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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
_______________
FORM 10-K
_______________
(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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-13817
_______________
BOOTS & COOTS
INTERNATIONAL WELL CONTROL, INC.
(Name of Registrant as specified in Its Charter)
DELAWARE 11-2908692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
777 POST OAK BOULEVARD, SUITE 800 77056
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
713-621-7911
(Issuer's Telephone Number, Including Area Code)
_______________
Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------- -----------------------------------------
Common Stock, $.00001 par value American Stock Exchange
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [x ]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in or any amendment to this
Form 10-K [ ].
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 March 29, 2001, based on
closing sales price on that day was $28,101,168.
The number of shares of the issuer's common stock outstanding on March 29,
2001 was 39,822,090.
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FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . 13
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5. Market for Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 23
Item 8. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . 24
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
2
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.
Through its participation in the proprietary insurance program WELLSURE, the
Company provides lead contracting and high risk management services, under
critical loss scenarios, to the program's insured clients. Additionally, the
WELLSURE program designates that the Company provide certain pre-event
prevention and risk mitigation services defined under the program. The Company
also provides snubbing and other high risk well control management services,
including pre-event planning, training and consulting services and markets oil
and hazardous materials spill containment and recovery equipment and a varied
line of industrial products for the oil and gas industry. 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.
As discussed herein under 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' 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
Prudential Subordinated Note Restructuring. On December 28, 2000, the
Company finalized the restructuring of its subordinated debt with Prudential
Insurance Company of America ("Prudential"). As previously disclosed, the
Company had been in default under its subordinated note agreement with
Prudential since the second quarter of 1999. Prudential's aggregate claims of
approximately $41,000,000 through October 24, 2000 were resolved by the Company:
(i) paying $12,000,000 cash at closing; (ii) establishing $7,200,000 face value
of new subordinated debt; (iii) issuing $5,000,000 face value of Series E
Cumulative Senior Preferred Stock; and (iv) issuing $8,000,000 face value of
Series G Cumulative Convertible Preferred Stock. All interest payments and
dividends are paid in kind and deferred for two years from the date of closing.
Additionally, as a component of this transaction, Prudential has received newly
issued warrants to purchase 8,800,000 shares of the Company's common stock, and
the Company agreed to reprice the existing common stock purchase warrants held
by Prudential. The Company has the right to repurchase, at a discount to face
value, all of its debt, stock and warrants issued to Prudential for an agreed
period.
Sale of Baylor. On September 28, 2000, the Company announced that it closed
the sale of the assets of the Baylor Company and its subsidiaries to National
Oilwell, Inc. The proceeds from the sale were approximately $29,000,000 cash, of
which $13,000,000 was paid to Comerica Bank-Texas, the Company's primary senior
secured lender at the time, as settlement of obligations due to them. The
results of operations of Baylor are presented herein as discontinued operations
for all periods presented.
Recent Financing Activity. During the year ended December 31, 2000, the
Company received approximately $8,700,000 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 representing the right to purchase an aggregate of 8,729,985
shares of common stock of the Company to the participation interest holders and
warrants to purchase an aggregate of 3,625,000 shares of common stock to the
investment group that arranged the financing. The warrants have a term of five
years and can be exercised by the payment of cash in the amount of $0.625 per
3
share as to 8,729,985 shares and $0.75 per share as to 3,625,000 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. On December 28, 2000, $7,729,985 of the participation
interest, plus $757,315 in accrued interest thereon, was exchanged for 89,117
shares of Series H Cumulative Senior Preferred Stock in the Company. The
remaining $1,000,000 of the participation interest was outstanding as senior
secured debt as of December 31, 2000.
ITS Bankruptcy Proceedings. As a result of ongoing operating losses, a
shortage of working capital and the absence of a viable purchaser for ITS
Supply Corporation ("ITS") operations, on May 18, 2000, ITS filed in Corpus
Christi, Texas for protection under Chapter XI of the U. S. Bankruptcy Code.
ITS is now proceeding to liquidate its assets and liabilities pursuant to
Chapter 7 of Title 11. At the time of the filing, ITS had total liabilities of
approximately $6,900,000 and tangible assets of approximately $950,000. The
Company has an outstanding subordinated 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.
A judgment against the Company has been entered by a state district court, and
that judgment is now on appeal. The Company does not believe the guaranty will
be enforceable in accordance with its terms. Further, the Company, in
consultation with its counsel, believes that it is not probable that any
creditors of ITS may successfully assert and realize collection against the
Company.
Going Concern. The accompanying financial statements for the year ended
December 31, 2000, 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 attain profitable operations and access working capital. The audit
opinion issued by Arthur Andersen LLP for the year ended December 31, 2000,
includes an explanatory fourth paragraph because of substantial doubt regarding
the Company's ability to continue as a going concern.
HISTORY OF COMPANY
Boots & Coots International Well Control, Inc. (the "Company") was
incorporated in Delaware in April 1988, remaining largely inactive until
entering into a business combination with IWC Services, Inc., a Texas
corporation ("IWC Services") on July 29, 1997. In the transaction, the
stockholders of IWC Services became the holders of approximately 93% of the
outstanding shares of common stock of the Company and the management of IWC
Services assumed 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.
Following the IWC Services transaction, the Company engaged in a series of
complementary business acquisitions. 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 LP"), and the stock of its
subsidiary corporations, Boots & Coots Overseas, Ltd., and Boots & Coots de
Venezuela, S.A. Boots & Coots LP and its subsidiaries were engaged in oil well
fire fighting, snubbing and blowout control services.
Boots & Coots LP was organized by Boots Hansen and Coots Matthews, 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.
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.
In response to depressed downstream industry conditions existing for a
significant part of 1999 and 2000, 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.
On January 2, 1998, the Company completed the acquisition of all of the
capital stock of ITS Supply Corporation ("ITS"). Through April 2000, ITS
operated as an ISO 9002 certified materials and equipment procurement,
transportation and logistics company serving the energy industry with offices in
Houston, Venezuela, Peru, Dubai (UAE) and the United Kingdom. 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.
4
On February 20, 1998, the Company completed the acquisition of Boots &
Coots Special Services, Inc. f/k/a Code 3, Inc.
("B & C Special Services"). 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, and specializes in the transfer of hazardous materials
and high and low pressure liquids and industrial fire fighting. B & C Special
Services also provides in-plant remedial plan implementation, hazardous waste
management, petroleum tank management, industrial hygiene, environmental and
occupational, health and safety services. During 1999 and continuing in 2000,
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.
On July 23, 1998, the Company completed the acquisition of Baylor Company
("Baylor"). As a result of the Company's financial difficulties, substantially
all of the assets of Baylor were sold in September 2000. Baylor, headquartered
in Sugar Land, Texas, manufactured and marketed a varied line of industrial
products, many of them proprietary, for the drilling, marine and power
generation industries.
Effective November 4, 1998, the Company completed the acquisition, through
B & C Special Services, of HAZ-TECH Environmental Services, Inc. ("HAZ-TECH").
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, bio
remediation and pond dewatering, and water treatment to chemical manufacturing,
railroad and truck transportation companies in Texas, Louisiana, Oklahoma and
Arkansas.
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, fire fighting,
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 and continuing in 2000, the Company has been forced
to operate with a minimum of working capital. As a result, the Company
curtailed its business expansion program, discontinued the operations of ITS,
sold Baylor Company, and reduced the operations of ABASCO and focused its
efforts on its remaining two core business segments, Emergency Response and
Restoration and Product 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 the Halliburton Alliance and the WELLSURE program, continue to integrate
the businesses of Boots & Coots, ABASCO, B & C Special Services, and HAZ-TECH,
increase the geographical scope of its training and consulting programs, and
establish additional Company-owned or operated Fire Stations. Like the Company
owned Fire Stations in Houston, Texas, and Anaco, Venezuela, the industry
supported Fire Station on the North Slope of Alaska and the Company operated
Fire Station in Algeria, the proposed Company Fire Stations would include the
equipment required to respond to a well blowout or fire. Subject to capital
availability, the Company intends to build upon its demonstrated strengths in
high-risk management while increasing revenues from its engineering, equipment
sales, environmental containment and remediation services and non-critical
events. Recognizing that the well control services business is a finite market
with services dependent upon the occurrence of blowouts which cannot be
reasonably predicted, the Company's business strategy is to market its pre-event
and engineering services on a global basis and expand its range of services to
grow market share within a diversified and expanded revenue base.
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 segments within the oil and gas services industry, the Company
believes a number of attractive acquisition opportunities exist in the pressure
control, emergency response, high-risk management 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 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.
5
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 Matthews 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 Matthews 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 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 assess the
damage, supervise debris removal, local equipment mobilization and site
preparation;
- - Gather and analyze the available data, including drilling history, geology,
availability of support equipment, personnel, water supplies and ancillary
firefighting resources;
- - Develop or implement a detailed fire suppression and well-control plan;
- - Mobilize additional well-control and firefighting equipment in Houston;
- - Transport equipment by air freight from Houston to the blowout location;
- - Extinguish the fire and bring the well under control; and
- - Transport the control team and equipment back to Houston.
On a typical blowout, debris removal, fire suppression and well control can
require several weeks of intense effort and consume millions of dollars,
including several hundred thousand dollars in air freight costs alone.
The 1990's have been a period of rapid change in the oil and gas well
control and firefighting business. The hundreds of oil well fires that were
started by Iraqi troops during their retreat from Kuwait spurred the development
of new firefighting techniques and tools that have become industry standards.
Moreover, after extinguishing the Kuwait fires, the entrepreneurs who created
the oil and gas well firefighting industry, including Red Adair, Boots Hansen
and Coots Matthews 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.
Trends. The increased recognition of the importance of risk mitigation
services, 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, both major and independent oil producers are coming to the Company for
proactive preparedness and incident prevention programs. These requests,
together with pre-event consultation on matters relating to well control
training, blowout contingency planning, on-site safety inspections and formal
fire drills, are expanding the market for the Company's engineering unit.
Decreasing availability of financial capacity in the re-insurance markets
are causing underwriting syndicated to seek significant renewal rate increases
and higher quality risks in the "Control of Well" segment of the energy
insurance market. The Company believes these factors enhance the viability of
proven alternative risk transfer programs such as WELLSURE, a proprietary
insurance program in which the Company is the provider of both pre-event
services and loss management.
6
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, B & C Special Services, HAZ-TECH and
anticipated revenues from the WELLSURE program and from the Company's
consulting, and industrial and marine firefighting services will help to provide
an expanded and more 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 high risk management
well control services, including pre-event planning, training and consulting
services. The Company also markets oil and hazardous materials spill containment
and recovery equipment and a varied line of industrial products for the oil and
gas industry. 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 and
has subsequently proceeded to liquidate its assets and liabilities pursuant to
Chapter 7 of Title XI. During 2000, the Company also sold Baylor Company, a
manufacturer of drilling, marine and power generation equipment and
substantially reduced the operations of ABASCO.
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 whether a fire has
occurred. (2) "Non-critical Event" response, on the other hand, is intended for
the more common sub-surface 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 over 225 years of aggregate industry experience in
responding to Critical Events, oilwell fires and blowouts.
Non-critical Events. Non-critical Events frequently occur in connection
with workover operations or the drilling of new wells into high pressure
reservoirs. In most Non-critical Events, the blowout prevention equipment 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. Non-critical Events can
escalate into Critical Events.
Firefighting 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.
7
WELLSURE(R) 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(R)," 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(R)
has been arranged with leading London insurance underwriters. WELLSURE(R)
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.
Firefighting 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 or the Emergency
Response Center recently established in Algeria. The Company has also entered
into agreements with renewal clauses to provide ongoing consulting services
relating to the Emergency Response Centers, including equipment sales, 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 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 work over 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.
8
Regional Emergency Response Centers. 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. The
Company also currently has Emergency Response Centers in Houston, Texas, Anaco,
Venezuela, and Algeria. The Company intends 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, purchased by a national oil company 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 a 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. 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.
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
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 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 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 and has subsequently proceeded to liquidate its assets and liabilities
pursuant to Chapter 7 of Title XI.
Manufacturing and Distribution
The Manufacturing and Distribution business segment includes the following
operating subsidiaries or business units of the Company: Baylor and ABASCO.
Baylor. On September 28, 2000, the Company announced that it closed the
sale of the assets of the Baylor Company and its subsidiaries to National
Oilwell, Inc. The proceeds from the sale were approximately $29,000,000 cash.
Comerica Bank-Texas, the Company's primary senior secured lender at the time,
was paid in full as a component of the transaction.
ABASCO. 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.
9
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,
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,
such as the recent Algerian Fire Station, and that maintenance of the Fire
Station equipment will be supported 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 $5,000,000 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.
10
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(R)
program, and its acquisitions of Boots & Coots, ABASCO, B & C Special Services,
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 March 9, 2001, the Company and its operating subsidiaries
collectively had 119 full-time employees, and 77 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, 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.
11
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 $58,000. In February 2000, the Company subleased approximately 25% 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, for a monthly rental of $2,500. The Company owns a
facility in northwest Houston, Texas, at 11615 N. Houston Rosslyn Road, 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 leases a
7,000 square foot office in the Halliburton Center, Houston, Texas. This space
is rented from an unaffiliated landlord through May 2002 for an average monthly
rental of $7,000,and is subleased on substantially the same terms. The Company'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 10,000 square foot office and equipment storage facility in southeast
Houston, Texas, through December 31, 2003 at a monthly rental of $11,547.
Additionally, the Company has leased office and equipment storage facilities in
various other cities within the United States, Venezuela, and Peru. The future
commitments on these additional leases are immaterial. The Company believes that
these facilities will be adequate for its anticipated needs.
12
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. Additionally, the
Company's liquidity problems and loan covenant defaults adversely impacted the
Company's ability to pay certain vendors on a timely basis. As a consequence, a
number of these vendors filed lawsuits against the Company and some have
obtained judgments for the amount of their claims, plus costs. The Company has
retained a third party to negotiate settlements of some of these claims and is
actively engaged in defending or resolving others. The Company expects that it
will be able to resolve these claims in an orderly fashion and does not believe
that these suits or judgments or any liabilities resulting from any such current
proceedings will have a material adverse effect on its operations or financial
position. However, the Company's business, financial performance and prospects
could be adversely affected if it is unable to adequately defend, pay or settle
its accounts, including as a consequence of efforts to enforce existing or
future judgments
In May of 2000, the Company's subsidiary ITS Supply Corporation ("ITS")
filed in Corpus Christi, Texas for protection under Chapter 11 of the U.S.
Bankruptcy Code. ITS is now proceeding to liquidate its assets and liabilities
pursuant to Chapter 7 of Title 11. At the time of the filing, ITS had total
liabilities of approximately $6,900,000 and tangible assets of approximately
$950,000. The Company has an outstanding subordinated 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. A judgment against the Company has been entered by a state
district court, and that judgment is now on appeal. The Company does not
believe the guaranty will be enforceable in accordance with its terms. Further,
the Company, in consultation with its counsel, believes that it is not probable
that any creditors of ITS may successfully assert and realize collection against
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 25, 2000, the Company convened its annual meeting of the
stockholders in Houston, Texas. The meeting was subsequently adjourned to
November 6, 2000, in light of the Company's announcement of an agreement in
principle to restructure the Prudential subordinated debt. The matters voted on
at the meeting were: (1) the election of eight directors of the Company into 3
classes, each serving for a staggered term from one to three years; (2) amending
the Certificate of Incorporation of the Company to (i) increase the authorized
capital stock of the Company to 125,000,000 shares of common stock, and (ii)
repeal provisions of the Certificate of Incorporation that prohibit the issuance
of common stock and preferred stock to directors, officers and 10% or greater
shareholders; and (3) to approve the Company's 2000 Long-Term Incentive Plan.
The voting was as follows for the election of directors:
FOR WITHHELD ABSTAINING
---------- ---------- ----------
Larry H. Ramming 33,299,530 2,701,530 --
Thomas L. Easley 33,423,985 2,577,075 --
E.J. "Jed" DiPaolo 33,073,308 2,891,388 --
Jerry Winchester 33,378,382 2,622,678 --
Richard Anderson 33,421,888 2,542,788 --
K. Kirk Krist 33,457,172 2,543,888 --
Tracy Turner 33,227,072 2,773,988 --
Brian Krause 33,247,172 2,753,888 --
Each of the directors was elected by the holders of more than a plurality
of the shares present, in person or by proxy, at the annual meeting.
The voting was as follows for the increase of common stock of the Company
to 125,000,000 shares:
FOR WITHHELD ABSTAINING
---------- --------- ----------
32,036,575 3,565,698 398,787
The proposal to increase the common stock of the Company was passed by the
holders of more than a majority of the shares entitled to vote thereon.
13
The voting was as follows for the repeal of the provisions of the
Certificate of Incorporation that restrict the issuance of common stock and
preferred stock to directors, officers and 10% or greater stockholders:
FOR WITHHELD ABSTAINING BROKER NON-VOTES
---------- --------- ---------- ----------------
21,042,238 3,880,471 889,699 10,188,652
The proposal to repeal the provisions of the Certificate of Incorporation
was passed by the holders of more than a majority of the shares entitled to vote
thereon.
The voting was as follows on approving the Company's 2000 Long-Term
Incentive Plan:
FOR WITHHELD ABSTAINING BROKER NON-VOTES
---------- --------- ---------- ----------------
21,426,480 3,225,809 1,160,119 10,188,652
The proposal to approve the 2000 Long-Term Incentive Plan was passed by the
holders of more than a majority of the shares present, in person or by proxy, at
the annual meeting.
14
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."
The following table sets forth the high and low sales prices per share of the
common stock for each full quarterly period within the two most recent fiscal
years as reported on the AMEX:
HIGH AND LOW SALES PRICES
1999 2000
---------------- ----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter. $2.8750 $1.7500 $1.8125 $0.3750
Second Quarter 2.1875 1.1875 0.8125 0.5000
Third Quarter. 1.2500 0.3750 1.0000 0.3750
Fourth Quarter 0.7500 0.2500 0.8125 0.3125
On March 29, 2001, the last reported sale price of the common stock as
reported on AMEX was $ 0.72 per share.
As of February 27, 2001, the Company's common stock was held by
approximately 238 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, if any, to provide funds for
the operation and expansion of its business. The Company's credit facilities
currently prohibit paying cash dividends. In addition, the Company is
prohibited from paying cash dividends on its common stock before full dividends,
including cumulative dividends, are paid to holders of the Company's preferred
stock.
SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
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 450,000 shares of common
stock at an exercise price of $1.25 per share.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 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 representing the
right to purchase an aggregate of 8,729,985 shares of common stock of the
Company to the participation interest holders and warrants to purchase an
aggregate of 3,625,000 shares of common stock to the investment group that
arranged the financing. 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
8,729,985 shares and $0.75 per share as to 3,625,000 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.
Subsequently, in connection with the Seventh Amendment to Loan Agreement
dated as of December 29, 2000, Specialty Finance Fund agreed to convert
$7,729,985 of the participation interest, plus $757,315 in accrued interest
thereon into 89,117 shares of the Company's Series H Cumulative Convertible
Preferred Stock. The remaining $1,000,000 of the participation interest was
outstanding as senior secured debt as of December 31, 2000. This offering was
structured as an exempt private placement pursuant to Section 4(2) of the
Securities Act of 1933. Specialty Finance Fund has the right to convert shares
of the Series H Stock, and all accrued but unpaid dividends owing through the
date of conversion, into shares of common stock. The number of shares of common
stock to be issued on each share of Series H Stock is determined by dividing
face value plus the amount of any accrued but unpaid dividends on the Series H
Stock by 85% of the ninety day average of the high and low trading prices
preceding the date of notice to the Company; provided, that the conversion shall
not use a price of less than $0.75 per share and shall not be greater than $1.25
per share unless the conversion occurs between January 1, 2001 and December 31,
2002, when the price shall not be greater than $2.50 per share. If the Series H
15
Stock is converted into common stock, the Company will also be obligated to
issue warrants providing the holders of the Series H Stock with the right for a
three year period to acquire shares of common stock, at a price equal to the
conversion price determined above, equivalent to ten percent (10%) of the number
of shares into which the shares of Series H Stock are converted. This offering
was structured as an exempt private placement pursuant to Section 4(2) of the
Securities Act of 1933.
As more fully disclosed elsewhere herein, on August 24, 2000, the Company
issued an aggregate of 3,000 shares of its Series C Preferred Stock and warrants
to purchase an aggregate of 300,000 shares of common stock at $0.75 per share to
its outside directors as reimbursement for expenses associated with their
service as directors of the Company. This offering was structured as an exempt
private placement pursuant to Section 4(2) of the Securities Act of 1933 to
existing directors of the Company.
As more fully disclosed elsewhere herein, on August 24, 2000, the Company
issued 1,500 shares of its Series C Preferred Stock and warrants to purchase an
aggregate of 150,000 shares at $0.75 per share to Larry Ramming, its Chief
Executive Officer, relating to his employment. This offering was structured as
an exempt private placement pursuant to Section 4(2) of the Securities Act of
1933 to an existing officer and director of the Company.
As more fully disclosed elsewhere herein, on February 15, 2000, the Company
issued options to purchase an aggregate of 150,000 shares at $0.75 per share to
each member of the board of directors (other than Tracy Turner) and Dewitt
Edwards, Vice President and Secretary. This offering was structured as an
exempt private placement pursuant to Section 4(2) of the Securities Act of 1933
to existing officers and directors of the Company.
On June 27, 2000, the Company issued 9,750 Shares of Series C Preferred
Stock and warrants to purchase an aggregate of 975,000 shares of common stock at
$0.75 per share to the Ramming Family Limited Partnership (the "Partnership"),
of which Larry Ramming is a controlling person, in exchange for accrued
obligations relating to renewals, modifications, points, and releases in
connection with a loan to the Company in the original principal amount of
$7,000,000. Additionally, the Company issued to the Partnership on June 27,
2000, a warrant to purchase 2,000,000 shares of common stock at $0.75 per share
in satisfaction of its obligation to do so at the inception of the loan. This
offering was structured as an exempt private placement pursuant to Section 4(2)
of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain historical financial data of the
Company for the fiscal year ended June 30, 1997, the six months ended December
31, 1997, and the years ended December 31, 1998, 1999 and 2000 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 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.
Baylor Company was sold in September of 2000 and the results of operations
of Baylor 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.
16
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, YEARS ENDED DECEMBER 31,
JUNE 30, -------------------------- --------------------------------------------------------
1997 1996 1997 1997 1998 1999 2000
------------ ------------ ------------ ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA:
Revenues . . . . . . . . . . $ 2,564,000 $ 743,000 $ 5,389,000 $ 7,154,000 $32,295,000 $ 33,095,000 $ 23,537,000
Operating loss . . . . . . . (68,000) (397,000) (432,000) (360,000) (1,202,000) (19,984,000) (11,390,000)
Loss from continuing
operations before
extraordinary item . . . . (156,000) (411,000) (565,000) (374,000) (3,562,000) (26,468,000) (22,732,000)
Income (Loss) from
discontinued operations,
net of income taxes. . . . - - - - 566,000 (4,648,000) 1,544,000
Loss from sale of
discontinued operations,
net of income taxes. . . . - - - - - - (2,555,000)
Net loss before
extraordinary item. . . . (156,000) (411,000) (565,000) (374,000) (2,996,000) (31,116,000) (23,743,000)
Extraordinary
Item - Gain (loss) on
debt extinguishment . . . - - (193,000) (193,000) - - 2,444,000
Net loss . . . . . . . . . . (156,000) (411,000) (758,000) (567,000) (2,996,000) (31,116,000) (21,299,000)
Net loss attributable to
common shareholders . . . . . (156,000) (411,000) (758,000) (567,000) (3,937,000) (32,360,000) (22,216,000)
BASIC AND DILUTED
LOSS PER COMMON SHARE:
Continuing Operations. . . . $ (0.01) $ (0.04) $ (0.02) $ (0.03) $ (0.14) $ (0.81) $ (0.70)
============ ============ ============ ============ ============ ============= =============
Discontinued Operations. . . $ - $ - $ - $ - $ 0.02 $ (0.13) $ (0.03)
============ ============ ============ ============ ============ ============= =============
Extraordinary Item . . . . . $ - $ - $ (0.01) $ (0.02) $ - $ - $ 0.07
============ ============ ============ ============ ============ ============= =============
Net Loss . . . . . . . . . . $ (0.01) $ (0.04) $ (0.03) $ (0.05) $ (0.12) $ (0.94) $ (0.66)
============ ============ ============ ============ ============ ============= =============
Weighted average common
Shares outstanding . . . . 12,191,000 11,500,000 23,864,000 12,136,000 31,753,000 34,352,000 33,809,000
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------- -------------- --------------
BALANCE SHEET DATA:
Total assets. . . . . . . . . . . $ 82,156,000 $ 53,455,000 $ 18,126,000
Long-term debt and notes payable. 50,349,000 43,181,000 12,620,000
Working capital (deficit) . . . . 48,625,000 (20,455,000) (4,018,000)
Shareholders' equity (deficit). . 20,236,000 (4,327,000) (6,396,000)
Common shares outstanding . . . . 33,044,000 35,244,000 31,692,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and the other financial
information contained in the Company's periodic reports previously filed with
the Commission and incorporated herein by reference.
As discussed herein, the Company completed the acquisitions of Boots &
Coots, L.P. as of July 31, 1997; ABASCO, Inc. as of September 25, 1997; ITS
Supply Corporation as of January 2, 1998; Boots & Coots Special Services, Inc.
(formerly known as Code 3, Inc.) as of February 20, 1998; Baylor Company as of
July 23, 1998, and HAZ-TECH Environmental Services, Inc. as of November 4, 1998.
The results of operations for such acquisitions are included in the condensed
Statements of Operations set forth hereinafter from the respective dates of
acquisitions through the reporting period end. For all periods presented herein,
the operations of ITS and Baylor have been reclassified as discontinued
operations.
17
A summary of operating results for the fiscal years ended December 31,
1998, 1999 and 2000 are as follows:
YEARS ENDED DECEMBER 31
------------------------------------------
1998 1999 2000
------------ ------------- -------------
Revenues. . . . . . . . . . . . . . . . $32,295,000 $ 33,095,000 $ 23,537,000
Costs and Expenses:
Cost of Sales and Operating
Expenses. . . . . . . . . . . . . 24,415,000 31,971,000 21,792,000
Selling, General and
Administrative . . . . . . . . . . 7,560,000 13,694,000 8,637,000
Depreciation and
Amortization . . . . . . . . . . . 1,522,000 2,907,000 2,665,000
Write-down of long-lived assets . . . - 4,507,000 -
Loan guaranty charge. . . . . . . . . - - 1,833,000
Operating Income (Loss) . . . . . . . (1,202,000) (19,984,000) (11,390,000)
Interest (expense) and other income,
net . . . . . . . . . . . . . . . . (2,241,000) (6,402,000) (11,277,000)
Income Tax Expense. . . . . . . . . . (119,000) (82,000) (65,000)
Loss from Continuing Operations
before Extraordinary Item .. . . . . (3,562,000) (26,468,000) (22,732,000)
Income (Loss) from Discontinued
Operations, net of income taxes. . . 566,000 (4,648,000) 1,544,000
Loss from Sale of Discontinued
Operation net of income tax . . . . - - (2,555,000)
Gain on Extraordinary Item. . . . . . . - - 2,444,000
Net Loss . . . . . . . . . . . . . . (2,996,000) (31,116,000) (21,299,000)
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(R) 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 business operations, an assessment has been made
that the Company's risk management programs previously included in Programs and
Services 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.
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1999 2000
------------ ------------- -------------
REVENUES
Emergency Response and Restoration. $28,999,000 $ 28,418,000 $ 22,236,000
Manufacturing and Distribution. . . 3,296,000 4,677,000 1,301,000
------------ ------------- -------------
32,295,000 33,095,000 23,537,000
============ ============= =============
COST OF SALES AND OPERATING EXPENSES
Emergency Response and Restoration. 21,599,000 27,509,000 20,244,000
Manufacturing and Distribution. . . 2,816,000 4,462,000 1,548,000
------------ ------------- -------------
24,415,000 31,971,000 21,792,000
============ ============= =============
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (1)
Emergency Response and Restoration. 7,289,000 11,858,000 8,160,000
Manufacturing and Distribution. . . 271,000 1,836,000 477,000
------------ ------------- -------------
7,560,000 13,694,000 8,637,000
============ ============= =============
DEPRECIATION AND AMORTIZATION
Emergency Response and Restoration. 1,402,000 2,780,000 2,665,000
Manufacturing and Distribution. . . 120,000 127,000 -
------------ ------------- -------------
1,522,000 2,907,000 2,665,000
============ ============= =============
OPERATING INCOME
Emergency Response and Restoration. (1,291,000) (17,296,000) (10,667,000)
Manufacturing and Distribution. . . 89,000 (2,688,000) (723,000)
------------ ------------- -------------
(1,202,000) (19,984,000) (11,390,000)
============ ============= =============
(1) Selling, General and Administrative and Corporate expenses have been
allocated pro rata among segments using relative revenues for the basis.
18
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 firefighting
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 of $1,207,000 for 1999 compared to 1998; offset by lower
revenues in Special Services hazardous materials operations of $1,670,000 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(R)
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 of $1,870,000 due to substantially lower activity in
emergency response out calls and the effect of a large ship fire project of
$1,036,000 in 1998.
The net increase in Manufacturing and Distribution revenues of $1,379,000
from 1998 compared to 1999 is primarily the result of increased sales by ABASCO
during the 1999 resulting from second and third quarter 1999 international sales
and sales of industrial fire fighting equipment, foam 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(R)
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 of 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 $1,646,000 from 1998 to 1999 is primarily the result of
additional costs of sales associated with increased second quarter 1999 ABASCO
sales of firefighting equipment, foam and supplies. 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 $4,569,000 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(R) 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 $1,565,000 from the 1998 to 1999 period is primarily
the result of allocation of an increased overhead base for additional corporate
investments in personnel, systems and infrastructure necessary to support an
expanded scope of operations.
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.
19
Depreciation and Amortization
The net increase in Emergency Response and Restoration depreciation and
amortization of $1,378,000 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 $7,000 from 1998 to 1999 is primarily due to capital
expenditures in 1998 and the early part of 1999.
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 $3,933,000 for 1998 increased
to $6,402,000 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.
Operating results of Baylor, acquired as of July 23, 1998, are presented as
discontinued operations for the years ended December 31, 1998 and 1999.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 WITH THE YEAR ENDED DECEMBER 31,
2000
Revenues
Emergency Response and Restoration revenues were $22,236,000 for the year
ended December 31, 2000, compared to $28,418,000 for the year ended December 31,
1999, a decrease of $6,182,000 (22%) in the current year. The reduction included
a $3,900,000 decrease in revenues from the Company's well control operations,
the timing of which is largely unpredictable. The prior year period included a
large well control project in which the Company acted as general contractor.
Revenues from the Special Services hazardous materials remediation operation
decreased by $5,400,000 primarily as a result of difficulties in securing
adequate subcontracting resources because of the Company's liquidity
constraints.
Manufacturing and Distribution revenues were $1,301,000 for the year ended
December 31, 2000, representing a decrease of $3,376,000 (72%) compared to the
prior year. The decline in revenues resulted from sharply lower sales at ABASCO
due to a continuing decline in international sales and lack of significant
orders for fire and protective equipment packages.
Cost of Sales and Operating Expenses
Emergency Response and Restoration Cost of Sales and Operating Expenses
declined by $7,265,000 for the year ended December 31, 2000, a decrease of 26%
in comparison to last year. This decrease is the result of lower sales and the
result of the Company's initiatives targeted at reducing operational overhead.
As a percentage, Cost of Sales and Operating Expenses declined more than the
corresponding segment revenues, resulting in an improved contribution margin for
Emergency Response and Restoration; a 3.2% contribution margin versus an 9%
contribution margin for the years ended December 31, 1999 and December 31, 2000,
respectively.
20
The decrease in Manufacturing and Distribution Cost of Sales and Operating
Expenses of $2,914,000 (65%) for the year ended December 31, 2000, is directly
related to the continuing decline in international revenues, and the associated
related costs, and lack of significant orders for fire and protective equipment
packages. This improvement reflects the result of the Company's initiatives
targeted at reducing operational overhead.
Selling, General And Administrative Expenses
Selling, General and Administrative Expenses for the Emergency Response and
Restoration segment were $8,160,000 for the year ended December 31, 2000,
compared to $11,858,000 for the year ended December 31, 1999, a decrease of
$3,698,000 (31%) from the prior year. Selling, General and Administrative
Expenses were reduced in response to 1999 cost reduction initiatives primarily
in Boots & Coots Special Services.
The decrease in Manufacturing and Distribution Selling, General and
Administrative Expenses of $1,359,000 (74%) for the year ended December 31,
2000, compared to the year ended December 31, 1999, is primarily the result of
management's cost reduction initiatives at ABASCO.
Depreciation and Amortization
The net decrease in Emergency Response and Restoration depreciation and
amortization of $115,000 from 1999 to 2000 is the result of an increased
depreciable asset base for Well Control and Boots & Coots Special Services.
The net decrease in Manufacturing and Distribution depreciation and
amortization of $127,000 from 1999 to 2000 is primarily due to the 1999 write
down of Property Plant and Equipment to net realizable value.
Interest Expense and Other, Including Finance Cost
Interest expense for the year ended December 31, 2000 was $7,454,000
compared to $6,184,000 in the prior year. The increase of $1,270,000 in
interest expense is primarily due to the additional senior debt incurred during
the year.
Other expense, including financing cost, includes $1,060,000 in expenses
relating to warrants issued to the participation interest and advisory services
associated therewith. Other expense also includes approximately $3,886,000 in
legal settlements and other financing related costs.
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 Company receives the majority of its revenues from customers in the
energy industry, which experienced a significant downturn in the third quarter
of 1998 that continued throughout 1999. Industry conditions improved in 2000,
however the Company's upstream and downstream customer base has not to date
increased project expenditure levels to those existing in the first half of
1998. Demand for the Company's products and services is impacted by the number
and size of projects available as changes in oil and gas exploration and
production activities change customers' forecasts and budgets. These
fluctuations have a significant effect on the Company's cash flows.
Oil and gas prices have significantly improved since the downturn in 1998.
While these price improvements have brought the company increases in the
frequency of high risk work and in the volume of prevention related projects,
the Company's well control business has not yet benefited to a meaningful degree
from an increase in the volume of critical events. Historically, the well
control business has provided the Company with the opportunity for highly
profitable operating activities. However, the timing of critical events is
unpredictable and they occur in irregular patterns. Consequently, the Company's
financial performance has been subject to significant fluctuations.
As a result of the relatively low incidences of critical events over the
last two years and the resultant negative effect on the Company's financial
position, the Company's management initiated actions in 1999 which included
among others, (a) downsizing personnel, (b) attempting to improve its working
capital, (c) closing and/or consolidating certain of its field offices, (d)
consolidating certain administrative functions, and (e) evaluating and
21
discontinuing certain business lines to ensure that the Company's resources are
deployed in the more profitable operations. The Company's initial efforts to
rationalize its operations commenced in the first quarter of 1999. Through 1999
and continuing through 2000, the results of these efforts were not sufficient to
prevent significant operating losses.
The Company's impaired liquidity position has resulted in the inability to
pay certain vendors in a timely manner. This has hampered the Company's ability
to hire sub-contractors, obtain materials and supplies, and otherwise conduct
operations in an effective or efficient manner. Moreover, throughout most of
fiscal 2000, the Company was in default under its senior secured debt agreement
and its subordinated debt agreement.
To alleviate the Company's liquidity problems and to improve its overall
capital structure, the Company initiated and completed a program to restructure
its debt and equity positions. The program involved a series of steps designed
to raise new funds, sell assets of certain subsidiaries, retire the Company's
existing senior debt, restructure its subordinated debt and increase its
shareholders' equity.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 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 representing the
right to purchase an aggregate of 8,729,985 shares of common stock of the
Company to the participation interest holders and warrants to purchase an
aggregate of 3,625,000 shares of common stock to the investment group that
arranged the financing. 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
8,729,985 shares and $0.75 per share as to 3,625,000 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. On December 28, 2000, $7,729,985 of the participation interest, plus
$757,315 in accrued interest thereon, was exchanged for 89,117 shares of Series
H Cumulative Senior Preferred Stock in the Company. The remaining $1,000,000 of
the participation interest was outstanding as senior secured debt as of December
31, 2000.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica Bank-Texas,
the Company's primary senior secured lender, was paid in full as a component of
the transaction. Specialty Finance Fund I, LLC, as a participant in the Comerica
senior facility, remains as the senior secured lender.
On October 24, 2000, the Company announced that it had reached agreement in
principal with Prudential Insurance Company of America, in the form of a letter
of intent, regarding the restructuring of the Company's subordinated debt with
Prudential. The Company had been in default under its subordinated note
agreement with Prudential since the second quarter of 1999. A restructuring
agreement was executed by both parties on December 28, 2000. The Prudential
restructuring agreement provided that the aggregate
indebtedness due to Prudential be resolved by the Company paying: (i)
12,000,000 cash, (ii) $7,200,000 of new subordinated debt, (iii) 5,000,000 face
value of Senior Preferred Stock ($2,850,000 fair value) and (iv) $8,000,000
face value of Convertible Preferred Stock ($2,600,000 fair value). In addition,
$500,000 is contingently payable upon the Company securing a new term loan with
a third party lender. All interest payments and dividends are paid in kind and
deferred for two years from the date of closing. Additionally, as a component
of the transaction, Prudential received newly issued warrants to purchase
8,800,000 shares of the Company's Common Stock for $0.625 per share and the
Company agreed to re-price the existing Common Stock purchase warrants held by
Prudential to $0.625 per share. The Company has the right to repurchase, at a
discount to face value, all of the debt, stocks and warrants issued to
Prudential for agreed periods of time.
The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions Statement of Financial
Accounting Standards (SFAS) No. 15. As a result of the application of this
accounting standard, the total indebtedness due to Prudential, inclusive of
accrued interest, was reduced by the cash and fair market value of securities
issued by the Company, and the residual balance of the indebtedness was recorded
as the new carrying value of the subordinated note due to Prudential.
Consequently, the $7,200,000 face value of the subordinated note is recorded on
the Company's balance sheet at $11,520,000. The additional carrying value of the
debt in excess of face value represents the accrual of future interest expense
due on the face value of the subordinated note to Prudential. The remaining
excess of amounts previously due Prudential over the new carrying value was
$2,444,000 and was recognized as an extraordinary gain.
The new financing obtained during the year from Specialty Finance Fund I,
LLC, and the restructuring of the subordinated debt with Prudential has a
potentially significant dilutive impact on existing common shareholders. This
could adversely affect the market price for the Company's common stock and limit
the price at which new stock can be issued for future capital requirements.
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.
22
As of December 31, 2000, the Company's current assets totaled approximately
$7,984,000 and current liabilities were $12,002,000, resulting in a working
capital deficit of approximately $4,018,000. However, the Company's highly
liquid current assets, represented by cash of $1,416,000 and receivables of
$5,620,000, were collectively $4,966,000 less than the amount required to settle
current liabilities. The Company is actively exploring new sources of financing,
including the establishment of new credit facilities and the issuance of debt
and/or equity securities. Additionally, the Company continues to pursue methods
to expand its business activities and enhance its operating cash flow. However,
absent any new sources of financing, or if the Company does not significantly
improve its operating performance, the Company may not have sufficient funds to
meet its current obligations over the next twelve months and may be required to
dispose of additional assets or operations outside of the normal course of
business in order to satisfy current obligations
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 1998, 1999 and 2000. 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. 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.
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 January 1, 2001. Adoption in January 2001 did not have a
material impact on the financial statements of the Company.
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 guidance.
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 his 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".
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, 1999 and 2000, and all other factors affecting
the Company's debt remained the same, pretax earnings would have been lower by
approximately $83,000, $160,000 and $122,000 in 1998, 1999 and 2000. 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,
1999 and 2000, 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 $1,684,000,
$1,568,000 and $247,000 at December 31, 1998, 1999 and 2000, respectively. Given
the composition of the Company's debt structure, the Company does not, for the
most part, actively manage its interest rate risk.
23
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.
24
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.
NAME AGE POSITION
- ------------------- --- ----------------------------------------------------
Larry H. Ramming. . 54 Chairman of the Board of Directors
Chief Executive Officer and Chief Financial Officer
Brian Krause. . . . 45 Director
Vice President of Boots & Coots Services
K. Kirk Krist . . . 43 Director
Jerry L. Winchester 42 Director
President and Chief Operating Officer
Dewitt H. Edwards . 42 Corporate Secretary - Executive Vice President
Thomas L. Easley. . 56 Director (Vice President & Chief Financial Officer
Through February 7, 2000)
E. J. DiPaolo . . . 48 Director
W. Richard Anderson 48 Director
Tracy Turner. . . . 40 Director
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, Inc. 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.
Previously Mr. Ramming was actively involved in mortgage banking and the
packaging and resale of mortgage notes, consumer loans and other debt
instruments for over 15 years. In addition, Mr. Ramming has been an active
venture capital investor.
Brian Krause has served as a director of the Company since the acquisition
of IWC Services (Well Control Business Unit) 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 third annual meeting after the annual meeting of stockholders
held in calendar year 2000. 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 director 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 third annual
meeting after the annual meeting of stockholders held in calendar year 2000. 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 has served as a director since July 1997. Mr.
Winchester serves as a Class II Director for a two-year term that will expire on
the date of the second annual meeting after the annual meeting of stockholders
held in calendar year 2000. Mr. Winchester also serves on the Compensation
Committee. Mr. Winchester has served as President and Chief Operating Officer of
the Company since November 1, 1998. Before assuming these positions, 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.
25
Dewitt H. Edwards has served as Executive Vice President of the Company
since September 1, 1998 and has served as Corporate Secretary since April 2000.
Before assuming these positions, Mr. Edwards served in progressive positions of
responsibilities 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. 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
serves as a Class I Director for a term that will expire on the date of the next
annual meeting of stockholders. Mr. DiPaolo also serves on the Audit Committee.
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. Mr.
Anderson serves as a Class II Director for a two-year term that will expire on
the date of the second annual meeting after the annual meeting of stockholders
held in calendar year 2000. Mr. Anderson also serves on the Audit Committee. Mr.
Anderson is the 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.
Tracy Scott Turner has served as a director since November 2000. Mr. Turner
serves as a Class II Director for a two-year term that will expire on the date
of the second annual meeting after the annual meeting of stockholders held in
calendar year 2000. Mr. Turner is also currently a principal at Geneva
Associates, L.L.C., a merchant bank. In addition, Mr. Turner is the founding
principal of Interra Ventures, L.L.C., a merchant bank which focuses on
telecommunications and energy related investments. From 1993 to 1996, Mr. Turner
served as a Senior Vice President of the Private Placement Group for ABN AMRO
Bank. From 1986 to 1993, he was a Managing Director in the Private Placement
Group for Canadian Imperial Bank of Commerce. Mr. Turner has an investment in
and sits on the board of directors of Rio Bravo Exploration and Production. He
also currently sits on the board of directors of Vertaport, Inc., Early Warning
Corporation and Clean Air Research and Environmental and is a principal of
Turner Land and Cattle Company and Southern Capital Partners, L.L.C. Mr. Turner
is a managing member of Specialty Finance Fund I, L.L.C.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review of the Forms 3, 4, and 5 presented to it, the Company
believes that the following individuals have failed to file the following
reports on a timely basis.
Each member of the board of directors, other than Tracy S. Turner, has
failed to file a Form 4 reporting the issuance by the Company of options to
purchase 150,000 shares of common stock at $0.75 per share, as discussed
elsewhere herein.
Each non-employee director of the Company, other than Tracy S. Turner, has
failed to file a Form 4 reporting the issuance by the Company of 750 shares of
Series C Preferred Stock, convertible into 100,000 shares of common stock at
$0.75 per share, and related warrants to purchase 75,000 shares of common stock
at $0.75 per share.
Larry H. Ramming has failed to file Forms 4 reporting the issuance of an
aggregate of 1,650,000 options to purchase common stock at $0.75 per share,
warrants to purchase 300,000 of shares common stock at $0.75, and 3,000 shares
of Series C Preferred Stock, convertible into 400,000 shares of common stock at
$0.75 per share, issued in connection with his employment; and warrants to
purchase an aggregate of 2,825,000 shares of common stock at $0.75 per share and
8,250 shares of Series C Preferred Stock, convertible into 1,100,000 shares of
common stock at $0.75 per share, issued to the Ramming Family Limited
Partnership, of which he is a controlling person, in connection with a loan to
the Company.
26
Jerry Winchester has failed to file Forms 4 reporting the issuance of
options to purchase an aggregate of 1,385,000 shares of common stock at $0.75
per share issued in connection with his employment.
Dewitt Edwards has failed to file Forms 4 reporting the issuance of options
to purchase an aggregate of 408,000 shares of common stock at $0.75 per share
issued in connection with his employment.
Brian Krause has failed to file Forms 4 reporting the issuance of options
to purchase an aggregate of 75,000 shares of common stock at $0.75 per share
issued in connection with his employment and warrants to purchase 41,700 shares
of common stock at $0.75 per share in exchange for certain expenses of the
Company paid by him.
ITEM 11. EXECUTIVE COMPENSATION.
The Summary Compensation Table below sets forth the cash and non-cash
compensation information for the years ended December 31, 1998, 1999, and 2000
for the Chief Executive Officer and the two other executive officers whose
salary and bonus earned for services rendered to the Company exceeded $100,000
for the years then ended.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------------------ ----------------------------------
Awards Payouts
------------------------- -------
Other Securities
Name Annual Restricted Underlying All Other
And Compen Stock Options/ LTIP Compen-
Principal Salary Bonus -sation Award(s) SARs Payouts sation
Postion Year ($) ($) ($) ($) (#) ($) ($)
- ---------------------- ---- -------- ---------- -------- ----------- ------------ -------- ----------
Larry H. Ramming 2000 298,125 174,402(1) 1,200,000(2) 174,402(5)
Chairman, Chief 1999 280,624
Executive Officer 1998 287,000
and Chief
Financial Officer
- ---------------------- ---- -------- ---------- -------- ----------- ------------ -------- ----------
Jerry Winchester 2000 262,000 418,000(3) 3,109(6)
President 1999 262,000
1998 43,666
- ---------------------- ---- -------- ---------- -------- ----------- ------------ -------- ----------
Dewitt H. Edwards 2000 170,333 408,000(4) 3,109(6)
Executive Vice 1999 162,000
President 1998 54,000
- ---------------------- ---- -------- ---------- -------- ----------- ------------ -------- ----------
(1) Represents the fair market value of 1,500 shares of Series C Preferred
Stock of the Company and a warrant to purchase 150,000 shares of common
stock at $0.75 per share issued for performance during 1999 and 2000. The
fair market value was determined to be the face value for each share of
Series C Preferred Stock ($100). A Black-Scholes model using the
assumptions as set forth in Note I to the Financial Statements included
herein was used to determine the fair market value of the warrants.
(2) Excludes reissuance of option to purchase 900,000 shares of common stock in
exchange for option to purchase 750,000 shares of common stock. See "Ten
Year Option/SAR Repricing Table."
(3) Excludes reissuance of option to purchase 1,080,000 shares of common stock
in exchange for option to purchase 1,000,000 shares of common stock. See
"Ten Year Option/SAR Repricing Table."
(4) Excludes reissuance of option to purchase 108,000 shares of common stock in
exchange for option to purchase 100,000 shares of common stock. See "Ten
Year Option/SAR Repricing Table."
(5) Represents the fair market value of 1,500 shares of Series C Preferred
Stock of the Company and a warrant to purchase 150,000 shares of common
stock at $0.75 per share issued in satisfaction of certain benefit
obligations under Mr. Ramming's employment agreement. Also includes a $109
term life insurance premium payment. The fair market value on the date of
grant was determined as set forth in Note (1).
(6) Employer matching contribution to 401(k) plan account of $3,000 and $109
term life insurance premium payment.
27
The following table sets forth additional information with respect to stock
options granted in 2000 to the named Executive Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
---------------------------------
Individual Grants
- ----------------------------------------------------------------------------- Potential Realizable
Percent of Value at Assumed
Total Annual Rates of Stock Price
Number of Options/ Market Appreciation for Option Term(8)
Securities SARs Exer- Price ---------------------------------
Underlying Granted to cise or at Date Grant Date
Options/ Employees Base of Value
SARs in Fiscal Price Grant Expira- 5% 10% 0%
Name Granted Year ($) ($) tion Date ($) ($) ($)
- ------------------- ------------ ----------- -------- -------- ---------- -------- ---------- -----------
Larry H. Ramming(1) 900,000(2) 0.75 0.50 5/03/09 23,099 386,076 (225,000)
750,000(3) 35% 0.75 1.25 2/15/10(5) 964,589 1,869,134 375,000(9)
150,000 0.75 1.25 2/15/10 192,918 373,827 75,000
150,000 0.75 0.50 6/27/05 (17,069) (2,154) (37,500)
150,000 0.75 0.625 8/24/05 1,163 19,808 (18,750)
- ------------------- ------------ ----------- -------- -------- ---------- -------- ---------- -----------
Jerry Winchester 1,080,000(2) 0.75 0.50 9/09/08 (50,166) 242,307 (270,000)
250,000(3) 26% 0.75 1.25 2/15/10(6) 321,529 623,045 125,000(9)
150,000 0.75 1.25 2/15/10 192,918 373,827 75,000
55,000 0.75 0.50 4/25/05 (6,259) (790) (13,750)
18,000(4) 0.75 0.50 4/25/05 (2,048) (322) (4,500)
- ------------------- ------------ ----------- -------- -------- ---------- -------- ---------- -----------
Dewitt H. Edwards 108,000(2) 7% 0.75 0.50 8/21/08 (5,016) 24,131 (27,000)
150,000(3) 0.75 1.25 2/15/10(7) 192,918 373,827 75,000(9)
150,000 0.75 1.25 2/15/10 192,918 373,827 75,000
- ------------------- ------------ ----------- -------- -------- ---------- -------- ---------- -----------
(1) Table does not include grants of 3,000 shares of preferred stock to Mr.
Ramming, such shares being convertible into approximately 400,000 shares of
common stock as of the date hereof.
(2) Reissuance for surrender of option in exchange for the Company's promise to
reissue an option for 120% of the number of vested shares underlying the
surrendered option upon an increase in the authorized shares of common
stock of the Company.
(3) Issued pursuant to terms of employment agreement.
(4) Reissuance for surrender of option received as outside director in 1997 in
exchange for the Company's promise to reissue an option for 120% of the
number of vested shares underlying the surrendered option upon an increase
in the authorized shares of common stock of the Company.
(5) Expires on the earlier of the ten year anniversary date of issuance
February 15, 2010, 30 days after termination of employment by reason of
death or disability, the date of termination of employment for cause, or 30
days after termination for any other reason. Vests in increments of 150,000
shares annually.
(6) Expires on the earlier of the ten year anniversary date of issuance
February 15, 2010, 30 days after termination of employment by reason of
death or disability, the date of termination of employment for cause, or 30
days after termination for any other reason. Vests in increments of 50,000
shares annually.
(7) Expires on the earlier of the ten year anniversary date of issuance
February 15, 2010, 30 days after termination of employment by reason of
death or disability, the date of termination of employment for cause, or 30
days after termination for any other reason. Vests in increments of 30,000
shares annually.
(8) The assumed values result from the indicated rates of stock price
appreciation starting from the market price on the date of grant and
continuing for the duration of the option, subject to any vesting schedule.
The actual value of the option grants is dependent on future performance of
the common stock. There is no assurance that the values reflected in this
table will be achieved. The Company did not use an alternative formula for
a grant date valuation, as it is not aware of any formula that will
determine with reasonable accuracy a present value based on future unknown
or volatile factors.
(9) Option is subject to an annual vesting schedule and was not exercisable for
any shares of common stock on the date of grant.
28
In May 2000, Messrs. Ramming, Winchester and Edwards agreed to surrender
options issued to them pursuant to the terms of their employment agreements in
exchange for a promise by the Company to reissue options on the same terms when
shares became available to do so. Additionally, the Company promised that the
new options would be issued for 120% of the surrendered option shares and would
be issued at the market price on the date of surrender. The following table
reflects the terms of this reissuance.
TEN-YEAR OPTION/SAR REPRICINGS
Number of Length of
Securities Market Original
Underlying Price of Exercise Option
Options/ Stock at Price at Term
SARs Time of Time of New Remaining
Repriced or Repricing or Repricing or Exercise at Date of
Amended Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
- ------------------------- ------- ------------ -------------- -------------- ---------- ------------
Larry H. Ramming 4/17/00 900,000 $ 0.50 $ 1.55 $ 0.75 9 years
Chairman, Chief
Executive Officer and
Chief Financial Officer
- ------------------------- ------- ------------ -------------- -------------- ---------- ------------
Jerry Winchester 4/17/00 1,080,000 .50 1.91 .75 8 years
President
- ------------------------- ------- ------------ -------------- -------------- ---------- ------------
Dewitt H. Edwards 4/17/00 108,000 .50 3.29 .75 8 years
Executive Vice
President
- ------------------------- ------- ------------ -------------- -------------- ---------- ------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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.
Compensation of Directors. Directors who are employees of the Company do
not generally receive a retainer or fees for service on the board or any
committees. Directors who are not employees of the Company receive a fee of
$1,000 for attendance at each meeting of the Board or special committee meeting.
Both employee and non-employee directors are reimbursed for reasonable
out-of-pocket expenses incurred in attending meetings of the Board or committees
and for other reasonable expenses related to the performance of their duties as
directors. In addition, pursuant to the 1997 Non-Employee Directors' Stock
Option Plan, each non-employee director on the date of his or her election to
the Board of Directors automatically will be granted a stock option to purchase
15,000 shares of common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. The plan also provides for the
automatic additional grant to each non-employee director of stock options to
purchase 15,000 shares of common stock for each year the non-employee director
serves on the Board.
Compensation Committee Reports. The Company's compensation committee is
comprised of two or more persons appointed from time to time by, and serving at
the discretion of, the Board of Directors. During 2000, the committee consisted
of Messrs. Krist and Winchester, with Mr. Turner joining late in the year. The
compensation committee, which is chaired by Mr. Krist, administers the Company's
stock option plans, and in this capacity makes all option grants or awards to
employees, including executive officers, under the plans. In addition, the
compensation committee is responsible for making recommendations to the Board of
Directors with respect to the compensation of the Company's chief executive
officer and its other executive officers and for establishing compensation and
employee benefit policies. During 2000, the compensation committee held 5
meetings.
The objectives of the compensation committee in determining executive
compensation are to retain and reward qualified individuals serving as our
executive officers. To achieve these objectives, the committee relies primarily
on salary, annual bonuses (awardable either in stock or cash) and awards under
the Company's various stock option plans. In making its decisions, the
committee takes into account the conditions within our industry, our income
statement and cash flow and the attainment of any designated business
29
objectives. Individual performances are also reviewed, taking into account the
individual's responsibilities, experience and potential, his or her period of
service and current salary and the individual's compensation level as compared
to similar positions at other companies. The committee's evaluation of these
considerations is, for the most part, subjective and, to date, it has not
established any specific written compensation plans or formulas pursuant to
which the executive officers' annual compensation is determined.
Beginning in 1999 and continuing through 2000, the board of directors
initiated efforts to alleviate the Company's liquidity problems and to improve
its overall capital structure by endeavoring to restructure the Company's debt
and equity positions. The program involved a series of steps designed to raise
new operating capital, sell assets of certain subsidiaries, retire and modify
the Company's existing senior debt, restructure its subordinated debt and
increase its shareholders' equity. The Board agreed that the implementation of
this program would require additional time, effort and responsibility from the
Company's executive officers and its Board of Directors. Additionally, the Board
recognized that, due to the scope of the challenges faced by the Company with
its current debt and liquidity problems, and the high probability that the
Company might not be successful in its reorganization efforts, the board as a
whole, the Chief Executive Officer and the Company's executive management faced
increased risk and liabilities in the event of failure. The board of directors
instructed the compensation committee to review and determine, in light of this
program and the increased risks incurred, the most effective means in which to
compensate and provide incentives for the board as a whole, the Chief Executive
Officer, the Company's executive management and it's non-employee outside
directors.
In July 2000, the compensation committee agreed that in lieu of cash
relating to outside directors' compensation of $1000.00 per meeting and to
incentivize Board members and management in connection with the effort required
and increased liabilities incurred in connection with the initiatives of the
restructuring plan, that compensation for these items be accomplished through
the issuance of Series C Cumulative Convertible Junior Preferred Stock and
associated warrants to the Company's non-employee directors, and that for
leading the initiative of the restructuring program that the Chief Executive
Officer, Larry H. Ramming, also be issued Series C Cumulative Convertible Junior
Preferred Stock and associated warrants, and, finally, that each member of the
Board be issued an option to purchase common stock of the Company. This
compensation method was ultimately adopted and resulted in the issuance of 750
shares of Series C Cumulative Convertible Junior Preferred Stock and warrants to
purchase 75,000 shares of common stock at $0.75 per share to K. Kirk Krist, E.
J. "Jed" DiPaolo, William R. Anderson and Thomas Easley, 1,500 shares of Series
C Cumulative Convertible Junior Preferred Stock and warrants to purchase 150,000
shares of the Company's common stock at $0.75 per share to Larry H. Ramming, and
an option to purchase 150,000 shares of common stock at $0.75 per share to each
of K. Kirk Krist, E. J. "Jed" DiPaolo, William R. Anderson, Thomas Easley, Larry
H. Ramming, Jerry Winchester and Dewitt H. Edwards, in recognition of the
additional duties required of him in his capacity of Secretary to the Company
and the Board of Directors.
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 reissue
such options in the future, plus a twenty percent premium to the number of
option shares at then current market prices subject to availability of
authorized and issued or committed common shares.
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.
30
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 to
provide additional available shares of common stock for warrants to be issued in
connection with additional financings. The Company agreed to reissue to Mr.
Ramming such option in the future, plus a twenty percent premium in the number
of option shares at then current market prices 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
reissue to Mr. Winchester such option in the future, plus a twenty percent
premium in the number of option shares at the current market prices subject to
availability of authorized and unissued or committed common stock.
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 reissue to Mr. Edwards such option in the future, plus a twenty
percent premium in the number of option shares at then current market prices
subject to availability of authorized and unissued or committed common shares.
31
The following graph compares the Company's total stockholder return on its
common stock for the years ended December 31, 1997, 1998, 1999 and 2000 with the
Standard & Poors' 500 Stock Index and the Standard & Poors' Energy Composite
Index over the same period.
[GRAPHIC OMITED]
12/97 12/98 12/99 12/00
------ ------ ------ ------
Boots & Coots International Well Control, Inc. 100.00 77.40 11.29 12.90
S&P 500 Index 100.00 128.60 153.67 138.18
S&P Energy Composite Index 100.00 100.50 118.40 137.06
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 26, 2001, 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------------------ --------------------- -----------------
Larry H. Ramming 6,343,467 (2) 13.8%
Brian Krause 266,700 (3) *
Jerry L. Winchester 1,372,000 (4) 3.3%
K. Kirk Krist 962,832 (5) 2.4%
Thomas L. Easley 265,000 (6) *
Dewitt H. Edwards 408,000 (7) 1%
E.J. DiPaolo 358,000 (8) *
W. Richard Anderson 358,000 (8) *
Tracy S. Turner 731,666 (9)(10) 1.8%
Specialty Finance Fund I, L.L.C. 9,534,043 (11) 19.3%
All executive officers and directors as a group 11,065,665 22.4%
(nine persons) ---------------------
__________
* less than 1%
(1) Unless otherwise noted, the business address for purposes hereof for each
person listed is 777 Post Oak Boulevard, Suite 800, Houston, Texas 77056.
Beneficial owners have sole voting and investment power with respect to the
shares unless otherwise noted.
(2) Includes warrants and/or options to purchase 4,925,000 shares of common
stock and preferred stock convertible into 1,366,667 shares of common
stock. Of this number, options and/or warrants convertible into 2,975,000
shares of common stock and preferred stock convertible into 1,166,667
shares of common stock are owned by the Ramming Family Limited Partnership,
of which Larry H. Ramming is a controlling person.
(3) Includes warrants and/or options to purchase 266,700 shares of common
stock.
(4) Includes options to purchase 1,368,000 shares of common stock.
(5) Includes warrants and/or options to purchase 288,000 shares of common
stock.
(6) Includes warrants and/or options to purchase 165,000 shares of common stock
and preferred stock convertible into 100,000 shares of common stock.
(7) Includes options to purchase 408,000 shares of common stock.
(8) Includes warrants and/or options to purchase 258,000 shares of common stock
and preferred stock convertible into 100,000 shares of common stock.
(9) Includes options to purchase 15,000 shares of common stock. 666,666 of the
shares beneficially owned are held in a partnership, of which Tracy S.
Turner is a general partner.
(10) Tracy S. Turner may also own beneficially all of the shares owned by
Specialty Finance Fund I, L.L.C., as a Managing Member.
(11) Includes warrants to purchase 8,729,985 shares of common stock and
preferred stock convertible into 657,000 shares of common stock.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Transactions with Larry H. Ramming and the Ramming Family Limited Partnership
On April 30, 1998, Larry H. Ramming, the Company's Chairman and Chief
Executive Officer, on behalf of himself and the Ramming Family Limited
Partnership, of which he is a controlling person, loaned the Company $7,000,000
to enable it to retire certain bridge financing. In consideration of making the
loan, the Partnership received an option to purchase 2,000,000 shares of common
stock at $0.75 per share, however the issuance of this option was voluntarily
deferred in exchange for the commitment of the Company to reissue the option
subject to availability of authorized but unissued or committed shares of common
stock in the Company. The deferral was necessary to allow the Company
sufficient authorized but unissued and uncommitted shares of the Company's
common stock in connection with financing transactions completed during 2000.
During 1999, interest (10%) and extension (2%) expenses aggregating
$337,000 and principal payments of $6,431,000 were paid to the Partnership, with
the remaining principal balance being $569,000 and accrued interest and accrued
but unpaid extension fees aggregating $270,000. During 2000, the Company and the
Partnership agreed that the remaining principal amount of the loan and all
accrued but unpaid interest and fees associated with extensions, subordination,
modifications and releases of liens would be satisfied by the issuance of an
aggregate of 8,250 shares of Series C Cumulative Convertible Junior Preferred
Stock and warrants to purchase an aggregate of 825,000 shares of common stock at
$0.75 per share.
The Company believes the terms and conditions of the loan and its
conversion to equity were as favorable as those that could have been negotiated
with unaffiliated parties.
Transactions with Specialty Finance Fund I, LLC
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests in its senior
secured credit facility with Comerica from the investment group, Specialty
Finance Group I, LLC, a group of which Tracy S. Turner is a managing member. In
connection with this financing, the Company issued 147,058 shares of common
stock and warrants representing the right to purchase an aggregate of 8,729,985
shares of common stock of the Company to Specialty Finance Fund I, LLC, and
warrants to purchase an aggregate of 3,625,000 shares of common stock to the
investment group that arranged the financing, including warrants to purchase an
aggregate of 736,667 shares of common stock to Tracy S. Turner. On December 28,
2000, $7,729,985 of the participation interest, plus $757,315 in accrued
interest thereon, was exchanged for 89,117 shares of Series H Cumulative Senior
Preferred Stock in the Company. The remaining $1,000,000 of the participation
interest was outstanding as senior secured debt as of December 31, 2000.
34
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,
2000, included after signature page.
2. Financial statement schedules included in Consolidated financial
statements.
3. Exhibit Index
Exhibit No. Document
- ----------- --------------------------------------------------------------
3.01 - Amended and Restated Certificate of Incorporation(1)
3.02 - Amendment to Certificate of Incorporation(2)
3.03 - Amended Bylaws(3)
4.01 - Specimen Certificate for the Registrant's Common
Stock(4)
4.02 - Certificate of Designation of 10% Junior Redeemable
Convertible Preferred Stock(5)
4.03 - Certificate of Designation of Series A Cumulative Senior
Preferred Stock(6)
4.04 - Certificate of Designation of Series B Convertible Preferred
Stock(7)
4.05 - Certificate of Designation of Series C Cumulative Convertible
Junior Preferred Stock(8)
4.06 - Certificate of Designation of Series D Cumulative Junior
Preferred Stock(9)
*4.07 - Certificate of Designation of Series E Cumulative Senior
Preferred Stock
*4.08 - Certificate of Designation of Series F Convertible Senior
Preferred Stock
*4.09 - Certificate of Designation of Series G Cumulative Convertible
Preferred Stock
*4.10 - Certificate of Designation of Series H Cumulative Convertible
Preferred Stock
10.01 - Alliance Agreement between IWC Services, Inc. and
Halliburton Energy Services, a division of Halliburton
Company(10)
10.02 - Executive Employment Agreement of Larry H. Ramming(11)
10.03 - Executive Employment Agreement of Brian Krause(12)
10.04 - 1997 Incentive Stock Plan(13)
10.05 - Outside Directors' Option Plan(14)
10.06 - Executive Compensation Plan(15)
10.07 - Halliburton Center Sublease(16)
10.08 - Registration Rights Agreement dated July 23, 1998,
between Boots & Coots International Well Control, Inc. and
The Prudential Insurance Company of America(17)
10.09 - 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.(18)
10.10 - Common Stock Purchase Warrant dated July 23, 1998, issued
to The Prudential Insurance Company of America(19)
10.11 - Loan Agreement dated October 28, 1998, between Boots &
Coots International Well Control, Inc. and Comerica
Bank - Texas(20)
10.12 - Security Agreement dated October 28, 1998, between
Boots & Coots International Well Control, Inc. and Comerica
Bank - Texas(21)
35
Exhibit No. Document
- ----------- --------------------------------------------------------------
10.13 - Executive Employment Agreement of Jerry Winchester(22)
10.14 - Executive Employment Agreement of Dewitt Edwards(23)
10.15 - Office Lease for 777 Post Oak(24)
10.16 - Open
10.17 - Open
10.18 - Third Amendment to Loan Agreement dated April 21, 2000
(25)
10.19 - Fourth Amendment to Loan Agreement dated May 31,
2000(26)
10.20 - Fifth Amendment to Loan Agreement dated May 31, 2000(27)
10.21 - Sixth Amendment to Loan Agreement dated June 15, 2000(28)
10.22 - Seventh Amendment to Loan Agreement dated December
29,2000(29)
*10.23 - Subordinated Note Restructuring Agreement with The
Prudential Insurance Company of America dated December 28,
2000
10.25 - Preferred Stock and Warrant Purchase Agreement, dated April
15, 1999, with Halliburton Energy Services, Inc. (30)
10.26 - Letter of Engagement, dated April 10, 2000, with Maroon Bells
(31)
10.27 - Form of Warrant issued to Specialty Finance Fund I, LLC and
to Turner, Volker, Moore (32)
10.28 - Amended and Restated Purchase and Sale Agreement with
National Oil Well, L.P.(33)
21.01 - List of subsidiaries(34)
*23.01 - Consent of Arthur Andersen LLP
24.01 - Power of Attorney (included on Signature Page)
______________________
* Filed herewith
(1) Incorporated herein by reference to exhibit 3.2 of Form 8-K filed August
13, 1997.
(2) Incorporated herein by reference to exhibit 3.3 of Form 8-K filed August
13, 1997
(3) Incorporated herein by reference to exhibit 3.4 of Form 8-K filed August
13, 1997.
(4) Incorporated herein by reference to exhibit 4.1 of Form 8-K filed August
13, 1997.
(5) Incorporated herein by reference to exhibit 4.06 of Form 10-QSB filed May
19, 1998.
(6) Incorporated herein by reference to exhibit 4.07 of Form 10-K filed July
17, 2000.
(7) Incorporated herein by reference to exhibit 4.08 of Form 10-K filed July
17, 2000.
(8) Incorporated herein by reference to exhibit 4.09 of Form 10-K filed July
17, 2000.
(9) Incorporated herein by reference to exhibit 4.10 of Form 10-K filed July
17, 2000.
(10) Incorporated herein by reference to exhibit 10.1 of Form 8-K filed August
13, 1997.
(11) Incorporated herein by reference to exhibit 10.33 of Form 10-Q filed August
12, 1999.
(12) Incorporated herein by reference to exhibit 10.4 of Form 8-K filed August
13, 1997.
(13) Incorporated herein by reference to exhibit 10.14 of Form 10-KSB filed
March 31, 1998.
36
(14) Incorporated herein by reference to exhibit 10.15 of Form 10-KSB filed
March 31, 1998.
(15) Incorporated herein by reference to exhibit 10.16 of Form 10-KSB filed
March 31, 1998.
(16) Incorporated herein by reference to exhibit 10.17 of Form 8-K filed March
31, 1998.
(17) Incorporated herein by reference to exhibit 10.22 of Form 8-K filed August
7, 1998.
(18) Incorporated herein by reference to exhibit 10.23 of Form 8-K filed August
7, 1998.
(19) Incorporated herein by reference to exhibit 10.24 of Form 8-K filed August
7, 1998.
(20) Incorporated herein by reference to exhibit 10.25 of Form 10-Q filed
November 16, 1998.
(21) Incorporated herein by reference to exhibit 10.26 of Form 10-Q filed
November 16, 1998.
(22) Incorporated herein by reference to exhibit 10.29 of Form 10-K filed April
15, 1999.
(23) Incorporated herein by reference to exhibit 10.30 of Form 10-K filed April
15, 1999.
(24) Incorporated herein by reference to exhibit 10.31 of Form 10-K filed July
17, 2000.
(25) Incorporated herein by reference to exhibit 10.38 of Form 10-K filed July
17, 2000.
(26) Incorporated herein by reference to exhibit 10.39 of Form 10-K filed July
17, 2000.
(27) Incorporated herein by reference to exhibit 10.40 of Form 10-K filed July
17, 2000.
(28) Incorporated herein by reference to exhibit 10.41 of Form 10-K filed July
17, 2000.
(29) Incorporated herein by reference to exhibit 99.1 of Form 8-K filed January
12, 2001.
(30) Incorporated herein by reference to exhibit 10.42 of Form 10-K filed July
17, 2000.
(31) Incorporated herein by reference to exhibit 10.43 of Form 10-K filed July
17, 2000.
(32) Incorporated herein by reference to exhibit 10.47 of Form 10-Q filed
November 14, 2000.
(33) Incorporated herein by reference to exhibit 2 of Form 8-K filed October 10,
2000.
(34) Incorporated herein by reference to exhibit 21.01 of Form 10-K filed April
15, 1999.
(b) Reports on Form 8-K
Form 8-K filed October 11, 2000, reporting the disposition of assets under
Item 2 and including the following financial statements:
(i) Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2000.
(ii) Pro Forma Condensed Consolidated Statement of Operations for the
six months ended June 30, 2000.
(iii)Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1999.
(iv) Notes to Pro Forma Condensed Consolidated financial statements as
of June 30, 2000 and December 31, 1999.
37
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 Financial Officer
Date: April 1, 2001.
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 here of. 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.
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.
SIGNATURE TITLE DATE
- --------------------------- ---------------------------------------- --------------
By: /s/ LARRY H. RAMMING Chief Executive Officer, Chief Financial March 30, 2001
- --------------------------- Officer, and Director
Larry H. Ramming
By: /s/ JERRY WINCHESTER President, Chief Operating Officer March 30, 2001
- --------------------------- and Director
Jerry Winchester
By: /s/ BRIAN KRAUSE Vice President and Director March 30, 2001
- ---------------------------
Brian Krause
By: /s/ THOMAS L. EASLEY Director March 30, 2001
- ---------------------------
Thomas L. Easley
By: /s/ K. KIRK KRIST Director March 30, 2001
- ---------------------------
K. Kirk Krist
By: /s/ E. J. DIPAOLO Director March 30, 2001
- ---------------------------
E.J. Dipaolo
By: /s/ W. RICHARD ANDERSON Director March 30, 2001
- ---------------------------
W. Richard Anderson
By: /s/ TRACY TURNER Director March 30, 2001
- ---------------------------
Tracy Turner
38
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, 1999
and 2000, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three year period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 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, 1999 and 2000, and the results of their operations and their cash flows for
each of the years in the three year period ended December 31, 2000, 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 1998, 1999 and 2000. The Company receives the
majority of its revenues from customers in the energy industry, which
experienced a significant downturn in the third quarter of 1998 that continued
throughout 1999. Industry conditions improved in 2000, however, the Company's
customer base has not to date increased project expenditure levels to those
existing in the first half of 1998. As a result of the relatively low
incidences of critical events over the last two years and the resultant negative
effect on the Company's financial position, the Company's management initiated
actions in 1999 which included, among 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 of 1999 and continued
into 2000. The Company was able to restructure its obligations with Prudential
Insurance Company of America and repaid Comerica - Bank, Texas with proceeds
from the sale of the Company's subsidiary Baylor Company. However, the
Company's deteriorating liquidity position and lack of access to working capital
has also resulted in the inability to pay certain vendors in a timely manner.
Management could be forced to dispose of additional assets or operations outside
of the normal course of business in order to satisfy future liquidity
requirements if their efforts to raise capital and improve operating results
are not sufficient. 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. The Company's plans for addressing these issues are further described
in Note A. The accompanying consolidated 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
April 1, 2001
F-1
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1999 2000
------------- -------------
CURRENT ASSETS:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 222,000 $ 1,416,000
Receivables - net of allowance for doubtful accounts of
$1,686,000 and $1,339,000 at December 31, 1999 and 2000,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 5,176,000 5,620,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 882,000 401,000
Prepaid expenses and other current assets . . . . . . . . . . . . 1,073,000 547,000
Net assets of discontinued operations . . . . . . . . . . . . . . 29,984,000 -
------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . 37,337,000 7,984,000
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . 10,531,000 7,971,000
OTHER ASSETS:
Deferred financing costs and other assets - net of
accumulated amortization of $626,000 and $701,000 at
December 31, 1999 and 2000, respectively . . . . . . . . . . . 2,202,000 268,000
Goodwill - net of accumulated amortization of $445,000
and $595,000 at December 31, 1999 and 2000,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 3,385,000 1,903,000
------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 53,455,000 $ 18,126,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 10,266,000 $ 5,343,000
Accrued liabilities and customer advances . . . . . . . . . . . . 4,335,000 6,559,000
Current maturities of long-term debt and notes payable. . . . . . 43,181,000 100,000
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 57,782,000 12,002,000
------------- -------------
LONG-TERM DEBT AND NOTES PAYABLE - net of current
maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 12,520,000
COMMITMENTS AND CONTINGENCIES (Note K)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ($.00001 par, 5,000,000 shares authorized,
132,000 and 365,000 shares issued and outstanding at December
31, 1999 and 2000, respectively) (Note I). . . . . . . . . . . - -
Common stock ($.00001 par, 125,000,000 shares authorized,
35,243,683 and 31,692,454 shares issued and outstanding
at December 31, 1999 and 2000, respectively) . . . . . . . . . - -
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 32,951,000 53,098,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (37,278,000) (59,494,000)
------------- -------------
Total shareholders' equity (deficit). . . . . . . . . . . (4,327,000) (6,396,000)
------------- -------------
Total liabilities and shareholders' equity (deficit). . . $ 53,455,000 $ 18,126,000
============= =============
See accompanying notes to consolidated financial statements.
F-2
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
-------------- -------------- --------------
REVENUES. . . . . . . . . . . . . . . . . . . . . $ 32,295,000 $ 33,095,000 $ 23,537,000
COSTS AND EXPENSES:
Cost of Sales and Operating Expenses. . . . . . 24,415,000 31,971,000 21,792,000
Selling, General and Administrative . . . . . . 7,560,000 13,694,000 8,637,000
Depreciation and Amortization . . . . . . . . . 1,522,000 2,907,000 2,665,000
Write-down of long-lived assets . . . . . . . . - 4,507,000 -
Loan guaranty charge (Note K) . . . . . . . . . - - 1,833,000
-------------- -------------- --------------
33,497,000 53,079,000 34,927,000
-------------- -------------- --------------
OPERATING LOSS. . . . . . . . . . . . . . . . . . (1,202,000) (19,984,000) (11,390,000)
INTEREST EXPENSE & OTHER, NET . . . . . . . . . . 2,241,000 6,402,000 11,277,000
-------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM AND INCOME TAXES . . . . . . . (3,443,000) (26,386,000) (22,667,000)
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . 119,000 82,000 65,000
-------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . $ (3,562,000) $ (26,468,000) $ (22,732,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
net of income taxes (Note D) . . . . . . . . . . 566,000 (4,648,000) 1,544,000
LOSS FROM SALE OF DISCONTINUED OPERATIONS,
net of income taxes . . . . . . . . . . . . . . . - - (2,555,000)
-------------- -------------- --------------
NET LOSS BEFORE EXTRAORDINARY ITEM. . . . . . . . $ (2,996,000) $ (31,116,000) $ (23,743,000)
EXTRAORDINARY GAIN ON EARLY DEBT EXTINGUISHMENT,
net of income taxes . . . . . . . . . . . . . . . - - 2,444,000
-------------- -------------- --------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . $ (2,996,000) $ (31,116,000) $ (21,299,000)
STOCK AND WARRANT ACCRETION . . . . . . . . . . . (865,000) (775,000) (53,000)
PREFERRED DIVIDENDS PAID . . . . . . . . . . . . (76,000) (14,000) -
PREFERRED DIVIDENDS ACCRUED . . . . . . . . . . . - (455,000) (864,000)
-------------- -------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS. . . $ (3,937,000) $ (32,360,000) $ (22,216,000)
============== ============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Continuing Operations. . . . . . . . . . . . . $ (0.14) $ (0.81) $ (.70)
============== ============== ==============
Discontinued Operations. . . . . . . . . . . . $ .02 $ (0.13) $ (.03)
============== ============== ==============
Extraordinary Item . . . . . . . . . . . . . . $ - $ - $ .07
============== ============== ==============
Net Loss . . . . . . . . . . . . . . . . . . . $ (0.12) $ (0.94) $ (.66)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. . . . 31,753,000 34,352,000 33,809,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-3
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ------------------- PAID-IN ACCUMULATED SHAREHOLDER'S
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- ------- ----------- ------- ------------ ------------- -------------
BALANCES, December 31, 1997 . . . . . . . . - $ - 29,999,000 $ - $11,213,000 $ (981,000) $ 10,232,000
Common stock issued upon exercise of
options . . . . . . . . . . . . . . . . - - 354,000 - 557,000 - 557,000
Common stock issued in connection with
acquisitions. . . . . . . . . . . . . . - - 500,000 - 650,000 - 650,000
Common stock issued to acquire Baylor
Company, net of offering costs. . . . . - - 540,000 - 2,855,000 - 2,855,000
Common stock issued to acquire Boots &
Coots Special Services, Inc., net of
offering costs. . . . . . . . . . . . . - - 488,000 - 2,143,000 - 2,143,000
Common stock issued to acquire
HAZ-TECH Environmental
Services, Inc., net of offering costs. - - 269,000 - 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 - - - -
Net loss. . . . . . . . . . . . . . . . . - - - - - (2,996,000) (2,996,000)
-------- ------- ----------- ------- ------------ ------------- -------------
BALANCES, December 31, 1998 . . . . . . . . 140,000 $ - 33,044,000 $ - $25,154,000 $ (4,918,000) $ 20,236,000
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 - - - -
Common stock issued in private
placement, net of offering costs. . . - - 1,400,000 - 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 at December 31, 1999 . . . . . . . 132,000 $ - 35,244,000 $ - $32,951,000 $(37,278,000) $ (4,327,000)
Common stock issued for services
and settlements . . . . . . . . . . . . - - 214,000 - 1,429,000 - 1,429,000
Common stock options exercised. . . . . . - - 47,000 - 15,000 - 15,000
Common stock options issued
for services. . . . . . . . . . . . . . - - - - 80,000 - 80,000
Common stock exchanged for
preferred stock . . . . . . . . . . . . 57,000 - (5,689,000) - - - -
Preferred stock and warrants issued
for debt restructuring . . . . . . . . 130,000 - - - 7,125,000 - 7,125,000
Preferred stock issued upon
conversion of debt . . . . . . . . . . 89,000 - - - 8,487,000 - 8,487,000
Preferred stock conversion to
common stock. . . . . . . . . . . . . . (70,000) - 1,876,000 - - - -
Preferred stock issued for services
and settlements . . . . . . . . . . . . 23,000 - - - 1,987,000 - 1,987,000
Preferred stock dividends accrued
or issued . . . . . . . . . . . . . . . 4,000 - - - 864,000 (864,000) -
Warrant discount accretion. . . . . . . . - - - - 53,000 (53,000) -
Warrants issued for services and
convertible debt financing . . . . . . - - - - 1,330,000 - 1,330,000
Transaction costs of convertible
debt financing. . . . . . . . . . . . . - - - - (1,223,000) - (1,223,000)
Net Loss. . . . . . . . . . . . . . . . . - - - - - (21,299,000) (21,299,000)
-------- ------- ----------- ------- ------------ ------------- -------------
BALANCES at December 31, 2000 . . . . . . . 365,000 $ - 31,692,000 $ - $53,098,000 $(59,494,000) $ (6,396,000)
======== ======= =========== ======= ============ ============= =============
See accompanying notes to consolidated financial statements.
F-4
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,996,000) $ (31,116,000) $ (21,299,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 1,522,000 2,907,000 2,665,000
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . 591,000 1,484,000 662,000
Extraordinary gain on debt extinguishment, net of tax. . . . . . . . - - (2,444,000)
Loss from sale of discontinued operations. . . . . . . . . . . . . . - - 2,555,000
Loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . . - 75,000 -
Write-down of long-lived assets. . . . . . . . . . . . . . . . . . . - 4,507,000 -
Amortization of note discount. . . . . . . . . . . . . . . . . . . . - 293,000 -
Equity issued for services and settlements . . . . . . . . . . . . . - 244,000 4,826,000
Changes in operating assets and liabilities, net of assets and
liabilities acquired:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,241,000) 6,208,000 (1,106,000)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (503,000) 988,000 481,000
Prepaid expenses and other current assets. . . . . . . . . . . . . 20,000 (320,000) 526,000
Deferred financing costs and other assets. . . . . . . . . . . . . (4,759,000) (1,518,000) 3,190,000
Accounts payable, accrued liabilities and customer
advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,127,000 4,992,000 2,464,000
Change in net assets of discontinued operations . . . . . . . . . . (11,664,000) 14,855,000 (1,544,000)
-------------- -------------- --------------
Net cash provided by (used in) operating activities. . . . . . (18,903,000) 3,599,000 (9,024,000)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, including transaction costs,
net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . (23,597,000) - -
Property and equipment additions . . . . . . . . . . . . . . . . . . (3,565,000) (3,803,000) (260,000)
Sale of net assets of discontinued operations, net of selling costs. - - 28,973,000
Proceeds from sale of property and equipment . . . . . . . . . . . . - 375,000 379,000
-------------- -------------- --------------
Net cash provided by (used in) investing activities. . . . . . (27,162,000) (3,428,000) 29,092,000
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised . . . . . . . . . . . . . . . . . . . 557,000 5,000 15,000
Proceeds from issuance of debt and warrants. . . . . . . . . . . . . 62,118,000 - -
Borrowings under line of credit. . . . . . . . . . . . . . . . . . . 21,000,000 38,140,000 27,417,000
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . (2,605,000) - -
Repayments under line of credit. . . . . . . . . . . . . . . . . . . (38,722,000) (45,601,000) (41,738,000)
Proceeds from issuance of convertible debt . . . . . . . . . . . . . - 1,865,000 8,700,000
Repayments of Senior Subordinated Note . . . . . . . . . . . . . . . - - (12,045,000)
Transaction costs of convertible debt financing. . . . . . . . . . . - - (1,223,000)
Proceeds from the issuance of redeemable preferred stock
and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,678,000 4,760,000 -
Advisory fee paid to induce conversion of preferred stock to
common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . - (107,000) -
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . (76,000) (14,000) -
Preferred stock redemption . . . . . . . . . . . . . . . . . . . . . (1,400,000) (200,000) -
-------------- -------------- --------------
Net cash provided by (used in) financing activities. . . . . . 45,550,000 (1,152,000) (18,874,000)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . (515,000) (981,000) 1,194,000
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . 1,718,000 1,203,000 222,000
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . $ 1,203,000 $ 222,000 $ 1,416,000
============== ============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . $ 2,542,000 $ 4,505,000 $ 1,357,000
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . $ 278,000 $ 265,000 $ 249,000
============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock and common stock options issued in exchange
for property and equipment and services rendered . . . . . . . . . $ 650,000 $ - $ -
Issuance of common stock in acquisitions . . . . . . . . . . . . . . 6,235,000 - -
Stock offering costs . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . - 455,000 864,000
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-5
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. GOING CONCERN AND IMPAIRMENTS:
The accompanying Consolidated Financial Statements have been prepared
assuming the Company will continue as a going concern. The Company receives the
majority of its revenues from customers in the energy industry, which
experienced a significant downturn in the third quarter of 1998 that continued
throughout 1999. Industry conditions improved in 2000, however the Company's
customer base has not to date increased project expenditure levels to those
existing in the first half of 1998. Demand for the Company's products and
services is impacted by the number and size of projects available as changes in
oil and gas exploration and production activities change the respective
customers' forecasts and budgets. These fluctuations have a significant effect
on the Company's cash flows.
Oil and gas prices have improved significantly since the downturn in 1998.
While these price improvements have brought the company increases in the
frequency of high risk work and in the volume of prevention related projects,
the Company's well control business has not yet benefited to a meaningful degree
from an increase in the volume of critical events. Historically, the well
control business has provided the Company with the opportunity for highly
profitable operating activities. However, the timing of critical events is
unpredictable and they occur in irregular patterns. Consequently, the Company's
financial performance has been subject to significant fluctuations.
As a result of the relatively low incidences of critical events over the
last two years and the resultant negative effect on the Company's financial
position, Company management initiated actions in 1999 which included among
others, (a) downsizing personnel, (b) attempting to improve its working capital,
(c) closing and/or consolidating certain of its field offices, (d) consolidating
certain administrative functions, and (e) evaluating and discontinuing certain
business lines to ensure that the Company's resources are deployed in the more
profitable operations. The Company's efforts to rationalize its operations
commenced in the first quarter of 1999 and continued through 2000. However, the
results of these efforts were not sufficient to prevent significant operating
losses or provide sufficient levels of operating capital.
The Company's impaired liquidity position has resulted in the inability to
pay certain vendors in a timely manner. This has hampered the Company's ability
to hire sub-contractors, obtain materials and supplies, and otherwise conduct
operations in an effective or efficient manner. Moreover, throughout most of
fiscal 2000, the Company was in default under its senior secured debt agreement
and its subordinated debt agreement. To alleviate the Company's liquidity
problems and to improve its overall capital structure, the Company initiated and
completed a program to restructure its debt and equity positions. The program
involved a series of steps designed to raise new funds, sell assets of certain
subsidiaries, retire the Company's existing senior debt, restructure its
subordinated debt and increase its shareholders' equity.
During the year ended December 31, 2000, the Company received approximately
$8,700,000 in funds from the purchase of participation interests by an
investment group, Specialty Finance Fund I, LLC (Specialty Finance) in its
senior secured credit facility with Comerica - Bank,Texas ("Comerica"). In
connection with this financing, the Company issued 147,058 shares of common
stock and warrants representing the right to purchase an aggregate of 8,729,985
shares of common stock of the Company to the participation interest holders and
warrants to purchase an aggregate of 3,625,000 shares of common stock to the
investment group that arranged the financing, including warrants to purchase an
aggregate of 736,667 shares of common stock to Tracy S. Turner, a director of
the Company. 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 8,729,985 shares and
$0.75 per share as to 3,625,000 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. On
December 28, 2000, $7,729,985 of the participation interest, plus $757,315 in
accrued interest thereon, was exchanged for 89,117 shares of Series H Cumulative
Senior Preferred Stock in the Company. The remaining $1,000,000 of the
participation interest was outstanding as senior secured debt as of December 31,
2000. Tracy S. Turner, a managing member of Specialty Finance is also a member
of the Company's Board of Directors.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica , the
Company's primary senior secured lender at the time, was paid approximately
$13,000,000 as payment in full as a component of the transaction. Specialty
Finance, as a participant in the Comerica senior facility, remains as the senior
secured lender.
F-6
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had been in default under its subordinated note agreement with
Prudential since the second quarter of 1999. A restructuring agreement was
executed by both parties on December 28, 2000. The Prudential Insurance Company
of America ("Prudential") restructuring agreement provided that the aggregate
indebtedness due to Prudential be resolved by the Company: (i) paying
approximately $12,000,000 cash, (ii) establishing $7,200,000 of new subordinated
debt, (iii) issuing $5,000,000 face value of Series E Cumulative Senior
Preferred Stock ($2,850,000 fair value) and (iv) issuing $8,000,000 face value
of Series G Cumulative Convertible Preferred Stock ($2,600,000 fair value). In
addition, $500,000 is contingently payable upon the Company securing a new term
loan with a third party lender. All interest payments and dividends are paid in
kind and deferred for two years from the date of closing. Additionally, as a
component of the transaction, Prudential received newly issued warrants to
purchase 8,800,000 shares of the Company's Common Stock for $0.625 per share
($1,232,000 fair value) and the Company agreed to re-price the existing Common
Stock purchase warrants held by Prudential to $0.625 per share ($443,000 fair
value). The Company has the right to repurchase, at a discount to face value,
all of the debt, stocks and warrants issued to Prudential for agreed upon
periods of time.
The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 15 "Accounting By Debtors and Creditors For
Troubled Debt Restructurings". As a result of the application of this
accounting standard, the total indebtedness due to Prudential, inclusive of
accrued interest, was reduced by the cash and fair market value of securities
issued by the Company, and the residual balance of the indebtedness was recorded
as the new carrying value of the subordinated note due to Prudential.
Consequently, the $7,200,000 face value of the subordinated note is recorded on
the Company's balance sheet at $11,520,000. The additional carrying value of
the debt in excess of face value represents the accrual of future interest
expense due on the face value of the subordinated note to Prudential. The
remaining excess of amounts previously due Prudential over the new carrying
value was $2,444,000 and was recognized as an extraordinary gain.
The new financing obtained during the year from Specialty Finance and the
restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common shareholders. This could
materially adversely affect the market price for the Company's common stock and
limit the price at which new stock can be issued for future capital
requirements. Further, there can be no assurance that the Company will be able
to obtain new capital, and if new capital is obtained that it will be on terms
favorable to the Company.
As of December 31, 2000, the Company's current assets totaled $7,984,000
and current liabilities were $12,002,000, resulting in a working capital deficit
of approximately $4,018,000. Further, the Company's highly liquid current
assets, represented by cash of $1,416,000 and receivables of $5,620,000, were
collectively $4,966,000 less than the amount required to settle current
liabilities. The Company is actively exploring new sources of financing,
including the establishment of new credit facilities and the issuance of debt
and/or equity securities. Additionally, the Company continues to pursue methods
to expand its business activities and enhance its operating cash flow. However,
absent new sources of financing, or if the Company does not significantly
improve its operating performance, the Company will not have sufficient funds to
meet its current obligations over the next twelve months and could be forced to
dispose of additional assets or operations outside of the normal course of
business in order to satisfy future liquidity requirements. 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.
Impairments
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:
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
----------
F-7
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, certain ABASCO manufactured inventories were reduced $613,000
in 1999 to reflect decreased market value as a result of the decision to suspend
and outsource manufacturing operations at ABASCO. Certain of these inventories
were reduced an additional $94,000 in 2000 in order to reflect these assets at
lower of cost or market.
B. ORGANIZATION AND BUSINESS
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 oil and gas wells to production. Through
its participation in the proprietary insurance program WELLSURE(R), the Company
provides lead contracting and high risk management services, under critical loss
scenarios, to the program's insured clients. Additionally, the WELLSURE(R)
program designates that the Company provide certain pre-event prevention and
risk mitigation services defined under the program. The Company also provides
snubbing and other high risk well control management services, including
pre-event planning, training and consulting services and markets oil and
hazardous materials spill containment and recovery equipment and a varied line
of industrial products for the oil and gas industry. 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.
Boots & Coots International Well Control, Inc., 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 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 it remained 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 Inc. ("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.
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.
F-8
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Cash And Cash Equivalents - 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.
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 customer acceptance and 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.
The Company recognizes revenues under the WELLSURE program as follows: (a)
Initial deposits for pre-event type services are recognized ratably over the
life of the contract period, typically twelve months (b) Billings for pre-event
type services provided are recognized when the insurance carrier has billed the
operator and the revenues become determinable and (c) Billings for contracting
and event services are recognized based upon predetermined day rates of the
Company and sub-contracted work as incurred.
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 are 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 years), manufacturing equipment (8-12 years), well control
and firefighting 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.
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, Boots & Coots Special Services, Inc. (f/k/a
Code 3,Inc.). For business acquisitions made prior to December 31, 1997,
goodwill is amortized over 15 years. Management performs a fair market value
computation for each acquisition and the resulting goodwill is amortized over
the appropriate lives, typically 40 years for each additional acquisition.
Amortization expense of goodwill was $218,000, $276,000 and $143,000 for
the years ended December 31, 1998, 1999 and 2000, respectively.
F-9
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realization of Long Lived Assets -In accordance with SFAS 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.
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 carry forwards.
Risk Factors - Risk factors of the Company include, but are not limited to,
liquidity constraints, 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 years ended December 31, 1998, 1999 and
2000. 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 the 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 January 1, 2001. The adoption in
January 2001 did not have a material impact on the financial statements of the
Company.
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 adopted
the provisions of SAB 101 in the fourth quarter of 2000, and there was no
material impact on the Financial Statements of the Company.
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.
Reclassifications - Certain reclassifications have been made in prior
period consolidated financial statements to conform to current year
presentation.
F-10
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 viable purchaser for ITS Supply
Corporation ("ITS") operations, on May 18, 2000, ITS filed in Corpus Christi,
Texas for protection under Chapter XI of the U. S. Bankruptcy Code. ITS is now
proceeding to liquidate its assets and liabilities pursuant to Chapter 7 of
Title 11. At the time of the filing, ITS had total liabilities of approximately
$6,900,000 and assets of approximately $950,000. The Company has an outstanding
subordinated 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 (See Note K). A judgment
against the Company has been entered by a state district court, and that
judgment is now on appeal. The Company does not believe the guaranty will be
enforceable in accordance with its terms. As a result of the Bankruptcy filing
by ITS, the Company reduced its net investment in ITS to zero at December 31,
1999. Accordingly, any losses incurred by ITS in excess of the Company's net
investment have not been recognized.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 in cash. Comerica
Bank-Texas, the Company's primary senior secured lender at the time, was paid in
full as a component of the transaction.
The following table presents the revenues, loss from operations and other
components attributable to the discontinued operations of ITS and BAYLOR:
YEAR ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
-------------- -------------- --------------
Revenues . . . . . . . . . . . . . . . . . . . . . $ 43,988,000 $ 45,769,000 $ 17,654,000
Income (Loss) from operations before income taxes. 670,000 (7,340,000) 1,544,000
Provision for income taxes . . . . . . . . . . . . 104,000 132,000 -
Losses in excess of investment in ITS. . . . . . . - 2,824,000 -
Loss on disposal of Baylor, net of income taxes. . - - (2,555,000)
-------------- -------------- --------------
Net income (loss) from discontinued operations . $ 566,000 $ (4,648,000) $ (1,011,000)
============== ============== ==============
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, an ISO 9002 certified
materials and equipment procurement, transportation and logistics company that
served the energy industry worldwide, with offices in Houston, Venezuela, Peru,
Dubai (UAE) and the United Kingdom. ITS also served as a distributor in
Venezuela and Peru of artificial lift oil recovery systems. Total consideration
F-11
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 3were 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"). 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 was approximately $25,000,000
in cash, a $2,000,000 dividend payment and the issuance at closing of 540,000
shares of the Company's common stock valued at $5.63 per share. This transaction
was accounted for as a purchase and the acquired net assets and liabilities of
Baylor were valued at fair market value resulting in goodwill of $7,294,000
which is being amortized over 40 years. As discussed in Note D, management
disposed of the Baylor operations in September 2000 and, accordingly, these
operations are reported as a discontinued operation in the accompanying
financial statements.
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. However, the ITS
and Baylor acquisitions have been reflected as discontinued operations and
therefore are also excluded from the Pro Forma presentation below. The Company's
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, and HAZ-TECH acquisitions occurred on January 1, 1998 would
be as follows:
YEARS ENDED
--------------
DECEMBER 31,
1998
--------------
(UNAUDITED)
Revenues . . . . . . . . . . . . . . . . $ 35,372,000
Net Income (Loss) to Common Shareholders (6,709,000)
Basic Earnings (Loss) Per Common Share . (.21)
Diluted Earnings (Loss) Per Common Share (.21)
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that would
have resulted had the acquisitions been in effect on the date indicated, that
have resulted since the date or acquisition or that may result in the future.
F-12
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. INVENTORIES, PROPERTY AND EQUIPMENT:
Inventories consisted of the following as of:
DECEMBER 31, DECEMBER 31,
1999 2000
------------- -------------
Raw material and supplies $ 482,000 $ -
Work in process . . . . . 52,000 -
Finished goods. . . . . . 348,000 401,000
------------- -------------
$ 882,000 $ 401,000
============= =============
Property and equipment consisted of the following as of:
DECEMBER 31, DECEMBER 31,
1999 2000
-------------- --------------
Land . . . . . . . . . . . . . . . . . . . $ 136,000 $ 136,000
Buildings and improvements . . . . . . . . 2,069,000 2,055,000
Well control and firefighting equipment. . 6,052,000 6,103,000
Shop and other equipment . . . . . . . . . 3,610,000 2,126,000
Vehicles . . . . . . . . . . . . . . . . . 763,000 1,668,000
Office equipment and furnishings . . . . . 1,759,000 1,591,000
Construction in progress . . . . . . . . . 372,000 517,000
-------------- --------------
Total property and equipment . . . . . . . 14,761,000 14,196,000
Less: Accumulated depreciation and
Amortization . . . . . . . . . . (4,230,000) (6,225,000)
-------------- --------------
Net property and equipment . . . . $ 10,531,000 $ 7,971,000
============== ==============
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:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------- ------------- -------------
Federal $ $ $
Current. . . . . . - - -
Deferred . . . . . - - -
State
Current. . . . . . 47,000 - -
Deferred . . . . . - - -
Foreign . . . . . . . . 72,000 82,000 65,000
------------- ------------- -------------
$ 119,000 $ 82,000 $ 65,000
============= ============= =============
Discontinued operations
Current. . . . . . 104,000 132,000 -
Deferred . . . . . - - -
------------- ------------- -------------
$ 223,000 $ 214,000 $ 65,000
============= ============= =============
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 from continuing operations before
extraordinary item and income taxes were multiplied by the Federal income tax
rate (statutory rate) as follows:
F-13
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------ ------------ ------------
Income tax benefit at the statutory rate (34%). . $(1,171,000) $(8,971,000) $(7,707,000)
Increase resulting from:
Foreign taxes in excess of statutory rate. . . 176,000 82,000 65,000
State income taxes, net of related tax effect. 31,000 87,000 -
Unrecognized net operating losses. . . . . . . 1,130,000 5,144,000 7,271,000
Foreign income deemed repatriated. . . . . . . - 1,112,000 378,000
Goodwill amortization. . . . . . . . . . . . . - 2,674,000 19,000
Other. . . . . . . . . . . . . . . . . . . . . 57,000 86,000 39,000
------------ ------------ ------------
$ 223,000 $ 214,000 $ 65,000
============ ============ ============
As of December 31, 1999 and 2000, the Company has net domestic operating
loss carryforwards of approximately $22,362,000 and $47,155,000, respectively,
expiring in various amounts beginning in 2011. The net operating loss carry
forwards, along with the other timing differences, generate a net deferred tax
asset. The Company has recorded valuation allowances in each year for these net
deferred tax assets since management 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:
DECEMBER 31, DECEMBER 31,
1999 2000
------------ -------------
Deferred income tax liabilities
Depreciation and amortization. . . . . . . $(1,681,000) $ (1,338,000)
------------ -------------
Total deferred income tax liabilities. $(1,681,000) $ (1,338,000)
============ =============
Deferred income tax assets
Net operating loss carryforward . . . . . $ 7,603,000 $ 16,033,000
Asset disposals . . . . . . . . . . . . . 547,000 140,000
Allowance for doubtful accounts . . . . . 823,000 165,000
Inventory - IRS Code Section 263A Costs . 285,000 -
Accruals. . . . . . . . . . . . . . . . . 467,000 19,000
Foreign tax credit. . . . . . . . . . . . 273,000 338,000
Warranty reserves . . . . . . . . . . . . 222,000 -
Other assets. . . . . . . . . . . . . . . 51,000 48,000
------------ -------------
Total deferred income tax assets. . $10,271,000 $ 16,743,000
============ =============
Valuation allowance . . . . . . . . . . . $(8,590,000) $(15,405,000)
------------ -------------
Net deferred income tax asset. . . . $ 1,681,000 $ 1,338,000
============ =============
Net deferred tax asset (liability) . $ - $ -
============ =============
F-14
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
H. LONG-TERM DEBT AND NOTES PAYABLE:
Long-term debt and notes payable consisted of the following:
DECEMBER 31, DECEMBER 31,
1999 2000
------------- -------------
11.28% Senior Subordinated Note - Net of Warrant Value
($30,000,000 - Face) . . . . . . . . . . . . . . . . . . . $ 28,046,000 $ -
12.00 % Senior Subordinated Note . . . . . . . . . . . . . . - 11,520,000
Revolving Loan Agreement . . . . . . . . . . . . . . . . . . 14,321,000 1,000,000
10% Shareholder Note . . . . . . . . . . . . . . . . . . . . 569,000 -
12% other subordinated note payable . . . . . . . . . . . . 90,000 100,000
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. . 155,000 -
------------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . . 43,181,000 12,620,000
Less: current portion of long-term debt and notes
payable. . . . . . . . . . . . . . . . . . . . . 43,181,000 100,000
------------- -------------
Total long-term debt and notes payable . . . . . . $ - $ 12,520,000
============= =============
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 and $30,000,000 of 11.28% Senior Subordinated Notes due July 23,
2006 (the "Subordinated Notes") to 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 a warrant purchase agreement for 3,165,000
warrants relating to the Subordinated Notes ("The Warrant Purchase Agreement")
imposed restrictions on the Company's activities including, without limitation,
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 was 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.
As of December 31, 1999, and continuing through December 28, 2000, the
Company was not in compliance with certain financial covenants of the
Subordinated Notes and Warrant Purchase Agreement, as amended, including the
Company's EBITDA to total liabilities ratio. Further, quarterly interest
payments due since July 23, 1999 on the Subordinated Notes had not been made by
the Company. As a result of these compliance issues, the Subordinated Notes were
included in current liabilities as of December 31, 1999.
A restructuring agreement was executed by both parties on December 28,
2000. The Prudential restructuring agreement provided that the aggregate
indebtedness due to Prudential be resolved by the Company: (i) paying
approximately $12,000,000 cash, (ii) establishing $7,200,000 of new subordinated
debt, ("12% Senior Subordinated Note") (iii) issuing $5,000,000 face value of
Series E Cumulative Senior Preferred Stock ($2,850,000 fair value) and (iv)
issuing $8,000,000 face value of Series G Cumulative Convertible Preferred Stock
($2,600,000 fair value). Additionally, as a component of the transaction,
Prudential received newly issued warrants to purchase 8,800,000 shares of the
Company's common stock for $0.625 per share, with a fair value of $1,232,000
fair value, and the Company agreed to re-price the existing warrants held by
Prudential to $0.625 per share, with a fair value of $443,000. In addition,
$500,000 is contingently payable upon the Company's securing a new term loan
with a third party lender. All interest payments and dividends are paid in kind
and deferred for two years from the date of closing. The Company has the right
to repurchase, at a discount to face value, all of the debt, stocks and warrants
issued to Prudential for agreed periods of time.
The refinancing of the Company's debt with Prudential qualified as a
troubled debt restructuring under the provisions of SFAS 15. As a result of the
application of this accounting standard, the total indebtedness due to
Prudential, inclusive of accrued interest, was reduced by the cash and fair
market value of securities (determined by independent appraisal) issued by the
Company, and the residual balance of the indebtedness was recorded as the new
carrying value of the subordinated note due to Prudential. Consequently, the
$7,200,000 face value of the 12% senior subordinated note is recorded on the
Company's balance sheet at $11,520,000. The additional carrying value of the
debt effectively represents an accrual of future interest expense due on the
face value of the subordinated note due to Prudential. The remaining excess of
amounts previously due Prudential over the new carrying value was $2,444,000 and
was recognized as an extraordinary gain.
F-15
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
bore interest at the greater of Comerica's daily prime rate or the federal funds
rate plus .5%. Subject to certain limitations, the Company had the option under
the Comerica Loan Agreement to convert to a LIBOR based interest rate
calculation. The Company also paid a commitment fee equal to .25% per annum on
the unused portion of the commitment under the Comerica Loan Agreement. Advances
under the Comerica Loan Agreement were secured by substantially all of the
assets of the Company and its subsidiaries. The Loan Agreement imposed 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. Effective April 15, 1999, the Comerica Loan Agreement was amended
to waive compliance with certain financial covenants through December 31, 1998
and to modify certain financial covenants prospectively. Comerica's commitment
under the 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 September 2000, the Company
was not in compliance with certain provisions of the Comerica Loan Agreement, as
modified in 1999. The Company negotiated and entered into interim forbearance
agreements with Comerica which have permitted additional time for seeking
alternative financing sources. Outstanding borrowings under the Comerica Loan
Agreement of $14,321,000 at December 31, 1999 were included in current
maturities of long-term debt and notes payable in the accompanying financial
statements.
On September 28, 2000, the Company announced that it closed the sale of the
assets of the Baylor Company and its subsidiaries to National Oilwell, Inc. The
proceeds from the sale were approximately $29,000,000 cash. Comerica
Bank-Texas, the Company's primary senior secured lender, was paid in full
totaling $13,000,000 as a component of the transaction. As discussed in Note A,
Specialty Finance as a participant in the Comerica senior facility, remains as
the senior secured lender. The Company has received a waiver from Specialty
Finance indicating that they have no intention of taking any action that would
accelerate any payments from the Company of the amounts outstanding under the
Revolving Loan Agreement prior to January 1, 2002. Accordingly, the $1,000,000
outstanding under this facility has been included in long-term debt in the
accompanying financial statements.
The new financing obtained during the year from Specialty Finance and the
restructuring of the subordinated debt with Prudential has a potentially
significant dilutive impact on existing common shareholders. This could
adversely affect the market price for the Company's common stock and limit the
price at which new stock can be issued for future capital requirements.
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.
The Company's Chairman and Chief Executive Officer, Larry H. Ramming, and
the Ramming Family Partnership of which Mr. Ramming is a controlling person,
was granted a waiver of the lock-up restrictions on their 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 notes payable (the 10% 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
F-16
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, was $569,000.
Accrued interest and accrued but unpaid extension fees aggregated $270,000. The
aggregate obligation was satisfied in 2000 with the issuance of 9,750 shares of
Series C Preferred Stock and warrants to purchase an aggregate of 975,000 shares
of Common Stock at $0.75 per share as further discussed in Note I. Management
believes the terms and conditions of Mr. Ramming's loan to the Company were
favorable to the Company as compared to those that could have been negotiated
with outside parties.
I. SHAREHOLDERS' EQUITY (DEFICIT):
Common and Preferred Stock
The Company's shareholders approved an increase in the authorized common
stock ($.00001 par) from 50,000,000 shares up to 125,000,000 shares during 2000.
As of December 31, 1999 and 2000, 35,243,683 and 31,692,454 shares were issued
and outstanding, respectively. The Company also has 5,000,000 shares of
preferred stock ($.00001 par) authorized for designation. Under the Company's
Amended and Restated Certificate of Incorporation, the board of directors has
the power, without further action by the holders of common stock, to designate
the relative rights and preferences of the Company's preferred stock, when and
if issued. Such rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, over shares of common stock. The board of directors may, without
further action by the stockholders of the Company, issue shares of preferred
stock which it has designated. The rights of holders of common stock will be
subject to, and may be adversely affected by or diluted by, the rights of
holders of 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 $219,000 was attributed
to these warrants.
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, until the nine month anniversary of the date of
issuance be convertible, at the election of the holder thereof, into 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 shares of Redeemable Preferred were not Redeemed
Stock on or before the nine month anniversary of the date of issuance, each
unredeemed share became immediately convertible, at the election of the holder
thereof, into of common stock at $2.75 per share (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. The Company did not redeem
any shares in 2000.
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
70,000 shares of Redeemable Preferred with a face amount of $1,750,000, 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 to convert such shares into
F-17
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During the years ended December
31, 1999 and 2000, 40,000 and 30,000 preferred shares, respectively, had been
converted into 667,000 and 560,000 common shares respectively. The three
investor groups received warrants to purchase, for a five year period, 381,000
shares of Common Stock at $5.00 per share respectively. Using the Black-Scholes
pricing model, the company recognized an inducement charge $460,000 related to
the enhanced conversion rights of this preferred stock and a further inducement
charge of $105,000 related to the warrant which were accreted over the agreement
period in 1999 as a charge to net loss to common shareholders.
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 Redeemable
Preferred held by certain of such unaffiliated parties and issued warrants to
purchase 450,000 shares of common stock at an exercise price of $1.25 per share.
During 2000, the 40,000 shares of Redeemable Preferred converted into 363,636
shares of common stock and the additional 952,153 shares of common stock were
also issued. 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. These transactions resulted in a charge to expense of $1,429,000.
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. During
2000, the Company and Halliburton agreed to increase the number of shares to
which the warrant is exercisable to 2,750,000 and to lower the exercise price to
$1.25 per share.
On April 28, 2000, the Company adopted the Certificate of Designation of
Rights and Preferences of the Series B Preferred Stock, which designates this
issue to consist of 100,000 shares of $.00001 par value per share with a face
value of $100 per share; has a dividend requirement of 10% per annum, payable
semi-annually at the election of the Company in additional shares of Series B
Preferred Stock in lieu of cash; has voting rights equivalent to 100 votes per
share; and, may be converted at the election of the Company into shares of the
Company's Common Stock on the basis of a $0.75 per share conversion rate.
In order for the Company to have available shares of authorized but
unissued or committed share of common stock to accommodate the conversion
features of preferred stock issued in connection with the Specialty Finance
borrowing discussed in Note A, as well as common stock purchase warrants related
to this financing, the Company negotiated during the period from April through
June, 2000 with certain of its common stock shareholders to contribute an
aggregate of 5,688,650 shares of common stock to the Company in exchange for
56,888 share of Series B Preferred Stock. This total included certain directors
and officers of the Company who contributed 2,600,000 shares of common stock
they held in exchange for receipt of 26,000 shares of Series B Preferred Stock.
During 2000, preferred dividends of an additional 3,497 shares were awarded to
holders of Series B Preferred Stock.
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, 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 from the issuance date a holder of Series C Preferred Stock may elect to
have future dividends paid in cash.
F-18
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August, 2000, the Company issued an aggregate of 3,000 shares of its
Series C Preferred Stock and warrants to purchase an aggregate of 300,000 shares
of common stock at $0.75 per share to its outside directors as reimbursement for
expenses associated with their service as directors of the Company. The Company
charged $344,000 to expense as a result of these transactions.
In August, 2000, the Company issued 1,500 shares of its Series C Preferred
Stock and warrants to purchase an aggregate of 150,000 shares at $0.75 per share
to Larry Ramming, its Chief Executive Officer, in exchange for compensation and
benefits not paid to Mr. Ramming as required under his employment agreement. The
Company charged $174,000 to expense as a result of these transactions.
In June, 2000, the Company issued 9,750 Shares of Series C Preferred Stock
and warrants to purchase an aggregate of 975,000 shares of common stock at $0.75
per share to Ramming Family Limited Partnership (the "Partnership"), of which
Larry Ramming is a controlling person, in exchange for accrued obligations
relating to renewals, modifications, points, and releases in connection with a
loan to the Company in the original principal amount of $700,000. Subsequently,
the Company also issued to the Partnership a warrant to purchase 2,000,000
shares of common stock at $0.75 per share in satisfaction of its obligation to
do so at the inception of the loan. The Company charged $238,000 to expense for
these warrants.
During 2000, the Company issued 1,625 shares of its Series C Preferred
Stock to third party providers of financial advisory services and as payment for
other obligations; 2,000 shares of its Series C Preferred Stock and a warrant to
purchase 100,000 shares of common stock at $0.75 per share to a third party
provider of legal services; 2,000 shares of its Series C Preferred Stock to a
third party in settlement of litigation; options to purchase an aggregate of
300,000 shares of common stock at $0.75 per share to providers of legal
services; an option to purchase 5,000 shares of common stock at $0.75 per share
to a third party provider of consulting services; options to purchase 300,000
shares of common stock at $0.75 per share and 60,000 shares at $1.00 per share
to a third party provider of financial advisory services; options to purchase
100,000 shares of common stock at $1.25 per share and 100,000 shares at $0.75
per share to a third party provided of financial advisory services; and an
option to purchase to 35,000 shares at $0.75 per share to a consultant for
accounting services; an option to purchase 15,000 shares of common stock at
$0.75 per share to a director of the Company in connection with a personal loan
to the Company; and a warrant to purchase 41,700 shares of common stock at $0.75
per share to an officer and director of the Company in satisfaction of Company
obligations paid by such officer and director. The Company charged $758,000 to
expense as a result of these transactions.
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 $.0001 par Value per share with a face value of $100 per share; has
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.
In April and December 2000, the Company issued 3,000 shares, of its Series
D Cumulative Junior Preferred Stock to three individuals in connection with the
borrowing transaction with Specialty Finance.
As further discussed in Note H, during December 2000, the Company issued
50,000 shares of Series E Cumulative Senior Preferred Stock; 80,000 shares of
Series G Cumulative Convertible Preferred Stock; and warrants to purchase
8,800,000 shares of common stock at $0.625 per share to The Prudential Insurance
Company of America in connection with the restructuring of the Company's
obligations to Prudential. The Company also agreed to reduce the exercise price
on an already outstanding warrant to purchase 3,165,000 shares of common stock
to $0.625 per share.
In connection with the $8,700,000 borrowing with Specialty Finance
discussed in Note A, the Company issued 147,058 shares of common stock and
warrants representing the right to purchase an aggregate of 8,729,985 shares of
common stock of the Company to the participation interest holders and warrants
to purchase an aggregate of 3,625,000 shares of common stock to the investment
group that arranged the financing. 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
8,729,985 shares and $0.75 per share as to 3,625,000 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. The fair value of the warrants issued in the transaction was
$986,000.
F-19
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsequently, in connection with the Seventh Amendment to Loan Agreement
dated as of December 29, 2000, Specialty Finance agreed to convert $7,729,985 of
the participation interest, plus $757,315 in accrued interest thereon, into
89,117 shares of the Company's Series H Cumulative Convertible Preferred Stock.
The remaining $1,000,000 of the participation interest was outstanding as senior
secured debt as of December 31, 2000. Specialty Finance Fund has the right to
convert shares of the Series H Stock, and all accrued but unpaid dividends owing
through the date of conversion, into shares of common stock. The number of
shares of common stock to be issued on each share of Series H Stock is
determined by dividing face value plus the amount of any accrued but unpaid
dividends on the Series H Stock by 85% of the ninety day average of the high and
low trading prices preceding the date of notice to the Company; provided, that
the conversion shall not use a price of less than $0.75 per share and shall not
be greater than $1.25 per share unless the conversion occurs between January 1,
2001 and December 31, 2002, when the price shall not be greater than $2.50 per
share. If the Series H Stock is converted into common stock, the Company will
also be obligated to issue warrants providing the holders of the Series H Stock
with the right for a three year period to acquire shares of common stock, at a
price equal to the conversion price determined above, equivalent to ten percent
(10%) of the number of shares into which the shares of Series H Stock are
converted.
As of December 31, 1999 and 2000 the Company accrued $455,000 and $864,000,
respectively, for dividends relating to all series of preferred stock.
Warrants:
On September 18, 1997, placement agents in connection with a private
placement offering for the sale of common stock were awarded 748,000 warrants at
an exercise price of $1.20, which are exercisable for a period of three to five
years from grant date. At December 31, 2000, 100,000 of these warrants remained
outstanding.
In connection with the acquistions of ITS and Code 3 in 1998, the Company
issued warrants to purchase 2,000,000 and 500,000 shares, respectively of the
Company's common stock at a price of $2.62 and $4.50 per share, respectively.
During 1998 and 1999, certain of these warrants were exercised. During 2000, the
warrants to purchase common stock at $2.62 per share were re-priced to $.0.625
per share in accordance with the warrant agreement. At December 31, 2000,
warrants to purchase 800,000 shares at $0.625 per share and 300,000 shares at
$4.50 per share remain outstanding.
In connection with the July 23, 1998, sale of the Subordinated Notes
referred to in Note H 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 contain 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
Subordinated Notes and was being periodically charged to interest expense over
the term of the Subordinated Notes. As discussed in Note H these warrants were
re-priced to $0.625 per share in 2000 in connection with the debt restructuring
with Prudential.
F-20
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of warrants outstanding as of December 31, 2000 is as follows:
EXERCISE PRICE NUMBER
EXPIRATION DATE PER SHARE OF SHARES
--------------- --------------- ----------
08/07/2002. . . $ 1.20 100,000
01/03/2004. . . 0.625 800,000
03/07/2004. . . 4.50 300,000
04/17/2003. . . 5.00 220,000
04/30/2003. . . 5.00 80,000
05/05/2003. . . 5.00 20,000
05/18/2003. . . 5.00 15,000
05/22/2003. . . 5.00 25,000
06/04/2003. . . 5.00 200,000
06/05/2003. . . 5.00 170,000
06/08/2003. . . 5.00 50,000
05/22/2003. . . 1.25 100,000
05/22/2003. . . 1.50 100,000
07/23/2008. . . 0.625 3,165,000
04/10/2008. . . 1.25 2,750,000
04/23/2004. . . 0.75 288,936
04/27/2004. . . 5.00 163,302
05/03/2004. . . 5.00 18,130
05/12/2004. . . 5.00 420,000
05/12/2004. . . 4.00 700,000
12/31/2004. . . 4.00 140,000
12/31/2004. . . 5.00 36,286
03/09/2005. . . 1.25 450,000
04/17/2007. . . 0.75 2,000,000
04/25/2005. . . 0.75 202,500
04/25/2005. . . 0.625 2,500,000
05/04/2005. . . 0.625 2,500,000
05/04/2005. . . 0.75 924,939
06/04/2005. . . 0.75 1,012,562
06/27/2005. . . 0.75 975,000
06/30/2005. . . 0.75 1,500,000
06/30/2005. . . 0.625 3,000,000
07/07/2005. . . 0.75 100,000
08/24/2005. . . 0.75 450,000
09/07/2005. . . 0.75 41,700
12/28/2005. . . 0.625 729,985
07/23/2008. . . 0.625 8,800,000
----------
35,048,340
==========
401(k) Plan:
The Company sponsors a 40l(k) Plan adopted in 1999 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. During the years ended December 31, 1999 and 2000, the Company
contributed approximately $280,000 and $70,000 under the Plan.
Stock Options:
A summary of stock option plans in effect as of December 31, 2000 follows:
1996 Incentive Stock Plan authorizing the Board of Directors to provide a
number of key employees with incentive compensation commensurate with their
positions and responsibilities. The 1996 Plan permitted the grant of incentive
equity awards covering up to 960,000 shares of common stock. In connection with
the acquisition of IWC Services by the Company, the Company issued incentive
stock options covering an aggregate of 460,000 shares of common stock to
employees who were the beneficial owners of 200,000 options that were previously
granted by IWC Services. These incentive stock options 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 non qualified stock options, restricted stock, phantom
stock, stock bonuses and cash bonuses. As of the date hereof, stock options
covering an aggregate of 1,475,000 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 non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of December
31, 2000, stock option grants covering an aggregate of 780,000 shares of Common
Stock have been made under the Plan.
F-21
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 maybe 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, 2000, grants of stock options covering an aggregate of
192,000 shares of common stock have been made under the 1997 Outside Directors'
Option Plan.
2000 Long-Term Incentive Plan authorizes the Board of Directors to provide
full time employees and consultants (whether full or part time) with incentive
compensation in connection with their services to the Company. The plan permits
the grant of incentive equity awards covering up to 6,000,000 shares of common
stock. Grants may be in the form of qualified or non qualified stock options,
restricted stock, phantom stock, stock bonuses and cash bonuses. As of the date
hereof, stock options covering an aggregate of 2,345,000 shares of common stock
have been made under the 2000 Long-Term Incentive Plan. Such options vest
ratably over a five-year period from the date of grant. Options granted to
consultants are valued using the Black Scholes pricing model and expensed over
the vesting period.
In March 1999, the Company awarded 288,000 options 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 options.
In June, 2000, the Company issued options to purchase 150,000 shares at
$0.75 per share to each member of the board of directors (other than Tracy
Turner) and Dewitt Edwards, Vice President and Secretary.
Additional non-plan option grants were issued to non-employee directors and
employees during 2000 in the amount of 1,200,000 shares and to third party
providers of legal services for 300,000 shares.
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. During the
third quarter 2000, options covering an aggregate of 2,345,000 shares of common
stock were issued at an exercise price of $0.75. No compensation expense was
required to be recorded at the date of issue. However, as these options will be
accounted for as a variable plan, future increases in the Company's stock price
may result in recognition of compensation expense.
F-22
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity for the years ended December 31, 1998, 1999 and 2000 was
as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
---------- ---------------
Outstanding December 31, 1997 1,172,000 $ 1.59
Granted . . . . . . . . . . 1,645,000 2.85
Exercised . . . . . . . . . (354,000) .80
Cancelled . . . . . . . . . (21,000) 2.00
---------- ---------------
Outstanding December 31, 1998 2,442,000 $ 2.55
Granted . . . . . . . . . . 1,360,000 1.55
Exercised . . . . . . . . . (12,000) .43
Cancelled . . . . . . . . . (168,000) 3.36
---------- ---------------
Outstanding December 31, 1999 3,622,000 2.14
Granted . . . . . . . . . . 4,565,000 .76
Exercised . . . . . . . . . (47,000) .43
Cancelled . . . . . . . . . (197,000) 4.50
---------- ---------------
Outstanding December 31, 2000 7,943,000 $ .76
========== ===============
The Company applies APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its employee and director stock
option plans. Had compensation expense for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, consistent with the method of SFAS No. 123, the
Company's reported net loss and net loss per common share would have changed to
the pro forma amounts indicated below:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
-------------- -------------- --------------
Net loss to common shareholders As reported $ (3,937,000) $ (32,360,000) $ (22,216,000)
Pro forma (5,460,000) $ (34,142,000) $ (22,707,000)
Net loss per common share As reported $ (0.12) $ (0.94) $ (0.66)
Pro forma $ (0.17) $ (0.99) $ (0.67)
The company used the Black-Scholes option pricing model to estimate the
fair value of options on the date of grant for 1999 and 2000. The following
assumptions were applied in determining the pro forma compensation costs:
YEAR END DECEMBER 31,
1999 2000
-------- --------
Risk-free interest rate. . . . . . . . 5.7% 6.0%
Expected dividend yield. . . . . . . . - -
Expected option life . . . . . . . . . 5 yrs. 5 yrs.
Expected volatility. . . . . . . . . . 109.3% 141.9%
Weighted average fair value of options
Granted at market value . . . . . . . $ 1.37 $ 0.75
Summary information about the Company's stock options outstanding at
December 31, 2000.
WEIGHTED
UNDERLYING SHARES AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE PRICE DECEMBER 31, 2000 PERIODS IN YEARS EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- --------------- ----------------- ---------------
.43 - $2.00 7,943,000 5.6 $ 0.76 1,890,000 $ 0.75
F-23
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. RELATED PARTY TRANSACTIONS
As further described in Notes H and I, the Company has entered into various
financing and equity transactions with the Company's Chairman and Chief
Executive Officer, Larry H. Ramming and the Ramming Family Limited Partnership,
("The Partnership") of which Mr. Ramming is a controlling person. Management
believes the terms and conditions of the financing and equity transactions made
with Mr. Ramming and the partnership to the Company are as favorable to the
Company as 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.
As discussed in Notes A and H, the Company has entered into financing
transactions with an investment group, Specialty Finance. The managing member of
Specialty Finance is also a member of the Company's Board of Directors.
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.
At December 31, 2000, future minimum lease payments under these
non-cancelable operating leases are approximately:
YEARS ENDING DECEMBER 31: AMOUNT
-------------------------- ----------
2001 . . . . . . . . . . . $1,047,000
2002 . . . . . . . . . . . 892,000
2003 . . . . . . . . . . . 788,000
2004 . . . . . . . . . . . 623,000
2005 . . . . . . . . . . . 417,000
Thereafter . . . . . . . . 207,000
----------
$3,974,000
==========
Rent expense for the years ended December 31, 1998, 1999 and 2000, was
approximately $1,158,000, $2,001,000 and $1,557,000, and respectively.
The Company is involved in or threatened with various legal proceedings
from time to time arising in the ordinary course of business. Additionally, the
Company's liquidity problems and loan covenant defaults adversely impacted the
Company's ability to pay certain vendors on a timely basis. As a consequence, a
number of these vendors filed lawsuits against the Company and some have
obtained judgments for the amount of their claims, plus costs. The Company has
retained a third party to negotiate settlements of some of these claims and is
actively engaged in defending or resolving others. The Company expects that it
will be able to resolve these claims in an orderly fashion and does not believe
that these suits or judgments or any liabilities resulting from any such current
proceedings will have a material adverse effect on its operations or financial
position. However, the Company's business, financial performance and prospects
could be adversely affected if it is unable to adequately defend, pay or settle
its accounts, including as a consequence of efforts to enforce existing or
future judgments
In May of 2000, the Company's subsidiary ITS filed in Corpus Christi, Texas
for protection under Chapter 11 of the U.S. Bankruptcy Code. ITS is now
proceeding to liquidate its assets and liabilities pursuant to Chapter 7 of
Title 11. At the time of the filing, ITS had total liabilities of approximately
$6,900,000 and tangible assets of approximately $950,000. The Company has an
outstanding subordinated 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. A judgment
against the Company has been entered by a state district court, and that
judgment is now on appeal. The Company does not believe the guaranty will be
enforceable in accordance with its terms. The Company recorded a charge of
$1,833,000 attributed to this guaranty. Further, the Company, in consultation
F-24
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with its counsel, believes that it is not probable that any creditors of ITS may
successfully assert and realize collection against the Company.
L. BUSINESS SEGMENT INFORMATION, REVENUES FROM MAJOR CUSTOMERS AND
CONCENTRATION OF CREDIT RISK:
Information concerning operations in different business segments as of
December 31, 1998, 1999 and 2000, and for the respective years 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 discontinue ITS's business
operations, an assessment has been made that the Company's risk management
programs formerly included in Programs and Services 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 and Baylor are presented
as discontinued operations in the consolidated financial statements and are
therefore excluded from the segment information for all periods.
EMERGENCY MANUFACTURING
RESPONSE AND AND
RESTORATION DISTRIBUTION CONSOLIDATED
-------------- --------------- --------------
Year Ended December 31, 2000
Net Operating Revenues . . . . $ 22,236,000 $ 1,301,000 $ 23,537,000
Operating Income (Loss). . . . (10,671,000) (719,000) (11,390,000)
Identifiable Operating Assets. 17,584,000 542,000 18,126,000
Capital Expenditures . . . . . 260,000 - 260,000
Depreciation and Amortization. 2,665,000 - 2,665,000
Interest expense . . . . . . . 7,029,000 425,000 7,454,000
Year Ended December 31, 1999
Net Operating Revenues . . . . $ 28,418,000 $ 4,677,000 $ 33,095,000
Operating Income (Loss). . . . (17,296,000) (2,688,000) (19,984,000)
Identifiable Operating Assets. 52,507,000 948,000 53,455,000
Capital Expenditures . . . . . 3,501,000 302,000 3,803,000
Depreciation and Amortization. 2,780,000 127,000 2,907,000
Interest expense . . . . . . . 5,389,000 795,000 6,184,000
Year Ended December 31, 1998
Net Operating Revenues . . . . $ 28,999,000 $ 3,296,000 $ 32,295,000
Operating Income (Loss). . . . (1,291,000) 89,000 (1,202,000)
Identifiable Operating Assets. 80,484,000 1,672,000 82,156,000
Capital Expenditures . . . . . 3,517,000 48,000 3,565,000
Depreciation and Amortization. 1,402,000 120,000 1,522,000
Interest expense . . . . . . . 3,385,000 353,000 3,738,000
DURING THE PERIODS PRESENTED BELOW, THE FOLLOWING CUSTOMERS REPRESENTED
SIGNIFICANT CONCENTRATIONS OF CONSOLIDATED REVENUES:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------- ------------- -------------
Customer A $ 2,956,000 $ 3,890,000 $ -
Customer B 4,405,000 - -
Customer C - - 4,086,000
F-25
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's revenues are generated geographically as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000
------------- ------------- -------------
Domestic customers 35% 80% 81%
Foreign customers. 65% 20% 19%
None of the Company's customers at December 31, 1998, 1999 and 2000
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. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the unaudited quarterly results of operations
for 2000. Certain revisions have been made to previously reported data for the
quarter ended March 31, 2000 in order to properly reflect the fair value
attributed to certain equity transactions within that quarter. These revisions
resulted in an addition to the losses of $1,679,000 ($.05 per share).
In addition, certain reclassifications have been made to the September 30, 2000
data to conform to the yearend presentation.
QUARTER ENDED
2000 MARCH 31, 2000 JUNE 30, 2000 SEPTEMBER 30, 2000 DECEMBER 31, 2000
- -------------------------------------------- ---------------- --------------- -------------------- -------------------
Revenues $ 7,523,000 $ 4,449,000 $ 5,631,000 $ 5,934,000
Loss from continuing operations (3,459,000) (4,346,000) (8,047,000) (6,880,000)
Net Loss (2.683,000) (4,408,000) (9,722,000) (4,486,000)
Net Loss attributable to common shareholders (2,802,000) (4,527,000) (9,841,000) (5,046,000)
Net loss per common share
Basic (0.08) (0.13) (0.31) (0.14)
Diluted (0.08) (0.13) (0.31) (0.14)
QUARTER ENDED
1999 MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
- -------------------------------------------- ---------------- --------------- -------------------- -------------------
Revenues $ 11,227,000 $ 8,565,000 $ 7,742,000 $ 5,561,000
Loss from continuing operations (1,925,000) (5,492,000) (3,688,000) (15,363,000)
Net Loss (1,927,000) (5,331,000) (3,985,000) (19,873,000)
Net Loss attributable to common shareholders (2,017,000) (5,664,000) (4,562,000) (20,117,000)
Net loss per common share
Basic (0.06) (0.16) (0.13) (0.63)
Diluted (0.06) (0.16) (0.13) (0.63)
The quarterly data for 2000 presented above was not subjected to timely
reviews by independent public accountants as previously disclosed in the
Company's Form 10-Q's. In connection with the year end audit of the 2000
financial statements, these reviews were completed by the Company's independent
public Accountants. The quarterly data for 1999 presented above has not been
subjected to a review in accordance with standards established by the American
Institute of Certified Public Accountants.
Basic and diluted loss per common share for each of the quarters presented
above is based on the respective weighted average number of common and dilutive
potential common shares outstanding for each period and the sum of the quarters
may not necessarily be equal to the full year basic and diluted earnings per
common share amounts.
F-26
BOOTS & COOTS INTERNATIONAL WELL CONTROL, INC. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
N. EVENTS SUBSEQUENT TO DECEMBER 31, 2000 (UNAUDITED)
In January 2001, the Company effected the conversion to common stock of all
60,385 shares of Series B Convertible Preferred Stock outstanding at December
31, 2000, as well as an additional 587 shares issued in January 2001 in lieu of
cash dividends. The conversion required the issuance of 8,129,636 shares of
common stock in the aggregate and resulted in the cancellation of all
outstanding shares of Series B Convertible Preferred Stock.
F-27