to
Prudential)(2)
10.09 -- Stock Pledge Agreement with Main Street/Geneva (assigned
to Prudential)(2)
10.10 -- First Amendment to Stock Pledge Agreement (assigned to
Prudential)(2)
10.11 -- Form of Warrant issued to Main Street/Geneva(2)
10.12 -- Form of Registration Rights Agreement with Main
Street/Geneva(2)
10.13 -- Form of First Amendment to Registration Rights
Agreement(2)
10.14 -- 1997 Incentive Stock Plan(2)
10.15 -- Outside Directors' Option Plan(2)
10.16 -- Executive Compensation Plan(2)
10.17 -- Halliburton Center Sublease(2)
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
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)
10.34 -- Executive Employment Agreement of Thomas L. Easley(7)
10.35 -- Forbearance Agreement dated December 21, 1999, between
Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas
10.36 -- Second Amendment to Forbearance and Extension Agreement
dated April 21, 2000, between Boots & Coots International
Well Control, Inc. and Comerica Bank -- Texas
10.37 -- First Amendment to Forbearance and Extension Agreement
dated June 15, 2000, between Boots & Coots International
Well Control, Inc. and Comerica Bank -- Texas
10.38 -- Third Amendment to Loan Agreement dated April 21, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas
10.39 -- Fourth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas
10.40 -- Fifth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas
10.41 -- Sixth Amendment to Loan Agreement dated June 15, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas
10.42 -- Preferred Stock and Warrant Purchase Agreement, dated
April 15, 1999, between Boots & Coots International Well
Control, Inc. and Halliburton Energy Services, Inc.
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.43 -- Letter of Engagement, dated April 10, 2000, between Boots
& Coots International Well Control, Inc. and Maroon Bells
Capital, Inc.
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
10.45 -- Settlement Agreement, dated March 20, 2000, between Boots
& Coots International Well Control, Inc. and the Donald
and Shelley Moorehead Charitable Trust
21.01 -- List of subsidiaries(6)
23.01 -- Consent of Arthur Andersen LLP
23.02 -- Consent of Hein + Associates LLP
24.01 -- Power of Attorney (included on Signature Page)
27.01 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None
---------------
(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.
37
<PAGE> 38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
BOOTS & COOTS INTERNATIONAL
WELL CONTROL, INC.
By: /s/ LARRY H. RAMMING
----------------------------------
Larry H. Ramming,
Chief Executive and
Principal Financial Officer
Date: July 17, 2000
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Larry H. Ramming, his true and lawful
attorney-in-fact and agent with full power of substitution to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intent and purposes as he could do in person, hereby ratifying and confirming
that said attorney-in-fact or his substitute, or any of them, shall do or cause
to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
By: /s/ LARRY H. RAMMING Chief Executive Officer and July 17, 2000
----------------------------------------------------- Director
Larry H. Ramming (Principal Financial Officer)
By: /s/ JERRY WINCHESTER President, Chief Operating July 17, 2000
----------------------------------------------------- Officer and Director
Jerry Winchester
By: /s/ BRIAN KRAUSE Vice President and Director July 17, 2000
-----------------------------------------------------
Brian Krause
By: /s/ THOMAS L. EASLEY Director July 17, 2000
-----------------------------------------------------
Thomas L. Easley
By: /s/ K. KIRK KRIST Director July 17, 2000
-----------------------------------------------------
K. Kirk Krist
By: /s/ E. J. DIPAOLO Director July 17, 2000
-----------------------------------------------------
E. J. DiPaolo
By: /s/ W. RICHARD ANDERSON Director July 17, 2000
-----------------------------------------------------
W. Richard Anderson
</TABLE>
38
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. and subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Boots & Coots International Well Control, Inc. and subsidiaries as of December
31, 1998 and 1999, and the results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
A to the consolidated financial statements, the Company experienced recurring
losses from operations during 1999 due to downturns in the energy industry and
the resulting reduction of capital expenditures by the Company's customers in
the industry. 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 other things: (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 were deployed in
the more profitable operations. The Company's initial efforts commenced in the
first quarter 1999. Through 1999 and continuing into 2000, the results of these
efforts were not sufficient to prevent significant operating losses.
Furthermore, as of December 31, 1999 and continuing to date, the Company was not
in compliance with certain provisions of its revolving loan agreement with
Comerica Bank -- Texas and its Subordinated Note and Warrant Purchase Agreement
with Prudential Insurance Company of America. 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, the Company is not aware of
any other action taken by Prudential to collect such obligations. 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 securing those loans.
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.
The current uncertainties surrounding the sufficiency of its future cash flows
and the lack of firm commitments for additional capital raise substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
----------------------------------------
Arthur Andersen LLP
Houston, Texas
July 14, 2000
F-1
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Boots & Coots International Well Control, Inc.
We have audited the accompanying consolidated balance sheets of Boots &
Coots International Well Control, Inc. and subsidiaries as of June 30, 1997 and
December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year ended June 30, 1997 and for the
six-month period ended December 31, 1997 (as revised, see Note C). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Boots &
Coots International Well Control, Inc. and subsidiaries as of June 30, 1997 and
December 31, 1997, and the results of their operations and their cash flows for
the year ended June 30, 1997 and for the six-month period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
------------------------------------
Hein + Associates LLP
Houston, Texas
March 27, 1998
F-2
<PAGE> 41
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 3,930,000 $ 739,000
Receivables -- net of allowance for doubtful accounts of
$872,000 and $2,103,000 at December 31, 1998 and 1999,
respectively........................................... 18,366,000 8,885,000
Inventories............................................... 9,786,000 8,226,000
Prepaid expenses and other current assets................. 861,000 1,402,000
Net assets of discontinued operations..................... 8,697,000 --
----------- ------------
Total current assets.............................. 41,640,000 19,252,000
PROPERTY AND EQUIPMENT, net................................. 27,285,000 28,101,000
OTHER ASSETS:
Deferred financing costs and other assets -- net of
accumulated amortization of $448,000 and $853,000 at
December 31, 1998 and 1999, respectively............... 5,637,000 4,457,000
Goodwill -- net of accumulated amortization of $385,000
and $746,000 at December 31, 1998 and 1999,
respectively........................................... 14,739,000 10,438,000
----------- ------------
Total assets...................................... $89,301,000 $ 62,248,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $11,269,000 $ 14,858,000
Accrued liabilities and customer advances................. 7,347,000 8,486,000
Current maturities of long-term debt and notes payable.... 1,373,000 43,231,000
----------- ------------
Total current liabilities......................... 19,989,000 66,575,000
----------- ------------
LONG-TERM DEBT AND NOTES PAYABLE -- net of current
maturities................................................ 49,076,000 --
COMMITMENTS AND CONTINGENCIES (Note K)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
140,000 and 132,000 shares issued and outstanding at
December 31, 1998 and 1999, respectively) (Note I)..... -- --
Common stock ($.00001 par, 50,000,000 shares authorized,
33,044,091 and 35,243,683 shares issued and outstanding
at December 31, 1998 and 1999, respectively)........... -- --
Additional paid-in capital................................ 25,154,000 32,951,000
Accumulated deficit....................................... (4,918,000) (37,278,000)
----------- ------------
Total shareholders' equity (deficit).............. 20,236,000 (4,327,000)
----------- ------------
Total liabilities and shareholders' equity
(deficit)...................................... $89,301,000 $ 62,248,000
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 42
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES................................ $ 2,564,000 $ 5,389,000 $50,947,000 $ 67,565,000
COSTS AND EXPENSES:
Cost of Sales and Operating
Expenses........................... 1,460,000 3,786,000 36,792,000 55,683,000
Selling, General and Administrative... 1,061,000 1,536,000 10,724,000 19,608,000
Depreciation and Amortization......... 111,000 499,000 2,216,000 4,455,000
Write-down of long-lived assets....... -- -- -- 4,507,000
----------- ----------- ----------- ------------
2,632,000 5,821,000 49,732,000 84,253,000
----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)................. (68,000) (432,000) 1,215,000 (16,688,000)
INTEREST EXPENSE AND OTHER, NET......... 63,000 92,000 3,954,000 6,386,000
----------- ----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND INCOME TAXES... (131,000) (524,000) (2,739,000) (23,074,000)
INCOME TAX EXPENSE...................... 25,000 41,000 119,000 214,000
----------- ----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM.................... $ (156,000) $ (565,000) $(2,858,000) $(23,288,000)
LOSS FROM DISCONTINUED OPERATIONS, net
of income taxes (Note D).............. -- -- (138,000) (7,828,000)
----------- ----------- ----------- ------------
NET LOSS BEFORE EXTRAORDINARY ITEM...... $ (156,000) $ (565,000) $(2,996,000) $(31,116,000)
EXTRAORDINARY LOSS ON EARLY DEBT
EXTINGUISHMENT, net of income taxes... -- (193,000) -- --
----------- ----------- ----------- ------------
NET LOSS................................ $ (156,000) $ (758,000) $(2,996,000) $(31,116,000)
PREFERRED STOCK ACCRETION............... -- -- (865,000) (775,000)
PREFERRED DIVIDENDS PAID................ -- -- (76,000) (14,000)
PREFERRED DIVIDENDS ACCRUED............. -- -- -- (455,000)
----------- ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.......................... $ (156,000) $ (758,000) $(3,937,000) $(32,360,000)
=========== =========== =========== ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing Operations................. $ (0.01) $ (0.02) $ (0.12) $ (0.71)
=========== =========== =========== ============
Discontinued Operations............... -- -- -- (0.23)
=========== =========== =========== ============
Extraordinary Item.................... -- (0.01) -- --
=========== =========== =========== ============
Net Loss.............................. $ (0.01) $ (0.03) $ (0.12) $ (0.94)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING........................... 12,191,000 23,864,000 31,753,000 34,352,000
=========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 43
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEAR ENDED JUNE 30, 1997, SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 AND
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDERS'
---------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------ ---------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996................. -- $-- 11,500,000 $115 $ 800,000 $ (67,000) $ 733,000
Common stock issued for services
rendered........................... -- -- 1,058,000 11 46,000 -- 46,000
Common stock issued as placement
fees............................... -- -- -- -- 46,000 -- 46,000
Common stock issued in connection
with equity offering............... -- -- 1,629,000 16 -- -- --
Sale of common stock warrants........ -- -- -- -- 156,000 -- 156,000
Net loss............................. -- -- -- -- -- (156,000) (156,000)
------- --- ---------- ---- ----------- ------------ ------------
BALANCES, June 30, 1997................ -- -- 14,187,000 142 1,048,000 (223,000) 825,000
Common stock issued in connection
with equity offering............... -- -- 1,315,000 13 -- -- --
Exchange conversion with Havenwood
reverse merger..................... -- -- 1,173,000 12 -- -- --
Common stock issued to acquire Boots
& Coots L.P. assets................ -- -- 260,000 3 1,000,000 -- 1,000,000
Sale of common stock warrants........ -- -- -- -- 145,000 -- 145,000
Common stock issued to extinguish
debt............................... -- -- 3,867,000 39 2,447,000 -- 2,447,000
Sale of common stock, net of offering
costs.............................. -- -- 7,475,000 75 6,238,000 -- 6,238,000
Common stock issued to purchase
ABASCO, Inc........................ -- -- 300,000 3 240,000 -- 240,000
Common stock issued for services
rendered........................... -- -- 100,000 1 80,000 -- 80,000
Common stock issued upon exercise of
options............................ -- -- 1,287,000 12 -- -- --
Common stock issued upon exercise of
options............................ -- -- 35,000 -- 15,000 -- 15,000
Net loss............................. -- -- -- -- -- (758,000) (758,000)
------- --- ---------- ---- ----------- ------------ ------------
BALANCES, December 31, 1997............ -- -- 29,999,000 300 11,213,000 (981,000) 10,232,000
Common stock issued upon exercise of
options............................ -- -- 354,000 4 557,000 -- 557,000
Common stock issued in connection
with acquisitions.................. -- -- 500,000 5 650,000 -- 650,000
Common stock issued to acquire Baylor
Company, net of offering costs..... -- -- 540,000 5 2,855,000 -- 2,855,000
Common stock issued to acquire Boots
& Coots Special Services, Inc., net
of offering costs.................. -- -- 488,000 5 2,143,000 -- 2,143,000
Common stock issued to acquire HAZ-
TECH Environmental Services, Inc.,
net of offering costs.............. -- -- 269,000 2 695,000 -- 695,000
Preferred stock issued in connection
with equity offering, net of
offering costs..................... 196,000 -- -- -- 4,678,000 -- 4,678,000
Preferred stock dividends paid....... -- -- -- -- -- (76,000) (76,000)
Preferred stock accretion............ -- -- -- -- 865,000 (865,000) --
Preferred stock redemption........... (56,000) -- -- -- (1,400,000) -- (1,400,000)
Sale of common stock warrants........ -- -- -- -- 2,898,000 -- 2,898,000
Exercise of common stock warrants.... -- -- 894,000 9 -- -- --
Net loss............................. -- -- -- -- -- (2,996,000) (2,996,000)
------- --- ---------- ---- ----------- ------------ ------------
BALANCES, December 31, 1998............ 140,000 $-- 33,044,000 $330 $25,154,000 $(4,918,000) $ 20,236,000
======= === ========== ==== =========== ============ ============
</TABLE>
F-5
<PAGE> 44
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) -- (CONTINUED)
YEAR ENDED JUNE 30, 1997, SIX-MONTH PERIOD ENDED DECEMBER 31, 1997 AND
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL SHAREHOLDERS'
---------------- ------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------- ------ ---------- ------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred stock redemption........... (8,000) -- -- -- (200,000) (14,000) (214,000)
Preferred stock issued in private
placement, net of offering cost.... 50,000 -- -- -- 4,760,000 -- 4,760,000
Preferred stock dividends accrued.... -- -- -- -- 455,000 (455,000) --
Warrant discount accretion in
connection with preferred stock
issuance........................... -- -- -- -- 105,000 (105,000) --
Inducement to provide for conversion
of preferred stock to common
stock.............................. -- -- -- -- 460,000 (460,000) --
Advisory fees paid in connection with
conversion inducement.............. -- -- -- -- (107,000) -- (107,000)
Preferred stock conversion to common
stock.............................. (50,000) -- 788,000 8 -- -- --
Common stock issued in private
placement, net of offering costs... -- -- 1,400,000 14 1,865,000 -- 1,865,000
Warrant discount accretion in
connection with common stock
issuance........................... -- -- -- -- 210,000 (210,000) --
Exercise of common stock options..... -- -- 12,000 -- 5,000 -- 5,000
Warrants issued for consulting
services........................... -- -- -- -- 244,000 -- 244,000
Net loss............................. -- -- -- -- -- (31,116,000) (31,116,000)
------- --- ---------- ---- ----------- ------------ ------------
BALANCES, December 31, 1999............ 132,000 $-- 35,244,000 $352 $32,951,000 $(37,278,000) $ (4,327,000)
======= === ========== ==== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 45
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (156,000) $ (758,000) $(2,996,000) $(31,116,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 111,000 499,000 2,216,000 4,455,000
Common stock issued as compensation....................... 36,000 --
Bad debt expense.......................................... -- 7,000 591,000 1,484,000
Loss on debt extinguishment, net of tax................... -- 193,000 -- --
Loss on sale of assets.................................... -- -- -- 75,000
Write-down of long-lived assets........................... -- -- -- 4,507,000
Amortization of note discount............................. -- -- -- 293,000
Warrants issued for consulting services................... -- -- -- 244,000
Changes in operating assets and liabilities, net of assets
and liabilities acquired:
Receivables............................................. (1,076,000) (1,392,000) (7,188,000) 7,998,000
Inventories............................................. (288,000) 338,000 (1,347,000) 1,560,000
Prepaid expenses and other current assets............... (43,000) (380,000) (233,000) (541,000)
Deferred costs and other assets......................... (34,000) -- (4,009,000) (570,000)
Accounts payable, accrued liabilities and customer
advances.............................................. 1,098,000 1,003,000 5,904,000 6,094,000
Change in net assets of discontinued operations......... -- -- (8,697,000) 8,697,000
----------- ----------- ------------ ------------
Net cash provided by (used in) operating
activities........................................ (352,000) (490,000) (15,759,000) 3,180,000
----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, including transaction costs,
net of cash acquired.................................... (45,000) (2,874,000) (23,597,000) --
Property and equipment additions.......................... (123,000) (188,000) (3,982,000) (5,544,000)
Disposition of assets..................................... 4,000 39,000 -- 375,000
----------- ----------- ------------ ------------
Net cash used in investing activities............... (164,000) (3,023,000) (27,579,000) (5,169,000)
----------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised............................ -- 15,000 557,000 5,000
Proceeds from issuance of debt and warrants............... 1,555,000 1,445,000 62,118,000 --
Borrowings under line of credit........................... -- -- 21,000,000 38,140,000
Deferred financing costs.................................. (321,000) (210,000) (2,605,000) --
Debt repayments........................................... (71,000) (3,223,000) (38,722,000) (45,651,000)
Proceeds from sales of common stock....................... -- 6,503,000 -- 1,865,000
Proceeds from the issuance of redeemable preferred stock
and warrants............................................ -- -- 4,678,000 4,760,000
Advisory fees paid to induce conversion of preferred stock
to common stock......................................... -- -- -- (107,000)
Preferred stock dividends................................. -- -- (76,000) (14,000)
Preferred stock redemption................................ -- -- (1,400,000) (200,000)
----------- ----------- ------------ ------------
Net cash provided by (used in) financing
activities........................................ 1,163,000 4,530,000 45,550,000 (1,202,000)
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH............................. 647,000 1,017,000 2,212,000 (3,191,000)
CASH AND CASH EQUIVALENTS, beginning of period.............. 54,000 701,000 1,718,000 3,930,000
----------- ----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 701,000 $ 1,718,000 $ 3,930,000 $ 739,000
=========== =========== ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 53,000 $ 66,000 $ 2,550,000 $ 4,513,000
Cash paid for income taxes................................ $ 23,000 $ 41,000 $ 278,000 $ 265,000
=========== =========== ============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock and common stock options issued in exchange
for property and equipment and services rendered........ $ 56,000 $ 80,000 $ 650,000 $ --
Conversion of subordinated debt to common stock........... -- 2,900,000 -- --
Issuance of common stock in acquisitions.................. -- 1,240,000 6,235,000 --
Stock offering costs...................................... -- 541,000 587,000 400,000
Warrants issued with financings........................... -- -- 2,898,000 315,000
Inducement to provide for conversion of preferred stock to
common stock............................................ -- -- -- 460,000
Preferred stock dividends accrued......................... -- -- -- 455,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 46
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. IMPAIRMENTS AND 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
into 1999. World-wide oil and gas prices and related activity including many
refined products hit new lows in late 1998 and early 1999, on an inflation
adjusted basis, for the past several decades, impacting the Company and its
competitors. It should further be considered that with the exception of this
latest commodity value pricing fluctuation, crude and refined products pricing
have been historically considered cyclical. Some improvements in the industry
have occurred through the first six months of 2000, however to date the
Company's well control businesses have not yet benefited to a meaningful degree
from price improvements due to the lag time in exploration and production
companies restoring capital and operating budgets that have been materially
curtailed since the third quarter of 1998 and 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. In the
years ended December 31, 1998 and 1999, the Company incurred after-tax losses of
$2,858,000 and $23,288,000, respectively, from continuing operations and
$2,996,000 and $31,116,000 in net losses after consideration of discontinued
operations. A decision was made to discontinue the operations of the Company's
ITS subsidiary and such operation is reported as a discontinued operation in the
accompanying consolidated financial statements. See Note D.
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 July 31, 2000 and there is
no assurance such agreements can be further extended. Outstanding borrowings
under the Comerica Loan Agreement of $14,321,000 at December 31, 1999 have been
included in current maturities of long-term debt and notes payable in the
accompanying financial statements.
As of December 31, 1999, 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. Such financial covenant non-compliance continues
through the date hereof. 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, the Company is not aware of any other action taken by
Prudential to collect such obligations. Further, quarterly interest payments due
since July 23, 1999 on the Prudential Subordinated Note 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 the
$30,000,000 Prudential Note and
F-8
<PAGE> 47
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued interest thereon. Based on the uncertain status of the Company's
discussions with Prudential, the outstanding balance of the Prudential
Subordinated Notes of $28,046,000 has been included in current maturities on
long-term debt and notes payable in the accompanying financial statements. An
additional obligation to Prudential of $1,954,000, representing the remaining
note face amount as of December 31, 1999 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 of
$30,000,000.
The Company has continued to explore possibilities for new improved debt
financing and/or equity infusions. As discussed in Note M, through July 14,
2000, $6,635,000 (unaudited) 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. The Company has received a
commitment, expiring on July 31, 2000, from a senior secured credit facility
that would replace the Comerica facility. There are substantive unresolved
issues associated with closing this facility and negotiations are ongoing with
the prospective lender. In addition, the Company has ongoing discussions
regarding the sale of certain assets and operations; however, there are no
definitive agreements in place as of this date.
The new financing obtained to date and any future additional financing 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.
During the fourth quarter of 1999, the Company recorded a charge to
operations of $4,507,000 to reduce the carrying value of long-lived assets as
follows:
<TABLE>
<S> <C>
Property and Equipment:
Boots & Coots Special Services........................ $ 399,000
ABASCO................................................ 286,000
----------
685,000
Goodwill:
Boots & Coots Special Services........................ 2,347,000
Haz-Tech.............................................. 821,000
ABASCO................................................ 654,000
----------
3,822,000
----------
TOTAL......................................... $4,507,000
==========
</TABLE>
In addition, certain ABASCO manufactured inventories were reduced $613,000
to reflect decreased market value as a result of the decision to suspend and
outsource manufacturing operations at ABASCO.
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 securing
those loans. 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 and liquidity issues and attain profitable operations.
The Company believes that (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
F-9
<PAGE> 48
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. ORGANIZATION:
Boots & Coots International Well Control, Inc. (the "Company"), formerly
known as Havenwood Ventures, Inc. ("Havenwood"), was incorporated in Delaware in
April 1988. Havenwood was originally formed to serve as a blind pool investment
fund, and in July 1988 Havenwood raised $500,000 in an initial public offering
of its common stock. After completing its initial public offering, Havenwood
expended its available resources in the development of a business enterprise
which it ultimately divested, thereafter remaining inactive, with no material
assets or liabilities, until it entered into a business combination with IWC
Services, Inc. on July 29, 1997.
The Company acquired IWC Services, Inc. ("IWC Services") on July 29, 1997,
in a transaction in which it issued shares of common stock to the stockholders
of IWC Services in exchange for all of the issued and outstanding common stock
of IWC Services and issued options and warrants to purchase common stock of the
Company in exchange for all of the options and warrants to purchase common stock
of IWC Services then outstanding. As a result of the merger, IWC Services became
a wholly-owned subsidiary of the Company, the stockholders of IWC Services
became the beneficial holders of approximately 93% of the post-merger issued and
outstanding shares of common stock and the board of directors and management of
IWC Services began management of the Company. For accounting purposes, this was
treated as an acquisition by IWC Services of Havenwood.
IWC Services, incorporated in Texas on June 27, 1995, was formed with the
issuance of 100,000 shares of no par common stock (increased to 5,000,000
pursuant to a 50-to-one stock split discussed in Note I) in exchange for cash of
$549,000, property and equipment valued at $108,925 assigned by Buckingham
Capital Corporation, and services performed by certain other shareholders, prior
to the transaction. The shareholders of Hell Fighters, a Texas corporation,
incorporated on May 4, 1995, contributed to IWC Services all of their
outstanding common shares of Hell Fighters, becoming a wholly-owned subsidiary
of IWC Services. IWC Services had no operations prior to its acquisition of Hell
Fighters, Inc. ("Hell Fighters").
Under the plan of merger between Havenwood and IWC Services, (i) the
outstanding voting securities of the Company were reverse split in the ratio of
one post-split share for every 135 pre-split shares held by a shareholder,
provided, however, that no single shareholder's share ownership was reduced to
fewer than 100 post-split shares; (ii) certain principal shareholders of the
Company surrendered a total of 741,000 post-split shares to the Company for
cancellation, leaving a total of 1,173,000 shares of common stock issued and
outstanding on the closing date; (iii) each issued and outstanding share of
common stock of IWC Services was converted into 2.30 post-merger shares of the
Company's common stock, amounting to approximately 15,502,000 post-merger shares
in the aggregate (all share amounts herein have been adjusted to reflect this
2.30 for 1 split); (iv) outstanding options and warrants to purchase shares of
the authorized and unissued common stock of IWC Services were converted into
substantially similar options and warrants to purchase shares of the Company's
authorized and unissued common stock, and (v) IWC Services became a wholly-
owned subsidiary of the Company with the former IWC Services shareholders, as a
group, acquiring shares representing approximately 93% of the resulting
capitalization of the Company. Following the completion of the transactions,
there were approximately 16,675,000 shares of the Company's common stock issued
and outstanding. Immediately after the merger, all the officers and directors of
the Company resigned and were replaced by representatives of IWC.
C. SIGNIFICANT ACCOUNTING POLICIES:
Consolidation -- The accompanying consolidated financial statements include
the financial transactions and accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
F-10
<PAGE> 49
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition -- Revenue is recognized on the Company's service
contracts either as earned on the basis of day work completed or, for turnkey
contracts, on the percentage-of-completion method based upon costs incurred to
date and estimated total contract costs. Revenue and cost from product and
equipment sales is recognized upon contract completion.
The Company recognizes profits on long-term manufacturing contracts on the
percentage-of-completion method and uses the completed contract method of
accounting on a contract-per-contract basis. The completed contract method is
used when a lack of dependable estimates and inherent hazards may cause the
production of unreliable data. A contract is considered to be complete when all
costs except insignificant items have been incurred and the installation is
operating according to specifications or has been accepted by the customer.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Inventories -- Inventories consist primarily of equipment, parts and
supplies, work-in-progress and finished goods. Inventories are valued at the
lower of cost or market with cost determined using the first-in first-out
method.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation is provided principally using the straight-line method over the
estimated useful lives of the respective assets as follows: buildings and
improvements (15-31.5 years), manufacturing equipment (8-12 years), well control
and fire-fighting equipment (8 years), shop and other equipment (8 years),
vehicles (5 years) and office equipment and furnishings (5 years). Facilities
and leasehold improvements are amortized over remaining primary lease terms.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.
Realization of Long Lived Assets -- In accordance with Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), the
Company evaluates the recoverability of property and equipment, goodwill and
other long-lived assets, if facts and circumstances indicate that any of those
assets might be impaired. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if an impairment of such property is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such property and its carrying value. As discussed in Note A, during
the fourth quarter of 1999 the Company recorded a charge to operations of
$4,507,000 to recognize impairments on certain property and equipment and
goodwill.
Goodwill -- The Company amortizes costs in excess of fair value of net
assets of businesses acquired using the straight-line method over periods
ranging from 15 to 40 years. Recoverability is reviewed annually or sooner if
events or changes in circumstances indicate that the carrying amount may exceed
fair value. Recoverability is then determined by comparing the estimated
undiscounted net cash flows of the assets to which the goodwill applies to the
net book value including goodwill of those assets. Goodwill shown in the
consolidated financial statements relates to the Company's acquisitions of the
assets of IWC, Boots & Coots LP, ABASCO Inc., ITS Supply Corporation, Boots &
Coots Special Services, Inc. (f/k/a Code 3, Inc.), Baylor Company and HAZ-TECH
Environmental Services, Inc. For business acquisitions made prior to December
31, 1997, goodwill is amortized over 15 years. Management performs a fair market
value computation for each acquisition and the resulting goodwill is amortized
over the appropriate lives, typically
F-11
<PAGE> 50
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
40 years for each acquisition. The allocations of the purchase prices to the
assets acquired and liabilities assumed of these companies have been recorded
based upon preliminary estimates of fair value and may be adjusted in the year
following the acquisition as additional information becomes available.
Amortization expense of goodwill was $13,000 for the year ended June 30,
1997, $20,000 for the six-month period ended December 31, 1997, and $339,000 and
$457,000 for the years ended December 31, 1998 and 1999, respectively.
Foreign Currency Transactions -- The functional currency of the Company's
foreign operations is the U.S. dollar. Substantially all customer invoices and
vendor payments are denominated in U.S. currency. Revenues and expenses from
foreign operations are remeasured into U.S. dollars on the respective
transaction dates and foreign currency gains or losses are included in the
Consolidated Statements of Operations. The majority of the foreign transactions
have terms that require a reimbursement of the currency fluctuation. This
mitigates the exposure to foreign currency losses. The Company does not enter
into hedge contracts, derivatives or interest rate swaps.
Income Taxes -- The Company accounts for income taxes pursuant to the
liability method, which requires recognition of deferred income tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Under this
method, deferred income tax liabilities and assets are determined based on the
temporary differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities and available tax carryforwards.
Risk Factors -- Risk factors of the Company include, but are not limited
to, liquidity constraints, acquisition financing, acquisition strategy including
the related uncertainty of future profitability, environmental and governmental
regulations, and the ability to generate sufficient cash flows to meet working
capital requirements and to finance its business plan.
Earnings Per Share -- Basic and diluted loss per common share was computed
by dividing net loss attributable to common shareholders by the weighted average
common shares outstanding during the year ended June 30, 1997, the six-month
period ended December 31, 1997, and the years ended December 31, 1998 and 1999.
Options and warrants to purchase shares of common stock were outstanding during
the respective periods but were not included in the computation of diluted loss
per common share, because these losses made the options and warrants
anti-dilutive.
Fair Value of Financial Instruments -- The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term maturities of these instruments. Management believes that the
carrying amount of long-term debt approximates fair value as the majority of
borrowings bear interest at current market interest rates for similar debt
structures.
Recently Issued Accounting Standards -- In June 1998, Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") was issued. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument be measured
at its fair value, recorded in the balance sheet as either an asset or liability
and that changes in the derivative's fair value be recognized currently in
earnings. SFAS 133, as amended, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet quantified the impacts of
adopting SFAS 133 on its financial statements. The Company did not early adopt
SFAS 133, therefore it will be adopted in 2001.
In December 1999, SEC Staff Accounting Bulletin: No. 101 -- Revenue
Recognition in Financial Statements ("SAB 101") was issued. SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company believes
its accounting practices are consistent with this rule but will complete its
evaluation in the third quarter of 2000.
F-12
<PAGE> 51
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates -- The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes. Actual
results could differ from these estimates.
Cash Flow Information -- The Company considers all unrestricted, highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Change in Fiscal Year -- Effective December 8, 1997, the Company changed
its fiscal year from June 30 to December 31. The consolidated financial
statements include presentation of the transition period beginning on July 1,
1997 and ending December 31, 1997.
Change in Presentation -- Certain reclassifications have been made in prior
period consolidated financial statements to conform to current year
presentation.
D. DISCONTINUED OPERATIONS:
A 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 December 1999 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 fully amortize goodwill associated
with the ITS acquisition. In April 2000, substantially all prospective
operations were ceased and the majority of 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 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 that it is not probable that any creditors of ITS may 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
recognized. As discussed in Note K, the Company is contingently liable for a
guaranty issued to a creditor of ITS. The results of operations of ITS are
presented as discontinued operations in the accompanying consolidated financial
statements. The following table presents the revenues, loss from operations and
gain on disposal of ITS due to the ITS bankruptcy filing:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Revenues.................................................. $25,336,000 $ 11,299,000
Loss from operations before income taxes.................. (34,000) (10,652,000)
Provision for income taxes................................ 104,000 --
Adjustment to offset loss from operations in excess of the
Company's net investment in ITS......................... -- 2,824,000
----------- ------------
Net loss from discontinued operations........... $ (138,000) $ (7,828,000)
=========== ============
</TABLE>
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.
F-13
<PAGE> 52
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. BUSINESS ACQUISITIONS:
On July 31, 1997, IWC Services acquired all of the operating assets,
including stock of its foreign services subsidiaries, of Boots & Coots, L.P.
("Boots & Coots"), an oil and gas well control firefighting, snubbing and
industrial and marine firefighting company. The consideration paid consisted of
(i) $369,000 cash payable to Boots & Coots, (ii) $681,000 placed in escrow to
pay certain debts of Boots & Coots, (iii) the issuance of secured promissory
notes of the Company in the aggregate principal amount of $4,761,000 and (iv)
260,000 shares of common stock valued at $3.85 per share of the Company. The
promissory notes, secured by the acquired assets of Boots & Coots, were paid in
1998, after the determination of foreign tax obligations. This transaction was
accounted for as a purchase and the acquired assets and liabilities of Boots &
Coots were valued at fair market value as of July 31, 1997 resulting in goodwill
of $1,420,000 which is being amortized over 15 years.
On September 25, 1997, the Company formed a wholly-owned subsidiary
company, ABASCO, Inc. ("ABASCO") to purchase the assets of ITS Environmental, a
manufacturer and distributor of rapid response oil and chemical spill
containment and reclamation equipment and products since 1975. The Company paid
$1,590,000 in cash and issued 300,000 shares of common stock valued at $0.80 per
share to acquire the manufacturing equipment, inventory and customer lists. This
transaction was accounted for as a purchase and the acquired assets and
liabilities of ABASCO were valued at fair market value effective as of September
12, 1997 resulting in goodwill of $750,000 which was being amortized over 25
years.
On January 2, 1998, the Company funded the acquisition, effective as of
December 31, 1997, of all of the capital stock of ITS Supply Corporation
("ITS"), an ISO 9002 certified materials and equipment procurement,
transportation and logistics company that serves the energy industry worldwide,
with offices in Houston, Venezuela, Peru, Dubai (UAE) and the United Kingdom.
ITS also serves as a distributor in Venezuela and Peru of artificial lift oil
recovery systems. Total consideration of $6,000,000 for the acquisition was
provided from working capital ($500,000); proceeds from the issuance of 10%
Senior Secured Notes due May 2, 1998 ($4,500,000); and short-term bridge
financing from the seller ($1,000,000). As discussed in Note D, management
decided to discontinue the operations of the Company's ITS subsidiary and such
operation is reported as a discontinued operation in the accompanying
consolidated financial statements.
On February 20, 1998, the Company completed the acquisition of all of the
stock of Code 3, Inc. ("Code 3"). Consideration for the acquisition of Code 3
(subsequently renamed Boot & Coots Special Services, Inc.,) included $571,000
cash; the repayment of Code 3 corporate secured debt and interest thereon of
approximately $1,250,000; the allotment of $550,000 of Code 3 accounts
receivable to the former shareholders; and the issuance of 488,000 shares of the
Company's common stock valued at $5.06 per share, of which 159,000 shares were
delivered into escrow to secure the indemnification obligations of the
stockholders of Code 3. This transaction was accounted for as a purchase and the
acquired underlying net assets of Code 3 were valued during 1998 at the
estimated fair market value, resulting in goodwill of $4,064,000 which is being
amortized over 40 years.
On July 23, 1998, the Company completed the acquisition of 100% of the
outstanding shares of common stock of Elmagco, Inc., a Delaware Corporation
("Elmagco") from Begemann, Inc., a Delaware Corporation ("Begemann"). Elmagco
and its subsidiaries conduct business using the trade name Baylor Company
("Baylor"). Baylor is engaged in the design and manufacture of electrical
braking and control equipment predominantly used in the drilling and marine
markets, highly engineered specialty products such as SCR systems and custom
pedestal leg locking systems for the offshore market. Additionally, Baylor
designs and manufactures a broad line of custom AC generators, which are used in
a variety of industrial, commercial and governmental applications.
Consideration for the acquisition of Baylor, with a June 30, 1998 effective
date, was approximately $25,000,000 in cash, a $2,000,000 dividend payment and
the issuance at closing of 540,000 shares of the Company's common stock valued
at $5.63 per share. This transaction was accounted for as a purchase and the
F-14
<PAGE> 53
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired net assets and liabilities of Baylor have been valued at fair market
value resulting in goodwill of $7,294,000 which is being amortized over 40
years.
On November 4, 1998 the Company's wholly-owned subsidiary, Boots & Coots
Special Services, Inc., completed the acquisition through merger of HAZ-TECH
Environmental Services, Inc. ("HAZ-TECH"), an emergency prevention and response
services company with operations in Arkansas, Oklahoma, Louisiana and Northeast
Texas. Consideration for the HAZ-TECH acquisition was $316,000 in cash and the
issuance of 269,000 shares of the Company's common stock valued at $2.69 per
share and assumed liabilities. This transaction was accounted for as a purchase
and the acquired net assets of HAZ-TECH were valued during 1998 at estimated
fair market value resulting in goodwill of $1,413,000 which is being amortized
over 40 years.
For all acquisitions, the fair value of common stock issued is estimated
using management's and the board of directors' judgment, which is based on
recent transactions, the trading value of Company stock, trading value of
similar investments, discussions with financial advisors, and the negotiations
with sellers.
The operations of the acquired entities have been included in the Company's
consolidated operations from the respective acquisition dates. The Company's
1997 and 1998 revenues, net loss attributable to common shareholders, and net
loss per common share on an unaudited pro forma basis, assuming that the IWC,
ABASCO, B & C Special Services, Baylor and HAZ-TECH acquisitions occurred on
January 1, 1997 would be as follows:
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues................................................... $96,997,000 $79,092,000
Net Loss to Common Shareholders............................ (412,000) (4,343,000)
Basic and Diluted Loss Per Common Share.................... (.03) (.13)
</TABLE>
F. INVENTORIES, PROPERTY AND EQUIPMENT:
Inventories consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Raw material and supplies................................... $2,862,000 $6,307,000
Work in process............................................. 4,327,000 1,430,000
Finished goods.............................................. 2,597,000 489,000
---------- ----------
$9,786,000 $8,226,000
========== ==========
</TABLE>
Property and equipment consisted of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Land....................................................... $ 2,241,000 $ 2,241,000
Buildings and improvements................................. 7,421,000 8,524,000
Well control and firefighting equipment.................... 13,451,000 14,786,000
Shop and other equipment................................... 3,179,000 3,535,000
Vehicles................................................... 582,000 790,000
Office equipment and furnishings........................... 2,359,000 2,826,000
Construction in progress................................... 530,000 985,000
----------- -----------
Total property and equipment............................... 29,763,000 33,687,000
Less: Accumulated depreciation................... (2,478,000) (5,586,000)
----------- -----------
Net property and equipment....................... $27,285,000 $28,101,000
=========== ===========
</TABLE>
F-15
<PAGE> 54
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
G. INCOME TAXES:
The Company and its wholly-owned domestic subsidiaries file a consolidated
Federal income tax return. The provision for income taxes shown in the
Consolidated Statements of Operations is made up of current, deferred and
foreign tax expense as follows:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Continuing Operations:
Federal
Current........................... $ -- $ -- $ -- $ --
Deferred.......................... -- -- -- --
State
Current........................... -- -- 47,000 132,000
Deferred.......................... -- -- -- --
Foreign............................. 25,000 41,000 72,000 82,000
------- ------- -------- --------
Total..................... 25,000 41,000 119,000 214,000
------- ------- -------- --------
Discontinued operations:
Current........................... -- -- 104,000 --
Deferred.......................... -- -- -- --
------- ------- -------- --------
Total..................... -- -- 104,000 --
Income tax expense........ $25,000 $41,000 $223,000 $214,000
======= ======= ======== ========
</TABLE>
The above foreign taxes represent income tax liabilities in the respective
foreign subsidiary's domicile. The provision for income taxes differs from the
amount that would be computed if the loss before income taxes were multiplied by
the Federal income tax rate (statutory rate) as follows:
<TABLE>
<CAPTION>
YEAR SIX-MONTH
ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income tax benefit at the statutory
rate (34%)....................... $(45,000) $(258,000) $(943,000) $(10,507,000)
Increase resulting from:
Foreign taxes in excess of
statutory rate................ 25,000 41,000 176,000 82,000
State income taxes, net of
related tax effect............ -- -- 31,000 87,000
Unrecognized net operating
losses........................ 45,000 258,000 902,000 6,680,000
Foreign income deemed
repatriated................... -- -- -- 1,112,000
Goodwill amortization............ -- -- -- 2,674,000
Other............................ -- -- 57,000 86,000
-------- --------- --------- ------------
$ 25,000 $ 41,000 $ 223,000 $ 214,000
======== ========= ========= ============
</TABLE>
As of December 31, 1998 and 1999, the Company has net domestic operating
loss carryforwards of approximately, $2,221,000 and $22,362,000, respectively,
expiring in various amounts beginning in 2011. The net operating loss
carryforwards, along with the other timing differences, generate a net deferred
tax asset in each year the Company has recorded valuation allowances for these
net deferred tax assets since management
F-16
<PAGE> 55
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
believes it is more likely than not the assets will not be realized. The
temporary differences representing deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Deferred income tax liabilities
Depreciation and amortization........................... $(1,181,000) $(1,681,000)
----------- -----------
Total deferred income tax liabilities........... (1,181,000) (1,681,000)
=========== ===========
Deferred income tax assets
Net operating loss carryforward......................... 1,205,000 7,603,000
Asset disposals......................................... -- 547,000
Allowance for doubtful accounts......................... 270,000 823,000
Inventory -- IRS Code Section 263A Costs................ 298,000 285,000
Accruals................................................ 329,000 467,000
Foreign tax credit...................................... -- 273,000
Warranty reserves....................................... 244,000 222,000
Other assets............................................ 33,000 51,000
----------- -----------
Total deferred income tax assets................ 2,379,000 10,271,000
=========== ===========
Valuation allowance..................................... (1,198,000) (8,590,000)
----------- -----------
Total deferred income tax asset................. 1,181,000 1,681,000
=========== ===========
Net deferred tax asset (liability).............. -- --
=========== ===========
</TABLE>
H. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
11.28% Senior Subordinated Note -- Net of Warrant Value
($30,000,000 -- Face).................................... $27,748,000 $28,046,000
Revolving Loan Agreement................................... 21,000,000 14,321,000
10% Shareholder Note....................................... 1,217,000 569,000
12% Subordinated Note...................................... 90,000 90,000
Vehicle and equipment notes bearing interest at rates from
9.25% to 12.25%, payable in monthly installments, through
April 2003 and collateralized by vehicles and
equipment................................................ 394,000 205,000
----------- -----------
Total............................................ 50,449,000 43,231,000
Less: current maturities of long-term debt and
notes
payable........................................ 1,373,000 43,231,000
----------- -----------
Total long-term debt and notes payable........... $49,076,000 $ --
=========== ===========
</TABLE>
In January 1997, through a Private Placement Memorandum, the Company issued
Investment Units which consisted of a 12% Senior Subordinated Note (the "Notes")
in the principal amount of $1,000 with a warrant to purchase shares of the
Company's common stock at a discounted price. Management estimated the fair
value of the proceeds applicable to the warrants issued through June 30, 1997 to
be $156,000 and for the six-month period ended December 31, 1997 to be $145,000,
which have been amortized to interest expense over the term of the notes.
Interest on the Notes at the rate of 12% per annum (13.3% effective interest
rate based on reduced note balances) is payable semi-annually commencing July 1,
1997 with maturity date for the Notes on December 31, 2000, subject to extension
for up to two periods of six months each with an increase in the interest rate
to 14%. Net proceeds, after sales commissions and offering expenses, (deferred
and amortized
F-17
<PAGE> 56
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
over term of notes) from $3,000,000 in notes sold pursuant to this financing
were utilized for working capital and business expansion purposes. Effective
September 12, 1997, holders of the Company's 12% Senior Subordinated Notes were
offered the election to exercise the warrants into common stock of the Company
at an exchange rate of $.75 per share with payment accomplished through
surrender and retirement of their notes. An aggregate face amount of $2,900,000
of Notes were converted into an aggregate of 3,867,000 shares of common stock
with $193,000 recognized as an extraordinary charge to operations for early
extinguishment of indebtedness. The carrying amount, net of costs associated
with debt offering, was transferred to equity at time of conversion.
In connection with the acquisition of ITS, the Company sold through private
placement 10% Senior Secured Notes on January 2, 1998, and concurrently entered
into a financial advisory arrangement pursuant to which the note holders are to
provide a certain level of financial, merger and acquisition advisory services
over a three-year period in consideration of an advance cash consulting fee of
$500,000, all of which was added to the principal balance of the Senior Secured
Notes which had a scheduled maturity date of May 2, 1998. The commitment for the
Senior Secured Notes by the note holders also required the payment by the
Company of a $50,000 commitment fee. The holders of the 10% Senior Secured Notes
were also issued warrants exercisable over a six year term to purchase an
aggregate of 2,000,000 shares of the Company's common stock at a price of $2.62
per share. Using the Black-Scholes pricing model, an estimated fair value was
attributed to the warrants issued and has been subsequently charged to
operations as interest expense over the term of the 10% Senior Secured Notes.
During 1998, through mutual agreement with the holder of the warrants, the
warrants were converted to 777,000 shares of common stock. Also in connection
with the acquisition of ITS, seller financing of $1,000,000 was obtained. The
seller note, together with interest at the rate of 10% per annum, was repaid
during 1998.
In connection with the acquisition of Code 3, on March 5, 1998, the Company
sold through private placement to the note holders providing financing for the
ITS acquisition an additional $2,250,000 of 10% Senior Secured Notes due June
15, 1998. In addition, these note holders were issued attached warrants,
exercisable over a six year term, to purchase an additional 500,000 shares of
the Company's common stock at a price of $4.50 per share. Using the
Black-Scholes pricing model, an estimated fair value of $516,000 was attributed
to the warrants issued in connection with the 10% Senior Secured Notes and has
been charged to operations as interest expense over the three-month term of the
notes during the year ended December 31, 1998.
The Company's Chairman and Chief Executive Officer, Larry H. Ramming, was
granted a waiver of the lock-up restrictions on his shares of common stock with
respect to a pledge of such shares to secure a loan, the proceeds of which were
used by Mr. Ramming on April 30, 1998 to purchase the $7,000,000 remaining
balance outstanding on the 10% Senior Secured Notes issued by the Company in
connection with the acquisitions of ITS and Code 3. Mr. Ramming agreed to extend
the maturity dates of such notes to October 1, 1998 and thereafter on a
month-to-month basis, in exchange for a fee of 1% of the principal balances of
such note. As of December 31, 1998, the Company had paid Mr. Ramming $5,783,000
to be applied toward the principal balance of the 10% Notes held by Mr. Ramming
and $383,000 in interest and extension fees. During the period from January 1,
1999 through April 15, 1999, at which time Mr. Ramming agreed to subordinate and
delay future note payments so long as the Comerica senior secured credit
facility remained outstanding, additional principal payments of $648,000 were
paid to Mr. Ramming. As further consideration for the certain bridge financing,
Mr. Ramming was eligible to be granted 2,000,000 options to purchase common
stock at a per share price of $0.75 subject to issuance and availability of
authorized and unissued or committed common shares which was voluntarily
deferred in exchange for the commitment of the Company to issue subject to
availability of authorized but unissued or committed shares of common stock in
the Company. This act was taken to make available additional authorized but
unissued and uncommitted shares in connection with financing transactions
completed subsequent to December 31, 1999. At December 31, 1999, the remaining
principal balance on this note, which remains subordinated to the Company's
senior secured debt, is $569,000.
F-18
<PAGE> 57
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued interest and additional accrued but unpaid extension fees aggregate
$270,000. Management believes the terms and conditions of Mr. Ramming's loan to
the Company are favorable to those that could have been negotiated with outside
parties.
Concurrent with the acquisition of Baylor on July 23, 1998, and to provide
the Company with cash to fund the acquisition and for other corporate purposes,
the Company completed the sale of $15,000,000 of Senior Secured Notes due
January 6, 1999 (the "Senior Notes") and $30,000,000 of 11.28% Senior
Subordinated Notes due July 23, 2006 (the "Subordinated Notes") to The
Prudential Insurance Company of America ("Prudential"). Proceeds from these
financing transactions were used to fund the Baylor acquisition, repay
$5,000,000 in bridge financing provided through Prudential Securities Credit
Corporation on July 6, 1998 and provide working capital.
The Subordinated Note and Warrant Purchase Agreement relating to the
Subordinated Notes imposes restrictions on the Company's activities including,
without limitation, with respect to the payment of dividends or other
distributions on its capital stock; incurring additional indebtedness; granting
liens to secure any other indebtedness; making loans or advances to, or
investments in, other persons or entities; liquidating, dissolving or merging
with another company; dispositions of assets; transactions with affiliates;
changing the nature of its business; and the issuance of additional shares of
preferred stock. Further, the Company is required to meet certain minimum
financial tests so long as the Subordinated Notes are outstanding. The
Subordinated Note and Warrant Purchase Agreement also provided for customary
affirmative and negative covenants.
In connection with the sale of the Subordinated Notes, the Company issued
to Prudential Warrants to purchase, commencing on July 23, 2000 and terminating
with the later of July 23, 2008, or six months after the Subordinated Notes are
fully retired, 3,165,000 shares of common stock (the "Warrants") of the Company
at an initial exercise price of $6.70 per share. The Warrants contains
anti-dilution and repricing provisions that may result in downward adjustments
to the exercise price upon the occurrence of certain events and a provision for
the "cashless" exercise of the Warrants. The Company granted Prudential a
one-time demand registration right and unlimited "piggyback" registration rights
for the shares of common stock issuable upon the exercise of the Warrants. The
Company and certain stockholders of the Company also agreed with Prudential that
in the event of significant sales of securities of the Company by the Company or
such stockholders, Prudential would be entitled to participate in such sale.
Using the Black-Scholes pricing model, an estimated fair value of $2,382,000 was
attributed to the Warrants issued in connection with the sale of the Notes and
is being periodically charged to interest expense over the term of the
Subordinated Notes.
As of December 31, 1999, and continuing through July 14, 2000, 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. Such financial covenant
non-compliance continues through the date hereof. 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, the Company is not
aware of any other action taken by Prudential to collect such obligations.
Further, quarterly interest payments due since July 23, 1999 on the Prudential
Subordinated Note 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 modification of certain financial covenants and deferral of the unpaid
quarterly interest payments and other proposals designed to resolve the
subordinated debt and related interest obligations. Based on the status of the
Company's discussions with Prudential, the outstanding balance of the Prudential
Subordinated Notes of $28,046,000 has been included in current maturities of
long-term debt and notes payable in the accompanying financial statements. In
the event that the Prudential Subordinated Notes are early extinguished,
amortization of warrant discounts totaling $1,954,000 at December 31, 1999 and
deferred financing costs totaling $1,093,000 at December 31, 1999 would be
accelerated.
F-19
<PAGE> 58
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 28, 1998, the Company entered into a Revolving Loan Agreement
with Comerica Bank Texas ("Comerica"), as agent and lender, providing for a
$25,000,000 revolving loan facility (the "Comerica Loan Agreement"). The
Company, subject to a borrowing base formula, had drawn through December 31,
1998 $21,000,000 under the Comerica Loan Agreement to repay all of the interim
$15,000,000 Prudential Senior Notes. Advances under the Comerica Loan Agreement
bear interest at the greater of Comerica's daily prime rate or the federal funds
rate plus .5%. Subject to certain limitations, the Company has the option under
the Loan Agreement to convert to a LIBOR based interest rate calculation. The
Company also pays a commitment fee equal to .25% per annum on the unused portion
of the commitment under the Comerica Loan Agreement. Based on finalized results
of operations for the year ended December 31, 1998, the Company was not in
compliance with certain financial covenants in the Comerica Loan Agreement.
Effective April 15, 1999, the Comerica Loan Agreement was amended to waive
compliance with these financial covenants through December 31, 1998 and to
modify certain financial covenants prospectively. Comerica's commitment under
this credit facility was reduced to $20,000,000, the interest rate adjusted to a
base rate approximating prime plus 1%, and the maturity date was then modified
to May 31, 2000.
As of December 31, 1999, and continuing through July 14, 2000, the Company
was not in compliance with certain provisions of the Comerica Loan Agreement, as
modified in 1999. Such events of non-compliance continued to exist through
December 1999, at which time the Company 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 July 31, 2000 and there is no assurance such agreements can be
further extended. Outstanding borrowings under the Comerica Loan Agreement of
$14,321,000 at December 31, 1999 have been included in current maturities of
long-term debt and notes payable in the accompanying financial statements.
Advances under the Loan Agreement are secured by substantially all of the
assets of the Company and its subsidiaries. The Loan Agreement imposes certain
restrictions on the Company's activities, including, without limitation, a
prohibition on the payment of cash dividends on the Company's equity securities;
limitations on incurring additional borrowed money indebtedness; limitations on
incurring or permitting liens upon the assets of Company and its subsidiaries;
limitations on making loans or advances to, or investments in, other persons or
entities; limitations on the Company or its subsidiaries liquidating, dissolving
or merging with another company; limitations on the disposition of assets by the
Company and its subsidiaries; a prohibition on the Company changing the nature
of its business; and a prohibition of the Company repurchasing its equity
securities.
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 securing
those loans. Although the accompanying financial statements for the year ended
December 31, 1999 have been prepared on the basis of a going concern, as
discussed in Note A to the accompanying consolidated financial statements,
significant uncertainties exist as to the ability of the Company to resolve its
financing issues and attain profitable operations.
I. SHAREHOLDERS' EQUITY (DEFICIT):
Capital Structure:
At June 30, 1996, IWC Services authorized 1,000,000 shares of no par common
stock of which 100,000 shares were issued and outstanding. Effective December
17, 1996, IWC Services amended its Articles of Incorporation and By-Laws
increasing its authorized capital stock to 50,000,000 shares of $0.01 par value
common stock and effected a 50-to-1 stock split and 5,000,000 shares of $0.00001
par value preferred stock,
F-20
<PAGE> 59
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which may be issued at the discretion of the Board of Directors. At December 31,
1998 and 1999, a total of 33,044,000 shares and 35,244,000 shares, respectively,
of common stock were issued and outstanding. In June 1998, the Company completed
the sale through private placement of 196,000 Units of 10% Junior Redeemable
Convertible Preferred Stock ("Redeemable Preferred"), each Unit consisting of
one share of the Preferred Stock and one Unit Warrant representing the right to
purchase five shares of common stock of the Company at a price of $5.00 per
share. The Redeemable Preferred Stock could be redeemed by the Company at any
time on or before the six month anniversary of the date of issuance (from
October 17, 1998 through December 8, 1998) without prior written notice in an
amount per share equal to $25.00, plus any accrued and unpaid dividends thereon.
After the six month anniversary of the date of issuance of the Redeemable
Preferred Stock and for so long as such shares are outstanding, the Company
could redeem such shares upon fifteen days prior written notice.
In the event shares of Redeemable Preferred Stock were not redeemed by the
Company on or before the six month anniversary of the date of issuance, each
unredeemed share shall thereafter, until the nine month anniversary of the date
of issuance be convertible, at the election of the holder thereof, into such
number of shares of common stock at 85% of the average of the last reported
sales prices of shares of the common stock (or the average of the closing bid
and asked prices if no transactions have been reported), not to exceed $6.00 per
share, for the 10 trading days immediately preceding the receipt by the Company
of written notice from the holder thereof of an election to so convert such
share of Redeemable Preferred Stock. In the event the Company has not redeemed
shares of Redeemable Preferred Stock on or before the nine month anniversary of
the date of issuance, each unredeemed share shall become immediately
convertible, at the election of the holder thereof, into such number of shares
of common stock as shall be obtained by dividing $25.00 by $2.75
(proportionately adjusted for common stock splits, combinations of common stock
and dividends paid in shares of common stock).
Using the Black-Scholes pricing model and taking into account the discount
upon conversion, an estimated fair value of $865,000 was attributed to the
warrants issued in connection with the Redeemable Preferred Stock. This amount
was accreted over the initial six-month redemption period in 1998 as a charge to
net loss to common shareholders.
During the years ended December 31, 1998 and 1999, the Company redeemed
56,000 and 8,000 shares, respectively, of Redeemable Preferred Stock for
$1,400,000 and $200,000 plus accrued dividends, respectively, and subsequently
retired those shares.
On April 15, 1999, the Company completed the sale of $5,000,000 of Series A
Cumulative Senior Preferred Stock ("Series A Stock") to Halliburton Energy
Services, Inc. ("Halliburton"), a wholly-owned subsidiary of Halliburton
Company. The Series A Stock has a dividend requirement of 6.25% per annum
payable quarterly until the fifth anniversary at the date of issuance, whereupon
the dividend requirement increases to the greater of prime plus 6.25% or 14% per
annum, which is subject to adjustment for stock splits, stock dividends and
certain other events. In addition, Halliburton received warrants to purchase,
for a five year period, 1,250,000 shares of the Company's $.00001 par value
Common Stock at $4.00 per share. The Agreement also provides for additional
warrants to purchase an additional 1,250,000 shares of the Company's stock which
are contingently issuable if certain revenue targets in the Alliance Agreement
are not met at the end of three years. Also in connection with the equity
investment, the Company and Halliburton entered into an expanded Alliance
Agreement which effectively broadens and extends the term of the alliance
between the Company and Halliburton that has been in effect since 1995.
In March 1999, one holder of the Company's 10% Junior Redeemable Preferred
Stock converted 10,000 preferred shares into 121,000 common shares. In April and
May 1999, three unaffiliated investor groups purchased from certain holders
74,000 shares of the Company's 10% Junior Redeemable Preferred Stock with a face
amount of $1,841,000, plus accrued payment-in-kind dividends thereon. The
Company entered into an agreement with two of the investor groups for the
preferred shares to cancel further dividend requirements and
F-21
<PAGE> 60
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be convertible into 1,167,000 shares of Common Stock 90 days after closing. The
third investor group entered into an agreement with the Company to convert the
preferred shares into 60,000 shares of common stock 90 days after closing and
continue the preferred stock dividend until conversion to common stock. As of
December 31, 1999, 40,000 preferred shares had been converted into 667,000
common shares. The three investor groups received warrants to purchase, for a
five year period, 381,000 shares of Common Stock at $5.00 per share. Using the
Black-Scholes pricing model, an estimated fair value of $460,000 was attributed
to these warrants. This amount was accreted over the 90 day agreement period in
1999 as a charge to net loss to common shareholders.
As of December 31, 1999 the Company has accrued $455,000 for preferred
stock dividends relating to the Series A preferred stock and the redeemable
preferred stock.
In May 1999, the Company completed the sale of $2,100,000 of Common Stock
in private placements. In connection with these private placement transactions,
warrants were issued to purchase 420,000 shares of Common Stock for a five year
period at $5.00 per share and 700,000 shares of Common Stock for a four year
period at $4.00 per share. Additional warrants were issued to the investors in
the private placement to purchase 63,000 shares of Common Stock for a five-year
period at $5.00 per share as a penalty for non-registration of the private
placement Common Stock within 150 days of the completion of the sale. Using the
Black-Scholes pricing model, an estimated fair value of $2,000 was attributed to
these warrants.
During 1999 and through July 17, 2000, the Company has been actively
exploring opportunities for improved and/or replacement secured debt financing
and, in addition, new equity infusions. A financing plan has been agreed to in
principle which would waive existing loan covenant violations, modify future
covenants and provide additional interim debt financing of $5,000,000
(increasing under certain circumstances up to $8,000,000) to supplement the
existing secured credit facility. As discussed in Note M, through July 14, 2000,
$6,635,000 in funds have been received. This interim credit facility is intended
to permit the orderly replacement of the current secured credit facility.
Closing is subject to completion of legal documentation and requisite reviews
and approvals. Furthermore, the Company has confidentiality agreements and is in
active discussions with certain investor groups regarding the making of an
equity investment in the Company. However, there is no assurance that the
Company will be able to complete either of these transactions, or that they will
necessarily be on terms favorable to the Company. Furthermore, should such
financings be obtained, they would have a significantly dilutive impact on
common shareholders.
Warrants:
On September 18, 1997, the Company closed a private placement offering for
the sale of 7,475,000 shares of common stock at $1 per share for a total of
$7,475,000. Proceeds to the Company after placement agents' fees and expenses of
the offering were approximately $6,323,000 and were used for payment on the
Boots & Coots, L.P. acquisition notes and for working capital. Additionally, the
placement agents were awarded 748,000 warrants at an exercise price of $1.20,
which are exercisable for a period of four years from grant date. In March 1999,
the Company awarded 240,000 warrants as compensation to an outside consultant at
an exercise price of $2.50 per share, which vest over twelve months and are
exercisable over a five-year period from the date of grant. Based on a
Black-Scholes calculation, the Company recorded a $244,000 compensation charge
related to the issuance of these warrants.
F-22
<PAGE> 61
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note H, in connection with various short-term interim and
long-term financings, the Company has granted to the lenders warrants to
purchase common stock of the Company. A summary of warrants outstanding as of
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
--------------- -------------- ---------
<S> <C> <C>
06/30/00.................................................... $3.84 26,000
12/01/01.................................................... 2.85 300,000
05/14/02.................................................... 4.00 700,000
09/18/02.................................................... 1.20 748,000
04/23/03.................................................... 5.00 200,000
05/31/03.................................................... 5.00 980,000
01/02/04.................................................... 2.62 800,000
03/07/04.................................................... 4.50 300,000
03/07/04.................................................... 2.50 240,000
04/15/04.................................................... 4.00 1,250,000
04/26/04.................................................... 5.00 163,000
05/02/04.................................................... 5.00 18,000
05/14/00.................................................... 5.00 420,000
08/12/04.................................................... 5.00 42,000
10/11/04.................................................... 5.00 21,000
07/23/08.................................................... 6.70 3,165,000
---------
9,373,000
=========
</TABLE>
Voting Trust Agreement:
In May 1995, certain officers and directors of the Company entered into a
Voting Trust Agreement giving the Company's chairman and a director of the
Company the absolute right to vote all shares of common stock owned by certain
other officers of the Company during a five-year period ending December 31,
2000. The Voting Trust Agreement provides that twenty percent of the shares
subject to such agreement are eligible for release therefrom on each one year
anniversary date of the agreement. As of July 14, 2000, none of such shares
remain subject to the Voting Trust Agreement.
401(k) Plan:
The Company's wholly-owned subsidiary, Baylor Company, was sponsor of the
Baylor Company 401(k) Plan for eligible employees having six months of service
and being at least twenty-one years of age. Employees can make elective
contributions of 1% to 15% of compensation, as defined. Baylor Company matched
50% of participant contributions up to 6% of considered compensation. During the
period from July 23, 1998 (acquisition date) through December 31, 1998, Baylor
Company contributed $73,000 under this plan. Effective February 1, 1999, the
Baylor 401(k) Plan was renamed the Boots & Coots Group 401(k) Plan and the
amended Plan was adopted by the Company and its other operating subsidiaries.
During the year ended December 31, 1999, the Company contributed approximately
$280,000 under the Plan.
Stock Option Plans:
A summary of Stock Option Plans in effect as of December 31, 1999, follows:
1996 Incentive Stock Plan authorizing the Board of Directors to provide a
number of key employees with incentive compensation commensurate with their
positions and responsibilities. The 1996 Plan permitted the grant of incentive
equity awards covering up to 960,000 shares of common stock. In connection with
the
F-23
<PAGE> 62
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition of IWC Services by the Company, the Company issued incentive stock
options covering an aggregate of 460,000 shares of common stock to employees who
were the beneficial owners of 200,000 options that were previously granted by
IWC Services. These incentive stock options were exercisable for a period of 10
years from the original date of grant at an exercise price of $0.43 per share.
1997 Boots & Coots Employee Option Grant, providing for IWC Services to
issue options to purchase a total of 100,000 shares of its common stock at a
price of $1.00 per share to nine employees of Boots & Coots. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 230,000 shares of common stock to the
Boots & Coots employees who were the beneficial owners of the 100,000 options
that were previously granted by IWC Services. These stock options vest at the
rate of 20% per year commencing in July 1998 and are exercisable for a period of
10 years from the original date of grant at an exercise price of $0.43 per
share.
1997 Incentive Stock Plan authorizing the Board of Directors to provide key
employees with incentive compensation commensurate with their positions and
responsibilities. The 1997 Incentive Stock Plan permits the grant of incentive
equity awards covering up to 1,475,000 shares of common stock. Grants may be in
the form of qualified or nonqualified stock options, restricted stock, phantom
stock, stock bonuses and cash bonuses. As of the date hereof, stock options
covering an aggregate of 1,310,000 shares of common stock have been made under
the 1997 Incentive Stock Plan. Such options vest ratably over a five-year period
from the date of grant.
1997 Executive Compensation Plan authorizing the Board of Directors to
provide executive officers with incentive compensation commensurate with their
positions and responsibilities. The 1997 Executive Compensation Plan permits the
grant of incentive equity awards covering up to 1,475,000 shares of common
stock. Grants may be in the form of qualified or nonqualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of December
31, 1999, stock option grants covering an aggregate of 780,000 shares of Common
Stock have been made under the Plan.
1997 Outside Directors' Option Plan authorizing the issuance each year of
an option to purchase 15,000 shares of common stock to each member of the Board
of Directors who is not an employee of the Company. The purpose of the
Directors' Plan is to encourage the continued service of outside directors and
to provide them with additional incentive to assist the Company in achieving its
growth objectives. Options may be exercised over a five-year period with the
initial right to exercise starting one year from the date of the grant, provided
the director has not resigned or been removed for cause by the Board of
Directors prior to such date. After one year from the date of the grant, options
outstanding under the Directors' Plan may be exercised regardless of whether the
individual continues to serve as a director. Options granted under the
Directors' Plan are not transferable except by will or by operation of law.
Through December 31, 1999, stock options covering an aggregate of 75,000 shares
of common stock have been made under the 1997 Outside Directors' Option Plan.
F-24
<PAGE> 63
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in these option plans for the year ended June 30, 1997, six months
ended December 31, 1997, and years ended December 31, 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding June 30, 1996................................... --........ $ --
Granted................................................... 690,000 0.43
Exercised................................................. -- --
Expired................................................... -- --
---------- -----
Outstanding June 30, 1997................................... 690,000 0.43
Granted................................................... 1,920,000 1.14
Exercised................................................. (1,426,000) 0.43
Cancelled................................................. (12,000) 0.43
---------- -----
Outstanding December 31, 1997............................... 1,172,000 1.59
Granted................................................... 1,645,000 2.85
Exercised................................................. (354,000) 0.80
Cancelled................................................. (21,000) 2.00
---------- -----
Outstanding December 31, 1998............................... 2,442,000 $2.55
Granted................................................... 1,360,000 1.55
Exercised................................................. (12,000) 0.43
Cancelled................................................. (168,000) 3.36
---------- -----
Outstanding December 31, 1999............................... 3,622,000 $2.14
========== =====
</TABLE>
As of December 31, 1999, 639,000 options are currently exercisable at
exercise prices ranging from $0.43 to $6.00 and the remaining options vest over
a period of three to ten years from date of grant.
In December 1996 and May 1997, the Company issued a total of 1,265,000
contractual stock options to five persons, including 460,000 options issued to
certain officers and directors and 805,000 options issued to two attorneys.
These contractual stock options had a two-year term beginning on the original
date of grant, were fully vested and are immediately exercisable by the holders
thereof at a price of $0.43 per share. During the six months ended December 31,
1997, the Company allowed the exercise of these options through the redemption
of common shares owned by the option holders.
In September 1997, the Company granted 80,000 options to two consultants at
an exercise price of $2.00 per share. These options are exercisable upon grant
and remain exercisable for a period of four years from the grant date.
In December 1997, the Company granted 50,000 options to a consultant at an
exercise price of $3.62 per share. These options are exercisable upon grant and
remain exercisable for a period of five years from the grant date.
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its employee and director stock
option plans. Had compensation expense for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans,
F-25
<PAGE> 64
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consistent with the method of SFAS No. 123, the Company's reported net loss and
net loss per common share would have changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss to common
shareholders.............. As reported $(156,000) $ (758,000) $(3,937,000) $(32,360,000)
Pro forma (220,000) (1,029,000) (5,460,000) (34,142,000)
Net loss per common share... As reported (0.01) (0.03) (0.12) (0.94)
Pro forma (0.02) (0.04) (0.17) (0.99)
</TABLE>
The Company used the Black-Scholes option pricing model to estimate the
fair value of options granted on the date of grant for 1998 and 1999. The
following assumptions were applied in determining the pro forma compensation
costs:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1998 1999
--------- -------
<S> <C> <C>
Risk-free interest rate..................................... 6.0% 5.7%
Expected dividend yield..................................... -- --
Expected option life........................................ 1-3 yrs. 5 yrs.
Expected volatility......................................... 45.0% 109.3%
Weighted average fair value of options granted at market
value..................................................... $1.98 $1.37
</TABLE>
Summary information about the Company's stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICE DECEMBER 31, 1999 PERIODS IN YEARS EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
-------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ .43 - $1.75 1,514,000 9.1 $ 1.39 94,000 $ .43
1.75 - $3.00 1,523,000 8.1 1.99 379,000 1.98
3.00 - $5.00 320,000 7.7 3.69 113,000 3.70
5.00 - $6.00 265,000 8.2 5.47 53,000 5.47
--------- --- ------ ------- -----
$ .43 - $6.00 3,622,000 8.5 $ 2.14 639,000 $2.34
========= === ====== ======= =====
</TABLE>
In April 2000, the Company voided stock options covering an aggregate of
3,007,000 shares of Common Stock by agreement with the option holders with the
understanding that the stock options would be repriced and reissued. As of July
14, 2000, these options had not been reissued.
J. RELATED PARTY TRANSACTIONS:
Through December 31, 1997, the Company shared certain administrative
facilities and services including corporate office space, administrative
personnel and office support equipment with Buckingham Capital Corporation, an
affiliate of the Company's then major individual shareholder, Chairman and Chief
Executive Officer, Larry H. Ramming. For the year ended June 30, 1997 and
six-month period ended December 31, 1997, the Company paid approximately
$236,000 and $186,000, respectively, to Buckingham Capital Corporation for such
services. Management believes such charges are comparable to what would have
been paid to outside parties for such facilities and services.
During the year ended June 30, 1997 and the six-month period ended December
31, 1997, the Company incurred $156,000 and $145,000, respectively, in financial
consulting fees for services rendered by Buckingham
F-26
<PAGE> 65
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Corporation in connection with the Company's private offering of
$3,000,000 principal amount of 12% Senior Subordinated Notes. Such fees were
included with deferred financing costs in the consolidated balance sheet and
amortized over the term of the Notes, $2,900,000 of which were converted to
common stock in September 1997 (see Note H).
As discussed in Note H, the Company's then major individual shareholder,
Chairman and Chief Executive Officer, Larry H. Ramming, was granted a waiver of
the lock-up restrictions on his shares of common stock with respect to a pledge
of such shares to secure a loan, the proceeds of which were used by Mr. Ramming
on April 30, 1998 to purchase the $7,000,000 remaining balance outstanding on
the 10% Senior Secured Notes issued by the Company in connection with the
acquisitions of ITS and Code 3. Mr. Ramming agreed to extend the maturity dates
of such notes to October 1, 1998 and thereafter on a month-to-month basis, in
exchange for a fee of 1% of the principal balances of such note. As of December
31, 1998, the Company had paid Mr. Ramming $5,783,000 to be applied toward the
principal balance of the 10% Notes held by Mr. Ramming and $383,000 in interest
and extension fees. During the period from January 1, 1999 through April 15,
1999, at which time Mr. Ramming agreed to subordinate and delay future note
payments so long as the Comerica senior secured credit facility remained
outstanding, additional principal payments of $648,000 were paid to Mr. Ramming.
As further consideration for certain bridge financing, Mr. Ramming was eligible
to be granted 2,000,000 options to purchase common stock at a per share price of
$0.75 subject to issuance and availability of authorized and unissued or
committed common shares. Further, Mr. Ramming deferred issuance of 2,000,000
warrants to purchase Common Stock on the basis of a $0.75 per share purchase
price as was eligible for issue in connection with his loan and renewals to the
Company, in exchange for the commitment by the Company to issue subject to
availability of authorized but unissued or committed shares of Common Stock in
the Company. This act was taken to make available additional authorized but
unissued and uncommitted shares of the Company's Common Stock in connection with
financing transactions completed subsequent to December 31, 1999. At December
31, 1999, the remaining principal balance on this note, which was voluntarily
subordinated to the Company's senior secured debt, is $569,000. Accrued interest
and additional accrued but unpaid extension fees aggregate $270,000. Management
believes the terms and conditions of Mr. Ramming's loan to the Company are
favorable to those that could have been negotiated with outside parties.
In 1998 the Company entered into an agreement with a company controlled by
Mr. Ramming to have available for charter, on a 24-hour per day, 365 days per
year stand-by status, a jet aircraft and full time stand-by crew to be utilized
in connection with the Company's mobilization of personnel and selected
equipment for emergency response well control and spill containment and
remediation spills, which in those events are billed to the utilizing customer
at a rate of Company cost plus a 20% service fee mark up and for other corporate
purposes as needed. For the years ended December 31, 1998 and 1999, $399,000 and
$128,000, respectively, was paid pursuant to such charter arrangement, based on
rates comparable to those available from third party aircraft charter operators
for comparable charter arrangements. This arrangement was terminated during the
second quarter of 1999.
K. COMMITMENTS AND CONTINGENCIES:
The Company leases vehicles, equipment and shop and equipment storage
facilities under operating leases with terms in excess of one year.
F-27
<PAGE> 66
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, future minimum lease payments under these
non-cancelable operating leases are approximately:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
------------------------- ----------
<S> <C>
2000.................................................... 1,229,000
2001.................................................... 1,032,000
2002.................................................... 918,000
2003.................................................... 874,000
2004.................................................... 696,000
Thereafter.............................................. 462,000
----------
$5,211,000
==========
</TABLE>
Rent expense for the year ended June 30, 1997, the six-month period ended
December 31, 1997, and the years ended December 31, 1998 and 1999, was
approximately $77,000, $140,000, $1,158,000, and $2,001,000, respectively.
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Except as
disclosed under this item, management of the Company does not believe that any
liabilities resulting from any such current proceedings will have a material
adverse effect on its operations or financial position.
The Company and a subsidiary are named in a lawsuit filed in August of 1999
relating to the purchase of Haz-Tech Environmental Services, Inc. ("Haz-Tech")
in November of 1998. The lawsuit is styled James Stephen Gladden and Gerald
Anglin v. Boots & Coots International Well Control, Inc. and Boots & Coots
Special Services, Inc.; Cause No. 1999-39928; in the 80th Judicial District
Court of Harris County, Texas.
This is a lawsuit for breach of the plaintiffs' respective employment
agreements, fraud, and breach of the merger agreement pursuant to which Haz-Tech
was acquired and merged into Boots & Coots Special Services, Inc. ("Special
Services"). Plaintiffs allege that they signed six-year employment agreements
with Special Services which could be terminated only for cause, as defined in
the agreements, and that they were wrongfully terminated without cause pursuant
to a cost-reduction plan. Plaintiffs further allege that Special Services
fraudulently represented its intention to employ them for an extended period at
the time the employment agreements were executed and that the Company breached
the merger agreement by failing to use its best efforts to collect certain
scheduled accounts receivable of Haz-Tech following the acquisition, including
certain Haz-Tech invoices to Code 3, Inc. (n/k/a Boots & Coots Special Services,
Inc.) in the alleged total amount of approximately $93,000, by failing to assign
them any uncollected accounts receivable, by failing to issue additional stock
to plaintiffs pursuant to a price adjustment provision in the merger agreement,
and by failing to release certain Boots & Coots stock which was escrowed
pursuant to the merger agreement. Each plaintiff alleges damages in excess of
$600,000 in connection with their wrongful termination claims as well as
additional damages in connection with their other claims.
Although the Company disagrees with the contentions made by the plaintiffs,
management of the Company can make no assurances that it will be able to defend
the Company successfully.
Additionally, in May of 2000, the Company's subsidiary ITS Supply
Corporation ("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. At the time of the filing, 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 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 may successfully
assert and realize judgements against the Company.
F-28
<PAGE> 67
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
L. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND CONCENTRATION
OF CREDIT RISK:
Information concerning operations in different business segments at
December 31, 1999, and for the year then ended is presented below. Through
September 30, 1999, the Company considered that it operated in three segments:
Emergency Response and Restoration, Programs and Services (risk management,
outsource purchasing, manufacturer's representation and services); and
Manufacturing and Distribution. Intercompany transfers between segments were not
material. The accounting policies of the operating segments are the same as
those described in the summary of significant accounting policies. For purposes
of this presentation, general and corporate expenses have been allocated between
segments on a pro rata basis based on revenue. In addition, general and
corporate are included in the calculation of identifiable assets and are
included in the Emergency Response and Restoration business segment and the
domestic segment.
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. Further, ITS operating results are presented as
discontinued operations for periods included herein.
<TABLE>
<CAPTION>
EMERGENCY MANUFACTURING
RESPONSE AND AND
RESTORATION DISTRIBUTION CONSOLIDATED
------------ ------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1999
Net Operating Revenues................... $ 28,418,000 $39,147,000 $ 67,565,000
Operating Loss........................... (15,201,000) (1,487,000) (16,688,000)
Identifiable Operating Assets............ 23,092,000 39,156,000 62,248,000
Capital Expenditures..................... 3,581,000 1,963,000 5,544,000
Depreciation and Amortization............ 2,500,000 1,955,000 4,455,000
Interest Expense......................... 2,925,000 3,268,000 6,193,000
Year Ended December 31, 1998
Net Operating Revenues................... $ 28,999,000 $21,948,000 $ 50,947,000
Operating Income (Loss).................. (1,291,000) 2,506,000 1,215,000
Identifiable Operating Assets............ 43,328,000 45,973,000 89,301,000
Capital Expenditures..................... 3,703,000 447,000 4,150,000
Depreciation and Amortization............ 1,402,000 814,000 2,216,000
Interest Expense......................... 2,606,000 1,702,000 4,308,000
Six-Month Period Ended December 31, 1997
Net Operating Revenues................... $ 4,417,000 $ 972,000 $ 5,389,000
Operating Income (Loss).................. (493,000) 61,000 (432,000)
Identifiable Operating Assets............ 11,540,000 2,521,000 14,061,000
Capital Expenditures..................... 188,000 -- 188,000
Depreciation and Amortization............ 466,000 33,000 499,000
Interest Expense......................... 117,000 -- 117,000
</TABLE>
For the year ended June 30, 1997, there was only one business
segment -- Emergency Response and Restoration. Thus, the segment information for
this period is presented in the accompanying financial statements.
F-29
<PAGE> 68
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the periods presented below, the following customers represented
significant concentrations of consolidated revenues:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Customer A.......................... $385,000 $ -- $ -- $ --
Customer B.......................... 757,000 -- -- --
Customer C.......................... 416,000 -- -- --
Customer D.......................... -- 1,454,000 -- --
Customer E.......................... -- 568,000 -- --
Customer F.......................... -- -- -- 12,741,000
</TABLE>
The Company's revenues are generated geographically as follows:
<TABLE>
<CAPTION>
SIX-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1999
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Domestic customers................... 71% 61% 35% 80%
Foreign customers.................... 29% 39% 65% 20%
</TABLE>
Two of the Company's customers collectively accounted for 27% of
outstanding accounts receivable at December 31, 1997. None of the Company's
customers at December 31, 1998 and 1999 accounted for greater than ten percent
of outstanding accounts receivable. The Company believes that future accounts
receivable will continue to be collected under normal credit terms based on
previous experience. The Company performs ongoing evaluations of its customers
and generally does not require collateral. The Company assesses its credit risk
and provides an allowance for doubtful accounts for any accounts which it deems
doubtful of collection.
The Company maintains deposits in banks which may exceed the amount of
federal deposit insurance available. Management believes that any possible
deposit loss is minimal.
M. EVENTS SUBSEQUENT TO DECEMBER 31, 1999 (UNAUDITED)
The Company has undertaken financing initiatives subsequent to December 31,
1999 directed toward the obtaining of additional financing for working capital
purposes, the refinancing of the Comerica Senior Secured Loan, and negotiating a
restructuring of the Prudential Subordinated Note. In furtherance of these
steps, on April 10, 2000 the Company entered into a financial advisory agreement
with an Investment Group ("the Investment Group") to provide to the Company, for
a twelve (12) month term, financial consulting services in connection with a
proposed $8,000,000 of debt and/or equity financing. As consideration for such
services, the Investment Group will receive fees in the form of an "in-kind"
issuance of options to purchase shares of the Company's $.00001 par Value Common
Stock ("Common Stock") on a $0.75 per share basis equal to 7.5% of the funds
raised; and, warrants to purchase, for a 5 year term, 1,600,000 shares of the
Company's Common Stock at $0.75 per share.
On April 12, 2000, the Company entered into an agreement with the
Investment Group, as agent for a syndicate that would purchase, in the form of a
participation interest in the Traunche B Revolver, Comerica Bank Senior Secured
Credit Facility. The group receives, on the basis of 1 warrant for each $1 of
participation interest in the Traunche 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 traunche 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
F-30
<PAGE> 69
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Senior 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 on the basis of a $0.75 per share conversion rate.
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.
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 30 day 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.
The participation interest holders were also issued warrants to purchase at
any time during a five (5) year period after closing, warrants to purchase an
amount of the Company's Common Stock equivalent to 10% of the converted shares
of such Common Stock at the same conversion price as the Series B Preferred
Stock, with a floor conversion rate of $0.75 per share.
To date, $6,635,000 in funds from the purchase of above participation
interests have been received with approximately $1,400,000 in additional funds
committed to be raised.
In order for the Company to have available shares of authorized but
unissued or committed shares of Common Stock to accommodate the conversion
features discussed above for Series B Preferred Stock for the participation
interest holders 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
5,288,650 shares of Common Stock to the Company in exchange for 52,888 share 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 3,007,000 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 five-year term.
In March 2000, in satisfaction of a dispute between the Company and certain
unaffiliated parties the Company agreed to modify the terms of certain warrants
held by such parties to lower the exercise price on 100,000 shares from $5.00
per share to $1.25 per share and to lower the exercise price on 100,000 shares
to $1.50 per share. The Company also agreed to issue an additional 952,153
shares of its common stock upon the conversion of 40,000 shares of its 10%
Junior Redeemable Convertible Preferred Stock held by certain of such
unaffiliated parties and issued a warrant to purchase 456,000 shares of common
stock at an exercise price of $1.25 per share. The Company relied upon Section
4(2) of the Act for the issuance of the warrant. The
F-31
<PAGE> 70
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company used no general advertising or solicitation in connection with such
issuance, there were a limited number of parties, all of whom were accredited
investors and sophisticated and the Company had reason to believe that such
purchasers did not intend to engage in a distribution of such securities.
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 one vote 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 eighteen months of 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 of such Series C 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 has 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. Further Mr. Ramming deferred
issuance of 2,000,000 warrants to purchase common stock on the basis of a $0.75
per share purchase price as was eligible for issue in connection with his loan
and renewals to the Company, in exchange for the commitment by the Company to
issue subject to availability of authorized but unissued or committed shares of
common stock in the Company. This act was taken to make available additional
authorized but unissued and uncommitted shares of the Company's common stock in
connection with financing transactions completed subsequent to December 31,
1999.
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. 3,000 shares of Series D Preferred
Stock has been issued to the Investment Group discussed above.
F-32
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
3.01 -- Amended and Restated Certificate of Incorporation(1)
3.02 -- Amendment to Certificate of Incorporation(1)
3.03 -- Amended Bylaws(1)
4.01 -- Specimen Certificate for the Registrant's Common Stock(1)
4.02 -- Form of 12% Senior Subordinated Notes due December 31,
2000(1)
4.03 -- Form of Noteholders' Warrants to Purchase $3,000,000 of
Common Stock(1)
4.04 -- Form of Employees Options to Purchase 690,000 shares of
Common Stock(1)
4.05 -- Form of Contractual Options to Purchase 1,265,000 shares
of Common Stock(1)
4.06 -- Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(3)
4.07 -- Certificate of Designation of Series A Cumulative Senior
Preferred Stock.
4.08 -- Certificate of Designation of Series B Convertible
Preferred Stock.
4.09 -- Certificate of Designation of Series C Cumulative
Convertible Junior Preferred Stock.
4.10 -- Certificate of Designation of Series D Cumulative Junior
Preferred Stock.
9.01 -- Voting Trust Agreement between Larry H. Ramming, Raymond
Henry, Richard Hatteberg, Danny Clayton and Brian Krause
(as amended)(2)
10.01 -- Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(1)
10.02 -- Executive Employment Agreement of Larry H. Ramming(1)
10.03 -- Executive Employment Agreement of Raymond Henry(1)
10.04 -- Executive Employment Agreement of Brian Krause(1)
10.05 -- Executive Employment Agreement of Richard Hatteberg(1)
10.06 -- Executive Employment Agreement of Danny Clayton(1)
10.07 -- Security Agreement and Financing Statement with Main
Street/Geneva(2)
10.08 -- First Amendment to Security Agreement (assigned to
Prudential)(2)
10.09 -- Stock Pledge Agreement with Main Street/Geneva (assigned
to Prudential)(2)
10.10 -- First Amendment to Stock Pledge Agreement (assigned to
Prudential)(2)
10.11 -- Form of Warrant issued to Main Street/Geneva(2)
10.12 -- Form of Registration Rights Agreement with Main
Street/Geneva(2)
10.13 -- Form of First Amendment to Registration Rights
Agreement(2)
10.14 -- 1997 Incentive Stock Plan(2)
10.15 -- Outside Directors' Option Plan(2)
10.16 -- Executive Compensation Plan(2)
10.17 -- Halliburton Center Sublease(2)
10.18 -- Camac Plaza Sublease(2)
10.19 -- Senior Loan Agreement dated July 6, 1998, between Boots &
Coots International Well Control, Inc., and Prudential
Securities Credit Corporation(4)
10.20 -- First Amendment to Senior Loan Agreement (Bridge
Facility) dated July 23, 1998, between Boots & Coots
International Well Control, Inc., and The Prudential
Insurance Company of America(4)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.21 -- Subordinated Note and Warrant Purchase Agreement dated
July 23, 1998, between Boots & Coots International Well
Control, Inc., and The Prudential Insurance Company of
America(4)
10.22 -- Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc.,
and The Prudential Insurance Company of America(4)
10.23 -- Participation Rights Agreement dated July 23, 1998, by
and among Boots & Coots International Well Control, Inc.
The Prudential Insurance Company of America and certain
stockholders of Boots & Coots International Well Control,
Inc.(4)
10.24 -- Common Stock Purchase Warrant dated July 23, 1998(4)
10.25 -- Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank -- Texas(5)
10.26 -- Security Agreement dated October 28, 1998, between Boots
& Coots International Well Control, Inc. and Comerica
Bank -- Texas(5)
10.27 -- Amendment No. 1 to Subordinated Note and Warrant Purchase
Agreement between Boots & Coots International Well
Control, Inc., and The Prudential Insurance Company of
America(5)
10.28 -- Executive Employment Agreement of H. B. Payne, Jr.(6)
10.29 -- Executive Employment Agreement of Jerry Winchester(6)
10.30 -- Executive Employment Agreement of Dewitt Edwards(6)
10.31 -- Office Lease(6)
10.33 -- Executive Employment Agreement of Larry H. Ramming(7)
10.34 -- Executive Employment Agreement of Thomas L. Easley(7)
10.35 -- Forbearance Agreement dated December 21, 1999, between
Boots & Coots International Well Control, Inc. and
Comerica Bank -- Texas.
10.36 -- Second Amendment to Forbearance and Extension Agreement
dated April 21, 2000, between Boots & Coots International
Well Control, Inc. and Comerica Bank -- Texas.
10.37 -- First Amendment to Forbearance and Extension Agreement
dated June 15, 2000, between Boots & Coots International
Well Control, Inc. and Comerica Bank -- Texas.
10.38 -- Third Amendment to Loan Agreement dated April 21, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas.
10.39 -- Fourth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas.
10.40 -- Fifth Amendment to Loan Agreement dated May 31, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas.
10.41 -- Sixth Amendment to Loan Agreement dated June 15, 2000,
between Boots & Coots International Well Control, Inc.
and Comerica Bank -- Texas.
10.42 -- Preferred Stock and Warrant Purchase Agreement, dated
April 15, 1999, between Boots & Coots International Well
Control, Inc. and Halliburton Energy Services, Inc.
10.43 -- Letter of Engagement, dated April 10, 2000, between Boots
& Coots International Well Control, Inc. and Maroon Bells
Capital, Inc.
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
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
10.45 -- Settlement Agreement, dated March 20, 2000, between Boots
& Coots International Well Control, Inc. and the Donald
and Shelley Moorehead Charitable Trust
21.01 -- List of subsidiaries(6)
23.01 -- Consent of Arthur Andersen LLP
23.02 -- Consent of Hein + Associates LLP
24.01 -- Power of Attorney (included on Signature Page)
27.01 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
None
---------------
(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.
