As filed with the Securities and Exchange Commission on November 8, 2004.
Registration No. 333-118916
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ALLIS-CHALMERS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 39-0126090
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1311
(Primary Standard
Industrial Code Number)
5075 WESTHEIMER, SUITE 890
HOUSTON, TEXAS 77056
(713) 369-0550
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
VICTOR M. PEREZ, CHIEF FINANCIAL OFFICER
5075 WESTHEIMER, SUITE 890
HOUSTON, TEXAS 77056
(713) 369-0550
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
WITH COPIES TO:
Joseph P. Bartlett, Esq. Alan B. Spatz, Esq.
Greenberg Glusker Fields Claman Troy & Gould Professional Corporation
Machtinger & Kinsella LLP 1801 Century Park East, 16th Floor
1900 Avenue of the Stars, Suite 2100 Los Angeles, California 90067-2367
Los Angeles, California 90067 (310) 789-1231
(310) 201-7481
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
If the only securities on this form are being offered pursuant to dividend or
interest reinvestment plans, please check the following box. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
================================================ =============== ==================== ====================== ==============
Proposed Maximum Proposed Maximum Amount Of
Title of Each Class of Securities Amount To Be Offering Price Aggregate Registration
To Be Registered Registered(1) Per Unit Offering Price Fee
------------------------------------------------ --------------- -------------------- ---------------------- --------------
Common Stock, par value $.01 per share.......... 12,070,096 (2) $57,936,461 $7,340.55
------------------------------------------------ --------------- -------------------- ---------------------- --------------
Common Stock, par value $.01 per share, which
may be issued upon exercise of warrants......... 1,738,498 (3) $8,344,790 $1,057.28
------------------------------------------------ --------------- -------------------- ---------------------- --------------
Common Stock, par value $.01 per share, which
may be issued upon exercise of options.......... 612,000 (3) $2,937,600 $372.19
------------------------------------------------ --------------- -------------------- ---------------------- --------------
Common Stock, par value $.01 per share, which
may be issued upon exercise of options.......... 800 (4) $11,000 $1.39
------------------------------------------------ --------------- -------------------- ---------------------- --------------
TOTAL........................................... 14,421,394 $69,229,851 $8,771.41(5)
================================================ =============== ==================== ====================== ==============
(1) In the event of a stock split, stock dividend, or similar transaction
involving the Registrant's common stock, in order to prevent dilution, the
number of shares registered shall automatically be increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), on the basis of the average high and low prices of
the Registrant's common stock reported by the American Stock Exchange on
November 4, 2004.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g), on the basis of the average high and low prices of
the Registrant's common stock reported by the American Stock Exchange on
November 4, 2004.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g), on the basis of the price at which the securities
may be exercised.
(5) A registration fee of $9,239.60 was paid with the initial filing of the
Registration Statement on September 10, 2004.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE TIME UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
SUBJECT TO COMPLETION - NOVEMBER 8, 2004
PROSPECTUS
ALLIS-CHALMERS CORPORATION
14,421,394 SHARES OF COMMON STOCK
($0.01 par value)
This prospectus relates to the offer and sale from time to time of up to
14,421,394 shares of our common stock that are owned by or may be issued upon
the exercise of rights to acquire common stock held by the stockholders named in
the "Selling Stockholders Table" section of this prospectus. The shares of our
common stock offered pursuant to this prospectus were originally acquired or
will be acquired by selling stockholders pursuant to the conversion of
convertible preferred stock, pursuant to the exercise of warrants and options
to purchase common stock, pursuant to public offerings and private placements
of common stock by the Company and in purchases from third parties in public and
private transactions.
The prices at which the selling stockholders may sell the shares in this
offering will be determined by the prevailing market price for the shares or in
negotiated transactions. We will not receive any of the proceeds from the sale
of the shares. We will receive the exercise price in connection with any
exercise of options and warrants by selling stockholders. We will bear all
expenses of registration incurred in connection with this offering. The selling
stockholders whose shares are being registered will bear all selling and other
expenses.
Our common stock trades on the American Stock Exchange under the symbol "ALY".
On November 4, 2004 the last sale price reported for the common stock on the
American Stock Exchange was $4.80 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT THE RISKS YOU SHOULD
CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR COMMON STOCK.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____________________
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 5
Special Note Regarding Forward-Looking Statements 10
Use of Proceeds 10
Market Price Information 10
Equity Compensation Plan Information 12
Capitalization 13
Selected Historical Financial Information 14
Summary Pro Forma Financial Information 14
Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Business and Properties 31
Management 39
Principal Holders of Common Stock 47
Transactions with Selling Stockholders and Other Related Parties 49
Description of Capital Stock 52
Selling Stockholders Table 54
Plan of Distribution 57
Where You Can Find More Information 59
Legal Matters 59
Experts 59
Glossary of Oil & Natural Gas Terms 59
Index to Financial Statements F-1
Unless the context otherwise requires, references in this prospectus to
"Allis-Chalmers," "we," "us," "our" or "ours" refer to Allis-Chalmers
Corporation, together with our operating subsidiaries. When the context
requires, we refer to these entities separately. References in this prospectus
to the "selling stockholders" refer to the selling stockholders identified in
the "Selling Stockholders Table" section of this prospectus.
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, utilizing a shelf registration
process. Under this shelf registration process, the selling stockholders may,
from time to time, sell the shares of our common stock described in this
prospectus. This prospectus provides you with a general description of us and
our common stock. From time to time we may provide a prospectus supplement that
will also add, update or change information contained in this prospectus. You
should read both this prospectus and any prospectus supplement together with
additional information described under the heading "Where You Can Find More
Information."
You should rely only on the information contained in this prospectus and in any
prospectus supplement. We have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it.
Except as otherwise expressly provided, all references to numbers of shares and
to the exercise price of options and warrants contained in this prospectus have
been restated to give retroactive effect to a one-to-five reverse stock split
effective on June 10, 2004.
2
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING IN "RISK
FACTORS" AND OUR FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL
STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. WE HAVE PROVIDED DEFINITIONS
FOR CERTAIN OIL AND NATURAL GAS TERMS USED IN THIS PROSPECTUS IN THE "GLOSSARY
OF OIL AND NATURAL GAS TERMS" INCLUDED IN THIS PROSPECTUS.
ABOUT OUR COMPANY
We are engaged in the business of providing oilfield services and equipment to
meet the drilling and related needs of oil and gas exploration and development
companies in the southwest United States and the Gulf of Mexico and Mexico. We
currently operate in three sectors of the oilfield service industry: the casing
and tubing handling and installation sector; the specialized directional and
horizontal drilling sector; and the compressed air drilling sector.
We believe that consolidation among large oilfield service providers has created
an opportunity for us to compete effectively in certain niche markets that are
under-served by the large oilfield service providers. At the same time,
producers are favoring suppliers that provide a comprehensive package of
products and services, which allows us to compete effectively with smaller
competitors currently providing a significant portion of the services in this
industry.
Our strategy is based on broadening the geographic scope of our products and
services primarily within two areas of the oilfield services and equipment
industry: casing and tubing handling services and equipment and drilling
services. We intend to implement this growth strategy through internal expansion
and the acquisition of companies operating within these segments. We intend to
identify and acquire companies with significant management and field expertise,
strong client relationships and high quality products and services. As discussed
under "Risk Factors" included elsewhere herein, there can be no assurance that
we will be able to complete any further acquisitions.
Our casing and tubing, directional drilling and compressed air drilling
businesses had revenues of approximately $10.0 million, $16.0 million and $6.7
million, respectively, during the year ended December 31, 2003.
CORPORATE INFORMATION
Allis-Chalmers Corporation was incorporated in Delaware in 1913. We reorganized
in bankruptcy in 1988, and sold all of our major businesses. In May 2001, we
consummated a merger in which we acquired OilQuip Rentals, Inc. and its
wholly-owned subsidiary, Mountain Compressed Air, Inc. In December 2001, we sold
the last of our pre-bankruptcy operations. In February 2002, we acquired
approximately 81% of the capital stock of Jens' Oilfield Service, Inc. and
substantially all of the capital stock of Strata Directional Technology, Inc. In
July 2003, we entered into a limited liability company operating agreement with
a division of M-I L.L.C., a joint venture between Smith International and
Schlumberger N.V., to form a Texas limited liability company named AirComp, LLC.
We own 55% and M-I L.L.C. owns 45% of AirComp. In September 2004, we increased
our ownership in Jens' Oilfield Service, Inc. to 100%.
Our executive offices are located at 5075 Westheimer Suite 890, Houston, Texas
77056, and our telephone number is (713) 369-0550. We currently do not maintain
a website.
3
ABOUT THE OFFERING
Common stock to be offered by the selling
stockholders from time to time, assuming the
exercise of all outstanding options and
warrants held by the selling stockholders
are exercised 14,421,394 shares
Common stock to be offered by the selling
stockholders from time to time, assuming no
exercise of outstanding options and warrants
held by the selling stockholders are exercised 12,070,096 shares
Shares outstanding prior to the offering 13,042,081 shares as of November 2, 2004.
Shares outstanding after the offering,
assuming the exercise of outstanding
options and warrants held by the selling
stockholders 15,393,379
Use of proceeds We will not receive any proceeds from the
sale of shares by the selling stockholders.
Dividend Policy We do not intend to declare or pay dividends
in the foreseeable future. Instead, we generally
intend to invest any future earnings in our business.
Risk factors Please read "Risk Factors" for a discussion of
factors you should consider carefully before deciding
to invest in shares of our common stock.
American Stock Exchange trading symbol "ALY"
The number of shares outstanding after the offering includes the following
shares being registered for resale pursuant to the registration statement of
which this prospectus is a part: 12,070,096 shares of currently outstanding
common stock, 612,800 shares which may be issued upon the exercise of
outstanding options to purchase common stock, and 1,738,498 shares which may
be issued upon the exercise of outstanding warrants to purchase common stock.
4
RISK FACTORS
You should carefully consider the following risks before you decide to buy our
common stock. The risks and uncertainties described below are the material ones
facing our company. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. If this
occurs, the trading price of our common stock could decline, and you could lose
all or part of the money you paid to buy our common stock
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
OUR STOCK PRICE MAY DECREASE IN RESPONSE TO VARIOUS FACTORS, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS AND CAUSE OUR STOCKHOLDERS TO SUFFER SIGNIFICANT
LOSSES. THESE FACTORS INCLUDE:
o decreases in prices for oil and natural gas resulting in decreased
demand for our services;
o variations in our operating results and failure to meet
expectations of investors and analysts;
o increases in interest rates;
o the loss of customers;
o failure of customers to pay for our services;
o competition;
o illiquidity of the market for the common stock;
o sales of common stock by existing stockholders; and
o other developments affecting us or the financial markets.
A reduced stock price will result in a loss to investors and will adversely
affect our ability to issue stock to fund our activities.
A LARGE NUMBER OF SHARES ARE ELIGIBLE FOR FUTURE SALE, WHICH MAY REDUCE THE
PRICE OF THE COMMON STOCK.
Sales of substantial amounts of shares of common stock in the public market
could have an adverse effect on the market value of our common stock.
Approximately 12.1 million shares of currently outstanding common stock and
approximately 2.4 million shares of common stock which may be issued upon
exercise of options and warrants are eligible to be sold pursuant to this
prospectus. Substantially all other outstanding shares of common stock are
freely tradable. Market sales of common stock or the availability of common
stock may reduce the price of the common stock.
EXISTING STOCKHOLDERS' INTEREST IN US MAY BE DILUTED BY ADDITIONAL ISSUANCES OF
EQUITY SECURITIES.
We expect to issue additional equity securities to fund the acquisition of
additional businesses and pursuant to employee benefit plans. We may also issue
additional equity for other purposes. These securities may be on parity with our
common stock or may have dividend, liquidation, or other preferences to our
common stock. The issuance of additional equity securities will dilute the
holdings of existing stockholders and may reduce the share price of our common
stock.
WE ARE CONTROLLED BY A FEW STOCKHOLDERS, WHICH WILL LIMIT OTHER STOCKHOLDERS'
ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS.
A small number of stockholders effectively control us. Six stockholders who own
49% of the outstanding common stock are parties to a stockholders agreement
providing for the election of a majority of our board of directors. This group
of stockholders, which includes a majority of our board of directors,
effectively has the power to elect a majority of our board of directors and to
control its affairs, and is also able to control the outcome of matters
submitted to a vote of stockholders requiring a majority vote. As a result,
other stockholders will not have the ability to elect a majority of the board of
directors or influence the outcome of key transactions. In addition, the voting
power of these stockholders may discourage others from seeking to acquire
control of us through the purchase of our common stock, which might depress the
price of our common stock. In addition, the stockholders agreement provides that
in the event we has not completed a public offering of our common stock prior to
September 30, 2005, then, at the request of Energy Spectrum, our largest
shareholder, we will retain an investment banking firm to identify candidates
for a transaction involving the sale of us or its assets.
5
The parties to the stockholders agreement have the power to control, subject to
any fiduciary duty owed to other stockholders under Delaware law, all matters
affecting us, including:
o the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers,
o the determination of incentive compensation, which may affect our
ability to retain key employees,
o any determinations with respect to mergers or other business
combinations,
o our acquisition or disposition of assets,
o our financing decisions and our capital raising activities,
o the payment of dividends on our common stock, and
o amendments to our amended and restated certificate of
incorporation or bylaws.
WE DO NOT EXPECT TO PAY DIVIDENDS ON THE COMMON STOCK AND INVESTORS WILL BE ABLE
TO RECEIVE CASH IN RESPECT OF THE SHARES OF COMMON STOCK ONLY IF THEY SELL THE
SHARES.
We have not within the last ten years paid any cash dividends on the common
stock. We have no intention in the foreseeable future to pay any cash dividends
on the common stock and or credit agreements restrict the payment of dividends
on our common stock. Therefore an investor in our common stock, in all
likelihood, will obtain an economic benefit from the common stock only by
selling the common stock.
RISKS ASSOCIATED WITH OUR COMPANY
BECAUSE WE ARE HIGHLY LEVERAGED WE MAY HAVE DIFFICULTY OBTAINING ADDITIONAL
FINANCING, AND COULD EXPERIENCE LOSSES AND FAIL TO MEET OUR CAPITAL EXPENDITURE
REQUIREMENTS AND OUR FINANCIAL OBLIGATIONS IF OUR REVENUES OR INCOME DECREASE OR
IF INTEREST RATES INCREASE.
As a result of acquisition financing, we are highly leveraged. At December 31,
2003 and September 30, 2004, we had approximately $32.2 million and $30.0
million, respectively, of debt outstanding. This high level of debt will:
o impair our ability to obtain additional financing;
o make us more vulnerable to economic downturns and declines in oil
and natural gas prices and declines in drilling activities; and
o make us more vulnerable to increases in interest rates.
We may not maintain sufficient revenues to sustain profitability or to meet our
capital expenditure requirements and our financial obligations.
IF WE FAIL TO OBTAIN ADDITIONAL FINANCING, WE MAY BE UNABLE TO REFINANCE OUR
EXISTING DEBT, EXPAND OUR CURRENT OPERATIONS OR ACQUIRE NEW BUSINESSES, WHICH
COULD RESULT IN FAILURE TO GROW OR IN DEFAULTS UNDER OUR CREDIT AGREEMENTS.
In order to refinance indebtedness, expand existing operations and acquire
additional businesses we will require substantial amounts of capital. There can
be no assurance that financing, whether from equity or debt financings or other
sources, will be available or, if available, will be on terms satisfactory to
us. If we are unable to obtain such financing, we will be unable to acquire
additional businesses and may be unable to meet our obligations under our
existing credit agreements.
WE MAY FAIL TO ACQUIRE ADDITIONAL BUSINESSES, WHICH WILL RESTRICT OUR GROWTH AND
MAY RESULT IN A DECREASE IN OUR STOCK PRICE.
Our business strategy is to acquire companies operating in the oil and natural
gas equipment rental and services industry. However, there can be no assurance
that we will be successful in acquiring any additional companies. Successful
acquisition of new companies will depend on various factors, including but not
limited to:
o our ability to obtain financing;
o the competitive environment for acquisitions; and
o the integration and synergy issues described in the next two risk
factors.
6
There can be no assurance that we will be able to acquire and successfully
operate any particular business or that we will be able to expand into areas
that we have targeted. The price of the common stock may fall if we fail to
acquire additional businesses.
DIFFICULTIES IN INTEGRATING ACQUIRED BUSINESSES MAY RESULT IN REDUCED REVENUES
AND INCOME.
We may not be able to successfully integrate the business of our operating
subsidiaries or any business we may acquire in the future. The integration of
the businesses will be complex and time consuming, will place a significant
strain on management, and may disrupt our businesses. We may encounter
substantial difficulties, costs and delays involved in integrating common
information and communication systems, operating procedures, internal controls
and human resources practices, including incompatibility of business cultures
and the loss of key employees and customers. These difficulties may reduce our
ability to gain customers or retain existing customers, and may increase
operating expenses, resulting in reduced revenues and income.
IF WE DO NOT EXPERIENCE EXPECTED SYNERGIES WE MAY NOT ACHIEVE INCREASES IN
REVENUES AND REDUCTIONS IN EXPENSES THAT WE HOPE TO OBTAIN WHEN ACQUIRING
BUSINESSES.
We may not be able to achieve the synergies we expect from the combination of
businesses, including plans to reduce overhead through shared facilities and
systems, to cross-market to the businesses' customers, and to access a larger
pool of customers due to the combined businesses' ability to provide a larger
range of services.
OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE RESULTING IN A LOSS OF CUSTOMERS
AND REVENUES.
Our business success is dependent upon providing our customers efficient,
cost-effective oil and gas drilling equipment services and technology. It is
possible that competing technologies may render our equipment and technologies
obsolete, causing us to lose customers and revenues.
OUR HISTORICAL RESULTS ARE NOT AN INDICATOR OF OUR FUTURE OPERATIONS.
Our business is conducted through three subsidiaries, one of which was acquired
in February 2001 and two of which were acquired in February 2002. In 2003 we
contributed the assets of one of our subsidiaries to a joint venture. As a
result of these transactions, our past performance is not indicative of future
performance and investors in the common stock should not base their expectations
as to our future performance on our historical results.
THE LOSS OF KEY PERSONNEL WOULD ADVERSELY AFFECT OUR ABILITY TO EFFECTIVELY
FINANCE AND MANAGE OUR BUSINESS, ACQUIRE NEW BUSINESSES, AND TO OBTAIN AND
RETAIN CUSTOMERS.
We are dependent upon the efforts and skills of our executives to finance and
manage our business, to identify and consummate additional acquisitions and to
obtain and retain customers. These executives include:
o Chief Executive Officer and Chairman Munawar H. Hidayatallah,
o President and Chief Operating Officer Jens H. Mortensen, and
o President and Chief Executive Officer of Strata, David Wilde.
In addition, our development and expansion will require additional experienced
management and operations personnel. No assurance can be given that we will be
able to identify and retain these employees. The loss of the services of one or
more of our key personnel could increase our exposure to the other risks
described in this Risk Factors section. We do not maintain key man insurance on
any of our personnel.
7
FAILURE TO RETAIN KEY PERSONNEL COULD HURT OUR OPERATIONS.
We require highly skilled personnel to operate equipment and provide technical
services. To the extent that demand for drilling services increases, shortages
of qualified personnel could arise, creating upward pressure on wages and
difficulty in obtaining skilled personnel.
WE ARE DEPENDENT ON A FEW CUSTOMERS AND OUR CASH FLOW WOULD BE SERIOUSLY
AFFECTED IF ONE OR MORE SIGNIFICANT CUSTOMERS FAIL TO PAY US.
Our customers are engaged in the oil and natural gas drilling business in the
southwestern United States and Mexico. We are dependent upon a few customers for
a significant portion of our revenues. This concentration of customers may
impact our overall exposure to credit risk, in that customers may be similarly
affected by changes in economic and industry conditions. A failure by one or
more significant customers to pay us could materially reduce our cash flow and
result in losses.
OUR OPERATIONS IN MEXICO MAY EXPOSE US TO POLITICAL AND OTHER UNCERTAINTIES,
INCLUDING RISKS OF:
o terrorist acts, war and civil disturbances,
o changes in laws or policies regarding the award of contracts, and
o the inability to collect or repatriate income or capital.
ENVIRONMENTAL LIABILITIES RELATING TO DISCONTINUED OPERATIONS COULD RESULT IN
SUBSTANTIAL LOSSES.
We reorganized under the bankruptcy laws in 1988. Since that time, a number of
parties, including the Environmental Protection Agency have asserted that we are
responsible for the cleanup of hazardous waste sites. These assertions have been
made only with respect to our pre-bankruptcy activities. We believe such claims
are barred by applicable bankruptcy law and have not experienced any material
expense in relation to any such claims; however, if we do not prevail with
respect to these claims in the future, we could become subject to material
environmental liabilities which could materially impact our net worth.
PRODUCTS LIABILITY CLAIMS RELATING TO DISCONTINUED OPERATIONS COULD RESULT IN
SUBSTANTIAL LOSSES.
We were reorganized under the bankruptcy laws in 1988. Since that time we have
been regularly named in products liability lawsuits primarily resulting from the
manufacture of products containing asbestos. In connection with our bankruptcy,
a special products liability trust was established to be responsible for
products liability claims. We believe that claims against us are banned by
applicable bankruptcy law, and that the products liability trust will continue
to be responsible for products liability claims. Since 1988 no court has ruled
that we are responsible for products liability claims. However, if we are held
responsible for product liability claims, we could suffer substantial losses. We
have not manufactured products containing asbestos since our bankruptcy in 1988.
RISKS ASSOCIATED WITH OUR INDUSTRY
CYCLICAL DECLINES IN OIL AND NATURAL GAS PRICES MAY RESULT IN REDUCED USE OF OUR
SERVICES, AFFECTING OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATION
AND OUR ABILITY TO MEET OUR CAPITAL EXPENDITURE OBLIGATIONS AND FINANCIAL
COMMITMENTS.
The oil and natural gas exploration and drilling business is highly cyclical.
Generally, as oil and gas prices decrease, exploration and drilling activity
declines as marginally profitable projects become uneconomic and are either
delayed or eliminated. Declines in the number of operating drilling rigs result
in reduced use of and prices for our services. Accordingly, when oil and natural
gas prices are relatively low, our revenues and income will suffer. Oil and gas
prices depend on many factors beyond our control, including the following:
8
o economic conditions in the United States and elsewhere;
o changes in global supply and demand for oil and natural gas;
o the level of production of the Organization of Petroleum Exporting
Countries, commonly called "OPEC;"
o the level of production of non-OPEC countries;
o the price and quantity of imports of foreign oil and natural gas;
o political conditions, including embargoes, in or affecting other
oil and natural gas producing activities;
o the level of global oil and natural gas inventories; and
o advances in exploration, development and production technologies.
Depending on the market prices of oil and gas, companies exploring for oil and
gas may cancel or curtail their drilling programs, thereby reducing demand for
drilling services. Our contracts are generally short term, and oil and gas
companies tend to respond quickly to upward or downward changes in prices. Any
reduction in the demand for drilling services may materially erode both pricing
and utilization rates for our services and adversely affect our financial
results. As a result, we may suffer losses, be unable to make necessary capital
expenditures and be unable to meet our financial obligations.
OUR INDUSTRY IS HIGHLY CYCLICAL, AND OUR RESULTS OF OPERATIONS MAY BE VOLATILE.
Our industry is highly cyclical, with periods of high demand and high pricing
followed by periods of low demand and low pricing. Periods of low demand
intensify the competition in the industry and often result in equipment being
idle for long periods of time. We may be required to enter into lower rate
contracts in response to market conditions in the future.
Due to the short-term nature of most of our contracts, changes in market
conditions can quickly affect our business. As a result of the cyclicality of
our industry, our results of operations have been volatile, and we expect this
volatility to continue.
OUR INDUSTRY IS HIGHLY COMPETITIVE, WITH INTENSE PRICE COMPETITION.
The regions in which we operate are highly competitive. Contracts are
traditionally awarded on a competitive bid basis. Pricing is often the primary
factor in determining which qualified contractor is awarded a job. The
competitive environment has intensified as recent mergers among oil and gas
companies have reduced the number of available customers. Many other oil and gas
service companies are larger than we are and have greater resources than we
have. This allows them to better withstand industry downturns, better compete on
the basis of price and better be able to acquire new equipment and technologies,
all of which could affect our revenues and profitability. These competitors
compete with us both for customers and for acquisitions of other businesses.
This competition may cause our business to suffer. We believe that competition
for contracts will continue to be intense in the foreseeable future.
WE MAY BE SUBJECT TO CLAIMS FOR PERSONAL INJURY AND PROPERTY DAMAGE, REDUCING
OUR NET WORTH.
Our services are used for the exploration and production of oil and natural gas.
These operations are subject to inherent hazards that can cause personal injury
or loss of life, damage to or destruction of property, equipment, the
environment and marine life, and suspension of operations. Litigation arising
from an accident at a location where our products or services are used or
provided may cause us to be named as a defendant in lawsuits asserting
potentially large claims. We maintain customary insurance to protect our
business against these potential losses. However, we could become subject to
material uninsured liabilities which materially reduce our net worth.
WE ARE SUBJECT TO GOVERNMENT REGULATIONS.
We are subject to various federal, state and local laws and regulations relating
to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Although we are not aware of any proposed material changes in any
federal, state and local statutes, rules or regulations, any changes could
materially affect our financial condition and results of operations.
9
WE MAY EXPERIENCE INCREASED LABOR COSTS OR THE UNAVAILABILITY OF SKILLED
WORKERS.
We are dependent upon the available labor pool of skilled employees. We are also
subject to the Fair Labor Standards Act, which governs such matters as minimum
wage, overtime and other working conditions. A shortage in the labor pool or
other general inflationary pressures or changes in applicable laws and
regulations could require us to enhance our wage and benefits packages. There
can be no assurance that labor costs will not increase. Any increase in our
operating costs could cause our business to suffer.
OUR BUSINESS MAY BE AFFECTED BY TERRORIST ACTIVITY AND BY SECURITY MEASURES
TAKEN IN RESPONSE TO TERRORISM.
We may experience loss of business or delays or defaults in payments from payers
that have been affected by the terrorist activities and potential activities.
Some oil and gas drilling companies have implemented security measures in
response to potential terrorist activities, including access restrictions that
could adversely affect our ability to market our services to new and existing
customers, and could increase our costs. Terrorist activities and potential
terrorist activities and any resulting economic downturn could adversely impact
our results of operations, impair our ability to raise capital or otherwise
adversely affect our ability to grow our business.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 regarding our business, financial
condition, results of operations and prospects. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates and similar expressions
or variations of such words are intended to identify forward-looking statements.
However, these are not the exclusive means of identifying forward-looking
statements. Although forward-looking statements in this prospectus reflect our
good faith judgment, such statements can only be based on facts and factors
currently known to us. Consequently, forward-looking statements are inherently
subject to risks and uncertainties, and actual outcomes may differ materially
from the results and outcomes discussed in the forward-looking statements.
Further information about the risks and uncertainties that may impact us are
described in the Risk Factors section beginning on page 5. You should read the
Risk Factors section carefully. You should not place undue reliance on
forward-looking statements, which speak only as of the date of this prospectus.
We undertake no obligation to update publicly any forward-looking statements in
order to reflect any event or circumstance occurring after the date of this
prospectus or currently unknown facts or conditions or the occurrence of
unanticipated events.
USE OF PROCEEDS
The proceeds from the sale of each selling stockholder's common stock will
belong to that selling stockholder. We will not receive any proceeds from such
sales. We will receive proceeds of any exercise of options, warrants and other
rights to acquire our common stock.
MARKET PRICE INFORMATION
Since September 13, 2004, our common stock has been traded on the American Stock
Exchange under the symbol "ALY." Prior to September 13, 2004, our common stock
was quoted on the OTC Bulletin Board and traded only sporadically. The following
table sets forth, for periods prior to September 13, 2004, volume and high and
low bid information for the common stock, as determined from sporadic quotations
on the Over-the-Counter Bulletin Board, during the periods indicated, and for
periods since September 13, 2004, volume and high and low sale prices of our
common stock on the American Stock Exchange. The quotations set forth below for
periods prior to September 13, 2004 reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Effective June 10, 2004, we affected a one-to-five reverse stock split. Share
prices for periods prior to June 10, 2004, set forth below have been adjusted to
give retroactive effect to the reverse stock split.
10
CALENDAR QUARTER HIGH(1) LOW(1) VOLUME
--------------------------------------------------------------------------------
2002 (# OF SHARES)
First Quarter......................... 6.25 2.00 47,960
Second Quarter........................ 10.00 3.75 6,220
Third Quarter......................... 7.00 3.75 3,080
Fourth Quarter........................ 5.05 .60 48,620
2003
First Quarter......................... 4.50 .55 7,660
Second Quarter........................ 5.00 2.25 6,260
Third Quarter......................... 4.50 2.60 4,300
Fourth Quarter........................ 6.00 2.60 12,804
2004
First Quarter......................... 10.05 2.55 13,262
Second Quarter........................ 10.25 4.25 36,223
Third Quarter(through September 10)... 9.75 5.50 23,600
Third Quarter(September 13 through
September 30)... 5.25 4.75 106,400
Fourth Quarter(through November 5).... 5.10 4.50 248,200
HOLDERS. As of November 2, 2004, there were approximately 1,963 holders of
record of our common stock. On November 5, 2004, the last sale price for our
common stock reported on the American Stock Exchange was $4.50 per share.
SHARES ELIGIBLE FOR FUTURE SALE. We have registered pursuant to the registration
statement that includes this prospectus the resale of 14,421,394 shares of our
common stock, including 2,351,298 shares which may be issued upon the exercise
of outstanding options and warrants. Substantially all other outstanding common
stock may be traded pursuant to Rule 144 under the Securities Act of 1933. The
availability of these shares could have a material effect on the market price
of our common stock.
DIVIDENDS. No dividends were declared or paid during the past three years, and
no dividends are anticipated to be declared or paid in the foreseeable future.
Our credit facilities restrict our ability to pay dividends on our common stock.
11
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans.
Number of securities
securities to be Weighted
issued upon average Number of securities
exercise of price of remaining available
outstanding outstanding for future issuance
options, warrants options, warrants under equity
Plan Category and rights and rights compensation plans
--------------------------- ---------- ---------- ------------------
Equity compensation plans
approved by security holders 868,500 $2.75 331,500
Equity compensation plans
not approved by security holders 404,800 $2.05 --
---------- ---------- ------------------
Total 1,273,300 $2.53 331,500
----------
Equity Compensation Plans Not Approved By Security Holders:
-----------------------------------------------------------
These plans comprise the following:
In 1999 and 2000, the Board compensated former and continuing Board members who
had served from 1989 to March 31, 1999 without compensation by issuing
promissory notes totaling $325,000 and by granting stock options to these same
individuals. Options to purchase 4,800 shares of common stock were granted with
an exercise price of $13.75. These options vested immediately and expire in
March 2010. None of these options have been exercised.
On May 31, 2001, our Board granted to one of our directors, Leonard Toboroff, an
option to purchase 100,000 shares of common stock at $2.50 per share, expiring
in October 2011. The option was granted for services provided by Mr. Toboroff to
OilQuip prior to the merger of OilQuip Rentals, Inc. and Allis-Chalmers
Corporation, including providing financial advisory services, assisting in
OilQuip's capital structure and assisting OilQuip Rentals, Inc. in finding
strategic acquisition opportunities. None of these options have been exercised.
In February 2001, we issued warrants to purchase 233,000 shares of our common
stock at an exercise price of $0.75 per share and warrants to purchase 67,000
shares of our common stock at an exercise price of $5.00 per share in connection
with a subordinated debt financing effected in 2001. These warrants expire in
February 2011. None of these warrants has been exercised.
12
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2004. You
should read this table in conjunction with our financial statements and the
notes to those financial statements included elsewhere in this prospectus.
June 30, 2004
(unaudited)
(in thousands)
Cash and cash equivalents $ 485
Current portion of long-term debt $ 4,848
Long-term debt 26,163
-------------
Total debt $ 31,011
Common stock: 0.01 par value, 20,000,000 shares authorized,
6,264,758 shares issued and outstanding $ 63
Additional paid-in capital $ 18,593
Retained earnings $ (7,690)
-------------
Total stockholders' equity $ 10,966
Total capitalization $ 41,977
(1) On August 10, 2004, we issued 3,504,667 shares of our common stock in
connection with a private placement of common stock, for $10,514,001.
On September 30, 2004, we issued 1,956,634 shares in connection with a
private placement of our common stock, for $5,869,907.
13
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information for each of the four
years ended December 31, 2003, has been derived from our audited consolidated
financial statements and related notes. The following selected historical
financial information for the six months ended June 30, 2004 and 2003 has been
derived from our unaudited consolidated financial statements. In the opinion of
our management, the unaudited interim consolidated financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary for
the fair statement of the selected historical consolidated financial data. This
information is only a summary and you should read it in conjunction with
material contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." which includes a discussion of factors
materially affecting the comparability of the information presented, and in
conjunction with our financial statements included elsewhere in this prospectus.
As discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operation," we have during the past four years effected a number of
business combinations and other transactions that materially affect the
comparability of the information set forth below.
Six Months Ended June 30 Year Ended December 31,
(in thousands, except per share data)
2004 2003 2003 2002 2001 2000
--------- --------- --------- --------- --------- ---------
(unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues $ 21,083 $ 14,339 $ 32,724 $ 17,990 $ 4,796 $ --
Income (loss) from operations $ 2,398 $ 1,933 $ 2,624 $ (1,170) $ (1,433) $ (627)
Net income (loss) from continuing
operations $ 1,059 $ (282) $ 548 $ (3,969) $ (2,273) $ (627)
Net income (loss) attributed to
common shareholders $ 935 $ (763) $ (108) $ (4,290) $ (4,577) $ (627)
Per Share Data:
Net Income (loss) from continuing
operations per common share:
Basic $ 0.18 $ (0.19) $ (0.03) $ (1.14) $ (2.88) $ (0.31)
Diluted $ 0.11 $ (0.19) $ (0.03) $ (1.14) $ (2.88) $ (0.31)
Weighted average number of
common shares outstanding:
Basic 6,094 3,927 3,927 3,766 790 2,000
Diluted 8,242 3,927 3,927 3,766 790 2,000
CONSOLIDATED BALANCE SHEET DATA
Six Months Ended June 30 Year Ended December 31,
(in thousands, except per share data)
2004 2003 2003 2002 2001 2000
--------- --------- --------- --------- --------- ---------
Total Assets $ 53,061 $ 35,047 $ 48,873 $ 34,778 $ 12,465 $ 2,360
Long-term debt classified as:
Current $ 4,848 $ 6,406 $ 5,150 $ 13,890 $ 1,023 $ --
Long Term $ 26,163 $ 13,433 $ 27,083 $ 7,331 $ 6,833 $ --
Redeemable convertible
Preferred stock $ -- $ 4,302 $ 4,171 $ 3,821 $ -- $ --
Stockholders' Equity $ 10,966 $ 497 $ 1,207 $ 1,009 $ 1,250 $ 2,348
Book value per share $ 2.16 $ 0.13 $ 0.31 $ 0.26 $ 1.58 $ 1.17
14
SUMMARY PRO FORMA FINANCIAL INFORMATION
We have included the following unaudited pro forma summary financial information
only for the purposes of illustration. The pro forma statement of operations
data for the six months ended June 30, 2004 and 2003 and for the year ended
December 31, 2003 reflect our continuing operations and illustrates the effects
of the formation of AirComp on the Company's results of operations as of
December 31, 2003 based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented, and
should be read in conjunction with the pro forma financial information and notes
thereto included elsewhere in this prospectus. The pro forma information does
not necessarily indicate what the operating results or financial position would
have been if the retirement had been completed at the dates indicated. Moreover,
this information does not necessarily indicate what our future operating results
or financial position will be.
Year Ended
Six Months ended June 30, December 31,
(in thousands, except per share amounts)
2004 2003 2003
--------- --------- ---------
Revenues $ 21,083 $ 16,061 $ 34,446
Cost of revenues 15,729 11,909 25,435
--------- --------- ---------
Gross margin 5,354 4,152 9,011
General and administrative expense 2,956 1,835 6,033
--------- --------- ---------
Income/ (loss) from operations 2,398 2,317 3,008
Other income (expense):
Interest income -- -- 3
Interest expense (1,068) (1,447) (2,434)
Minority interests in income of subsidiaries (256) (209) (285)
Factoring costs on note receivable -- -- --
Settlement on lawsuit -- -- 1,034
Other 205 (174) 111
--------- --------- ---------
Total other income (expense) (1,119) 1,830 (1,571)
--------- --------- ---------
Net income/ (loss) before income taxes 1,279 487 1,437
Provision for foreign income tax (220) 250 370
--------- --------- ---------
Net income/ (loss) 1,059 (237) 1,067
Preferred stock dividend (124) (481) (656)
--------- --------- ---------
Net income/ (loss) attributed to common shareholders $ 935 $ (244) $ 411
========= ========= =========
Income/ (loss) per common share - basic $ 0.18 $ (0.06) $ 0.10
========= ========= =========
Income/ (loss) per common share - diluted $ 0.11 $ (0.06) $ 0.07
========= ========= =========
Weighted average number of common shares outstanding:
Basic 6,094 3,927 3,927
Diluted 8,242 3,927 5,762
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
SELECTED HISTORICAL FINANCIAL DATA AND OUR ACCOMPANYING FINANCIAL STATEMENTS AND
THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THAT REFLECT OUR PLANS,
ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED ABOVE UNDER "RISK
FACTORS."
OVERVIEW OF OUR BUSINESS
We provide services and equipment to the oil and gas drilling industry. Our
customers are principally small independent and major oil and gas producers
engaged in the exploration and development of oil and gas. Our operations are
conducted principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, the Rocky Mountain regions of New Mexico and
Colorado. We also operate in Mexico through a Mexican partner.
We provide casing and tubing handling services and drilling services, which
includes our directional drilling services segment and compressed air drilling
services segment. Our casing and tubing services segment supplies specialized
equipment and trained operators to install casing and tubing, change out drill
pipe and retrieve production tubing for both onshore and offshore drilling and
workover operations. Our directional drilling operations provide directional,
horizontal and "measure while drilling" services to oil and gas companies
operating both onshore and offshore in Texas and Louisiana. Our compressed air
drilling segment provides compressed air and related products and services for
the air drilling, workover, completion, and transmission segments of the oil,
gas and geothermal industries. Our strategy is to broaden the geographic regions
in which we provide our casing and tubing handling and drilling services and to
expand the types of services and equipment we provide to the oil and gas
drilling industry.
We derive operating revenues from per day and per job rates we charge to provide
both the labor and equipment required to provide a service. The day rate varies
widely from project to project depending upon the scope of services we are asked
to provide. The price we charge for our services depends upon several factors,
including the level of oil and gas drilling activity in the particular
geographic regions in which we operate and the competitive environment.
Contracts are awarded based on price, quality of service and equipment, and
general reputation and depth of operations and management personnel. The demand
for drilling services has historically been volatile and is affected by the
capital expenditures of oil and gas exploration and development companies, which
in turn are impacted by the prices of oil and natural gas, or the expectation
for the prices of oil and natural gas.
The number of working drilling rigs is important indicator of activity levels in
the oil and gas industry, typically referred to as the rig count. The rig count
in the U.S. increased from 862 as of December 31, 2002 to 1,126 on December 31,
2003, according to the Baker Hughes rig count survey. According to The Baker
Hughes rig count survey, the directional and horizontal rig counts increased
from 283 as of December 31, 2002 to 381 on December 31, 2003, which accounted
for 32.8% and 33.8% of the total U.S. rig count, respectively. As of October 29,
2004, this trend has continued, with directional and horizontal rigs climbing to
464, which was 37.1% of the 1,251 total U.S. rig count on such date.
Our operating expenses represent all direct and indirect costs associated with
the operation and maintenance of our equipment. The principal elements of these
costs are direct and indirect labor and benefits, repairs and maintenance of our
equipment, insurance, equipment rentals and fuel. Operating expenses do not
necessarily fluctuate in proportion to changes in revenues because we have a
fixed base of inventory of equipment and facilities to support our operations,
and we may also seek to preserve labor continuity to market our services and
maintain our equipment.
16
Prior to May 2001, we operated primarily through Houston Dynamic Services, Inc.,
which conducted a machine repair business. In May 2001, as part of a strategy to
acquire and develop businesses in the natural gas and oil services industry, we
consummated a merger in which we acquired 100% of the capital stock of OilQuip
Rentals, Inc., which owned Mountain Compressed Air, Inc., which provided
compressed air drilling services. In December 2001, we disposed of Houston
Dynamic Service, Inc., and in February 2002, we acquired substantially all of
the capital stock of Strata Directional Drilling, Inc. and approximately 81% of
the capital stock of Jens' Oilfield Service, Inc. Our business conducted in 2001
did not include the operations of Jens' Oilfield Service and Strata Directional
Drilling. In July 2003, through Mountain Compressed Air, we entered into a
limited liability company operating agreement with M-I L.L.C., a joint venture
between Smith International and Schlumberger N.V. to form a Texas limited
liability company named AirComp LLC. Mountain Air contributed assets with a net
book value of approximately $6.3 million and M-I contributed assets with a net
book value of approximately $6.8 million to AirComp. We own 55% and M-I owns 45%
of AirComp. We have consolidated AirComp into our financial statements beginning
with the quarter ending September 30, 2003. In September 2004, we acquired the
remaining 19% of Jens' Oilfield Service, Inc.
For accounting purposes, the OilQuip Rentals merger was treated as a reverse
acquisition by OilQuip Rentals of Allis-Chalmers and financial statements
presented herein for periods prior to May 2001 present the results of operations
and financial condition of OilQuip Rentals. As a result of the OilQuip Rentals
merger, the fixed assets and other intangibles of Allis-Chalmers in existence
immediately prior to the merger were increased by $2.7 million.
We effected a reverse stock split on June 10, 2004 in order to increase the
share price of the common stock. As a result of the reverse stock split, every
five shares of our common stock were combined into one share of common stock.
The reverse stock split reduced the number of shares of outstanding common stock
from 31,393,789 to approximately 6,276,015 and reduced the number of
stockholders from 6,070 to 2,140. Prior to September 13, 2004, our common stock
traded on the OTC Bulletin Board. On September 13, 2004, our common stock began
trading on the American Stock Exchange.
RESULTS OF OPERATIONS
Results of operations for 2001 reflect the business operations of OilQuip
Rentals. From its inception on February 4, 2000 to February 6, 2001, OilQuip
Rentals was in the developmental stage. OilQuip Rentals' activities for the
period prior to February 6, 2001 consisted of developing its business plan,
raising capital and negotiating with potential acquisition targets. Therefore,
the results for operations for the period prior to February 6, 2001 reflect no
sales, cost of sales, or marketing and administrative expenses that would be
reflective of an operating company. On February 6, 2001, OilQuip Rentals
acquired the assets of Mountain Air, which provides compressed air drilling
services to natural gas exploration operations, which we refer to as compressed
air drilling services.
On May 9, 2001, OilQuip Rentals merged with a subsidiary of Allis-Chalmers, and
was deemed to acquire the assets of Allis-Chalmers, including the operations of
Houston Dynamic Services. The results of operation of Houston Dynamic Services,
which was sold in December 2001, are included in discontinued operations from
May 9, 2001. On February 6, 2002, Allis-Chalmers acquired 81% of the outstanding
stock for Jens' Oilfield Service, Inc., which supplies specialized equipment and
operations to install casing and production tubing required to drill and
complete oil and gas wells, which we refer to as casing and tubing services
segment.
On February 6, 2002, we also purchased substantially all the outstanding common
stock and preferred stock of Strata Directional Technology, Inc., which provides
directional and horizontal drilling services for specific targeted reservoirs
that cannot be reached vertically, which we refer to as directional drilling
services.
17
The results from our casing and tubing services and directional drilling
services are included in our operating results from February 1, 2002. In July
2003, through our subsidiary Mountain Air, we entered into a limited liability
company operating agreement with a division of M-I L.L.C., a joint venture
between Smith International and Schlumberger N.V. to form AirComp. We own 55%
and M-I owns 45% of AirComp. We have consolidated AirComp into our financial
statements beginning with the quarter ending September 30, 2003.
In September 2004, we acquired the remaining 19% of Jens' Oilfield Service, Inc.
Comparison of Six Months Ended June 30, 2004 and 2003
-----------------------------------------------------
Our revenues for the six months ended June 30, 2004 were $21.1 million, an
increase of 47.6% compared to $14.3 million for the first six months of 2003.
The increase in revenues for the six months ended June 30, 2004 was principally
due to an increase in revenues from our directional drilling services segment
and the inclusion of the revenues contributed by M-I in connection with the
formation of AirComp in July 2003, offset in part by a decrease in revenues in
our casing and tubing services segment.
Our gross profit for the first six months of 2004 increased from $5.4 million,
or 25.6% of revenues, to $3.9 million, or 27.3 % of revenues for the first six
months of 2003, principally as a result of increased revenues in our directional
drilling segment. Increased gross margins in our directional drilling segment
were more than offset by increased wage and benefit costs and increased
competition and weaker pricing in our casing and tubing services segment. Our
cost of revenues consists principally of our labor costs and benefits, equipment
rentals, maintenance and repairs of our equipment, insurance and fuel.
General and administrative expense was $3.0 million in the 2004 six-month period
compared to $2.0 million in the comparable period of 2003. General and
administrative expense increased due to additional administrative costs
associated with the inclusion of AirComp and the hiring of additional sales
force and administrative personnel at each of the our subsidiaries and due to
increased professional fees and other expenses related to our financing
activities. As a percentage of revenues, general and administrative expenses
were 14.2% in the 2004 six month period and 14.0% in the 2003 six month period.
Depreciation and amortization was flat at $1.4 million in the first six months
of 2004 and 2003.
Income from operations consists of our revenues less cost of sales, general and
administrative expenses, and depreciation and amortization. Income from
operations for the six months ended June 30, 2004 totaled $2.4 million, a 26.3%
increase over the comparable period in 2003, reflecting the increased revenues
from directional drilling services and the inclusion of operating income of
AirComp, offset in part by a decrease in revenues and income from operations
from our casing and tubing services segment.
Our interest expense decreased to $1.1 million for the six months of 2004,
compared to $1.5 million for the six months of the prior year due to the
reduction of our debt.
Minority interest in income of subsidiaries for the first six months of 2004 was
$256,000 compared to $311,000 in the first six months of 2003 due to the
decrease in the net income of our casing and tubing services subsidiary, which
until September 30, 2004 was owned 19% by Jens Mortensen.
We had net income attributed to common shareholders of $935,000, or $0.18 per
common share, for the six months ended June 30, 2004 compared with a net loss of
($763,000), or ($0.19) per common share, for the six months ended June 30, 2003.
18
The following table compares revenues and income from operations for each of our
business segments for the six months ended June 30, 2004 and 2003. Income from
operations consists of our revenues less cost of revenues, general and
administrative expenses, and depreciation and amortization:
Revenues Income (Loss) from Operations
-------- ------------------------------
2004 2003 Change 2004 2003 Change
-------- -------- -------- -------- -------- --------
(in thousands)
Casing services $ 4,386 $ 5,153 $ (767) $ 1,225 $ 2,227 $(1,002)
Directional drilling services 11,675 6,983 4,692 1,389 511 878
Compressed air drilling services 5,022 2,203 2,819 812 (36) 848
General corporate -- -- -- (1,028) (769) (259)
-------- -------- -------- -------- -------- --------
Total $21,083 $14,339 $ 6,744 $ 2,398 $ 1,933 $ 465
======== ======== ======== ======== ======== ========
CASING AND TUBING SERVICES SEGMENT
Revenues for the six months ended June 30, 2004 for the casing and tubing
services segment were $4.4 million, a decrease of 15.4% from the $5.2 million in
revenues for the comparable 2003 period. Revenues from domestic operations
decreased to $2.2 million in the first six months of 2004 from $3.5 million in
the first six months of 2003 as a result of increased competition in South
Texas, resulting in fewer contracts awarded to us and lower pricing for our
services. Revenues from Mexican operations increased to $2.2 million in the
first six months of 2004 from $1.7 million in the first six months of 2003 as a
result of increased drilling activity in Mexico and the addition of equipment
that increased our capacity. Income from operations decreased by 45.4% to $1.2
million for the first six months of 2004 from $2.2 million for the same period
in 2003 as a result of lower revenues from domestic operations as well as
increased wage and benefit costs domestically, which was partially offset by
increased revenues from Mexico.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for the six months ended June 30, 2004 for our directional drilling
services segment were $11.7 million, an increase of 67.1% from the $7.0 million
in revenues for the comparable 2003 period. Operating income increased by 174.0%
to $1.4 million for the six-month period of 2004 from $511,000 for the same
period in 2003. The increase in revenues and income from operations for this
segment was due to the increase in drilling activity in the Texas and Gulf Coast
areas and the addition of operations and sales personnel which increased our
capacity and market presence. Increased operating expenses as a result of the
additional personnel were more than offset by the growth in revenues and reduced
operating costs for down-hole motors as a result of our purchases in late 2003
and early 2004 of most of the down-hole motors used in our directional drilling
activities. Previously we had leased these motors.
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $5.0 million for the first six months
of 2004, an increase of 127.3% compared to $2.2 million in revenues in the 2003
period. Revenues increased as a result of inclusion of revenues from the
business contributed by M-I in connection with the formation of AirComp in July
2003 as well as an increase in revenues from the business contributed by us to
AirComp. Income from operations increased to $812,000 for the six-month period
of 2004 from a loss from operations of $36,000 for the same period in 2003 due
to the increase in revenues. Through this joint venture we have been able to
expand the geographical areas in which we operate to include natural gas
drilling to West Texas.
Pro Forma Comparison of Six Months Ended June 30, 2004 and 2003
---------------------------------------------------------------
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the our results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Proforma
results of operations set forth below includes results of operations for the six
months ended June 30, 2004 and 2003.
19
Pro forma revenues for the six months of 2004 totaled $21.1 million, compared to
pro forma revenues in the six months of 2003 of $16.1 million, an increase of
approximately 31.0%. The increase in 2004 compared to 2003 was primarily due to
higher revenues resulting from the general improvement in oil and gas drilling
activity. The increase in revenues was experienced principally by our
directional drilling services segment and AirComp, and was offset in part by a
decrease in revenues for our casing and tubing services segment. Pro forma
revenues for the first six months of 2004 for AirComp totaled $3.9 million,
compared to pro forma sales in the first six months of 2003 of $2.2 million. The
$1.7 million increase in pro forma revenues in 2004 for AirComp is increased due
to increased drilling activity in West Texas and a slight increase in activity
in the San Juan basin over the same period in 2003.
Pro forma gross profit for the first six months of 2004 was $5.4 million, or
25.4% of revenues, compared to $4.2 million, or 31 % of revenues for the first
six months of 2003, as increased gross margins in our directional drilling
segment was more than offset by increased competition and weaker pricing in our
casing and tubing services segment. Our cost of revenues consists principally of
our labor costs and benefits, equipment rentals, maintenance and repairs of our
equipment, insurance and fuel.
Pro forma depreciation and amortization was flat at $1.4 million in the first
six months of 2004 and 2003 due to the accelerated amortization of the put
obligation and deferred amortization expense related to the debt at Mountain
Compressed Air.
Pro forma general and administrative expense was $3.0 million in 2004 compared
with $1.8 million in 2003. The pro forma general and administrative expense
increased in 2004 due to the overhead costs associated with AirComp and the
hiring of additional sales force and administrative personnel at each of our
subsidiaries to meet increased demand in the market.
We had pro forma income from operations for the first six months of 2004 of $2.4
million an increase of 4.0% as compared to pro forma operating income of $2.3
million in the first six months of 2003. The increase in pro forma operating
income for the 2004 period was primarily due to higher revenues resulting from
the general improvement in oil and gas drilling activity.
Our pro forma interest expense decreased to $1.1 million for the first six
months of 2004, compared to $1.4 million for the six months of the prior year
due to the reduction of our debt.
Pro forma minority interest in income of subsidiaries for the first six months
of 2004 was $256,000 compared $209,000 in the first six months of 2003 due to
the decrease in the net income of our casing and tubing services subsidiary,
which until September 30, 2004, was owned 19% by Jens Mortensen.
We recorded pro forma net income of $935,000, or $0.18 per common share, for the
six months ended June 30, 2004 compared with a pro forma net loss of ($244,000),
or ($0.06) per common share, for the six months ended June 30 2003.
Comparison of Years Ended December 31, 2003 and 2002
----------------------------------------------------
Revenues for the year ended December 31, 2003 totaled $32.7 million, an increase
of 81.7% from the $18.0 million in revenues for the year ended December 31,
2002. The increase in revenues is due to the general increase in oil and gas
drilling activity and the inclusion of AirComp, our compressed air drilling
joint venture, beginning in July 2003. The increase in revenues is also due to
2003 being the first full year of revenue contribution from the casing and
tubing services segment and the directional drilling segment, both of which were
acquired in February 2002.
Our gross profit for the year ended December 31, 2003 was $8.8 million, or 26.9%
of revenues, compared to $3.4 million, or 18.9 % of revenues for the year ended
December 31, 2002, due to increased utilization of our equipment and personnel
and increased pricing in each of our business segments due to the increase in
industry activity. Our cost of revenues consist principally of our labor costs
and benefits, equipment rentals, maintenance and repairs of our equipment,
insurance and fuel.
General and administrative expenses were $6.2 million, or 19.0% of revenues, in
2003 compared to $3.8 million, or 21.1% of revenues in 2002. The increase in
general and administrative expenses in absolute terms was due to the inclusion
of general and administrative expenses for AirComp, which created a larger
operation compared to our previous Mountain Air subsidiary, the hiring of
additional sales force and operations personnel due to the improvement in the
oil and gas drilling market, and a full year in 2003, of our casing and tubing
services and directional drilling services segments acquired in February 2002.
Depreciation and amortization expenses increased to $2.8 million in 2003
compared to $2.6 million in 2002, due to the formation of AirComp in July 2003,
and the acquisition of our casing and tubing services and directional drilling
segments in February 2002.
20
Income from operations for the year 2003 totaled $2.6 million reflecting the
general increase in oil and gas drilling activity and the inclusion of revenues
and operating income contributed by M-I through the formation of AirComp in July
2003. In the comparable period of 2002, we incurred an operating loss of $1.2
million. During the third quarter of 2002, we reorganized in order to contain
costs and Recorded charges related to the reorganization in the amount of
$495,000. These charges consisted of related payroll costs for terminated
employees of $307,000, consulting fees of $113,000, and costs associated with a
terminated rent obligation of $75,000. We also recorded one-time charges for
costs related to abandoned acquisitions and an abandoned private placement in
the amount of $233,000.
Interest expense increased to $2.5 million in 2003, compared to $2.3 million in
the prior year due to increased debt associated with acquisitions completed in
2002, and debt associated with the formation of AirComp in July 2003.
Minority interest in income of subsidiaries for 2003 was $387,000 compared to
$189,000 in 2003 due to the increase in the net income of our casing and tubing
services subsidiary which until September 30, 2004, was owned 19% by Jens
Mortensen; and the formation, in July 2003, of AirComp, which is owned 45% by
M-I.
In the year ended December 31, 2003 we recorded a one-time gain on the reduction
of a note payable of $1.0 million in the third quarter as a result of settling a
lawsuit against the former owners of Mountain Air Drilling Service Co. Inc. The
gain was calculated in part by discounting the note payable to $1.5 million
using a present value calculation and accreting the note payable to $1.9
million, the amount due in September 2007. We will record interest expense
totaling $394,043 over the life of the note payable beginning July 2003. The net
loss for 2002 included a discount given to the holder of the Houston Dynamic
Services note in the amount of $191,000 as an incentive to pay-off the note in
September 2002.
We had a net loss attributed to common shareholders of ($108,000), or $(0.01)
per common share, for the year ended December 31, 2003 compared with a net loss
of ($4.3 million), or ($0.23) per common share, for the year ended December 31,
2002.
The following table compares revenues and income from operations for each of our
business segments for the years ended December 31, 2003, 2002 and 2001. Income
from operations consists of our revenues less cost of revenues, general and
administrative expenses, and depreciation and amortization:
Revenues Income (Loss) from Operations
2003 2002 Change 2001 Change 2003 2002 Change 2001 Change
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Casing services $10,037 $ 7,796 $ 2,241 $ -- $ 2,241 $ 3,628 $ 2,495 $ 1,133 $ -- $ 2,495
Directional 16,008 6,529 9,479 -- $ 9,479 1,103 (576) 1,679 -- (576)
drilling services
Compressed air 6,679 3,665 3,014 4,796 (1,782) 115 (945) 1,060 434 (1,379)
drilling services
General corporate -- -- -- -- -- (2,222) (2,144) (78) (1,867) (277)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $32,724 $17,990 $14,734 $ 4,796 $ 9,938 $ 2,624 $(1,170) $ 3,794 $(1,433) $ 263
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
21
CASING AND TUBING SERVICES SEGMENT
Revenues for the year ended December 31, 2003 for the casing and tubing services
segment were $10.0 million, an increase of 28.2% from the $7.8 million in
revenues for the year ended December 31, 2002. Revenues from domestic operations
increased to $6.3 million in 2003 from $5.1 million in 2002 as a result of a
general improvement in oil and gas drilling activity in South Texas and the
inclusion of this segment, which was acquired in February 2002, for a full year
in 2003. Revenues from Mexican operations increased to $3.7 million in 2003 from
$2.7 million in 2002 as a result of increased drilling activity in Mexico.
Income from operations increased 45.4% to $3.6 million in 2003 from $2.5 million
in 2002 due to the increase in revenues.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for 2003 for directional drilling services were $16.0 million, an
increase of 146.2% from $6.5 million in revenues for 2002 due to increased
drilling activity in the Texas and Gulf Coast areas in 2003. Operating income
increased to $1.1 million for 2003 compared to a loss from operations of
$576,000 for the same period in 2002 due to the increase in revenues, which more
than offset an increase in operating expenses due to the addition of operations
and sales personnel.
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $6.7 million in 2003, an increase of
81.1% compared to $3.7 million in revenues in 2002. Revenues increased in 2003
due to the inclusion of revenues contributed by M-I through the formation of
AirComp in July 2003. Operating income increased to $115,000 in 2003 from a
$945,000 loss from operations in 2002 due to the increase in revenues, improved
pricing from a significant. As a result of the formation of AirComp we were able
to expand the scope of our operations. We expanded the geographical areas in
which we operate to include gas drilling in West Texas along with the drilling
and workover operations of Mountain Air in the San Juan basin in New Mexico.
Pro Forma Comparison of Years Ended December 31, 2003 and 2002
--------------------------------------------------------------
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on our results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Proforma
results of operations set forth below includes results of operations for all of
2003 and 2002. These financial statements should be read in conjunction with the
pro forma financial statements included herein.
Pro forma revenues for the year 2003 totaled $34.4 million, reflecting the
revenue of AirComp. In the comparable period of 2002, pro forma revenues were
$20.4 million. The increase in 2003 compared to 2002 was primarily due to higher
revenues resulting from the general improvement in the oil and gas drilling
market.
Our pro forma gross profit for the year ended December 31, 2003 was $9.0
million, or 26.9% of revenues, compared to $4.0 million, or 19.4% of revenues
for the year ended December 31, 2002, due to increased utilization of our
equipment and personnel and increased pricing in each of our business segments
due to the increase in industry activity. Our cost of revenues consists
principally of our labor costs and benefits, equipment rentals, maintenance and
repairs of our equipment, insurance and fuel.
Pro forma general and administrative expense was $6.0 million in 2003 compared
with $4.8 million in 2002. The pro forma general and administrative expense
increased in 2003 due to the costs associated with the formation of AirComp and
the hiring of additional sales force and operations personnel due to the
improvement in the market.
Pro forma depreciation and amortization expenses increased to $2.9 million in
2003 compared to $1.6 million in 2002 due to the accelerated amortization of the
put obligation and deferred amortization expense related to the debt at Mountain
Compressed Air in the first six months of 2003 and increased capital
expenditures.
We had had pro forma income from operations for the year 2003 of $3.0 million as
compared to pro forma operating (loss) of ($867,000) in 2002. The increase in
pro forma operating income for 2003 was primarily due to higher revenues
resulting from the overall upturn in oil and gas drilling activity.
22
Pro forma interest expense increased to $2.4 million in 2003, compared to $2.3
million in the prior year due to increased debt associated with acquisitions
completed in 2002, and debt associated with the formation of AirComp in July
2003.
Minority interest in income of subsidiaries for 2003 was $285,000 compared
$189,000 in 2003 due to the increase in the net income of our casing and tubing
services subsidiary which until September 30, 2004, was owned 19% by Jens
Mortensen and the formation, in July 2003, of AirComp, which is owned 45% by M-I
L.L.C.
Our pro forma net income was $411,000, or $0.10 per common share, for the year
ended December 31, 2003 compared with a pro forma net loss of ($3.8 million), or
($0.19) per common share, for the year ended December 31 2002.
Comparison of Years Ended December 31, 2002 and 2001
----------------------------------------------------
Revenues for the year 2002 totaled $18.0 million compared to $4.8 million in
2001. The 275.0 % increase in revenues reflects the revenues of our casing and
tubing services and directional drilling segments which were acquired in
February 2002.
Revenues for the year ended December 31, 2002 for the casing and tubing
services, directional drilling services, and compressed air drilling services
segments were $7.8 million, $6.5 million and $3.7 million, respectively. We had
no revenues from casing services and directional drilling services in 2001 as
those operations were acquired in February 2002. Revenues for the compressed air
drilling services segment decreased to $3.7 million in 2002 from $4.8 million
for the year ended December 31, 2001, primarily due to lower revenues from
Burlington Resources, which decreased from $3.3 million in 2001 to $1.8 million
in 2002. Burlington Resources represented 49.9% and 62.6% of the compressed air
drilling services revenues in 2002 and 2001, respectively. Revenues also
declined as a result of an overall decline in drilling activity. The rig count
in the United States decreased from an average of 1,156 in 2001 to an average of
830 in 2002, according to the Baker Hughes rig count.
Our gross profit for the year ended December 31, 2002 was $3.3 million, or 18.9%
of revenues, compared to $1.5 million, or 31.2 % of revenues for the year ended
December 31, 2001, due to the acquisition of the casing and tubing services and
directional drilling segments in 2002 and a decreased gross margin in our
compressed air drilling operation due to reduced revenues at Mountain Air. Our
cost of revenues consists principally of our labor costs and benefits, equipment
rentals, maintenance and repairs of our equipment, insurance and fuel.
General and administrative expense was $3.8 million, or 21.1% of revenues in
2002, compared with $2.9 million, or 60.4 % of revenues in 2001. The general and
administrative expenses increased in absolute terms in 2002 compared to 2001 due
to the acquisition of our casing and tubing services and directional drilling
segments in February 2002.
In 2002 we reported a ($1.2) million loss from operations compared to a loss
from operations of ($1.4) million in 2001. The loss from operations in 2002
includes the restructuring and other one-time charges totaling $728,000.
Interest expense in 2002 was $2.3 million, compared to $869,000 in 2001, due to
the increase in debt associated with the acquisitions of our casing and tubing
services and directional drilling services operations.
We incurred a net loss attributed to common shareholders of ($4.3 million), or
($0.23) per common share, for the year ended December 31, 2002 compared with a
loss of ($4.6 million), or ($1.15) per common share, for the year ended December
31, 2001. The net loss for 2002 included a discount given to the holder of the
Houston Dynamic Services note in the amount of $191,000 as an incentive to
pay-off the note in September 2002. The net loss in 2001 included a $2.0 million
loss from the sale of discontinued operations.
23
Comparison of Years Ended December 31, 2001 and 2000
----------------------------------------------------
From its inception on February 4, 2000 to February 6, 2001, OilQuip Rentals was
in the developmental stage. OilQuip Rentals' activities for the period prior to
February 6, 2001 consisted of developing its business plan, raising capital and
negotiating with potential acquisition targets. Therefore, the results for
operations for the period prior to February 6, 2001 reflect no sales, cost of
sales, or marketing and administrative expenses that would be reflective of an
operating company. On February 6, 2001, OilQuip Rentals acquired the assets of
Mountain Air, which provides compressed air drilling services to natural gas
exploration operations.
LIQUIDITY AND CAPITAL RESOURCES
Our on-going capital requirements arise primarily from our need to service our
debt and retire redeemable securities, to acquire and maintain equipment, for
working capital and for acquisitions. Our primary sources of liquidity are
borrowings under our revolving lines of credit, proceeds from the issuance of
equity securities and cash flows from operations. We had cash and cash
equivalents of $485,000 at June 30, 2004 compared to $1.3 million at December
31, 2003 and compared to $146,000 at December 31, 2002.
OPERATING ACTIVITIES
In the six months ended June 30, 2004 we generated $742,000 in cash from
operating activities compared to $1.7 million in cash from operating activities
for the same period in 2003. Net income for the first six months of 2004
increased to $1.1 million, compared to a net loss of $282,000 in the comparable
2003 period. Non-cash adjustments to net income totaled $1.8 million in the 2004
period compared to $2.2 million in the 2003 period, consisting of principally of
depreciation and amortization expense and minority interest in the income of a
subsidiary. During the first six months of 2004, the changes in working capital
used $2.1 million in cash compared to a use of $284,000 in cash in the 2003
period, principally due, in the 2004 period, to a decrease in accrued expenses
of $429,000, and an increase in accounts receivables and other current assets of
$1.7 million, which were partially offset by an increase of $258,000 in accounts
payable. During the comparable 2003 period, accounts receivable and other
current assets increased $2.2 million, and accounts payable increased by $1.4
million.
For the 12 months ended December 31, 2003 we generated 1.9 million in cash from
operating activities compared to $2.2 million in cash from operating activities
for the same period in 2002. Net income for the 2003 period improved to 548,000,
compared to a net loss of $4.0 million in the comparable 2002 period. Non-cash
adjustments to net income totaled $2.7 million in 2003 compared to $3.4 million
in 2002, consisting principally of depreciation and amortization expense,
including amortization of discount on debt, and minority interest in the income
of a subsidiary. Non-cash items in 2003 is net of a non-cash $1.0 million gain
included in income in 2003 from the settlement of a lawsuit. During 2003, the
changes in working capital used $2.1 million in cash compared to changes in
working capital which provided $2.8 million in cash in the 2002 period. In 2003,
accounts receivable and other current assets increased by $5.2 million,
partially offset by an increase of $2.3 million in accounts payable and an
increase of $823,000 in accrued expenses. During 2002 period, accounts
receivable and other current assets increased by $2.4 million and accounts
payable and accrued expenses increased by a total of $717,000.
INVESTING ACTIVITIES
During the first six months of 2004, we used $1.9 million in investing
activities, consisting of capital expenditures of $788,000 to purchase equipment
for our directional drilling services segment, approximately $425,000 to
purchase casing equipment and approximately $664,000 to make capital repairs to
existing equipment at our compressed air drilling segment. This compares total
net cash used in investing activities of $121,000 in the comparable 2003 period.
During the 12 month period ended December 31, 2003, we used $4.5 million in
investing activities, consisting of the purchases of equipment of $5.4 million,
which was partially offset by the proceeds from the sales of equipment of
$843,000. This compares to net cash used in investing activities in the
comparable 2002 period of $8.5 million, due to the acquisitions of our Jens' and
Strata subsidiaries for a total of $8.3 million, purchases of other equipment of
$518,000, and proceeds from the sales of equipment of $367,000.
24
FINANCING ACTIVITIES
During the first six months of 2004, financing activities provided a net of
$323,000 in cash. We received $1.9 million in net proceeds from the issuance of
common stock which was offset in part by the repayment of $1.3 million of
long-term debt and $211,000 in debt issuance costs. This compares to the first
six months of 2003 when we paid $1.7 million in financing activities to reduce
debt.
During the year ended December 31, 2003 financing activities provided a net of
$3.8 million in cash compared to a net of $6.3 million in cash from financing
activities in the prior year. In 2003, we received $14.1 million from the
issuance of long term debt and $30.5 million from borrowings under our lines of
credit. These proceeds were used to pay long term debt in the amount of $10.8
million and make principal payments on outstanding borrowings under our lines of
credit in the amount of $29.4 million. We also used $408,000 in cash for debt
issuance costs in 2003. In 2002, we received $9.7 million from the issuance of
long term debt and $7.1 million from borrowings under our lines of credit. These
proceeds were used to pay long term debt in the amount of $4.1 million and make
principal payments on outstanding borrowings under our lines of credit in the
amount of $5.8 million. We also used $588,000 in cash for debt issuance costs in
2002
In April 2004, Energy Spectrum the holder of our preferred stock, converted its
3,500,000 shares of Series A 10% Cumulative Convertible Preferred Stock,
including accrued dividend rights, into 1,718,090 shares of common stock.
On August 10, 2004 we completed the private placement of 3,504,667 shares of our
common stock at a price of $3.00 per share. Net proceeds to us, after selling
commissions and expenses, was approximately $9.6 million. On September 30, 2004,
we completed the private placement of 1,956,634 shares of our common stock at a
price of $3.00 per share. Net proceeds to us, after selling commissions and
expenses, was approximately $5,389,000. We agreed to file the registration
statement, of which this prospectus is a part under the Securities Act of 1933
to allow investors in the August 2004 private placement and the September
private placement to resell the common stock in public markets. We will use the
net proceeds of the private placement offerings to reduce debt, for
acquisitions, and for general corporate purposes.
On September 30, 2004, we issued 1,300,000 shares of our common stock to Jens
Mortensen, our President, in exchange for his 19% interest in Jens' Oilfield
Service, Inc. As a result of this transaction, we now own 100% of Jens' Oilfield
Service, Inc.
We have several bank credit facilities and other debt instruments at
Allis-Chalmers and at our three operating subsidiaries. Allis-Chalmers
guarantees the loans owed by Jens' and Strata, and Mountain Compressed Air
guarantees AirComp's obligations to its bank lenders. All three of our
subsidiaries are consolidated on our financial statements. At June 30, 2004 we
had $31.0 million in outstanding indebtedness, of which $26.2 million was
long-term debt and $4.8 million was the current portion of long-term debt.
Through Jens', our casing and tubing services subsidiary, we have two principal
bank facilities. We have a term loan in the original amount of $4.0 million that
was increased, in October 2003, to $5.1 million. We are required to make monthly
principal payments of $85,000 plus 25% of our collections from our operations in
Mexico. Interest accrues at a floating rate plus a margin. The interest rate on
the term loan was 6.0% at June 30, 2004. At June 30, 2004 the outstanding amount
was $3.7 million. We also have a $1.0 million bank line of credit of which
$248,000 was outstanding at June 30, 2004. Interest accrues at a floating rate
plus a margin. The interest rate on the line of credit was 7.0% at June 30,
2004. We pay a 0.5% fee on the undrawn portion. The maturity date of both the
term loan and the line of credit was January 31, 2005, but in April 2004 we
amended the facilities to extend their maturities to January 31, 2006. The term
loan and the line of credit are secured by liens on substantially all of the
assets of Jens'. Borrowings under the line of credit are subject to a borrowing
base consisting of the Jens' "eligible" accounts receivables as defined in the
agreement governing the line of credit. The agreement governing these credit
facilities contains customary events of default and financial covenants. It also
limits our ability to incur additional indebtedness, make capital expenditures,
pay dividends or make other distributions, create liens, and sell assets.
Our Jens' subsidiary also has a note payable to Jens Mortensen, who sold Jens'
to us and is our president and a director. The note is in the original amount of
$4.0 million at 7.5% simple interest with quarterly interest payments. At June
30, 2004, $492,000 of interest was accrued and was included in account payable,
related parties. The principal and interest are due on January 31, 2006. In
connection with the purchase of Jens', we also agreed to pay a total of $1.2
million to the Mr. Mortensen in exchange for a non-compete agreement. We are
required to make monthly payments of $20,576 through the period ended January
25
31, 2007. As of June 30, 2004, the balance due is approximately $638,000,
including $247,000 classified as short-term.
Jens' also has outstanding three term loans. One is a real estate bank loan in
the amount of $532,000 at a floating interest rate with monthly principal
payments of $14,778 plus interest. The interest rate was 6.0% at June 30, 2004.
At June 30, 2004, the outstanding amount due was $118,000. The final principal
payment is due on February 1, 2005. The second term loan is a bank term loan in
the original amount of $397,080 at a floating interest rate with monthly
principal payments of $11,000 plus interest. The interest was 6.0% at June 30,
2004. The balance at June 30, 2004 was $290,000. The final maturity date of the
loan is September 17, 2006. The third term loan is a bank term loan in the
original amount of $74,673 at a floating interest rate with monthly principal
payments of $1,946 plus interest. The interest was 6.0% at June 30, 2004. The
balance at June 30, 2004 was $64,000. The final maturity date of the loan is
January 12, 2007.
Through Strata, our directional drilling services operating subsidiary, we have
a $4.0 million bank line of credit of which $2.8 million was outstanding at June
30, 2004. All amounts borrowed under the line of credit were due on January 31,
2005 but in April 2004 we amended the credit facility to extend the maturity to
January 31, 2006 and to increase the amount of the line of credit line from $2.5
million to $4.0 million. Interest accrues at a floating rate plus a margin. The
interest rate was 7.0% at June 30, 2004. We pay a 0.5% annual fee on the
undrawn portion of the line. Borrowings under the line of credit agreement are
limited to a borrowing base consisting of Strata's "eligible" accounts
receivable as defined in the agreement governing the line of credit. The line of
credit agreement contains customary events of default and requires that we
satisfy various financial covenants. It also limits our ability to incur
additional indebtedness, make capital expenditures, pay dividends or make other
distributions, create liens, and sell assets.
In December 2003, through our Strata subsidiary we entered into a short-term
vendor financing agreement in the original amount of $1.7 million with a major
supplier for drilling motor rentals, motor lease costs and motor repair costs.
The agreement provides for repayment of all amounts not later than December 30,
2005. Payment of interest is due monthly and principal payments of $582,000 are
due in each of October 2004, April 2005, and December 2005. The interest rate is
fixed at 8.0%. As of June 30, 2004, the outstanding balance was $1.8 million.
Through AirComp, our 55%-owned compressed air drilling joint venture company, we
have a $1.0 million bank line of credit of which $807,000 was outstanding at
June 30, 2004. The line of credit matures on June 27, 2007 and interest
accrues at a floating rate plus a margin. The interest rate on amounts
outstanding under the credit facility was 6.25% at June 30, 2004. We also pay a
0.5% fee on the undrawn portion.
AirComp also has two term loans outstanding. We have a term loan in the original
amount of $8.0 million with a floating interest rate based on either Prime or
the London interbank offered rate, commonly called LIBOR plus a margin. The
interest rate averaged 4.09% at June 30, 2004. Principal payments of $286,000
are due quarterly, plus interest, with a final maturity date of June 27, 2007.
The remaining balance at June 30, 2004 was $6.9 million. We also have a "delayed
draw" term loan facility in the amount of $1.0 million to be used for capital
expenditures. Interest accrues at a rate equal to LIBOR plus a margin. Quarterly
principal payments commence on March 31, 2005 in an amount equal to 5% of the
outstanding balance as of December 31, 2004. The final maturity date of the loan
is June 27, 2007. The outstanding balance of this facility at June 30, 2004 was
$ 490,000. The AirComp credit facilities are secured by liens on substantially
all of its assets. Borrowings under the line of credit are subject to a
borrowing base consisting of accounts receivable. The agreement governing these
credit facilities contain customary events of default and requires that AirComp
satisfy various financial covenants. It also limits AirComp's ability to incur
additional indebtedness, make capital expenditures, pay dividends or make other
distributions, create liens, and sell assets. Mountain Compressed Air guarantees
the obligations of AirComp under these facilities.
AirComp also issued a subordinated note payable to M-I in the amount of $4.8
million bearing interest at an annual rate of 5.0%. In 2007 each party has the
right to cause AirComp to sell its assets (or the other party may buy out such
party's interest), and in such event this note (including accrued interest) is
due and payable. The note is also due and payable if M-I sells its interest in
AirComp or upon a termination of AirComp's joint venture occurs. At June 30,
2004, $212,000 of interest was included in accrued interest. Neither
Allis-Chalmers nor Mountain Compressed Air is liable for the obligations of
AirComp under this note.
26
At Allis-Chalmers we also have a subordinated note in the original amount of
$3.0 million with a fixed interest rate of 12.0%. The outstanding balance was
$2.3 million at June 30, 2004. The principal amount was due on January 31, 2005,
but in April 2004 was extended to January 31, 2006. In connection with this
note, we issued redeemable warrants, which have been recorded as a liability of
$900,000 and as a discount to the face amount of the debt. This amount is being
amortized as additional interest expense over the term of the note. The debt is
recorded at $2.3 million net of unamortized portion of the put obligation.
In connection with the issuance of the $3.0 million subordinated notes, we
issued redeemable warrants that are exercisable for up to 233,000 shares of our
common stock at an exercise price of $0.75 per share and non-redeemable warrants
that are exercisable for a maximum of 67,000 shares of our common stock at $5.00
per share. The warrants exercisable for $0.75 per share are subject to cash
redemption provisions in the amount of $1,500,000, at the discretion of the
warrant holders at any time after January 31, 2005. We have recorded a liability
of $1.5 million in respect of the warrant redemption rights. We are amortizing
the effects of the puts to interest expense over the life of the $3.0 million
subordinated debt.
In 1999 we compensated former and continuing directors who had served on the
board of directors from 1989 to March 31, 1999 without compensation by issuing
promissory notes totaling $325,000. The notes bear interest at the rate of 5.0%
and are due on March 28, 2005. At June 30, 2004, the principal and accrued
interest on these notes totaled approximately $394,000.
As part of the acquisition of Mountain Air in 2001, we issued a note to the
sellers of Mountain Air in the original amount of $2.2 million at 5.75% simple
interest which was reduced to $1.5 million as a result of the settlement of a
legal action against the sellers. At June 30, 2004 the outstanding amount due,
including accrued interest, was $1.6 million. The principal and accrued interest
is due on September 30, 2007. As discussed in "Business and Properties - Legal
Proceedings," the Company is currently involved in a lawsuit pursuant to which
the holder of this note is seeking to accelerate its payment.
We also have a term loan in the original amount of $267,000 at an interest rate
of 5%, with principal and interest payments of $5,039 due on the last day of
each month. At June 30, 2004, the outstanding amount due was $223,000. The
maturity date of the loan is June 30, 2008.
In connection with incurring subordinated debt that was subsequently
extinguished in connection with the formation of AirComp, Mountain Air issued
redeemable warrants, which have been recorded as a liability of $600,000. The
redeemable warrants remain outstanding.
The following table summarizes our obligations and commitments to make future
payments under our notes payable, operating leases, employment contracts and
consulting agreements for the periods specified as of June 30, 2004.
PAYMENTS BY PERIOD
------------------
(in thousands)
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
---------- ---------- ---------- ---------- ----------
CONTRACTUAL OBLIGATIONS
Notes Payable $ 31,011 $ 4,848 $ 15,811 $ 10,352 $ --
Interest Payments on notes payable 2,016 495 848 673 --
Operating Lease 756 318 323 115 --
Employment Contracts 2,818 1,006 1,812 -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $ 36,601 $ 6,667 $ 18,794 $ 11,140 $ --
========== ========== ========== ========== ==========
We have no off balance sheet arrangements that have or are likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues, expenses, results of operations, liquidity, capital
expenditures or capital resources. We do not guarantee obligations of any
unconsolidated entities.
We currently believe that we will make $6.5 million of capital expenditures
during the second half of 2004, excluding any potential acquisitions. We believe
that our current cash generated from operations, availability under our credit
facilities and net proceeds from the August 2004 private placement will provide
sufficient funds for our identified projects.
27
We intend to implement a growth strategy of increasing the scope of services
through both internal growth and acquisitions. On September 23, 2004, we
acquired 100% of the outstanding stock of Safco-Oil Field Products, Inc. for
$1.0 million. Safco leases spiral drill pipe and provides related oilfield
services to the oil drilling industry. We are regularly involved in discussions
with a number of potential acquisition candidates.
We expect to make capital expenditures to acquire and to maintain our existing
equipment. Our performance and cash flow from operations will be determined by
the demand for our Services which in turn are affected by our customers'
expenditures for oil and gas exploration and development and industry
perceptions and expectations of future oil and gas prices in the areas where we
operate. We will need to refinance our existing debt facilities as they become
due and provide funds for capital expenditures and acquisitions. To effect our
expansion plans, we will require additional equity or debt financing in excess
of our current working capital and amounts available under credit facilities.
There can be no assurance that we will be successful in raising the additional
debt or equity capital or that we can do so on terms that will be acceptable to
us.
28
CRITICAL ACCOUNTING POLICIES
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to our Consolidated Financial
Statements included elsewhere in this Prospectus. Note that our preparation of
our financial statements requires us to make estimates and assumptions that
affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no
assurance that actual results will not differ from those estimates.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The determination of the collectibility of
amounts due from our customers requires us to use estimates and make judgments
regarding future events and trends, including monitoring our customer payment
history and current credit worthiness to determine that collectibilty is
reasonably assured, as well as consideration of the overall business climate in
which our customers operate. Inherently, those uncertainties require us to make
frequent judgments and estimates regarding our customers' ability to pay amounts
due us in order to determine the appropriate amount of valuation allowances
required for doubtful accounts. Provisions for doubtful accounts are recorded
when it becomes evident that the customers will not be able to make the required
payments at either contractual due dates or in the future. Over the past two
years, reserves for doubtful accounts, as a percentage of total accounts
receivable before reserves, have ranged from 1% to 2%. At December 31, 2003 and
2002, reserves for doubtful accounts totaled $168,000, or 2%, and $32,000, or 1%
of total accounts receivable before reserves, respectively. We believe that our
reserve for doubtful accounts is adequate to cover anticipated losses under
current conditions; however, uncertainties regarding changes in the financial
condition of our customers, either adverse or positive, could impact the amount
and timing of any additional provisions for doubtful accounts that may be
required.
REVENUE RECOGNITION. Our revenue recognition policy is significant because
revenue is a key component of the results of operations. In addition, revenue
recognition determines the timing of certain expenses, such as commissions and
royalties. We provide rental equipment and drilling services to our customers at
per day and per job contractual rates and recognize the drilling related revenue
as the work progresses and when collectibility is reasonably assured. The
Securities and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) No.
104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 104"), provides
guidance on the SEC staff's views on application of generally accepted
accounting principles to selected revenue recognition issues. Our revenue
recognition policy is in accordance with generally accepted accounting
principles and SAB No. 104.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.
29
GOODWILL AND OTHER INTANGIBLES. The Company has recorded approximately
$7,661,000 of goodwill and $2,290,000 of other identifiable intangible assets.
The Company performs purchase price allocations to intangible assets when it
makes a business combination. Business combinations and purchase price
allocations have been consummated for purchase of the Mountain Air, Strata and
Jens' operating segments. The excess of the purchase price after allocation of
fair values to tangible assets is allocated to identifiable intangibles and
thereafter to goodwill. Subsequently, the Company has performed its initial
impairment tests and annual impairment tests in accordance with Financial
Accounting Standards Board No. 141, BUSINESS COMBINATIONS, and Financial
Accounting Standards Board No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. These
initial valuations required the use of third-party valuation experts who in turn
developed assumptions to value the carrying amount of the individual reporting
units. Significant and unanticipated changes to these assumptions could require
a provision for impairment in future periods.
STOCK BASED COMPENSATION. The Company accounts for its stock-based compensation
using Accounting Principles Board's Opinion No. 25 ("APB No. 25"). Under APB No.
25, compensation expense is recognized for stock options with an exercise price
that is less than the market price on the grant date of the option. For stock
options with exercise prices at or above the market value of the stock on the
grant date, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company has adopted the disclosure-only provisions of SFAS 123
for the stock options granted to the employees and directors of the Company.
Accordingly, no compensation cost has been recognized for these options. Many
equity instrument transactions are valued based on pricing models such as
Black-Scholes, which require judgments by management. Values for such
transactions can vary widely and are often material to the financial statements.
Quantitative and Qualitative Disclosure About Market Risk.
----------------------------------------------------------
We are exposed to market risk primarily from changes in interest rates and
foreign currency exchange risks.
INTEREST RATE RISK.
Fluctuations in the general level of interest rates on our current and future
fixed and variable rate debt obligations expose us to market risk. We are
vulnerable to significant fluctuations in interest rates on our variable rate
debt and on any future repricing or refinancing of our fixed rate debt and on
future debt.
At September 30, 2004, we were exposed to interest rate fluctuations on
approximately $14.0 million of notes payable and bank credit facility borrowings
carrying variable interest rates. A hypothetical one hundred basis point
increase in interest rates for these notes payable would increase our annual
interest expense by approximately $140,000. Due to the uncertainty of
fluctuations in interest rates and the specific actions that might be taken by
us to mitigate the impact of such fluctuations and their possible effects, the
foregoing sensitivity analysis assumes no changes in our financial structure.
We have also been subject to interest rate market risk for short-term invested
cash and cash equivalents. The principal of such invested funds would not be
subject to fluctuating value because of their highly liquid short-term nature.
As of September 30, 2004, we had $13.0 million invested in short-term maturing
investments.
FOREIGN CURRENCY EXCHANGE RATE RISK.
We conduct business in Mexico through our Mexican partner, Matyep. This business
exposes us to foreign exchange risk. To control this risk, we provide for
payment in U.S. dollars. However, we have historically provided our partner a
discount upon payment equal to 50% of any loss suffered by our partner as a
result of devaluation of the Mexican peso between the date of invoicing and the
date of payment. During 2003 and 2002 the discounts have not exceeded $10,000
per year.
30
BUSINESS AND PROPERTIES
We are engaged in the business of providing oilfield services and equipment to
meet the drilling and related needs of oil and gas exploration and development
companies in the southwest United States and the Gulf of Mexico. We currently
operate in three sectors of the oilfield service industry: the casing and tubing
sector; the directional drilling sector; and the compressed air drilling sector.
Currently, we receive 80% to 85% of our revenues from natural gas drilling
services and the balance from oil drilling services; however, most of our
services can be utilized for either activity.
We believe that consolidation among large oilfield service providers has created
an opportunity for us to compete effectively in certain niche markets that are
under-served by large service and equipment companies. At the same time,
producers are favoring suppliers that provide a comprehensive package of
products and services, which allows us to compete effectively with smaller
competitors currently providing a significant portion of the services in this
industry.
Our strategy is based on broadening the geographic scope of our products and
services primarily within two areas of the oilfield services and equipment
industry: casing and tubing handling services and equipment and drilling
services. We intend to implement this growth strategy through internal expansion
and the acquisition of companies operating within these segments. We intend to
identify and acquire companies with significant management and field expertise,
strong client relationships and high quality products and services. As discussed
under "Risk Factors" included elsewhere herein, there can be no assurance that
we will be able to complete any further acquisitions.
Our compressed air drilling, directional drilling and casing and tubing
businesses had revenues of approximately $6.7 million, $16.0 million and $10.0
million, respectively, during the year ended December 31, 2003.
See Note 16 to our consolidated financial statements included elsewhere herein
for information regarding the revenues, income from operations and assets of
each or our segments.
We were incorporated in 1913 under Delaware law. We reorganized in bankruptcy in
1988, and sold all of our major businesses. In May 2001, we consummated a merger
in which we acquired OilQuip Rentals, Inc. and its wholly-owned subsidiary,
Mountain Compressed Air, Inc. In December 2001, we sold Houston Dynamic
Services, Inc., our last pre-bankruptcy business. In February 2002, we acquired
approximately 81% of the capital stock of Jens' Oilfield Service, Inc. and
substantially all of the capital stock of Strata Directional Technology, Inc. In
July 2003, we entered into a limited liability company operating agreement with
a division of M-I L.L.C., a joint venture between Smith International and
Schlumberger N.V., to form a Texas limited liability company named AirComp LLC.
We own 55% and M-I owns 45% of AirComp. In September 2004, we increased our
ownership of Jens' Oilfield Service, Inc. to 100%. As a result of these
transactions, our prior results for each of the casing and tubing sector, the
directional drilling sector and the air drilling sector may not be indicative of
current or future operations of those sectors.
INDUSTRY OVERVIEW
-----------------
Oil and natural gas producers tend to focus on their core competencies on
identifying reserves, which has resulted in the extensive outsourcing of
drilling and service functions. The use of service companies allows gas
companies to avoid the capital and maintenance costs of the equipment in what is
already a capital intensive industry. As drilling becomes increasingly more
technical and costly, exploration and production companies are increasingly
demanding higher quality equipment and service from equipment and service
providers. We believe that:
o oil and gas exploration and production companies are currently
consolidating their supplier base to streamline their purchasing
operations and generate economies of scale by purchasing from just
a few suppliers.
o Producers are favoring larger suppliers that provide a
comprehensive list of products and services.
o Companies that can meet customer's demands will continue to earn
new and repeat business.
o Many businesses in the highly fragmented oilfield industry lack
sufficient size (many businesses generate annual revenues of less
than $15 million), lack depth of management (many businesses are
family-owned and managed) and have less sophisticated service and
control capabilities.
31
o We can offer customers crucial advantages over our smaller
competitors.
o Opportunities exist to acquire these competing businesses and
successfully integrate and enhance their operations within our
operating structure.
o Consolidation among larger oilfield service providers has created
an opportunity for us to compete effectively in certain niche
markets which are under-served by the large oilfield service and
equipment companies and in which we can provide better products
and services than the smaller competitors currently providing a
significant portion of the services in this industry.
Our strategy is based on broadening the geographic scope of our products and
services primarily within two areas of the oilfield services and equipment
industry: casing and tubing handling services and equipment and drilling
services. We intend to implement this growth strategy through internal expansion
and the acquisition of companies operating within these segments. We intend to
seek to identify and acquire companies with significant management and field
expertise, strong client relationships and high quality products and services.
With typically less than $15 million in revenues, each target company is likely
to have limited financial resources for expansion and few exit alternatives for
the owners. As discussed under "Risk Factors" included elsewhere herein, there
can be no assurance that we will be able to complete any further acquisitions.
DESCRIPTION OF BUSINESSES
-------------------------
CASING SERVICES
---------------
We supply specialized equipment and trained operators to install casing and
tubing, change out drill pipe and retrieve production tubing for both onshore
and offshore drilling and workover operations, which we refer to as casing and
tubing services. Most wells drilled for oil and natural gas require some form of
casing and tubing to be installed in the completion phase of a well.
We have an extensive inventory of specialized equipment consisting of casing
tongs and laydown machines in various sizes, powered by diesel motors and driven
by hydraulic pumps. Non-powered equipment consists of elevators, slips, links
and protectors. We also maintain a fleet of other revenue generating equipment
such as forklifts and delivery trucks that transport our various rental
equipment and transfer the customers' casing from truck to pipe rack. We charge
customers for tong trucks, laydown trucks and personnel on hourly basis portal
to portal and rental equipment on a daily basis portal to portal. The customer
is liable for damaged or lost equipment.
We currently provide casing and tubing services primarily to areas in South
Texas and Mexico. Although there are two large companies, Frank's Casing Crew
and Rental Tools Inc. and Weatherford International Inc. ("Weatherford"), which
have a substantial portion of the casing and tubing crew market, that market
remains highly competitive and fragmented with at least 30 casing and tubing
crew companies working in the U.S. We believe that we have several competitive
advantages including:
o A well-established, loyal customer base in South Texas and Mexico;
o An management team with over 15 years of service experience;
o An extensive inventory of specialized equipment;
o A reputation for customer responsiveness;
o Substantial experience in South Texas, primarily a natural gas
market; and
o An excellent relationship with our Mexican partner, which enables
us to access the Mexican market.
We believe that through geographic expansion, we can optimize the utilization of
both our equipment and personnel by accessing additional niche markets
underserved by the larger oilfield service companies in the U.S. and Mexico.
32
We provide services in Mexico through a significant Mexican customer, Materiales
y Equipo Petroleo, S.A. de C.V., which we refer to as Matyep, in Villa Hermosa,
Reynosa, VeraCruz and Ciudad del Carmen, Mexico. These services are provided
primarily to offshore drilling operations. We provide substantially all of the
necessary equipment and Matyep provides all personnel, repairs, maintenance,
insurance and supervision for provision of the casing and tubing crew and torque
turn service. In addition, Matyep is responsible for the preparation of billing
invoices, collection of receivables and the import and export of equipment. The
joint venture provides services solely for Petroleos Mexicanos, known as Pemex.
Bidding protocol for Pemex requires that service providers with Mexican
ownership like Matyep be awarded contracts in preference to other service
providers as long as they are competitive. A change in this protocol could have
a material adverse effect on us. We have approximately $8.0 million of equipment
in Mexico, and have operated profitably in Mexico since 1997.
Services to offshore drilling operations in Mexico are seasonal, and operations
are generally reduced during the first quarter of each calendar year due to
weather conditions.
Matyep is responsible for payment to us, even if it is unable to collect payment
on a timely basis, though in the past our receipt of payments has been delayed
for significant periods of time by failure of Pemex to pay amounts due Matyep on
a timely basis. Our primary competitors in Mexico are South American enterprises
and Weatherford, both of which provide similar products and services.
For the years ended December 31, 2003 and 2002, our Mexico operations accounted
for approximately $3.3 million and $2.7 million, respectively, of our revenues,
and the loss of Pemex as a customer would have a material adverse effect on our
business. We provide extended payment terms to Matyep and maintain a high
account receivable balance due to these terms. The account receivable balance
reached a maximum of approximately $1.6 million during 2003 and was $1.4 million
at December 31, 2003. Jens' has been providing services to Pemex in partnership
with Matyep since 1997 and has never experienced a default in payment; however a
default on these receivables could have a material adverse effect.
The following table details revenues of our casing and tubing services segment
by class for the year ended December 31, 2003 and from February 2002 through
December 31, 2002 (in thousands).
February 2002 through
Revenues by class: December 31, 2003 Percentage December 31, 2002 Percentage
------------------ ----------------- ---------- ----------------- ----------
Laydown machines $ 2,426 24.2% $ 2,136 27.4%
Casing installation 3,829 38.1% 2,849 36.5%
Mexico operations 3,729 37.2% 2,696 34.6%
Other 53 .5% 115 1.5%
----------- ------- --------- ----------
Total revenues $ 10,037 100.0% $ 7,796 100.0%
========== =========
Historically, we have sought to purchase equipment for our casing and tubing at
auction or on an opportunistic basis; however, there is currently a shortage of
casing and tubing equipment, which is available new from four suppliers. We
believe there is a six to eight month backlog on orders to these suppliers.
However, we currently own sufficient equipment for projected operations over the
next 12 months, and believe the shortage of equipment will result in increased
demand for our services.
Our casing and tubing sector is not materially dependent upon the ownership of
any patents, trademarks, franchises or other concessions.
33
DIRECTIONAL DRILLING SERVICES
-----------------------------
We provide directional, horizontal and measure while drilling, services to oil
and gas companies operating both onshore and offshore in Texas and Louisiana. We
refer to these as directional drilling services. Management believes there are
several advantages to horizontal and directional drilling services including:
o Improvement of total cumulative recoverable reserves
o Improved reservoir production performance beyond conventional
vertical wells
o Reduction of the number of field development wells
o Reduction of water and gas coning problems
We provide specialized directional drilling services in niche markets, including
the Austin Chalk, where specialized, technically focused applications are
necessary. Our teams of experienced personnel utilizing state of the art tools
provide services including well planning and engineering to meet drilling
performance and geological or reservoir targets set by the customer, directional
drilling tool configuration, well site directional drilling supervision and
guidance, new well and reentry drilling, steerable drilling and log while
drilling services.
There are three major directional drilling companies, Schlumberger, Halliburton
and Baker Hughes, that market both worldwide and in the U.S., as well as
numerous small regional players, including us. There are believed to be at least
50 regional directional and horizontal drilling companies operating in the U.S.
Management estimates that the regional market companies account for
approximately 15% of the domestic market.
The following table details of our horizontal and directional drilling segment's
revenues by class for the year ended December 31, 2003 and from February 2002
through December 31, 2002 (in thousands).
Year Ended February 2002 through
Revenues by class: December 31, 2003 Percentage December 31, 2002 Percentage
------------------ ----------------- ---------- ----------------- ----------
Drilling operations $ 13,188 82.4% $ 4,477 68.6%
Other 2,820 17.6% 2,052 31.4%
----------- ------- --------- ----------
Total revenues $ 16,008 100.0% $ 6,529 100.0%
=========== =========
We have only a single supplier for most or all of each type of equipment we use
(down hole motors, tubing, and measure while drilling and log while drilling
equipment). However, we believe that other suppliers of such equipment are
available. We have entered into preferred leasing agreements with our current
suppliers, which are intended to assure the availability of equipment through
2006 for tubing, MWD and LWD equipment. We have an indefinite contract with our
supplier of down hole motors.
Our directional drilling sector is not materially dependent upon the ownership
of any patents, trademarks, franchises or other concessions.
COMPRESSED AIR DRILLING SERVICES
--------------------------------
AirComp LLC, our joint venture with M-1, is the world's second largest provider
of compressed air and related products and services for the compressed air
drilling, workover, completion and transmission segments of the oil, gas and
geothermal industries which we refer to as compressed air drilling services. We
believe compressed air products and services represent more than 10% of an
overall $750-$900 million under balanced drilling operations market.
34
Compressed air drilling services include the following products and services:
o Engineering Services
o Compressed Air
o Nitrogen (Membrane Separators, Cyrogenic, etc.)
o Chemicals (Foamers, Defoamers, Polymers, Shale Stabilizers,
Corrosion Inhibitors, etc.)
o Specialized Bits
o Hammers and other Downhole Tools
o Surface Blow-Out Prevention Equipment
o Multi-Phase Separation Equipment
We provide engineering services, compressed air and chemicals. These products
and services can be used exclusive of the other under balanced components in
traditional compressed air, mist and foam drilling applications or as part of a
more sophisticated under balanced drilling operations package employing most or
all of the elements listed above.
We provide compressed air drilling services primarily in Eastern Oklahoma, North
Texas, West Texas, and throughout the Rocky Mountains. Our operations offices
are in Fort Stockton, Texas; Farmington, New Mexico; and Grand Junction,
Colorado. Our compressed air drilling services operations are headquartered in
Houston, Texas, with a sales and technical support office in Denver, Colorado.
We believe that our operational facilities are well located for quick logistical
response to customer needs.
We are recognized in the compressed air drilling markets for providing superior
compressed air equipment, chemicals and personnel for under balanced drilling.
These operations include compressed air, mist, foam and aerated mud drilling,
completion and workover as well as pipeline testing and commissioning. We have a
combined fleet of over 80 compressors and boosters including:
o Gardner-Denver two-stage reciprocating compressors (35)
o Clark four stage reciprocating compressors (15)
o GHH-Rand three stage screw compressors (12)
o IR four stage screw compressors (3)
o MDY two stage booster (15)
o Ariel two stage booster (4)
This broad and diversified product line enables us to compete in the under
balanced drilling market with an equipment package engineered and customized to
specifically meet customer requirements. All the revenues from our compressed
air drilling services are derived from the rental of equipment and personnel.
In addition to the oil and gas industry, we are a world leader in providing
specialized compressed air equipment and experienced personnel in geothermal
applications.
Our largest competitor for compressed air drilling services is Weatherford
International. Weatherford focuses on large projects, but also competes in the
more common compressed air, mist, foam and aerated mud drilling applications.
Other competition comes from smaller independently owned companies with a
one-region only presence, e.g., Rocky Mountains only, West Texas only. We
compete successfully with Weatherford and others through:
o Diversified fleet allowing customized packages
o Multi-region presence
o Highly experienced and effective personnel
o Customer relationships
o Assistance of Sales Personnel from M-I and from other our
companies.
o Reputation of predecessor companies: M-I Air Drilling Services and
Mountain Compressed Air, each of which had over a 30 year history
of superior service
35
There is a continuing trend in the industry to drill, complete, and work over
wells with under balanced drilling operations. Multi-component (complete
package) under balanced drilling operations are found in the Middle East, Latin
America, Western Canada and other areas. Under balanced drilling shortens the
time required to drill a well, and enhances production by minimizing formation
damage. The older, depleted, low permeability reservoirs in many areas of the
Western United States are particularly good applications. We expect the market
to continue to grow. Where possible, we purchase equipment from a number of
suppliers and at auctions on an opportunistic basis for our compressed air
drilling sector. The equipment provided by these suppliers is customized and
often times overhauled in order to improve performance. In other instances,
equipment must be made to order. As a result of purchasing the majority of its
equipment at auction, we are not significantly dependent upon any one supplier
for compressed air drilling equipment.
Our compressed air drilling sector is not materially dependent upon the
ownership of any patents, trademarks, franchises or other concessions.
CYCLICAL NATURE OF EQUIPMENT RENTAL AND SERVICES INDUSTRY
---------------------------------------------------------
The oil and gas equipment rental and services industry is highly cyclical. The
most critical factor in assessing the outlook for the industry is worldwide
supply and demand for oil and natural gas (the supply and demand for oil and gas
are generally correlative). The peaks and valleys of demand are further apart
than those of many other cyclical industries. This is primarily a result of the
industry being driven by commodity demand and corresponding price increases. As
demand increases, producers raise their prices. The price escalation enables
producers to increase their capital expenditures. The increased capital
expenditures ultimately result in greater revenues and profits for services and
equipment companies. The increased capital expenditures also ultimately result
in greater production, which, historically, has resulted in reduced prices.
After experiencing a strong market throughout most of 2000 and the first half of
2001, the energy services industry experienced a significant drop-off due to
lower demand for hydrocarbons (particularly natural gas), which we believe was
largely a function of the U.S. recession, a warm winter and increased inventory
levels. This trend continued for most of 2002; however, in the fourth quarter of
2002, the market experienced an increase in demand due to a colder than expected
winter and decreased natural gas inventory levels. Demand for our services was
strong throughout 2003 and management believes demand will remain strong
throughout 2004 due to increased demand and declining production costs for
natural gas as compared to other energy sources. Because of these market
fundamentals for natural gas, management believes the long-term trend of
activity in the oilfield services market is favorable; however, these factors
could be more than offset by other developments affecting the worldwide supply
and demand for oil and natural gas products.
COMPETITION
-----------
As discussed above, we experience significant competition in all areas of our
business. Our top ten customers by segment accounted for $20.7 million, or 63%,
and $9.3 million, or 52%, of revenues for the years ended December 31, 2003 and
2002, respectively. The top ten customers for the six month period July 1, 2003
through December 31, 2003 of our compressed air segment account for $3.9
million, or 86% of total revenues of our compressed air segment in 2003. In
general, the markets in which we compete are highly fragmented, and a large
number of companies offer services that overlap and are competitive with our
services and products. We believe that the principal competitive factors are
technical and mechanical capabilities, management experiences, past performance
and price. While we have considerable experience, there are many other companies
that have comparable skills. Many of our competitors are larger and have greater
financial resources than we do.
BACKLOG
-------
We do not have a significant backlog of orders because our customers utilize our
services on an as-needed basis without significant on-going commitments.
36
EMPLOYEES
---------
Our strategy is to acquire companies with strong management and to enter into
long-term employment contracts with key employees in order to preserve customer
relationships and assure continuity following acquisition. We believe we have
good relations with our employees, none of whom are represented by a union. We
actively train employees across various functions, which we believe is crucial
to motivate our workforce and maximize efficiency. Employees showing a higher
level of skill are trained on the more technically complex equipment and given
greater responsibility. All employees are responsible for on-going quality
assurance. At December 31, 2003, we had 195 employees.
INSURANCE
---------
We carry a variety of insurance for our operations, and are partially
self-insured for certain claims in amounts that we believe to be customary and
reasonable. However, there is a risk that our insurance may not be sufficient to
cover any particular loss or that insurance may not cover all losses. Finally,
insurance rates have in the past been subject to wide fluctuation, and changes
in coverage could result in less coverage, increases in cost or higher
deductibles and retentions.
FEDERAL REGULATIONS AND ENVIRONMENTAL MATTERS
---------------------------------------------
Our operations are subject to federal, state and local laws and regulations
relating to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Because we provide services to companies producing oil and gas, which
are toxic substances, we may become subject to claims relating to the release of
such substances into the environment. While we are not currently aware of any
situation involving an environmental claim that would likely have a material
adverse effect on us, it is possible that an environmental claim could arise
that could cause our business to suffer. We do not anticipate any material
expenditures to comply with environmental regulations affecting our operations.
In addition to claims based on our current operations, we are from time to time
subject to environmental claims relating to our activities prior to our
bankruptcy in 1988 (See, "Legal Proceedings").
HOUSTON DYNAMIC SERVICE, INC.
-----------------------------
Houston Dynamic Service, Inc., which we sold on December 12, 2001, serviced and
repaired various types of mechanical equipment, including compressors, pumps,
turbines, engines and other machinery, providing repair, inspection, testing and
other services for various industrial customers, including those in the
petrochemical, chemical, refinery, utility, waste and waste treatment, minerals
processing, power generation, pulp and paper and irrigation industries.
INTELLECTUAL PROPERTY RIGHTS
----------------------------
Except for our relationships with our customers and suppliers described above,
we do not own any patents, trademarks, licenses, franchises or concessions which
we believe are material to the success of our business. As part of our overall
corporate strategy to focus on our core business of providing services to the
oil and gas industry and to increase shareholder value, we are investigating the
sale or license of our worldwide rights to trade names and logos for products
and services outside the energy sector.
DESCRIPTION OF PROPERTIES
-------------------------
To support our compressed air drilling operations, we lease an approximate 6,000
square foot facility in Grand Junction, Colorado, which includes offices, shop
and a warehouse; an approximate 10,000 square foot facility in Farmington, New
Mexico, which includes offices, shop and a warehouse; and a yard in Fort
Stockton, Texas.
37
To support our casing and tubing operations, we own facilities located in
Edinburg, Texas on approximately 8 acres. One building has approximately 5,000
square feet of office space, 5,000 square feet of additional expansion capacity
and 2,500 square feet of storage capability. Additionally, there is a 10,000
square foot mechanical repair, tool storage and maintenance facility. In
addition, we lease yards located in Victoria and Pearsall, Texas. The yard in
Pearsall is owned by Jens Mortensen, our President and a director.
To support our directional drilling operations, we lease office space and a shop
in Houston, Texas.
We maintain our principal executive offices in Houston, Texas.
LEGAL PROCEEDINGS
-----------------
On June 29, 1987, we filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. Our plan of reorganization was confirmed by the
Bankruptcy Court after acceptance by our creditors and stockholders, and was
consummated on December 2, 1988.
At confirmation of our plan of reorganization, the United States Bankruptcy
Court approved the establishment of the A-C Reorganization Trust as the primary
vehicle for distributions and the administration of claims under our plan of
reorganization, two trust funds to service health care and life insurance
programs for retired employees and a trust fund to process and liquidate future
product liability claims. The trusts assumed responsibility for substantially
all remaining cash distributions to be made to holders of claims and interests
pursuant to our plan of reorganization. We were thereby discharged of all debts
that arose before confirmation of our plan of reorganization.
We do not administer any of the aforementioned trusts and retain no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to our plan of reorganization.
As part of our plan of reorganization, we settled U.S. Environmental Protection
Agency ("EPA") claims for cleanup costs at all known sites where we were alleged
to have disposed of hazardous waste. The EPA settlement included both past and
future cleanup costs at these sites and released us of liability to other
potentially responsible parties in connection with these specific sites. In
addition, we negotiated settlements of various environmental claims asserted by
certain state environmental protection agencies.
Subsequent to our bankruptcy reorganization, the EPA and state environmental
protection agencies have in certain cases asserted we are liable for cleanup
costs or fines in connection with several hazardous waste disposal sites
containing products manufactured by us prior to consummation of the Plan of
Reorganization. In each instance, we have taken the position that the cleanup
cost or other liabilities related to these sites were discharged in the
bankruptcy, and the cases have been disposed of without material cost. A number
of Federal Courts of Appeal have issued rulings consistent with this position
and based on such rulings we believe that we will continue to prevail in our
position that our liability to the EPA and third parties for claims for
environmental cleanup costs that had pre-petition triggers have been discharged.
A number of claimants have asserted claims for environmental cleanup costs that
had pre-petition triggers, and in each event, the A-C Reorganization Trust,
under its mandate to provide Plan of Reorganization implementation services to
us, has responded to such claims, generally, by informing claimants that our
liabilities were discharged in the bankruptcy. Each of such claims has been
disposed of without material cost. However, there can be no assurance that we
will not be subject to environmental claims relating to pre-bankruptcy
activities that would have a material, adverse effect on us.
The EPA and certain state agencies continue from time to time to request
information in connection with various waste disposal sites containing products
manufactured by us before consummation of the Plan of Reorganization that were
disposed of by other parties. Although we have been discharged of liabilities
with respect to hazardous waste sites, we are under a continuing obligation to
provide information with respect to our products to federal and state agencies.
The A-C Reorganization Trust, under its mandate to provide Plan of
Reorganization implementation services to us, has responded to these
informational requests because pre-bankruptcy activities are involved.
38
We have been advised that the A-C Reorganization Trust will be terminated and
its assets distributed during 2004, and as a result we will assume the
responsibility of responding to claimants and to the EPA and state agencies
previously undertaken by the A-C Reorganization Trust. However, we have been
advised by the A-C Reorganization Trust that its cost of providing these
services has not been material in the past, and therefore we do not expect to
incur material expenses as a result of responding to such requests. However,
there can be no assurance that we will not be subject to environmental claims
relating to pre-bankruptcy activities that would have a material, adverse effect
on us.
We are named as a defendant from time to time in product liability lawsuits
alleging personal injuries resulting from our activities prior to our
reorganization involving asbestos. These claims are referred to and handled by a
special products liability trust formed to be responsible for such claims in
connection with our reorganization. As with environmental claims, we do not
believe we are liable for product liability claims relating to our business
prior to our bankruptcy; moreover, the products liability trust is defending all
such claims. However, there can be no assurance that we will not be subject to
material product liability claims in the future.
Mountain Compressed Air, Inc. is a defendant in an action brought in April 2004
(No. 04CV308) in the District Court of Mesa County, Colorado, by the former
owner of Mountain Air Drilling Service Co., Inc. nka Pattongill & Murphy, Inc.,
from whom Mountain Compressed Air acquired assets in 2001. The plaintiff seeks
to accelerate payment of the note issued in connection with the acquisition and
is seeking $1,863,000 in damages (representing principal and interest due under
the note), on the basis that Mountain Compressed Air has failed to timely
provide financial statements required by the note. We have raised several
defenses to the plaintiff's claim, including the holder's failure to comply with
the terms and conditions of the note, as well others including substantial
performance and impossibility of performance. We believe the claim is without
merit because of these defenses. For example, Mountain Compressed Air no longer
maintains separate financial statements and the Company provided plaintiff with
the Company's publicly available financial statements. The financial statements
disclose as a separate segment the operations of AirComp, which conducts
business using the assets acquired from plaintiff. Discovery is presently
ongoing, and based upon present information, the Company intends to vigorously
defend the case. Finally, we have claims in the amount of approximately $20,000
for legal fees and other expenses that the plaintiff agreed to pay in connection
with the settlement of an earlier lawsuit involving the acquisition of assets
from the plaintiff.
We are also subject to legal proceedings, claims and litigation arising in the
ordinary course of business.
MANAGEMENT
BOARD OF DIRECTORS
The following individuals serve on our Board for a term of one year and until
their successors are elected and take office:
NAME AGE DIRECTOR SINCE
---- --- --------------
David A. Groshoff 32 October 1999
Munawar H. Hidayatallah 60 May 2001
John E. McConnaughy, Jr. 75 May 2004
Jens H. Mortensen, Jr. 51 February 2003
Robert E. Nederlander 71 May 1989
Saeed M. Sheikh 68 May 2001
James W. Spann 52 February 2002
Leonard Toboroff 72 May 1989
Thomas O. Whitener, Jr. 57 February 2002
Christina E. Woods 27 March 2004
David A. Groshoff has served as our director since October 1999. Mr. Groshoff
has been employed by Pacholder Associates, Inc. since September 1997 and
currently serves as Senior Vice President and Associate General Counsel. From
November 1996 until September 1997, Mr. Groshoff was a practicing attorney. Mr.
Groshoff serves on our Board on behalf of the Pension Benefit Guaranty
Corporation, which has the right to appoint one director for so long as it holds
117,020 shares of our common stock. Mr. Groshoff is also a director of Atlas
Minerals, Inc.
39
Munawar H. Hidayatallah has served as our Chairman of the board of directors and
Chief Executive Officer since May 2001, and was President from May 2001 through
February 2003. Mr. Hidayatallah was Chief Executive Officer of OilQuip Rentals,
Inc., which merged with us in May 2001, from its formation in February 2000
until the date of the merger. From December 1994 until August 1999, Mr.
Hidayatallah was the Chief Financial Officer and a director of IRI
International, Inc., which was acquired by National Oilwell, Inc. in early 2000.
IRI International, Inc. manufactured, sold and rented oilfield equipment to the
oilfield and natural gas exploration and production sectors. From August 1999
until February 2000, Mr. Hidayatallah worked as a consultant to IRI
International, Inc. and Riddell Sports Inc.
John E. McConnaughy, Jr. was appointed to our board of directors in May 2004.
Mr. McConnaughy has served as Chairman and Chief Executive Officer of JEMC
Corporation, a personal holding company, since he founded it in 1985. His career
includes positions of management with Westinghouse Electric and the Singer
Company, as well as service as a director of numerous public and private
companies. In addition, he previously served as Chairman and Chief Executive
Officer of Peabody International Corp. and Chairman and Chief Executive Officer
of GEO International Corp. He retired from Peabody in February 1986 and GEO in
October 1992. Mr. McConnaughy currently serves on the boards of five public
companies (Wave Systems Corp., Mego Financial Corp., Riddell Sports, Inc.,
Levcor International, Inc., and DeVlieg Bullard, Inc.), and one private company
(PetsChoice, Ltd.). He also serves on the Board of Trustees and Executive
Committee of the Strang Cancer Prevention Center and as Chairman of the Board
for the Harlem School of the Arts. Mr. McConnaughy holds a B.A. in Economics
from Denison University, and an M.B.A. in Marketing and Finance from the Harvard
Graduate School of Business Administration.
Mr. Jens H. Mortensen, Jr. has served as our director since February 2002 and as
our President and Chief Operating Officer since February, 2003. Mr. Mortensen
formed and has served as President and Chief Executive Officer of Jens' Oilfield
Service, Inc., one of our subsidiaries, since 1982 after having spent eight
years in operations and sales positions with a South Texas casing and tubing
crew operator. As sole stockholder and CEO of Jens', Mr. Mortensen grew Jens'
from its infancy to approximately $10.0 million of revenues in 2001. Mr.
Mortensen's experience includes extensive knowledge of specialized equipment
utilized to install the various strings of casing required to drill and complete
oil and gas wells.
Robert E. Nederlander has served as our director since May 1989. Mr. Nederlander
served as our Chairman of the board of directors from May 1989 to 1993, and as
our Vice Chairman of the board of directors from 1993 to 1996. Mr. Nederlander
has been a Director of Cendant Corp since December 1997 and Chairman of the
Corporate Governance Committee of Cendant Corp. since 2002. Mr. Nederlander was
a Director of HFS from July 1995 to December 1997. Since November 1981, Mr.
Nederlander has been President and/or Director of the Nederlander Organization,
Inc., owner and operator of legitimate theaters in the New York City. Since
December 1998, Mr. Nederlander has been a managing partner of the Nederlander
Company, LLC, operator of legitimate theaters outside the New York City. Mr.
Nederlander was Chairman of the board of directors of Varsity Brands, Inc.
(formerly Riddell Sports Inc.) from April 1988 to September 2003 and was the
Chief Executive Officer of such corporation from 1988 through April 1, 1993. Mr.
Nederlander has been a limited partner and a director of the New York Yankees
since 1973. Mr. Nederlander has been President of Nederlander Television and
Film Productions, Inc. since October 1985 and was Chairman of the board of
directors and Chief Executive Officer of Mego Financial Corp. from January 1988
to January 2002. Mr. Nederlander was a director of Mego Mortgage Corp. from
September 1996 until June 1998.
Saeed M. Sheikh has served as our director since May 2001. Since 1972 Mr. Sheikh
has served as President and a director of Star Trading & Marine, Inc., a ship
brokerage firm and international shipping agent.
James W. Spann has served as our director since February 2002. Mr. Spann was a
founding partner and since May 1996 has served as Chief Investment Officer of
Energy Spectrum Capital, the general partner of Energy Spectrum Partners LP, a
private equity partnership focusing on the energy industry and our largest
stockholder. Prior to 1996, Mr. Spann was a managing director of CIGNA Private
Securities, the private debt and equity investment division of CIGNA
Corporation, at which Mr. Spann oversaw a portfolio of private oil, chemical and
gas securities totaling over $1.5 billion.
Leonard Toboroff has served as our director and Vice Chairman of the board of
directors since May 1989 and served as our Executive Vice President from May
1989 until February 2002. Mr. Toboroff served as a director and Vice President
of Varsity Brands, Inc. (formerly Riddell Sports Inc.) from April 1988 through
October 2003, and is also a director of Engex Corp. Mr. Toboroff has been a
practicing attorney continuously since 1961.
40
Thomas O. Whitener, Jr. has served as our director since February 1, 2002. Mr.
Whitener is a founding partner of Energy Spectrum Capital and has been a partner
since May 1996. Mr. Whitener has also served as a managing director of Energy
Spectrum Advisors Inc., a financial advisory firm for energy companies, since
October 1997. Mr. Whitener has been financing companies in the energy industry
since 1974. From 1987 to 1996, Mr. Whitener was an investment banker with R.
Reid Investments Inc. and Dean Witter Reynolds.
Christina E. Woods has served as our director since March 2004. Ms. Woods joined
Energy Spectrum as an accountant in October 1999 and for the last four years has
functioned as its Accounting Manager. As such, Ms. Woods managed all functions
of accounting, including revenue recognition, expense recognition, accounts
payable and accounts receivable. Ms. Woods also coordinates and supervises
Energy Spectrum's audit and tax engagements, and has been the firm's primary
contact for such engagements. Since October 2002, Ms. Woods has become actively
involved in Energy Spectrum's private equity investment activities by assisting
in strategic and due diligence analyses for potential investments and assisting
with the monitoring and oversight of current investments. Ms. Woods received her
Bachelor of Arts degree in 1999 and her Master of Business Administration in
2003 from the University of Texas at Dallas.
See "Principal Holders of Common Stock" for a description of a stockholders
agreement pursuant to which six of our ten directors may be elected.
AUDIT COMMITTEE
We have an audit committee consisting of three directors, Mr. Spann, who serves
as Chairman, and Messrs. Groshoff and McConnaughy. All of our directors our
"independent" under applicable Securities and Exchange Commission rules
regarding audit committee membership. Mr. Spann was appointed as Chairman of the
Audit Committee in February 2002 and Ms. Woods was appointed to the Audit
Committee in March 2004. The Board has determined that Mr. Spann qualifies as an
"audit committee financial expert" under applicable Securities and Exchange
Commission rules and regulations governing the composition of the Audit
Committee.
The Audit Committee assists the board of directors in fulfilling its oversight
responsibility by overseeing (i) the conduct of our accounting and financial
reporting process and the integrity of the financial statements that will be
provided to stockholders and others; (ii) the functioning of our systems of
internal accounting and financial controls; and (iii) the engagement,
compensation, performance, qualifications and independence of our independent
auditors.
The Audit Committee meets privately with the independent auditors, and the
independent auditors have unrestricted access and report directly to the Audit
Committee. The Audit Committee also has unrestricted access to the independent
auditors and all of our personnel. The Audit Committee has selected UHY Mann
Frankfort Stein & Lipp, LLP as our independent auditors for the fiscal year
ending December 31, 2004.
The Audit Committee held five meetings during 2003. The board of directors
adopted a written Audit Committee charter in March 2002. The charter is reviewed
annually and revised as appropriate.
NOMINATING COMMITTEE
We do not have a nominating committee. Six of the ten directors that serve on
the board of directors are designated by stockholders under the stockholders
agreement described in "Principal Holders of Common Stock. The entire board of
directors identifies nominees for the remaining positions by first evaluating
the current members of the board of directors willing to continue in service.
Current members of the board of directors with the skills and experience that
are relevant to our business, and who are willing to continue in service, are
considered first for re-nomination.
INFORMATION REGARDING EXECUTIVE OFFICERS
The names of our current executive officers, and certain information about them,
are set forth below. Subject to the terms of the written employment agreement
described below, our officers serve at the will of our board of directors.
41
NAME AGE POSITION
Munawar H. Hidayatallah 60 Munawar H. Hidayatallah has served as our Chairman of the board of
directors and Chief Executive Officer since May 2001, and was President
from May 2001 through February 2003. Mr. Hidayatallah was Chief
Executive Officer of OilQuip Rentals, Inc., which merged with us in May
2001, from its formation in February 2000 until the date of the merger.
From December 1994 until August 1999, Mr. Hidayatallah was the Chief
Financial Officer and a director of IRI International, Inc., which was
acquired by National Oilwell, Inc. in early 2000. IRI International,
Inc. manufactured, sold and rented oilfield equipment to the oilfield and
natural gas exploration and production sectors. From August 1999 until
February 2000, Mr. Hidayatallah worked as a consultant to IRI
International, Inc. and Riddell Sports Inc.
Jens H. Mortensen, Jr. 51 Mr. Jens H. Mortensen, Jr. has served as our director since February 2002
and as our President and Chief Operating Officer since February 2003.
Mr. Mortensen formed and has served as President and Chief Executive
Officer of Jens' Oilfield Service, Inc., one of our subsidiaries, since
1982 after having spent eight years in operations and sales positions
with a South Texas casing and tubing crew operator. As sole stockholder
and CEO of Jens', Mr. Mortensen grew Jens' from its infancy to
approximately $10.0 million of revenues in 2001. Mr. Mortensen's
experience includes extensive knowledge of specialized equipment utilized
to install the various strings of casing required to drill and complete
oil and gas wells.
Victor M. Perez 51 Mr. Perez became our Chief Financial Officer in August 2004. From July
2003 to July 2004 Mr. Perez was a private consultant engaged in corporate
and international finance advisory. Mr. Perez was formerly Vice President
and Chief Financial Officer of Trico Marine Services, Inc. a marine
transportation company serving the offshore energy industry from February
1995 to June 2003. Mr. Perez was Vice President of Corporate Finance
with Offshore Pipelines, Inc., an oilfield marine construction company,
from October 1990 to January 1995 when that company merged with a
subsidiary of McDermott International. Mr. Perez also has 15 years
experience in international and energy banking.
Todd C. Seward 42 Mr. Seward has served as our Chief Accounting Officer since September
2002 and from October 2001 through September 2002 served as our Corporate
Controller. Mr. Seward has served as Secretary since May 2004. From
February 2000 to October 2001, Mr. Seward was an Executive Accounting
Consultant where he served as a Regional Controller for Cemex, the
world's third largest cement company. From February 1997 until February
2000, Mr. Seward served as Director of Finance for APS Holdings, Inc., a
$750 million consumer branded auto parts distributor and reseller. Mr.
Seward has 16 years of experience in all aspects of accounting, financial
and treasury management. He possesses an extensive background in
Securities and Exchange Commission reporting including IPO's and GAAP.
42
Terrence P. Keane 52 Terrence P. Keane has served as President and Chief Executive Officer of
AirComp, LLC since its formation on July 1, 2003, and served as a
consultant to M-I, LLC in the area of compressed air drilling from July
2002 until June 2003. From March, 1999 until June 2002, Mr. Keane served
as Vice President and General Manager - Exploration, Production and
Processing Services for Gas Technology Institute where Mr. Keane was
responsible for all sales, marketing, operations and research and
development of the exploration, production and processing business unit.
For more than ten years prior to joining the Gas Technology Institute,
Mr. Keane had various positions with Smith International, Inc., Houston
Texas, most recently in the position of Vice President Worldwide
Operations and Sales for Smith Tool.
David Wilde 48 David Wilde has served as President and Chief Executive Officer of Strata
since October 2003 and served as Strata's President and Chief Operating
Officer from July 2003 until October 2003. From February of 2002 until
July 2003 Mr. Wilde was our Executive Vice President of Sales and
Marketing. From May 1999 until February 2002, Mr. Wilde served as Sales
and Operations Manager of Strata's Gulf Coast Division. From March 1998
until May 1999 Mr. Wilde was Sales Manager at Strata. Mr. Wilde has more
than 25 years experience in the drilling sector of the oil service
industry and 21 years experience in the directional and horizontal
drilling and rental tool business.
Theodore F. Pound III 50 Theodore F. Pound III has served as our general counsel since October 11,
2004. For ten years prior to joining us, he was in private practice at the
law firm of Wilson, Cribbs & Goren, P.C. in Houston Texas. Mr. Pound has
practiced law for more than twenty-four years. Mr. Pound has served as
lead counsel to the Company in each of its acquisitions beginning in 2001.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or awarded by us in 2003,
2002 and 2001 to all persons who served as executive officers during 2003 who
received more than $100,000 in salary and bonus compensation during 2003 (the
"named executive officers").
Annual Compensation Long Term Compensation Awards
Securities
Name and Other Annual Underlying
Principal Position YEAR SALARY ($) Bonus ($) Compensation (1) Options (#)
------------------ ---- ---------- --------- ---------------- -----------
Munawar H. Hidayatallah, 2003 $300,000(2) $81,775 $3,000 400,000
President, Chairman & 2002 $294,666(3) $143,000 $0 0
Chief Executive Officer of 2001 $240,635(4) $77,000 $0 0
Allis-Chalmers
Jens H. Mortensen, Jr., 2003 $150,000 $0 $1,500 100,000
President and Chief Operating 2002 $137,500 $0 $0 0
Officer of Allis-Chalmers, 2001 $0 $0 $0 0
President and Chief
Executive Officer of Jens' (5)
2003 $187,626 $30,000 $1,876 100,000
David Wilde 2002 $146,393 $0 $0 0
President and Chief 2001 $0 $0 $0 0
Executive Officer of Strata (6)
2003 $123,192 $40,000 $1,232 30,000
Todd C. Seward 2002 $35,000 $0 $0 0
Chief Accounting Officer of 2001 $0 $0 $0 0
Allis-Chalmers
(1) Represents contributions to officer 401K plans. We match contributions made
by all employees up to a maximum 1% of each employee's salary.
(2) Of this amount, $60,000 was deferred and not paid during 2003.
(3) Of this amount, $65,000 was deferred and not paid during 2002.
(4) This entire amount was deferred and paid to Mr. Hidayatallah in 2002.
(5) Mr. Mortensen served as President of Jens' since we acquired Jens' in
February 2002 and as such has been considered one of our executive
officers; in February 2003 Mr. Mortensen was named our President and Chief
Operating Officer.
(6) We consider Mr. Wilde to be one of our executive officers because he is
President and Chief Executive Officer of Strata, one of our subsidiaries.
43
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning stock options granted to the
named executive officers during 2003. All the grants were options to purchase
shares of common stock and were made under our 2003 Stock Incentive Plan. No
stock appreciation rights were granted during 2003. No options were exercised
during 2003.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERMS(3)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE EXPIRATION
NAME OPTIONS EMPLOYEES PER SHARE DATE 5%($) 10%($)
GRANTED(1) IN 2003 ($/SH)(2)
Munawar H. Hidayatallah 400,000 46.3% $ 2.75 12/15/2013 $ 691,784 $ 1,753,117
Jens H. Mortensen, Jr. 100,000 11.6% $ 2.75 12/15/2013 $ 172,946 $ 438,279
David Wilde 100,000 11.6% $ 2.75 12/15/2013 $ 172,946 $ 438,279
Todd C. Seward 30,000 3.5% $ 2.75 12/15/2013 $ 51,884 $ 131,484
(1) All options vest and become exercisable in three equal installments, one of
which vested upon the issuance of the options and one of which will vest
upon each of the first and second anniversaries of the date of grant of
option, provided that all options will become fully exercisable upon the
occurrence of a change of control (as defined in the 2003 Stock Incentive
Plan).
(2) The exercise price for these options was equal to the fair market value of
the common stock on December 16, 2003, the date of grant. The exercise
price may be paid in cash or in shares of common stock valued at the fair
market value on the exercise date.
(3) The 5% and 10% assumed rates of appreciation are prescribed by the rules
and regulations of the Securities and Exchange Commission and do not
represent our estimate or projection of the future trading prices of our
common stock. The calculations assume annual compounding and continued
retention of the options or the underlying common stock by the optionee for
the full option term of ten years. Unless the market price of the common
stock actually appreciates over the option term, no value will be realized
by the optionee from these option grants. Actual gains, if any, on stock
option exercises are dependent on numerous factors, including, without
limitation, the future performance, overall business and market conditions,
and the optionee's continued employment throughout the entire vesting
period and option term, which factors are not reflected in this table.
44
2003 YEAR-END OPTION VALUES
The following table sets forth, for the named executive officers, information
with respect to unexercised options and year-end option values, in each case
with respect to options to purchase shares of our common stock.
Potential Realizable Value at
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARSs Options/SARs
At Fiscal Year-End (#) At Fiscal Year-End ($)(1)
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
Munawar H. Hidayatallah 133,333 266,667 $0 $0
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
Jens H. Mortensen, Jr. 33,333 66,667 $0 $0
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
David Wilde 33,333 66,667 $0 $0
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
Todd C. Seward 10,000 20,000 $0 $0
------------------------------------ ---------------- ------------------ ---------------------- ----------------------
(1) Based on a value of $2.60 per share, the closing price per share on the OTC
Bulletin Board on December 31, 2003.
EMPLOYMENT AGREEMENTS WITH MANAGEMENT
Munawar H. Hidayatallah serves as our Chairman and Chief Executive Officer
pursuant to the terms of a three-year employment agreement dated as of April 1,
2004. Under the terms of the employment agreement, Mr. Hidayatallah receives an
annual base salary of $350,000 subject to annual increase in the discretion of
the board of directors. In addition, Mr. Hidayatallah is entitled to receive a
bonus in an amount equal to 100% of his base salary if he meets certain
strategic objectives specified in the agreement, and if he meets some but not
all of such objectives may be granted a bonus as determined by the Compensation
Committee of the board of directors. Mr. Hidayatallah received a signing bonus
of $230,000, but he will be required to return a pro rata portion of such bonus
if his employment is terminated for any reason prior to April 1, 2007. In
December 2003, we granted Mr. Hidayatallah options to acquire 400,000 shares of
common stock at a purchase price of $2.75 per share. The option vested as to
one-third of the shares subject to the option on the date of grant and will vest
as to one-third of the shares subject to the option on each of the first and
second anniversaries of the date of grant. If Mr. Hidayatallah's employment is
terminated by us for any reason other than "cause," as defined in Mr.
Hidayatallah's employment agreement, or death or disability, or if Mr.
Hidayatallah is "Constructively Terminated," as defined in the agreement (which
definition includes a change in control of us if Mr. Hidayatallah does not
continue employment with us or its successor), then he is entitled to receive
his then current salary for the entire term of his contract, reduced by any
amounts he earns for services during the severance period. Pursuant to the
agreement, we also maintain a term life insurance policy in the amount of
$2,500,000 the proceeds of which would be used to repurchase shares of our
common stock from Mr. Hidayatallah's estate in the event of his death. The
number of shares purchased will be determined based upon the fair market value
of our common stock, as determined by a third party experienced in valuations of
this type, appointed by us. Mr. Hidayatallah also receives an annual guarantee
fee equal to 0.25% of all loans guaranteed by Mr. Hidayatallah.
Jens H. Mortensen, Jr. serves as President of Jens' pursuant to the terms of a
three-year employment agreement dated February 1, 2002. Under the terms of his
agreement, Mr. Mortensen receives a salary of $150,000 that may not be reduced
below such amount. In December 2003, we granted Mr. Mortensen options to acquire
100,000 shares at a purchase price of $2.75 per share. The option vested as to
one-third of the shares subject to the option on the date of grant and will vest
as to one-third of the shares subject to the option on each of the first and
second anniversaries of the date of grant. If Mr. Mortensen's agreement is
terminated by us for any reason other than "cause," as defined in Mr.
Mortensen's agreement, or death or disability, then he is immediately entitled
to receive all amounts due through the term of his agreement. Mr. Mortensen also
serves as our President and Chief Operating Officer, but does not receive
additional compensation for such services.
45
David Wilde serves as President and Chief Executive Officer of Strata pursuant
to the terms of a three-year employment agreement dated as of April 1, 2004.
Under the terms of the employment agreement, Mr. Wilde receives an annual base
salary of $200,000 subject to annual review and potentially an increase by our
Board. In addition, Mr. Wilde is entitled to receive a bonus in an amount equal
to 5% of Strata's earnings before taxes, interest and depreciation provided that
Strata meets designated minimum earnings targets and provided further that such
bonus may not exceed 120% of Mr. Wilde's base salary. The bonus calculation is
subject to adjustment in subsequent years and in the event of acquisitions or
other extraordinary transactions. Mr. Wilde received a signing bonus of $75,000.
In addition, in December 2003 we granted Mr. Wilde options to acquire 100,000
shares of common stock at a purchase price of $2.75 per share, and on October
11, 2004, granted to Mr. Wilde options to purchase an additional 110,000 shares
at an exercise price of $4.85 per share. Both options granted to Mr. Wilde vest
as to one-third of the shares subject to the option on the grant date and will
vest as to one-third of the shares subject to the option on each of the first
two anniversaries of the grant date. If Mr. Wilde's employment is terminated by
us for any reason other than "cause," as defined in Mr. Wilde's employment
agreement, or death or disability, or if Mr. Wilde is "Constructively
Terminated," as defined in the agreement (which definition includes a change in
control with us if Mr. Wilde does not continue employment with us or its
successor), then he is entitled to receive his then current salary for the
entire term of his contract, reduced by any amounts he earns for services during
the severance period.
Victor M. Perez serves as Chief Financial Officer pursuant to the terms of a
three-year employment agreement dated as of July 26, 2004. Under the terms of
the employment agreement, Mr. Perez receives an annual base salary of $240,000
subject to annual review and potentially an increase by our Board. In addition,
Mr. Perez is entitled to receive a bonus in an amount equal to up to 50% of his
base salary if he meets certain strategic objectives specified in his employment
agreement. Pursuant to his employment agreement, on October 11, 2004, we granted
to Mr. Perez options to purchase 55,000 shares at an exercise price of $4.85 per
share. The option vested as to one-third of the shares subject to the option on
the date of grant and will vest as to one-third of the shares subject to the
option on each of the first and second anniversaries of the date of grant. If
Mr. Perez's employment is terminated by us for any reason other than "cause," as
defined in his employment agreement, or death or disability, or if Mr. Perez is
"Constructively Terminated," as defined in his employment agreement (which
definition includes a change in control with us if Mr. Perez does not continue
employment with us or its successor), then he is entitled to receive his then
current salary for the lesser of one year or the balance of the term of his
contract, reduced by any amounts he earns for services during the severance
period.
Terrence P. Keane, President and Chief Executive Officer of our subsidiary
AirComp L.L.C., a Delaware limited liability company, is employed pursuant to an
employment agreement dated July 1, 2003, which has a term of four years. Under
the terms of this agreement, Mr. Keane is entitled to base salary of $144,000
and to a bonus of up to 90% of his base salary based upon AirComp meeting
earnings targets established by AirComp's Management Committee. If Mr. Keane's
employment is terminated by AirComp without cause or by Mr. Keane for good
reason (as such terms are defined in the agreement), Mr. Keane will be entitled
to receive his accrued bonus, if any, and to continue to receive salary and
medical benefits for a period of six months. In addition, if a change in control
(as defined in the agreement) occurs with respect to AirComp, and Mr. Keane does
not accept employment with AirComp's successor, then Mr. Keane will be entitled
to receive his accrued bonus, if any, to continue to receive salary for a period
of 24 months, and to continue to receive medical benefits for a period of 12
months.
Theodore F. Pound III serves as General Counsel of the Company pursuant to a
three year employment agreement dated as of October 11, 2004. Under the terms of
the employment agreement, Mr. Pound receives an annual base salary of $180,000
subject to annual review and potentially an increase by our Board. In addition,
Mr. Pound is entitled to receive a bonus in an amount equal to up to 50% of his
base salary. Pursuant to his employment agreement, on October 11, 2004, the
Company issued to Mr. Pound options to purchase 50,000 shares of the Company's
Common Stock at a purchase price equal $4.85 per share. The option vested as to
one-third of the shares subject to the option on the date of grant and will vest
as to one-third of the shares subject to the option on each of the first and
second anniversaries of the date of grant. If Mr. Pound's employment is
terminated by us for any reason other than "cause," as defined in his employment
agreement, or death or disability, or if Mr. Pound is "Constructively
Terminated," as defined in his employment agreement (which definition includes a
change in control with us if Mr. Pound does not continue employment with us or
its successor), then he is entitled to receive his then current salary for the
lesser of one year or the balance of the term of his contract, reduced by any
amounts he earns for services during the severance period.
BOARD COMPENSATION
Our policy is to pay our non-employees directors a fee of $1,000 per quarter,
plus an annual grant of options to purchase 5,000 shares of our common stock at
an exercise price equal to the fair market value of the shares on the date of
46
grant. However, because of restraints imposed by our lenders, we did not pay
cash fees to our directors during 2002 or 2003. In lieu of such fees, in
December 2003 we awarded each non-employee director 10,000 shares of our common
stock as well as options to acquire an additional 10,000 shares of our common
stock at an exercise price of $2.75 per share. In lieu of issuing such shares
and options to directors serving as the designees of Energy Spectrum, we issued
such shares and options directly to Energy Spectrum. Directors are also
compensated for out of pocket travel expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board currently consists of Messrs. Sheikh and
Whitener. Neither of these individuals has been our officer or employee at any
time. No current executive officer has ever served as a member of the board of
directors or compensation committee of any other entity (other than our
subsidiaries) that has or has had one or more executive officers serving as a
member of our Board or our Compensation Committee.
Mr. Whitener is a principal of Energy Spectrum, from whom we acquired Strata in
February 2002, in consideration of 1,311,973 shares of our common stock,
warrants to purchase an additional 262,500 shares of Company common stock at an
exercise price of $0.75 per share and 3,500,000 shares of newly created Series A
Preferred Stock. On April 2, 2002, Energy Spectrum converted all of its Series A
Preferred Stock, including accrued dividend rights, into 1,718,090 shares of
common stock (see "Transactions with Selling Stockholders and Other Related
Parties"). Energy Spectrum, which is our largest stockholder, is a private
equity fund headquartered in Dallas, Texas.
PRINCIPAL HOLDERS OF COMMON STOCK
The following table sets forth certain information known to us with respect to
the beneficial ownership of our common stock as of September 9, 2004, calculated
in accordance with the rules of the Securities and Exchange Commission, by (i)
all persons known to beneficially own five percent or more of the our common
stock, (ii) each director, (iii) the named executive officers and (iv) all
current directors and executive officers as a group.
Beneficial
Number of Shares Ownership
Beneficially Owned Percentage
Energy Spectrum (1) 7,897,407 54.3%
Munawar H. Hidayatallah (2) 7,897,407 54.3%
Robert E. Nederlander (3) 7,897,407 54.3%
Leonard Toboroff (4) 7,897,407 54.3%
Saeed Sheikh (5) 7,897,407 54.3%
James W. Spann (1) 7,897,407 54.3%
Christina Woods (1) 7,897,407 54.3%
Thomas O. Whitener, Jr. (1) 7,897,407 54.3%
David Groshoff (6) 121,020 1.2%
Jens H. Mortensen, Jr. (7) 7,897,407 54.3%
David Wilde (8) 70,000 *
Todd C. Seward (9) 10,000 *
Named Executive Officers as a group 8,020,740 54.7%
(4 persons) (10)
All directors and executive officers as a group 8,425,093 55.5%
(11 persons) (11)
Palo Alto Investors (12) 1,666,667 12.8%
Steve Emerson (13) 978,000 9.0%
* less than one percent
-----------
(1) Energy Spectrum includes Energy Spectrum Partners LP, a Delaware limited
partnership, the principal business of which is investments, Energy Spectrum
Capital LP ("Energy Spectrum Capital"), a Delaware limited partnership, the
principal business of which is serving as the general partner of Energy Spectrum
Partners LP, Energy Spectrum LLC ("Energy Spectrum LLC") a Texas limited
liability company, the principal business of which is serving as the general
partner of Energy Spectrum Capital, and Sidney L. Tassin, James W. Spann, James
P. Benson, Leland B. White and Thomas O. Whitener, Jr., executives and
principals of the foregoing persons. The principal business address of each of
the foregoing persons is 5956 Sherry Lane, Suite 900, Dallas, Texas 75225.
Messrs. Tassin, Spann, Benson, White and Whitener are the members and managers
of Energy Spectrum LLC, and Messrs. Tassin (President), Whitener (Chief
Operating Officer) and Spann (Chief Investment Officer) are executive officers
of Energy Spectrum LLC. Messrs. Whitener and Spann are principals of Energy
Spectrum Partners LP's affiliates and the other persons listed above are also
deemed to beneficially own the securities held of record by Energy Spectrum
Partners LP. Energy Spectrum Partners LP is the record owner of 3,036,062 shares
of our common stock, warrants to purchase 262,500 shares of common stock, and an
option to purchase 6,000 shares of common stock. Energy Spectrum is also deemed
to beneficially own 4,426,178 shares of common stock that are owned by (or that
47
may be obtained within 60 days upon the exercise of options and warrants held
by) the other parties to the stockholders agreement described below. Under the
rules of the Securities and Exchange Commission, all parties to the stockholders
agreement may be deemed to beneficially own all common stock beneficially owned
by each party to the stockholders agreement.
(2) Mr. Hidayatallah is the record owner of 875,000 shares of our common stock
and options to purchase 400,000 shares of common stock, of which options to
purchase 133,333 shares are exercisable within 60 days following the date of
this report. In addition, Mr. Hidayatallah is deemed to beneficially own
6,722,407 shares of common stock that are owned by (or may be obtained within 60
days upon the exercise of options and warrants held by) the other parties to the
stockholders agreement described below. Mr. Hidayatallah's address is 5075
Westheimer, Suite 890, Houston, Texas, 77056.
(3) Includes (a) 276,529 shares of common stock owned directly by Mr.
Nederlander or by RER Corp. or QEN Corp., corporations wholly-owned by Mr.
Nederlander, (b) currently exercisable options and warrants to purchase 269,066
shares of common stock owned directly by Mr. Nederlander or RER Corp., and (c)
7,185,146 shares of common stock that are owned by (or may be obtained within 60
days upon the exercise of options and warrants held by) the other parties to the
stockholders agreement described below. Mr. Nederlander's address is 1450
Broadway, Suite 2001, New York, NY 10018.
(4) Includes (a) 226,928 shares of common stock owned directly by Mr. Toboroff
or Lenny Corp., a corporation wholly-owned by Mr. Toboroff, (b) currently
exercisable options and warrants to purchase 369,066 shares of common stock
owned directly by Mr. Toboroff, and (c) 7,134,746 shares of common stock that
are owned by (or may be obtained within 60 days upon the exercise of options and
warrants held by) the other parties to the stockholders agreement described
below. Mr. Toboroff's address is 1450 Broadway, Suite 2001, New York, NY 10018.
(5) Includes (a) 202,000 shares of common stock owned by Mr. Sheikh, (b)
currently exercisable options to purchase 2,000 shares of common stock held by
Mr. Sheikh, and (c) 7,526,740 shares of common stock that are owned by (or may
be obtained within 60 days upon the exercise of options and warrants held by)
the other parties to the stockholders agreement described below. Mr. Sheikh's
address is 1050 17th Street, N.W., Suite 450, Washington DC 20036.
(6) Includes 2,000 shares of common stock and currently exercisable options to
purchase 2,000 shares of common stock owned by Mr. Groshoff and 117,020 shares
of common stock as to which Mr. Groshoff has the authority to vote and to direct
the disposition on behalf of the Pension Benefit Guaranty Corporation. Mr.
Groshoff's address is 8044 Montgomery Rd., Suite 480, Cincinnati OH 45236.
(7) Includes (a) 265,591 shares of common stock owned of record by Mr.
Mortensen, (b) 1,300,000 shares of common stock issued to Mr. Mortensen on
September 30, 2004, in exchange for his 19% interest in Jens', (c) options to
purchase 100,000 shares of common stock, of which options to purchase 33,333
shares are exercisable within 60 days following the date of this prospectus, and
(d) 6,131,816 shares of common stock that are owned by (or may be obtained
within 60 days upon the exercise of options and warrants held by) the other
parties to the stockholders agreement described below. Mr. Mortensen's address
is 5075 Westheimer, Suite 890, Houston, Texas, 77056.
(8) Includes 70,000 shares of common stock which may be obtained upon exercise
of an option granted under our 2003 Stock Incentive Plan.
(9) Includes 10,000 shares of common stock which may be obtained upon exercise
of an option granted under our 2003 Stock Incentive Plan.
(10) Includes the shares beneficially owned by Messrs. Hidayatallah, Mortensen,
Wilde and Seward.
(11) Includes the shares described in Notes (1) - (2) and Notes (3) - (10).
48
(12) Consists of 920,000 shares, 666,667 shares and 80,000 shares owned by Micro
Cap Partners, L.P., UBTI Free, L.P. and Palo Alto Global Energy Fund, L.P.,
respectively. Palo Alto Investors, LLC acts as the general partner of Micro Cap
Partners, L.P., UBTI Free, L.P. and Palo Alto Global Energy Fund, L.P. Palo Alto
Investors, Inc. is the manager of Palo Alto Investors, LLC, and William L.
Edwards is the President of Palo Alto Investors, Inc. Palo Alto Investors, LLC,
Palo Alto Investors, Inc. and William L. Edwards each have investment and voting
authority with respect to the shares owned by this selling stockholder. The
business address for each of theses persons is 470 University Avenue, Palo Alto,
California, 94301.
(13) Consists of 528,000 shares, 400,000 shares and 50,000 shares owned by J.
Steven Emerson IRA RO II, Bear Stearns Securities Corporation, Custodian, J.
Steven Emerson Roth IRA, Bear Stearns Securities Corporation, Custodian and
Emerson Partners, Bear Stearns Securities Corporation, Custodian, respectively.
J. Steven Emerson has investment and voting authority with respect to the shares
owned by J. Steven Emerson IRA RO II, Bear Stearns Securities Corporation,
Custodian, J. Steven Emerson Roth IRA, Bear Stearns Securities Corporation,
Custodian and Emerson Partners, Bear Stearns Securities Corporation, Custodian.
Mr. Emerson's business address is 1522 Ensley Avenue, Los Angeles, California,
90024
STOCKHOLDERS AGREEMENT
In connection with our April 2004 private placement and the exchange by Energy
Spectrum of its preferred stock for common stock, we entered into a stockholders
agreement with the investors in the April 2004 private placement, Energy
Spectrum, Jens H. Mortensen, Jr., our President and a director, Saeed M. Sheikh,
our director, and Munawar H. Hidayatallah, our Chief Executive Officer and
Chairman. The stockholders agreement requires the parties to vote for the
election to the board of directors of us three persons nominated by Energy
Spectrum, two persons nominated by the investors in the April 2004 private
placement and one person nominated by Messrs. Hidayatallah, Mortensen and
Sheikh. The stockholders agreement also provides that in the event we have not
completed a public offering of its shares prior to September 30, 2005, then, at
the request of Energy Spectrum, we will retain an investment banking firm to
identify candidates for a transaction involving the sale of us or its assets.
TRANSACTIONS WITH SELLING STOCKHOLDERS AND OTHER RELATED PARTIES
RECENT SALES OF COMMON STOCK
We describe below transactions pursuant to which the selling stockholders have
acquired common stock. All references to numbers of shares below have been
adjusted to give retroactive effect to a one-to-five reverse stock split
effected on June 10, 2004.
In September 30, 2004, we issued 1,300,000 shares of our common stock to Jens H.
Mortensen, our President, Chief Operating Officer and a director, pursuant to a
merger between Jens' Oilfield Service, Inc. and a newly formed subsidiary of the
Company. As a result of the merger, we acquired Mr. Mortensen's 19% interest in
and now own 100% of Jens Oilfield Service, Inc. Mr. Mortensen is a selling
stockholder.
In September 2004, we completed a private placement of 1,956,634 shares of our
common stock to the following investors: Basic Energy Limited; Milton H. Dresner
Revocable Living Trust; Joseph S. Dresner; J. Steven Emerson Roth IRA; Waverly
Limited Partnership; Rosebury, L.P.; Meteoric, L.P.; Barbara C. Crane; Bristol
Investment Fund, Ltd.; L.H. Schmieding; Meadowbrook Opportunity Fund LLC; and
Kenneth Malkes. Each investor is a selling stockholder. Pursuant to the terms of
a stock purchase agreement, we sold to the selling stockholders an aggregate of
1,956,634 shares of common stock at a price per share of $3.00.
In August 2004 we completed a private placement of 3,504,667 shares of our
common stock to the following investors: J. Steven Emerson Roth IRA, Bear
Stearns Securities Corp., Custodian; J. Steven Emerson IRA RO II, Bear Stearns
Securities Corp., Custodian; Emerson Partners, Bear Stearns Securities Corp,
Custodian; GSSF Master Fund, LP; Gerald Lisac IRA C/O Union Bank of California,
Custodian; May Management, Inc.; Micro Cap Partners, L.P.; MK Employee Early
Stage Fund, L.P.; Morgan Keegan Early Stage Fund, L.P.; Palo Alto Global Energy
Fund, L.P.; RRCM Onshore I, L.P.; Earl Schatz, IRA C/O Union Bank of California,
Custodian; Strauss Partners, L.P., Strauss-GEPT Partners, LP;; UBTI Free, L.P.;
U.S. Bank NA as Custodian of the Holzman Foundation; U.S. Bank NA as Trustee of
the Reliable Credit Association Inc. Pension & Trust; and U.S. Bank NA as
Trustee of the Reliable Credit Association Inc. Profit Sharing Plan & Trust.
Each investor is a selling stockholder. Pursuant to the terms of a stock
purchase agreement, we sold to the selling stockholders an aggregate of
3,504,667 shares of common stock at a price per share of $3.00.
49
In May 2004, we issued a warrant to purchase 20,000 shares of our common stock
at an exercise price of $4.75 per share to Jeffrey Freedman in consideration of
financial advisory services to be provided by Mr. Freedman pursuant to a
consulting agreement. The warrants expire in May 2009. Mr. Freedman is a selling
stockholder.
In April 2004, we completed a private placement of 620,000 shares of common
stock and warrants to purchase 800,000 shares of common stock to the following
investors: Christopher Engel; Donald Engel; the Engel Investors Defined Benefit
Plan; RER Corp., a corporation wholly-owned by director Robert Nederlander; and
Leonard Toboroff, a director. Each investor is a selling stockholder. The
investors invested $1,550,000 in exchange for 620,000 shares of common stock for
a purchase price equal to $2.50 per share, and invested $450,000 in exchange for
warrants to purchase 800,000 shares of common stock at an exercise price of
$2.50 per share, expiring on April 1, 2006. Concurrently with this transaction,
Energy Spectrum Partners LP, the holder of all outstanding shares of our Series
A Preferred Series A Preferred Stock, converted all such shares, including
accrued dividend rights, into 1,718,090 shares of common stock. Energy Spectrum,
which is now our largest stockholder, is a private equity fund headquartered in
Dallas, Texas. Energy Spectrum's has designated three of its personnel as
directors of us, James W. Spann, Christina E. Woods, and Thomas O. Whitener, Jr.
Energy Spectrum Partners LP is a selling stockholder.
In April 2004 we issued warrants to purchase 20,000 shares of common stock to
Wells Fargo Credit, Inc., in connection with the extension of credit by Wells
Fargo Credit, Inc. The Warrants are exercisable at $13.75 per share and expire
in April 2014. Wells Fargo Credit, Inc. is a selling stockholder. As discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Wells Fargo Credit, Inc. is a party to a number of credit
agreements with us and our subsidiaries.
In March 2004, we issued a warrant to purchase 340,000 shares of our common
stock at an exercise price of $2.50 per share to Morgan Joseph & Co., Inc. in
consideration of financial advisory services to be provided by Morgan Joseph
pursuant to a consulting agreement. The warrants expire in February 2009.
Morgan Joseph is a selling stockholder.
In February 2002, we purchased from our current President and Chief Operating
Officer, Jens H. Mortensen, Jr., 81% of the outstanding stock of Jens' for (i)
$10,250,000 in cash, (ii) a $4,000,000 note payable with interest at an annual
rate of 7.5% with the principal due in four years, (iii) $1,234,560 for a
non-competition agreement payable in sixty monthly installments over five years,
(iv) an additional payment of $841,000 based upon Jens' working capital as of
February 1, 2002 and (v) 265,591 shares of our common stock. We entered into a
three-year employment agreement with Mr. Mortensen under which we pay Mr.
Mortensen a base salary of $150,000 per year. We also entered into a
Shareholders Agreement with Jens' and Mr. Mortensen providing for restrictions
against transfer of the stock of Jens' by us and Mr. Mortensen, and agreed to
give Mr. Mortensen the right to exchange his shares of stock of Jens' for shares
of our common stock based on an agreed upon formula. On September 30, 2004, we
issued to Mr. Mortensen 1,300,000 shares of our common stock in exchange for Mr.
Mortensen's interest in Jens'. Mr. Mortensen is a selling stockholder. The
number of shares issued to Mr. Mortensen was negotiated by the parties and was
not based upon an agreed upon formula.
In February 2002, we acquired 100% of the preferred stock and 95% of the common
stock of Strata in consideration for the issuance to Energy Spectrum of
1,311,973 shares of our common stock, warrants to purchase an additional 87,500
shares of Company common stock at an exercise price of $0.75 per share and
3,500,000 shares of Series A Preferred Stock. In addition, in February 2003, we
issued warrants to purchase an additional 175,000 shares of our common stock at
an exercise price of $0.75 per share as additional consideration for the
purchase of Strata. The warrants expire in February 2012. Energy Spectrum is a
selling stockholder.
In February 2002 we issued warrants to purchase 300,000 shares of common stock
to Wells Fargo Energy Capital, Inc., in connection with the extension of credit
by Wells Fargo Energy Capital, Inc. Warrants to purchase 233,000 shares are
exercisable at $0.75 per share and warrants to purchase 67,000 shares are
exercisable at $5.00 per share. The warrants expire February 1, 2011. Wells
Fargo Energy Capital, Inc. is a selling stockholder. As discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Wells Fargo Energy Capital, Inc. is a party to a number of credit
agreements with us and our subsidiaries.
50
In May 2001, we consummated a merger in which we acquired OilQuip Rentals, Inc.
in exchange for 2,000,000 shares of our common stock. In connection with that
transaction, we issued shares of common stock to the following investors:
Munawar H. Hidayatallah, our Chief Executive Officer and Chairman; Saeed Sheikh,
a director; Jeffrey Freedman; and Colebrooke Investment Limited. Each investor
is a selling stockholder.
In 1999 and 2000, we issued to each of directors Messrs. Nederlander and
Toboroff a promissory note in the amount of $25,000 and an option to purchase
2,000 shares of common stock an exercise price of $2.75. The promissory notes
bear interest at 5% annually and are due on March 28, 2005. The promissory note
and stock option were issued as compensation for services rendered as directors
from 1989 to March 31, 1999. The options vested immediately and may be exercised
any time prior to March 28, 2010. Messrs. Nederlander and Toboroff are selling
stockholders.
REGISTRATION RIGHTS AGREEMENTS
In connection with the September 2004 private placement, we entered into a
registration rights agreement with the investors in the September 2004 private
placement. Pursuant to the registrant rights agreement, we agreed to file a
registration statement registering the resale by the investors of the shares of
common stock issued to them and to keep the registration statement effective
until the earlier of two years following the sale of the common stock and the
date all the common shares may be sold by the investors pursuant to Rule 144
promulgated under the Securities Act of 1933. This registration rights agreement
also provides that if we do not register for resale the common shares within 120
days following the sale of the common stock, we must pay each of the investors a
fee of 1.0% of the per share purchase price paid by such investor for each share
of common stock for each month after such date that the investor cannot publicly
sell the common shares, which will increase to 2% per month after one month.
Pursuant to this agreement, we filed the registration statement of which this
prospectus is a part with the Securities and Exchange Commission to register for
resale the shares of common stock owned by the investors.
In connection with the August 2004 private placement, we entered into a
registration rights agreement with the investors in the August 2004 private
placement. Pursuant to the registrant rights agreement, we agreed to file a
registration statement registering the resale by the investors of the shares of
common stock issued to them and to keep the registration statement effective
until the earlier of two years following the sale of the common stock and the
date all the common shares may be sold by the investors pursuant to Rule 144
promulgated under the Securities Act of 1933. This registration rights agreement
also provides that if we do not register for resale the common shares within 120
days following the sale of the common stock, we must pay each of the investors a
fee of 1.0% of the per share purchase price paid by such investor for each share
of common stock for each month after such date that the investor cannot publicly
sell the common shares, which will increase to 2% per month after one month.
Pursuant to this agreement, we have registered the resale of the common stock
issued in the August 2004 private placement in the registration statement of
which this prospectus is a part.
In connection with the April 2004 private placement, we entered into a
registration rights agreement with the investors in the April 2004 private
placement. In addition, in connection with other transactions described above
occurring prior to April 2004 we entered into a registration rights agreement
with the investors in such transaction. In April 2004, each investor that was a
party to a registration rights agreement entered into prior to April 2, 2004
(other than the Pension Benefit Guarantee Corporation) terminated such agreement
and entered into the registration rights agreement entered into by investors in
the April 2004 private placement. We entered into a registration rights
agreement with the Pension Benefit Guarantee Corporation in March 1999, which is
still in effect.
The April 2004 registration rights agreement and the registration rights
agreement with the Pension Benefit Guarantee Corporation each provide the other
parties thereto the right to require us to register the resale of their shares
under certain circumstances, and the right to have their shares included in any
registration rights agreement filed by us, subject to certain circumstances. The
Pension Benefit Guarantee Corporation and most investors that are parties to the
April 2004 registration rights agreement elected to have their shares registered
in the registration statement of which this prospectus is a part. In addition,
we agreed to allow Morgan Joseph & Co., Inc. to register shares which may be
issued upon the exercise of warrants in the registration statement of which this
prospectus is a part.
51
STOCKHOLDERS AGREEMENT
In connection with the April 2004 private placement described above and the
exchange by Energy Spectrum of its preferred stock for common stock, we entered
into a stockholders agreement with the investors in the April 2004 private
placement, Energy Spectrum, Jens H. Mortensen, Jr., our President and a
director, Saeed M. Sheikh, our director, and Munawar H. Hidayatallah, our Chief
Executive Officer and Chairman of the board of directors. The stockholders
agreement requires the parties to vote for the election to the board of
directors of us three persons nominated by Energy Spectrum, two persons
nominated by the investors in the April 2004 private placement and one person
nominated by Messrs. Hidayatallah, Mortensen and Sheikh. The stockholders
agreement also provides that in the event we have not completed a public
offering of its shares prior to September 30, 2005, then, at the request of
Energy Spectrum, we will retain an investment banking firm to identify
candidates for a transaction involving the sale of us or its assets.
OTHER MATERIAL RELATIONSHIPS WITH SELLING STOCKHOLDERS
At December 31, 2002, we owed Mr. Hidayatallah $78,000 related to deferred
compensation and for advances to us totaling $49,000. At December 31, 2003, we
owed Mr. Hidayatallah $65,000 related to deferred compensation and for advances
to us totaling $49,000. Such obligations did not bear interest. All such amounts
were paid to Mr. Hidayatallah prior to August 31, 2004.
Mr. Hidayatallah is a personal guarantor of substantially all of the financing
extended to us by commercial banks. We have agreed to pay Mr. Hidayatallah a
guarantee fee equal to one-quarter of one percent of the total amount of the
debt guaranteed by him. The fee is payable quarterly, in arrears, commencing
March 31, 2004, based upon the average amount of debt outstanding in the prior
quarter.
We lease a yard in Pearsall, Texas from Mr. Mortensen for which we paid $28,800
rental payments in each of 2002 and 2003. In addition, Mr. Mortensen and members
of his family own 100% of Tex-Mex Rental & Supply Co., a Texas corporation, that
sold approximately $290,000 and $173,000 of equipment and other supplies to us
in 2002 and 2003, respectively. We believe each of the transactions between us
and our officers and directors was on terms at least as favorable to us as could
have been obtained from unrelated third parties.
In October 2004 we hired Theodore F. Pound III as our General Counsel. Prior to
joining us, Mr. Pound practiced law at Wilson Cribbs & Goren, P.C., who has
served as counsel to the Company since 2001. Mr. Pound has served as lead
acquisition counsel in each of our acquisitions since 2001. We incurred legal
fees and expenses to Wilson Cribbs & Goren of $149,000 in 2003 and $155,876 in
2004 through September 30.
Other than the transactions described above or as described in the table below,
we had no material relationship with any selling stockholder during the three
years preceding the date of this prospectus or other material transactions with
our officers, directors or principal stockholders during the three years
preceding the date of this prospectus.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 20,000,000 shares of common stock,
$0.01 par value per share and 10,000,000 shares of preferred stock, $0.01 par
value per share.
The following summary of the rights, preferences and privileges of our capital
stock and certificate of incorporation and by-laws does not purport to be
complete and is qualified in its entirety by reference to the provisions of
applicable law and to our certificate of incorporation and by-laws.
COMMON STOCK
There were 12,040,992 shares of our common stock outstanding as of September 27,
2004. Holders of our common stock are entitled to one vote for each share held
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of our common
stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of our common stock are entitled to
receive proportionately any dividends if and when such dividends are declared by
our board of directors, subject to any preferential dividend rights of
outstanding preferred stock. Upon the liquidation, dissolution or winding up of
Pour company, the holders of our common stock are entitled to receive ratably
our net assets available after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock. Holders of
our common stock have no preemptive, subscription, redemption or conversion
rights. The rights, preferences and privileges of holders of our common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.
52
PREFERRED STOCK
Under the terms of our certificate of incorporation, our board of directors is
authorized to designate and issue shares of preferred stock in one or more
series without stockholder approval. Our board of directors has discretion to
determine the rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, of each series of preferred stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of our common stock until the board of directors
determines the specific rights of the holders of the preferred stock. However,
these effects might include:
o restricting dividends on the common stock;
o diluting the voting power of the common stock;
o impairing the liquidation rights of the common stock; and
o delaying or preventing a change in control of our company.
We have no present plans to issue any shares of preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination or the transaction by which the person became an interested
stockholder is approved by the corporation's board of directors and/or
stockholders in a prescribed manner or the person owns at least 85% of the
corporation's outstanding voting stock after giving effect to the transaction in
which the person became an interested stockholder. The term "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock. A Delaware corporation may "opt out" from the
application of Section 203 through a provision in its certificate of
incorporation or by-laws. We have not "opted out" from the application of
Section 203.
Under our certificate of incorporation and by-laws, our board of directors is
not divided into classes, and each director serves for a term of one year. Any
vacancies on the board of directors may be filled by a majority vote of the
remaining directors or the stockholders. Our certificate of incorporation and
by-laws also provide that any director may be removed from office, with or
without cause, by the affirmative vote of the holders of a majority of the
voting power of our then outstanding capital stock entitled to vote generally in
the election of directors.
Our bylaws provide that meetings of stockholders may be called only by a
majority of our board of directors.
The foregoing provisions of our certificate of incorporation and by-laws and the
provisions of Section 203 of the Delaware General Corporation Law could have the
effect of delaying, deferring or preventing a change of control of our company.
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (1) for any breach of a
director's duty of loyalty to us or our stockholders, (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (3) under Section 174 of the Delaware General Corporation Law, or (4)
for any transaction from which the director derives an improper personal
benefit. Moreover, the provisions do not apply to claims against a director for
violations of certain laws, including federal securities laws. If the Delaware
General Corporation Law is amended to authorize the further elimination or
limitation of directors' liability, then the liability of our directors will
automatically be limited to the fullest extent provided by law. Our certificate
of incorporation and by-laws also contain provisions to indemnify our directors
and officers to the fullest extent permitted by the Delaware General Corporation
Law. In addition, we are in the process of entering into indemnification
agreements with all of our directors and executive officers. These provisions
and agreements may have the practical effect in certain cases of eliminating the
ability of stockholders to collect monetary damages from our directors and
officers. We believe that these contractual agreements and the provisions in our
certificate of incorporation and by-laws are necessary to attract and retain
qualified persons as directors and officers.
53
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Continental Stock
Transfer and Trust Company.
SELLING STOCKHOLDERS TABLE
The following table sets forth: (1) the name of each of the stockholders for
whom we are registering shares under this registration statement; (2) the number
of shares of our common stock beneficially owned by each such stockholder prior
to this offering (including all shares of common stock which may be issued upon
the exercise of warrants or the conversion of convertible preferred stock as
described above, whether or not exercisable within 60 days of the date hereof);
(3) the number of shares of our common stock offered by such stockholder
pursuant to this prospectus; and (4) the number of shares, and (if one percent
or more) the percentage of the total of the outstanding shares, of our common
stock to be beneficially owned by each such stockholder after this offering,
assuming that all of the shares of our common stock beneficially owned by each
such stockholder and offered pursuant to this prospectus are sold and that each
such stockholder acquires no additional shares of our common stock prior to the
completion of this offering. Such data is based upon information provided by
each selling stockholder.
PERCENTAGE OF
COMMON STOCK COMMON STOCK COMMON STOCK
COMMON STOCK BEING OFFERED OWNED UPON OWNED UPON
OWNED PRIOR TO PURSUANT TO THIS COMPLETION OF COMPLETION OF
NAME THE OFFERING PROSPECTUS THIS OFFERING THIS OFFERING (1)
-------------------------------------- -------------- ---------------- ------------- -----------------
Bear Stearns Securities Corp., Custodian
J. Steven Emerson Roth IRA (2) 596,000 596,000 0 --
Bear Stearns Securities Corp., Custodian
J. Steven Emerson Roth IRA R.O. II (3) 528,000 528,000 0 --
Bear Stearns Securities Corp., Custodian
Emerson Partners (4) 50,000 50,000 0 --
Energy Spectrum Partners, LP (5) 3,304,562 3,304,562 0 --
Christopher Engel (6) 177,411 177,411 0 --
Donald Engel (7) 212,893 212,893 0 --
Engle Defined Benefit Plan (8) 83,027 83,027 0 --
Jeffrey Freedman (9) 119,000 119,000 0 --
GSSF Master Fund, LP (10) 166,667 166,667 0 --
Hidayatallah Family Trust (11) 875,000 875,000
Munawar H. Hidayatallah (12) 400,000 400,000 0
Lenny Corp. (13) 17,862 17,862
Gerald Lisac, IRA R/O Union
Bank of California, Custodian(14) 10,000 10,000 0 --
May Management, Inc.
Bank of California, Custodian(15) 10,000 10,000 0 --
Micro Cap Partners, L.P.(16) 920,000 920,000 0 --
MK Employee Early Stage
Fund, L.P.(17) 36,600 36,600 0 --
Morgan Joseph & Co. Inc.(18) 340,000 340,000 0
Morgan Keegan Early Stage
Fund, L.P.(17) 130,067 130,067 0 --
Jens H. Mortensen (19) 1,665,591 1,665,591 0 --
Robert Nederlander (20) 4,400 4,400 0
Palo Alto Global Energy Fund, L.P.(21) 666,667 666,667 0 --
The Pension Benefit Guaranty
Corporation(22) 117,020 117,020 0 --
QEN, Inc. (23) 17,862 17,862 0
RER Corp. (24) 523,332 523,332 0 --
RRCM Onshore I, LP(25) 83,333 83,333 0 --
Earl Schatz, IRA R/O Union
Bank of California, Custodian(26) 10,000 10,000 0 --
Saeed M. Sheikh (27) 204,000 204,000 0 --
Strauss-GEPT Partners, LP(28) 133,333 133,333 0 --
Strauss Partners, L.P.(29) 200,000 200,000 0 --
Leonard Toboroff(30) 595,995 595,995 0 --
UBTI Free, L.P.(31) 80,000 80,000
U.S. Bank NA as Custodian of the
Holzman Foundation(32) 20,000 20,000 0 --
U.S. Bank NA as Trustee of the
Reliable Credit Association Inc.
Profit Sharing Plan & Trust(32) 20,000 20,000 0 --
U.S. Bank NA as Trustee of the
Reliable Credit Association Inc.
Pension Sharing Plan & Trust(32) 40,000 40,000 0 --
Wells Fargo Credit, Inc. (33) 20,000 20,000 0 --
Wells Fargo Energy Capital, Inc.(34) 300,000 300,000 0 --
54
PERCENTAGE OF
COMMON STOCK COMMON STOCK COMMON STOCK
COMMON STOCK BEING OFFERED OWNED UPON OWNED UPON
OWNED PRIOR TO PURSUANT TO THIS COMPLETION OF COMPLETION OF
NAME THE OFFERING PROSPECTUS THIS OFFERING THIS OFFERING (1)
-------------------------------------- -------------- ---------------- ------------- -----------------
Basic Energy Limited(35) 420,667 420,667 0 --
Milton H. Dresner Revocable
Living Trust(36) 51,250 50,000 1,250 --
Joseph S. Dresner(37) 51,250 50,000 1,250 --
Bear Stearns Securities Corp., Custodian
J. Steven Emerson Roth IRA (2) 596,000 196,000 0 --
Waverly Limited Partnership(38) 100,000 100,000 0 --
Rosebury, L.P.(39) 163,300 163,300 0 --
Meteoric, L.P.(39) 136,700 136,700 0 --
Barbara C. Crane(40) 33,300 33,334 0 --
Bristol Investment Fund, Ltd.(41) 500,000 500,000 0 --
The Schmieding Foundation(42) 100,000 100,000 0 --
Meadowbrook Opportunity Fund LLC(43) 200,000 200,000 0 --
Kenneth Malkes(44) 6,667 6,666 0 --
(1) Percentage ownership is based upon 13,042,081 shares of common
stock of the Registrant issued and outstanding as of the date of
this prospectus.
(2) J. Steven Emerson exercises investment and voting authority over
the shares owned by this selling stockholder.
(3) J. Steven Emerson exercises investment and voting authority over
the shares owned by this selling stockholder.
(4) J. Steven Emerson exercises investment and voting authority over
the shares owned by this selling stockholder.
(5) Includes 3,036,062 shares owned by this selling stockholder and
268,500 shares which may be issued upon the exercise of warrants
owned by this selling stockholder with an exercise price of $0.75.
The warrants expire in February 2013. Three executives and
employees of Energy Spectrum Partners LP, Thomas O. Whitener,
James W. Spann and Christina E. Woods, serve as our directors, and
James W. Spann serves as a member of our Audit Committee. Energy
Spectrum Capital LP, a Delaware limited partnership, serves as the
general partner of Energy Spectrum Partners LP. Energy Spectrum
LLC, a Texas limited liability company, serves as the general
partner of Energy Spectrum Capital LP. Sidney L. Tassin, James W.
Spann, James P. Benson, Leland B. White and Thomas O. Whitener,
Jr., are executives and principals of Energy Spectrum Capital LP
and are the members and managers of Energy Spectrum LLC. Messrs.
Tassin (President), Whitener (Chief Operating Officer) and Spann
(Chief Investment Officer) are also the executive officers of
Energy Spectrum LLC. Energy Spectrum Capital LP, Energy Spectrum
LLC, and Messrs. Tassin, Spann, Benson, White and Whitener
exercise investment and voting authority with respect to the
shares owned by this selling stockholder.
(6) Includes 77,461 shares owned by this selling stockholder and
99,950 shares which may be issued upon the exercise of warrants
owned by this selling stockholder with an exercise price of $2.50
per share. These warrants expire on April 1, 2006.
(7) Includes 92,953 shares owned by this selling stockholder and
119,940 shares which may be issued upon the exercise of warrants
owned by this selling stockholder with an exercise price of $2.50
per share. These warrants expire on April 1, 2006.
(8) Includes 36,251 shares owned by this selling stockholder and
46,776 shares which may be issued upon the exercise of warrants
owned by this selling stockholder with an exercise price of $2.50
per share. These warrants expire on April 1, 2006. Chris Engel
exercises investment and voting authority with respect to
securities owned by Engel Defined Benefit Plan
(9) Includes 103,000 shares owned by this selling stockholder and
16,000 shares which may be issued upon the exercise of warrants
owned by this selling stockholder with an exercise price of $4.65
per share. These warrants expire in May 2009.
(10) E.B. Lyon IV exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(11) Mr. Hidayatallah, our Chief Executive Officer and Chairman,
exercises investment and voting authority with respect to 875,000
shares of common stock owned by the Hidayatallah Family Trust.
(12) Represents options to purchase 400,000 shares issued pursuant to
our 2003 Stock Incentive Plan. The options have an exercise price
of $2.75 and expire in December 2013. The options are currently
exercisable with respect to 133,333 shares, and will become
exercisable with respect to an additional 133,333 shares in each
of December 2004 and in December 2005.
55
(13) Includes 17,862 shares owned by this selling stockholder. Leonard
Toboroff, one of our directors and selling stockholder, is the
sole director and officer of this selling stockholder and
exercises investment and voting authority with respect to the
securities owned by this selling stockholder.
(14) Gerald Lisac exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(15) May Management, Inc. its President, Roger May, and its Chairman,
Earl May, exercise investment and voting authority with respect to
the securities owned by this selling stockholder.
(16) Palo Alto Investors, LLC, Palo Alto Investors Inc. and William L.
Edwards exercise investment and voting authority with respect to
the securities owned by this selling stockholder. Palo Alto
Investors, LLC is the general partner of this selling stockholder.
Palo Alto Investors, Inc. is the Manager of Palo Alto Investors,
LLC. William L. Edwards is the President of Palo Alto Investors,
Inc.
(17) Merchant Bankers, Inc. is the general partner of this selling
stockholder. Merchant Bankers, Inc., its Chairman, Alan B. Morgan,
its President, Minor Perkins, and its Secretary and Treasurer,
Joseph C. Wells, exercise investment and voting authority with
respect to the securities owned by this selling stockholder.
(18) Represents shares which may be issued upon the exercise of
warrants issued to this selling stockholder. The warrants are
exercisable for $2.50 per share and expire in February 2009.
(19) Includes 1,565,591 shares owned by Mr. Mortensen and 100,000
shares which may be issued upon the exercise of options granted to
Mr. Mortensen pursuant to our 2003 Stock Incentive Plan. The
options have an exercise price of $2.75 and expire in December
2013. The options are currently exercisable with respect to 33,333
shares, and will become exercisable with respect to an additional
33,333 shares in each of December 2004 and December 2005.
(20) Includes 2,000 shares owned by this selling stockholder and 2,400
shares which may be issued upon the exercise of options owned by
this selling stockholder. Options to purchase 400 shares have an
exercise price of $13.75 per share and expire in March 2010.
Options to purchase 2,000 shares have an exercise price of $2.75
per share and expire in December 2013.
(21) Palo Alto Investors, LLC, Palo Alto Investors Inc. and William L.
Edwards exercise investment and voting authority with respect to
the securities owned by this selling stockholder. Palo Alto
Investors, LLC is the general partner of this selling stockholder.
Palo Alto Investors, Inc. is the Manager of Palo Alto Investors,
LLC. William L. Edwards is the President of Palo Alto Investors,
Inc.
(22) Pacholder Associates, Inc. and its officers, David A. Groshoff,
one of our directors, James P. Shanahan, Jr. and W. Scott Telford
III, exercise investment and voting authority with respect to the
securities owned by this selling stockholder.
(23) Includes 17,862 shares owned by this selling stockholder. Robert
E. Nederlander is the sole shareholder and officer of this selling
stockholder and exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(24) Includes 256,666 shares owned by this selling stockholder and
266,667 shares which may be issued upon exercise of warrants owned
by this selling stockholder. The warrants have an exercise price
of $2.50 per share and expire in April 2006. Robert E. Nederlander
is the sole shareholder and officer of this selling stockholder
and exercises investment and voting authority with respect to the
securities owned by this selling stockholder.
(25) Round Rock Capital Partners LP is the general partner of this
selling stockholder. Round Rock Capital Management LLC is the
general partner of Round Rock Capital Partners LP, and Peter Vig
and Michael D. Tapp are the Managing Director and Executive
Director, respectively, of Round Rock Capital Management LLC. Each
of Round Rock Capital Partners LP, Round Rock Capital Management
LLC, Peter Vig and Michael D. Tapp exercises investment and voting
authority with respect to the securities owned by this selling
stockholder.
(26) May Management, Inc. its President, Roger May, and its Chairman,
Earl May, exercise investment and voting authority with respect to
the securities owned by this selling stockholder.
(27) Includes 202,000 shares owned by this selling stockholder, and
2,000 shares which may be issued upon exercise of options granted
to Mr. Sheikh pursuant to our 2003 Stock Incentive Plan. Mr.
Sheikh is one of our directors.
(28) Melville Straus is the Managing Principal and exercises investment
and voting authority with respect to the securities owned by this
selling stockholder.
56
(29) Melville Straus is the Managing Principal and exercises investment
and voting authority with respect to the securities owned by this
selling stockholder.
(30) Includes 226,928 shares owned by this selling stockholder, 266,667
shares which may be issued upon exercise of warrants owned by this
selling stockholder and 102,400 shares which may be issued upon
exercise of options owned by this selling stockholder. The
warrants have an exercise price of $2.50 per share and expire in
April 2006. Options to purchase 100,000 shares have an exercise
price of $2.50 per share and expire in October 2011. Options to
purchase 400 shares have an exercise price have an exercise price
of $13.75 per share and expire in March 2010. Options to purchase
2,000 shares have an exercise price have an exercise price of
$2.75 per share and expire in December 2013. Mr. Toboroff is one
of our directors.
(31) Palo Alto Investors, LLC, Palo Alto Investors Inc. and William L.
Edwards exercise investment and voting authority with respect to
the securities owned by this stockholder. Palo Alto Investors, LLC
is the general partner of this selling stockholder. Palo Alto
Investors, Inc. is the Manager of Palo Alto Investors, LLC.
William L. Edwards is the President of Palo Alto Investors, Inc.
(32) May Management, Inc. its President, Roger May, and its Chairman,
Earl May, exercise investment and voting authority with respect to
the securities owned by this selling stockholder.
(33) Represents shares which may be issued upon exercise of warrants
owned by this selling stockholder. The warrants have an exercise
price of $0.75 per share and expire in April 2014. This selling
shareholder is a wholly-owned subsidiary of Wells Fargo & Company,
a publicly-traded bank holding company.
(34) Represents shares which may be issued upon exercise of warrants
owned by this selling stockholder. Warrants to purchase 233,000
shares have an exercise price of $0.75 per share and warrants to
purchase 67,000 shares have an exercise price of $5.00 per share.
The warrants expire In February 2012. This selling shareholder is
a wholly-owned subsidiary of Wells Fargo & Company, a
publicly-traded bank holding company.
(35) Transcontinental Capital and its President, Rolando Gonzalez
Bunster, exercise investment and voting authority with respect to
the securities owned by this selling stockholder.
(36) Milton H. Dresner exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(37) Joseph S. Dresner exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(38) Graham R. Smith is the managing general partner of and exercises
investment and voting authority with respect to the securities
owned by this selling stockholder.
(39) Guild Investment Management, Inc. and its President, Anthony R.
Danaher, exercise investment and voting authority with respect to
the securities owned by this selling stockholder.
(40) Barbara C. Crane exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
(41) Bristol Capital Advisors, LLC and its manager, Paul Kessler,
exercise investment and voting authority with respect to the
securities owned by this selling stockholder. Mr. Kessler
disclaims beneficial ownership of these securities.
(42) L.H. Schmieding is Chief Executive Officer of, and exercises
investment and voting authority with respect to, the securities
owned by this selling stockholder.
(43) MYR Pautreus, LLC and its Managing Member, Michael Ragins,
exercise investment and voting authority with respect to the
securities owned by this selling stockholder.
(44) Kenneth Malkes exercises investment and voting authority with
respect to the securities owned by this selling stockholder.
PLAN OF DISTRIBUTION
The shares of our common stock offered pursuant to this prospectus may be
offered and sold from time to time by the selling stockholders listed in the
preceding section, or their donees, transferees, pledgees or other successors in
interest that receive such shares as a gift or other non-sale related transfer.
These selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. We will bear all expenses
of registration incurred in connection with this offering. The selling
stockholders whose shares are being registered will bear all selling and other
expenses.
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed
prices, at prevailing market prices or at negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
57
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o An exchange distribution in accordance with the rules of the
applicable exchange;
o Privately negotiated transactions;
o Settlement of put or call option transactions;
o Settlement of short sales;
o Broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o A combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, which we refer to as the Securities Act, if
available, rather than under this prospectus.
The selling stockholders may effect transactions by selling shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
concessions, commissions or discounts from the selling stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. These concessions, commissions and discounts may
exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
The selling stockholders may enter into hedging transactions with broker-dealers
or other financial institutions. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of our
common stock in the course of hedging the positions they assume with selling
stockholders. The selling stockholders may also enter into options or other
transactions with broker-dealers or other financial institutions relating to the
shares offered hereby, which shares such broker-dealers or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may also be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. We have agreed to indemnify each selling
stockholder against certain liabilities, including liabilities arising under the
Securities Act. The selling stockholders have informed us that they do not have
any agreement or understanding, directly or indirectly, with any person to
distribute the common stock.
Because selling stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will be
subject to the prospectus delivery requirements of the Securities Act, which may
include delivery through the facilities of an exchange pursuant to Rule 153
under the Securities Act. The anti-manipulative provisions of Regulation M
promulgated under the Securities Exchange Act of 1934, as amended, may apply to
sales of our common stock and activities of the selling stockholders.
If a selling stockholder notifies us that any material arrangement has been
entered into with a broker-dealers for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, we will file a supplement to this prospectus, if
required, pursuant to Rule 424(b) under the Act, disclosing (i) the name of each
such selling stockholder and of the participating broker-dealer(s), (ii) the
58
number of shares involved, (iii) the price at which such shares were sold, (iv)
the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus and (vi) other facts material to the transaction.
In addition, upon us being notified by a selling stockholder that a donee or
pledgee intends to sell more than 500 shares, a supplement to this prospectus
will be filed.
We are required to pay all fees and expenses incident to the registration of the
shares. We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. We have also filed with
the SEC under the Securities Act a registration statement on Form S-1 with
respect to the common stock offered by this prospectus. This prospectus, which
constitutes part of the registration statement, does not contain all the
information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement, portions of which are
omitted as permitted by the rules and regulations of the SEC. Statements made in
this prospectus regarding the contents of any contract or other document are
summaries of the material terms of the contract or document. With respect to
each contract or document filed as an exhibit to the registration statement,
reference is made to the corresponding exhibit. For further information
pertaining to us and the common stock offered by this prospectus, reference is
made to the registration statement, including the exhibits and schedules
thereto, copies of which may be inspected without charge at the public reference
facilities of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies
of all or any portion of the registration statement may be obtained from the SEC
at prescribed rates. Information on the public reference facilities may be
obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a
web site that contains reports, proxy and information statements and other
information that is filed through the SEC's EDGAR System. The web site can be
accessed at HTTP://WWW.SEC.GOV .
You should rely only on the information contained in this prospectus and any
supplement to this prospectus. We have not authorized anyone else to provide you
with different information. You should not assume that the information in this
prospectus or any supplement is accurate on any date other than the date on the
front of those documents.
LEGAL MATTERS
Greenberg Glusker Fields Claman Machtinger & Kinsella LLP, Los Angeles,
California, has rendered to Allis-Chalmers Corporation a legal opinion as to the
validity of the common stock covered by this prospectus.
EXPERTS
The consolidated financial statements and schedules and notes thereto included
in this prospectus have been audited by Gordon, Hughes and Banks, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their prospectus incorporated herein by reference, and are incorporated
herein in reliance upon such prospectus given upon the authority of said firm as
experts in auditing and accounting.
GLOSSARY OF OIL AND NATURAL GAS TERMS
"booster" A machine that increases the volume of air
when used in conjunction with a compressor
or a group of compressors.
"under balanced drilling" A technique in which oil, gas, or
geothermal wells are drilled by creating a
pressure within the well that is lower than
the reservoir pressure. The result is
increased rate of penetration, reduced
formation damage, and reduced drilling
costs.
"casing" The pipe placed in a drilled well to secure
the well bore and formation.
"casing tongs" Hydraulic wrenches used to screw casing
pipes together.
"directional drilling" The technique of drilling a well with
varying the angle of direction of a well
and changing the direction of a well to hit
a specific target.
"drill pipe" A pipe that attaches to the drill bit to
drill a well.
59
"horizontal drilling" The technique of drilling wells at a
90-degree angle.
"lay down machines" A truck mounted machine used to move pipe
and casing and tubing onto a pipe rack
(from which a derrick crane lifts the drill
pipe, casing and tubing and inserts it into
the well).
"links" Adaptors that fit on the blocks to attach
handling tools.
"LWD" or "log while drilling" The technique of
measuring, in real time, the formation
pressure and the position of equipment
inside of a well.
"mist and foam drilling" The technique of using chemicals to
lubricate a well and to facilitate lifting
cuttings to the surface as the well is
being drilled.
"MWD" or "measure while drilling" The technique of measuring formation
properties within a well.
"protectors" A device placed on a drill pipe and casing
pipe to protect the threads.
"reciprocating compressor" A piston type compressor that constantly
pushes air with reciprocating pistons.
"screw compressor" A compressor that utilizes a positive
displacement mechanism.
"slips" Tools used to hold casing in place while
installing casing in wells.
"torque turn service" Monitoring device to insure proper makeup
of the casing.
"tubing" A pipe placed inside the casing to produce
the well.
60
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the Years Ended December 31,
2003, December 31, 2002 and December 31, 2001 F-3
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2003, December 31, 2002 and December
31, 2001 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, December 31, 2002 and December 31, 2001 F-5
Notes to Consolidated Financial Statements F-6
Consolidated Balance Sheets as of June 30, 2004 (unaudited) F-30
Consolidated Statements of Operations for the Six Months ended
June 30, 2004 and June 30, 2003 (unaudited) F-31
Consolidated Statement of Stockholders' Equity for the Six
Months ended June 30, 2004(unaudited) F-32
Consolidated Statements of Cash Flows for the Six Months ended
June 30, 2004(unaudited) F-33
Notes to Unaudited Consolidated Financial Statements F-34
Unaudited Pro Forma Consolidated Financial Statements F-45
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2003 F-46
Unaudited Pro Forma Consolidated Statement of Operations
For the Six Months Ended June 30, 2003 F-47
Notes to Unaudited Pro Forma Consolidated Financial Statements F-48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Allis-Chalmers Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Allis-Chalmers
Corporation as of December 31, 2003 and 2002 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allis-Chalmers
Corporation as of December 31, 2003 and 2002, and the results of consolidated
operations and cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/S/ GORDON, HUGHES & BANKS, LLP
-------------------------------
Greenwood Village, Colorado
March 3, 2004, except as to Note 20
which date is June 10, 2004.
F-1
ALLIS-CHALMERS CORPORATION DECEMBER 31,
CONSOLIDATED BALANCE SHEET 2003 2002
(in thousands) --------- ---------
ASSETS
Cash and cash equivalents $ 1,299 $ 146
Trade receivables, net of allowance for
doubtful accounts of $168 and $32 at
December 31, 2003 and 2002, respectively 8,823 4,409
Lease Deposit -- 525
Lease receivable, current (Note 13) 180 180
Deferred offering costs -- --
Prepaid expenses and other 887 317
--------- ---------
Total current assets 11,189 5,577
Property and equipment, net of accumulated
depreciation of $2,487 and $2,340 at December
31, 2003 and 2002, respectively 26,339 17,124
Goodwill 7,661 7,661
Other intangible assets, net of accumulated
amortization of $1,254, and $726 at December
31, 2003 and 2002, respectively 2,290 2,818
Debt issuance costs, net of accumulated
amortization of $462, and $331 at December
31, 2003 and 2002, respectively 567 515
Lease receivable, less current portion (Note 13) 787 1,042
Other Assets 40 41
--------- ---------
Total Assets $ 48,873 $ 34,778
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt (Note 8) $ 5,150 $ 13,890
Trade accounts payable 3,133 2,106
Accrued salaries, benefits and payroll taxes 591 280
Accrued interest 152 811
Accrued expenses 1,761 1,506
Accounts payable, related parties (Note 14) 787 --
--------- ---------
Total current liabilities 11,574 18,593
Accrued postretirement benefit obligations (Note 3) 545 670
Long-term debt, net of current maturities (Note 8) 27,083 7,331
Other long-term liabilities 270 270
Redeemable warrants (Notes 8 and 12) 1,500 1,500
Redeemable convertible preferred stock, $0.01 par
value (4,200,000 shares authorized; 3,500,000
issued and outstanding at December 31, 2003)
($1 redemption value) including accrued
dividends (Note 10) 4,171 3,821
Total liabilities 45,143 32,185
Commitments and Contingencies (Note 9 and Note 19)
Minority interests 2,523 1,584
COMMON STOCKHOLDERS' EQUITY (NOTE 10)
Common stock, $01 par value (20,000,000 shares
authorized; 3,926,668 issue and outstanding) 39 39
Capital in excess of par value 9,793 10,143
Accumulated (deficit) (8,625) (9,173)
--------- ---------
Total shareholders' equity 1,207 1,009
--------- ---------
Total liabilities and shareholders' equity $ 48,873 $ 34,778
========= =========
The accompanying Notes are an integral part of the Financial Statements.
F-2
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31.
(in thousands, except per share amounts) 2003 2002 2001
--------- --------- ---------
Revenues $ 32,724 $ 17,990 $ 4,796
Cost of revenues 23,931 14,640 3.331
--------- --------- ---------
Gross margin 8,793 3,350 1,465
General and administrative expense 6,169 3,792 2,898
Personnel restructuring costs -- 495 --
Abandoned acquisition/private placement costs -- 233 --
--------- --------- ---------
Total operating expenses 6,169 4,520 2,898
Income/ (loss) from operations 2,624 (1,170) (1,433)
Other income (expense) :
Interest income 3 49 41
Interest expense (2,467) (2,256) (869)
Minority interests in income of subsidiaries (387) (189) --
Factoring costs on note receivable -- (191) --
Settlement on lawsuit 1,034 -- --
Other 111 58 (12)
--------- --------- ---------
Total other income (expense) (1,706) (2,529) (840)
--------- --------- ---------
Net income/ (loss) before income taxes 918 (3,699) (2,273)
Provision for foreign income tax 370 270 --
--------- --------- ---------
Net income/ (loss) from continuing operations 548 (3,969) (2,273)
(Loss) from discontinued operations -- -- (291)
(Loss) from sale of discontinued operations -- -- (2,013)
--------- --------- ---------
Net (loss) from discontinued operations -- -- (2,304)
--------- --------- ---------
Net income/ (loss) 548 (3,969) (4,577)
Preferred stock dividend (656) (321) --
--------- --------- ---------
Net income/ (loss) attributed to common shareholders $ (108) $ (4.290) $ (4,577)
========= ========= =========
Income/ (loss) per common share - basic
Continued operations $ (0.03) $ (1.14) $ (2.88)
Discontinued operations -- -- (2.92)
--------- --------- ---------
$ (0.03) $ (1.14) $ (5.80)
========= ========= =========
Income/ (loss) per common share - diluted
Continued operations $ (0.03) $ (1.14) $ (2.88)
Discontinued operations -- -- (2.92)
--------- --------- ---------
$ (0.03) $ (1.14) $ (5.80)
========= ========= =========
Weighted average number of common shares outstanding:
Basic 3,927 3,766 790
========= ========= =========
Diluted 3,927 3,766 790
========= ========= =========
The accompanying Notes are an integral part of the Financial Statements.
F-3
Allis-Chalmers Corporation
Consolidated statement of shareholders' equity
(in thousands, except number of shares)
CAPITAL IN
COMMON STOCK EXCESS OF ACCUMULATED
Shares Amount PAR VALUE (DEFICIT) TOTAL
---------- ---------- ---------- ----------
Balances, December 31, 2000 80,000 1 $ 2,974 $ (627) $ 2,348
Issuance of common stock in
connection with Recapitalization 2,237,626 22 2,757 -- 2,779
Issuance of stock options for -- -- 500 -- 500
services
Issuance of stock purchase
warrants for services -- -- 200 -- 200
Net (loss) -- -- -- (4,577) (4,577)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2001 2,317,626 $ 23 $ 6,431 $ (4,577) $ 1,250
Issuance of common stock in
connection with the purchase of 279,570 3 627 -- 630
Jens'
Issuance of stock purchase
warrants in connection with the -- -- 47 -- 47
purchase of Jens'
Issuance of common stock in
connection with the 1,311,973 13 2,939 -- 2,952
purchase of Strata
Issuance of stock purchase
warrants in connection with the -- -- 267 -- 267
purchase of Strata
Issuance of common stock in
connection with the purchase of 17,500 -- 153 -- 153
Strata
Accrual of preferred dividends -- -- (321) -- (321)
Net (Loss) -- -- -- (3,969) (3,969)
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2002 3,926,668 39 $ 10,143 $ (9,173) $ 1,009
Accrual of preferred dividends -- -- (350) -- (350)
Net Income -- -- -- 548 548
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2003 3,926,668 39 $ 9,793 $ (8,625) $ 1,207
========== ========== ========== ========== ==========
The accompanying Notes are an integral part of the Financial Statements.
F-4
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
2003 2002 2001
--------- --------- ---------
Cash flows from operating activities:
Net income / (loss) $ 983 $ (3,969) $ (4,577)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 1,954 1,837 621
Amortization expense 884 744 482
Issuance of stock options for services -- -- 500
Amortization of discount on debt 516 475 183
Gain on change in PBO liability (125) -- --
Gain on settlement of lawsuit (1,034) -- --
Minority interest in income of subsidiaries 387 189 --
Loss on sale of property 82 119 --
Changes in working capital:
Decrease (increase in accounts receivable (4,414) (713) (511)
Decrease (increase in due from related party -- 61 43
Decrease (increase) in other current assets (1,260) 1,644 (139)
Decrease (increase) in other assets 1 902 --
Decrease (increase) in lease deposit 525 176 --
(Decrease) increase in accounts payable 2,251 1,316 238
(Decrease) increase in accrued interest (126) 651 176
(Decrease) increase in accrued expenses 397 (339) 156
(Decrease) increase in other long-term liabilities -- (123) --
(Decrease) increase in accrued employee benefits
and payroll taxes 426 (788) 463
Discontinued operations
Loss on sale of HDS operations -- -- 2,013
Operating cash provided (used) -- -- 381
Depreciation and amortization -- -- 124
--------- --------- ---------
Net cash provided by operating activities 1,879 2,182 153
Cash flows from investing activities:
Recapitalization, net of cash received -- -- (88)
Business acquisition costs -- -- (141)
Acquisition of MADSCO assets, net of cash acquired -- -- (9,534)
Acquisition of Jens', net of cash acquired -- (8,120) --
Acquisition of Strata, net of cash acquired -- (179) --
Purchase of equipment (5,354) (518) (402)
Proceeds from sale-leaseback of equipment,
net of lease deposit -- -- 2,803
Proceeds from sale of equipment 843 367 45
--------- --------- ---------
Net cash (used) by investing activities (4,511) (8,450) (7,317)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 14,127 9,683 5,832
Payments on long-term debt (10,826) (4,079) (489)
Payments on related party debt (246) -- --
Proceeds from issuance of common stock, net -- -- 1,838
Borrowings on lines of credit 30,537 7,050 375
Payments on lines of credit (29,399) (5,804) --
Debt issuance costs (408) (588) (244)
--------- --------- ---------
Net cash provided (used) by financing activities 3,785 6,262 7,312
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,153 (6) 148
Cash and cash equivalents:
Beginning of period 146 152 4
--------- --------- ---------
End of period $ 1,299 $ 146 $ 152
========= ========= =========
Supplemental information:
Interest paid $ 2,341 $ 1,082 $ 802
========= ========= =========
The accompanying Notes are an integral part of the Financial Statements.
F-5
ALLIS-CHALMERS CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Compressed Air
Inc. ("Mountain Air"), a Texas corporation, acquired certain assets of Mountain
Air Drilling Service Co., Inc. ("MADSCO"), whose business consists of providing
equipment and trained personnel in the four corner areas of the southwestern
United States. Mountain Air primarily provides compressed air equipment and
related products and services and trained operators to companies in the business
of drilling for natural gas.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers Corporation
("Allis-Chalmers" or the "Company"). In the merger, all of OilQuip's outstanding
common stock was converted into 2,000,000 shares of Allis-Chalmers' common
stock.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Air. However, for accounting purposes, OilQuip was treated as the
acquiring company in a reverse acquisition of Allis-Chalmers. The financial
statements prior to the merger are the financial statements of OilQuip. As a
result of the merger, the fixed assets and other intangibles of Allis-Chalmers
were increased by $2,691,000.
On November 30, 2001, the Company entered into an agreement to sell its wholly
owned subsidiary, Houston Dynamic Service, Inc. ("HDS"), to the general manager
of HDS in a management buy-out. The sale of HDS was finalized on December 12,
2001.
In conjunction with the sale of HDS, the Company formally discontinued the
operations segment related to precision machining of rotating equipment,
which was the principal HDS business.
On February 6, 2002, Allis-Chalmers acquired 81% of the outstanding stock of
Jens' Oilfield Service, Inc. ("Jens'"), which supplies highly specialized
equipment and operations to install casing and production tubing required to
drill and complete oil and gas wells. The Company also purchased substantially
all the outstanding common stock and preferred stock of Strata Directional
Technology, Inc. ("Strata"), which provides high-end directional and horizontal
drilling services for specific targeted reservoirs that cannot be reached
vertically.
In July 2003, through the subsidiary Mountain Air, the Company entered into a
limited liability company operating agreement with a division of M-I L.L.C.
("M-I"), a joint venture between Smith International and Schlumberger N.V.
(Schlumberger limited), to form a Texas limited liability company named AirComp
LLC ("AirComp"). Both Companies contributed assets with a combined net book
value of approximately $13 million to AirComp L.L.C. ("AirComp"). The
contributed assets and liabilities were recorded at historical cost basis. The
Company owns 55% and M-I owns 45% of AirComp. Because the Company controls
AirComp, the Company has consolidated the joint venture's financial position and
operations into those of the Company.
VULNERABILITIES AND CONCENTRATIONS
The Company provides oilfield services in several regions including the states
of California, Texas, Utah, Louisiana and New Mexico, the Gulf of Mexico and
southern portions of Mexico. The nature of the Company's operations and the many
regions in which it operates subject it to changing economic, regulatory and
political conditions. The company believes it is vulnerable to the risk of
near-term and long-term severe changes in the demand for and prices of oil and
natural gas.
F-6
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be perceived
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts, recoverability of long-lived assets and intangibles, useful
lives used in depreciation and amortization, income taxes and related valuation
allowances. The accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more experience is
acquired, as additional information is obtained and as the Company's operating
environment changes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries and joint venture, AirComp. The Company's subsidiaries are
Mountain Air, Jens', and Strata. All significant inter-company transactions have
been eliminated.
REVENUE RECOGNITION
The Company's revenue recognition policy is significant because revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions and royalties. The Company
provides rental equipment and drilling services to its customers at per day and
per job contractual rates and recognizes the drilling related revenue as the
work progresses and when collectibility is reasonably assured. The Securities
and Exchange Commission's (SEC) Staff Accounting Bulletin (SAB) No. 104, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 104"), provides guidance on the
SEC staff's views on application of generally accepted accounting principles to
selected revenue recognition issues. The Company's revenue recognition policy is
in accordance with generally accepted accounting principles and SAB No. 104.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are customer obligations due under normal trade terms. The
Company sells its services to oil and natural gas drilling companies. The
Company performs continuing credit evaluations of its customers' financial
condition and although the Company generally does not require collateral,
letters of credit may be required from customers in certain circumstances.
The Company records an allowance for doubtful accounts based on specifically
identified amounts that are uncollectible. The Company has a limited number of
customers with individually large amounts due at any given balance sheet date.
Any unanticipated change in any one of these customer's credit worthiness or
other matters affecting the collectibility of amounts due from such customers
could have a material effect on the results of operations in the period in which
such changes or events occur. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. As of December 31,
2003 and 2002, the Company had recorded an allowance for doubtful accounts of
$168,000 and $32,000, respectively. Bad debt expense was $136,000, $32,000 and
$0 for the years ended December 31, 2003, 2002 and 2001, respectively.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Maintenance and repairs are charged to operations when incurred. Maintenance and
repairs expense was $568,996, $631,939, and $126,436 for the years ended
December 31, 2003, 2002 and 2001, respectively. Refurbishments and renewals are
capitalized when the value of the equipment is enhanced for an extended period
and the cost exceeds a minimum amount of $1,000. When property and equipment are
sold or otherwise disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations.
F-7
The cost of property and equipment currently in service is depreciated over the
estimated useful lives of the related assets, which range from three to fifteen
years. Depreciation is computed on the straight-line method for financial
reporting purposes. Depreciation expense charged to operations was $1,954,000
for the year ended December 31, 2003, $1,837,000 for the year ended December 31,
2002, and $621,000 for the year ended December 31, 2001.
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). Goodwill, including goodwill associated with equity method investments,
and intangible assets with infinite lives are not amortized, but tested for
impairment annually or more frequently if circumstances indicate that impairment
may exist. Intangible assets with finite useful lives are amortized either on a
straight-line basis over the asset's estimated useful life or on a basis that
reflects the pattern in which the economic benefits of the intangible assets are
realized.
The Company performs impairment tests on the carrying value of its goodwill of
each reporting unit on an annual basis as of June 30th and December 31st for the
Mountain Air and Strata operating subsidiaries, respectively. As of December 31,
2003 and 2002, no evidence of impairment exists.
As a result of the formation of AirComp on July 1, 2003, the Company and its
subsidiary Mountain Air contributed assets whose cost was less than Mountain
Air's underlying equity in the net assets of AirComp. This difference between
the cost of the investment and the amount of the Company's underlying equity in
net assets of AirComp has been accounted for as if it was a reduction of
property and equipment. The difference of approximately $1,551,000 has been
recorded pro-rata as a contra-asset against the historical net book values of
the property and equipment of AirComp, and amortized as a reduction of
depreciation over the lives of the assets of approximately 15 years.
In 2001, goodwill associated with subsidiaries was amortized using the
straight-line method over its expected useful life of 20 years. For the period
ended December 31, 2001, the Company recorded $403,000 of amortization expense
related to its goodwill. Amortization ceased after 2001 in accordance with SFAS
No. 142.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment and other
intangible assets, and certain other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recorded in the period in which it is
determined that the carrying amount is not recoverable. The determination of
recoverability is made based upon the estimated undiscounted future net cash
flows, excluding interest expense. The impairment loss is determined by
comparing the fair value, as determined by a discounted cash flow analysis, with
the carrying value of the related assets.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts receivable
and payable, and debt. The carrying values of cash and cash equivalents,
accounts receivable and payable approximate fair value. The Company believes the
fair values and the carrying value of the debt would not be materially different
due to the instruments' interest rates approximating market rates for similar
borrowings at December 31, 2003 and 2002.
CONCENTRATION OF CREDIT AND CUSTOMER RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of significant concentration of credit risk regardless
of the degree of such risk.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company transacts its business with several financial
institutions. However, the amount on deposit in three financial institutions
exceeded the $100,000 federally insured limit at December 31, 2003 by a total of
$1,050,793. Management believes that the financial institutions are financially
sound and the risk of loss is minimal.
F-8
The Company sells its services to major and independent domestic and
international oil and gas companies. See Note 16 for further information on
major customers. The Company performs ongoing credit valuations of its customers
and provides allowance for probable credit losses where necessary.
Two customers comprised 25% of the Company's domestic revenues for the year
ended December 31, 2003 as compared to approximately 20% of the Company's
domestic revenues for the year ended December 31, 2002.
Customer 2003 % of total 2002 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
El Paso Production Oil and Gas $4,529 13.8 $1,831 10.2
--------------------------------------- ------- ---------- ------- ----------
Burlington Reserve Oil & Gas Co., L.P $3,646 11.1 $1,751 10.2
--------------------------------------- ------- ---------- ------- ----------
One customer comprised 100% of the Company's international revenues for the
years ended December 31, 2003 and 2002, respectively.
Customer 2003 % of total 2002 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
Materiales Y Equipo Petroleos $3,329 10.1 $2,699 15.0
--------------------------------------- ------- ---------- ------- ----------
Two customers comprised 20% of the Company's domestic revenues for the year
ended December 31, 2002 as compared to approximately 79% of the Company's
domestic revenues for the year ended December 31, 2001.
Customer 2002 % of total 2001 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
El Paso Production Oil and Gas $1,831 13.8 $ - -
--------------------------------------- ------- ---------- ------- ----------
Burlington Reserve Oil & Gas Co., L.P $1,828 11.1 $1,751 36.5%
--------------------------------------- ------- ---------- ------- ----------
Devon Energy Production Company -- -- $ 708 14.8%
--------------------------------------- ------- ---------- ------- ----------
One customer comprised 100% of the Company's international revenues for the year
ended December 31, 2002 and we had no international sales year ended December
31, 2001.
Customer 2002 % of total 2001 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
Materiales Y Equipo Petroleos $2,699 10.1 $ - -
--------------------------------------- ------- ---------- ------- ----------
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the straight-line method over the maturity periods of the
related debt. The maturity periods range from 2 to 5 years.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses for the years ended December 31, 2003, 2002, and 2001, totaled $41,000,
$96,500 and $31,400, respectively.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or income tax returns. Under this
method, the deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-9
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" requires the presentation and disclosure of all changes in equity from
non-owner sources as "Comprehensive Income". The Company had no items of
comprehensive income in the reported periods.
RECLASSIFICATIONS AND RESTATEMENT OF FORM 10-Q
Certain prior period balances have been reclassified to conform to current year
presentation.
A reclassification on the accompanying consolidated balance sheet as of December
31, 2003 has occurred since the Company's September 30, 2003 interim condensed
balance sheet was reported in the Company's September 30, 2003 Form 10-Q. The
basis differences created between the Company's cost of its investment in
AirComp and the Company's underlying equity in the net assets of AirComp has
been reclassified from additional paid in capital to reflect the pro rata
reduction of the Company's property and equipment balances. There was no effect
on the results of operations as previously reported in the Company's September
30, 2003 Form 10-Q and the current year presentation conforms with generally
accepted accounting principles.
The accompanying 2003 financial statements have been restated from the
previously filed interim financial statements included in Form 10-Q for the
first, second and third quarters of 2003. As discussed in Note 7 to the
accompanying financial statements, an adjustment was recorded in the fourth
quarter of 2003 to reflect a change in estimate of the recoverability of foreign
taxes paid in 2002 and 2003. The effect of the significant fourth quarter
adjustment on the individual quarterly financial statements is as follows:
Three Months Three Months Three Months
Ended Ended Ended
March 31, 2003 June 30, 2003 September 30, 2003
-------------- ------------- ------------------
Net income (loss) attributed to
common shareholders
Previously reported $ (183) $ (330) $ 1,136
Adjustment (158) (92) (93)
Restated (341) (422) 1,043
Net income (loss) per share, basic
and diluted
Previously reported $ (0.05) $ (0.10) $ 0.30
Adjustment (0.04) (0.00) (0.05)
Restated (0.09) (0.10) 0.25
Certain amounts in the accompanying statement of operations for the year ended
December 31, 2002 have been reclassified to conform to the restatement including
the reclassification of the foreign income taxes from cost of goods sold to
foreign tax expense.
PERSONNEL RESTRUCTURING COSTS
The Company has recorded and classified separately from recurring selling,
general and administrative costs of approximately $495,000 incurred to terminate
and relocate several members of management that occurred in September 2002.
BUSINESS ACQUISITION COSTS
The Company capitalizes direct costs associated with successful business
acquisitions and expenses acquisition costs for unsuccessful acquisition
efforts.
F-10
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using Accounting Principle
Board Opinion No. 25 ("APB No. 25"). Under APB 25, compensation expense is
recognized for stock options with an exercise price that is less than the market
price on the grant date of the option. For stock options with exercise prices at
or above the market value of the stock on the grant date, the Company adopted
the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). The Company also adopted the disclosure-only
provisions of SFAS No. 123 for the stock options granted to the employees and
directors of the Company. Accordingly, no compensation cost has been recognized
under APB No. 25. Had compensation expense for the options granted been recorded
based on the fair value at the grant date for the options, consistent with the
provisions of SFAS 123, the Company's net income/(loss) and net income/(loss)
per share for the years ended December 31, 2003, 2002, and 2001 would have been
decreased to the pro forma amounts indicated below.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
(in thousands, except per share
2003 2002 2001
-------- -------- --------
Net income/ (loss): As reported $ (108) $(3,969) $(4,577)
Pro forma (2,457) (3,969) (4,577)
======== ======== ========
Net (loss) per share:
Basic As reported $ (0.03) $ (1.05) $ (5.80)
Pro forma (0.06) (1.05) (5.80)
======== ======== ========
Diluted As reported $ (0.03) $ (1.05) $ (5.80)
Pro forma (0.06) (1.05) (5.80)
======== ======== ========
There were options granted in 2003 and 2001. See Note 11 for further disclosures
regarding stock options.
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Expected dividend yield 0 -- --
Expected price volatility 265.08% -- 100%
Risk-free interest rate 6.25% -- 5.0%
Expected life of options 7 years -- 4 years
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company discloses the results of its segments in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). The Company designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. At December 31,
2003 and 2002, the Company operates in three segments organized by service line:
casing services, directional drilling services and compressed air drilling
services. At December 31, 2001, the Company operated in only one segment. Please
see Note 15 for further disclosure in accordance with SFAS No. 131.
PENSION AND OTHER POST RETIREMENT BENEFITS
SFAS No. 132, EMPLOYER'S DISCLOSURES ABOUT PENSION AND OTHER POST RETIREMENT
BENEFITS ("SFAS No. 132"), requires certain disclosures about employers' pension
and other post retirement benefit plans and specifies the accounting and
measurement or recognition of those plans. SFAS No. 132 requires disclosure of
information on changes in the benefit obligations and fair values of the plan
assets that facilitates financial analysis. Please see Note 3 for further
disclosure in accordance with SFAS No. 132.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("SFAS No. 133"), establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Currently, the Company has no derivative
instruments.
F-11
INCOME (LOSS) PER COMMON SHARE
The Company computes income (loss) per common share in accordance with the
provisions of SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
earnings per share. Basic earnings per share is computed on the basis of the
weighted average number of shares of common stock outstanding during the period.
Preferred dividends are deducted from net income (loss) and have been considered
in the calculation of income available to common stockholders in computing basic
earnings per share. Diluted earnings per share is similar to basic earnings per
share, but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible preferred stock, stock options, etc.) as if they had
been converted. Potential dilutive common shares that have an anti-dilutive
effect (e.g., those that increase income per share or decrease loss per share)
are excluded from diluted earnings per share. As a result of the Company's net
loss for the years ended December 31, 2003, 2002 and 2001, common stock
equivalents have been excluded because their effect would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2003, the FASB approved SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY ("SFAS
No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after September 15, 2003. The effect on the
Company's financial position include the fact that beginning on July 1, 2003
redeemable warrants will be classified as liabilities and not shown in the
mezzanine equity section of the balance sheet. The adoption of SFAS No. 150
could also affect the Company's debt covenant calculations for purposes of its
bank loans. As of December 31, 2003, the Company was in default of certain
covenants at Jens's and Strata and has obtained waivers for these covenant
defaults from its lender.
NOTE 2 - EMERGENCE FROM CHAPTER 11
Allis-Chalmers Corporation emerged from Chapter 11 proceedings on October 31,
1988 under a plan of reorganization, which was consummated on December 2, 1988.
The Company was thereby discharged of all debts that arose before confirmation
of its First Amended and Restated Joint Plan of Reorganization ("Plan of
Reorganization"), and all of its capital stock was cancelled and made eligible
for exchange for shares of common stock of the reorganized Company. On May 9,
2001, the reverse merger with OilQuip described in Note 1 constituted the event
whereby the exchange of shares of common stock of the reorganized Company
occurred.
NOTE 3 - PENSION AND POST RETIREMENT BENEFIT OBLIGATIONS
PENSION PLAN
------------
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan"), and as a
result the Consolidated Plan was under funded on a present value basis. The
Company was unable to fund its obligations and in September 1997 obtained from
the Pension Benefit Guaranty Corporation ("PBGC") a "distress" termination of
the Consolidated Plan under section 4041(c) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The PBGC agreed to a plan
termination date of April 14, 1997. The PBGC became trustee of the terminated
Consolidated Plan on September 30, 1997. Upon termination of the Consolidated
Plan, the Company and its subsidiaries incurred a liability to the PBGC that the
PBGC estimated to be approximately $67.9 million (the "PBGC Liability").
In September 1997, the Company and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability, which required, among other
things, satisfactory resolution of the Company's tax obligations with respect to
the Consolidated Plan under Section 4971 of the Internal Revenue Code of 1986,
as amended ("Code"). In August 1998, the Company and the Internal Revenue
Service ("IRS") settled the Company's tax liability under Code Section 4971 for
$75,000.
F-12
In June 1999, the Company and the PBGC entered into an agreement for the
settlement of the PBGC Liability (the "PBGC Agreement"). Pursuant to the terms
of the PBGC Agreement, the Company issued 117,020 shares of its common stock to
the PBGC, reducing the pension liability by the estimated fair market value of
the shares to $66.9 million (the Company has a right of first refusal with
respect to the sale of such shares). In connection with the PBGC Agreement, the
Company and the PBGC entered into the following agreements: (i) a Registration
Rights Agreement (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement by and among Allis-Chalmers, the PBGC, and others. In connection with
the merger with OilQuip described below, the Lock-Up Agreement was terminated
and the Registration Rights Agreement was amended to provide the PBGC the right
to have its shares of common stock registered under the Securities Act of 1933
on Form S-3 during the 12 month period following the Merger (to the extent the
Company is eligible to use Form S-3 which it currently is not) and thereafter to
have its shares registered on Form S-1 or S-2.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provided that the Company had to either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which made available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million ("Release Event").
The merger with OilQuip (the "Merger") on May 9, 2001 (as described in Note 1)
constituted a Release Event, which satisfied and discharged the PBGC Liability.
In connection with the Merger, the Company and the PBGC agreed that the PBGC
should have the right to appoint one member of the Board of Directors of the
Company for so long as it holds at least 23,404 shares of the common stock. In
connection with the Merger, the Lock-Up Agreement was terminated in its
entirety. As of December 31, 2003 and 2002, the Company is no longer liable for
any obligations of the Consolidated Plan.
MEDICAL AND LIFE
----------------
Pursuant to the Plan of Reorganization, the Company assumed the contractual
obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI for 50% of
the actual cost of medical and life insurance claims for a select group of
retirees (SMI Retirees) of the prior Simplicity Manufacturing Division of
Allis-Chalmers. The actuarial present value of the expected retiree benefit
obligation is determined by an actuary and is the amount that results from
applying actuarial assumptions to (1) historical claims-cost data, (2) estimates
for the time value of money (through discounts for interest) and (3) the
probability of payment (including decrements for death, disability, withdrawal,
or retirement) between today and expected date of benefit payments. As of
December 31, 2003 and 2002, the Company has recorded post-retirement benefit
obligations of $545,000 and $670,000, respectively, associated with this
transaction.
401(k) SAVINGS PLAN
On January 1, 2003 the Company adopted the 401(k) Profit Sharing Plan (the
"Plan"). The Plan is a defined contribution savings plan designed to provide
retirement income to eligible employees of the Company and its subsidiaries. The
Plan is intended to be qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended. It is funded by voluntary pre-tax contributions from
eligible employees who may contribute a percentage of their eligible
compensation, limited and subject to statutory limits. The Plan is also funded
by discretionary matching employer contributions from the Company. Eligible
employees cannot participate in the Plan until they have attained the age of 21
and completed six-months of service with the Company. Upon leaving the Company,
each participant is 100% vested with respect to the participants' contributions
while the Company's matching contributions are vested over a three-year period
in accordance with the Plan document. Contributions are invested, as directed by
the participant, in investment funds available under the Plan. Matching
contributions of approximately $10,000 were paid in 2003.
NOTE 4 - ACQUISITIONS
On February 6, 2001, Mountain Air acquired the business and certain assets of
MADSCO, a private company, for $10,000,000 (including a $200,000 deposit paid in
2000) in cash and a $2,200,000 promissory note to the sellers (with interest at
5 3/4 percent and principal and interest due February 6, 2006). The acquisition
was accounted for as a business combination using the purchase method of
accounting. Goodwill of $3,661,000 and other identifiable intangible assets of
$800,000 were recorded on consolidation.
F-13
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
Merger, all of OilQuip's outstanding common stock was converted initially into
80,000 shares of Allis-Chalmers' common stock plus 1,920,000 shares of
Allis-Chalmers' common stock issued on October 15, 2001. The acquisition was
accounted for using the purchase method of accounting as a reverse acquisition.
Other identifiable intangible assets of $1,009,000 were recorded on
consolidation. Effective on the date of the merger, OilQuip retroactively became
the reporting company. As a result, financial statements prior to the merger are
those of OilQuip.
The Company completed two acquisitions and related financing on February 6,
2002.
The Company purchased 81% of the outstanding stock of Jens'. Jens' supplies
highly specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells. The Company also
purchased substantially all the outstanding common stock and preferred stock of
Strata. Strata provides high-end directional and horizontal drilling technology
for specific targeted reservoirs that cannot be reached vertically.
The aggregate purchase price for Jens' and Strata was (i) $10,250,000 in cash,
(ii) a $4,000,000 note payable due in four years, (iii) $1,234,560 for a
non-compete agreement payable over five years, (iv) 1,591,542 shares of common
stock of the Company, (v) 3,500,000 shares of a newly created Series A 10%
Cumulative Convertible Preferred Stock of the Company ("Preferred Stock") and
(vi) an additional payment estimated to be from $1,000,000 to $1,250,000, based
upon Jens' working capital on February 1, 2002. The actual working capital
adjustment was approximately $983,000. In addition, in connection with the
Strata acquisition, Energy Spectrum Partners LP was issued warrants to purchase
87,500 shares of Company common stock at an exercise price of $0.75 per share.
The acquisitions were accounted for using the purchase method of accounting.
Goodwill of $4,168,000 and other identifiable intangible assets of $2,035,000
were recorded with consolidation of the acquisitions.
In July 2003, through the subsidiary Mountain Air, the Company entered into a
Limited liability company operating agreement with a division of M-I L.L.C.
("M-I"), a joint venture between Smith International and Schlumberger N.V.
(Schlumberger limited), to form a Texas limited liability company named AirComp
LLC ("AirComp").
Pursuant to the terms of the AirComp operating agreement, the Company
contributed approximately $6.3 million in assets through its subsidiary Mountain
Air in exchange for a 55% ownership in AirComp and M-I contributed approximately
$6.8 million in exchange for a 45% ownership in AirComp. The assets contributed
were recorded at historical cost basis. As a result of the Company's controlling
interest and operating control, the Company has consolidated AirComp in its
financial statements.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations as of December 31, 2003 and the acquisitions of Jens' and Strata on
the Company's results of operations for December 31, 2002, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented.
Year Ended December 31,
(UNAUDITED)
(in thousands, except per share)
2003 2002
Revenues $ 34,446 $ 19,142
Operating income (loss) $ 3,008 $ (401)
Net income ( loss) $ 411 $ (4,431)
Net income (loss) per common share
Basic $ 0.10 $ (1.18)
Diluted $ 0.07 $ (1.18)
F-14
NOTE 5 - DISCONTINUED OPERATIONS
On December 12, 2001, the Company consummated the sale of its wholly owned
subsidiary, HDS, to the general manager of HDS (the "Buyer"), in a management
buy-out with an effective date of November 30, 2001. Under the terms of the
sale, the Company received a promissory note from the Buyer in the amount of
$790,500 due on November 30, 2007, secured by certain HDS equipment. The note
was to accrue interest at a rate of 7% through the payment date. On September
30, 2002, the Company received cash in the amount of $600,000 and recorded
$191,000 in factoring costs related to the early termination of the promissory
note from the buyer of HDS. A loss on the sale of approximately $2.0 million was
recorded in the year ended December 31, 2001.
In conjunction with the sale of HDS, the Company formally discontinued the
operations segment related to precision machining of rotating equipment in 2001.
All assets involved in the discontinued operation were disposed of prior to
December 31, 2001.
The operating results of the business sold have been reported separately as
discontinued operations in the accompanying statement of operations and consists
of the following:
Period May 9, 2001 through
November 30, 2001
(in thousands)
Revenues $ 1,925
Cost of Sales 1,486
--------
Gross Profit 439
Operating expenses 594
Depreciation and amortization 124
--------
(Loss) from operations (279)
Other (expense) income
Interest expense (12)
--------
(Loss) from discontinued operations $ (291)
========
Loss on sale of discontinued operations $(2,013)
========
F-15
NOTE 6 - PROPERTY AND OTHER INTANGIBLES ASSETS
Property and equipment is comprised of the following at December 31:
Depreciation
Period 2003 2002
---- ----
Land $ 27 $ 25
Building and improvements 15 - 20 years 729 706
Machinery and equipment 3 -15 years 23,972 14,674
Tools, furniture, fixtures and leasehold improvements 3 - 7 years 4,098 4,059
---------- -----------
Total $ 28,726 $ 19,464
Less: accumulated depreciation (2,487) (2,340)
---------- -----------
Property and equipment, net $ 26,339 $ 17,124
========== ===========
Intangible assets are as follows at December 31:
Amortization
Period 2003 2002
---- ----
Intellectual Property 20 years $ 1,009 $ 1,009
Non-compete agreements 3 - 5 years 1,535 1,535
Other intangible assets 3 - 10 years 1,000 1,000
---------- -----------
Total $ 3,544 $ 3,544
Less: accumulated amortization (1,254) (726)
---------- -----------
Intangibles assets, net $ 2,290 $ 2,818
========== ===========
2003 2002
Gross Accumulated Current year Gross Accumulated Current year
Value amortization amortization value amortization amortization
------ ------------ ------------ ------ ------------ ------------
Intellectual property $1,009 $ 183 $ 46 $1,009 $ 137 $ 46
Non-compete agreements 1,535 731 347 1,535 384 324
Other intangible assets 1,000 340 135 1,000 205 132
------ ------------ ------------ ------ ------------ -------------
Total $3,544 $ 1,254 $ 528 $3,544 $ 726 $ 502
====== ============ ============ ====== ============ =============
Amortization of intangible assets at December 31, is as follows:
INTANGIBLE AMORTIZATION BY PERIOD
---------------------------------
(in thousands)
Year ended December 31,
2008 and
2004 2005 2006 2007 thereafter
---------- ---------- ---------- ---------- ----------
Intangible Assets Amortization
Intellectual property $ 50 $ 50 $ 50 $ 50 $ 625
Non-compete agreements 286 250 247 21 --
Other intangible assets 135 135 99 65 226
---------- ---------- ---------- ---------- ----------
Total Intangible Amortization $ 471 $ 435 $ 396 $ 136 $ 852
========== ========== ========== ========== ==========
F-16
NOTE 7 - INCOME TAXES
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. A valuation allowance is established for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.
The Company has recorded a valuation allowance equal to the excess of deferred
tax assets over deferred tax liabilities as the Company was unable to determine
that it is more likely than not that the deferred tax asset will be realized.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carry forwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carry forwards, and could be triggered by a public offering
or by subsequent sales of securities by the Company or its stockholders.
Deferred income tax assets and the related allowance as of December 31, 2003 and
2002 are as follows:
2003 2002
--------- ---------
Deferred non-current income tax assets:
Net future tax deductible items $ 500 $ 500
Net operating loss carry forwards 2,975 2,033
A-C Reorganization Trust claims 35,000 35,000
--------- ---------
Total deferred non-current income tax assets 38,475 37,533
Valuation allowance (38,475 (37,533)
--------- ---------
Net deferred non-current income taxes $ -- $ --
========= =========
Net operating loss carry forwards for tax purposes at December 31, 2003 and 2002
are estimated to be $8.5 million and $5.9 million, respectively, expiring
through 2022.
Net future tax-deductible items relate primarily to differences in book and tax
depreciation and amortization and to compensation expense related to the
issuance of stock options. Gross deferred tax liabilities at December 31, 2003
and 2002 are not material.
The Company and its subsidiaries file a consolidated U.S. federal income tax
return. The Company has no current tax expense for the years ended December 31,
2003, 2002 and 2001, respectively. The Company and specifically, its Jens'
subsidiary, does pay foreign income taxes within the country of Mexico related
to its earnings on Mexico revenues. The Company paid $370,000 and $270,000 in
foreign income taxes to Mexico during the years ended December 31, 2003 and
2002, respectively. There is approximately $640,000 of U.S. foreign tax credits
available to the Company and of that amount; the Company has determined that
approximately $205,000 will be recoverable in a future period by applying the
credits back to the taxable income of the Jens' subsidiary in 2001 and 2000. The
$205,000 of recoverable foreign income taxes has been recorded as "other current
assets" on the accompanying balance sheet of the Company as of December 31,
2003. The remaining $435,000 of available U.S. foreign tax credits may or may
not be recoverable by the Company depending upon the availability of taxable
income in future years and therefore, have not been recorded as an asset as of
December 31, 2003. The foreign tax credits available to the Company begin to
expire in the year 2007.
F-17
The following table reconciles income taxes based on the U.S. statutory tax rate
to the Company's income tax expense from continuing operations:
2003 2002 2001
--------- --------- -------
Income tax expense based on the U.S. statutory tax rate $ -- $ -- $ --
Foreign income subject to foreign taxes a rate different
than the U.S. statutory rate 370,468 269,568 --
--------- --------- -------
Total $370,468 $269,568 $ --
========= ========= =======
The Plan of Reorganization established the A-C Reorganization Trust to settle
claims and to make distributions to creditors and certain shareholders. The
Company transferred cash and certain other property to the A-C Reorganization
Trust on December 2, 1988. Payments made by the Company to the A-C
Reorganization Trust did not generate tax deductions for the Company upon the
transfer but generate deductions for the Company as the A-C Reorganization Trust
makes payments to holders of claims.
The Plan of Reorganization also created a trust to process and liquidate product
liability claims. Payments made by the A-C Reorganization Trust to the product
liability trust did not generate current tax deductions for the Company.
Deductions are available to the Company as the product liability trust makes
payments to liquidate claims or incurs other expenses.
The Company believes the above-named trusts are grantor trusts and therefore
includes the income or loss of these trusts in the Company's income or loss for
tax purposes, resulting in an adjustment of the tax basis of net operating and
capital loss carry forwards. The income or loss of these trusts is not included
in the Company's results of operations for financial reporting purposes.
F-18
NOTE 8 - DEBT
Debt is as follows at:
Year Ended December 31,
(in thousands)
--------------
2003 2002
-------- --------
Debt of Mountain Air
Line of Credit with Wells Fargo $ -- $ 330
Note payable to Wells Fargo - Term Note -- 2.392
Note payable to Wells Fargo - Subordinated Debt, net -- 1,783
Note payable to Wells Fargo - Equipment Term Note -- 160
Note payable to Wells Fargo - Equipment leasing 247 --
Note payable to Seller of Mountain Air Drilling Service Company 1,511 2,200
Debt of Jens'
Line of Credit with Wells Fargo 26 67
Note payable to Wells Fargo - Term Note 4.654 3.369
Note payable to Wells Fargo - Real Estate Note 207 384
Subordinated Note payable to Seller of Jens' 4.000 4,000
Note payable to Seller of Jens' for non-compete agreement 761 1,008
Note payable to Texas State Bank - Term Note 354 --
Debt of Strata
Line of Credit with Wells Fargo 2,413 1,.275
Note payable to Wells Fargo - Term Note -- 1.041
Vendor financing 2,383 455
Note payable to former shareholder -- 12
Debt of Allis-Chalmers
Notes payable to certain former Directors 386 370
Note payable to Wells Fargo - Subordinated debt 2,675 2,375
Debt of AirComp
Line of Credit with Wells Fargo 369 --
Note payable to Wells Fargo - Term Note 7,429 --
Subordinated Note Payable to M-I L,L C 4,818 --
-------- --------
Total Debt $32,233 $21,221
Less: short term debt and current maturities 5,510 13,890
Long-term debt obligations $27,083 $ 7,331
======== ========
The debt above is stated as of December 31, 2003 and 2002, net of the remaining
put obligations totaling approximately $325,000 and $842,000 respectively that
are disclosed further in "REDEEMABLE WARRANTS" below. As of December 31, 2003
and 2002, the gross debt is equal to approximately $32,558,000 and $22,063,000,
respectively.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements. As of December 31, 2003, the Company's weighted
average interest rate for all of its outstanding debt is approximately 6.34%. As
of December 31, 2002, the Company's weighted average interest rate for all of
its outstanding debt was approximately 8.5%.
Maturities of debt obligations at December 31, 2003 are as follows:
Maturities of Debt
------------------
(in thousands)
Year Ended:
December 31, 2004 $ 6,800
December 31, 2005 9,465
December 31, 2006 5,533
December 31, 2007 5,581
December 31, 2008 and thereafter 4,854
-------------
Total $ 32,233
=============
F-19
The debt agreements are as follows:
MOUNTAIN AIR
NOTES PAYABLE TO WELLS FARGO - EQUIPMENT LEASING - A term loan in the original
amount of $267,000 at an interest rate of 5%, interest payable monthly, with
monthly principal payments of $5,039 due on the last day of the month. The
maturity date of the loan is June 30, 2008. The balance at December 31, 2003 was
$247,000.
NOTE PAYABLE TO SELLER OF MOUNTAIN AIR DRILLING SERVICE COMPANY ("MADSCO") - A
note to the sellers of MADSCO assets in the original amount of $2,200,000 at
5.75% simple interest was reduced to $1,469,151 as a result of the settlement of
a legal action against the sellers. The principal and accrued interest is due on
September 30, 2007 in the amount of $1,863,195. See Note 15 for information
regarding the modification to the terms of this agreement. The balance at
December 31, 2003 was $1,511,000.
JENS'
NOTE PAYABLE TO WELLS FARGO CREDIT, INC. - TERM NOTE - A term loan in the
original amount of $4,042,396 was amended in October 2003 to $5,100,000 at a
floating interest rate (6.0% at December 31, 2003) with monthly principal
payments of $85,000 plus 25% of Jens' receipt of any payment from Maytep. The
maturity date of the loan was January 31, 2005 but in April 2004 was extended to
January 31, 2006. The balance at December 31, 2003 was $4,654,000.
NOTE PAYABLE TO WELLS FARGO CREDIT INC. - REAL ESTATE NOTE - A real estate loan
in the amount of $532,000 at floating interest rate (6.0% at December 31, 2003)
with monthly principal payments of $14,778 plus accrued interest. The principal
will be due on January 31, 2005. The balance at December 31, 2003 was $207,000.
LINE OF CREDIT WITH WELLS FARGO CREDIT, INC. - At December 31, 2003, Jens' had a
$1,000,000 line of credit at Wells Fargo Credit, Inc., of which $26,000 was
outstanding at December 31, 2003. The committed line of credit is due on January
31, 2005 but in April 2003 was extended to January 31, 2006. Interest accrues at
a floating rate plus 3% (7.0% at December 31, 2003) for the committed portion.
Additionally, Jens' pays a 0.5% fee for the uncommitted portion.
SUBORDINATED NOTE PAYABLE TO SELLER OF JENS' - A subordinated seller's note in
the original amount of $4,000,000 at 7.5% simple interest. At December 31, 2003,
$533,000 of interest was accrued and was included in accounts payable, related
parties. The principal and interest are due on January 31, 2006. The note is
subordinated to the rights of the Company's bank lenders.
NOTE PAYABLE TO SELLER OF JENS' FOR NON-COMPETE AGREEMENT - In conjunction with
the purchase of Jens' (Note 4), the Company agreed to cause Jens' to pay a total
of $1,234,560 to the Seller of Jens' in exchange for a non-compete agreement
signed simultaneously. Jens' is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of December 31, 2003 the balance was
approximately $761,000 including $247,000 classified as short-term.
NOTE PAYABLE TO TEXAS STATE BANK - TERM NOTE - A term loan in the original
amount of $397,080 at a floating interest rate (6.0% at December 31, 2003) with
monthly principal payments of $11,000 plus interest. The maturity date of the
loan is September 17, 2006. As of December 31, 2003, the outstanding balance was
$354,000.
STRATA
VENDOR FINANCING - In December 2003, Strata entered into a short-term vendor
financing agreement in the original amount of $1,746,000 with a major supplier
of drilling motors for drilling motor rentals, motor lease costs and motor
repair costs. The agreement provides for repayment of all amounts due no later
than December 30, 2005. Payment of the interest on the note is due monthly and
three principal payments are due in October 2004, April 2005 and December 2005.
The vendor financing incurs interest at a rate of 8.0%. As of December 31, 2003,
the outstanding balance was approximately $1,746,000.
VENDOR FINANCING - In October 2003, Strata entered into a short-term vendor
financing agreement in the original amount of $779,000 with a major supplier of
drilling motors for the purchase of fifty (50) drilling motors. The agreement
provides for repayment of all amounts due no later than October 31, 2004.
Payment on the note is due monthly in the amount of $71,000 plus interest. The
vendor financing incurs interest at a rate of 8.0%. As of December 31, 2003, the
outstanding balance was approximately $637,000.
F-20
LINE OF CREDIT WITH WELLS FARGO CREDIT, INC. - At December 31, 2003, Strata has
a $2,500,000 line of credit at Wells Fargo Credit, Inc., of which $2,413,000 was
outstanding at December 31, 2003. The committed line of credit was due on
January 31, 2005 but in April 2004 was extended to January 31, 2006. Interest
accrues at a floating interest rate plus 3% (7.0% at December 31, 2003) for the
committed portion. Additionally, Strata pays a 0.5% annual fee for the
uncommitted portion.
ALLIS-CHALMERS
NOTES PAYABLE TO WELLS FARGO ENERGY CAPITAL, INC. - Subordinated Debt And
Amortization Of Redeemable Warrant - Secured subordinated debt issued to
partially finance the acquisitions of Jens' and Strata in the original amount of
$3,000,000 at 12% interest payable monthly. Of this amount, $2,675,000 was
outstanding on December 31, 2003. The principal was due on January 31, 2005 but
in April 2004 was extended to February 1, 2006. In connection with incurring the
debt, the Company issued redeemable warrants valued at $900,000, which have been
recorded as a discount to the subordinated debt and as a liability (see
Redeemable Warrants below and Note 12). The discount is amortizable over three
years beginning February 6, 2002 as additional interest expense of which
$300,000 was recognized for the year ended December 31, 2003. The debt is
recorded at $2,675,000 at December 31, 2003, net of the unamortized portion of
the put obligation.
NOTES PAYABLE TO CERTAIN FORMER DIRECTORS - The Allis-Chalmers Board established
an arrangement by which to compensate former and continuing Board members who
had served from 1989 to March 31, 1999. Pursuant to the arrangement in 1999,
Allis-Chalmers issued promissory notes totaling $325,000 to current or former
directors and officers. The notes bear interest at the rate of 5%, compounded
quarterly, and are due March 28, 2005. At December 31, 2003, the notes were
recorded at $386,000, including accrued interest.
REDEEMABLE WARRANTS - The Company issued redeemable warrants that are
exercisable for up to 233,000 shares of the Company's common stock at an
exercise price of $0.75 per share ("Warrants A and B") and non-redeemable
warrants that are exercisable for a maximum of 67,000 shares of the Company's
common stock at $5.00 per share ("Warrant C"). The warrants were issued in
connection with the issuance of a subordinated debt instrument for Mountain Air
in 2001, subsequently repaid in connection with the formation of AirComp in July
2003 and the related issuance of the $3 million subordinated debt discussed
above (collectively, the "Subordinated Debt"). Warrants A and B are subject to
cash redemption provisions ("puts") in the amount of $600,000 and $900,000,
respectively, at the discretion of the warrant holders beginning at the earlier
of the final maturity date of the Subordinated Debt or three years from the
closing of the Subordinated Debt (January 31, 2005). Warrant C does not contain
any such puts or provisions. In April 2004 the maturity date of the debt was
extended to February 1, 2006. The Company has recorded a liability of $600,000
at Mountain Air and $900,000 at Allis-Chalmers for a total of $1,500,000 and is
amortizing the effects of the puts to interest expense over the life of the
Subordinated Debt.
GUARANTEE OF SUBSIDIARY OBLIGATIONS. The Company guarantees many of its
subsidiaries' obligations. In addition, the Company's Chief Executive Officer
and Chairman, Munawar H. Hidayatallah, and his wife, guarantee substantially all
of the Company's obligations.
AIRCOMP LLC
LINE OF CREDIT WITH WELLS FARGO BANK - a $1,000,000 line of credit at Wells
Fargo bank, of which $369,000 was outstanding at December 31, 2003. Interest
accrues at a floating interest rate plus 2.25% (6.25% at December 31, 2003) for
the committed portion and is payable quarterly starting in September 2003.
Additionally, AirComp pays a 0.5% annual fee for the uncommitted portion. The
line of credit must be repaid on June 27, 2007.
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the original amount of
$8,000,000 at variable interest rates related to the Prime or LIBOR rates (4.09%
at December 31, 2003), interest payable quarterly, with quarterly principal
payments of $286,000 due on the last day of the quarter beginning in July 2003.
The maturity date of the loan is June 27, 2007. The balance at December 31, 2003
was $7,429,000
F-21
NOTE PAYABLE TO WELLS FARGO - EQUIPMENT TERM LOAN - A delayed draw term loan in
the amount of $1,000,000 with interest at a rate equal to the LIBOR rate plus
2.0% to 2.75%, with quarterly payments of interest and quarterly payments of
principal equal to 5% of the outstanding balance commencing in the first quarter
of 2005. The maturity date of the loan is June 27, 2007. AirComp has not yet
drawn down on this note and there was no outstanding balance at December 31,
2003.
NOTE PAYABLE TO M-I L.L.C. - SUBORDINATED DEBT - Subordinated debt in the amount
of $4,818,000 bearing an annual interest rate of 5% in conjunction with the
joint venture. The note is due and payable when M-I sells its interest or a
termination of AirComp occurs. At December 31, 2003, $120,000 of interest was
accrued and included in accrued interest.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company rents office space on a five-year lease, which expires February 5,
2006. The Company and its subsidiaries also rent certain other facilities and
shop yards for equipment storage and maintenance. Facility rent expense for the
years ended December 31, 2003, 2002 and 2001 was $370,000, $303,000 and $90,000,
respectively. The Company has no further lease obligations.
At December 31, 2003, future minimum rental commitments for all operating leases
are as follows:
Operating Leases
----------------
(in thousands)
Year Ended:
December 31, 2004 $ 318
December 31, 2005 207
December 31, 2006 116
December 31, 2007 115
December 31, 2008 and thereafter 58
------------
Total $ 814
============
NOTE 10 - SHAREHOLDERS' EQUITY
The equity and per share data on the financial statements as of December 31,
2001 have been presented so as to give effect to the recapitalization of the
Company, which occurred in the reverse acquisition of Allis-Chalmers on May 9,
2001. Under the recapitalization, the original number of shares outstanding of
the formerly private OilQuip is considered to have been exchanged for the
2,000,000 shares of Allis-Chalmers that were issued on the date of the reverse
acquisition to the owners of OilQuip.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Air. However, for accounting purposes OilQuip was treated as the
acquiring company in a reverse acquisition of Allis-Chalmers. The business
combination was accounted for as a purchase. As a result, $2,779,000, the value
of the Allis-Chalmers common stock outstanding at the date of acquisition, was
added to shareholders' equity, which reflects the recapitalization of
Allis-Chalmers and the reorganization of the combined company.
On February 6, 2002, in connection with the acquisition of 81% of the
outstanding stock of Jens' (Note 4), the Company issued 265,591 shares of common
stock to the seller of Jens', an individual presently employed as the President
of the Company. The business combination was accounted for as a purchase. As a
result, $630,000, the fair value of the Company's common stock issued at the
date of the acquisition, was added to shareholders' equity.
On February 6, 2002, in connection with the acquisition of 95% of the
outstanding stock of Strata (Note 4), the Company issued 1,311,973 shares of
common stock to the seller of Strata, Energy Spectrum. The business combination
was accounted for as a purchase. As a result, $2,952,000, the fair value of the
Company's common stock issued at the date of the acquisition, was added to
shareholders' equity.
On May 31, 2002, the Company acquired the remaining 5% of the outstanding stock
of Strata and issued 17,500 shares of common stock to the seller, Energy
Spectrum. As a result, $153,000, the fair value of the Company's common stock
issued at the date of the purchase, was added to shareholders' equity.
F-22
In connection with the Strata purchase, the Company authorized the creation of
Preferred Stock. The Preferred Stock has cumulative dividends at ten percent per
annum payable in additional shares of Preferred Stock or if elected and declared
by the Company, in cash. Additionally, the Preferred Stock was convertible into
common stock of the Company. The Preferred Stock is also subject to mandatory
redemption on or before February 4, 2004 or earlier from the net proceeds of new
equity sales and optional redemption by the Company at any time. The redemption
price of the Preferred Stock was $1.00 per share plus accrued but unpaid
dividends.
The Preferred Stock, including accrued dividends, was converted into 1,718,090
shares of common stock on April 2, 2004 (See, "Recent Developments.")
For the year ended December 31, 2003, the Company has accrued $671,000 of
dividends payable to the Preferred Stock holders. No dividends have been
declared or paid to date.
In connection with the Strata Acquisition, the Company issued to Energy Spectrum
a warrant to purchase 87,500 shares of the Company's common stock at an exercise
price of $0.75 per share, and on February 19, 2003, the Company issued an
additional warrant to purchase 175,000 shares of the Company's common stock at
an exercise price of $0.75 per share. The warrant issued on February 19, 2003
was valued in accordance with the Black-Scholes valuation model at approximately
$306,000. The fair value of this warrant issuance was recorded similar to a
preferred share dividend.
NOTE 11 - STOCK OPTIONS
In 2000, in conjunction with the promissory notes issued to certain current and
former Directors (Note 8), Allis-Chalmers' Board of Directors also granted stock
options to these same individuals. Options to purchase 4,800 shares of common
stock were granted with an exercise price of $2.75. These options vested
immediately and may be exercised any time prior to March 28, 2010. As of
December 31, 2003, none of the stock options were exercised. No compensation
expense has been recorded for these options that were issued with an exercise
price equal to the fair value of the common stock at the date of grant.
On May 31, 2001, the Board granted to Leonard Toboroff, a director of
Allis-Chalmers an option to purchase 100,000 shares of common stock at $2.50 per
share, exercisable for 10 years from October 15, 2001. The option was granted
for services provided by Mr. Toboroff to OilQuip prior to the merger, including
providing financial advisory services, assisting in OilQuip's capital structure
and assisting OilQuip in finding strategic acquisition opportunities. The
Company recorded compensation expense of $500,000 for the issuance of the option
for the year ended December 31, 2001.
On December 16, 2003, the Board granted to the employees of the Company options
to purchase 854,500 shares of common stock, and issued options to purchase
14,000 shares of common stock to non-employee directors and to Energy Spectrum
Partners LP as compensation for services rendered by directors in 2002 and 2003.
As further disclosed in Note 1, the Company accounts for its stock-based
compensation using APB No. 25. The Company has adopted the disclosure-only
provisions of SFAS No. 123 for the stock options granted to the employees and
directors of the Company. Accordingly, no compensation cost has been recognized
for these options. These options are exercisable for 10 years from December 16,
2003 at $2.75 per share. As of December 31, 2003, none of the stock options were
exercised.
A summary of the Company's stock option activity and related information is as
follows:
December 31, 2003 December 31, 2002 December 31, 2001
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Under Exercise Shares Under Exercise Shares Under Exercise
Option Price Option Price Option Price
---------------- -------------- --------------- ---------------- ----------------- --------------
Beginning balance 104,800 $ 3.00 104,800 $ 3.00 4,800 $ 13.75
Granted 868,500 2.75 - - 100,000 2.50
Canceled - - - - - -
Exercised - - - - - -
---------------- -------------- --------------- ---------------- ----------------- --------------
Ending balance 973,300 $ 2.78 104,800 $ 3.00 104,800 $ 3.02
================ ============== =============== ================ ================= ==============
F-23
The following table summarizes additional information about the Company's stock
options outstanding as of December 31, 2003:
Fair Value Weighted Average Remaining
Exercise Price Shares Under Option Contractual Life Weighted Average
---------------- -------------------- -------------------------- ------------------
$ 2.50 100,000 7.75 years $5.00
$13.75 4,800 6.25 years $9.85
$ 2.75 868,500 10.00 years $2.75
------- --------- ------------ ------
$ 2.78 973,300 9.75 years $3.15
======= ========= ============ ======
There were no stock options issued to employees or directors in the year ended
December 31, 2002.
NOTE 12 - STOCK PURCHASE WARRANTS
In conjunction with the Mountain Air purchase by OilQuip in February of 2001,
Mountain Air issued a common stock warrant for 620,000 shares to a third-party
investment firm that assisted the Company in its initial identification and
purchase of the Mountain Air assets. The warrant entitles the holder to acquire
up to 620,000 shares of common stock of Mountain Air at an exercise price of
$.01 per share over a nine-year period commencing on February 7, 2001. The stock
purchase warrant has been recorded at a fair value of $200,000 for the year
ended December 31, 2001.
As more fully described in Note 8, Mountain Air and Allis-Chalmers issued two
warrants ("Warrants A and B") for the purchase of 233,000 total shares of the
Company's common stock at an exercise price of $0.75 per share and one warrant
for the purchase of 67,000 shares of the Company's common stock at an exercise
price of $5.00 per share ("Warrant C") in connection with their subordinated
debt financing. The holders may redeem Warrants A and B for a total of
$1,500,000 as of January 31, 2005. The fair value of Warrant C was established
in accordance with the Black-Scholes valuation model and as a result, $47,000
was added to shareholders' equity. The following assumptions were utilized to
determine fair value: no dividend yield; expected volatility of 67.24%; risk
free interest rate of 5%; and expected lives of four years.
On February 6, 2002, in connection with the acquisition of substantially all of
the outstanding stock of Strata (Note 4), the Company issued a warrant for the
purchase of 87,500 shares of the Company's common stock at an exercise price of
$0.75 per share over the term of four years. The fair value of the warrant was
established in accordance with the Black-Scholes valuation model and as a
result, $267,000 was added to shareholders' equity. The following assumptions
were utilized to determine fair value: no dividend yield; expected volatility of
67.24%; risk free interest rate of 5%; and expected lives of four years.
In connection with the Strata Acquisition, on February 19, 2003, the Company
issued Energy Spectrum an additional warrant to purchase 175,000 shares of the
Company's common stock at an exercise price of $0.75 per share.
The Preferred Stock, including accrued dividends, was converted into 1,718,090
shares of common stock on April 2, 2004 (See, "Recent Developments.")
(unaudited)
NOTE 13 - LEASE RECEIVABLE
In June 2002, the Company's subsidiary, Strata, sold its measurement while
drilling (MWD) assets to a third party. Under the terms of the sale, the Company
will receive at least $15,000 per month for thirty-six months. After thirty-six
months, the purchaser has the option to pay the remaining balance or continue
paying a minimum of $15,000 per month for twenty-four additional months. After
the expiration of the additional twenty-four months, the purchaser must repay
any remaining balance. This transaction has been accounted for as a direct
financing lease with the nominal residual gain from the asset sale deferred into
income over the life of the lease. During the year ended December 31, 2003, the
Company received a total of $251,000 in payments from the third party related to
this lease.
F-24
NOTE 14 - RELATED PARTY TRANSACTIONS
At December 31, 2003 and 2002, the Company owed the Chief Executive Officer of
the Company $193,000 related to deferred compensation, and for advances totaling
$49,000, respectively. Also the Company owed a former Executive Vice President
and shareholder of the Company advances totaling $70,000, and deferred
compensation of $42,000.
The Company's Chief Executive Officer, Munawar H. Hidayatallah, and his wife
have guaranteed substantially all of the debt obligations of the Company and its
subsidiaries. The Company has agreed to compensate the Chief Executive Officer
annual fee equal to 1/4 of 1% of the amount of debts of the Company and its
subsidiaries guaranteed by Mr. Hidayatallah and his wife payable quarterly
beginning on March 31, 2004.
The President of the Company is the former owner of Jens' and currently holds a
19% minority interest in Jens'. This same individual is the holder of a
$4,000,000 subordinated note payable issued by Jens' and is also owed $533,000
in accrued interest and $761,000 related to the obligation of a non-compete
agreement (Note 8).
The President of the Company and formerly the sole proprietor of Jens' owns a
shop yard, which he leases to Jens' on a monthly basis. The annual lease
payments to the President under the terms of the lease were $28,800 for each of
the years ended December 31, 2003 and 2002.
In addition, the President of the Company and members of his family own 100% of
Tex-Mex Rental & Supply Co., a Texas corporation, that sold approximately
$173,000 and $290,000 of equipment and other supplies to Jens' for the years
ended December 31, 2003 and 2002, respectively. Management of the Company
believes these transactions were on terms at least as favorable to Jens' as
could have been obtained from unrelated third parties.
As further explained in Note 8, former directors of the Company were provided
with promissory notes in 2000 in lieu of compensation for past services
provided. A total of $386,000 included in the long-term debt of the Company is
due the former directors and current shareholders of the Company as of December
31, 2003.
At December 31, 2003, Mountain Air owes its other joint venture partner in
AirComp, LLC, M-I Fluids, LLC a total of $73,000.
NOTE 15 - SETTLEMENT ON LAWSUIT
In June 2003, Mountain Air filed a lawsuit against the former owners of Mountain
Air Drilling Service Company (the "Sellers") for breaches in the asset purchase
agreement. The Sellers stored hazardous materials on the property leased by
Mountain Air without the consent of Mountain Air and violated the non-compete
clause in the asset purchase agreement.
On July 15, 2003, Mountain Air entered into a settlement agreement with the
Sellers. As of the date of the agreement, Mountain Air owed the Sellers a total
of $2,563,195 including $2.2 million in principal and $363,195 in accrued
interest. As part of the settlement agreement, the note payable to the Sellers
was reduced from $2.2 million to $1.5 million. The note payable no longer
accrues interest and the due date of the note payable was extended from February
6, 2006 to September 30, 2007. The lump-sum payment due the Sellers at that date
will be $1,863,195. Mountain Air recorded a one-time gain on the reduction of
the note payable to the Sellers of $1,034,000 in the third quarter of 2003. The
gain was calculated by discounting the note payable to $1,469,152 using a
present value calculation and accreting the note payable to $1,863,195, the
amount due in September 2007. The Company will record interest expense totaling
$394,043 over the life of the note payable beginning July 2003.
F-25
NOTE 16 - SEGMENT INFORMATION
The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(AirComp). All of the segments provide services to the petroleum industry. The
Company only operated in one reporting segment for the year ended December 31,
2001. The revenues, operating income (loss), depreciation and amortization,
interest, capital expenditures and assets of each of the reporting segments plus
the Corporate function are reported below for the years ended December 31, 2003
and 2002:
Year Ended December 31,
2003 2002
--------- ---------
(in thousands)
REVENUES:
Casing services $ 10,037 $ 7,796
Directional drilling services 16,008 6,529
Compressed air drilling services 6,679 3,665
--------- ---------
Total revenues $ 32,724 $ 17,990
========= =========
OPERATING INCOME (LOSS):
Casing services $ 3,628 $ 2,495
Directional drilling services 1,103 (576)
Compressed air drilling services 115 (945)
General corporate (2,222) (2,144)
--------- ---------
Total income/(loss) from operations $ 2,624 $ (1,170)
========= =========
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 1,413 $ 1,265
Directional drilling services 275 295
Compressed air drilling services 1,041 955
General corporate 109 65
--------- ---------
Total depreciation and amortization expense $ 2,838 $ 2,580
========= =========
INTEREST EXPENSE:
Casing services $ 1,044 $ 643
Directional drilling services 268 215
Compressed air drilling services 839 761
General corporate 316 637
--------- ---------
Total interest expense $ 2,467 $ 2,256
========= =========
CAPITAL EXPENDITURES
Casing services $ 2,176 $ 137
Directional drilling services 1,066 83
Compressed air drilling services 2,093 288
General corporate 19 10
--------- ---------
Total capital expenditures $ 5,354 $ 518
========= =========
ASSETS:
Casing services $ 18,191 $ 15,681
Directional drilling services 11,529 8,888
Compressed air drilling services 17,946 9,138
General corporate 1,207 1,071
--------- ---------
Total assets $ 48,873 $ 34,778
========= =========
REVENUES
United States $ 29,395 $ 15,291
Mexico 3,329 2,699
--------- ---------
TOTAL $ 32,724 $ 17,990
========= =========
F-26
NOTE 17 - SUPPLEMENTAL CASH FLOWS INFORMATION
December December December
31, 2003 31, 2002 31, 2001
--------- --------- ---------
(in thousands)
Non-cash investing and financing transactions
in connection with the acquisition of
Mountain Air assets and merger of
Allis-Chalmers and OilQuip:
Fair value of net assets acquired $ -- $ -- $ (7,183)
Goodwill and other intangibles -- -- (2,732)
Notes payable to Seller of Mountain Air -- -- 2,200
Fair value of common stock exchanged $ -- $ -- $ (2,799)
Fair value of net assets, net of cash received -- -- 892
--------- --------- ---------
Net cash paid to acquire subsidiary and
consummate merger $ -- $ -- $ (6,829)
========= ========= =========
Non-cash investing and financing transactions
in connection with the acquisitions of Jens'
and Strata:
Fair value of net assets acquired $ -- $(13,945) $ --
Goodwill and other intangibles -- (5,903) --
Note payable to Seller of Jens' Oilfield Service -- 4,000 --
Value of common stock issued -- 3,735 --
Issuance of preferred stock -- 3,500 --
Fair value of warrants issued -- 314 --
--------- --------- ---------
Net cash paid to acquire subsidiary $ -- $ (8,299) $ --
========= ========= =========
Other non-cash investing and financing transactions:
Sale of property & equipment in connection with
the direct financing lease (Note 13) $ -- $ 1,193 $ --
(Gain) on settlement of debt $ (1,034) $ -- $ --
Amortization of discount on debt $ 442 $ -- $ --
Purchase of equipment financed through assumption of
debt or accounts payable $ 906 $ -- $ --
Other non-cash investing and financing transactions
in connection with AirComp:
Issuance of debt to joint venture by M-I $ (4,818) $ -- $ --
Contribution of property, plant and equipment by
M-I to joint venture $ 6,369 $ -- $ --
Difference of Company's investment cost basis in AirComp
and their share of underlying equity of net assets
of AirComp $ (1,551) $ -- $ --
--------- --------- ---------
Net cash paid in connection with the joint venture $ -- $ -- $ --
========= ========= =========
F-27
NOTE 18 - QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share amounts)
YEAR 2003
Revenues $ 6,999 $ 7,340 $ 8,089 $ 10,296
Operating income (loss) 1,023 910 727 (36)
Net income (loss) 53 (335) 1,131 (301)
--------- --------- --------- ---------
Preferred stock dividend (394) (87) (88) (87)
--------- --------- --------- ---------
Net income (loss) attributed to
common shares $ (341) $ (422) $ 1,043 $ (388)
========= ========= ========= =========
Income (loss) per common share
Basic: $ (0.09) $ (0.11) $ 0.27 $ (0.10)
========= ========= ========= =========
Income (loss) per common share
Diluted: $ (0.09) $ (0.11) $ 0.27 $ (0.10)
========= ========= ========= =========
YEAR 2002
Revenues $ 3,253 $ 4,238 $ 4,775 $ 5,724
Operating income (loss) (133) (729) (540) 232
Net income (loss) (640) (869) (1,505) (955)
--------- --------- --------- ---------
Preferred stock dividend (58) (87) (87) (89)
--------- --------- --------- ---------
Net income (loss) attributed to
common shares $ (698) $ (956) $ (1,592) $ (1,044)
========= ========= ========= =========
Income (loss) per common share
(Basic and diluted) $ (0.19) $ (0.25) $ (0.42) $ (0.27)
========= ========= ========= =========
NOTE 19 - LEGAL MATTERS
The Company is involved in various legal proceedings that arose in the ordinary
course of various businesses. The legal proceedings are at different stages. In
addition, special trusts established in connection with the Company's
reorganization (See Note 2 - Emergence From Chapter 11) are responsible for
certain costs and expenses related to the Company's pre-bankruptcy obligations.
In the opinion of management and their legal counsel, the ultimate gain or loss,
if any, to the Company from all such proceedings either cannot be reasonably
estimated at this time or are deemed to be only remotely probable of occurring.
F-28
NOTE 20 - SUBSEQUENT EVENTS
On June 10, 2004, the Company affected a reverse stock split in order to
increase the share price of the common stock. As a result of the reverse stock
split, every five shares of the Company's common stock were combined into one
share of common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from approximately 6,070 to
approximately 2,140. All share and related amounts presented have been
retroactively adjusted for the stock split.
On April 2, 2004, the Company entered into the following transactions:
o In exchange for an investment of $2 million, the Company issued
620,000 shares of common stock for a purchase price equal to $2.50
per share, and warrants to purchase 800,000 shares of common stock at
an exercise price of $2.50 per share, expiring on April 1, 2006, to an
investor group (the "Investor Group") consisting of entities affiliated
with Donald and Christopher Engel and directors Robert Nederlander and
Leonard Toboroff. The aggregate purchase price for the common stock was
$1,550,000, and the aggregate purchase price for the warrants was
$450,000.
o Energy Spectrum converted its 3,500,000 shares of Series A 10%
Cumulative Convertible Preferred Stock, including accrued dividends,
into 1,718,090 shares of common stock.
o The Company, the Investor Group, Energy Spectrum, and director Saeed
Sheikh, and officers and directors Munawar H. Hidayatallah and Jens H.
Mortensen entered into a stockholders agreement pursuant to which the
parties have agreed to vote for the election to the board of directors
of the Company three persons nominated by Energy Spectrum, two persons
nominated by the Investor Group and one person nominated by Messrs.
Hidayatallah, Mortensen and Sheikh. In addition, the parties and the
Company agreed that in the event the Company has not affected a public
offering of its shares prior to September 30, 2005, then, at the
request of Energy Spectrum, the Company will retain an investment
banking firm to identify candidates for a transaction involving the
sale of the Company or its assets.
o Wells Fargo Credit, Inc. and Wells Fargo Energy Capital, Inc. extended
the maturity dates for certain obligations (which at December 31, 2003,
aggregated approximately $9,768,000) from January and February of 2005
to January and February 2006. As a condition of the extension, the
Company will make a $400,000 initial payment and 24 monthly principal
payments in the amount of $25,000 each to Wells Fargo Energy Capital,
Inc. As part of the extension, the lenders waived certain defaults
including defaults relating to the failure of Jens' and Strata to
comply with certain covenants relating to the amount of their capital
expenditures, and amended certain covenants set forth in the loan
agreements on an on-going basis. In addition, Wells Fargo Credit, Inc.
increased Strata's line of credit from $2.5 million to $4.0 million.
F-29
ALLIS-CHALMERS CORPORATION JUNE 30,
CONSOLIDATED BALANCE SHEET 2004
-----------
(in thousands) (unaudited)
ASSETS
Cash and cash equivalents $ 485
Trade receivables, net 10,305
Lease receivable, current 180
Prepaid expenses and other current assets 1,137
---------
Total current assets 12,107
Property and equipment, net 27,234
Goodwill 7,661
Deferred offering costs 2,650
Other intangible assets, net 2,054
Debt issuance costs, net 612
Lease receivable, less current portion 664
Other Assets 79
---------
Total Assets $ 53,061
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 4,848
Trade accounts payable 3,391
Accrued salaries, benefits and payroll taxes 677
Accrued interest 212
Accrued expenses 1,332
Accounts payable, related parties 541
---------
Total current liabilities 11,001
Accrued postretirement benefit obligations 520
Long-term debt, net of current maturities 26,163
Other long-term liabilities 129
Redeemable warrants 1,500
---------
Total liabilities 39,313
Commitments and Contingencies (Note 7)
Minority interests 2,782
COMMON SHAREHOLDERS' EQUITY
Common stock, $01 par value (22,000,000 shares
authorized; 6,264,758 issued and outstanding) 63
Capital in excess of par value 18,469
Accumulated (deficit) (7,556)
---------
Total shareholders' equity 10,966
---------
Total liabilities and shareholders' equity $ 53,061
=========
F-30
ALLIS-CHALMERS CORPORATION SIX-MONTH PERIODS
CONSOLIDATED STATEMENTS OF OPERATIONS ENDED JUNE 30,
(in thousands, except per share amounts) 2004 2003
--------- ---------
(UNAUDITED)
Revenues $ 21,083 $ 14,339
Cost of revenues 15,729 10,405
--------- ---------
Gross margin 5,354 3,934
General and administrative expense 2,956 2,001
--------- ---------
Income/ (loss) from operations 2,398 1,933
Other income (expense) :
Interest income -- --
Interest expense (1,068) (1,480)
Minority interests in income of subsidiaries (256) (311)
Other 205 (174)
--------- ---------
Total other income (expense) (1,119) (1,965)
--------- ---------
Net income/ (loss) before income taxes 1,279 (32)
Provision for foreign income tax 220 250
--------- ---------
Net income/ (loss) 1,059 (282)
Preferred stock dividend (124) (481)
--------- ---------
Net income/ (loss) attributed to common shareholders $ 935 $ (763)
========= =========
Income/ (loss) per common share - basic
Continued operations $ 0.18 $ (0.19)
$ 0.18 $ (0.19)
========= =========
Income/ (loss) per common share - diluted
Continued operations $ 0.11 $ (0.19)
$ 0.11 $ (0.19)
========= =========
Weighted average number of common shares outstanding:
Basic 5,094 3,927
========= =========
Diluted 8,242 3,927
========= =========
The accompanying Notes are an integral part of the Financial Statements.
F-31
Allis-Chalmers Corporation
Consolidated statement of shareholders' equity
(in thousands, except number of shares) CAPITAL IN
(unaudited) COMMON STOCK EXCESS OF ACCUMULATED
Shares Amount PAR VALUE (DEFICIT) TOTAL
----------- ----------- ----------- ----------- -----------
Balances, December 31, 2003 3,926,668 39 $ 9,793 $ (8,625) $ 1,207
Accrual of preferred dividends -- -- (124) -- (124)
Conversion of redeemable
convertible preferred stock 1,718,090 18 4,278 -- 4,296
Issuance of common stock in
connection with the $2.0 million 620,000 6 1,544 -- 1,550
equity raise
Issuance of stock warrants in
connection with the $2.0 million -- -- 450 -- 450
equity raise
Issuance of stock purchase
warrants in connection the PIPE -- -- 2,528 -- 2,528
equity raise
Net income -- -- -- 1,059 1,059
----------- ----------- ----------- ----------- -----------
Balances, June 30, 2004 6,264,758 63 $ 18,469 $ (7,566) $ 10,966
=========== =========== =========== =========== ===========
The accompanying Notes are an integral part of the Financial Statements.
F-32
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS
ENDED JUNE 30,
(in thousands) 2004 2003
-------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income / (loss) $ 1,059 $ (282)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 987 925
Amortization expense 402 455
Fair value of warrant issued to consultant 14 --
Amortization of discount on debt 109 367
Minority interest in income of subsidiaries 256 311
Loss on sale of property -- 181
Changes in working capital:
Decrease (increase) in accounts receivable (1,482) (1,597)
Decrease (increase) in other current assets (250) (619)
Decrease (increase) in other assets 84 35
Decrease (increase) in lease deposit -- 525
(Decrease) increase in accounts payable 258 1,385
(Decrease) increase in accrued interest 60 468
(Decrease) increase in accrued expenses (429) (393)
(Decrease) increase in other long-term liabilities (141) --
(Decrease) increase in accrued employee benefits
and payroll taxes (185) (88)
-------- --------
Net cash provided by operating activities 742 1,673
Cash flows from investing activities:
Purchase of equipment (1,879) (821)
Proceeds from sale of equipment -- 700
-------- --------
Net cash (used) by investing activities (1,879) (121)
Cash flows from financing activities:
Payments on long-term debt (1,331) (1,668)
Proceeds from issuance of common stock, net 1,865 --
Debt issuance costs (211) --
-------- --------
Net cash provided (used) by financing activities 323 (1,668)
-------- --------
Net increase (decrease) in cash and cash equivalents (814) (116)
Cash and cash equivalents:
Beginning of period 1,299 146
-------- --------
End of period $ 485 $ 30
======== ========
Supplemental information:
Interest paid $ 1,068 $ 1,480
======== ========
Fair Value of Warrants paid
as stock offering costs $ 2,650 $ --
======== ========
The accompanying Notes are an integral part of the Financial Statements.
F-33
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included elsewhere in the prospectus of which these financial
statements are a part.
All normal and recurring adjustments considered necessary for a fair
presentation of the results of operations have been included in the unaudited
financial statements. In addition, all non-recurring adjustments necessary to
prevent the financial statements from being misleading have been included in the
unaudited financial statements. The results of operations for any interim period
are not necessarily indicative of the Company's operating results for a full
year.
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Compressed Air
Inc. ("Mountain Air"), a Texas corporation, acquired certain assets of Mountain
Air Drilling Service Co., Inc. ("MADSCO"), whose business consisted of providing
equipment and trained personnel in the four corner areas of the southwestern
United States. Mountain Air primarily provides compressed air equipment and
related products and services and trained operators to companies in the business
of drilling for natural gas.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
merger, all of OilQuip's outstanding common stock was converted into 2,000,000
shares of Allis-Chalmers' common stock.
For legal purposes, the Company acquired OilQuip, the parent company of Mountain
Air. However, for accounting purposes, OilQuip was treated as the acquiring
company in a reverse acquisition of Allis-Chalmers. The financial statements
prior to the merger reflect the operations of OilQuip. As a result of the
merger, the fixed assets and intangible assets of Allis-Chalmers were increased
by $2,691,000.
On February 6, 2002, the Company acquired 81% of the outstanding stock of Jens'
Oilfield Service, Inc. ("Jens'"), which supplies highly specialized equipment
and operations to install casing and production tubing required to drill and
complete oil and gas wells. The Company also purchased substantially all the
outstanding common stock and preferred stock of Strata Directional Technology,
Inc. ("Strata"), which provides high-end directional and horizontal drilling
services for specific targeted reservoirs that cannot be reached vertically.
In July 2003, through the subsidiary Mountain Air, the Company entered into a
limited liability company operating agreement with a division of M-I L.L.C.
("M-I"), a joint venture between Smith International and Schlumberger N.V.
(Schlumberger Limited), to form a Texas limited liability company named AirComp
LLC ("AirComp"). Mountain Air contributed assets with a net book value of
approximately $6.3 million and M-I contributed assets with a net book value of
approximately $6.8 million to AirComp L.L.C.. In addition, the AirComp issued a
subordinated note to M-I in the amount of $4.8 million. The Company owns 55% and
M-I owns 45% of AirComp. Because the Company controls AirComp, the Company has
consolidated accounts of the joint venture in its financial statements.
On June 10, 2004, the Company affected a reverse stock split in order to
increase the share price of the Common Stock. As a result of the reverse stock
split, every five shares of the Company's common stock were combined into one
share of common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from approximately 6,070 to
approximately 2,140.
UNAUDITED PERIODS
The financial information with respect to the six months ended June 30, 2004 and
2003 is unaudited. In the opinion of management, such information contains all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation of the results for such periods. The results for the interim
periods are not necessarily indicative of the results of operations for the full
fiscal year.
F-34
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be predicted
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts, recoverability of long-lived assets and intangibles, useful
lives used in depreciation and amortization, income taxes and related valuation
allowances. The accounting estimates used in the preparation of the consolidated
financial statements may change as new events occur, as more experience is
acquired, as additional information is obtained and as the Company's operating
environment changes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries Mountain Air, Jens', and Strata and its joint venture, AirComp.
All significant inter-company transactions have been eliminated.
REVENUE RECOGNITION
The Company's revenue recognition policy is significant because revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions and royalties. The Company
provides rental equipment and drilling services to its customers on a day rate
or per job basis and recognizes the related revenue as work progress and when
collectibility is reasonably assured. The Securities and Exchange Commission's
(SEC) Staff Accounting Bulletin (SAB) No. 104, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS ("SAB No. 104"), provides guidance on the SEC staff's views on
application of generally accepted accounting principles to selected revenue
recognition issues. The Company's revenue recognition policy is in accordance
with generally accepted accounting principles and SAB No. 104.
CONCENTRATION OF CREDIT AND CUSTOMER RISK
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of significant concentration of credit risk regardless
of the degree of such risk.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company transacts its business with several financial
institutions. However, the amount on deposit in three financial institutions
exceeded the $100,000 federally insured limit at December 31, 2003 by a total of
$1,050,793. Management believes that the financial institutions are financially
sound and the risk of loss is minimal.
The Company sells its services to major and independent domestic and
international oil and gas companies. See Note 16 for further information on
major customers. The Company performs ongoing credit valuations of its customers
and provides allowance for probable credit losses where necessary.
F-35
Three customers comprised 50.8% of the Company's domestic revenues for the six
months ended June 30, 2004 as compared to 38.2% of the Company's domestic
revenues for the six months ended June 30, 2003.
Customer 2004 % of total 2003 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
El Paso Production Oil and Gas $4,529 13.8 $2,128 14.8
--------------------------------------- ------- ---------- ------- ----------
Burlington Reserve Oil & Gas Co., L.P $4,144 19.7 $1,751 12.2
--------------------------------------- ------- ---------- ------- ----------
Anadarko Petroleum Corp $2,047 9.7 $1,601 11.2
--------------------------------------- ------- ---------- ------- ----------
One customer comprised 100% of the Company's international revenues for the
years ended December 31, 2003 and 2002, respectively.
Customer 2004 % of total 2003 % of total
Revenue revenue Revenue revenue
--------------------------------------- ------- ---------- ------- ----------
Materiales Y Equipo Petroleos $1,945 9.23 $1,539 10.7
--------------------------------------- ------- ---------- ------- ----------
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost less accumulated depreciation.
Maintenance and repairs are charged to operations when incurred. Maintenance and
repair costs were $282,000 and $287,000 for the six months ended June 30, 2004
and June 30, 2003, respectively. Depreciation expense charged to operations was
$687,000 and $925,000 for the six months ended June 30, 2004 and June 30, 2003,
respectively.
RECLASSIFICATIONS AND RESTATEMENT OF FORM 10-Q
Certain prior period balances have been reclassified to conform to current year
presentation.
The accompanying 2003 financial statements have been restated from the
previously filed interim financial statements included in Form 10-Q for the
first, second and third quarters of 2003. As discussed in Note 7 in the
financial statements for the year ended December 31, 2003, an adjustment
was recorded in the fourth quarter of 2003 to reflect a change in estimate
of the recoverability of foreign taxes paid in 2003. The effect of the
significant fourth quarter adjustment on the individual interim financial
statements is as follows:
Six Months
Ended
June 30, 2003
-------------
Net income (loss) attributed to
common shareholders
Previously reported $ (513)
Adjustment (250)
Restated (763)
Net income (loss) per share, basic
and diluted
Previously reported $ (0.13)
Adjustment (0.06)
Restated (0.19)
F-36
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company discloses the results of its segments in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). The Company designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. At June 30, 2004
and 2003, the Company operated in three segments organized by service line:
casing services, directional drilling services and compressed air drilling
services.
INCOME (LOSS) PER COMMON SHARE
The Company computes income (loss) per common share in accordance with the
provisions of SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
earnings per share. Basic earnings per share are computed on the basis of the
weighted average number of shares of common stock outstanding during the period.
Preferred dividends are deducted from net income (loss) and have been considered
in the calculation of income available to common stockholders in computing basic
earnings per share. Diluted earnings per share is similar to basic earnings per
share, but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible preferred stock, stock options, etc.) as if they had
been converted. Potential dilutive common shares that have an anti-dilutive
effect (e.g., those that increase income per share or decrease loss per share)
are excluded from diluted earnings per share.
The components of basic and diluted earnings per share are as follows:
(In thousands, except earnings per share)
-----------------------------------------------------------------------------
Six-Months Ended June 30 2004 2003
---- ----
Net income available for common shareholders (A) $935 $(763)
------------------------------------------------
Weighted average outstanding shares of common
stock (B)
Dilutive effect of assumed conversion of
preferred shares
Dilutive effect of employee stock options
and awards 5,094 3,927
------------------------------------------------
Common stock and common stock equivalents (C) 8,242 3,927
------------------------------------------------
Earnings per share:
Basic (A/B) $0.18 $(0.19)
======== ========
------------------------------------------------
Diluted (A/C) $0.11 $(0.19)
======== ========
*As a result of the Company's net (loss) for the six-month period ended June 30,
2003, common stock equivalents have been excluded because their effect would be
anti-dilutive.
F-37
NOTE 2 - ACQUISITIONS
In July 2003, through the subsidiary Mountain Air, the Company entered into a
limited liability company operating agreement with a division of M-I, a joint
venture between Smith International and Schlumberger N.V. (Schlumberger
Limited), to form a Texas limited liability company named AirComp. The formation
of AirComp has created the second largest provider of compressed air and related
products and services for the drilling, workover, completion, and transmission
segments of the oil, gas and geothermal industries.
Mountain Air contributed assets with a net book value of approximately $6.3
million and M-I contributed assets with a net book value of approximately $6.8
million to AirComp L.L.C. In addition, the Company issued a subordinated note to
M-I in the amount of $4.8 million. The Company owns 55% and M-I owns 45% of
AirComp. Because the Company controls AirComp, the Company has consolidated the
joint venture into its financial statements.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations as of June 30, 2003, based on the historical statements of
operations, as if the transaction had occurred as of the beginning of the period
presented.
Six Months Ended June 30,
-------------------------
(UNAUDITED)
(in thousands, except per share)
2003
----
Revenues $ 16,061
Operating income (loss) $ 2,317
Net income ( loss) $ (244)
Net income (loss) per common share
Basic $ (0.06)
Diluted $ (0.06)
NOTE 3 - DEBT
Debt is as follows at:
Six Months Ended
June 30,
(in thousands)
2004
--------
Debt of Mountain Air
Note payable to Wells Fargo - Equipment leasing 223
Note payable to Seller of Mountain Air Drilling Service Company 1,555
Debt of Jens'
Line of Credit with Wells Fargo 248
Note payable to Wells Fargo - Term Note 3,672
Note payable to Wells Fargo - Real Estate Note 118
Subordinated Note payable to Seller of Jens' 4,000
Note payable to Seller of Jens' for non-compete agreement 638
Note payable to Texas State Bank - Term Note 354
Debt of Strata
Line of Credit with Wells Fargo 2,782
Vendor financing 1,746
Debt of Allis-Chalmers
Notes payable to certain former Directors 394
Note payable to Wells Fargo - Subordinated debt 2,309
Debt of AirComp
Line of Credit with Wells Fargo 807
Note payable to Wells Fargo - Term Note 6,857
Note payable to Wells Fargo - Delayed Draw 490
Subordinated Note Payable to M-I L,L C 4,818
--------
Total Debt $31,011
Less: short term debt and current maturities 4,848
Long-term debt obligations $26,163
========
F-38
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.
Maturities of debt obligations at June 30, 2004 are as follows:
Maturities of Debt
------------------
(in thousands)
Year Ended:
June 30, 2005 $ 4,848
June 30, 2006 8,748
June 30, 2007 7,063
June 30, 2008 5,523
June 30, 2009 and thereafter 4,829
-----------------
Total $ 31,011
=================
The debt agreements are as follows:
MOUNTAIN AIR
NOTES PAYABLE TO WELLS FARGO - EQUIPMENT LEASING - A term loan in the original
amount of $267,000 at an interest rates of 5%, interest payable monthly, with
monthly principal payments of $5,039 due on the last day of the month. The
maturity date of the loan is June 30, 2008. The balance at June 30, 2004 was
$223,000.
NOTE PAYABLE TO SELLER OF MOUNTAIN AIR DRILLING SERVICE COMPANY ("MADSCO") - A
note to the sellers of MADSCO assets in the original amount of $2,200,000 at
5.75% simple interest was reduced to $1,469,151 as a result of the settlement of
a legal action against the sellers. The principal and accrued interest is due on
September 30, 2007 in the amount of $1,863,195. The balance at June 30, 2004 was
$1,555,000.
JENS'
NOTE PAYABLE TO WELLS FARGO CREDIT, INC. - TERM NOTE - A term loan in the
original amount of $4,042,396 was amended in October 2003 to $5,100,000 at a
floating interest rate (6.25% at June 30, 2004) with monthly principal payments
of $85,000 plus 25% of Jens' receipt of any payment from Maytep. The maturity
date of the loan was January 31, 2005 but in April 2004 was extended to January
31, 2006. The balance at June 30, 2004 was $3,672,000.
NOTE PAYABLE TO WELLS FARGO CREDIT INC. - REAL ESTATE NOTE - A real estate loan
in the amount of $532,000 at floating interest rate (6.25% at June 30, 2004)
with monthly principal payments of $14,778 plus accrued interest. The principal
will be due on January 31, 2005. The balance at June 30, 2004 was $118,000.
LINE OF CREDIT WITH WELLS FARGO CREDIT, INC. - At June 30, 2004, Jens had a
$1,000,000 line of credit at Wells Fargo Credit, Inc., of which $248,000 was
outstanding at June 30, 2004. The committed line of credit is due on January 31,
2005 but in April 2003 was extended to January 31, 2006. Interest accrues at a
floating rate plus 3% (7.25% at June 30, 2004) for the committed portion.
Additionally, Jens' pays a 0.5% fee for the uncommitted portion.
SUBORDINATED NOTE PAYABLE TO SELLER OF JENS' -A subordinated seller's note in
the original amount of $4,000,000 at 7.5% simple interest. At June 30, 2004,
$541,000 of interest was accrued and was included in accounts payable, related
parties. The principal and interest are due on January 31, 2006. The note is
subordinated to the rights of the Company's bank lenders.
NOTE PAYABLE TO SELLER OF JENS' FOR NON-COMPETE AGREEMENT - In conjunction with
the purchase of Jens', the Company agreed to cause Jens' to pay a total of
$1,234,560 to the Seller of Jens' in exchange for a non-compete agreement signed
simultaneously. Jens' is to make monthly payments of $20,576 through the period
ended January 31, 2007. As of June 30, 2004, the balance was approximately
$638,000 including $247,000 classified as short-term.
F-39
NOTE PAYABLE TO TEXAS STATE BANK - TERM NOTE - A term loan in the original
amount of $397,080 at a floating interest rate (6.25% at June 30, 2004) with
monthly principal payments of $11,000 plus interest. The maturity date of the
loan is September 17, 2006. As of June 30, 2004, the outstanding balance was
$290,000.
NOTE PAYABLE TO TEXAS STATE BANK - TERM NOTE - A term loan in the original
amount of $74,673 at a floating interest rate (6.25% at June 30, 2004) with
monthly principal payments of $1,946 plus interest. The maturity date of the
loan is January 12, 2007. As of June 30, 2004 the outstanding balance was
64,000.
STRATA
VENDOR FINANCING - In December 2003, Strata entered into a short-term vendor
financing agreement in the original amount of $1,746,000 with a major supplier
of drilling motors for drilling motor rentals, motor lease costs and motor
repair costs. The agreement provides for repayment of all amounts due no later
than December 30, 2005. Payment of the interest on the note is due monthly and
three principal payments are due in October 2004, April 2005 and December 2005.
The vendor financing incurs interest at a rate of 8.0%. As of June 30, 2004, the
outstanding balance was approximately $1,746,000.
LINE OF CREDIT WITH WELLS FARGO CREDIT, INC.- At June 30, 2004, Strata has a
$2,500,000 line of credit at Wells Fargo Credit, Inc., of which $2,782,000 was
outstanding at June 30, 2004. The committed line of credit was due on January
31, 2005 but in April 2004 was extended to January 31, 2006. Interest accrues at
a floating interest rate plus 3% (7.25% at June 30, 2004) for the committed
portion. Additionally, Strata pays a 0.5% annual fee for the uncommitted
portion.
ALLIS-CHALMERS
NOTES PAYABLE TO WELLS FARGO ENERGY CAPITAL, INC. - Subordinated Debt And
Amortization Of Redeemable Warrant - Secured subordinated debt issued to
partially finance the acquisitions of Jens' and Strata in the original amount of
$3,000,000 at 12% interest payable monthly. Of this amount $2,309,000 was
outstanding at June 30, 2004. The principal was due on January 31, 2005 but in
April 2004 was extended to February 1, 2006. In connection with incurring the
debt, the Company issued redeemable warrants valued at $900,000, which have been
recorded as a discount to the subordinated debt and as a liability (see
Redeemable Warrants below). The discount was amortizable over three years
beginning February 6, 2002 but in April 2004 was extended to 5 years as
additional interest expense of which $190,000 has been recognized for the six
months ended June 30, 2004. The debt is recorded at $2,309,000 at June 30, 2004,
net of the unamortized portion of the put obligation.
NOTES PAYABLE TO CERTAIN FORMER DIRECTORS - The Allis-Chalmers Board established
an arrangement by which to compensate former and continuing Board members who
had served from 1989 to March 31, 1999 without compensation. Pursuant to the
arrangement in 1999, Allis-Chalmers issued promissory notes totaling $325,000 to
current or former directors and officers. The notes bear interest at the rate of
5%, compounded quarterly, and are due March 28, 2005. At June 30, 2004 the notes
were recorded at $394,000, including accrued interest.
REDEEMABLE WARRANTS - The Company issued redeemable warrants that are
exercisable for up to 233,000 shares of the Company's common stock at an
exercise price of $0.75 per share ("Warrants A and B") and non-redeemable
warrants that are exercisable for a maximum of 67,000 shares of the Company's
common stock at $5.00 per share ("Warrant C"). The warrants were issued in
connection with the issuance of a subordinated debt instrument for Mountain Air
in 2001, subsequently repaid in connection with the formation of AirComp in July
2003 and the related issuance of the $3 million subordinated debt discussed
above (collectively, the "Subordinated Debt"). Warrants A and B are subject to
cash redemption provisions ("puts") in the amount of $600,000 and $900,000,
respectively, at the discretion of the warrant holders beginning at the earlier
of the final maturity date of the Subordinated Debt or three years from the
closing of the Subordinated Debt (January 31, 2005). Warrant C does not contain
any such puts or provisions. In April 2004 the maturity date of the debt was
extended to February 1, 2006. The Company has recorded a liability of $600,000
at Mountain Air and $900,000 at Allis-Chalmers for a total of $1,500,000 and is
amortizing the effects of the puts to interest expense over the life of the
Subordinated Debt.
GUARANTEE OF SUBSIDIARY OBLIGATIONS. The Company guarantees many of its
subsidiaries' obligations. In addition, the Company's Chief Executive Officer
and Chairman, Munawar H. Hidayatallah, and his wife, guarantee substantially all
of the Company's obligations.
F-40
AIRCOMP LLC
LINE OF CREDIT WITH WELLS FARGO BANK - a $1,000,000 line of credit at Wells
Fargo bank, of which $807,000 was outstanding at June 30, 2004. Interest accrues
at a floating interest rate plus 2.25% (6.50% at June 30, 2004) for the
committed portion and is payable quarterly starting in September 2003.
Additionally, AirComp pays a 0.5% annual fee for the uncommitted portion. The
line of credit must be repaid on June 27, 2007.
NOTES PAYABLE TO WELLS FARGO - Term Note - A term loan in the original amount of
$8,000,000 at variable interest rates related to the Prime or LIBOR rates (4.25%
at June 30, 2004), interest payable quarterly, with quarterly principal payments
of $286,000 due on the last day of the quarter beginning in July 2003. The
maturity date of the loan is June 27, 2007. The balance at June 30, 2004 was
$6,857,000.
NOTE PAYABLE TO WELLS FARGO - EQUIPMENT TERM LOAN - A delayed draw term loan in
the amount of $1,000,000 with interest at a rate equal to the LIBOR rate plus
2.0% to 2.75%, with quarterly payments of interest and quarterly payments of
principal equal to 5% of the outstanding balance commencing in the first quarter
of 2005. The maturity date of the loan is June 27, 2007. The balance at June 30,
2004 was $490,000.
NOTE PAYABLE TO M-I L.L.C. - SUBORDINATED DEBT - Subordinated debt in the amount
of $4,818,000 bearing an annual interest rate of 5% in conjunction with the
joint venture. The note is due and payable when M-I sells its interest or a
termination of AirComp occurs. At June 30, 2004, $212,000 of interest was
accrued and included in accrued interest.
NOTE 4 - SHAREHOLDERS' EQUITY
On March 3, 2004, the Company entered into an agreement with Morgan Joseph
whereby Morgan Joseph would provide underwriting and fundraising activities on
behalf of the Company. In exchange for their services, Morgan Joseph received a
stock purchase warrant to purchase 340,000 shares of common stock at an exercise
price of $2.50. For purposes of calculating fair value under SFAS No. 123, the
fair value of the warrant grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; expected volatility rate of 170.69% risk-free
interest rate of 6.25%; and average life of 5 years. The resulting fair value of
$2,650,000 assigned to the warrant issuance was recorded as a deferred offering
cost to be offset against the proceeds collected from the Company's private
placements of common stock (see Note 8) that closed in the third quarter of
fiscal year 2004.
On April 2, 2004, the Company completed the following transactions:
o In exchange for an investment of $2,000,000, the Company
issued 620,000 shares of common stock for a purchase price
equal to $2.50 per share, and issued warrants to purchase
800,000 shares of common stock at an exercise price of $2.50
per share, expiring on April 1, 2006, to an investor group
(the "Investor Group") consisting of entities affiliated with
Donald and Christopher Engel and directors Robert Nederlander
and Leonard Toboroff. The aggregate purchase price for the
common stock was $1,550,000, and the aggregate purchase price
for the warrants was $450,000.
o Energy Spectrum converted its 3,500,000 shares of Series A 10%
Cumulative Convertible Preferred Stock, including accrued
dividend rights, into 1,718,090 shares of common stock. The
conversion of the preferred stock will have an impact on the
earnings per share in future periods since the Company will
not record any dividends.
o The Company, the Investor Group, Energy Spectrum, and director
Saeed Sheikh, and officers and directors Munawar H.
Hidayatallah and Jens H. Mortensen entered into a stockholders
agreement pursuant to which the parties have agreed to vote
for the election to the board of directors of the Company
three persons nominated by Energy Spectrum, two persons
nominated by the Investor Group and one person nominated by
Messrs. Hidayatallah, Mortensen and Sheikh. In addition, the
parties and the Company agreed that in the event the Company
has not affected a public offering of its shares prior to
September 30, 2005, then, at the request of Energy Spectrum,
the Company will retain an investment banking firm to identify
candidates for a transaction involving the sale of the Company
or its assets.
F-41
On August 10, 2004, the Company completed the private placement of 3,504,667
shares of the Company's common stock at a price of $3.00 per share. Net proceeds
to the Company, after selling commissions and expenses, were approximately $9.6
million. The private placement was structured as what is known as a "private
investment in public equity" or "PIPE" offering, in which the Company issued
shares pursuant to an exemption from the Securities Act of 1933, and have agreed
to subsequently register the common stock under the Securities Act of 1933 to
allow investors to resell the common stock in public markets.
On September 30, 2004, the Company completed the private placement of 1,956,668
shares of the Company's common stock at a price of $3,00 per share. Net proceeds
to the Company, after selling commission and expenses, were approximately $5.5
million. The Private placement was structured as what is known as a "private
investment in public equity" or "pipe" offering, in which the Company issued
shares pursuant to an exemption from the Securities Act of 1933, and have agreed
to subsequently resell the common stock in public markets.
On September 30, 2004, the Company acquired Jens Mortensen's 19% minority
interest in Jens' Oilfield Service, Inc. in exchange for 1,300,000 shares of the
Company's common stock.
NOTE 5 - REVERSE STOCK SPLIT
The Company affected a reverse stock split on June 10, 2004 in order to increase
the share price of the common stock. As a result of the reverse stock split,
every five shares of the Company's common stock were combined into one share of
common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,265,000 and reduced
the number of stockholders of the Company from approximately 6,070 to
approximately 2,140. The Company currently has an application pending to list
the Common Stock on the American Stock Exchange, which has an initial listing
requirement that the Common Stock trade for a minimum of $3.00 per share and
certain other qualitative and quantitative listing requirements. There can be no
assurance that the Company will be successful in listing the Common Stock on the
American Stock Exchange. All share and related amounts presented have been
Retroactively adjusted for the stock split.
F-42
NOTE 6 - SEGMENT INFORMATION
The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(AirComp). All of the segments provide services to the petroleum exploration and
production industry. The revenues, operating income (loss), depreciation and
amortization, interest, capital expenditures and assets of each of the reporting
segments plus the General Corporate function are reported below for the quarters
and the six months ended June 30, 2004 and 2003:
Six Months Ended June 30,
2004 2003
(in thousands)
REVENUES:
Casing services $ 4,386 $ 5,153
Directional drilling services 11,675 6,983
Compressed air drilling services 5,022 2,203
--------- ---------
Total revenues $ 21,083 $ 14,339
========= =========
OPERATING INCOME (LOSS):
Casing services $ 1,225 $ 2,227
Directional drilling services 1,389 511
Compressed air drilling services 812 (36)
General corporate (1,028) (769)
--------- ---------
Total income/(loss) from operations $ 2,398 $ 1,933
========= =========
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 717 $ 690
Directional drilling services 214 119
Compressed air drilling services 408 511
General corporate 50 60
--------- ---------
Total depreciation and amortization expense $ 1,389 $ 1,380
========= =========
INTEREST EXPENSE:
Casing services $ 320 $ 393
Directional drilling services 142 140
Compressed air drilling services 317 574
General corporate 289 373
--------- ---------
Total interest expense $ 1,068 $ 1,480
========= =========
CAPITAL EXPENDITURES
Casing services $ 425 $ 242
Directional drilling services 788 69
Compressed air drilling services 664 494
General corporate 2 16
--------- ---------
Total capital expenditures $ 1,879 $ 821
========= =========
ASSETS:
Casing services $ 17,060 $ 16,562
Directional drilling services 12,795 8,125
Compressed air drilling services 18,588 9,038
General corporate 4,617 1,322
--------- ---------
Total assets $ 53,061 $ 35,047
========= =========
REVENUES:
United States $ 18,891 $ 12,678
Mexico 2,192 1,661
--------- ---------
Total $ 21,083 $ 14,339
========= =========
F-43
NOTE 7 - LEGAL MATTERS
The Company is involved in various legal proceedings arising in the ordinary
course of business. The legal proceedings are at different stages. In the
opinion of management and their legal counsel, the ultimate gain or loss, if
any, to the Company from all such proceedings either cannot be reasonably
estimated at this time or are deemed to be only remotely probable of occurring.
The Company is a defendant in an action (the "Action") brought in April 2004
(No. 04CV308) in the District Court of Mesa County Colorado by the former owner
of Mountain Air Drilling Service Company, Inc. nka Pattongill & Murphy, Inc.,
from whom the Company's Mountain Compressed Air, Inc. ("MCA") acquired assets in
2001. The plaintiff seeks to accelerate payment of a note (the "Note") issued in
connection with the acquisition and are seeking $1,863,000 in damages
(representing principal and interest due under the Note), on the basis that MCA
has failed to provide financial statements required by the Note. The Company
believes the claim is without merit because MCA no longer maintains separate
financial statements and the Company provides plaintiff with the Company's
publicly available financial statements. The financial statements disclose as a
separate segment the operations of AirComp, which conducts business using the
assets acquired from plaintiff. In addition, the rights of the holder of the
Note are subordinated to certain senior lease obligations, and therefore even if
the plaintiff had the right to accelerate the debt under the terms of the Note,
the plaintiff is prevented from doing so pursuant to the terms of the
subordination agreement until September, 2007, at which time the Note will
mature by its terms. Finally, the Company has claims in the amount of $12,000
for legal fees and other expenses that the plaintiff agreed to pay the Company
in connection with the settlement of an earlier lawsuit involving the
acquisition of assets from plaintiff.
NOTE 8 - SUBSEQUENT EVENTS
On September 13, 2004, the Company's common stock began trading on the American
Stock Exchange.
On July 17, 2004, the Strata and Jens subsidiaries entered into amendments to
their respective Wells Fargo Credit, Inc. credit agreements. The amendments
provide for an increase in the permitted capital expenditures in 2004 by Strata,
and also permitted additional indebtedness by Jens. Each of the amendments also
included consents to a $10.0 million to $15.0 million equity offering by the
Company and waived any requirement that the net proceeds be contributed to
Strata or Jens and used to prepay outstanding borrowings under the credit
facilities.
On August 10, 2004, the Company completed the private placement of 3,504,667
shares of the Company's common stock at a price of $3.00 per share. Net proceeds
to the Company, after selling commissions and expenses, were approximately $9.6
million. The private placement was structured as what is known as a "private
investment in public equity" or "PIPE" offering, in which the Company issued
shares pursuant to an exemption from the Securities Act of 1933, and have agreed
to subsequently register the resale of the common stock under the Securities Act
of 1933 to allow investors to resell the common stock in public markets.
On September 30, 2004, the Company completed the private placement of 1,956,668
shares of the Company's common stock at a price of $3,00 per share. Net proceeds
to the Company, after selling commission and expenses, were approximately $5.5
million. The Private placement was structured as what is known as a "private
investment in public equity" or "pipe" offering, in which the Company issued
shares pursuant to an exemption from the Securities Act of 1933, and have agreed
to subsequently register the common stock under the Securities Act of 1933 to
allow investors to resell the common stock in public markets.
On September 30, 2004, the Company acquired Jens Mortensen's 19% minority
interest in Jens' Oilfield Service, Inc. in exchange for 1,300,000 shares of the
Company's common stock.
The Company will use the net proceeds from the sale of its common stock to
reduce debt, for acquisitions, and for general corporate purposes. While the
Company is in discussions and in the analysis phase with potential acquisition
candidates, as of this date, the Company has not entered into definitive
agreements with respect to any acquisition candidate.
F-44
ALLIS-CHALMERS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Allis-Chalmers Corporation ("Company") entered into a joint venture
agreement with a division of M-I L.L.C., and related financing on July 1, 2003.
The Company through its subsidiary, Mountain Compressed Air, Inc., and M-I
L.L.C. each contributed assets with a combined fair market value in excess of
$27 million and combined net book value of approximately $13 million to AirComp
L.L.C. ("AirComp"). Mountain Compressed Air contributed substantially all of its
compressed air drilling assets with an estimated fair market value of
approximately $14.8 million net book value of approximately $7.2 million to
AirComp, which the Company believes will be the world's second largest provider
of air compressor products and services to the oil, natural gas and geothermal
drilling workover and completion industries. Allis-Chalmers will own 55% and M-I
L.L.C. will own 45% of AirComp L.L.C.
In connection with the transaction, AirComp obtained bank financing of
$8 million, of which $7.3 million was distributed to the Company. The debt bears
interest at a floating rate, currently LIBOR plus 0.5% annually. AirComp has the
ability to borrow an additional $2 million under its credit agreement with the
bank. AirComp's bank debt is secured by substantially all of the assets of
AirComp. The Company used these funds to retire debt of Mountain Compressed Air,
Inc. and for general working capital purposes at AirComp. As a result of the
debt repayment, the Company is in compliance with all of its loan covenants with
its bank lenders. The Company has guaranteed all of Mountain Compressed Air's
obligations under the joint venture agreement, and Mountain Compressed Air has
guaranteed up to $2 million of AirComp's debt.
The following unaudited pro forma income statements illustrates the
effects of the formation of AirComp on the results of operations, based on
historical statements of operations, as if the transaction had occurred as
of the beginning of the periods presented. AirComp acquired from each of M-I and
Mountain Compressed Air the personnel, equipment and customers of their
respective air drilling businesses. The historical financial results of
M-I Air Drilling reflect the business operations contributed to AirComp by M-I
and the historical financial results of Allis-Chalmers reflect the operations of
Mountain Compressed Air contributed to M-I. However, the pro forma information
does not necessarily indicate what the operating results would have been if the
transaction had been completed. Moreover, the information does not necessarily
indicate what our future operating results or financial position will be.
F-45
ALLIS-CHALMERS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ALLIS- PROFORMA
CHALMERS M-I AIRCOMP ALLIS-
CONSOLIDATED AIR DRILLING PURCHASE CHALMERS
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
--------- --------- --------- ---------
SALES
REVENUES $ 32,724 $ 1,722 $ -- $ 34,446
COST OF REVENUES 23,931 2,203 (699) a 25,435
--------- --------- --------- ---------
GROSS PROFIT 8,793 (481) 699 9,011
Marketing and administrative expense 6,169 45 (211) b 6,003
--------- --------- --------- ---------
Income/(loss) from operations 2,624 (526) 910 3,008
Other income (expense):
Interest income 3 -- -- 3
Interest expense (2,467) -- 33 c (2,434)
Minority interest (387) 102 d (285)
Settlement on Lawsuit 1,034 -- -- 1,034
Other income (expense) 111 -- 111
--------- --------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES 918 (526) 1,045 1,437
INCOME TAXES 370 -- -- 370
--------- --------- --------- ---------
NET INCOME/(LOSS) 548 (526) 1,045 1,067
PREFERRED STOCK DIVIDEND (656) -- -- (656)
--------- --------- --------- ---------
NET INCOME / (LOSS) ATTRIBUTED TO COMMON SHARES $ (108) $ (526) $ 1,045 $ 411
========= ========= ========= =========
Net income / (loss) per common shares:
Basic: $ (0.03) $ 0.10
========= =========
Diluted: $ (0.03) $ 0.07
========= =========
Weighted average number of common shares
outstanding:
Basic: 3,927 3,927
========= =========
Diluted: 3,927 5,762
========= =========
F-46
ALLIS-CHALMERS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ALLIS- PROFORMA
CHALMERS M-I AIRCOMP ALLIS-
CONSOLIDATED AIR DRILLING PURCHASE CHALMERS
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
SALES
REVENUES $ 14,339 $ 1,722 $ -- $ 16,061
COST OF REVENUES 10,405 2,203 (699) a 11,909
--------- --------- --------- ---------
GROSS PROFIT 3,934 (481) 699 4,152
MARKETING AND ADMINISTRATIVE EXPENSE 2,001 45 (211) b 1,835
--------- --------- --------- ---------
INCOME/ (LOSS) FROM OPERATIONS 1,933 (526) 910 2,317
Other income (expense):
Interest income -- -- -- --
Interest expense (1,480) -- 33 c (1,447)
Minority interest (311) -- 102 d (209)
Other income (expense): (174) -- (174)
--------- --------- --------- ---------
NET INCOME / (LOSS) BEFORE INCOME TAXES (32) (526) 1,045 487
INCOME TAXES (250) -- -- (250)
--------- --------- --------- ---------
NET INCOME / (LOSS) (282) (526) 1,045 237
PREFERRED STOCK DIVIDEND (481) -- -- (481)
--------- --------- --------- ---------
NET INCOME / (LOSS) ATTRIBUTED TO COMMON SHARES $ (763) $ (526) $ 1,045 $ (244)
========= ========= ========= =========
Net income / (loss) per common shares:
Basic $ (0.19) $ (0.06)
========= =========
Diluted $ (0.19) $ (0.06)
========= =========
Weighted average number of common shares
outstanding (basic and diluted) 3,927 3,927
========= =========
F-47
ALLIS-CHALMERS CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
a) To record reversal of operating equipment lease expense related to
leased equipment at the Company and M-I. Each company paid off the
operating leases before the formation of AirComp and therefore AirComp
does not incur the lease expense related to the equipment.
b) To record reversal of amortization expense related to deferred finance
costs and prepaid equipment lease deposit being amortized at the Company
and elimination of M-I corporate overhead allocations. Due to the
formation of AirComp these expenses are no longer recorded.
c) To record the effects of additional interest expense from increased debt
acquired to form AirComp less warrant amortization expense relating to
the Company's sub debt. The sub debt was paid off with the formation of
AirComp and is no longer being amortized.
d) To record minority interest expense related to the pro forma financial
information adjustment.
F-48
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table itemizes the expenses incurred by the Registrant in
connection with the offering. All the amounts shown are estimates except the
Securities and Exchange Commission registration fee.
Registration fee - Securities and Exchange Commission................ $ 8,771.41
Legal Fees and Expenses.............................................. $ 45,000
Accounting Fees and Expenses......................................... $ 10,000
Miscellaneous Expenses............................................... $ 8,000
----------
Total.......................................................... $71,771.41
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and its Bylaws provide for the indemnification
by the Registrant of each director, officer and employee of the Registrant to
the fullest extent permitted by the Delaware General Corporation Law, as the
same exists or may hereafter be amended. Section 145 of the Delaware General
Corporation Law provides in relevant part that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. Delaware law further provides that nothing in the above
described provisions shall be deemed exclusive of any other rights to
indemnification or advancement of expenses to which any person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
The Registrant's Certificate of Incorporation provides that a director of the
Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(o)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and transactions from which
the director derived an improper personal benefit.
II-1
The Registrant has entered into separate but identical indemnity agreements (the
"Indemnity Agreements") with each director of the Registrant and certain
officers of the Registrant (the "Indemnitees"). Pursuant to the terms and
conditions of the Indemnity Agreements, the Registrant indemnified each
Indemnitee against any amounts which he or she becomes legally obligated to pay
in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided, however, that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Registrant and, with respect to any criminal action, had no reasonable cause
to believe Indemnitee's Conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We effected a one to five reverse stock split on June 10, 2003. Disclosure set
forth below gives retroactive effect to the reverse stock split.
In September 2004, we issued 1,300,000 shares of our common stock to Jens H.
Mortensen, our President, Chief Operating Officer and a director, pursuant to a
merger between Jens' Oilfield Service, Inc. and a newly formed subsidiary of the
Company. As a result of the merger, we acquired Mr. Mortensen's 19% interest in
and now own 100% of Jens' Oilfield Service, Inc. The transaction was exempt from
the registration requirements of the Securities Act of 1933 pursuant to Section
4(2) of said Act.
In September 2004, we completed a private placement of 1,956,634 shares of our
common stock to the following investors: Transcontinental Capital Corp.; Milton
H. Dresner Revocable Living Trust; Joseph S. Dresner; J. Steven Emerson Roth
IRA; Waverly Limited Partnership; Rosebury, L.P.; Meteoric, L.P.; Barbara C.
Crane; Bristol Investment Fund, Ltd.; L.H. Schmieding; Meadowbrook Opportunity
Fund LLC; and Kenneth Malkes. Each investor is a selling stockholder. Pursuant
to the terms of a stock purchase agreement, we sold to the selling stockholders
an aggregate of 3,504,667 shares of common stock at a price per share of $3.00.
The transaction was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Regulation D promulgated by the Securities and Exchange
Commission under said Act. We paid a fee of $410,893 to Morgan Keegan & Company,
Inc. for its services as a placement agent in connection with the offering.
In August 2004 we completed a private placement of 3,504,667 shares of our
common stock to the following investors: Bear Stearns Securities Corp.,
Custodian, J. Steven Emersen Roth IRA; Bear Stearns Securities Corp., Custodian,
J. Steven Emersen IRA RO II; Bear Stearns Securities Corp., Custodian, Emerson
Partners; GSSF Master Fund, LP; Gerald Lisac, IRA C/O Union Bank of California,
Custodian; May Management, Inc.; Micro Cap Partners, L.P.; MK Employee Early
Stage Fund, L.P.; Morgan Keegan Early Stage Fund, L.P.; Palo Alto Global Energy
Fund, L.P.; RRCM Onshore I, L.P.; Earl Schatz, IRA C/O Union Bank of California,
Custodian; Straus Partners, L.P., Straus-GEPT Partners, LP;; UBTI Free, L.P.;
U.S. Bank NA as Custodian of the Holzman Foundation; U.S. Bank NA as Trustee of
the Reliable Credit Association Inc. Pension & Trust; and U.S. Bank NA as
Trustee of the Reliable Credit Association Inc. Profit Sharing Plan & Trust.
Pursuant to the terms of a stock purchase agreement, we sold to the selling
stockholders an aggregate of 3,504,667 shares of common stock at a price per
share of $3.00 for an aggregate purchase price of $10,514,000. The transaction
was exempt from the registration requirements of the Securities Act of 1933
pursuant to Regulation D of said Act. We paid a fee of $735,984 to Morgan Keegan
& Company, Inc. for its services as a placement agent in connection with the
offering.
In May 2004, we issued a warrant to purchase 20,000 shares of our common stock
at an exercise price of $4.75 per share to Jeffrey Freedman in consideration of
financial advisory services to be provided by Mr. Freedman pursuant to a
consulting agreement. The warrants expire in May 2009. The transaction was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of said Act.
In April 2004, we completed a private placement of 620,000 shares of common
stock and warrants to purchase 800,000 shares of common stock to the following
investors: Christopher Engel; Donald Engel; the Engel Investors Defined Benefit
Plan; RER Corp., a corporation wholly-owned by director Robert Nederlander; and
Leonard Toboroff, a director. The investors invested $1,550,000 in exchange for
620,000 shares of common stock for a purchase price equal to $2.50 per share,
and invested $450,000 in exchange for warrants to purchase 800,000 shares of
common stock at an exercise price of $2.50 per share, expiring on April 1, 2006.
Concurrently with this transaction, Energy Spectrum Partners LP, the holder of
all outstanding shares of our Series A Preferred Series A Preferred Stock,
converted all such shares, including accrued dividend rights, into 1,718,090
shares of common stock. Both transactions were exempt from the registration
requirements of the Securities Act of 1933 pursuant to Regulation D promulgated
by the Securities and Exchange Commission under said Act.
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In April 2004 we issued warrants to purchase 20,000 shares of common stock to
Wells Fargo Credit, Inc., in connection with the extension of credit by Wells
Fargo Credit, Inc. The Warrants are exercisable at $0.75 per share and expire in
April 2014. The transaction was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) of said Act.
In March 2004, we issued a warrant to purchase 340,000 shares of our common
stock at an exercise price of $2.50 per share to Morgan Joseph in consideration
of financial advisory services to be provided by Morgan Joseph pursuant to a
consulting agreement. The warrants expire in February 2009. The transaction was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of said Act.
In February 2002, we purchased from our current President and Chief Operating
Officer, Jens H. Mortensen, Jr., 81% of the outstanding stock of Jens' for (i)
$10,250,000 in cash, (ii) a $4,000,000 note payable with interest at an annual
rate of 7.5% with the principal due in four years, (iii) $1,234,560 for a
non-competition agreement payable in sixty monthly installments over five years,
(iv) an additional payment of $841,000 based upon Jens' working capital as of
February 1, 2002 and (v) 279,570 shares of our common stock. The transaction was
exempt from the registration requirements of the Securities Act of 1933 pursuant
to Section 4(2) of said Act. We entered into a three-year employment agreement
with Mr. Mortensen under which we pay Mr. Mortensen a base salary of $150,000
per year. We also entered into a Shareholders Agreement with Jens' and Mr.
Mortensen providing for restrictions against transfer of the stock of Jens' by
us and Mr. Mortensen, and entered into an agreement pursuant to which Mr.
Mortensen had the option to exchange his shares of stock of Jens' for shares of
our common stock based on a formula set forth in the agreement. On September 30,
2004, we issued Mr. Mortensen 1,300,000 shares of common stock in exchange for
his minority interest in Jens'. The number of shares was not based on the
formula set forth in the parties agreement, but was negotiated by the parties.
The transaction was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Section 4(2) of said Act.
In February 2002, we acquired substantially all of the capital stock of Strata
Directional Drilling Technologies, Inc. from Energy Spectrum. In connection
therewith, we issued to Energy Spectrum 3,500,000 shares of Series A 10%
Cumulative Convertible Preferred Stock and warrants to purchase 87,500 shares of
common stock at an exercise price of $0.75 per share, expiring in February 2012.
The transaction was exempt from the registration requirements of the Securities
Act of 1933 pursuant to Regulation D promulgated by the Securities and Exchange
Commission under said Act. In addition, in February 2003, as additional
consideration for the shares of Strata, we issued to Energy Spectrum additional
warrants to purchase 175,000 additional shares of common stock at an exercise
price of $0.75 per share, expiring in February 2012. The transaction was exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Section 4(2) of said Act.
In February 2002 we issued warrants to purchase 300,000 shares of common stock
to Wells Fargo Energy Capital, Inc., in connection with the extension of credit
by Wells Fargo Energy Capital, Inc. Warrants to purchase 233,000 shares are
exercisable at $0.75 per share and warrants to purchase 67,000 shares are
exercisable at $5.00 per share. The warrants expire February 1, 2011. The
transaction was exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) of said Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. The exhibits listed in the accompanying Exhibit Index are filed
(except where otherwise indicated) as part of this Registration Statement.
(b) FINANCIAL STATEMENT SCHEDULES. All schedules are omitted because the
required information is not present or is not present in sufficient amounts to
require submission of the schedule, or because the required information is
included in the consolidated financial statements and notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
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(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Houston, State
of Texas, on November 8, 2004.
ALLIS-CHALMERS CORPORATION
BY: /S/ MUNAWAR H. HIDAYATALLAH
---------------------------------------
MUNAWAR H. HIDAYATALLAH, CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
The undersigned directors and officers of Allis-Chalmers Corporation do hereby
constitute and appoint Munawar H. Hidayatallah and Victor M. Perez, and each of
them, as his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any or all amendments (including post effective
amendments) to this Registration Statement and a new Registration Statement
filed pursuant to Rule 462(b) of the Securities Act of 1933 and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the foregoing, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
SIGNATURE TITLE DATE
/S/ MUNAWAR H. HIDAYATALLAH CHAIRMAN OF THE BOARD OF NOVEMBER 8, 2004
--------------------------- DIRECTORS AND CHIEF EXECUTIVE
MUNAWAR H. HIDAYATALLAH OFFICER (PRINCIPAL EXECUTIVE OFFICER)
/S/ JENS H. MORTENSEN PRESIDENT AND DIRECTOR NOVEMBER 8, 2004
---------------------------
JENS H. MORTENSEN
/S/ VICTOR M. PEREZ CHIEF FINANCIAL OFFICER NOVEMBER 8, 2004
--------------------------- (PRINCIPAL FINANCIAL OFFICER)
VICTOR M. PEREZ
/S/ TODD C. SEWARD CHIEF ACCOUNTING OFFICER NOVEMBER 8, 2004
--------------------------- (PRINCIPAL ACCOUNTING OFFICER)
TODD C. SEWARD
DIRECTOR
---------------------------
DAVID A. GROSHOFF
DIRECTOR
---------------------------
JOHN E. MCCONNAUGHY, JR.
* DIRECTOR NOVEMBER 8, 2004
---------------------------
ROBERT E. NEDERLANDER
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* DIRECTOR NOVEMBER 8, 2004
---------------------------
SAEED M. SHEIKH
* DIRECTOR NOVEMBER 8, 2004
---------------------------
JAMES W. SPANN
* DIRECTOR NOVEMBER 8, 2004
---------------------------
LEONARD TOBOROFF
* DIRECTOR NOVEMBER 8, 2004
---------------------------
THOMAS O. WHITENER, JR.
* DIRECTOR NOVEMBER 8, 2004
---------------------------
CHRISTINA E. WOODS
*By: /S/ MUNAWAR H. HIDAYATALLAH
----------------------------
MUNAWAR H. HIDAYATALLAH
Attorney-in-fact
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
2.1 First Amended Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code, dated September 14, 1988, which includes the First
Amended and Restated Joint Plan of Reorganization dated September 14,
1988 (incorporated by reference to Registrant's Current Report on Form
8-K dated December 1, 1988).
2.2 Agreement and Plan of Merger dated as of May 9, 2001 by and among
Registrant, Allis-Chalmers Acquisition Corp. and OilQuip Rentals, Inc.
(incorporated by reference to Registrant's Current Report on Form 8-K
filed May 15, 2001).
2.3 Stock Purchase Agreement dated February 1, 2002 by and between
Registrant and Jens H. Mortensen, Jr. (incorporated by reference to
Registrant's Current Report on Form 8-K filed February 21, 2002).
2.4 Shareholders Agreement dated February 1, 2002 by and among Jens'
Oilfield Service, Inc., a Texas corporation, Jens H. Mortensen, Jr.,
and Registrant (incorporated by reference to Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001).
2.5 Stock Purchase Agreement dated February 1, 2002 by and among Registrant,
Energy Spectrum Partners LP, and Strata Directional Technology, Inc.
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
2.6 Joint Venture Agreement dated June 27, 2003 by and between Mountain
Compressed Air, Inc. and M-I L.L.C. (incorporated by reference to
Registrant's Current Report on Form 8-K filed July 16, 2003).
3.1 Amended and Restated Certificate of Incorporation of Registrant
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
3.2 Certificate of Designation, Preferences and Rights of the SERIES A 10%
CUMULATIVE CONVERTIBLE PREFERRED STOCK ($.01 Par Value) of Registrant
(incorporated by reference to Registrant's Current Report on Form 8-K
filed February 21, 2002).
3.3 Amended and Restated By-laws of Registrant (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001).
3.4 Certificate of Amendment of Certificate of Incorporation filed with the
Delaware Secretary of State on June 9, 2004 (incorporated by reference
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004).
4.1 Specimen Stock Certificate of Common Stock of Registrant (incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004).
4.2 Registration Rights Agreement dated as of March 31, 1999, by and between
Allis-Chalmers Corporation and the Pension Benefit Guaranty Corporation
(incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
4.3 Option Agreement dated October 15, 2001 by and between Registrant and
Leonard Toboroff (incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,2001).
4.4 Warrant Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Wells Fargo Energy Capital, Inc.,
including form of warrant (incorporated by reference to the Registrant's
Current Report on Form 8-K filed February 21, 2002)
4.5 Warrant Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Energy Spectrum Partners LP, including
form of warrant (incorporated by reference to the Registrant's Current
Report on Form 8-K filed February 21, 2002)
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4.6* 2003 Stock Incentive Plan (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002).
4.7* Form of Option Certificate issued pursuant to 2003 Stock Incentive Plan
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2002).
4.8 Warrant dated March 1, 2004, issued to Morgan Joseph & Co., Inc.
(incorporated by reference to the Registration Statement on Form S-1
(Registration No. 118916) filed on September 10, 2004).
4.9 Form of warrant issued to Investors pursuant to Stock and Warrant
Purchase Agreement dated April 2, 2004 by and among Registrant and
Donald Engel, Christopher Engel The Engel Defined Benefit plan, RER
Corp. and Leonard Toboroff (incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
4.10 Registration Rights Agreement dated April 2, 2004 by and between
Registrant and the Stockholder signatories thereto (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004).
4.11 Warrant dated May 19, 2004, issued to Jeffrey R. Freedman (incorporated
by reference to the Registration Statement on Form S-1 (Registration
No. 118916) filed on September 10, 2004).
5.1 Consent of Greenberg Glusker Fields Claman Machtinger & Kinsella LLP
9.1 Shareholders Agreement dated February 1, 2002 by and among Registrant
and the stockholders and warrant holders signatories thereto
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001).
9.2 Stockholders Agreement dated April 2, 2004, by and among Registrant and
the Stockholder signatories thereto. (incorporated by reference to the
registrant's Annual Report in Form 10-K for the year ended December 31,
2003)
10.1 Amended and Restated Retiree Health Trust Agreement dated September 14,
1988 by and between Registrant and Wells Fargo Bank (incorporated by
reference to Exhibit C-1 of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in Registrant's Current
Report on Form 8-K dated December 1, 1988).
10.2 Amended and Restated Retiree Health Trust Agreement dated September 18,
1988 by and between Registrant and Firstar Trust Company (incorporated
by reference to Exhibit C-2 of the First Amended and Restated Joint Plan
of Reorganization dated September 14, 1988 included in Registrant's
Current Report on Form 8-K dated December 1, 1988).
10.3 Reorganization Trust Agreement dated September 14, 1988 by and between
Registrant and John T. Grigsby, Jr., Trustee (incorporated by reference
to Exhibit D of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in Registrant's Current
Report on Form 8-K dated December 1, 1988).
10.4 Product Liability Trust Agreement dated September 14, 1988 by and
between Registrant and Bruce W. Strausberg, Trustee (incorporated by
reference to Exhibit E of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in Registrant's Current
Report on Form 8-K dated December 1, 1988).
10.5* Allis-Chalmers Savings Plan (incorporated by reference to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988).
10.6* Allis-Chalmers Consolidated Pension Plan (incorporated by reference to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1988).
10.7 Agreement dated as of March 31, 1999 by and between Registrant and the
Pension Benefit Guaranty Corporation (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999).
10.8 Letter Agreement dated May 9, 2001 by and between Registrant and the
Pension Benefit Guarantee Corporation (incorporated by reference to
Registrant's Quarterly Report on Form 8-K filed on May 15, 2002).
* Compensation Plan or Agreement
II-8
10.9 Termination Agreement dated May 9, 2001 by and between Registrant, the
Pension Benefit Guarantee Corporation and others (incorporated by
reference to Registrant's Current Report on Form 8-K filed on May 15,
2002).
10.10* Option Agreement dated October 15, 2001 by and between Registrant and
Leonard Toboroff (incorporated by reference to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).
10.11 Credit and Security Agreement dated February 1, 2002 by and between
Jens' Oilfield Service, Inc. and Wells Fargo Credit, Inc. (incorporated
by reference to Registrant's Current Report on Form 8-K filed February
21, 2002).
10.12 Amended and Restated Credit and Security Agreement dated February 1,
2002 by and between Strata Directional Technology, Inc. and Wells Fargo
Credit, Inc. (incorporated by reference to Registrant's Current Report
on Form 8-K filed February 21, 2002).
10.13 Credit Agreement dated February 1, 2002 by and between Registrant and
Wells Fargo Energy Capital, Inc. (incorporated by reference to
Registrant's Current Report on Form 8-K filed February 21, 2002).
10.14 Warrant Purchase Agreement dated February 1, 2002 by and between
Registrant and Wells Fargo Energy Capital, Inc. (incorporated by
reference to Registrant's Current Report on Form 8-K filed February 21,
2002).
10.15* Employment Agreement dated February 1, 2002 by Jens' Oilfield Service,
Inc. and Jens H. Mortensen, Jr. (incorporated by reference to
Registrant's Current Report on Form 8-K filed February 21, 2002).
10.16 Forbearance Agreement and Second Amendment to Amended and Restated
Credit Agreement dated March 21, 2003, by and between Strata Directional
Technology, Inc., and Wells Fargo Credit, Inc. (incorporated by
reference to Registrant's Annual Report on Form 10-K for the period
ended December 31, 2002).
10.17 Forbearance Agreement and First Amendment to Credit Agreement dated
March 21, 2003 by and between Jens' Oilfield Service, Inc. and Wells
Fargo Credit, Inc. (incorporated by reference to Registrant's Annual
Report on Form 10-K for the period ended December 31, 2002).
10.18 Forbearance Agreement dated January 17, 2003 by and between Mountain
Compressed Air, Inc., and Wells Fargo Equipment Finance, Inc.
(incorporated by reference to Registrant's Annual Report on Form 10-K
for the period ended December 31, 2002).
10.19 Credit and Security Agreement by and between AirComp, L.L.C. and Wells
Fargo Bank Texas NA, including Term Note, Revolving Line of Credit, and
Delayed Draw Term Note, each filed as of June 27, 2003 (incorporated by
reference to Registrant's Current Report on Form 8-K filed July 16,
2003).
10.20 Security Agreement by and between AirComp, L.L.C. and Wells Fargo Bank
Texas NA, filed as of June 27, 2003 (incorporated by reference to
Registrant's Current Report on Form 8-K dated July 16, 2003).
10.21* Employment Agreement dated July 1, 2003 by and between AirComp, L.L.C
and Terry Keane. (incorporated by reference to Registrant's Current
Report on Form 8-K filed July 16, 2003)
10.22 Second Amendment to Credit Agreement dated September 30 2003 by and
between Jens Oilfield Service, Inc. and Wells Fargo Credit Inc.
(incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 2003).
10.23 Third Amendment to Credit Agreement dated September, 2003 by and between
Strata Directional Technology, Inc., and Wells Fargo Credit Inc.
(incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 2003).
* Compensation Plan or Agreement
II-9
10.24 First Amendment to Credit Agreement dated October 1, 2003 by and between
Registrant and Wells Fargo Energy Capital Inc. (incorporated by
reference to Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2003).
10.25 Fourth Amendment to Credit Agreement dated as of January 30, 2004, by
and between Strata Directional Technologies, Inc., and Wells Fargo
Credit Inc. (incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004).
10.26 Letter Agreement dated February 13, 2004, by and between Registrant and
Morgan Joseph & Co., Inc. (incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 118916) filed on September 10,
2004).
10.27* Employment Agreement dated as of April 1, 2004 between Registrant and
Munawar H. Hidayatallah (incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.28* Employment Agreement dated as of April 1, 2004 between Registrant and
David Wilde (incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004).
10.29 Stock and Warrant Purchase Agreement dated April 2, 2004 by and among
Registrant and Donald Engel, Christopher Engel, the Engel Defined
Benefit Plan, RER Corp. and Leonard Toboroff (incorporated by reference
to Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.30 Preferred Stock Conversion Agreement dated April 2, 2004 by and between
Registrant and Energy Spectrum Partners LP (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.31 Second Amendment to Credit Agreement dated as of April 2, 2004, between
AirComp, LLC and Wells Fargo Bank, NA (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.32 Amendment to Credit Agreement by and between Registrant and Wells Fargo
Energy Capital dated April 2, 2004 (incorporated by reference to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).
10.33 Fifth Amendment to Credit Agreement dated as of April 6, 2004, by and
between Strata Directional Technology, Inc., and Wells Fargo Credit Inc.
(incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004).
10.34 Third Amendment to Credit Agreement dated as of April 6, 2004, by and
between Jens' Oilfield Service, Inc. and Wells Fargo Credit Inc.
(incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004).
10.35 Letter Agreement dated June 8, 2004, by and between the Registrant and
Morgan Keegan & Company, Inc. (incorporated by reference to the
Registration Statement on Form S-1 (Registration No. 118916) filed on
September 10, 2004).
10.36* Employment Agreement dated July 26, 2004, by and between the Registrant
and Victor M. Perez (incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 118916) filed on September 10,
2004).
10.37 Stock Purchase Agreement dated August 10, 2004 (incorporated by
reference to the Registration Statement on Form S-1 (Registration No.
118916) filed on September 10, 2004).
10.38 Amendment to Stock Purchase Agreement dated August 10, 2004
(incorporated by reference to the Registration Statement on Form S-1
(Registration No. 118916) filed on September 10, 2004).
10.39 Letter Agreement relating to Stock Purchase Agreement dated August 5,
2004 (incorporated by reference to the Registration Statement on Form
S-1 (Registration No. 118916) filed on September 10, 2004).
10.40 Addendum to Stock Purchase Agreement dated September 24, 2004
(incorporated by reference to Registrant's Current Report on Form 8-K
filed on September 30, 2004).
10.41 Stock Purchase Agreement dated September 24, 2004 (incorporated by
reference to Registrant's Current Report on Form 8-K filed on September
30, 2004).
10.42 Amendment to Stock Purchase Agreement (undated) (incorporated by
reference to Registrant's Current Report on Form 8-K filed on September
30, 2004).
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10.43 Side Letter dated August 5, 2004, related to Stock Purchase
Agreement(incorporated by reference to Registrant's Current Report on
Form 8-K filed on September 30, 2004).
10.44 Agreement and Plan of Merger dated September 30, 2004 (incorporated by
reference to Registrant's Current Report on Form 8-K filed on October 6,
2004).
10.45 Employment Agreement dated October 11, 2004, between the Registrant and
Theodore F. Pound III (incorporated by reference to Registrant's Current
Report on Form 8-K filed on ) October 15, 2004, 2004).
21.1 Subsidiaries of Registrant (incorporated by reference to the
Registration Statement on Form S-1 (Registration No. 118916) filed on
September 10, 2004).
23.1 Consent of Gordon, Hughes and Banks, LLP.
23.2 Consent of Greenberg Glusker Fields Claman Machtinger & Kinsella
LLP(included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
* Compensation Plan or Agreement
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