Filed pursuant to Rule 424(b)(3)
Registration No. 333-118916
PROSPECTUS
ALLIS-CHALMERS ENERGY INC.
14,379,325 SHARES OF COMMON STOCK
($0.01 par value)
This prospectus relates to the offer and sale from time to time of up to
14,379,325 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 June 1, 2005 the last sale price reported for the common stock on the
American Stock Exchange was $5.02 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 June 2, 2005
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 5
Special Note Regarding Forward-Looking Statements 10
Use of Proceeds 10
Market Price Information 11
Equity Compensation Plan Information 11
Capitalization 13
Selected Historical Financial Information 13
Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Business and Properties 33
Management 43
Principal Holders of Common Stock 54
Transactions with Selling Stockholders and Other Related Parties 56
Description of Capital Stock 60
Selling Stockholders Table 62
Plan of Distribution 66
Where You Can Find More Information 68
Legal Matters 68
Experts 68
Definitions of Certain Oil & Natural Gas Drilling Terms 69
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 Energy
Inc., 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. Certain specialized
terms used in describing our oil and gas service business are defined in
"Definitions of Certain Oil and Natural Gas Drilling Terms."
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 THE
INFORMATION UNDER THE HEADING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND
THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED ELSEWHERE 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, principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and the Rocky Mountain regions of New Mexico and
Colorado, Oklahoma and in Mexico. We currently operate in four sectors of the
oilfield service industry: the casing and tubing sector; the directional
drilling sector; the compressed air drilling sector; the rental tool sector; and
the production services 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 larger service and equipment companies. At the same time,
producers generally favor 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 product mix and the geographic scope of
our products and services primarily within four areas of the oilfield services
and equipment industry: casing and tubing handling services and equipment,
drilling services, oilfield rental tools and production 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 acquisitions or adequately integrate acquisitions into our
operations.
Our casing and tubing, directional drilling, compressed air drilling and other
services had revenues of approximately $10.4 million, $24.8 million, $11.6
million, and $1.0 million, respectively, during the year ended December 31,
2004. See Note 18 to our consolidated financial statements included elsewhere
herein for information regarding the revenues, income from operations and assets
of each of our segments.
CORPORATE INFORMATION
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%. In September 2004, we
acquired 100% of the outstanding stock of Safco Oil Field Products, Inc. In
November 2004, AirComp acquired substantially all of the assets of Diamond Air
Drilling Services, Inc. and Marquis Bit Co., LLC,. In December 2004, we acquired
Downhole Injection Services, LLC. In January 2005, we changed our name from
Allis-Chalmers Corporation to Allis-Chalmers Energy Inc. In April 2005, we
acquired Delta Rental Service, Inc. and in May 2005, we acquired Capcoil
Tubing Services, Inc. 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.
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 14,379,325 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 11,663,027 shares
Shares outstanding prior to the offering 14,020,958 shares as of June 2, 2005.
Shares outstanding after the offering,
assuming the exercise of outstanding
options and warrants held by the selling
stockholders 16,737,256
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: 11,663,027 shares of currently outstanding
common stock, 1,210,800 shares which may be issued upon the exercise of
outstanding options to purchase common stock, and 1,505,498 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 11.6 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. A group of stockholders
who beneficially own approximately 47.1% 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 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 have not
completed a public offering of our common stock prior to September 30, 2005,
then, at the request of Energy Spectrum, our largest stockholder, we will retain
an investment banking firm to identify candidates for a transaction involving
the sale of the Company or its assets. Energy Spectrum has verbally agreed to
enter into an amendment to the stockholders agreement to waive, until further
notice, its right to nominate two of the three directors it is entitled to
nominate under the stockholders agreement, and to waive permanently its right to
require us to retain an investment banking firm or seek to sell the Company.
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 by-laws.
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 our 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 and expect to continue to be highly
leveraged. At December 31, 2004, we had approximately $30.5 million of debt
outstanding and we intend to increase debt in the future to fund our expansion.
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
accounting, 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 and a failure to realize the anticipated bebefits of acquisitions.
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.
FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATIONS.
We are in the process of documenting and testing our internal control procedures
in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act,
which requires annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our independent
auditors addressing these assessments. During the course of our testing we may
identify deficiencies which we may not be able to remediate in time to meet the
deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements
of Section 404. In addition, if we fail to achieve and maintain the adequacy of
our internal controls, as such standards are modified, supplemented or amended
from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls are necessary for us to produce reliable financial reports and
are important to helping prevent financial fraud. If we cannot provide reliable
financial reports or prevent fraud, our business decision process may be
adversely affected, our business and operating results could be harmed,
investors could lose confidence in our reported financial information, and the
price of our stock could decrease as a result.
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.
We have made numerous acquisitions during the past four years. 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, and
o President and Chief Operating Officer 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 OPERATING IN A SINGLE INDUSTRY 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, and customers will likely 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. These competitors are better able to withstand industry downturns, compete
on the basis of price and 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.
10
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 effected a one-to-five reverse stock split. Share
prices for periods prior to June 10, 2004, set forth herein have been adjusted
to give retroactive effect to the reverse stock split.
CALENDAR QUARTER HIGH LOW 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......................... 9.75 4.75 130,000
Fourth Quarter........................ 5.40 3.25 1,315,100
2005
First Quarter ....................... 7.25 3.64 1,390,500
Second Quarter (through June 1) ..... 5.22 4.38 509,700
HOLDERS. As of June 1, 2005, there were approximately 2,100 holders of record
of our common stock. On June 1, 2005, the last sale price for our common stock
reported on the American Stock Exchange was $5.02 per share.
SHARES ELIGIBLE FOR FUTURE SALE. We have registered pursuant to the registration
Statement that includes this prospectus the resale of 14,379,325 shares of our
Common stock, including 2,716,298 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
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2004 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans.
A B C
Number of Number of securities
securities to be Weighted remaining available
issued upon average for future issuance
exercise of price of under equity
outstanding outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column A)
------------------------------- ----------------- ----------------- ----------------------
Equity compensation plans
approved by security holders(1) 1,215,000 $2.94 1,185,000
Equity compensation plans
not approved by security holders 531,800 $3.00 0
----------------- ----------------- ----------------
Total 1,746,800 $2.96 1,185,000
11
(1) In February 2005, we issued options to purchase 920,000 shares of common
stock pursuant to the 2003 Incentive Stock Plan, leaving 265,000 shares
available for issuance under this plan.
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 may be
exercised any time prior to March 28, 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,
exercisable for ten years from October 15, 2001. The option was granted for
services provided by Mr. Toboroff to OilQuip Rentals, Inc. prior to our merger
with OilQuip, including providing financial advisory services, assisting in
OilQuip's capital structure and assisting OilQuip Rentals, Inc. in finding
strategic acquisition opportunities.
In February 2001, we issued two warrants for the purchase of 233,000 total
shares of our common stock at an exercise price of $0.75 per share and one
warrant for the purchase of 67,000 shares of our common stock at an exercise
price of $5.00 per share in connection with a subordinated debt financing. The
warrants to purchase 233,000 shares were redeemed during December 2004. The
remaining warrant is currently outstanding and expires in February 2011.
In May 2004, we issued a warrant to director Jeffrey R. Freedman for the
purchase of 20,000 shares of our Common Stock at an exercise price of $4.65 per
share in consideration of financial advisory services provided by Mr. Freedman
pursuant to a consulting agreement. The warrant expires in May 2009.
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 warrant expires in February 2009.
12
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2004. You
should read this table in conjunction with our financial statements and the
notes to those financial statements included elsewhere in this prospectus.
December 31 2004
(in thousands)
Cash and cash equivalents $ 7,344
Current portion of long-term debt $ 5,541
Long-term debt 24,932
-------------
Total debt $ 30,473
Common stock: 0.01 par value, 20,000,000 shares authorized,
13,042,081 shares issued and outstanding $ 136
Additional paid-in capital $ 40,331
Accumulated Deficit $ (5,358)
-------------
Total stockholders' equity $ 35,109
Total capitalization $ 80,192
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information for each of the five
years ended December 31, 2004, has been derived from our audited
consolidated financial statements and related notes. The following selected
historical financial information for the three months ended March 31, 2005
and 2004 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. Such
consolidated financial statements and summary financial and operating data
have been restated as described in Note 2 to the Consolidated Financial
Statements for the three months ended March 31, 2004 and for the year ended
December 31, 2003, included elsewhere herein. 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.
13
Three Months Ended Year Ended
March 31, December 31,
---------------------- --------------------------------------------------------------
(in thousands, except per share data)
2005 2004 2004 2003 2002 2001 2000
--------- --------- --------- --------- --------- --------- --------
(Restated) (Restated)
(unaudited)
STATEMENT OF OPERATIONS DATA:
Revenues $ 19,334 $ 9,661 $ 47,585 $ 32,724 $ 17,990 $ 4,796 $ --
Income (loss) from operations $ 2,247 $ 1,103 $ 4,311 $ 2,526 $ (1,170) $ (1,433) $ (627)
Net income (loss) from continuing
operations $ 1,567 $ 472 $ 1,180 $ 2,927 $ (3,969) $ (2,273) $ (627)
Net income (loss) attributed to
common stockholders $ 1,567 $ 384 $ 1,056 $ 2,271 $ (4,290) $ (4,577) $ (627)
Per Share Data:
Net Income (loss) from continuing
operations per common share:
Basic $ 0.12 $ 0.10 $ 0.15 $ 0.58 $ (1.14) $ (2.88) $ (0.31)
Diluted $ 0.09 $ 0.05 $ 0.10 $ 0.39 $ (1.14) $ (2.88) $ (0.31)
Weighted average number of common
shares outstanding:
Basic 13,632 3,927 7,930 3,927 3,766 790 2,000
Diluted 17,789 5,762 11,549 5,761 3,766 790 2,000
CONSOLIDATED BALANCE SHEET DATA
Three Months Ended Year Ended
March 31, December 31,
-------------------- --------------------------------------------------------
(in thousands, except per share data)
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(Restated) (Restated)
(unaudited)
Total Assets $84,376 $48,365 $81,192 $53,662 $34,778 $12,465 $ 2,360
Long-term debt classified as:
Current $ 4,109 $ 4,888 $ 5,541 $ 3,992 $13,890 $ 1,023 $ --
Long-Term $28,750 $26,476 $24,932 $28,241 $ 7,331 $ 6,833 $ --
Redeemable convertible
Preferred stock $ -- $ 4,259 -- $ 4,171 $ 3,821 $ -- $ --
Stockholders' Equity $36,676 $ 1,708 $35,109 $ 4,541 $ 1,009 $ 1,250 $ 2,348
Book value per share $ 2.69 $ 0.43 $ 4.43 $ 1.16 $ 0.26 $ 1.58 $ 1.17
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 DOCUMENT. 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 wells. Our operations
are conducted principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and 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 and
natural gas industries. As a result of acquisitions completed in September and
December of 2004 and April and May of 2005, we are also engaged in providing
oilfield rental tools, principally renting spiral drill pipe to oil and gas
operators, and providing downhole production services. Our production services
business provides techniques, chemical processes and related services to
increase production from existing wells. The operations of the rental tools and
production services were aggregated into the Other Services segment for periods
through December 31, 2004. We plan to broaden the geographic regions in which we
operate and to expand the types of services and equipment we provide to the oil
and gas drilling industry.
We derive operating revenues from rates per day and rates per job that we charge
for the labor and equipment required to provide a service. 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, general reputation and experience of our 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 can fluctuate based upon 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 an 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. According to the
Baker Hughes rig count, 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 March 31, 2004,
this trend has continued, with directional and horizontal rigs climbing to 440,
which was 35.4% of the 1,243 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, fuel and depreciation. Operating
expenses do not fluctuate in direct proportion to changes in revenues because
among other factors, 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.
15
We effected a reverse stock split on June 10, 2004. As a result of the reverse
stock split, each five shares of our common stock was 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.
RESTATEMENT
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to Statement of
Financial Accounting Standard, or SFAS, No. 141, "Business Combinations" and SEC
Staff Accounting Bulletin, or SAB No. 51 "Accounting for Sales of Stock by a
Subsidiary". Consequently, we have restated our financial statements for the
year ended December 31, 2003, as described in Note 2 to the Consolidated
Financial Statements for the year ended December 31, 2004. All financial
statements for 2003 and 2004 presented herein have been restated.
RESULTS OF OPERATIONS
On February 6, 2002, we acquired 81% of the outstanding stock for Jens' Oilfield
Service, Inc. On February 6, 2002, we also purchased substantially all the
outstanding common stock and preferred stock of Strata Directional Technology,
Inc. 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.
and we acquired Safco Oil Field Products, Inc. In November 2004, AirComp
acquired substantially all of the assets of Diamond Air Drilling Services, Inc.
and Marquis Bit Co., LLC, and in December 2004, we acquired Downhole Injection
Services, LLC. We consolidated the results of these acquisitions from the day
they were acquired.
On April 1, 2005, we acquired Delta Rental Service, Inc. and on May 1, 2005, we
acquired Capcoil Tubing Services, Inc. As a result of the foregoing
acquisitions, our historical results are not indicatvie of our future results.
16
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
Our revenues for the three months ended March 31, 2005 were $19.3 million, an
increase of 98.9% compared to $9.7 million for the three months ended March 31,
2004. Revenues increased for all of our business segments due to increased
demand for our services due to the general increase in oil and gas industry
activity. Revenues increased most significantly at our directional drilling
services segment due to the addition of operations and sales personnel and the
opening of new operations offices, which increased our capacity and market
presence. Additionally, our compressed air drilling services division revenues
increased in the 2005 period compared to the 2004 period due to the acquisition
of Diamond Air and Marquis Bit, which we refer to herein collectively as Diamond
Air, on November 1, 2004, and improved pricing in West Texas.
Revenues increased at our casing and tubing services segment due to increased
revenues from Mexico, improved market conditions, improved market penetration
and the addition of operating personnel which broadened our capabilities. The
acquisition of Safco Oilfield Products, Inc. in September 2004 and the
acquisition of Downhole Injection Systems, LLC in December 2004 also
contributed to casing and tubing revenues as a result of cross marketing
opportunities.
Our cost of revenues consists principally of our labor costs and benefits,
equipment rentals, maintenance and repairs of our equipment, depreciation,
insurance and fuel. Because many of our costs are fixed, our gross profit as a
percentage of revenues is generally affected by our level of revenues. Our gross
profit for the quarter ended March 31, 2005 increased 167.7% to $5.6 million, or
29.1% of revenues, compared to $2.1 million, or 21.6%, of revenues for the three
months ended March 31, 2004, due to increased revenues and improved pricing in
the directional drilling services segment, increased revenues at our compressed
air drilling services segment, increased revenues from Mexico and improved
market conditions for our domestic casing and tubing segment.
Depreciation expense was $914,000 for the first quarter of 2005 compared to
$619,000 for the first quarter of 2004 due to the increase in our assets
resulting from our capital expenditures and the acquisitions completed in 2004.
General and administrative expense was $3.4 million in the first quarter of 2005
period compared to $1.1 million for the first quarter of 2004. General and
administrative expense increased in the 2005 quarter due to the additional
expenses associated with the acquisitions completed in the second half of 2004,
and the hiring of additional sales and administrative personnel for our other
businesses. General and administrative expense also increased because of
increased legal, accounting fees and other expenses related to our financing and
acquisition activities, including the filing of the registration statement of
which this prospectus is a part, increased legal, accounting, and consulting
fees in connection with our internal controls and corporate governance process,
and increased corporate accounting and administrative staff. General and
administrative expenses include $394,000 of amortization expense in the first
quarter of 2005 compared to $219,000 in the first quarter of 2004. The increase
in amortization expense is due to the amortization of intangible assets in
connection with our acquisitions and the amortization of deferred financing
costs. As a percentage of revenues, general and administrative expenses were
17.6% in the 2005 quarter and 11.3% in the 2004 quarter.
Income from operations for the three months ended March 31, 2005 totaled $2.2
million, a 120.0% increase over the $1.0 million in income from operations for
the three months ended March 31, 2004, reflecting the increase in our revenues
and gross profit, offset in part by increased depreciation and general and
administrative expenses.
Our interest expense was $521,000 in the first quarter of 2005, compared to
$569,000 for the first quarter of 2004. Interest expense decreased in the 2005
quarter due to the prepayment, in December 2004, of our 12% $2.4 million
subordinated note. Interest expense in the 2004 quarter includes $216,000 in
connection with the acceleration, in 2003, of the amortization of a put
obligation related to subordinated debt at Mountain Compressed Air. The
subordinated debt was paid off in connection with the formation of AirComp in
2003.
Minority interest in income of subsidiaries for the 2005 quarter was $144,000
compared to $73,000 for the 2004 quarter due to the increase in profitability at
AirComp, including the acquisition of Diamond Air as of November 1, 2004. The
increase in net income at AirComp was offset in part by the elimination of
minority interest at Jens', which was 19%-owned by director Jens Mortensen until
September 30, 2004.
17
We had net income attributed to common stockholders of $1.6 million for the
first quarter of 2005, an increase of 308.1%, compared to net income attributed
to common stockholders of $384,000 for the first quarter of 2004. The net income
attributed to common stockholders in the 2004 period is after $88,000 in
preferred stock dividends.
The following table compares revenues and income from operations for each of our
business segments for the quarters ended March 31, 2005 and March 31, 2004.
Income from operations consists of our revenues less cost of revenues, general
and administrative expenses, and depreciation and amortization:
Revenues Income (Loss) from Operations
----------------------------- -------------------------------
Quarter ended March 31, Quarter ended March 31,
2005 2004 Change 2005 2004 Change
------- ------- ------- ------- ------- -------
(in thousands)
Casing and tubing services $ 3,560 $ 1,939 $ 1,621 $ 1,327 $ 442 $ 885
Directional drilling services 9,901 5,253 4,648 1,878 662 1,216
Compressed air drilling services 4,181 2,469 1,712 527 255 272
Other services 1,692 -- 1,692 (119) -- (119)
General corporate -- -- -- (1,366) (329) (1,037
------- ------- ------- ------- ------- -------
Total $19,334 $ 9,661 $ 9,673 $ 2,247 $ 1,030 $ 1,217
======= ======= ======= ======= ======= =======
CASING AND TUBING SERVICES SEGMENT
Revenues for the quarter ended March 31, 2005 for the casing and tubing services
segment were $3.6 million, an increase of 89.5% from the $1.9 million in
revenues for the quarter ended March 31, 2004. Revenues from domestic operations
increased to $1.9 million in the 2005 period from $917,000 in the 2004 period as
a result of improved market conditions for our services in South Texas and the
addition of personnel which improved our capabilities and expanded our offered
services. Revenues from Mexican operations increased to $1.6 million in the 2005
first quarter from $1.0 million in the 2004 period as a result of increased
drilling activity in Mexico and the addition of equipment that increased our
capacity. Income from operations increased by 225.0% to $1.3 million in the
first quarter of 2005 from $442,000 in the first quarter of 2004. The increase
in this segment's operating income is due to increased revenues both
domestically and in our Mexico operations.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for the first quarter ended March 31, 2005 for our directional drilling
services segment were $9.9 million, an increase of 86.7% from the $5.3 million
in revenues for the first quarter ended March 31, 2004. Income from operations
increased 171.4% to $1.9 million for the first quarter of 2005 from $662,000 for
the comparable 2004 period. The improved results for this segment are due to the
increase in drilling activity in the Texas and Gulf Coast areas, the
establishment of new operations in West Texas and Oklahoma, and the addition of
operations and sales personnel which increased our capacity and market presence.
Increased personnel expenses were more than offset by the growth in revenues,
improved pricing for our services and cost savings as a result of purchases, in
late 2003 and in 2004, of most of the down-hole motors used in directional
drilling. Previously we had leased these motors.
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $4.2 million for the three months
ended March 31, 2005, an increase of 68.0% compared to $2.5 million in revenues
for the three months ended March 31, 2004. Income from operations increased to
$527,000 in the 2005 period compared to income from operations of $255,000 in
the 2004 period. Our compressed air drilling revenues and operating income for
the 2005 year increased compared to the prior year due in part to the
acquisition of Diamond Air as of November 1, 2004.
18
OTHER SERVICES SEGMENT
Revenues for this segment consist of Safco's rental tool business, acquired
September 1, 2004, and Downhole's production services acquired December 1, 2004.
Revenues for this segment were $1.7 million with a loss from operations of
$119,000. In the second quarter of 2005, we acquired Delta and Capcoil and, in
the future, we will report the results of operations of Delta and Safco in our
rental tool segment and will report the results of operations of Downhole and
Capcoil in our production services segment. We plan to expand these businesses
thereby improving profitability as we increase our market presence and our
critical mass.
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
Our revenues for the year ended December 31, 2004 were $47.7 million, an
increase of 45.9% compared to $32.7 million for the year ended December 31,
2003. Revenues increased due to increased demand for our services due to the
general increase in oil and gas drilling activity. Revenues increased most
significantly at our directional drilling services segment due to the addition
of operations and sales personnel, which increased our capacity and market
presence. Additionally, our compressed air drilling services revenues in 2004
increased compared to the 2003 year due to the inclusion, for a full year in
2004, of the business contributed by M-I in connection with the formation of
AirComp in July 2003 and the acquisition of Diamond Air on November 1, 2004. We
have consolidated AirComp into our financial statements beginning with the
quarter ended September 30, 2003. Mexico operations at our casing and tubing
services segment also contributed to an increase in revenues which was offset in
part by a decrease in domestic revenues for this segment due to increased
competition for casing and tubing services in South Texas. Finally we acquired
Safco of September 1, 2004 and acquired Downhole in December 2004.
Our gross profit for the year ended December 31, 2004 increased 42.5% to $12.4
million, or 26.0% of revenues, compared to $8.7 million, or 26.6 % of revenues
for the year ended December 31, 2003, due to the increase in revenues in the
directional drilling services segment, the compressed air drilling services
segment and from Mexico, which more than offset lower revenues and higher costs
in our domestic casing and tubing segment. Our cost of revenues consists
principally of our labor costs and benefits, equipment rentals, maintenance and
repairs of our equipment, depreciation, insurance and fuel. Because many of our
costs are fixed, our gross profit as a percentage of revenues is generally
affected by our level of revenues.
General and administrative expense was $8.0 million in 2004 compared to $6.2
million in 2003. General and administrative expense increased in 2004 due to
additional expenses associated with the inclusion of AirComp for a full year,
acquisitions completed in the second half of 2004, and the hiring of additional
sales and administrative personnel at each of our subsidiaries. General and
administrative expense also increased because of increased professional fees and
other expenses related to our financing and acquisition activities, including
the listing of our common stock on the American Stock Exchange, and increased
corporate accounting and administrative staff. As a percentage of revenues,
general and administrative expenses were 16.7% in 2004 and 18.8% in 2003.
Depreciation and amortization was $3.3 million for the year ended December 31,
2004 compared to $2.9 million for the year ended December 31, 2003 due to the
inclusion of AirComp for a full year and the increase in our assets resulting
from capital expenditures and acquisitions completed in 2004.
Income from operations for the year ended December 31, 2004 totaled $4.2
million, a 61.5% increase over the $2.6 million in income from operations for
the prior year, reflecting the increase in our revenues and gross profit, offset
in part by an increase in general and administrative expense and amortization.
Income from operations in the year ended December 31, 2004 includes $188,000 in
additional accrued expense for post-retirement medical benefits associated with
discontinued operations. The increase in this accrued expense was based on the
present value of the expected retiree benefit obligations as determined by a
third party actuary. Income from operations for the 2003 year includes income of
$99,000 which resulted from a reduction in projected post-retirement benefits
based on the third party actuary at the end of 2003. (Please refer to Note 3 -
"Pension and Post Retirement Benefit Obligations").
19
Our interest expense increased to $2.8 million in 2004, compared to $2.5 million
for the prior year, in spite of the decrease in out total debt. Interest expense
in 2004 includes $359,000 in warrant put amortization including the retirement
of warrants in connection with the prepayment, in December 2004, of our $2.4
million 12.0% subordinated note. Interest expense in 2003 includes $216,000 in
connection with the acceleration, in 2003, of the amortization of a put
obligation related to subordinated debt at Mountain Compressed Air. The
subordinated debt was paid off in connection with the formation of AirComp in
2003.
Minority interest in income of subsidiaries for 2004 was $321,000 compared to
$343,000 for 2003. The increase in net income at AirComp was offset in part by
the elimination of minority interest in Jens', which was 19%-owned by director
Jens Mortensen until September 30, 2004.
We had net income attributed to common stockholders of $764,000 for the year
ended December 31, 2004 compared to net income attributed to common stockholders
of $2.3 million for the year ended December 31, 2003. In 2003, we recognized a
non-operating gain on sale of an interest in a subsidiary in the amount of $2.4
million in connection with the formation of AirComp, and recognized a one-time
gain of $1.0 million in the third quarter of 2003 as a result of settling a
lawsuit against the former owners of Mountain Air Drilling.
The following table compares revenues and income from operations for each of our
business segments for the years ended December 31, 2004 and December 31, 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
------------------------------------- ----------------------------------
Year ended December 31, Year ended December 31,
2004 2003 Change 2004 2003 Change
----------- ---------- ---------- ----------- ----------- ---------
(in thousands)
Casing and tubing services $ 10,391 $ 10,037 $ 354 $ 3,217 $ 3,628 $ (411)
Directional drilling services 24,787 16,008 8,779 3,061 1,103 1,958
Compressed air drilling services 11,561 6,679 4,882 1,169 17 1,152
Other services 987 -- 987 (67) -- (67)
General corporate -- -- -- (3,153) (2,222) (931)
----------- ---------- ---------- ----------- ----------- ---------
Total $ 47,726 $ 32,724 $ 15,002 $ 4,227 $ 2,526 $ 1,601
=========== ========== ========== =========== =========== =========
CASING AND TUBING SERVICES SEGMENT
Revenues for the year ended December 31, 2004 for the casing and tubing services
segment were $10.4 million, an increase of 4.0% from the $10.0 million in
revenues for the year ended December 31, 2003. Revenues from domestic operations
decreased from $6.7 million in 2003 to $5.2 million in the 2004 year 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,
however, increased from $3.7 million in 2003 to $5.1 million in 2004 as a result
of increased drilling activity in Mexico and the addition of equipment that
increased our capacity. Income from operations decreased by 11.1% to $3.2
million in 2004 from $3.6 million in 2003. The decrease in this segment's
revenues and operating income is due to the decrease in revenues from domestic
operations and increases in wages and benefits domestically, which was partially
offset by increased revenues from Mexico.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for the year ended December 31, 2004 for our directional drilling
services segment were $24.8 million, an increase of 55.0% from $16.0 million in
revenues for the year ended December 31, 2003. Income from operations increased
by 181.8% to $3.1 million for 2004 from $1.1 million for 2003. The improved
results for this segment are 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 personnel expenses
were more than offset by the growth in revenues and cost savings as a result of
purchases, in late 2003 and in 2004, of most of the down-hole motors used in
directional drilling. Previously we had leased these motors.
20
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $11.6 million for the year ended
December 31, 2004, an increase of 73.1% compared to $6.7 million in revenues for
the year ended December 31, 2003. Income from operations increased to $1.2
million in 2004 compared to income from operations of $17,000 in 2003. Our
compressed air drilling revenues and operating income for the 2004 year
increased compared to the prior year due to the inclusion, for a full year in
2004, of the business contributed by M-I in connection with the formation of
AirComp in July 2003, and the acquisition of Diamond Air in November 2004.
OTHER SERVICES SEGMENT
Revenues for this segment consist of Safco's rental tool business, acquired in
September 2004, and Downhole's production services acquired in December 2004. We
acquired Delta and Capcoil in the second quarter of 2005 and, in the future, we
will report the results of operations of Delta and Safco in our rental tool
segment and will report the results of operations of Downhole and Capcoil in our
production services segment. Revenues for this segment were $987,000 with a loss
from operations of $67,000. It is our plan to grow in these businesses thereby
improving profitability as we increase our market presence.
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 was due to the general increase in oil and gas
drilling activity and the inclusion of AirComp, our compressed air drilling
venture, beginning in July 2003. The increase in revenues was also reflected 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 $8.7 million, or 26.6%
of revenues, compared to $3.4 million, or 18.9 % of revenues for the year ended
December 31, 2002, due to increased revenues, 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. Because many of our costs are
fixed, our gross profit as a percentage of revenues is generally affected by our
level of revenues. Gross profit as a percentage of revenues increased as a
result of higher revenues and better pricing for our services.
General and administrative expenses were $6.2 million, or 18.9% of revenues, in
2003 compared to $3.8 million, or 21.1% of revenues, in 2002. The increase in
general and administrative expenses reflected the formation of Aircomp in July
2003, the hiring of additional sales force and operations personnel due to the
improvement in the oil and gas drilling market, and the inclusion of the
operations of our casing and tubing services and directional drilling services
segments for a full year in 2003.
Depreciation and amortization expenses increased to $2.9 million in 2003
compared to $2.6 million in 2002, due to the formation of AirComp and the
acquisition of our casing and tubing services and directional drilling services
segments in February 2002.
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 of AirComp beginning in July 2003. In the comparable period
of 2002, we incurred an operating loss of $1.0 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 $343,000 compared to
$189,000 in 2002 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 of Aircomp in July 2003.
21
In the third quarter of 2003 we recorded a one-time gain on the reduction of a
note payable of $1.0 million 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. In addition, we also recorded a
one-time non-operating gain on the sale of an interest in a subsidiary of $2.4
million in connection with the formation of AirComp. We have adopted a policy
that any gain or loss incurred in the future on the sale in the stock of a
subsidiary will be recognized as such in the income statement.
Our 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 income attributed to common stockholders of $2.3 million, or $0.58
per common share, for the year ended December 31, 2003 compared with a net loss
of ($4.3 million), or ($1.14) 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 and 2002. 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 2003 2002 Change
----------- ---------- ---------- ----------- ----------- ---------
(in thousands)
Casing and tubing services $ 10,037 $ 7,796 $ 2,241 $ 3,628 $ 2,495 $ 1,133
Directional drilling services 16,008 6,529 9,479 1,103 (576) 1,679
Compressed air drilling services 6,679 3,665 3,014 17 (945) 962
General corporate -- -- -- (2,222) (2,144) (78)
----------- ---------- ---------- ----------- ----------- ---------
Total $ 32,724 $ 17,990 $ 14,734 $ 2,526 $ (1,170) $ 3,696
=========== ========== ========== =========== =========== =========
22
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 $7.8 million 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 $17,000 in 2003 from a
($945,000) loss from operations in 2002 due to the inclusion, for six months in
the 2003 period, of the business contributed by M-I in connection with the
formation of AirComp in July 2003. Through this venture, 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.
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, to
fund acquisitions and to fund our working capital requirements. Our primary
sources of liquidity are borrowings under our credit facilities, proceeds from
the issuance of equity securities and cash flows from operations. We had cash
and cash equivalents of $6.0 million at March 31, 2005, compared to $7.3 million
at December 31, 2004, $1.3 million at December 31, 2003 and $146,000 at December
31, 2002.
OPERATING ACTIVITIES
In the quarter ended March 31, 2005, we used $822,000 in cash from operating
activities compared to $1.6 million in cash generated from operating activities
for the same period in 2004. Net income attributed to common shareholders for
the quarter ended March 31, 2005 increased to $1.6 million, compared to $384,000
in the 2004 period. Revenues and income from operations increased in the first
quarter of 2005 due to increased demand for our services due to the general
increase in oil and gas drilling activity, both domestically and in Mexico, the
addition of operations and marketing personnel which increased our market
presence and capabilities and acquisitions completed in the second half of 2004.
Non-cash additions to net income totaled $1.5 million in the first quarter of
2005 consisting of $1.3 million of depreciation and amortization and $144,000 of
minority interest in the income of AirComp. Non-cash additions to net income in
the first quarter of 2004 totaled $984,000, consisting of depreciation and
amortization expense of $836,000, minority interest of $73,000 and amortization
of discount on debt of $75,000.
During the three months ended March 31, 2005, changes in working capital used
$3.8 million in cash compared to the three months ended March 31, 2004 when
changes in working capital provided $166,000 in cash, principally due, in the
2005 period, to an increase of $3.4 million in accounts receivable, an increase
of $515,000 in other assets, and an increase in accrued salaries and payroll of
$185,000, offset in part by a decrease of $92,000 in accrued expenses. Accounts
receivable increased by $3.4 million due to the increase in our revenues. Other
assets increased $515,000 due primarily to an increase in prepaid insurance
related to insurance premium deposits required for our policies that went into
effect April 1, 2005.
23
During the three months ended March 31, 2004, changes in working capital
provided $166,000 in cash, principally due to a decrease in accounts receivables
and other current assets of $489,000, an increase in accounts payable of
$350,000 and accrued interest of $89,000, offset in part by a decrease in
accrued expenses of $595,000 and a decrease in accrued salaries, benefits,
payroll taxes and other long-term liabilities of $167,000. Accounts receivables
decreased as of March 31, 2004 compared to December 31, 2003 due to improved
collection of past due receivables. Accounts payable increased at March 31, 2004
compared to December 31, 2003 due to increased operational expenses. The
decrease in accrued expenses at March 31, 2004 was due to a decrease in accrued
operating expenses of $391,000, a decrease in accrued professional fees of
$37,000, and a decrease in accrued restructuring costs of $167,000. Accrued
restructuring costs included amounts due to certain former employees.
In the year ended December 31, 2004, we generated $3.3 million in cash from
operating activities compared to $1.9 million in cash from operating activities
for the same period in 2003. Net income before preferred stock dividend for the
year ended December 31, 2004 decreased to $888,000, compared to $2.9 million in
the 2003 period. Revenues and income from operations increased in 2004 due to
increased demand for our services due to the general increase in oil and gas
drilling activity. Net income in 2003 includes a $1.0 million gain from the
settlement of a lawsuit and a $2.4 million non-operating gain on the sale of
interest in AirComp. Non-cash additions to net income totaled $4.3 million in
the 2004 period consisting of $3.6 million of depreciation and amortization,
$334,000 of minority interest in the income of a subsidiary and $350,000 in
amortization of discount on debt. Non-cash additions to net income in 2003
totaled $305,000, consisting of depreciation and amortization expense of $2.9
million, minority interest in the income of a subsidiary of $343,000 and
amortization of discount on debt of $516,000, offset by the $3.4 million of
non-cash gains.
During the year ended December 31, 2004, changes in working capital used $1.9
million in cash compared to a use of $1.3 million in cash in the 2003 period,
principally due, in the 2004 period, to an increase of $2.3 million in accounts
receivable, an increase of $638,000 in other current assets, and a decrease of
$398,000 in accrued expenses and other liabilities, offset in part by an
increase of $1.1 million in accounts payable, an increase of $299,000 in accrued
interest and a decrease of $229,000 in lease receivable. Our accounts receivable
increased by $2.3 million at December 31, 2004 due to the increase in our
revenues in 2004. Current assets increased $638,000 due primarily to an increase
in prepaid insurance premiums. Accounts payable increased by $1.3 million at
December 31, 2004 due to the increase in our cost of sales associated with the
increase in our revenues and the acquisitions completed in the fourth quarter of
2004.
For the year 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 before preferred stock dividend for the
2003 period improved to $2.9 million, compared to a net loss of ($4.0 million)
in the comparable 2002 period, due to the increase in revenues and income from
operations in 2003 due to the general increase in oil and gas drilling activity
and the formation of AirComp, our compressed air drilling subsidiary, in July
2003. Net income for 2003 includes a $1.0 million gain from the settlement of a
lawsuit and a $2.4 million non-operating gain on sale of interest in AirComp.
Non-cash additions to net income totaled $305,000 in 2003, which is net of a
$1.0 million non-cash gain from the settlement of a lawsuit and a $2.4 million
non-operating gain on the sale of an interest in a subsidiary, compared to $3.4
million in non-cash additions in 2002, consisting principally of depreciation
and amortization expense, including amortization of discount on debt, and
minority interest in the income of a subsidiary.
During the year ended December 31, 2003, changes in working capital used $1.3
million in cash compared to the year ended December 31, 2005, when changes in
working capital which provided $2.8 million in cash principally due, in 2003, to
an increase in accrued expenses of $1.7 million, an increase in accounts
receivable and other current assets of $5.6 million, and an increase in accounts
payable of $2.2 million. The increase in accrued expenses is due which was
partially offset by a decrease in accrued interest of $126,000 due to the
retirement of subordinated debt carrying an interest rate of 12% and lower
interest rates on other debt with variable interest rates. Accounts receivable
increased $4.4 million due to an increase in revenues in our directional
drilling services segment, our compressed air drilling services segment due to
the inclusion of the business contributed by M-I to AirComp in July 2003, and
our casing and tubing services segment. Other current assets decreased primarily
because of the recovery of a lease deposit related to an equipment lease which
was paid off in June 2003. Accounts payable increased by $2.3 million in the
2003 period due to increased costs related to increased revenues, and the
inclusion of the accounts payable of AirComp in July 2003.
24
INVESTING ACTIVITIES
During the quarter ended March 31, 2005, we used $2.7 million in investing
activities, consisting principally of approximately $1.6 million for the
purchase of casing equipment, approximately $263,000 for the purchase of
downhole motors and approximately $779,000 for new compressed air drilling
equipment.
During the quarter ended March 31, 2004, we used $1.4 million in investing
activities, consisting of approximately $379,000 for the purchase of casing
equipment, approximately $705,000 for the purchase of downhole motors and
approximately $326,000 for repairs related to compressed air equipment.
During the year ended December 31, 2004, we used $9.1 million in investing
activities, consisting principally of capital expenditures of approximately $4.6
million, including $1.6 million to purchase equipment for our directional
drilling services segment, approximately $1.2 million to purchase casing
equipment and approximately $1.4 million to make capital repairs to existing
equipment in our compressed air drilling services segment. In September 2004 we
acquired 100% of the outstanding stock of Safco for $1.0 million. As of November
1, 2004, AirComp acquired substantially all the assets of Diamond Air for $4.6
million in cash and the assumption of approximately $450,000 of debt. We
contributed our share of the purchase price, or $2.5 million, to AirComp in
order to fund the purchase. Finally, in December 2004, we acquired Downhole for
approximately $1.1 million in cash, 568,466 shares of our common stock and the
payment or assumption of $950,000 of debt.
During the year 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 sale of equipment of $843,000.
Cash used in investing activities in 2002 was $8.5 million, reflecting 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.
FINANCING ACTIVITIES
During the three months ended March 31, 2005, financing activities provided a
net of $2.2 million in cash. We received $2.4 million, net, in borrowings under
long-term debt facilities and paid $178,000 in debt issuance costs. During the
three months ended March 31, 2004 financing activities used $1.0 million in cash
consisting of $944,000 for the repayment of long-term debt and $75,000 in debt
issuance costs.
During the year ended December 31, 2004, financing activities provided a net of
$11.8 million in cash. We received $16.9 million in net proceeds from the
issuance of common stock, $8.2 million in borrowings under long-term debt
facilities and a $689,000 increase in net borrowings under our revolving lines
of credit. The proceeds were used to repay long-term debt totaling $13.5 million
and to pay $391,000 in debt issuance costs. During the year ended December 31,
2003 financing activities provided a net of $3.8 million in cash. In 2003, we
received $14.1 million from the issuance of long-term debt and $30.5 million
from borrowings under our credit facilities. 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. During the year
ended December 31, 2002 financing activities provided a net of $6.3 million in
cash. In 2002, we received $9.7 million from the issuance of long-term debt and
$7.1 million from borrowings under our credit facilities. 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 $5.4 million. We used the net
proceeds of the private placement offerings to fund the acquisitions of Safco,
Downhole, Delta and Capcoil.
25
In September 2004, we issued 1.3 million shares of our common stock to Jens
Mortensen, a director in exchange for his 19% interest in Jens'. As a result of
this transaction, we now own 100% of Jens'. The purchase price was valued at
$6.4 million, which was the value of the 1.3 million shares of common stock
issued to Mr. Mortensen based on the last sale price ($4.95) of the common stock
as reported on the American Stock Exchange on the date of issuance. This amount
was treated as a contribution to stockholders equity. On our balance sheet, we
eliminated the amount recorded as Jens' minority interest, $2.0 million. The
balance of the contribution ($4.5 million) was allocated as follows: In June
2004, we obtained an appraisal of the fixed assets of Jens', which valued the
fixed assets at $20.1 million. The book value of the fixed assets was $15.8
million. We increased the value of Jens' fixed assets by 19% of the excess of
the appraised value over the book value of the assets, or $813,511. The balance
of the purchase price, or $3.7 million, was allocated to goodwill.
In January 2005, we executed a business development agreement with CTTV
Investments LLC, an affiliate of ChevronTexaco Inc., whereby we issued 20,000
shares of our common stock to CTTV, and further agreed to issue up to an
additional 60,000 shares to CTTV contingent upon our subsidiaries receiving
certain levels of revenues in 2005 from ChevronTexaco and its affiliates.
On April 1, 2005, we issued 223,114 shares of common stock in connection with
the acquisition of Delta and on May 1, 2005, we issued 168,161 shares of common
stock in connection with the acquisition of Capcoil.
We have several bank credit facilities and other debt instruments at
Allis-Chalmers, all of which are consolidated in our financial statements. As
described below, Aircomp, which is majority-owned by us, has a separate credit
facility. The agreements governing these credit facilities contain customary
events of default and financial covenants, and limit our ability to incur
additional indebtedness, make capital expenditures, pay dividends or make other
distributions, create liens, and sell assets. At March 31, 2005, we had $32.9
million in outstanding indebtedness, of which $28.8 million was long-term debt
and $4.1 million was the current portion of long-term debt. Allis-Chalmers and
its subsidiaries other than Aircomp are all parties to or guarantors of the
Allis-Chalmers credit facilities.
We have a credit agreement dated December 7, 2004 that provides for the
following credit facilities:
o A $10.0 million revolving line of credit. Borrowings are subject
to a borrowing base calculated as 85% of eligible accounts
receivables, as defined. Outstanding borrowings under this line of
credit were $5.0 million as of March 31, 2005.
o A term loan with a principal balance at March 31, 2005 of $5.7
million providing for monthly payments of principal of $105,583.
We are also required to prepay this term loan by an amount equal
to 20% of the accounts receivables collections from Matyep in
Mexico.
o A $6.0 million capital expenditure and acquisition line of credit.
Borrowings under this facility are payable monthly over four years
beginning January 2006. Availability of this capital expenditure
term loan facility is subject to security acceptable to the lender
in the form of equipment or other acquired collateral. Outstanding
borrowings under this line of credit were $793,000 as of March 31,
2005.
Our credit facilities mature on December 31, 2008 and are secured by liens on
substantially all our assets. The interest rate payable on borrowings fluctuates
based on the prime rate. The average interest rate was 6.81% as of March 31,
2005. We pay a 0.5% per annum fee on the undrawn portion of the revolving line
of credit and the capital expenditure line.
Our Jens' subsidiary has a subordinated note in the amount of $4.0 million
payable to Jens Mortensen, who sold Jens' to us and is one of our directors. The
note accrues interest at 7.5% per annum and provides for quarterly interest
payments. 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 Mr.
Mortensen in exchange for a non-compete agreement. We are required to make
monthly payments of $20,576 through January 31, 2007. As of March 31, 2005, the
balance due was approximately $453,000, including $247,000 classified as current
portion of long-term debt.
26
Jens' also has several small equipment financings and a real estate loan which
in the aggregate totalled $778,000 as of March 31, 2005. First, Jens' has two
bank term loans aggregating $223,000 which accrue interest at an adjustable rate
based on the prime rate (7.25% at March 31, 2005) and which require monthly
payments of $13,000 plus accrued interest. The first loan, with a balance of
$177,000, matures on September 17, 2006, while the second loan, with a balance
of $48,000, matures on January 12, 2007. Jens also has a five-year equipment
financing term loan with a principal balance of $307,000 at March 31, 2005. The
loan is payable in monthly installments of principal and interest equal to
$6,449 per month through December 2009. Finally, Jens' has a real estate term
loan which is payable in equal monthly installments of $4,344 with the remaining
outstanding balance due on January 1, 2010. The interest rate floats based on
the prime rate. The outstanding principal balance was $553,000 at March 31,
2005.
Strata entered into a short-term vendor financing agreement that provides
extended payment terms for the purchase, lease and repair costs related to
downhole drill motors. As of March 31, 2005, the outstanding balance was $1.2
million. Payment of interest is due monthly and principal payments of $582,000
are due in each of April 2005 and December 2005. The interest rate is fixed at
8.0%.
In connection with the purchase of Safco, we agreed to pay a total of $150,000
to the sellers in exchange for a non-compete agreement. We are required to make
yearly payments of $50,000 through September 30, 2007. As of March 31, 2005, the
balance due was $150,000.
Downhole has notes payable to two former shareholders totaling $22,000. Downhole
also has a note payable over 10 months at $1,137 per month. At March 31, 2005,
the balance due was $11,371.
AirComp has the following credit facilities:
o A $3.5 million bank line of credit of which $1.6 million was
outstanding at March 31, 2005. Interest accrues at an
adjustable rate based on the prime rate. The average interest
rate was 7.66% as of March 31, 2005. We pay a 0.5% per annum
fee on the undrawn portion. Borrowings under the line of
credit are subject to a borrowing base consisting of 80% of
eligible accounts receivable.
o A term loan with a remaining principal balance of $6.5 million
which accrues interest at an adjustable rate based on either
the London Interbank Offered Rate, which is referred to as
LIBOR, or the prime rate. The average interest rate was 6.41%
as of March 31, 2005. Principal payments of $286,000 plus
interest are due quarterly with a final maturity date of June
27, 2007.
o A "delayed draw" term loan facility in the amount of $1.5
million to be used for capital expenditures. Interest accrues
at an adjustable rate based on either the LIBOR or the prime
rate. Quarterly principal payments commence on March 31, 2006
in an amount equal to 5.0% of the outstanding balance as of
December 31, 2005, with a final maturity of June 27, 2007. The
outstanding principal balance was $670,000 as of March 31,
2005.
The AirComp credit facilities are secured by liens on substantially all of
AirComp's assets. Allis-Chalmers and Mountain Compressed Air guarantee 55% of
the obligations of AirComp under these facilities.
AirComp also has 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. At March 31, 2005, $441,000 of
interest was included in accrued interest. We are not liable for the obligations
of AirComp under this note.
In 2000 we compensated directors, including current directors Nederlander and
Toboroff, who served on the board of directors from 1989 to 1999 without
compensation by issuing promissory notes totaling $325,000. The notes accrued
interest at the rate of 5.0% per annum. The notes matured on March 31, 2005, and
we are in the process of locating and paying the holders of these notes. As of
March 31, 2005, notes totaling $96,300, including accrued interest remained
outstanding.
27
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 which accrued
interest at 5.75% per annum. This note was reduced to $1.5 million in 2003 as a
result of the settlement of a legal action against the sellers. In April 2005,
we settled a subsequent legal action by paying $1.0 million in cash and agreeing
to pay an additional $350,000 on June 1, 2006, and $150,000 on June 1, 2007, in
extinguishment of all amounts due under the promissory note and all other
claims. Mountain Air has a term loan in the amount of $185,000 at March 31, 2005
with an interest rate of 5.0%. Principal and interest payments of $5,039 are due
on the last day of each month. The final maturity date is June 30, 2008.
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 December 31, 2004.
PAYMENTS BY PERIOD
------------------
(IN THOUSANDS)
LESS THAN
TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
-------------- ------------- ------------ ------------ ---------------
CONTRACTUAL OBLIGATIONS
Notes Payable $ 30,473 $ 5,541 $ 17,406 $ 7,526 $ --
Interest Payments on notes payable 2,133 316 1,470 346 --
Operating Lease 1,834 550 813 471 --
Employment Contracts 2,566 1,006 1,560 -- --
-------------- -------------- ------------- ------------ ---------------
Total Contractual Cash Obligations $ 37,006 $ 7,413 $ 21,249 $ 8,343 $ --
============== ============= ============ ============ ===============
We have no off balance sheet arrangements, other than normal operating leases
and employment agreements, that have or are likely to have a current or future
material 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 have identified capital expenditure projects that will require up to
approximately $6.0 million for the remainder of 2005, exclusive of any
acquisitions. We believe that our current cash generated from
operations, cash available under credit facilities and cash on hand will provide
sufficient funds for our identified projects.
Our business strategy includes both internal growth and acquisitions. We are
regularly involved in discussions with a number of potential acquisition
candidates and from time to time enter into non-binding letters of intent for
acquisitions, only some of which are consummated. We also expect to make
significant capital expenditures to acquire equipment and to maintain our
existing equipment. We will also need to refinance our existing debt facilities
as they become due and provide funds for capital expenditures and acquisitions.
We are currently in discussions to refinance our debt. To effect our business
strategy, 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.
RECENT DEVELOPMENTS
In April 2005, we acquired 100% of the outstanding stock of Delta Rental
Service, Inc. for $4.6 million in cash, 223,114 shares of our common stock
and two promissory notes totaling $350,000. Delta, located in Lafayette,
Louisiana, is a rental tool company providing specialty rental items to the
oilfield such as spiral heavy wate drill pipe, test plugs used to test blow-out
preventors, well head retrieval tools, spacer spools and assorted handling
tools. For the year ended December 31, 2004, Delta had revenues of $3.3 million.
In April 2005, we amended our December 7, 2004 credit agreement to extend the
final maturity of our credit facilities for one year to December 31, 2008,
include our Delta and Downhole subsidiaries as parties to our credit facilities,
and provide for increased availability under our $10.0 million revolving line of
credit and our $6.0 million acquisition line of credit based on the receivables
and assets of Delta and Downhole.
28
Additionally, the amendment documented the lender's consent to the $1.5 million
settlement with the former owners of Mountain Air Drilling Service described
above and the prepayment of the $4.0 million Jens' subordinated seller note by
an amount not to exceed $397,000.
In May 2005, we acquired 100% of the outstanding capital stock of Capcoil Tubing
Services, Inc. for $2.7 million, 168,161 shares of the Company's common stock
and the payment or assumption of approximately $1.3 million of debt. Capcoil,
located in Kilgore, Texas, provides coil tubing services to enhance production
from existing wells. Capcoil had revenues of $5.8 million for the year ended
December 31, 2004.
On May 2, 2005, we amended our December 7, 2004 credit agreement to obtain
consent to the Capcoil acquisition, to include Capcoil as a party to the credit
agreement and increase the availability under the $10.0 million revolving line
of credit and the $6.0 million capital expenditure line of credit based on the
receivables and other assets of Capcoil.
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 the Consolidated Financial
Statements included elsewhere in this document. Our preparation of this document
and 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 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 collectibility is
reasonably assured, as well as consideration of the overall business climate in
which our customers operate. 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.
REVENUE RECOGNITION. 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, or SAB, No. 104, REVENUE RECOGNITION IN FINANCIAL STATEMENTS,
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 our total assets. We make 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 our 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. We have recorded approximately $11.8 million of
goodwill and $5.0 million of other identifiable intangible assets. We perform
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, we have 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 used two
approaches to determine the carrying amount of the individual reporting units.
The first approach is the Discounted Cash Flow Method, which focuses on the
expected cash flow of the Company. In applying this approach, the cash flow
available for distribution is projected for a finite period of years. Cash flow
available for distribution is defined as the amount of cash that could be
distributed as a dividend without impairing our future profitability or
operation. The cash flow available for distribution and the terminal value (the
value at the end of the estimation period) are then discounted to present value
to derive an indication of value of the business enterprise. This valuation
method is dependent upon the assumptions made regarding future cash flow and
cash requirements. The second approach is the Guideline Company Method which
focuses on comparing the Company to selected reasonably similar publicly traded
companies. Under this method, valuation multiples are: (i) derived from
operating data of selected similar companies; (ii) evaluated and adjusted based
on the strengths and weaknesses of the Company relative to the selected
guideline companies; and (iii) applied to the operating data of the Company to
arrive at an indication of value. This valuation method is dependent upon the
assumption that the value of the Company can be evaluated by analysis of its
earnings and its strengths and weaknesses relative to the selected similar
companies. Significant and unanticipated changes to these assumptions could
require a provision for impairment in a future period.
AIRCOMP AND SALE OF INTEREST IN SUBSIDIARY. We have adopted SEC Staff Accounting
Bulletin (SAB) No. 51, Accounting for Sales of Stock by a Subsidiary, to account
for its investment in AirComp. AirComp has been accounted for and consolidated
as a subsidiary under SFAS No. 141, BUSINESS COMBINATIONS. Pursuant to SAB No.
51, the Company has recorded its own contribution of assets and liabilities at
its historical cost basis. Since liabilities exceeded assets, the Company's
basis in AirComp was a negative amount. The Company has accounted for the assets
contributed from M-I at a fair market value as determined by an outside
appraiser. The Company gave M-I a 45% interest in AirComp in exchange for the
assets contributed. As a result of the formation of the venture and its
retention of 55% interest in the venture, the Company realized an immediate gain
to the extent of its negative basis and its 55% interest in the combined assets
and liabilities of the venture. In accordance with SAB No. 51, the Company has
recorded its negative basis investment in AirComp as an addition to equity and
its share of the combined assets and liabilities realized from M-I assets as
non-operating income.
STOCK BASED COMPENSATION. We account for our stock-based compensation using
Accounting Principles Board, or APB, Opinion 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, we adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. We have
adopted the disclosure-only provisions of SFAS 123 for the stock options granted
to our employees and directors. 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an Amendment
of ARB No. 43, Chapter 4, which amends the guidance in ARB No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 requires that these items be recognized
as current period charges. In addition, SFAS No. 151 requires the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are currently evaluating
the provisions of SFAS No. 151 and will adopt SFAS No. 151 on January 1, 2006.
30
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT (SFAS
123R). SFAS 123R revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and focuses on accounting for share-based payments for services by employer to
employee. The statement requires companies to expense the fair value of employee
stock options and other equity-based compensation. The statement does not
require a certain type of valuation model and either a binomial or Black-Scholes
model may be used. Under the current rules, we will be required to prepare
financial statements in accordance with the provisions of SFAS 123R beginning in
the first quarter of 2006. We are currently evaluating the method of adoption
and the impact on our operating results. Our future cash flows will not be
impacted by the adoption of this standard.
In December 2004, the FASB issued FASB Staff Position No. 109-1, Application of
FASB Statement No. 109, "Accounting for Income Taxes", to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004, which provides guidance on the recently enacted American Jobs Creation Act
of 2004. The Jobs Creation Act provides a tax deduction for income from
qualified domestic production activities. FSP 109-1 provides for the treatment
of the deduction as a special deduction as described in SFAS No. 109. As such,
the deduction will have no effect on existing deferred tax assets and
liabilities. The impact of the deduction is to be reported in the period in
which the deduction is claimed on our U.S. tax return. We do not expect that
this deduction will have a material impact on our effective tax rate in future
years. FSP 109-1 is effective prospectively as of January 1, 2005.
31
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 affecting our
adjustable rate debt, and any future refinancing of our fixed rate debt and our
future debt.
At March 31, 2005, we were exposed to interest rate fluctuations on
approximately $20.9 million of notes payable and bank credit facility borrowings
carrying adjustable interest rates. A hypothetical one hundred basis point
increase in interest rates for these notes payable would increase our annual
interest expense by approximately $209,000. 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 March 31, 2005, we had $6.0 million invested in short-term 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. To date, such payment have not been material in amount.
32
BUSINESS AND PROPERTIES
This document contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such
differences include, but are not limited to, the general condition of the oil
and natural gas drilling industry, demand for our oil and natural gas service
and rental products, and competition. Other factors are identified in our
Securities and Exchange Commission filings and elsewhere herein including under
the heading "Risk Factors."
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, principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and the Rocky Mountain regions of New Mexico and
Colorado, Oklahoma and in Mexico. We currently operate in four segments of the
oilfield service industry: the casing and tubing sector; the directional
drilling sector; the compressed air drilling sector, the rental tool sector and
the production services 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 larger service and equipment companies. At the same time,
producers generally favor 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 product mix and the geographic scope of
our products and services, primarily in the segments described above, through
internal expansion and the acquisition of companies operating within these
segments. We seek 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 and
adequately integrate these acquisitions into our operations.
Our casing and tubing, directional drilling, and compressed air drilling
segments had revenues of approximately $10.4 million, $24.8 million and $11.6
million, respectively, during the year ended December 31, 2004. Revenues for our
rental tool and production services segments, which were acquired in the third
and fourth quarters of 2004, were approximately $1.0 million during the year
ended December 31, 2004. See Note 18 to our consolidated financial statements
included elsewhere herein for information regarding the revenues, income from
operations and assets of each of 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 Mountain Compressed Air, Inc. In December 2001, we sold 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%. In September 2004, we acquired 100% of the
outstanding stock of Safco Oil Field Products, Inc. In November 2004, AirComp
acquired substantially all of the assets of Diamond Air Drilling Services, Inc.
and Marquis Bit Co., LLC. In December 2004, we acquired Downhole Injection
Services, LLC. As a result of these transactions, our prior results may not be
indicative of current or future operations of those sectors. In January 2005, we
changed our name from Allis-Chalmers Corporation to Allis-Chalmers Energy Inc.
On April 1, 2003, we acquired Delta Rental Service, Inc. and on May 1, 2005, we
acquired Capcoil Tubing Services, Inc.
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 oil and 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:
33
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 fewer
suppliers.
o Producers are favoring larger suppliers that provide a comprehensive
list of products and services.
o Companies that can meet customers' 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.
o We can offer customers significant advantages over our smaller
competitors.
o Opportunities exist to acquire 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.
34
DESCRIPTION OF BUSINESSES
CASING AND TUBING 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 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 an 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. Two large companies, Frank's Casing Crew and Rental Tools Inc.
and Weatherford International Inc., have a substantial portion of the casing and
tubing crew market in South Texas. However, the 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 A management team with over 15 years of service experience;
o An 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
under-served by the larger oilfield service companies in the U.S. and Mexico.
We provide casing and tubing services in Mexico through a significant Mexican
customer, Materiales y Equipo Petroleo, S.A. de C.V., which we refer to as
Matyep, in Villahermosa, Reynosa, Veracruz and Ciudad del Carmen, Mexico.
Matyep, in turn provides equipment and services to Petroleos Mexicanos, known as
Pemex. 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. 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, 2004 and 2003, our Mexico operations accounted
for approximately $5.1 million and $3.3 million, respectively, of our revenues,
and the loss of Matyep as a customer would have a material adverse effect on our
business. We provide extended payment terms to Matyep and maintain a high
accounts receivable balance due to these terms. The accounts receivable balance
was approximately $968,000 at December 31, 2004 and was $1.4 million as of
December 31, 2003. Jens' has been providing services to Pemex in association
with Matyep since 1997 and has never experienced a default in payment; however a
default on these receivables could have a material adverse effect on us.
The following table details revenues of our casing and tubing services segment
by class for the year ended December 31, 2004 and December 31, 2003 (in
thousands).
35
Year Ended Year Ended
Revenues by class: December 31, 2004 Percentage December 31, 2003 Percentage
------------------ ----------------- ---------- ----------------- ----------
Laydown machines $ 1,850 17.8% $ 2,426 24.2%
Casing installation 3,396 32.7% 3,829 38.1%
Mexico operations 5,141 49.5% 3,729 37.2%
Other 4 -- 53 .5%
------- ------ ------- ------
Total revenues $10,391 100.0% $10,037 100.0%
======= =======
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 also 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.
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
We provide specialized directional drilling services in niche markets, including
the Austin Chalk region, where specialized, technically focused applications are
necessary. Our teams of experienced personnel utilizes state of the art tools to
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 our horizontal and directional drilling segments
revenues by class for the years ended December 31, 2004 and December 31, 2003
(in thousands).
Year Ended Year Ended
Revenues by class: December 31, 2004 Percentage December 31, 2003 Percentage
------------------ ----------------- ---------- ----------------- ----------
Drilling operations $ 20,942 83.2% $ 13,188 82.4%
Other 3,845 16.8% 2,820 17.6%
-------- ------ -------- ------
Total revenues $ 24,787 100.0% $ 16,008 100.0%
======== ====== ======== ======
36
We have only a single supplier for most or all of each type of equipment we use
(downhole 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 downhole 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 limited liability company owned jointly with M-I, 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.
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 boosters (15)
o Ariel two stage boosters (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.
37
Effective November 1, 2004, AirComp acquired substantially all the assets of
Diamond Air for $4.6 million in cash. We contributed $2.5 million and M-I L.L.C.
contributed $2.1 million to AirComp LLC in order to fund the purchase. Diamond
Air and Marquis Bit provide air drilling technology and products to the oil and
gas industry in West Texas, New Mexico and Oklahoma. Diamond Air is a leading
provider of air hammers and hammer bit products. The acquired assets include air
hammers, hammer bits and products, accounts receivable, equipment and rolling
stock utilized in the air drilling business. Diamond Air manufactures its own
hammer bits. Diamond Air's and Marquis Bit's air hammers and hammer bits will
complement and add to AirComp's offering of products and services and enhance
its ability to offer packaged pricing. Diamond Air and Marquis Bit together had
revenues of approximately $4.0 million and $5.5 million for the seven months
ended July 31, 2004 and the year ended December 31, 2003, respectively.
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.
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 that compete in
only one region, 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 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
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 our
air compression equipment at auction, we are not significantly dependent upon
any one supplier for compressed air drilling equipment.
RENTAL TOOLS
Effective September 1, 2004, we acquired Safco and effective April 1, 2005, we
acquired Delta Rental Service, Inc. With these acquisitions, we supply
specialized equipment for both onshore and offshore drilling and workover
operations, which we refer to as rental tools services. Most wells drilled for
oil and natural gas require some form of rental tools in the completion phase of
a well.
We have an inventory of specialized equipment consisting of "hevi-wate" spiral
drill pipe, double studded adaptors, test plugs, wear sleeves, adaptor spools,
baskets and spacer spools and other assorted handling tools in various sizes to
met our customers demands. We also provide related oilfield services to oil and
gas exploration and development companies. We charge customers for rental
equipment on a daily basis portal to portal. The customer is liable for damaged
or lost equipment.
We currently provide rental tool services primarily to areas in Texas, Oklahoma,
Louisiana, and offshore in the Gulf of Mexico. The rental tool business is
highly fragmented with hundreds of companies offering various rental tool
services. Our largest competitors include Weatherford, Oil and Gas Rental Tools,
Quail Rental Tools, and Knight Rental Tools. We believe we currently have a less
than 5% market share in the Southwestern United States. We believe that we have
several competitive advantages including:
38
o A well-established, loyal customer base in Texas, Oklahoma and
Louisiana;
o A management team with over 30 years of service experience;
o An inventory of quality specialized equipment;
o A reputation for customer responsiveness;
We believe that through geographic expansion, we can optimize the utilization of
both our equipment and personnel by accessing additional niche markets
under-served by the larger oilfield service companies in the U.S.
For the years ended December 31, 2004 and 2003, Safco had revenues of
approximately $1.3 million and $1.0 million, respectively. For the years ended
December 31, 2004 and 2003, Delta Rental had revenues of $3.2 million and $2.7
million, respectively. We plan to further expand our rental tools operations in
the domestic oil and gas industry through joint marketing efforts with our other
business segments. In addition, we believe the acquisition of Safco and Delta
Service will provide us a platform to facilitate offering other services to the
rental tool segment of the energy industry. These services may be developed
internally or obtained through acquisition of other rental tool companies.
Historically, we have sought to purchase equipment for our rental tools on an
opportunistic basis; however, there is currently a shortage of equipment, which
is available new from our 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 rental tools sector is not materially dependent upon the ownership of any
patents, trademarks, franchises or other concessions.
39
PRODUCTION SERVICES
In December 2004, we acquired Downhole and effective May 1, 2005, we
acquired Capcoil. With these two acquisitions, we supply specialized equipment
and trained operators to install capillary tubing and coiled tubing into flowing
oil and gas wells up to depths of approximately 20,000 feet, typically without
interrupting production for both onshore and offshore producing wells, which we
refer to as production services. Chemicals are injected through the tubing to
targeted zones. The result is improved production from treatment of downhole
corrosion, scale, paraffin and salt build-up in producing wells. Natural gas
wells with low bottom pressures can experience fluid accumulation in the tubing
and well bore. This injection system can inject a foaming agent which lightens
the fluids allowing them to flow out of the well. Additionally, corrosion
inhibitors can be introduced to reduce corrosion in the well.
We have an inventory of specialized equipment consisting of capillary and coil
tubing units in various sizes ranging from 1/4" to 1 1/4" along with nitrogen
pumping and transportation equipment. We also maintain a full range of stainless
and carbon steel coiled tubing and related supplies used in the installation of
the tubing. We sell or rent the tubing and charge a fee for its installation,
servicing and removal, which includes the service personnel and associated
equipment on a turn key hourly basis. We do not provide the chemicals injected
into the well.
We currently provide coiled and capillary tubing services primarily to areas in
Eastern Oklahoma, West Texas, South Texas and throughout the Rocky Mountains. We
also have one capillary coiled tubing unit in Mexico and one in the Middle East.
There are two other significant competitors in the market, Weatherford and Dyna
Coil. We believe we have approximately 30% market share in the Southwestern
United States for chemical injection services using the capillary coiled tubing
system. We believe that we have several competitive advantages including:
o A well-established, loyal customer base in Texas, Mexico and the
Middle East;
o A management team with over 25 years of service experience;
o An inventory of specialized equipment;
o A reputation for customer responsiveness;
o Substantial experience in the Texas oil and natural gas market;
o An excellent relationship with a customer in Mexico, which enables
us to access the Mexican market and;
o An excellent relationship with our Middle Eastern partner, which
enables us to access the Middle East market.
We believe that through geographic expansion, we can optimize the utilization of
both our equipment and personnel by accessing additional niche markets.
We have a service agreement with a company in Mexico to provide Pemex with
capillary tubing installations and services. Our customer provides drilling
fluids and petrochemical products to companies around the globe. For the year
ended December 31, 2004, we had revenues of approximately $567,000 and we did
not provide any services to Mexico in 2003. We are currently working offshore
Del Carmen and onshore in the Villahermosa Region.
We have had a 3 year relationship with a major oil company in the UAE. We have
been contracted to provide capillary tubing installations and services for one
of their fields in Sharjah. For the years ended December 31, 2004 and 2003, we
had revenues of approximately $251,000 and $154,000, respectively. Our
experienced staff has become an integral part of their operations. Our
supervisors no longer need to be accompanied by a company field representative
to carry out the work detail on the well site. Our experience in the region has
opened the opportunity to expand our product offering to other companies in the
Middle East.
40
We believe the use of chemical injection services such as those provided by
Downhole has significant growth potential. For the years ended December 31, 2004
and 2003, Downhole had revenues of approximately $5.2 million and $3.8 million,
respectively. For the years ended December 31, 2004 and 2003, Capcoil had
revenues of $5.8 million and $5.5 million, respectively. We plan to further
expand our production services operations in the international markets and in
the domestic oil and gas industry through joint marketing efforts with our other
business segments. In addition, we believe the acquisition of Downhole and
Capcoil will provide us a platform to facilitate offering other services to the
production services segment of the energy industry. These services may be
developed internally or obtained through acquisition of other production
services companies.
Our market is a relatively new market, and there is not excess equipment readily
available to expand our markets. We have the ability to manufacture certain
smaller capillary units. We can assemble a new capillary unit in 90 to 120 days.
Our larger coiled tubing and nitrogen equipment is built by other manufactures,
and this process takes 180 to 240 days.
Our production services 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 the worldwide
supply and demand for oil and the domestic supply and demand for natural gas.
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 increased supplies and 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 in that period 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 has been strong throughout 2003, 2004, and 2005. Management
believes demand will remain strong throughout 2005 due to high oil prices and
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 our markets 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.
CUSTOMERS
Our customers are the major and independent oil and gas companies operating in
the U.S. and Mexico. In 2004, Matyep in Mexico represented 11.0.% and Burlington
Resources Inc. represented 10.1% of our consolidated revenues. In 2003, Matyep,
Burlington Resources Inc. and El Paso Energy Corporation represented 10.1%,
11.1% and 13.8%, respectively, of our revenues. The loss without replacement of
our larger existing customers could have a material adverse effect on our
operations.
40
COMPETITION
As discussed above, we experience significant competition in all areas of our
business. 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 experience, 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.
EMPLOYEES
Our strategy includes acquiring companies with strong management and entering
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, 2004, we had 261 employees.
INSURANCE
We carry a variety of insurance coverages 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").
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 stockholder 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 compressed air drilling operations, we
lease an Approximately 6,000 square foot facility in Grand Junction, Colorado,
which includes offices, shops and a warehouse; an approximately 10,000 square
foot facility in Farmington, New Mexico, which includes offices, shops and a
warehouse, a yard in Fort Stockton, Texas and a 4,000 square foot shop in
Carlsbad, New Mexico.
41
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, one of our directors.
To support our directional drilling operations, we lease office space and a shop
in Houston, Texas.
To support our production services operations, we leave office space, warehouses
and yards in Midland, Corpus Christi and Kilgore, Texas.
To support our tool rental operations, we lease office space, warehouses and
yards in Houston, Texas and Lafayette, Louisiana.
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 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.
42
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.
We have been advised that the A-C Reorganization Trust will be terminated and
its assets distributed during 2005, 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.
We are involved in various other legal proceedings in the ordinary course of
businesses. The legal proceedings are at different stages; however, we believe
that the likelihood of material loss relating to any such legal proceeding is
remote.
43
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
Jeffrey R. Freedman 58 January 2005
Victor F. Germack 65 January 2005
David A. Groshoff 32 October 1999
Munawar H. Hidayatallah 61 May 2001
Thomas E. Kelly 50 January 2005
John E. McConnaughy, Jr. 76 May 2004
Jens H. Mortensen, Jr. 51 February 2003
Robert E. Nederlander 71 May 1989
Leonard Toboroff 72 May 1989
Thomas O. Whitener, Jr. 57 February 2002
Jeffrey R. Freedman was appointed to our board of directors in January 2005. Mr.
Freedman served as our Executive Vice President - Corporate Development from
March 2002 to December 2002. Since January 2003, Mr. Freedman has been involved
in real estate development in South Florida. From 1994 through March 2002, Mr.
Freedman was Managing Director - Oil Services and Equipment for Prudential
Securities with responsibilities for institutional equity research of the
largest oilfield services and contract drilling companies in the U.S. public
markets. Mr. Freedman has been involved and held various positions with major
institutional brokerage firms in equity research relating to the oil service
sector over the last twenty years.
Victor F. Germack was appointed to our board of directors in January 2005. Mr.
Germack has served since 1980 as President of Heritage Capital Corp., a company
engaged in investment banking services. In addition, Mr. Germack formed, and
since 2002 has been President of, RateFinancials Inc., a company that rates and
ranks the financial reporting of the largest U.S. public companies.
David A. Groshoff is Vice President of JPMorgan Investment Management, Inc. and
Chief Compliance Officer of JPMorgan Investment Advisers' closed end high yield
bond fund, the Pacholder High Yield Fund, Inc. Prior to joining JPMorgan (at
that time Pacholder Associates, Inc.) in 1997, Mr. Groshoff worked in private
legal practice in Cincinnati, Ohio. 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 member of the Board of Directors of Fansteel, Inc., a
manufacturer of aerospace castings and engineered metal components.
Munawar H. Hidayatallah has served as our Chairman of the Board 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.
Thomas E. Kelly was appointed to our board of directors in January 2005. Mr.
Kelly was an owner and founder of Downhole Injection Systems, LLC, which we
purchased in December 2004. Since 1997, Mr. Kelly has been the Chairman and CEO
of United Fuel & Energy, the largest provider of fuel, lubricants and services
in the Permian Basin of West Texas. Mr. Kelly is also CEO of BPZ Energy, a
Houston based exploration and production company with properties in Peru and
Ecuador. Mr. Kelly has been involved in oil and gas exploration projects since
1981, including Baytech, Inc. which he co-founded in 1981 and was involved in
until it was sold in 2002. Mr. Kelly currently serves on the board of directors
of BPZ Energy which is a public company.
44
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 six public
companies (Wave Systems Corp., Consumer Portfolio Services, Inc., Overhill
Farms, Inc. Varsity Brands, Inc., Levcor International, Inc. and Eutoclaims,
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.
Jens H. Mortensen, Jr. has served as our director since February 2002 and served
as our President and Chief Operating Officer from February 2003 through February
2005. Mr. Mortensen founded Jens', one of our subsidiaries, in 1982 after having
spent eight years in operations and sales positions with a South Texas casing
crew operator. As sole stockholder and Chief Executive Officer of Jens', Mr.
Mortensen grew the company 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 New York City. Since December
1998, Mr. Nederlander has been a managing partner of the Nederlander Company,
LLC, operator of legitimate theaters outside 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 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.
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.
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 Securities Corp., 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.
45
STOCKHOLDERS AGREEMENT
On April 2, 2004, an investor group consisting of Donald Engel, Chris Engel, the
Engel Investors Defined Benefit Plan, director Leonard Toboroff and RER Corp., a
Michigan corporation wholly owned by director Robert Nederlander, Energy
Spectrum, and directors Jens H. Mortensen, Jr., Saeed M. Sheikh and Munawar H.
Hidayatallah entered into a stockholders agreement pursuant to which the parties
agreed to vote for the election to our board of directors three persons
nominated by Energy Spectrum, two persons nominated by the Investor Group and
one person nominated by Messrs. Hidayatallah, Mortensen and Sheikh. The parties
to the Stockholders Agreement collectively beneficially own approximately 49.6%
of the common stock, and thus have the power to elect six of our nine directors.
Messrs. Whitener, Hidayatallah, Toboroff and Nederlander have been designated to
be elected as directors pursuant to the Stockholders Agreement.
The Stockholders Agreement also provides that in the event we do not complete 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 the Company or its assets. In
addition, Energy Spectrum verbally agreed to amend the stockholders agreement to
eliminate the requirement to retain an investment banking firm to identify
candidates for a sale of the Company.
All parties to the Stockholders Agreement are deemed to be a group and each
party is deemed to beneficially own all common stock beneficially owned by each
member of the group. Mr. Whitener is a principal of Energy Spectrum and its
affiliates and is deemed to beneficially own the securities held of record by
Energy Spectrum.
In December 2004, two directors appointed by Energy Spectrum resigned and Energy
Spectrum verbally agreed to amend the stockholders agreement to provide that
Energy Spectrum will designate only one nominee to the Board of Directors unless
and until it provides further notice to the Company.
AUDIT COMMITTEE
We have an Audit Committee consisting of three directors, Mr. McConnaughy, who
serves as Chairman, Mr. Groshoff and Mr. Germack. All of our directors are
"independent" under the applicable American Stock Exchange and Securities and
Exchange Commission rules regarding audit committee membership. The Board has
determined that Mr. Germack 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 our 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
ended December 31, 2004.
46
The Audit Committee held 8 meetings during 2004. The Board adopted a written
Audit Committee charter in March 2002. The charter is reviewed annually and
revised as appropriate.
NOMINATING COMMITTEE.
The Nominating Committee of our board of directors was established in January
2005 to select nominees for the board of directors. The Nominating Committee
consists of Mr. Nederlander, as Chairman, and Mr. Freedman. The Nominating
Committee operates pursuant to a charter approved by our board of directors and
the Nominating Committee. The Nominating Committee will utilize a variety of
methods for identifying and evaluating nominees for directors. Candidates may
come to the attention of the Nominating Committee through current board members,
stockholders and other persons. We have no formal procedure pursuant to
which stockholders may recommend nominees to our board of directors or
Nominating Committee.
47
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.
NAME AGE POSITION
Munawar H. Hidayatallah 61 Munawar H. Hidayatallah has served as
our Chairman of the Board 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 51 Jens H. Mortensen, Jr. has served as our
director since 2002 and served as our
President and Chief Operating Officer
from February, 2003 until February 2005.
Mr. Mortensen founded Jens' Oilfield
Service, Inc., one of our subsidiaries,
in 1982 after having spent eight years
in operations and sales positions with a
South Texas casing and tubing crew
operator. As sole stockholder and Chief
Executive Officer of Jens', Mr.
Mortensen grew Jens' from its infancy to
approximately $10.0 million 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.
Dave Wilde 51 Mr. Wilde became our President and Chief
Operating Officer in February, 2005. Mr.
Wilde was President and Chief Executive
Office of Strata from October 2003
through February 2005 and served as
Strata's President and Chief Operating
Officer from July 2003 until October
2003. From February 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
at Strata. Mr. Wilde has more than 25
years' experience in the drilling sector
of the oil service industry and 2 years'
experience in the directional and
horizontal drilling and rental tool
business.
48
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. From
February 1995 to June 2003, Mr. Perez
was Vice President and Chief Financial
Officer of Trico Marine Services, Inc.,
a marine transportation company serving
the offshore energy industry. 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 energy banking. Mr. Perez
is a director of Safeguard Security
Holdings.
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 served as secretary from May
2004 through January 2005. 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.
Terrence P. Keane 52 Terrence P. Keane has served as
President and Chief Executive Officer of
our AirComp, LLC subsidiary 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 K. Bryan 47 Mr. Bryan has served as President and
Chief Executive Officer of Strata since
February 2005. Mr. Bryan served as Vice
President of Strata from June 2002 until
February 2005. From February 2002 to
June 2002 he served as General Manager,
and from May 1999 through February 2002
he served as Operations Manager of
Strata. Mr. Bryan has been involved in
the directional drilling sector since
1979.
49
Theodore F. Pound III 50 Mr. Pound became our general counsel in
October 2004 and was elected Secretary
in January 2005. For ten years prior to
joining us, he practiced law with the
law firm of Wilson, Cribbs & Goren,
P.C., Houston, Texas. Mr. Pound has
practiced law for more than twenty-four
years. Mr. Pound has acted as our lead
counsel in each of our acquisitions
beginning in 2001.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or awarded by us in 2004,
2003 and 2002 to our chief executive officer and the four other most highly
compensated officers for the year ended December 31, 2004.
Annual Compensation Long
------------------- ----
Term Compensation
-----------------
Awards Securities
Name and Other Annual Underlying
Principal Position Year Salary($) Bonus($) Compensation(1) Options/SARS (#)
------------------ ---- --------- -------- --------------- ----------------
Munawar H. Hidayatallah, 2004 $ 337,500 $ 580,000(2) $ 3,375 0
President, Chairman & 2003 $ 300,000(3) $ 81,775 $ 3,000 400,000
Chief Executive Officer of Allis- 2002 $ 294,666(4) $ 143,000 $ 0 0
Chalmers (5)
Jens H. Mortensen, Jr., 2004 $ 150,000 $ 0 $ 1,500 0
President and Chief Operating 2003 $ 150,000 $ 0 $ 1,500 100,000
Officer of Allis-Chalmers, President 2002 $ 137,500 $ 0 $ 0 0
of Jens' (6)
David Wilde 2004 $ 200,000 $ 188,364 $ 1,672 110,000
President and Chief 2003 $ 187,626 $ 30,000 $ 1,876 100,000
Operating Officer (7) 2002 $ 146,393 $ 0 $ 0 0
Terrence P. Keane 2004 $ 153,508 $ 50,000 $ 0 0
President and Chief Executive 2003 $ 72,086 $ 0 $ 0 0
Officer of AirComp(8) 2002 $ 0 $ 0 $ 0 0
Todd C. Seward 2004 $ 131,000 $ 65,500(9) $ 650 0
Chief Accounting Officer of 2003 $ 123,192 $ 40,000 $ 1,232 30,000
Allis-Chalmers 2002 $ 35,000 $ 0 $ 0 0
(1) Represents contributions to 401K plans. We match contributions made by all
employees up to a maximum 1% of each employee's salary.
(2) Of this amount $175,000 was paid in 2005.
(3) Of this amount, $60,000 was deferred and paid during 2004.
(4) Of this amount, $65,000 was deferred and paid during 2003.
(5) The bonuses awarded to Mr. Hidayatallah for fiscal years 2002 and 2003 were
determined pursuant to his 2001 employment agreement, based on acquisitions
completed for fiscal years 2002 and 2003, and the bonus for fiscal year
2004 was based on Mr. Hidayatallah's attaining certain strategic objectives
set forth in his 2004 employment agreement (see, "Employment Agreements
with Management," below).
(6) Mr. Mortensen served as President of Jens' since we acquired Jens' in
February 2002 until February 2005 and as such has been considered one of
our executive officers; Mr. Mortensen served as our President and Chief
Operating Officer from February 2003 until February 2005.
(7) Mr. Wilde was President and Chief Executive Officer of Strata, one of our
subsidiaries, until January 2005 when he was named our President and Chief
Operating Officer.
(8) Mr. Keane serves as President and Chief Executive Officer of AirComp, LLC
and as such is considered an executive officer.
(9) Of this amount $32,500 was paid in 2005.
50
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning stock options granted to the
named executive officers during 2004. All the grants were options to purchase
shares of common stock and were made under our 2003 Incentive Stock Plan. No
stock appreciation rights were granted during 2004. No options were exercised
during 2004.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERMS(3)
% OF TOTAL
NUMBER OF OPTIONS/SARS EXERCISE
SECURITIES GRANTED PRICE
UNDERLYING TO PER
OPTIONS/SARS EMPLOYEES SHARE EXPIRATION
NAME GRANTED(1) IN 2004 ($/SH)(2) DATE 5%($) 10%($)
---- ---------- ------- --------- ---- ----- ------
David Wilde 110,000 44.4% $ 4.85 9/27/2014 $ 335,515 $ 850,965
(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 Incentive Stock Plan).
(2) The exercise price for these options was equal to the fair market value
of the common stock on September 28, 2004, the date of grant. The
exercise price may be paid in cash or in shares of commons tock 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 of the
Company, overall business and market conditions, and the optionee's
continued employment with the Company throughout the entire vesting
period and option term, which factors are not reflected in this table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs Options/SARs
at Fiscal Year-End (#) at Fiscal Year-End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
Munawar H. Hidayatallah 266,667 133,333 $1,306,668 $653,332
Jens H. Mortensen, Jr. 66,667 33,333 $ 326,668 $163,332
David Wilde 103,334 106,666 $ 506,337 $522,663
Todd C. Seward 20,000 10,000 $ 98,000 $ 49,000
(1) Based on a value of $4.90 per share, the closing price per share on the
American Stock Exchange on December 31, 2004, minus the exercise price.
51
EMPLOYMENT AGREEMENTS WITH MANAGEMENT
We have entered into written employment agreements with our executive officers
as described below. Each employment agreement (other than the agreement of Mr.
Keane, which is described below) provides that if the executive officer's
employment is terminated by us for any reason other than "cause," as defined
inthe employment agreement, or death or disability, or if the executive officer
is "Constructively Terminated," as defined in the agreement (which definition
includes a change in control of us if the executive officer does not continue
employment with us or our 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.
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 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 and in February 2005 we granted Mr.
Hidayatallah an option to purchase 600,000 shares of common stock at an exercise
price of $3.81 per share. The options vested as to one-third of the shares
subject to the options on the date of grant and 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. 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 would 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. served as President of Jens' pursuant to the terms of a
three-year employment agreement dated February 1, 2002 which terminated on
February 1, 2005. Mr. Mortensen is currently our Vice Chairman and receives a
salary of $150,000 and is involved in acquisitions and development of
international business on behalf of the Company
David Wilde was appointed as our President and Chief Operating Officer in
January 2005. Previously Mr. Wilde served 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 received a signing bonus of $75,000 and an annual base salary of $200,000
subject to annual review and potentially an increase by our Board. In addition,
Mr. Wilde was entitled to receive a bonus in an amount equal to 5% of Strata's
earnings before taxes, interest and depreciation provided that Strata met
designated minimum earnings targets and provided further that such bonus could
not exceed 120% of Mr. Wilde's base salary. In February 2005, in connection with
being named our President and Chief Operating Officer, our board of directors,
upon the recommendation of our Compensation Committee, authorized the Company to
amend Mr. Wilde's employment agreement. Under the amended employment agreement,
Mr. Wilde's annual base salary was increased to $300,000 subject to annual
review and potentially an increase by our Board, and Mr. Wilde is entitled to
receive a bonus in an amount equal to up to 100% of his base salary, 50% of
which is based on meeting quarterly and annual operating income targets for the
Company. The bonus calculation is subject to adjustment in subsequent years.
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 September
28, 2004, we granted to Mr. Wilde options to purchase an additional 110,000
shares at an exercise price of $4.85 per share. In connection with being named
President and Chief Operating Officer, we awarded to Mr. Wilde options to
purchase an additional 200,000 shares at a purchase price of $3.86 per share in
February 2005. All options vested immediately as to one-third of the shares
subject to the option and vest as to one-third of the shares subject to the
option on each of the first two anniversaries of the grant date.
52
Victor M. Perez serves as our 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 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.
Theodore F. Pound III serves as our General Counsel 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 to $4.85 per share. The option vested as
to one-third of the shares subject to the option on the date of grant and 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.
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.
BOARD COMPENSATION
Our policy is to pay our independent directors a fee of $5,000 per quarter
beginning in 2005. Messrs. Hidayatallah, Mortensen and Toboroff are not deemed
independent. Each independent director serving on a committee of the Board will
receive $1,250 quarterly for service on such committee and each independent
director serving as Chairman of a committee of the Board would receive an
additional $1,250 per quarter for acting as chairman of such committee. In 2004
we did not pay directors any compensation. Directors are also compensated for
out of pocket travel expenses.
In April 2004, we entered into an oral consulting agreement with Mr. Toboroff
pursuant to which we pay him $10,000 per month to advise us regarding financing
and acquisition opportunities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board currently consists of Messrs. Kelly 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 subsidiaries
the Company) that has or has had one or more executive officers serving as a
member of our Board or our Compensation Committee.
53
Mr. Whitener is a principal of Energy Spectrum, from whom we acquired Strata in
February 2002. On April 2, 2002, Energy Spectrum converted all of its Series A
Preferred Stock, including accrued dividend rights, into 8,590,449 shares of
common stock (see "Certain Relationships and Related Transactions"). Energy
Spectrum, which is our largest stockholder, is a private equity fund
headquartered in Dallas, Texas. Mr. Kelly was an owner and founder of Downhole
Injection Systems, LLC, which was purchased by the Company in December, 2004.
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 June 2, 2005, 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) 7,410,005 47.1%
Munawar H. Hidayatallah (2) 7,410,005 47.1%
Robert E. Nederlander (3) 7,410,005 47.1%
Leonard Toboroff (4) 7,410,005 47.1%
Thomas O. Whitener, Jr. (1) 7,410,005 47.1%
Jeffrey R. Freedman (5) 119,000 *%
David Groshoff (6) 121,020 1.2%
Thomas E. Kelly (7) 94,201 *%
Jens H. Mortensen, Jr. (8) 7,410,005 47.1%
John E. McConnaughy, Jar (9) 300,000 2.3%
David Wilde (10) 175,000 *
Todd C. Seward (11) 20,000 *
Named Executive Officers as a group 7,605,005 47.8%
(7 persons) (12)
All directors and executive officers as a group 8,239,226 51.7%
(15 persons) (13)
Palo Alto Investors (14) 1,666,667 11.9%
Steve Emerson (15) 1,174,000 8.4%
Saeed M. Sheikh (16) 7,410,005 47.1%
* 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, a Delaware limited partnership, the principal business of which is
serving as the general partner of Energy Spectrum Partners LP, 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 2,391,062 shares
of our common stock, warrants to purchase 268,500 shares of common stock, and an
option to purchase 6,000 shares of common stock. Energy Spectrum is also deemed
to beneficially own 4,830,443 shares of common stock that are owned by (or that
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.
54
(2) Mr. Hidayatallah is the trustee of the Hidayatallah Family Trust, which is
the record owner of 845,000 shares of our common stock, and Mr. Hidayatallah
holds options to purchase 1,000,000 shares of common stock, of which options to
purchase 466,667 shares are exercisable within 60 days. In addition, Mr.
Hidayatallah is deemed to beneficially own 6,098,338 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, TX
77056.
(3) Includes (a) 446,528 shares of common stock owned directly by Mr.
Nederlander or by RER Corp. or QEN Corp., corporations controlled 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)
6,694,411 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) 326,527 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) 6,714,412 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 16,000 shares that may be issued upon the exercise of warrants
owned by Mr. Freedman. Mr. Freedman's address is 123 Via Verde Way, Palm Beach,
FL 33418.
(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) Mr. Kelly's address is 450 North Marienfield, Suite 200, Midland, TX 79701.
(8) Includes (a) 1,565,591 shares of common stock owned of record by Mr.
Mortensen, (b) options to purchase 100,000 shares of common stock, of which
options to purchase 66,667 shares are exercisable within 60 days, and (c)
5,777,747 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, TX 77056.
(9) Includes 300,000 shares of common stock owned by Mr. McConnaughy. Mr.
McConnaughy's address is 2 Parklands Drive, Darien, CT 06820.
(10) Includes 5,000 shares of common stock owned by Mr. Wilde and 170,000 shares
of common stock which may be obtained upon exercise of an option granted under
our 2003 Incentive Stock Plan. Mr. Wilde's address is 5075 Westheimer, Suite
890, Houston, TX 77056.
(11) Includes 20,000 shares of common stock which may be obtained upon exercise
of an option granted under our 2003 Incentive Stock Plan. Mr. Sewards' address
is 5075 Westheimer, Suite 890, Houston, TX 77056.
(12) Includes the shares beneficially owned by Messrs. Hidayatallah, Mortensen,
Wilde and Seward.
(13) Includes the shares described in Notes (1) and (11).
(14) 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 stockholder. The business
address for each of theses persons is 470 University Avenue, Palo Alto, CA
94301.
55
(15) 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, CA 90024.
(16) Includes (a) 202,000 shares owned by Mr. Sheikh, (b) 2,000 shares which may
be obtained upon exercise of an option granted under our 2003 Incentive Stock
Plan, and (c) 7,407,905 shares owned (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, D.C. 20030.
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 Christopher Engel; Donald Engel; the Engel Investors Defined
Benefit Plan; RER Corp., a corporation wholly-owned by director Robert
Nederlander; Leonard Toboroff, a director; Energy Spectrum; Jens H. Mortensen,
Jr., President of Jens' and a director; Saeed M. Sheikh, a former director; and
Munawar H. Hidayatallah, our Chief Executive Officer and Chairman. All parties
to the Stockholders Agreement are deemed to be a group and each party is deemed
to beneficially own all common stock beneficially owned by each member of the
group.
The stockholders agreement requires the parties to vote for the election to the
board of directors 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.
In December 2004, two directors appointed by Energy Spectrum resigned and Energy
Spectrum verbally agreed to amend the stockholders agreement to provide that
Energy Spectrum will designate only one nominee to the Board of Directors unless
and until it provides further notice to the Company. In addition, Energy
Spectrum verbally agreed to amend the stockholders agreement to eliminate the
requirement to retain an investment banking firm to identify candidates for a
sale of the Company.
TRANSACTIONS WITH SELLING STOCKHOLDERS AND OTHER RELATED PARTIES
SALES OF COMMON STOCK TO SELLING STOCKHOLDERS
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, 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 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.
56
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 other than MK Employee Early Stage Fund, L.P. and Morgan Keegan
Early Stage Fund, L.P. 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.
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 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 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.
57
In February 2002, we purchased from director 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
exercisable at $0.75 per share were repurchased for $1,500,000 in December
2004 and warrants to purchase 67,000 shares exercisable at $5.00 per share are
currently outstanding and 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 facilities with us and our
subsidiaries.
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, among
others: Munawar H. Hidayatallah, our Chief Executive Officer and Chairman; Saeed
Sheikh, a former director; and Jeffrey Freedman, a director. Each named 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
400 shares of common stock an exercise price of $13.75. The promissory notes
accrued interest at 5% annually and were repaid 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 registration 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. 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.
58
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 registration 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.
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 occurring prior to
April 2004, we entered into registration rights agreements with other investors.
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. These
investors include, in addition to the investors in the April 2004 private
placement, Energy Spectrum Partners LP, officers and directors Munawar H.
Hidayatallah and Jens H. Mortensen, and former director Saeed M. Sheikh. 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 exceptions. 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. and certain stockholders who
acquired shares from selling stockholders to register such shares pursuant to
the registration statement of which this prospectus is a part. These selling
stockholders are John E. McConnaughy, Jr., a director, Bestin Worldwide Limited,
officers Theodore F. Pound III and Dave Wilde, and employees Dick Backset, David
K. Bryan and James Davey and Nadia Hidayatallah, Alya Hidayatallah and Yasmin
Indrizzo.
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., a director, Saeed M. Sheikh,
a former 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. In December 2004, two directors appointed by Energy Spectrum
resigned and Energy Spectrum verbally agreed to amend the stockholders agreement
to provide that Energy Spectrum will designate only one nominee to the Board of
Directors unless and until it provides further notice to the Company. In
addition, Energy Spectrum verbally agreed to amend the stockholders agreement to
eliminate the requirement to retain an investment banking firm to identify
candidates for a sale of the Company.
59
OTHER MATERIAL RELATIONSHIPS WITH SELLING STOCKHOLDERS
At December 31, 2004, the Company owed Mr. Hidayatallah $65,000 related to
deferred compensation and for advances to the Company totaling $49,000.
At December 31, 2003, we owed Mr. Hidayatallah $81,775 related to deferred
compensation and for advances to us totaling $49,000. Such obligations did not
bear interest.
Until December 2004, Mr. Hidayatallah was a personal guarantor of substantially
all of the financing extended to us by commercial banks. In December 2004, we
refinanced most of our outstanding debt and obtained the release of Mr.
Hidayatallah's guarantees. Currently, Mr. Hidayatallah guarantees approximately
$5.5 million of our outstanding debt. 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 Mr. Hidayatallah from time to time. The fee is payable
quarterly, in arrears, based upon the average amount of debt outstanding in the
prior quarter. During 2004, Mr. Hidayatallah received $48,331 in respect of
his guarantee of the Company's debt. During the first three months of 2005,
Mr. Hidayatallah received $3,625 in respect of this guarantee.
In April 2004, we entered into an oral consulting agreement with Mr. Toboroff
pursuant to which we pay him $10,000 per month to advise us regarding financing
and acquisition opportunities.
We leased a yard in Pearsall, Texas, from Mr. Mortensen for which we paid
$28,800 rental payments in each of 2004 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 $167,000 and $173,000 of equipment and
other supplies to us in 2004 and 2003, respectively.
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 $178,638 in
2004.
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. We believe each of the foregoing
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.
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. Our board has approved, subject to stockholder approval, an
amendment to increase our authorized shares to 100 million shares of common
stock and 25 million shares of preferred stock.
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 approximately 14,020,958 shares of our common stock outstanding as of
June 2, 2005, 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
our 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.
60
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 by-laws 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, our board has approved and 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.
61
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) 2,579,562 2,579,562 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) 845,000 845,000
Munawar H. Hidayatallah (12) 1,000,000 1,000,000 0
Nadia Hidayatallah 5,000 5,000 0 --
Alya Hidayatallah 5,000 5,000 0 --
Yasmin Indrizzo 5,000 5,000 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 --
62
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)
-------------------------------------- -------------- ---------------- ------------- -----------------
Morgan Joseph & Co. Inc.(18) 340,000 340,000 0
Jens H. Mortensen (19) 1,665,591 1,665,591 0 --
Robert Nederlander (20) 174,400 174,400 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) 2,000 2,000 0 --
Strauss-GEPT Partners, LP(28) 133,333 133,333 0 --
Strauss Partners, L.P.(29) 200,000 200,000 0 --
Leonard Toboroff(30) 577,732 577,732 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) 67,000 67,000 0 --
Basic Energy Limited(35) 420,667 420,667 0 --
Milton H. Dresner Revocable
Living Trust(36) 51,125 50,000 1,125 --
Joseph S. Dresner(37) 51,125 50,000 1,125 --
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 33,300 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 --
John E. McConnaughy 300,000 300,000 0 --
Bestin Worldwide Limited 100,000 100,000 0 --
Theodore F. Pound III 5,000 5,000 0 --
Dave Wilde 5,000 5,000 0 --
Dick Backset 5,000 5,000 0 --
David K. Bryan 12,000 12,000 0 --
James Davey 3,000 3,000 0 --
(1) Percentage ownership is based upon 14,020,958 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.
63
(5) Includes 2,391,062 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 and 6,000 shares which may be
sold upon the exercise of options issued for this selling
stockholder with an exercise price of $2.75 per share, expiring in
2013. Thomas O. Whitener, Jr., an executive of Energy Spectrum,
serve as one of our directors. 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 1,000,000 shares issued pursuant to
our 2003 Incentive Stock Plan. Options to purchase 400,000 shares
have an exercise price of $2.75 per share and expire in December
2013. Options to purchase 600,000 shares have an exercise price of
$3.86 per share and expire in February 2015. The options are
currently exercisable with respect to 466,667 shares.
(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.
(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.
64
(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 Incentive Stock 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 172,000 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 stockholder 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 stockholder 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 exercise 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 2,000 shares owned by Mr. Sheikh.
(28) Melville Straus is the Managing Principal and exercises investment
and voting authority with respect to the securities owned by this
selling stockholder.
(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 308,665 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 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.
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.
65
(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
stockholder 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. The warrants have an exercise
price of $5.00 per share and expire in February 2012.
This selling stockholder 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 The Schmieding
Foundation, 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:
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;
66
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-dealer 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
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.
67
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
website that contains reports, proxy and information statements and other
information that is filed through the SEC's EDGAR System. The website 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 the Company a legal opinion as to the validity of
the common stock covered by this prospectus.
EXPERTS
The consolidated financial statements of Allis-Chalmers Energy Inc. and
schedules and notes thereto included in this prospectus and registration
statement have been audited by Gordon, Hughes and Banks, LLP, independent
certified public accountants, and by UHY Mann Frankfort Stein & Lipp CPAs, LLP,
in each case to the extent and for the periods set forth in their report thereon
appearing elsewhere herein, and are incorporated herein in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
The financial statements of Diamond Air Drilling Service, Inc. and Marquis Bit.
Co., LLC and schedules and notes thereto included in this prospectus and
registration statement have been audited by Accounting & Consulting Group, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report thereon appearing elsewhere herein, and are incorporated
herein in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
The financial statements of Downhole Injection Services, LLC and schedules and
notes thereto included in this prospectus and registration statement have been
audited by Johnson, Miller & Co., independent certified public accountants, to
the extent and for the periods set forth in their report thereon appearing
elsewhere herein, and are incorporated herein in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
The financial statements of Delta Rental Service, Inc. and schedules and notes
thereto included in this prospectus and registration statement have been audited
by Wright, Moore, Dehart, Dupuis & Hutchinson, LLC, independent certified public
accountants, to the extent and for the periods set forth in their report thereon
appearing elsewhere herein, and are incorporated herein in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
The financial statements of Capcoil Tubing Services, Inc. and schedules and
notes thereto included in this prospectus and registration statement have been
audited by Curtis Blakely & Co., PC, independent certified public accountants,
to the extent and for the periods set forth in their report thereon appearing
elsewhere herein, and are incorporated herein in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
68
DEFINITIONS OF CERTAIN TERMS USED IN
THE OIL AND NATURAL GAS DRILLING INDUSTRY
"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.
"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 form 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.
69
"blow out preventors" Large safety device placed on the surface
of a well to maintain high pressure well
bores.
"test plugs" A device used to test the connections of
well heads and the blow out preventors.
"spacer spools" High pressure connections or links which
are stacked to elevate the blow out
preventors to the drilling rig floor.
"hevi-wate spiral drill pipe" Heavy drill pipe used for special
applications primarily in directional
drilling. The "spiral" design increases
flexibility and penetration of the pipe.
70
INDEX TO FINANCIAL STATEMENTS
Financial Statements:
ALLIS CHALMERS ENERGY INC.
Reports of Independent Registered Public Accounting Firms F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-5
Consolidated Statements of Operations for the Years Ended December 31, 2004,
December 31, 2003 and December 31, 2002 F-6
Consolidated Statement of Stockholders' Equity for the Years Ended
December 31, 2002, December 31, 2001 and December 31, 2000 F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
December 31, 2003 and December 31, 2002 F-8
Notes to Consolidated Financial Statements F-9
Consolidated Balance Sheet as of March 31, 2005 (unaudited) F-40
Consolidated Statements of Operations for the Three Months ended
March 31, 2005 and March 31, 2004 (unaudited) F-41
Consolidated Statements of Cash Flows for the Three Months ended
March 31, 2005 and March 31, 2004 (unaudited) F-42
Notes to Unaudited Consolidated Financial Statements F-43
DIAMOND AIR DRILLING SERVICE, INC.
Independent Auditors' Reports F-58
Balance Sheets as of July 31, 2004 and the Years Ended
December 31, 2003 and 2002 F-60
Statements of Income for the Seven Months Ended July 31, 2004
and the Years Ended December 31, 2003 and 2002 F-61
Statements of Stockholders' Equity for the Seven Months Ended
July 31, 2004 and the Years Ended December 31, 2003 and 2002 F-62
Statements of Cash Flows for the Seven Months Ended
July 31, 2004 and the Years Ended December 31, 2003 and 2002 F-63
Notes to Financial Statements F-64
MARQUIS BIT CO., LLC
Independent Auditors' Report F-71
Balance Sheets as of July 31, 2004 and the Years Ended
December 31, 2003 and 2002 F-73
Statements of Income and Members' Equity for the Seven Months Ended
July 31, 2004, the Year Ended December 31, 2003 and the
Period from Inception, October 1, 2002, through December 31, 2002 F-74
Statements of Cash Flows for the Seven Months Ended
July 31, 2004, the Year Ended December 31, 2003 and the
Period from Inception, October 1, 2002, through December 31, 2002 F-75
Notes to Financial Statements F-76
F-1
DOWNHOLE INJECTION SERVICES, LLC
Independent Auditors' Report F-80
Balance Sheets as of November 30, 2004 and
December 31, 2003 F-81
Statements of Operations and Members' Equity for the Eleven Months
Ended November 30, 2004 and the Year Ended December 31, 2003 F-82
Statements of Cash Flows for the Eleven Months Ended November 30,
2004 and the Year Ended December 31, 2003 F-83
Notes to Financial Statements F-84
DELTA RENTAL SERVICE, INC.
Independent Auditors' Report F-91
Balance Sheets as of December 31, 2004 and 2003 F-92
Statements of Operations for the Years Ended December 31, 2004 and 2003 F-94
Statements of Retained Earnings for the Years Ended December 31, 2004
and 2003 F-95
Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 F-96
Notes to Financial Statements F-98
CAPCOIL TUBING SERVICES, INC.
Independent Auditors' Report F-103
Balance Sheets as of December 31, 2004 and 2003 F-104
Statements of Operations and Retained Earnings for the Years Ended
December 31, 2004 and 2003 F-106
Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 F-107
Notes to Financial Statements F-108
Independent Auditors' Report on Additional Information F-116
Statements of Operations with Additional Information F-117
PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Consolidated Condensed Financial Statements F-119
Unaudited Pro Forma Consolidated Condensed Statement of
Financial Position as of March 31, 2005 F-120
Unaudited Pro Forma Consolidated Condensed Statement of
Operations for the three Months Ended March 31, 2005 F-122
Unaudited Pro Forma Consolidated Condensed Statement of
Financial Position as of December 31, 2004 F-124
Unaudited Pro Forma Consolidated Condensed Statement of
Operations for the Year Ended December 31, 2004 F-126
Notes to Unaudited Pro Forma Consolidated Condensed
Financial Statements F-130
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Allis-Chalmers Energy Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Allis-Chalmers
Energy Inc. and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Allis-Chalmers Energy Inc. and subsidiaries as of December 31, 2004, and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
/s/ UHY Mann Frankfort Stein & Lipp CPAs, LLP
---------------------------------------------
Houston, Texas
April 8, 2005
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Allis-Chalmers Energy Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Allis-Chalmers
Energy Inc. as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Allis-Chalmers Energy Inc. as of December 31, 2003, and the results of
consolidated operations and cash flows for each of the two years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
restated the consolidated financial statements as of and for the year ended
December 31, 2003.
/S/ GORDON, HUGHES & BANKS, LLP
-------------------------------
Greenwood Village, Colorado
March 3, 2004, except as to Note 20 which date is
June 10, 2004 and Notes 17 and 21 which date is February 10, 2005.
F-4
ALLIS-CHALMERS ENERGY INC. DECEMBER 31,
CONSOLIDATED BALANCE SHEETS 2004 2003
(in thousands, except for share amounts) ---------- -----------
(Restated)
ASSETS
Cash and cash equivalents $ 7,344 $ 1,299
Trade receivables, net of allowance for doubtful
accounts of $265 and $168 at December 31, 2004
and 2003, respectively 12,986 8,823
Inventory 2,373 --
Lease receivable, current 180 180
Prepaid expenses and other 1,495 887
---------- -----------
Total current assets 24,378 11,189
---------- -----------
Property and equipment, at costs net of accumulated depreciation
of $5,251 and $2,586 at December 31, 2004 and 2003,
respectively 37,679 31,128
Goodwill 11,776 7,661
Other intangible assets, net of accumulated amortization
of $2,036 and $1,254 at December 31, 2004 and 2003,
respectively 5,057 2,290
Debt issuance costs, net of accumulated amortization of
$828 and $462 at December 31, 2004 and 2003, respectively 685 567
Lease receivable, less current portion 558 787
Other Assets 59 40
---------- -----------
Total assets $ 80,192 $ 53,662
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 5,541 $ 3,992
Trade accounts payable 5,694 3,133
Accrued salaries, benefits and payroll taxes 615 591
Accrued interest 470 152
Accrued expenses 1,852 1,761
Accounts payable, related parties 740 787
---------- -----------
Total current liabilities 14,912 10,416
Accrued postretirement benefit obligations 687 545
Long-term debt, net of current maturities 24,932 28,241
Other long-term liabilities 129 270
Redeemable warrants -- 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 -- 4,171
---------- -----------
Total liabilities 40,660 45,143
Commitments and Contingencies (Note 9 and Note 21)
Minority interests 4,423 3,978
STOCKHOLDERS' EQUITY (NOTE 10)
Common stock, $0.01 par value (20,000,000 shares
authorized; 13,611,525 and 3,926,668 issue and outstanding
at December 31, 2004 and December 31, 2003, respectively 136 39
Capital in excess of par value 40,331 10,748
Accumulated deficit (5,358) (6,246)
---------- -----------
Total stockholders' equity 35,109 4,541
---------- -----------
Total liabilities and stockholders' equity $ 80,192 $ 53,662
========== ===========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
F-5
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31.
2004 2003 2002
--------- ----------- ---------
(Restated)
Revenues $ 47,726 $ 32,724 $ 17,990
Cost of revenues 35,300 24,029 14,640
--------- ----------- ---------
Gross margin 12,426 8,695 3,350
General and administrative expense $ 8,011 $ 6,169 3,792
Personnel restructuring costs -- -- 495
Abandoned acquisition/private placement costs -- -- 233
Post retirement medical costs 188 (99) (98)
--------- ----------- ---------
Total operating expenses 8,199 6,070 4,422
--------- ----------- ---------
Income(loss) from operations 4,227 2,625 (1,072)
Other income(expense):
Interest income 32 3 49
Interest expense (2,808) (2,467) (2,256)
Minority interests in income of subsidiaries (321) (343) (189)
Factoring costs on note receivable -- -- (191)
Settlement on lawsuit -- 1,034 --
Gain on sale of interest in AirComp -- 2,433 --
Other 272 12 (40)
--------- ----------- ---------
Total other income (expense) (2,825) 672 (2,627)
--------- ----------- ---------
Net income (loss) before income taxes 1,402 3,297 (3,699)
Provision for foreign income tax (514) (370) (270)
--------- ----------- ---------
Net income (loss) 888 2,927 (3,969)
Preferred stock dividend (124) (656) (321)
--------- ----------- ---------
Net income (loss) attributed to common stockholders $ 764 $ 2,271 $ (4,290)
========= =========== =========
Income (loss) per common share - basic $ 0.10 $ 0.58 $ (1.14)
========= =========== =========
Income (loss) per common share - diluted $ 0.07 $ 0.39 $ (1.14)
========= =========== =========
Weighted average number of common shares outstanding:
Basic 7,930 3,927 3,766
========= =========== =========
Diluted 11,959 5,761 3,766
========= =========== =========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
F-6
Allis-Chalmers Energy Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
CAPITAL IN
COMMON STOCK EXCESS OF ACCUMULATED
Shares Amount PAR VALUE DEFICIT TOTAL
---------- ---------- ----------- ----------- -----------
Balances, December 31, 2001 2,317,626 $ 23 $ 6,431 $ (5,204) $ 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 1,311,972 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
Effect of consolidation of
AirComp -- -- 955 -- 955
Accrual of preferred dividends -- -- (350) -- (350)
Net Income (RESTATED) -- -- -- 2,927 2,927
---------- ---------- ----------- ----------- -----------
Balances, December 31, 2003, as restated 3,926,668 $ 39 $ 10,748 $ (6,246) $ 4,541
(RESTATED)
Issuance of common stock in connection with 620,000 6 1,544 -- 1,550
the $2 million equity raise
Issuance of stock purchase warrants in
Connection with the $2 million equity raise -- -- 450 -- 450
Issuance of common stock in
Connection with the $16.4 million equity raise 5,461,301 55 14,056 -- 14,111
Issuance of stock purchase warrants in
Connection with the $16.4 million equity raise -- -- 641 -- 641
Issuance of common stock in connection
With the 19% conversion of Jens 1,300,000 13 6,421 -- 6,434
Conversion of preferred stock 1,718,090 17 4,278 -- 4,295
Issuance of common stock for services 14,000 -- 97 -- 97
Issuance of common stock for services 3,000 -- 2 -- 2
Issuance of stock purchase warrants in
Connection with the issuance of debt -- -- 47 -- 47
Issuance of common stock for
Purchase of Downhole Injector Systems 568,466 6 2,171 -- 2,177
Accrual of preferred dividends -- -- (124) -- (124)
Net Income -- -- -- 888 888
---------- ---------- ----------- ----------- -----------
Balances, December 31, 2004 13,611,525 $ 136 $ 40,331 $ (5,358) $ 35,109
========== ========== =========== =========== ===========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
F-7
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
2004 2003 2002
--------- --------- ---------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income / (loss) $ 888 $ 2,927 $ (3,969)
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities:
Depreciation expense 2,702 2,052 1,837
Amortization expense 876 884 744
Issuance of stock options for services 14 -- --
Amortization of discount on debt 350 516 475
(Gain) on change in PBO liability (125) --
(Gain) on settlement of lawsuit (1,034) --
(Gain) on sale of interest in AirComp (2,433) --
Minority interest in income of subsidiaries 321 343 189
Loss on sale of property 82 119
Changes in working capital:
Decrease (increase) in accounts receivable (2,292) (4,414) (713)
Decrease (increase) in due from related party (7) -- 61
Decrease (increase) in other current assets (612) (1,260) 1,644
Decrease (increase) in other assets (19) 1 902
Decrease (increase) in lease deposit 525 176
(Decrease) increase in accounts payable 1,140 2,251 1,316
(Decrease) increase in accrued interest 299 (126) 651
(Decrease) increase in accrued expenses (276) 397 (339)
(Decrease) increase in other long-term liabilities (141) -- (123)
(Decrease) increase in accrued employee benefits 19
and payroll taxes 1,293 (788)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,262 1,879 2,182
Cash flows from investing activities:
Acquisition of Jens', net of cash acquired -- (8,120)
Acquisition of Strata, net of cash acquired (179)
Acquisition of Safco (947) -- --
Acquisition of Diamond Air, net of cash acquired (2,530) -- --
Acquisition of Downhole Services, net of cash acquired (982) -- --
Purchase of equipment (4,603) (5,354) (518)
Proceeds from sale of equipment 843 367
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (9,062) (4,511) (8,450)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 8,169 14,127 9,683
Payments on long-term debt (13,505) (10,826) (4,079)
Payments on related party debt -- (246) --
Proceeds from issuance of common stock 16,883 -- --
Borrowings on lines of credit 689 1,138 1,246
Debt issuance costs (391) (408) (588)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,845 3,785 6,262
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,045 1,153 (6)
Cash and cash equivalents:
Beginning of year 1,299 146 152
--------- --------- ---------
END OF YEAR $ 7,344 $ 1,299 $ 146
========= ========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 2,159 $ 2,341 $ 1,082
========= ========= =========
Foreign taxes paid $ 514 $ 370 $ 270
========= ========= =========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
F-8
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS`
Allis-Chalmers Energy Inc. ("Allis-Chalmers" or the "Company") was incorporated
in Delaware in 1913. 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 Corners area 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 Energy Inc. ("Allis-Chalmers" or the "Company"). In the merger,
all of OilQuip's outstanding common stock was converted into 2.0 million 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.
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. On February 2, 2002, the Company also purchased
substantially all of 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 its 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"). The assets contributed by Mountain Air were recorded at
Mountain Air's historical cost of $6.3 million, and the assets contributed by
M-I were recorded at fair market value of $10.3 million. The Company owns 55%
and M-I owns 45% of AirComp. As a result of the Company's controlling interest
and operating control, the Company consolidated AirComp in its financial
statements. AirComp is in the compressed air drilling services segment.
On September 23, 2004, the Company acquired 100% of the outstanding stock of
Safco Oil Field Products, Inc. ("Safco") for $1.0 million. Safco leases spiral
drill pipe and provides related oilfield services to the oil drilling industry.
On September 30, 2004, the Company acquired the remaining 19% of Jens' in
exchange for 1.3 million shares of its common stock. The total value of the
consideration paid to the seller, Jens Mortensen, was $6.4 million which was
equal to the number of shares of common stock issued to Mr. Mortensen multiplied
by the last sale price ($4.95) of the common stock as reported on the American
Stock Exchange on the date of issuance.
On November 10, 2004, AirComp acquired substantially all the assets of Diamond
Air Drilling Services, Inc. and Marquis Bit Co., L.L.C. collectively ("Diamond
Air") for $4.6 million in cash and the assumption of approximately $450,000 of
accrued liabilities. The Company contributed $2.5 million and M-I L.L.C.
contributed $2.1 million to AirComp LLC in order to fund the purchase. Diamond
Air provides air drilling technology and products to the oil and gas industry in
West Texas, New Mexico and Oklahoma. Diamond Air is a leading provider of air
hammers and hammer bit products.
On December 10, 2004, the Company acquired Downhole Injection Services, LLC
("Downhole") for approximately $1.1 million in cash, 568,466 shares of common
stock and payment or assumption of $950,000 of debt. Downhole is headquartered
in Midland, Texas, and provides chemical treatments to wells by inserting small
diameter, stainless steel coiled tubing into producing oil and gas wells.
F-9
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is vulnerable to near-term and long-term
changes in the demand for and prices of oil and natural gas and the related
demand for oilfield service operations.
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 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. The Company's subsidiaries at December 31, 2004 are Mountain
Air, AirComp (55% owned), Jens', Strata, Safco and Downhole. All significant
inter-company transactions have been eliminated.
REVENUE RECOGNITION
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 the 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 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, 2004 and
2003, the Company had recorded an allowance for doubtful accounts of $265,000
and $168,000 respectively. Bad debt expense was $104,000, $136,000 and $32,000
for the years ended December 31, 2004, 2003 and 2002, 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.
F-10
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out ("FIFO") method or the average cost method, which
approximates FIFO, and includes the cost of materials, labor and manufacturing
overhead.
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 $575,803, $568,996, and $ 631,939 for the years ended
December 31, 2004, 2003 and 2002, respectively. Refurbishments and renewals are
capitalized when the value of the equipment is enhanced for an extended period.
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.
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 twenty
years. Depreciation is computed on the straight-line method for financial
reporting purposes. Depreciation expense charged to operations was $2.7 million
for the year ended December 31, 2004, $2.1 million for the year ended December
31, 2003, and $1.8 million for the year ended December 31, 2002.
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. Goodwill,
including goodwill associated with equity method investments, and other
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 on
an annual basis as of December 31st for the Mountain Air and Strata operating
subsidiaries, respectively. As of December 31, 2004 and 2003, no evidence of
impairment exists.
AIRCOMP AND SALE OF INTEREST IN VENTURE
The Company has adopted SEC Staff Accounting Bulletin (SAB) No.51, Accounting
for Sales of Stock by a Subsidiary, to account for its investment in AirComp.
AirComp has been accounted for and consolidated as a subsidiary under SFAS No.
141, BUSINESS COMBINATIONS. Pursuant to SAB No. 51, the Company has recorded its
own contribution of assets and liabilities at its historical cost basis. Since
liabilities exceeded assets, the Company's basis in AirComp was a negative
amount. The Company has accounted for the assets contributed by M-I at a fair
market value as determined by an outside appraiser. The Company issued M-I a 45%
interest in AirComp in exchange for the assets contributed to AirComp. As a
result of the formation of the venture and its retention of 55% interest in the
venture, the Company realized an immediate gain to the extent of its negative
basis and its 55% interest in the combined assets and liabilities of the
venture. In accordance with SAB No. 51, the Company has recorded its negative
basis investment in AirComp as an addition to equity and its share of the
combined assets and liabilities realized from M-I assets as non-operating
income.
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.
F-11
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts receivable
and payable, and debt. The carrying values of cash and cash equivalents and
accounts receivable and payable approximate fair value due to their sort-term
nature. The Company believes the fair values and the carrying value of the
Company's debt would not be materially different due to the instruments'
interest rates approximating market rates for similar borrowings at December 31,
2004 and 2003.
CONCENTRATION OF CREDIT AND CUSTOMER 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 two financial institutions
exceeded the $100,000 federally insured limit at December 31, 2004 by a total of
$7.1 million. 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. The Company performs ongoing credit
valuations of its customers and provides allowances for probable credit losses
where appropriate.
In the year ended December 31, 2004, Matyep in Mexico represented 10.8%, and
Burlington Resources represented 10.1% of our consolidated revenues,
respectively. In the year ended December 31, 2003, Matyep, Burlington Resources,
Inc., and El Paso Energy Corporation represented 10.2%, 11.1% and 14.1%,
respectively, of our consolidated revenues. Revenues from Matyep represented
98.0% and 100% of our international revenues in 2004 and 2003.
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.
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.
PERSONNEL RESTRUCTURING COSTS
The Company has recorded and classified separately from recurring selling,
general and administrative costs approximately $495,000 incurred to terminate
and relocate several members of management in September 2002.
F-12
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004, 2003, and 2002 would have been
decreased to the pro forma amounts indicated below.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
(in thousands, except per share
2004 2003 2002
-------- -------- --------
(Restated)
Net income/ (loss): As reported $ 764 $ 2,271 $(4,290)
Less total stock based employee
compensation expense determined under
fair value based method for all awards
net of tax related effects (1,072) (2,314) --
-------- ------- --------
Pro-forma net income (loss) to
common stockholders' $ (308) $ (43) $(4,290)
Net income/ (loss) per share:
Basic As reported $ 0.10 $ 0.58 $ (1.14)
Pro forma (0.04) (0.01) (1.14)
======== ======== ========
Diluted As reported $ 0.07 $ 0.39 $ (1.14)
Pro forma (0.03) (0.01) (1.14)
======== ======== ========
Options were granted in 2004 and 2003. See Note 12 for further disclosures
regarding stock options. The following assumptions were applied in determining
the pro forma compensation costs:
FOR THE YEAR ENDED DECEMBER 31,
2004 2003 2002
-------- -------- -------
Expected dividend yield -- -- --
Expected price volatility 89.76% 265.08% --
Risk-free interest rate 7.0% 6.25% --
Expected life of options 7 years 7 years --
Weighted average fair value of options
granted at market value $ 3.19 $ 2.78 $ --
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 the Company operated in three segments organized by service line: casing
and tubing services, directional drilling services and compressed air drilling
services. The Company acquired Safco in September 2004 and Downhole in December
2004. These companies are engaged in rental tools (Safco) and production
services (Downhole). The operations from these two companies have been
aggregated into the Other Services segment as of December 31, 2004. Please see
Note 18 for further disclosure of segment information in accordance with SFAS
No. 131.
F-13
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
For periods through April 12, 2004, preferred dividends (see Note 10) 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 year
ended December 31, 2002, common stock equivalents have been excluded because
their effect would be anti-dilutive.
The components of basic and diluted earnings per share are as follows:
Year Ended December 31, 2004 2003
(In thousands, except
earnings per share)
Numerator:
Net income available for common stockholders $ 764 $ 2,271
Plus income impact of assumed conversions:
Preferred stock dividends/interest 124 656
-------- --------
Net income (loss) applicable to common stockholders
Plus assumed conversions $ 888 $ 2,927
Denominator:
Denominator for basic earnings per share - weighted
average shares outstanding 7,930 3,927
Effect of potentially dilutive common shares:
Convertible preferred stock and employee and
director stock options 4,029 1,834
-------- --------
Denominator for diluted earnings per share - weighted
average shares outstanding and assumed conversions 11,959 5,761
Basic earnings (loss) per share $ 0.10 $ 0.58
======== ========
Diluted earning (loss) per share $ 0.07 $ 0.39
======== ========
RECLASSIFICATION
Certain prior period balances have been reclassified to conform to current year
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS - an Amendment
of ARB No. 43, Chapter 4, which amends the guidance in ARB No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 requires that these items be recognized
as current period charges. In addition, SFAS No. 151 requires the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are currently evaluating
the provisions of SFAS No. 151 and will adopt SFAS No. 151 on January 1, 2006.
F-14
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT (SFAS
123R). SFAS 123R revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and focuses on accounting for share-based payments for services by employer to
employee. The statement requires companies to expense the fair value of employee
stock options and other equity-based compensation at the grant date. The
statement does not require a certain type of valuation model and either a
binomial or Black-Scholes model may be used. The provisions of SFAS 123R are
effective for financial statements for Annual or interim periods beginning after
June 15, 2005. We are currently evaluating the method of adoption and the impact
on our operating results. Our future cash flows will not be impacted by the
adoption of this standard.
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES" ("SFAS No.
109") to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, which provides guidance on the recently
enacted American Jobs Creation Act of 2004 (the "Act"). The Act provides a tax
deduction for income from qualified domestic production activities. FSP 109-1
provides for the treatment of the deduction as a special deduction as described
in SFAS No. 109. As such, the deduction will have no effect on existing deferred
tax assets and liabilities. The impact of the deduction is to be reported in the
period in which the deduction is claimed on our U.S. tax return. We do not
expect that this deduction will have a material impact on our effective tax rate
in future years. FSP 109-1 is effective prospectively as of January 1, 2005.
NOTE 2 - RESTATEMENT
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets in exchange for a 55% interest and 45% interest,
respectively, in AirComp. The Company originally accounted for the formation of
AirComp as a joint venture, but in February 2005, determined that the
transaction should have been accounted for using purchase accounting pursuant to
SFAS No. 141, BUSINESS COMBINATIONS and accounting for the sale of an interest
in a subsidiary in accordance with SAB No. 51. Consequently, the Company has
restated its financial statements for the year ended December 31, 2003 and for
the three quarters ended September 30, 2004, to reflect the following
adjustments:
INCREASE IN BOOK VALUE OF FIXED ASSETS. Under joint venture accounting, the
Company originally recorded the value of the assets contributed by M-I to
AirComp at M-I's historical cost of $6.9 million. Under purchase accounting, the
Company increased the recorded value of the assets contributed by M-I by
approximately $3.3 million to $10.3 million to reflect their fair market value
as determined by a third party appraisal. In addition, under joint venture
accounting, the Company established negative goodwill which reduced fixed assets
in the amount of $1,550,000. Under purchase accounting, the Company increased
fixed assets by $1.6 million to reverse the negative goodwill previously
recorded. Therefore, fixed assets have been increased by a total of $4.9
million.
INCREASE IN MINORITY INTEREST AND PAID IN CAPITAL. Under purchase accounting,
minority interest and capital in excess of par were increased by $1.5 million
and $955,000, respectively.
RECOGNITION OF NON-OPERATING GAIN. Under joint venture accounting, no gain or
loss was recognized in connection with the formation of AirComp. Under purchase
accounting, we recorded a $2.4 million non-operating gain in the third quarter
of 2003.
REDUCTION IN NET INCOME. As a result of the increase in fixed assets, during the
year ended December 31, 2003, depreciation expense increased by $98,000 and
minority interest expense decreased by $44,000, resulting in reduction in net
income attributable to common stockholders of $54,000. However, as a result of
recording the above non-operating gain and recording the reduction in income,
net income attributed to common stockholders increased by $2.4 million.
A restated consolidated balance sheet at December 31, 2003, a restated
consolidated of operations and a restated consolidated statement of cash flows
for the year ended December 31, 2003, reflecting the above adjustments, is
presented below. The amounts are in thousands, except for share amounts:
F-15
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2003
------------------------------------
As Restatement As
Reported Adjustments Restated
--------- ----------- ---------
ASSETS
Cash and cash equivalents $ 1,299 $ 1,299
Trade receivables, net of allowance for
doubtful accounts 8,823 8,823
Lease Receivable, current 180 180
Prepaid expenses and other 887 887
--------- ---------
Total current assets 11,189 11,189
Property and equipment, net of accumulated
depreciation 26,339 4,789 31,128
Goodwill 7,661 7,661
Other intangible assets, net of accumulated
amortization 2,290 2,290
Debt issuance costs, net of accumulated
amortization 567 567
Lease receivable, less current portion 787 787
Other Assets 40 40
--------- ----------- ---------
Total Assets $ 48,873 $ 4,789 $ 53,662
========= =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,992 $ 3,992
Trade accounts payable 3,133 3,133
Accrued salaries, benefits and payroll taxes 591 591
Accrued interest 152 152
Accrued expenses 1,761 1,761
Accounts payable, related parties 787 787
--------- ---------
Total current liabilities 10,416 10,416
Accrued postretirement benefit obligations 545 545
Long-term debt, net of current maturities 28,241 28,241
Other long-term liabilities 270 270
Redeemable warrants 1,500 1,500
Redeemable convertible preferred stock
including accrued dividends 4,171 4,171
--------- ---------
Total liabilities 45,143 45,143
Commitments and Contingencies
Minority interests 2,523 1,455 3,978
COMMON STOCKHOLDERS' EQUITY
Common stock 39 39
Capital in excess of par value 9,793 955 10,748
Accumulated (deficit) (8,625) 2,379 (6,246)
--------- ----------- ---------
Total stockholders' equity 1,207 3,334 4,541
--------- ----------- ---------
Total liabilities and stockholders' equity $ 48,873 $ 4,789 $ 53,662
========= =========== =========
F-16
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003
------------------------------------
As Restatement As
Reported Adjustments Restated
--------- ------------ ---------
Revenues $ 32,724 $ 32,724
Cost of revenues 23,931 98 24,029
--------- ------------ ---------
Gross margin 8,793 (98) 8,695
General and administrative expense 6,169 6,169
--------- ------------ ---------
Income/ (loss) from operations 2,624 (98) 2,626
Other income (expense):
Interest income 3 -- 3
Interest expense (2,467) -- (2,467)
Minority interests in income of subsidiaries (387) 44 (343)
Settlement on lawsuit 1,034 -- 1,034
Gain on sale of stock in a subsidiary -- 2,433 2,433
Other 111 -- 111
--------- ------------ ---------
Total other income (expense) (1,706) 2,477 771
--------- ------------ ---------
Net income/ (loss) before income taxes 918 2,379 3,297
Provision for foreign income tax (370) -- (370)
--------- ------------ ---------
Net income/ (loss) 548 2,379 2,927
Preferred stock dividend (656) -- (656)
--------- ------------ ---------
Net income attributed to common stockholders $ (108) $ 2,379 $ 2,271
========= ============ =========
Income/ (loss) per common share - basic $ (0.03) $ 0.58
========= =========
Income/ (loss) per common share - diluted $ (0.03) $ 0.39
========= =========
Weighted average number of common shares outstanding:
Basic 3,927 3,927
========= =========
Diluted 3,927 5,761
========= =========
F-17
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003
------------------------------------
As Restatement As
Reported Adjustment Restated
--------- ------------ ---------
Cash flows from operating activities:
Net income/ (loss) $ 548 $ 2,379 $ 2,927
Adjustments to reconcile net income/ (loss) to net cash
provided by operating activities:
Depreciation expense 1,954 98 2,052
Amortization expense 884 -- 884
Issuance of stock options for services -- -- --
Amortization of discount on debt 516 -- 516
(Gain) / loss on change PBO liability (125) -- (125)
(Gain) / loss on settlement of lawsuit (1,034) -- (1,034)
(Gain) / loss on sale of interest in AirComp -- (2,433) (2,433)
Minority interest in income of subsidiaries 387 (44) 343
Loss on sale of property 82 -- 82
Changes in working capital:
Decrease (increase) in accounts receivable (4,414) -- (4,414)
Decrease (increase) in due from related party -- -- --
Decrease (increase) in other current assets (1,260) -- (1,260)
Decrease (increase) in other assets 1 -- 1
Decrease (increase) in lease deposit 525 -- 525
Increase (decrease) in accounts payable 2,251 -- 2,251
Increase (decrease) in accrued interest (126) -- (126)
Increase (decrease) in accrued expenses 397 -- 397
Increase (decrease) in other long-term liabilities -- -- --
Increase (decrease) in accrued employee benefits and
payroll taxes 1,293 -- 1,293
--------- ------------ ---------
Net cash provided by operating activities 1,879 -- 1,879
Cash flows from investing activities:
Recapitalization, net of cash received -- --
Business acquisition costs -- --
Acquisition of MADSCO assets, net of cash acquired -- --
Acquisition of Jens', net of cash acquired -- --
Acquisition of Strata, net of cash acquired -- --
Purchase of equipment (5,354) (5,354)
Proceeds from sale-leaseback of equipment, net of lease
deposit -- --
Proceeds from sale of equipment 843 843
--------- ---------
Net cash (used) by investing activities (4,511) (4,511)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 14,127 14,127
Payments on long-term debt (10,826) (10,826)
Payments on related party debt (246) (246)
Proceeds from issuance of common stock, net -- --
Borrowing on lines of credit 30,537 30,537
Payments on lines of credit (29,399) (29,399)
Debt issuance costs (408) (408)
--------- ---------
Net cash provided (used) by financing activities 3,785 3,785
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,153 1,153
Cash and cash equivalents:
Beginning of the year 146 146
--------- ---------
End of the year $ 1,299 $ 1,299
========= =========
Supplemental information:
Interest paid $ 2,341 $ 2,341
========= =========
F-18
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the 2004 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 2004. The effect of the restatement on the
individual Quarterly financial statements is as follows:
Three Months Three Months Three Months
Ended Ended Ended
March 31, 2004 June 30, 2004 September 30, 2004
-------------- ------------- ------------------
Net income (loss) attributed to
common stockholders
Previously reported $ 501 $ 434 $ 576
Adjustment - depreciation expense (139) (79) (79)
Adjustment - minority interest expense 22 22 22
Restated 384 377 519
Net income (loss) per share, basic
and diluted
Previously reported $ 0.03 $ 0.07 $ 0.05
Total adjustments 0.01 0.01 0.01
Restated 0.02 0.06 0.04
In addition, 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. 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 stockholders
Previously reported $ (183) $ (330) $ 1,136
Adjustment - gain on sale of stock
in a subsidiary -- -- 2,433
Adjustment - depreciation expense -- -- (49)
Adjustment - minority interest expense -- -- 22
Adjustment - foreign tax expense (158) (92) (93)
Restated (341) (422) 3,449
Net income (loss) per share, basic
and diluted
Previously reported $ (0.05) $ (0.10) $ 0.29
Total adjustments (0.04) (0.00) 0.58
Restated (0.09) (0.10) 0.87
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.
F-19
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
$10.0 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, 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, 2004, 2003 and 2002, the Company has recorded post-retirement
benefit obligations of $687,000, $545,000 and $670,000, respectively, associated
with this transaction.
F-20
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(k) SAVINGS PLAN
On June 30, 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 $35,000 was paid in 2004 and approximately
$10,000 was paid in 2003.
NOTE 4 - ACQUISITIONS
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) $10.3 million in cash,
(ii) a $4.0 million note payable due in four years, (iii) $1.2 million in a
non-compete agreement payable over five years, (iv) 1.6 million shares of common
stock of the Company, (v) 3.5 million shares of a newly created Series A 10%
Cumulative Convertible Preferred Stock of the Company ("Preferred Stock") and
(vi) an additional post-closing payment of 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 $4.2 million and other identifiable intangible
assets of $2.0 million were recorded with consolidation of the acquisitions.
In July 2003, through its 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"). The assets contributed by Mountain Air were recorded at
Mountain Air's historical cost of $6.3 million, and the assets contributed by
M-I were recorded at a fair market value of $10.3 million. The Company owns 55%
and M-I owns 45% of AirComp. As a result of the Company's controlling interest
and operating control, the Company consolidated AirComp in its financial
statements. AirComp comprises the compressed air drilling services segment.
In September 2004, the Company 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.
In September 2004, the Company acquired the remaining 19% of Jens' in exchange
for 1.3 million shares of its common stock. The total value of the consideration
paid to the seller, Jens Mortensen, was $6.4 million which was equal to the
number of shares of common stock issued to Mr. Mortensen (1.3 million)
multiplied by the last sale price ($4.95) of the common stock as reported on the
American Stock Exchange on the date of issuance. This amount was treated as a
contribution to stockholders' equity. On the balance sheet, the $1.9 million
minority interest in Jens' was eliminated. The balance of the contribution of
$4.4 million was allocated as follows: In June 2004, the Company obtained an
appraisal of the fixed assets at Jens' which valued the fixed assets at $20.1
million. The book value of the fixed assets was $15.8 million and the fixed
assets appraised value was $4.3 million over the book value. The Company
increased the value of its fixed assets by 19% of the amount of the excess of
the appraised value over the book value, or $.8 million. The remaining balance
of $3.6 million was allocated to goodwill.
F-21
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2004, AirComp acquired substantially all the assets of Diamond Air
Drilling Services, Inc. and Marquis Bit Co., L.L.C., collectively Diamond Air,
for $4.6 million in cash and the assumption of approximately $450,000 of accrued
liabilities. The Company contributed $2.5 million and M-I L.L.C. contributed
$2.1 million to AirComp LLC in order to fund the purchase. Diamond Air provides
air drilling technology and products to the oil and gas industry in West Texas,
New Mexico and Oklahoma. Diamond Air is a leading provider of air hammers and
hammer bit products.
In December 2004, The Company acquired Downhole for approximately $1.1 million
in cash, 568,466 shares of Common Stock and the assumption of approximately
$950,000 of debt. Downhole is headquartered in Midland, Texas, and provides
economical chemical treatments to wells by inserting small diameter, stainless
steel coiled tubing into producing oil and gas wells.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Diamond Air and Downhole on the
Company's results of operations for the year ended December 31, 2004 and
formation of AirComp on the Company's results of operations for the year ended
December 31, 2003 and the acquisitions of Jens' and Strata on the Company's
results of operations for the year ended 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)
2004 2003 2002
Revenues $ 58,103 $ 34,446 $ 19,142
Operating income (loss) $ 5,405 $ 3,008 $ (401)
Net income (loss) $ 1,367 $ 411 $ (4,431)
Net income (loss) per common share
Basic $ 0.17 $ 0.10 $ (1.18)
Diluted $ 0.12 $ 0.07 $ (1.18)
NOTE 5 - INVENTORIES
Inventories are comprised of the following at December 31:
2004 2003
Hammer bit inventory
Finished goods $ 857 $ --
Work in process 385 --
Raw materials 151 --
------- -----
Total hammer bit inventory $ 1,393 $ --
Hammer inventory 417 --
Chemical inventory 254 --
Coil tubing and related inventory 309 --
------- -----
Total inventory $ 2,373 $ --
======= =====
F-22
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND OTHER INTANGIBLES ASSETS
Property and equipment is comprised of the following at December 31:
Depreciation
Period 2004 2003
--------- ----------
(Restated)
Land -- $ 27 $ 27
Building and improvements 15 - 20 years 740 729
Machinery and equipment 3 - 15 years 41,120 28,860
Tools, furniture, fixtures and leasehold improvements 3 - 7 years 1,043 4,098
--------- ----------
Total $ 42,930 $ 33,714
Less: accumulated depreciation (5,251) (2,586)
--------- ----------
Property and equipment, net $ 37,679 $ 31,128
========= ==========
Intangible assets are as follows at December 31:
Amortization
Period 2004 2003
--------- ----------
Intellectual Property 20 years $ 1,009 $ 1,009
Non-compete agreements 3-5 years 2,856 1,535
Patent 15 years 496 --
Other intangible assets 3- 10 years 2,743 1,000
--------- ----------
Total $ 7,093 $ 3,544
Less: accumulated amortization (2,036) (1,254)
--------- ----------
Intangibles assets, net $ 5,057 $ 2,290
========= ==========
2004 2003
Gross Accumulated Current year Gross Accumulated Current year
Value amortization amortization Value amortization amortization
Intellectual
Property $1,009 $ 239 $ 56 $1,009 $ 183 $ 46
Non-compete agreements 2,855 1,032 300 1,535 731 347
Patent 496 6 6 -- -- --
Other intangible assets 2,733 760 420 1,000 340 135
------ ------------ ------------ ------ ------------ ------------
Total $7,093 $ 2,036 $ 782 $3,544 $ 1,254 $ 528
====== ============ ============ ====== ============ ============
Amortization of intangible assets at December 31, is as follows:
F-23
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE AMORTIZATION BY PERIOD
---------------------------------
(in thousands)
Year ended December 31,
2009 and
2005 2006 2007 2008 thereafter
------- ------- ------- ------- ----------
Intangible Assets Amortization
Intellectual property $ 56 $ 56 $ 56 $ 56 $ 546
Non-compete agreements 484 481 275 234 349
Patent 33 33 33 33 358
Other intangible assets 244 244 214 214 1,057
------- ------- ------- ------- ----------
Total Intangible Amortization $ 817 $ 814 $ 578 $ 537 2,310
======= ======= ======= ======= ==========
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, 2004 and
2003 were as follows:
2004 2003
--------- ---------
Deferred non-current income tax assets:
Net future tax deductible items $ 533 $ 500
Net operating loss carry forwards 4,894 2,975
A-C Reorganization Trust claims 30,112 35,000
--------- ---------
Total deferred non-current income tax assets 35,539 38,475
Valuation allowance (35.539) (38,475)
--------- ---------
Net deferred non-current income taxes $ -- $ --
========= =========
Net operating loss carry forwards for tax purposes at December 31, 2004 and 2003
were estimated to be $14.5 million and $8.5 million, respectively, expiring
through 2024.
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, 2004
and 2003 are not material.
F-24
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiaries are required to file a consolidated U.S.
federal income tax return. The Company had no current tax expense for the years
ended December 31, 2004, 2003 and 2002, respectively. The Company pays foreign
income taxes in Mexico related to Jens' earnings on Mexico revenues. The Company
paid $514,000, $370,000 and $270,000 in foreign income taxes to Mexico during
the years ended December 31, 2004, 2003 and 2002, respectively. There are
approximately $1,154,000 of U.S. foreign tax credits available to the Company
and of that amount, the Company has determined that approximately $205,000 may
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, 2004. The remaining
$949,000 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, 2004. The
foreign tax credits available to the Company begin to expire in the year 2007.
The following table reconciles income taxes based on the U.S. statutory tax rate
to the Company's income tax expense from continuing operations:
2004 2003 2002
-------- -------- --------
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 514,089 370,468 269,568
-------- -------- --------
Total $514,089 $370,468 $269,568
======== ======== ========
The Company's 1988 Plan of Reorganization established the A-C Reorganization
Trust to settle claims and to make distributions to creditors and certain
stockholders. 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-25
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - DEBT
The long-term debt of the Company and its subsidiaries as of December 31, 2004
and December 31, 2003 consists of the following:
December 31,
(in thousands)
-----------------
2004 2003
------- -------
Debt of Allis-Chalmers Energy
Revolving line of credit 2,353 --
Bank term loan 6,335 --
Notes payable to former directors 402 386
12.0% subordinated note -- 2,675
Debt of Jens'
Revolving line of credit -- 26
Bank term loan -- 4,654
Bank real estate note -- 207
Subordinated seller note 4,000 4,000
Note payable under non-compete agreement 514 761
Bank term loan 263 354
Equipment installment note 321 --
Debt of Strata
Revolving line of credit -- 2,413
Vendor financing 1,164 2,383
Debt of Safco
Note payable under non-compete agreement 150 --
Debt of Downhole
Vehicle installment note 11 --
Notes payable to a former shareholders 49 --
Debt of Mountain Air
Term loan 198 247
Seller note 1,600 1,511
Debt of AirComp
Revolving line of credit 1,520 369
Bank term loan 6,775 7,429
Subordinated note payable to M-I LLC 4,818 4,818
------- -------
Total debt $30,473 $32,233
Less: short-term debt and current maturities 5,541 3,992
------- -------
Long-term debt obligations $24,932 $28,241
======= =======
As of December 31, 2004 and 2003, the Company's debt was approximately $30.5
million and $32.2 million, respectively. The Company's weighted average interest
rate for all of its outstanding debt was approximately 6.3% at December 31, 2004
and at December 31, 2003.
Maturities of debt obligations at December 31, 2004 are as follows:
Maturities of Debt
------------------
(in thousands)
Year Ending:
December 31, 2005 5,541
December 31, 2006 7,378
December 31, 2007 10,028
December 31, 2008 2,638
December 31, 2009 4,888
Thereafter --
------------
Total $ 30,473
============
F-26
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 7, 2004, the Company entered into an amended and restated credit
agreement which consolidated and increased various credit facilities previously
maintained by the Company and two of its subsidiaries, Jens' and Strata. The
credit agreement governing the facilities was entered into jointly by
Allis-Chalmers, Jens', Strata, Safco, and Downhole is guaranteed by our MCA and
OilQuip subsidiaries. The amended credit facilities include:
o A $10.0 million revolving line of credit. Borrowings are subject to a
borrowing base based on 85% of eligible accounts receivables, as
defined. Outstanding borrowings under this line of credit were $2.4
million as of December 31, 2004.
o A term loan in the amount of $6.3 million to be repaid in monthly
payments of principal of $105,583 per month. Prepayments are also
required in an amount equal to 20% of our collections from Matyep in
Mexico. Proceeds of the term loan were used to prepay the term loan
owed by our Jens' subsidiary and to prepay the 12% $2.4 million
subordinated note and retire its related warrants. The outstanding
balance was $6.3 million as of December 31, 2004.
o A $6.0 million capital expenditure and acquisition line of credit.
Borrowings under this facility are to be repaid monthly over four
years beginning January 2006. Availability of this capital expenditure
term loan facility is subject to security acceptable to the lender in
the form of equipment or other acquired collateral. There were no
outstanding borrowings as of December 31, 2004
The credit facilities mature on December 31, 2007 and are secured by liens on
substantially all of the Company's assets. The agreement governing these credit
facilities contains customary events of default and financial covenants. It also
limits the Company's ability to incur additional indebtedness, make capital
expenditures, pay dividends or make other distributions, create liens, and sell
assets. Interest accrues at a floating rate based on the prime rate. The
interest rate was 6.25% as of December 31, 2004. There is a 0.5% per annum fee
on the undrawn portion of the revolving line of credit and the capital
expenditure line.
In connection with the acquisition of Jens' and Strata in 2002, the Company
issued a 12% secured subordinated note in the original amount of $3.0 million.
In connection with this subordinated note, the Company issued redeemable
warrants valued at $1.5 million, which were recorded as a discount to the
subordinated debt and as a liability. The discount was amortized over the life
of the subordinated note beginning February 6, 2002 as additional interest
expense of which $350,000 and $300,000 were recognized in the years ended
December 31, 2004 and December 31, 2003, respectively. The debt was recorded at
$2.7 million at December 31, 2003, net of the unamortized portion of the put
obligation. On December 7, 2004, the Company prepaid the $2.4 million balance of
the 12% subordinated note and retired the $1.5 million of warrants, with a
portion of the proceeds from the Company's new $6.3 million bank term loan.
Jens' has a subordinated note payable to Jens Mortensen, the seller of Jens' and
a director of the Company, in the amount of $4.0 million with a fixed interest
rate of 7.5%. Interest is payable quarterly and the final maturity of the note
is January 31, 2006. In connection with the purchase of Jens', the Company
agreed to pay a total of $1.2 million to Mr. Mortensen in exchange for a
non-compete agreement. Monthly payments of $20,576 are due under this agreement
through January 31, 2007. As of December 31, 2004, the remaining balance was
approximately $514,000, including $247,000 classified as short-term. The
subordinated note is subordinated to the rights of the Company's bank lenders.
Jens' has two bank term loans with a remaining balance totaling $263,000 at
December 31, 2004 and with interest accruing at a floating interest rate based
on prime +2.0%. The interest rate was 7.25% at December 31, 2004. Monthly
principal payments are $13,000 plus interest. The maturity date of one of the
loans, with a balance of $210,000, is September 17, 2006, while the second loan,
with a balance of $53,000, has a final maturity of January 12, 2007.
Additionally, in October 2004, Jens' borrowed $326,000 in a five-year equipment
financing term loan. The loan is to be repaid in 60 installments of principal
and interest equal to $6,449 per month beginning December 2004 and ending
December 2009.
F-27
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, Strata, the Company's directional drilling subsidiary, entered
into a financing agreement with a major supplier of downhole motors for
repayment of motor lease and repair cost totaling $1.7 million. 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 on April
2005 and December 2005. The interest rate is fixed at 8.0%. As of December 31,
2004, the outstanding balance was $1.2 million.
In connection with the purchase of Safco, the Company also agreed to pay a total
of $150,000 to the sellers in exchange for a non-compete agreement. The Company
is required to make annual payments of $50,000 through September 30, 2007. As of
December 31, 2004, the balance due is $150,000.
Downhole has notes payable to two former shareholders totaling $49,000. The
Company is required to make monthly payments of $8,878 through June 30, 2005.
The company also has a vehicle installment note. The note is to be repaid over
10 months at $1,137 per month without interest. At December 31, 2004, the
balance due is $11,371.
In connection with the acquisition of Diamond Air and Marquis Bit described
above, on November 15, 2004, the Company amended and increased AirComp's credit
facilities to provide for the following:
o A $3.5 million bank line of credit of which $1.5 million was
outstanding at December 31, 2004. Interest accrues at a floating rate
based on the prime rate. The interest rate was 7.50% as of December
31, 2004. There is a 0.5% per annum fee on the undrawn portion of the
facility. Borrowings under the line of credit are subject to a
borrowing base consisting of eligible accounts receivable.
o A $7.1 million term loan with an adjustable, floating interest rate
based on either the prime rate or the London interbank offered rate or
("LIBOR"). The interest rate was 6.25% as of December 31, 2004.
Principal payments of $286,000 plus accrued interest are due
quarterly, with a final maturity date of June 27, 2007. The balance at
December 31, 2004 was $6.8 million.
o A $1.5 million term loan facility to be used for capital expenditures.
Interest accrues at a floating interest rate based on either the prime
rate or LIBOR. Quarterly principal payments commence on March 31, 2006
in an amount equal to 5.0% of the outstanding balance as of December
31, 2005, with a final maturity of June 27, 2007. There were no
borrowings outstanding under this facility as of December 31, 2004.
The AirComp credit facilities are secured by liens on substantially all of
AirComp's assets. The agreement governing these credit facilities contains
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 Air guaranteed the obligations of AirComp under
these facilities.
AirComp also has 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. At December 31, 2004, $376,000 of
interest was included in accrued interest. The Company is not liable for the
obligations of AirComp under this note.
In 2000 the Company compensated directors, including current directors
Nederlander and Toboroff, who 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%. At December 31, 2004, the
principal and accrued interest on these notes totaled approximately $402,000. As
of March 31, 2005, the notes totaling $96,300, including accrued interest
remained outstanding.
F-28
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the acquisition of Mountain Air in 2001, the Company issued a note to
the sellers of Mountain Air in the original amount of $2.2 million bearing
interest at an interest rate of 5.75%. The note was reduced to $1.5 million as a
result of the settlement of a legal action against the sellers in 2003. At
December 31, 2004 the outstanding amount due, including accrued interest, was
$1.6 million. In March 2005, the Company reached an agreement with the sellers
and holders of the note as a result of an action brought against the Company by
the sellers. Under the terms of the agreement, the Company agreed to pay to the
plaintiff $1.0 million in cash, and agreed to pay an additional $350,000 on June
1, 2006, and an additional $150,000 on June 1, 2007, in settlement of all
claims. (See Note 21 - Legal Matters).
Mountain Air also has a term loan in the amount of $198,000 at December 31, 2004
with an interest rate of 5.0%. Principal and interest of $5,039 are payable
monthly with a final maturity date of June 30, 2008.
Until December 2004, the Company's Chief Executive Officer and Chairman, Munawar
H. Hidayatallah and his wife were personal guarantors of substantially all of
the financing extended to the Company. In December 2004, the Company refinanced
most of its outstanding bank debt and obtained the release of certain
guarantees. Mr. Hidayatallah continues to guarantee approximately $5.6 million
of the Company's debt consisting of the Jens' $4.0 million subordinated seller
note and the $1.6 million Mountain Air seller note. The Company pays Mr.
Hidayatallah an annual guarantee fee equal to one-quarter of one percent of the
total amount of the debt guaranteed by Mr. Hidayatallah (See Note 22 -
Subsequent Events in connection with the $1.6 million Mountain Air seller note.)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company rents office space on a five-year lease which expires November 2009.
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, 2004, 2003 and 2002 was $577,000, $370,000, and, $303,000
respectively. The Company has no further lease obligations.
At December 31, 2004, future minimum rental commitments for all operating leases
are as follows:
Operating Leases
----------------
(in thousands)
Year Ending:
December 31, 2005 $ 550
December 31, 2006 425
December 31, 2007 388
December 31, 2008 265
December 31, 2009 206
Thereafter --
-----------
Total $ 1,834
===========
NOTE 10 - STOCKHOLDERS' EQUITY
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 Jens Mortensen, a director 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
stockholders' 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, $3.0 million, the fair value of
the Company's common stock issued at the date of the acquisition, was added to
stockholders' 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. As a result, $153,000, the fair value of the Company's common stock
issued at the date of the acquisition, was added to stockholders' equity.
F-29
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the Strata purchase, the Company authorized the creation of
Preferred Stock. The Preferred Stock had 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 was 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. In April 2004, Energy Spectrum, the holder of the Company's 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.
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.
In connection with the formation of AirComp in July 2003, the Company eliminated
$955,000 its negative investment in the assets contributed to AirComp. Under
purchase accounting, the Company recognized a $955,000 increase in stockholders
equity.
On March 3, 2004, the Company entered into an agreement with an investment
banking firm whereby they would provide underwriting and fundraising activities
on behalf of the Company. In exchange for their services, the investment banking
firm received a stock purchase warrant to purchase 340,000 shares of common
stock at an exercise price of $2.50 per share. The warrant expires in February
2009. 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 89.7% risk-free interest rate of
7.00%; and average life of 5 years.
On April 2, 2004, the Company completed the following transactions:
o In exchange for an investment of $2.0 million 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 $1.55 million 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 former director
Saeed Sheikh and officers and directors Munawar H. Hidayatallah and
Jens H. Mortensen entered into a stockholders agreement pursuant to
which the parties 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
effected 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. Energy Spectrum has
agreed to enter into an amendment to the Stockholders Agreement to
eliminate the requirement that an investment bank be retained to sell
the Company. Two of Energy Spectrum's three designated directors on
the Board resigned January 14, 2005 and Energy Spectrum has agreed not
to utilize its right to appoint more than one director unless and
until the parties to the Stockholders of the Company of its
determination to reassert such right.
F-30
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Company issued shares pursuant to an exemption from the Securities
Act of 1933, and 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 Company issued shares pursuant to an exemption from the Securities
Act of 1933, and 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 issued 1.3 million shares of common stock to
Jens Mortensen, a director, in exchange for his 19% interest in Jens'. As a
result of this transaction, The Company owns 100% of Jens'. The total value of
the consideration paid to Jens was $6.4 million, which was equal to the number
of shares of common stock issued to Mr. Mortensen multiplied by the last sale
price ($4.95) of the common stock as reported on the American Stock Exchange on
the date of issuance. This amount was treated as a contribution to stockholders
equity. On the balance sheet, the Company eliminated the amount recorded as the
value of the Jens' minority interest, $2.0 million. The balance of the
contribution ($4.5 million) was allocated as follows: In June 2004, a
third-party appraisal of the fixed assets was obtained which valued the fixed
assets at $20.1 million. The book value of the fixed assets was $15.8 million
and the excess of appraised value over book value was $4.3 million. The value of
Jens' fixed assets was increased by 19% of this amount, or $813,511. The
remaining balance of $3.7 million was allocated to goodwill.
On December 10, 2004, the Company acquired Downhole for approximately $1.1
million in cash, 568,466 shares of Common Stock and payment or assumption of
$950,000 of debt. Approximately $2.2 million, the value of the common stock
issued to Downhole's sellers based on the closing price of the Company's common
stock issued at the date of the acquisition, was added to stockholders' equity.
NOTE 11- REVERSE STOCK SPLIT
The Company effected a reverse stock split on June 10, 2004. 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 6,070 to
approximately 2,140. All share and related amounts presented have been
retroactively adjusted for the stock split.
NOTE 12- STOCK OPTIONS
In 2000, the company issued stock options and promissory notes to certain
current and former directors as compensation for services as directors (Note 8),
and the Company's Board of Directors granted stock options to these same
individuals. Options to purchase 4,800 shares of common stock were granted with
an exercise price of $13.75 per share. These options vested immediately and may
be exercised any time prior to March 28, 2010. As of December 31, 2004, none of
the stock options had been 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 the
Company, 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.
F-31
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
These options are exercisable for 10 years from December 16, 2003 at $2.75 per
share. On October 11, 2004, the Board granted to certain employees of the
Company the option to purchase 248,000 shares of common stock. The options are
exercisable for 10 years from October 11, 2004 at $4.85 per share. As 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. As of
December 31, 2004, none of the stock options issued had been exercised.
A summary of the Company's stock option activity and related information is as
follows:
December 31, 2004 December 31, 2003 December 31,2002
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Under Exercise Shares Under Exercise Shares Under Exercise
Options Price Option Price Option Price
------------ ----------------- ------------ ----------------- ------------ ----------------
Beginning balance 973,300 2.78 104,800 $ 3.00 104,800 $ 3.00
Granted 248,000 4.85 868,500 2.75 -- --
Canceled (6,300) 2.78 -- -- -- --
Exercised -- -- -- -- -- --
----------- ----------------- ------------ ----------------- ------------ ----------------
Ending balance 1,215,000 $ 3.20 973,300 $ 2.78 104,800 $ 3.00
=========== ================= ============ ================= ============ ================
The following table summarizes additional information about the Company's stock
options outstanding as of December 31, 2004:
Fair Value Shares Under Weighted Average Remaining Options Fair Value of
Exercise Price Option Contractual Life Exercisable Exercise Price
$ 2.50 100,000 6.79 years 100,000 $ 2.50
$ 13.75 4,800 5.24 years 4,800 $ 13.75
$ 2.75 862,200 8.96 years 574,800 $ 2.75
$ 4.85 248,000 9.73 years 82,667 $ 4.85
------- --------- ----------- -------- -------
$ 3.20 1,215,000 8.93 years 762,267 $ 3.01
There were no stock options issued to employees or directors in the year ended
December 31, 2002.
NOTE 13- 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.
F-32
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 however the warrants were paid off on December
7, 2004. 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
stockholders' 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 life of four years.
On February 6, 2002, in connection with the acquisition of substantially all of
the outstanding stock of Strata (see 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 stockholders' 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.
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., in
consideration of financial advisory services to be provided by Morgan Joseph
pursuant to a consulting agreement. The warrants expire in February 2009.
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. 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.
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 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 of $2.50 per share, expiring on April 1, 2006.
In May 2004, we issued a warrant to purchase 3,000 shares of our common stock at
an exercise price of $4.75 per share to Jeffrey R. Freedman in consideration of
financial advisory services to be provided by Mr. Freedman pursuant to a
consulting agreement. The warrants expire in May 2009, and were exercised in May
2004.
The Preferred Stock, including accrued dividends, was converted into 1,718,090
shares of common stock on April 2, 2004
NOTE 14- LEASE RECEIVABLE
In June 2002, Strata, the Company's subsidiary, sold its measurement while
drilling (MWD) assets to a third party for $1.3 million. 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, 2004, the Company received a total of $229,000 in payments
from the third party related to this lease.
F-33
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- RELATED PARTY TRANSACTIONS
At December 31, 2004 and 2003, the Company owed the Chief Executive Officer of
the Company, Munawar H. Hidayatallah, $175,000 and $193,000, respectively,
related to deferred compensation. Mr. Hidayatallah owes the company $7,000
classified as an employee receivable. In March and April of 2005 the Company
paid all amounts due Mr. Hidayatallah.
Until December 2004, the Company's Chief Executive Officer and Chairman, Munawar
H. Hidayatallah and his wife were personal guarantors of substantially all of
the financing extended to the Company by commercial banks. In December 2004, the
Company refinanced most of its outstanding bank debt and obtained the release of
certain guarantees at December 31, 2004. Mr. Hidayatallah guaranteed
approximately $5.6 million of the Company's debt consisting of the Jens' $4.0
million subordinated seller note and the $1.6 million Mountain Air seller note.
See Note 22 "Subsequent Events" regarding the modification of this note. The
Company has agreed to pay Mr. Hidayatallah an annual guarantee fee equal to
one-quarter of one percent of the total amount of the debt guaranteed by Mr.
Hidayatallah. The fee is payable quarterly, in arrears, based upon the average
amount of debt outstanding in the prior quarter.
Jens Mortensen, a director of the Company, is the former owner of Jens' and held
a 19% minority interest in Jens' until September 30, 2004. He is also the holder
of a $4.0 million subordinated note payable issued by Jens' and at December 31,
2004 was owed $517,000 in accrued interest and $514,000 related to a non-compete
agreement. (See Note 8). The accrued interest was paid in January 2005. Mr.
Mortensen, formerly the sole proprietor of Jens', owns a shop yard which he
leases to Jens' on a monthly basis. The annual lease payments under the terms of
the lease were $28,800 for each of the years ended December 31, 2004 and
December 31, 2003. In addition, Mr. Mortensen and members of his family own 100%
of Tex-Mex Rental & Supply Co., a Texas corporation, that sold approximately
$166,669 and $173,000 of equipment and other supplies to Jens' for the years
ended December 31, 2004 and 2003, respectively.
As descripted in Note 8, former directors of the Company were issued promissory
notes in 2000 in lieu of compensation for services. A total of $402,000 included
in the short-term debt of the Company is due these former directors of the
Company as of December 31, 2004. All but three notes were paid on the maturity
date of March 28, 2005. There is approximately $96,300 that remains outstanding
including accrued interest.
At December 31, 204 and 2003, Mountain Air owed its joint venture partner in
AirComp, LLC, M-I LLC $74,000 and $73,000 respectively.
NOTE 16- SETTLEMENT OF LAWSUIT
In June 2003, Mountain Air filed a lawsuit against the former owners of Mountain
Air Drilling Service Company for breach of the asset purchase agreement pursuant
to which Mountain Air acquired Mountain Air Drilling Services Company, alleging
that 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 $2.6 million 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 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 was $1.9 million.
Mountain Air recorded a one-time gain on the reduction of the note payable to
the sellers of $1.0 million in the third quarter of 2003. The gain was
calculated 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 (See Note 22 - Subsequent Events).
F-34
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17- GAIN ON SALE OF INTEREST IN A SUBSIDIARY
In July 2003, through the subsidiary Mountain Air, the Company entered into a
limited liability company operating agreement with a division of M-I to form a
Texas limited liability company named AirComp. Both companies contributed assets
with a combined value of $16.6 million to AirComp. The contributed assets from
Mountain Air were contributed at a historical book value of approximately $6.3
million and the assets contributed by M-I were contributed at a fair market
value of approximately $10.3 million. Prior to the formation of AirComp, the
Company owned 100% of Mountain Air and after the formation of AirComp, the
Company owns 55% and M-I owns 45% of the business combination. The business
combination was accounted for as a purchase and recorded a one-time
non-operating gain on the sale of the 45% interest in the subsidiary of
approximately $2,433,000. The gain was calculated after recording the assets
contributed by M-I of approximately $10.3 million less the subordinated note
issued to M-I in the amount of approximately $4.8 million, recording minority
interest of approximately $2,049,000 and an increase in equity of $955,000 in
accordance with Staff Accounting Bulletin No. 51 ("SAB 51"). The Company has not
recorded any deferred income taxes because the increase in assets and gain is a
permanent timing difference. The Company has adopted a policy that any gain or
loss in the future incurred on the sale in the stock or an interest of a
subsidiary would be recognized as such in the income statement.
NOTE 18- SEGMENT INFORMATION
At December 31, 2004, the Company had four operating segments including Casing
and Tubing Services (Jens'), Directional Drilling Services (Strata) and
Compressed Air Drilling Services (AirComp) and Other Services (Safco and
Downhole). All of the segments provide services to the energy industry. 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, 2004 and
2003 (in thousands):
Year Ended December 31,
2004 2003 2002
---------- --------- ---------
(Restated)
REVENUES:
Casing services $ 10,391 $ 10,037 $ 7,796
Directional drilling services 24,787 16,008 6,529
Compressed air drilling services 11,561 6,679 3,665
Other services 987 -- --
---------- --------- ---------
Total revenues 47,726 $ 32,724 $ 17,990
========== ========= =========
OPERATING INCOME (LOSS):
Casing services $ 3,217 $ 3,628 $ 2,495
Directional drilling services 3,061 1,103 (576)
Compressed air drilling services 1,169 17 (945)
Other services (67) -- --
General corporate (3,153) (2,123) (2,242)
---------- --------- ---------
Total income/loss) from operations $ 4,227 $ 2,625 $ (1,072)
========== ========= =========
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 1,597 $ 1,413 $ 1,265
Directional drilling services 466 275 295
Compressed air drilling services 1,329 1,139 955
Other services 66 -- --
General corporate 120 109 65
---------- --------- ---------
Total depreciation and amortization expense $ 3,218 $ 2,936 $ 2,580
========== ========= =========
F-35
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST EXPENSE:
Casing services $ 827 $ 1,044 $ 643
Directional drilling services 321 268 215
Compressed air drilling services 801 839 761
Other services 4 -- --
General corporate 855 316 637
---------- --------- ---------
Total interest expense $ 2,808 $ 2,467 $ 2,256
========== ========= =========
CAPITAL EXPENDITURES
Casing services $ 1,285 $ 2,176 $ 137
Directional drilling services 1,552 1,066 83
Compressed air drilling services 1,399 2,093 288
Other services 338 -- --
General corporate 29 19 10
---------- --------- ---------
Total capital expenditures $ 4,603 $ 5,354 $ 518
========== ========= ==========
GOODWILL:
Casing services $ 3,673 $ -- $ --
Directional Drilling Services 4,168 4,168 4,168
Compressed Air Drilling Services 3,510 3,493 3,493
Other services 425 -- --
General Corporate -- -- --
---------- --------- ---------
Total Goodwill $ 11,776 $ 7,661 $ 7,661
========== ========= ==========
ASSETS:
Casing services $ 21,197 $ 18,191 $ 15,681
Directional drilling services 14,166 11,529 8,888
Compressed air drilling services 29,147 22,735 9,138
Other services 7,097 -- --
General corporate 8,585 1,207 1,071
---------- --------- ---------
Total assets $ 80,192 $ 53,662 $ 34,778
========== ========= ==========
REVENUES
United States $ 42,466 $ 29,395 $ 15,321
International 5,260 3,329 2,669
---------- --------- ---------
TOTAL $ 47,726 $ 32,724 $ 17,990
========== ========= ==========
NOTE 19 - SUPPLEMENTAL CASH FLOWS INFORMATION
December December December
31,2004 31, 2003 31, 2002
--------- --------- ---------
(Restated)
(in thousands)
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)
========= ========= =========
F-36
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other non-cash investing and financing transactions:
Sale of property & equipment in connection with
the direct financing lease (Note 14) $ -- -- $ 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 --
Non-cash investing and financing transactions
in connection with the formation of AirComp:
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 -- 10,268 --
Increase in minority interest -- (2,063) --
(Gain) on sale of stock in a subsidiary -- (2,433) --
Difference of Company's investment cost basis in AirComp
and their share of underlying equity of net assets
of AirComp -- (955) --
--------- --------- ---------
Net cash paid in connection with the joint venture $ -- $ -- $ --
========= ========= =========
Non-cash investing and financing transactions in
connection with the acquisitions of Safco, Diamond
Air and Downhole:
Fair Value of net assets acquired $ (4,867) -- --
Goodwill and other intangibles (3,839) -- --
Value of common stock, issued 2,177 -- --
Value of minority interest contribution 2,070 -- --
--------- --------- ---------
$ (4,459) $ -- $ --
Non-cash investing and financing transaction in
connection with the remaining acquisition of the 19% of Jens:
Fair Value of net assets acquired $ (813) -- --
Goodwill and other intangibles (3,676) -- --
Value of common stock issued 6,434 -- --
Value of minority interest retirement (1,945) -- --
--------- --------- ---------
-- -- --
========= ========= =========
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20- QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
(In thousands, except per share amounts)
YEAR 2004
Revenues $ 9,661 $ 11,422 $ 11,888 $ 14,755
Operating income 1,030 1,150 1,239 808
Net income (loss) 472 413 519 (516)
---------- ---------- ---------- ---------
Preferred stock dividend (88) (36) -- --
---------- ---------- ---------- ---------
Net income (loss) attributed to
common shares $ 384 $ 377 $ 519 $ (516)
========== ========== ========== =========
Income (loss) per common share
Basic: $ .02 $ .06 $ .04 $ (0.07)
========== ========== ========== =========
Income (loss) per common share
Diluted: $ .01 $ .04 $ .04 $ (0.04)
========== ========== ========== =========
F-37
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(Restated) (Restated)
(In thousands, except per share amounts)
YEAR 2003
Revenues $ 6,999 $ 7,340 $ 8,089 $ 10,296
Operating income 1,023 910 475 118
Net income (loss) 53 (335) 2,974 235
--------- --------- --------- ---------
Preferred stock dividend (394) (87) (88) (87)
--------- --------- --------- ---------
Net income (loss) attributed to
common shares $ (341) $ (422) $ 2,886 $ 148
========= ========= ========= =========
Income (loss) per common share
(Basic) $ (0.09) $ (0.11) $ 0.73 $ 0.04
========= ========= ========= =========
Income (loss) per common share
Diluted: $ (0.09) $ (0.11) $ 0.67 $ 0.03
========= ========= ========= =========
NOTE 21 - LEGAL MATTERS
The Company is named from time to time in legal proceedings related to the
Company's activities prior to its bankruptcy in 1988; however, the Company
believes that it was discharged from liability for all such claims in the
bankruptcy and believes the likelihood of a material loss relating to any such
legal proceeding is remote.
At December 31, 2004, Mountain Compressed Air, Inc. was a defendant in an action
brought in April 2004 in the District Court of Mesa County, Colorado, by the
former owner of Mountain Air Drilling Service Company, Inc. from whom Mountain
Compressed Air, Inc. acquired assets in 2001. The plaintiff sought to accelerate
payment of the note issued in connection with the acquisition and sought $1.9
million in damages (representing principal and interest due under the note), on
the basis that Mountain Compressed Air has failed to provide financial
statements required by the note. The Company raised several defenses to the
plaintiff's claim. In March 2005, the Company reached agreement with the
plaintiff to settle the action and agreed to pay to the plaintiff $1.0 million
in cash, and to pay to the plaintiff an additional $350,000 on June 1, 2006, and
an additional $150,000 on June 1, 2007, in settlement of all amounts due under
the promissory note and all other claims.
The Company is involved in various other legal proceedings in the ordinary
course of business. The legal proceedings are at different stages; however, the
Company believes that the likelihood of material loss relating to any such legal
proceeding is remote.
NOTE 22 - SUBSEQUENT EVENTS
In January 2005, Jens' obtained a real estate term loan in the amount of
$556,000. This loan is to be repaid in 59 equal monthly installments of $4,344
with the remaining outstanding balance due on January 1, 2010. The interest rate
floats based on the prime rate and was 7.25% at the time of funding. Proceeds
were used to pay accrued interest on the Jens' $4.0 million subordinated seller
note.
As of January 1, 2005, the Company executed a business development agreement
with CTTV Investments LLC, ("CTTV"), an affiliate of ChevronTexaco Inc., whereby
the Company issued 20,000 shares of its common stock to CTTV, and further agreed
to issue up to an additional 60,000 shares to CTTV contingent upon subsidiaries
of the Company receiving certain levels of revenues, in 2005, from ChevronTexaco
and its affiliates. CTTV was a minority owner of Downhole.
F-38
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mountain Compressed Air, Inc. was a defendant in an action brought in April 2004
in the District Court of Mesa County, Colorado, by the former owner of Mountain
Air Drilling Service Company, Inc. from whom Mountain Compressed Air, Inc.
acquired assets in 2001. (See Note 21. Legal Proceedings). In March 2005, the
Company reached agreement with the plaintiff to settle the action. Under the
terms of the agreement, the Company on April 1, 2005, paid the plaintiff $1.0
million in cash, and agreed to pay an additional $350,000 on June 1, 2006, and
an additional $150,000 on June 1, 2007, in settlement of all claims.
On April 1, 2005, the Company acquired 100% of the outstanding stock of Delta
Rental Service, Inc. ("Delta") for $4.6 million in cash and 223,114 shares of
the Company's common stock and two promissory notes totaling $350,000. Delta,
located in Lafayette, Louisiana, is a rental tool company providing specialty
rental items to the oil and gas industry such as spiral heavy weight drill pipe,
test plugs used to test blow-out preventors, well head retrieval tools, spacer
spools and assorted handling tools. For the year ended December 31, 2004, Delta
had revenues of $3.3 million.
On April 4, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to extend the final maturity of its credit facilities for one year to
December 31, 2008, include the Company's Delta and Downhole subsidiaries as
parties to the credit agreement, and provide for increased availability under
the $10.0 million revolving line of credit and the $6.0 million acquisition line
of credit based on the receivables and assets of Delta and Downhole.
Additionally, the amendment documented the lender's consent to the $1.5 million
settlement with the former owners of Mountain Air Drilling Service mentioned
above and to the prepayment of the $4.0 million Jens' subordinated seller note
by an amount not to exceed $397,000.
F-39
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
MARCH 31, DECEMBER 31,
2005 2004
----------- -----------
(unaudited)
ASSETS
Cash and cash equivalents $ 5,999 $ 7,344
Trade receivables, net 16,402 12,986
Inventory 2,464 2,373
Lease receivable, current 180 180
Prepaid expenses and other 1,976 1,495
----------- -----------
Total current assets 27,021 24,378
----------- -----------
Property and equipment, net 39,493 37,679
Goodwill 11,776 11,776
Other intangible assets, net 4,891 5,057
Debt issuance costs, net 635 685
Lease receivable, less current portion 485 558
Other assets 75 59
----------- -----------
Total assets $ 84,376 $ 80,192
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 4,109 $ 5,541
Trade accounts payable 5,698 5,694
Accrued salaries, benefits and payroll taxes 811 615
Accrued interest 460 470
Accrued expenses 2,300 1,852
Accounts payable, related parties 200 740
----------- -----------
Total current liabilities 13,578 14,912
Accrued postretirement benefit obligations 676 687
Long-term debt, net of current maturities 28,750 24,932
Other long-term liabilities 129 129
----------- -----------
Total liabilities 43,133 40,660
Commitments and Contingencies
Minority interests 4,567 4,423
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value (20,000,000 shares authorized;
13,631,525 and 13,611,525 issued and outstanding at
March 31, 2005 and December 31, 2004, respectively) 136 136
Capital in excess of par value 40,331 40,331
Accumulated deficit (3,791) (5,358)
----------- -----------
Total stockholders' equity 36,676 35,109
----------- -----------
Total liabilities and stockholders' equity $ 84,376 $ 80,192
=========== ===========
The accompanying Notes are an integral part of the Consolidated Financial Statements.
F-40
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED OF OPERATIONS STATEMENTS
(in thousands, except per share)
(unaudited)
Three Months Ended
March 31, March 31,
2005 2004
----------- -----------
(Restated)
Revenues $ 19,334 $ 9,661
Cost of revenues 12,785 6,909
Depreciation expense 914 619
----------- -----------
Total cost of revenues 13,699 7,528
Gross margin 5,635 2,133
General and administrative expense 2,994 884
Amortization expense 394 219
----------- -----------
Total general and administrative costs 3,388 1,103
Income from operations 2,247 1,030
Other income (expense):
Interest expense (521) (569)
Settlement on lawsuit 115 --
Other 33 187
----------- -----------
Total other income (expense) (373) (382)
----------- -----------
Net income before minority interest and income taxes 1,874 648
Minority interest in income of subsidiaries (144) (73)
Provision for foreign taxes (163) (103)
----------- -----------
Net income 1,567 472
Preferred stock dividend -- (88)
----------- -----------
Net income attributed to common shareholders $ 1,567 $ 384
=========== ===========
Income per common share basic $ .12 $ 0.10
=========== ===========
Income per common share diluted $ .09 $ 0.05
=========== ===========
Weighted average number of common shares outstanding:
Basic 13,632 3,927
=========== ===========
Diluted 17,789 5,762
=========== ===========
The accompanying Notes are an integral part of the Financial Statements.
F-41
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended
March 31,
2005 2004
----------- -----------
(Restated)
Cash flows from operating activities:
Net income $ 1,567 $ 472
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 914 619
Amortization expense 394 217
Amortization of discount on debt 3 75
Minority interest in income of subsidiaries 144 73
Changes in working capital:
Decrease (increase) in accounts receivable (3,416) 476
Decrease (increase) in other current assets (499) 13
Decrease (increase) other assets (16) --
(Decrease) increase in accounts payable 4 350
(Decrease) increase in accrued interest (10) 89
(Decrease) increase in accrued expenses (92) (595)
(Decrease) increase in accrued salaries,
benefits and payroll taxes 185 (26)
(Decrease) increase in other long-term liabilities -- (141)
----------- -----------
Net cash (used in) /provided by operating activities (822) 1,622
Cash flows from investing activities:
Purchase of equipment (2,728) (1,411)
----------- -----------
Net cash used in investing activities (2,728) (1,411)
Cash flows from financing activities:
Proceeds/(repayments)on long-term debt, net 2,383 (944)
Debt issuance costs (178) (75)
----------- -----------
Net cash provided by (used in) financing activities 2,205 (1,019)
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,345) (808)
Cash and cash equivalents at beginning of year 7,344 1,299
----------- -----------
Cash and cash equivalents at end of period $ 5,999 $ 491
=========== ===========
Supplemental information:
Interest paid $ 437 $ 480
=========== ===========
Foreign taxes paid $ 163 $ 103
=========== ===========
The accompanying Notes are an integral part of the Financial Statements.
F-42
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2005 AND MARCH 31, 2004
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Allis-Chalmers Energy Inc provides a variety of products and services to the oil
and natural gas industry. Through its subsidiaries, Allis-Chalmers is engaged in
providing specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells, directional and
horizontal drilling services, the rental of "hevi-wate" spiral drill pipe and
related oilfield services, services to enhance production through the
installation of small diameter coiled tubing and chemicals into producing oil
and gas wells and air drilling services to natural gas exploration and
development operators.
BASIS OF PRESENTATION
Our unaudited consolidated condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. We believe that the
presentations and disclosures herein are adequate to make the information not
misleading. The unaudited consolidated condensed financial statements reflect
all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation of the interim periods. These unaudited consolidated condensed
financial statements should be read in conjunction with our audited consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2004. The results of operations for the interim periods are
not necessarily indicative of the results of operations to be expected for the
full year.
In the notes to the unaudited consolidated condensed financial statements, all
dollar and share amounts in tabulations are in millions of dollars and shares,
respectively, unless otherwise indicated.
Certain reclassifications have been made to the prior year's consolidated
condensed financial statements to conform with the current period presentation.
F-43
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 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.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS - an Amendment
of ARB No. 43, Chapter 4, which amends the guidance in ARB No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 requires that these items be recognized
as current period charges. In addition, SFAS No. 151 requires the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We are currently evaluating
the provisions of SFAS No. 151 and will adopt SFAS No. 151 on January 1, 2006.
In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT (SFAS
123R). SFAS 123R revises SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
and focuses on accounting for share-based payments for services by employer to
employee. The statement requires companies to expense the fair value of employee
stock options and other equity-based compensation at the grant date. The
statement does not require a certain type of valuation model and either a
binomial or Black-Scholes model may be used. The provisions of SFAS 123R are
effective for financial statements for annual or interim periods beginning after
December 15, 2005. We are currently evaluating the provisions of SFAS No. 123R
and will adopt SFAS No. 123R on January 1, 2006. Our future cash flows will not
be impacted by the adoption of this standard.
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP 109-1"),
Application of FASB Statement No. 109, "ACCOUNTING FOR INCOME TAXES" ("SFAS No.
109") to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, which provides guidance on the recently
enacted American Jobs Creation Act of 2004 (the "Act"). The Act provides a tax
deduction for income from qualified domestic production activities. FSP 109-1
provides for the treatment of the deduction as a special deduction as described
in SFAS No. 109. As such, the deduction will have no effect on existing deferred
tax assets and liabilities. The impact of the deduction is to be reported in the
period in which the deduction is claimed on our U.S. tax return. We do not
expect that this deduction will have a material impact on our effective tax rate
in future years. FSP 109-1 is effective prospectively as of January 1, 2005.
NOTE 2 - 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 quarters ended March 31, 2005, and 2004 would have been
decreased to the pro forma amounts indicated below.
F-44
FOR THE QUARTER ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE)
2005 2004
---------- ----------
(RESTATED)
Net income: As reported $ 1,567 $ 384
Less total stock based employee
compensation expense determined
under fair value based method
for all awards net of tax
related effects (2,902) --
---------- ----------
Pro-forma net income to
common stockholders' $ (1,335) $ 384
Net income per share:
Basic As reported $ 0.10 $ 0.10
========== ==========
Diluted As reported $ 0.08 $ 0.05
========== ==========
Options were granted in 2005. The following assumptions were applied in
determining the pro forma compensation costs:
FOR THE QUARTER ENDED
MARCH 31,
2005
---------------------
Expected dividend yield --
Expected price volatility 89.76%
Risk-free interest rate 7.0%
Expected life of options 7 years
Weighted average fair value of options
granted at market value $ 3.86
NOTE 3 - INCOME PER COMMON SHARE
The Company computes income 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. For
periods through April 12, 2004, preferred dividends are deducted from net income
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) are excluded from diluted earnings per share.
F-45
The components of basic and diluted earnings per share are as follows:
March 31, March 31,
2005 2004
(in thousands, except earnings per share)
Numerator:
Net income available for common stockholders $ 1,567 $ 384
Plus income impact of assumed conversions:
Preferred stock dividends -- 88
---------- ----------
Net income applicable to common stockholders
Plus assumed conversions $ 1,567 $ 472
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 13,632 3,927
Effect of potentially dilutive common shares:
Convertible preferred stock and employee
and director stock options 4,157 1,835
---------- ----------
Denominator for diluted earnings per share -
weighted average shares outstanding and
assumed conversions 17,789 5,762
Basic earnings per share $ 0.12 $ 0.10
========== ==========
Diluted earning per share $ 0.09 $ 0.05
========== ==========
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS
In accordance with SFAS 142, "Goodwill and Other Intangible Assets," goodwill
and indefinite-lived intangible assets are not permitted. To be amortized.
Goodwill and indefinite-lived intangible assets remain on the balance sheet and
are tested for impairment on an annual basis, or when there is reason to suspect
that their values may have been diminished or impaired. Goodwill and
indefinite-lived intangible assets listed on the balance sheet totaled $11.8
million at March 31, 2005 and December 31, 2004. Based on impairment testing
performed during 2004, pursuant to the requirements of SFAS 142, these assets do
not appear to be impaired.
Intangible assets with definite lives continue to be amortized over their
estimated useful lives. Definite-lived intangible assets that continue to be
amortized under SFAS 142 relate to our purchase of customer-related and
marketing-related intangibles. These intangibles have useful lives ranging from
five to 10 years. Amortization of intangible assets was $166,000 for the first
three months of 2005, compared to $132,000 for the same period last year. At
March 31, 2005, net intangible assets totaled $4.9 million, net of $2.2 million
of accumulated amortization.
NOTE 5 - RESTATEMENT
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to SFAS No. 141,
BUSINESS COMBINATIONS and recorded the sale of an interest in a subsidiary, in
accordance with SAB No. 51. Consequently, we restated our financial statements
for the quarter ended September 30, 2003, for the year ended December 31, 2003
and for the three quarters ended September 30, 2004, to reflect the following
adjustments:
F-46
INCREASE IN BOOK VALUE OF FIXED ASSETS. Under joint venture accounting, we
originally recorded the value of the assets contributed by M-I to AirComp at
M-I's historical cost of $6,932,000. Under purchase accounting, we increased the
recorded value of the assets contributed by M-I by approximately $3,337,000 to
$10,269,000 to reflect their fair market value as determined by a third party
appraisal. In addition, under joint venture accounting, we established negative
goodwill which reduced fixed assets in the amount of $1,550,000. The negative
goodwill was amortized by us over the lives of the related fixed assets. Under
purchase accounting, we increased fixed assets by $1,550,000 to reverse the
negative goodwill previously recorded and reversed amortization expenses
recorded in 2004. Therefore, fixed assets were increased by a total of
$4,887,000.
INCREASE IN NET INCOME. During the three months ended March 31, 2004,
depreciation expense related to the fixed assets increased by $49,000, as a
result of the increase in fixed assets, depreciation expense was increased by
$90,000 as a result of the reversal of amortization of negative goodwill, and
minority interest expense decreased by $22,000, resulting in reduction in net
income attributable to common stockholders of $117,000.
A restated consolidated balance sheet at March 31, 2004, and a restated
consolidated income statement and a restated consolidated statement of cash
flows for the three months ended March 31, 2004, reflecting the above
adjustments, is presented below. The amounts are in thousands, except for share
amounts:
At March 31, 2004
------------------
As Restatement As
Reported Adjustments Restated
-------- ----------- --------
ASSETS
Cash and cash equivalents $ 491 $ 491
Trade receivables, net of allowance for
doubtful accounts 8,347 8,347
Lease Receivable, current 180 180
Prepaid expenses and other 900 900
--------- --------
Total current assets 9,918 9,918
Property and equipment, net of accumulated
depreciation 27,270 4,650 31,920
Goodwill 7,661 7,661
Other intangible assets, net of accumulated
amortization 2,158 2,158
Debt issuance costs, net of accumulated
amortization 557 557
Lease receivable, less current portion 722 722
Other assets 79 79
--------- --------- --------
Total Assets $ 48,365 $ 4,650 $53,015
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 4,888 $ 4,888
Trade accounts payable 3,483 3,483
Accrued salaries, benefits and payroll taxes 885 885
Accrued interest 241 241
Accrued expenses 1,166 1,166
Accounts payable, related parties 467 467
--------- --------
Total current liabilities 11,130 11,130
F-47
Accrued postretirement benefit obligations 545 545
Long-term debt, net of current maturities 26,476 26,476
Other long-term liabilities 129 129
Redeemable warrants 1,500 1,500
Redeemable convertible preferred stock
including accrued dividends 4,259 4,259
--------- --------
Total liabilities 44,039 44,039
Commitments and Contingencies
Minority interests 2,618 1,433 4,051
COMMON STOCKHOLDERS' EQUITY
Common stock 39 39
Capital in excess of par value 9,793 955 10,748
Accumulated (deficit) (8,124) 2,262 (5,862)
--------- --------- --------
Total stockholders' equity 1,708 3,217 4,925
--------- --------- --------
Total liabilities and stockholders' equity $ 48,365 $ 4,650 $53,015
========= ========= ========
F-48
Three Months March 31, 2004
------------------------------
As Restatement As
Reported Adjustments Restated
Revenues $ 9,661 -- $ 9,661
Cost of revenues 7,389 139 7,528
-------- --------- ---------
Gross margin 2,272 (139) 2,133
General and administrative expense 1,103 -- 1,103
-------- --------- ---------
Income from operations 1,169 (139) 1,030
Other income (expense):
Interest expense (569) -- (569)
Minority interests in income of subsidiaries (95) 22 (73)
Other 187 -- 187
-------- --------- ---------
Total other income (expense) (477) 22 (455)
-------- --------- ---------
Net income before income taxes 692 (117) 575
Provision for foreign income tax (103) -- (103)
-------- --------- ---------
Net income 589 (117) 472
Preferred stock dividend (88) -- (88)
-------- --------- ---------
Net income attributed to common stockholders $ 501 $ (117) $ 384
======== ========= =========
Income per common share - basic $ 0.15 $ 0.10
======== =========
Income per common share - diluted $ 0.10 $ 0.05
======== =========
Weighted average number of common shares outstanding:
Basic 3,927 3,927
======== =========
Diluted 5,762 5,762
========= =========
F-49
Three Months Ended March 31, 2004
------------------------------
As Restatement As
Reported Adjustment Restated
-------- ---------- --------
Cash flows from operating activities:
Net income $ 589 $ (117) $ 472
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 697 139 836
Amortization of discount on debt 75 -- 75
Minority interest in income of subsidiaries 95 (22) 73
Changes in working capital:
Decrease (increase) in accounts receivable 476 -- 476
Decrease (increase) in other current assets 13 -- 13
Increase (decrease) in accounts payable 350 -- 350
Increase (decrease) in accrued interest 89 -- 89
Increase (decrease) in accrued expenses (595) -- (595)
Increase (decrease) in other long-term liabilities (141) -- (141)
Increase (decrease) in accrued employee benefits
and payroll taxes (26) -- (26)
--------- -------- ---------
Net cash provided by operating activities 1,622 -- 1,622
Cash flows from investing activities:
Purchase of equipment (1,411) (1,411)
--------- ---------
Net cash use) in investing activities (1,411) (1,411)
Cash flows from financing activities:
Repayments of long-term debt (944) (944)
Debt issuance costs (75) (75)
--------- ---------
Net cash used in financing activities (1,019) (1,019)
--------- ---------
Net decrease) in cash and cash equivalents (808) (808)
Cash and cash equivalents:
Beginning of the year 1,299 1,299
--------- ---------
End of period $ 481 $ 481
========= =========
Supplemental information:
Interest paid $ 480 $ 480
========= =========
Certain prior period balances have been reclassified to conform to current year
presentation.
F-50
NOTE 6 - INVENTORIES
Inventories are comprised of the following at March 31:
2005 2004
Hammer bit inventory
Finished goods $ 547 $ --
Work in process 291 --
Raw materials 391 --
------ -----
Total hammer bit inventory $1,229 $ --
Hammer inventory 465 --
Chemical inventory 202 --
--
Coil tubing and related inventory 568 --
------ -----
Total inventory $2,464 $ --
====== =====
F-51
NOTE 7 - DEBT
The long-term debt of the Company and its subsidiaries as of March 31, 2005
consists of the following:
March 31,
(in thousands)
2005
--------------
Debt of Allis-Chalmers Energy
-----------------------------
Revolving line of credit 4,967
Bank term loan 5,722
Capital expenditure and acquisition line 793
Notes payable to former directors 96
Debt of Jens'
-------------
Subordinated seller note 4,000
Note payable under non-compete agreement 453
Bank term loan 223
Equipment installment note 307
Real estate loan 553
Debt of Strata
--------------
Vendor financing 1,164
Debt of Safco
-------------
Note payable under non-compete agreement 150
Debt of Downhole
----------------
Vehicle installment note 11
Notes payable to a former shareholders 22
Note payable to insurance company 106
Debt of Mountain Air
--------------------
Term loan 185
Seller note 500
Debt of AirComp
---------------
Revolving line of credit 1,639
Bank term loan 6,480
Delayed draw term loan 670
Subordinated note payable to M-I LLC 4,818
-----------
Total debt $ 32,859
Less: short-term debt and current maturities 4,109
-----------
Long-term debt obligations $ 28,750
===========
As of March 31, 2005 the Company's debt was approximately $32.9 million.
On December 7, 2004, the Company entered into an amended and restated credit
agreement which consolidated and increased various credit facilities previously
maintained by the Company and two of its subsidiaries, Jens' and Strata. The
credit agreement governing the facilities was entered into jointly by
Allis-Chalmers, Jens', Strata, and Safco, and is guaranteed by our MCA and
OilQuip subsidiaries. The amended credit facilities include:
o A $10.0 million revolving line of credit. Borrowings are subject
to a borrowing base calculated as 85% of eligible accounts
receivables, as defined. Outstanding borrowings under this line of
credit were $5.0 million as of March 31, 2005.
F-52
o A term loan with a principal balance of $5.7 million payable in
monthly payments of principal of $105,583 per month. Prepayments
are also required in an amount equal to 20% of our collections
from Matyep in Mexico.
o A $6.0 million capital expenditure and acquisition line of credit.
Borrowings under this facility are payable monthly over four years
beginning in January 2006. Availability of this capital
expenditure term loan facility is subject to security acceptable
to the lender in the form of equipment or other acquired
collateral. The outstanding principal balance was $793,000 as of
March 31, 2005.
The credit facilities mature on December 31, 2008 and are secured by liens on
substantially all of the Company's assets. The agreement governing these credit
facilities contains customary events of default and financial covenants. It also
limits the Company's ability to incur additional indebtedness, make capital
expenditures, pay dividends or make other distributions, create liens, and sell
assets. Interest accrues at an adjustable rate based on the prime rate. The
interest rate was 6.81% as of March 31, 2005. There is a 0.5% per annum fee on
the undrawn portion of the revolving line of credit and the capital expenditure
line.
Jens' has a subordinated note payable to Jens Mortensen, the seller of Jens' and
a director of the Company, in the amount of $4.0 million with a fixed interest
rate of 7.5%. Interest is payable quarterly and the final maturity of the note
is January 31, 2006. In connection with the purchase of Jens', the Company
agreed to pay a total of $1.2 million to Mr. Mortensen in exchange for a
non-compete agreement. Monthly payments of $20,576 are due under this agreement
through January 31, 2007. As of March 31, 2005, the remaining balance was
approximately $453,000, including $247,000 classified as short-term. The note is
subordinated to the rights of the Company's bank lenders.
Jens' also has several small equipment financings and a real estate loan which
in the aggregate total $778,000 as of March 31, 2005. First, Jens' has two bank
term loans aggregating $ 223,000 which accrue interest at an adjustable rate
based on the prime rate (7.25% at March 31, 2005) and which require monthly
payments of $13,000 plus accrued interest. The maturity date of one of the
loans, with a balance of $177,000, is September 17, 2006, while the second loan,
with a balance of $48,000, matures January 12, 2007. Jens also has a five-year
equipment financing term loan with a principal balance of $307,000 at March 31,
2005. The loan is payable in monthly installments of principal and interest
equal to $6,449 per month through December 2009. Finally, Jens' has a real
estate term loan which is payable in equal monthly installments of $4,344 with
the remaining outstanding balance due on January 1, 2010. The interest rate
floats based on the prime rate. The outstanding principal balance was $553,000
at March 31, 2005.
Strata, the Company's directional drilling subsidiary, entered into a short-term
vendor financing agreement with a major supplier of downhole drill motors. The
agreement consists of an extension of amounts due to the supplier for motor
rentals, lease and repair costs. As of March 31, 2005, the outstanding balance
was $1.2 million. Payment of interest is due monthly and principal payments of
$582,000 are due in each of April 2005 and December 2005. The interest rate is
fixed at 8.0%.
In connection with the purchase of Safco, the Company agreed to pay a total of
$150,000 to the sellers in exchange for a non-compete agreement. The Company is
required to make yearly payments of $50,000 through September 30, 2007. As of
March 31, 2005, the balance due was $150,000.
Downhole has notes payable to two former shareholders totaling $22,000. Downhole
also has a vehicle installment note. The note is payable over 10 months at
$1,137 per month without interest. At March 31, 2005, the balance due was
$11,371.
AirComp has the following credit facilities:
o A $3.5 million bank line of credit of which $1.6 million was
outstanding at March 31, 2005. Interest accrues at an adjustable
rate based on the prime rate. The average interest rate was 7.66%
as of March 31, 2005. The Company pays a 0.5% per annum fee on the
undrawn portion. Borrowings under the line of credit are subject
to a borrowing base consisting of 80% of eligible accounts
receivable.
F-53
o A term loan with a remaining principal balance of $6.5 million
that accrues interest at an adjustable rate based on either the
London Interbank Offered Rate ("LIBOR") or the prime rate. The
average interest rate was 6.41% as of March 31, 2005. Principal
payments of $286,000 are due quarterly, plus interest, with a
final maturity date of June 27, 2007.
o A "delayed draw" term loan facility in the amount of $1.5 million
to be used for capital expenditures. Interest accrues at an
adjustable, adjustable rate based on either the LIBOR or the prime
rate. Quarterly principal payments commence on March 31, 2006 in
an amount equal to 5.0% of the outstanding balance as of December
31, 2005, with a final maturity of June 27, 2007. The outstanding
principal balance was $670,000 as of March 31, 2005.
The AirComp credit facilities are secured by liens on substantially all of
AirComp's assets. The agreement governing these credit facilities contains
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. Allis-Chalmers and Mountain Compressed Air guarantee 55%
of the obligations of AirComp under these facilities.
AirComp also has 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. At March 31, 2005, $441,000 of
interest was included in accrued interest. We are not liable for the obligations
of AirComp under this note.
In 2000 the Company compensated directors, including current directors
Nederlander and Toboroff, who served on the board of directors from 1989 to
March 31, 1999 without compensation by issuing promissory notes totaling
$325,000. The notes accrued interest at the rate of 5.0% per annum. The notes
matured on March 31, 2005, and the Company is in the process of locating and
paying the holders of these notes. As of March 31, 2005, the notes totaling
$96,300, including accrued interest remained outstanding.
As part of the acquisition of Mountain Air in 2001, the Company issued a note to
the sellers of Mountain Air in the original amount of $2.2 million accruing
interest at an interest rate of 5.75% per annum. The note was reduced to $1.5
million as a result of the settlement of a legal action against the sellers in
2003. In March 2005, the Company reached an agreement with the sellers and
holders of the note as a result of an action brought against the Company by the
sellers. Under the terms of the agreement, the Company has paid to the plaintiff
$1.0 million in cash, and agreed to pay an additional $350,000 on June 1, 2006,
and an additional $150,000 on June 1, 2007, in settlement of all claims. (See
Note 11 - Legal Matters). Mountain Air also has a term loan in the amount of
$185,000 at March 31, 2005 accruing interest of 5.0% per annum. Principal and
interest of $5,039 are payable monthly with a final maturity date of June 30,
2008.
The Company's Chief Executive Officer and Chairman, Munawar H. Hidayatallah is a
personal guarantor of the Company's debt consisting of the Jens' $4.0 million
subordinated seller note. The Company pays Mr. Hidayatallah an annual guarantee
fee equal to one-quarter of one percent of the total amount of the debt
guaranteed by Mr. Hidayatallah. These fees aggregated $3,625 during the three
months ended March 31, 2005.
NOTE 8 - STOCKHOLDERS' EQUITY
As of January 1, 2005, we executed a business development agreement with CTTV
Investments LLC, ("CTTV"), an affiliate of ChevronTexaco Inc., whereby we issued
20,000 shares of our common stock to CTTV, and further agreed to issue up to an
additional 60,000 shares to CTTV contingent upon our subsidiaries receiving
certain levels of revenues, in 2005, from ChevronTexaco and its affiliates. CTTV
was a minority owner of Downhole.
F-54
NOTE 9 - REVERSE STOCK SPLIT
The Company effected a reverse stock split on June 10, 2004. As a result of the
reverse stock split, every five shares of the Company's common stock was
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 6,070 to
approximately 2,140. All share and related amounts presented have been
retroactively adjusted for the stock split.
NOTE 10 - SEGMENT INFORMATION
At March 31, 2005, the Company had four operating segments including Casing and
Tubing Services (Jens'), Directional Drilling Services (Strata) Compressed Air
Drilling Services (AirComp) and Other Services (Safco and Downhole). All of the
segments provide services to the energy industry. 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 quarters ended March 31, 2005 and March 31, 2004 (in thousands):
QUARTER ENDED MARCH 31,
2005 2004
------------- -------------
(RESTATED)
REVENUES:
Casing services $ 3,560 $ 1,939
Directional drilling services 9,901 5,253
Compressed air drilling services 4,181 2,469
Other services 1,692 --
------------- -------------
Total revenues $ 19,334 $ 9,661
============= =============
OPERATING INCOME (LOSS):
Casing services $ 1,327 $ 442
Directional drilling services 1,878 662
Compressed air drilling services 527 255
Other services (119) --
General corporate (1,366) (329)
------------- -------------
Total income/ (loss) from operations $ 2,247 $ 1,030
============= =============
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 440 $ 361
Directional drilling services 150 101
Compressed air drilling services 448 351
Other services 224 --
General corporate 46 25
------------- -------------
Total depreciation and amortization expense $ 1,308 $ 838
============= =============
INTEREST EXPENSE:
Casing services $ 99 $ 165
Directional drilling services 22 75
Compressed air drilling services 231 159
Other services 1 --
General corporate 168 170
------------- -------------
Total interest expense $ 521 $ 569
============= =============
CAPITAL EXPENDITURES:
Casing services $ 1,640 $ 379
Directional drilling services 263 705
Compressed air drilling services 779 326
Other services 37 --
General corporate 9 1
------------- -------------
Total capital expenditures $ 2,728 $ 1,411
============= =============
F-55
GOODWILL:
Casing services $ 3,673 $ --
Directional drilling services 4,168 4,168
Compressed air drilling services 3,510 3,493
Other services 425 --
General corporate -- --
------------- -------------
Total Goodwill $ 11,776 $ 7,661
============= =============
ASSETS:
Casing services $ 23,406 $ 17,159
Directional drilling services 14,811 11,459
Compressed air drilling services 29,265 23,046
Other services 7,186 --
General corporate 9,708 1,351
------------- -------------
Total assets $ 84,376 $ 53,015
============= =============
REVENUES:
United States $ 17,561 $ 8,632
International 1,773 1,029
------------- -------------
TOTAL $ 19,334 $ 9,661
============= =============
NOTE 11 - LEGAL MATTERS
The Company is named from time to time in legal proceedings related to the
Company's activities prior to its bankruptcy in 1988; however, the Company
believes that it was discharged from liability for all such claims in the
bankruptcy and believes the likelihood of a material loss relating to any such
legal proceeding is remote.
At December 31, 2004, Mountain Compressed Air, Inc. was a defendant in an action
brought in April 2004 in the District Court of Mesa County, Colorado, by the
former owner of Mountain Air Drilling Service Company, Inc. from whom Mountain
Compressed Air, Inc. acquired assets in 2001. The plaintiff sought to accelerate
payment of the note issued in connection with the acquisition and sought $1.9
million in damages (representing principal and interest due under the note), on
the basis that Mountain Compressed Air failed to provide financial statements
required by the note. The Company raised several defenses to the plaintiff's
claim. In March 2005, the Company reached an agreement with the plaintiff to
settle the action and agreed to pay to the plaintiff $1.0 million in cash, and
to pay to the plaintiff an additional $350,000 on June 1, 2006, and an
additional $150,000 on June 1, 2007, in settlement of all amounts due under the
promissory note and all other claims. The $1.0 million cash payment was made on
April 1, 2005.
The Company is involved in various other legal proceedings in the ordinary
course of business. The legal proceedings are at different stages; however, the
Company believes that the likelihood of material loss relating to any such legal
proceeding is remote.
NOTE 12 - SUBSEQUENT EVENTS
On April 1, 2005, the Company acquired 100% of the outstanding stock of Delta
Rental Service, Inc. ("Delta") for $4.6 million in cash and 223,114 shares of
the Company's common stock and two promissory notes totaling $350,000. Delta,
located in Lafayette, Louisiana, is a rental tool company providing specialty
rental items to the oil and gas industry such as spiral heavy weight drill pipe,
test plugs used to test blow-out preventors, well head retrieval tools, spacer
spools and assorted handling tools. For the year ended December 31, 2004, Delta
had revenues of $3.3 million.
On April 4, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to extend the final maturity of its credit facilities for one year to
December 31, 2008, obtain the lender's consent for the Delta acquisition,
include the Company's Delta and Downhole subsidiaries as parties to the credit
agreement, and provide for increased availability under the $10.0 million
revolving line of credit and the $6.0 million capital expenditure and
acquisition line of credit based on the receivables and assets of Delta and
Downhole.
F-56
Additionally, the amendment documented the lender's consent to the $1.5 million
settlement with the former owners of Mountain Air Drilling Service and to the
prepayment of the $4.0 million Jens' subordinated seller note by an amount not
to exceed $397,000.
As of May 1, 2005, the Company acquired 100% of the outstanding capital stock of
Capcoil Tubing Services, Inc. ("Capcoil") for $2.7 million, 168,161 shares of
the Company's common stock and the payment or assumption of approximately $1.3
million of debt. Capcoil, located in Kilgore, Texas, is engaged in downhole well
servicing by providing coil tubing services to enhance production from existing
wells. Capcoil had revenues of $5.8 million for the year ended December 31,
2004.
On May 2, 2005, the Company amended its December 7, 2004 credit agreement with
its lender to obtain its consent to the Capcoil acquisition, include Capcoil as
a party to the credit agreement and increase the availability under the $10.0
million revolving line of credit and the $6.0 million capital expenditure line
of credit based on the receivables and other assets of Capcoil.
F-57
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Diamond Air Drilling Services, Inc.
We have audited the accompanying balance sheet of Diamond Air Drilling Services,
Inc. (a Texas S-Corporation) (the Company) as of July 31 2004, and December 31,
2003 and 2002 and the related statements of income, stockholders' equity, and
cash flows for the seven months ended July 31, 2004 and the years ended December
31, 2003 and 2002. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our report dated September 14, 2004, we expressed an opinion that, except for
the effects of such adjustments, if any, might have been determined to be
necessary had we been able to observe the physical inventories taken as of
December 31, 2003, 2002 and 2001, the financial statements referred to in the
first paragraph present fairly, in all material respects, the financial
position, results of operations and cash flows in conformity with accounting
principals generally accepted in the United States America. Subsequently, the
Company has provided us additional information regarding the prior years
inventories and we were able to satisfy ourselves about the inventory quantities
and values using alternative procedures. Accordingly, our present opinion on the
financial statements referred to in the first paragraph, as presented herein, is
different from that expressed in our previous report.
In our opinion the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Diamond Air
Drilling Services, Inc. as of July 31, 2004 and December 31, 2003 and 2002, and
the results of its operations and its cash flows for the seven months ended July
31, 2004 and the years ended December 31, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States of America
The Company and its affiliate, Marquis Bit Co., LLC, are controlled by common
ownership who have the ability to influence the volume and price of business
done between each company. As discussed in Note 2, the Company and its affiliate
have engaged in significant transactions with each other. We have audited the
financial statements of Marquis Bit Co., LLC under a separate report dated
January 12, 2005.
/s/ Accounting & Consulting Group, LLP
--------------------------------------
Accounting & Consulting Group, LLP
Carlsbad, New Mexico
January 12, 2005
F-58
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Of Diamond Air Drilling Services, Inc.
We have audited the accompanying balance sheets of Diamond Air Drilling
Services, Inc. (a Texas S-Corporation) (the Company) as of July 31, 2004, and
December 31, 2003 and 2002 and the related statements of income, members equity,
and cash flows for the seven months ended July 31, 2004, the years ended
December 31, 2003 and 2002. 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
We did not observe the taking of the work in process inventory as of December
31, 2003 and 2002 and 2001 (states at $1,146,070 and $344,948, as of December
31, 2003 and 2002, respectively), since those dates were prior to the time we
were initially engaged as auditors for the Company. We were unable to satisfy
ourselves about the work in process quantities by other auditing procedures.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to observe the physical
inventories taken as of December 31, 2003 and 2002, the financial statements
referred to in the first paragraph present fairly, in all material respects, the
financial position of Diamond Air Drilling Services, Inc. as of July 31, 2004
and December 31, 2003 and 2002 and the results of the potations and its cash
flows for the seven months ended July 31, 2004 and the years ended December 31,
2003 and 2002 in conformity with accounting principles generally accepted in the
United States of America.
The Company and its affiliate, Marquis Bit Co., LLC, are controlled by common
ownership who have the ability to influence the volume and price of business
done between each company. As discussed in Note 2, the Company and its affiliate
have engaged in significant transactions with each other. We have audited the
financial statements of Marquis Bit Co., LLC under a separate report dated
September 14, 2004.
/s/ Accounting & Consulting Group, LLP
--------------------------------------
Accounting & Consulting Group, LLP
Carlsbad, New Mexico
September 14, 2004
F-59
DIAMOND AIR DRILLING SERVICES, INC.
BALANCE SHEETS
JULY 31, 2004, DECEMBER 31, 2003 AND 2002
July 31, December 31, December 31,
2004 2003 2002
------------- ------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 123,171 $ 38,566 $ 129,612
Accounts receivable (Note 3) 826,198 704,466 547,332
Unbilled receivables 75,809 -- 3,518
Related party receivables (Note 2) 85,636 153,981 197,859
Inventories (Note 4) 1,712,465 1,146,070 344,948
Prepaid expenses 10,160 16,300 9,629
------------- ------------- -------------
TOTAL CURRENT ASSETS 2,833,439 2,059,383 1,232,898
------------- ------------- -------------
Related party receivables (Note 2) 182,844 234,607 317,003
Property, Plant and Equipment, at cost (Note 5) 295,867 245,673 223,217
Other Assets (Note 12) 24,885 31,699 27,036
------------- ------------- -------------
TOTAL ASSETS $ 3,337,035 $ 2,571,362 $ 1,800,154
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 341,184 $ 171,561 $ 164,535
Current maturities of capital lease obligations 3,447 -- --
Accounts payable 635,418 602,918 517,471
Accrued expenses 97,366 197,588 269,489
Related party payables (Note 2) 687,559 427,465 48,694
Loans from related parties (Note 2) 768,281 667,137 209,000
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 2,533,255 2,066,669 1,209,189
------------- ------------- -------------
Long-Term Debt (Note 6) 312,085 309,612 410,524
Capital lease obligations (Note 5) 14,873 -- --
Commitments and Contingencies -- -- --
------------- ------------- -------------
TOTAL LIABILITIES 2,860,213 2,376,281 1,619,713
------------- ------------- -------------
STOCKHOLDERS' EQUITY
Common stock, par value $1
1,000 shares issued and outstanding 1,000 1,000 1,000
Paid-in capital 2,370 2,370 2,370
Retained earnings 473,452 191,711 177,071
------------- ------------- -------------
TOTAL STOCKHOLDERS' EQUITY 476,822 195,081 180,441
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,337,035 $ 2,571,362 $ 1,800,154
============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-60
DIAMOND AIR DRILLING SERVICES, INC.
STATEMENTS OF INCOME
FOR THE SEVEN MONTHS ENDED JULY 31, 2004
AND YEARS ENDED DECEMBER 31, 2003 AND 2002
July 31, December 31, December 31,
2004 2003 2002
------------ ------------ ------------
NET SALES (Note 8) $ 3,984,512 $ 5,470,208 $ 4,073,653
------------ ------------ ------------
Drilling expenses 2,803,729 4,592,677 3,394,507
Selling, general, and administrative 390,690 620,776 492,067
Depreciation and amortization 91,902 99,730 102,648
Interest expense 34,156 48,279 16,217
------------ ------------ ------------
Total Costs and Expenses 3,320,477 5,361,462 4,005,439
------------ ------------ ------------
Operating income 664,035 108,746 68,214
------------ ------------ ------------
Other income
Gain (loss) on sale of assets (7,104) 9,841 15,906
Interest income 11,008 23,053 5,232
------------ ------------ ------------
NET INCOME $ 667,939 $ 141,640 $ 89,352
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-61
DIAMOND AIR DRILLING SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SEVEN MONTHS ENDED JULY 31, 2004
THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Paid-in Retained
Stock Capital Earnings Total
--------- --------- --------- ---------
Balance, January 1, 2002 $ 1,000 $ 2,370 $ 485,719 $ 489,089
Net Income -- -- 89,352 89,352
Dividends paid -- -- (398,000) (398,000)
--------- --------- --------- ---------
Balance, December 31, 2002 1,000 2,370 177,071 180,441
Net Income -- -- 141,640 141,640
Dividends paid -- -- (127,000) (127,000)
--------- --------- --------- ---------
Balance, December 31, 2003 1,000 2,370 191,711 195,081
Net Income -- -- 667,939 667,939
Dividends paid -- -- (386,198) (386,198)
--------- --------- --------- ---------
Balance, July 31, 2004 $ 1,000 $ 2,370 $ 473,452 $ 476,822
========= ========= ========= =========
F-62
DIAMOND AIR DRILLING SERVICES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 2004 AND
THE YEARS ENDED DECEMBER 31, 2003 AND 2002
July 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 667,939 $ 141,640 $ 89,352
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 91,902 99,730 102,648
Gain (loss) on sale of property, plant, and
equipment (7,104) 9,841 15,906
Change in operating assets and liabilities:
Accounts receivable (197,541) (153,616) (165,294)
Inventory (566,395) (801,122) (47,471)
Prepaid expenses 6,140 (6,671) (302)
Other noncurrent assets 6,814 (4,663) (13,780)
Accounts payable 292,594 464,218 198,954
Accrued payroll and employee benefits (100,224) (71,899) 162,920
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 194,125 (322,542) 342,933
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment from loans to related parties 120,108 128,896 202,450
Loans made to related parties -- (2,622) (430,370)
Proceeds from sale of property, plant, and
equipment -- 30,494 53,804
Capital expenditures on property, plant, and
equipment (115,314) (162,521) (140,047)
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 4,794 (5,753) (314,163)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (188,522) (219,947) (111,897)
Proceeds from issuance of long-term debt 360,618 126,061 367,788
Repayment of short-term debt (200,000) (200,000) --
Proceeds from issuance of short-term debt 200,000 200,000 --
Repayment of capital lease obligations (1,358) -- --
Repayment of loans from related parties (162,667) (302,494) (6,000)
Proceeds from loans from related parties 263,813 760,629 215,000
Payment of dividend distributions to stockholders (386,198) (127,000) (398,000)
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (114,314) 237,249 66,891
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 84,605 (91,046) 95,661
Cash and Cash Equivalents at Beginning of Year 38,566 129,612 33,951
-------------- -------------- --------------
Cash and Cash Equivalents at End of Year $ 123,171 $ 38,566 $ 129,612
============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Payments made directly to Marquis Bit Co., LLC
from a loan obtained by the Company $ -- $ -- $ 102,565
============== ============== =============
The accompanying notes are an integral part of these financial statements.
F-63
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Diamond Air Drilling Services, Inc. (the Company)
provides air drilling services to the oil & gas drilling industry
across the Western United States. The Company employs a unique air
drilling methodology, utilizing air hammers and bits to effectively and
efficiently drill wells. The Company operates three offices in Texas,
New Mexico, and Oklahoma.
Effective December 2002, the Company entered into an agreement with
Marquis Bit Co, LLC to manufacture drill bits for the Company. The
Company pays Marquis Bit Co, LLC a set fee to fabricate the drill bits
using raw materials purchased by the Company.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash
balances and highly liquid investments with an initial maturity of
three months or less. The Company places its temporary cash investments
with a high credit quality financial institution. At times such
deposits may be in excess of the Federal Deposit Insurance Corporation
(FDIC) insurance limit.
TRADE ACCOUNTS RECEIVABLE. Trade receivables and loans receivable are
carried at their estimated collectible amounts. Trade credit is
generally extended on a short-term basis; thus trade receivables do not
bear interest. Trade accounts receivable are periodically evaluated for
collectibility based on past credit history with customers and their
current financial condition.
UNBILLED RECEIVABLES. Unbilled receivables represent revenue earned in
the current period but not billed to the customer until future dates,
usually within one month.
INVENTORY. Inventories consist of air hammers, drill bits, drill bits
in process, and raw materials and are valued at the lower of cost or
market using the specific identification method.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
recorded at cost less depreciation and amortization. Depreciation is
provided over the estimated useful life of each class of depreciable
asset and is computed using the double declining balance method.
Equipment under capital lease obligations is amortized on the double
declining balance method over the shorter period of the lease term or
the estimated useful life of the equipment. Such amortization is
included in depreciation and amortization in the financial statements.
Estimated useful lives for equipment and transportation equipment range
from three to seven years. Betterments and large renewals which extend
the life of the asset are capitalized whereas maintenance and repairs
and small renewals are expensed as incurred.
REVENUE RECOGNITION. Drilling services and equipment are provided to
its customers at per day and per job contractual rates. Drilling
related revenue is recognized in the financial statements as work
progresses and when collectibility is reasonably assured. Net sales are
arrived at by deducting discounts, and sales taxes from gross sales.
F-64
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ADVERTISING COSTS. Advertising costs are expensed as incurred.
Advertising costs totaled $9,032 for the seven months ended July, 31,
2004 and $5,055, and $4,926 for the years ended December 31, 2003 and
2002, respectively.
INCOME TAXES. The Company has elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those provisions,
the Company does not pay federal corporate income taxes on its taxable
income. Instead, the stockholders are liable for individual federal
income taxes on their respective shares of the Company's taxable income
in their individual income tax returns. Accordingly, no provision or
liability for income taxes has been included in the financial
statements.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual
results could differ from those estimates.
NOTE 2: RELATED-PARTY TRANSACTIONS
The principal shareholders of the Company and entities under their
control periodically loan money to the Company for operations, or
borrow money from the Company to fund the operations of other related
entities. A summary of amounts due from related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Note receivable from Marquis Bit Co,
LLC, variable interest rate (currently
7.25%) payable in monthly installments
of $7,315 maturing September 2005,
unsecured $ 268,480 $ 317,002 $ 395,684
Note receivables from stockholders,
due upon demand, bearing interest
of 0%, unsecured -- 64,148 111,740
Note receivables from Marquis Bit Co,
LLC, due upon demand, bearing
interest of 0%, unsecured -- 7,438 7,438
------------- ------------- -------------
Subtotal 268,480 388,588 514,862
Less current portion 85,636 153,981 197,859
------------- ------------- -------------
Related party receivables $ 182,844 $ 234,607 $ 317,003
============= ============= =============
F-65
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: RELATED-PARTY TRANSACTIONS (continued)
A summary of accounts payable due to related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Trade accounts payable to Marquis Bit
Co, LLC for fabrication of drill bits $ 687,559 $ 427,465 $ 48,694
------------- ------------- -------------
Related party payables $ 687,559 $ 427,465 $ 48,694
============= ============= =============
A summary of loans due to related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Notes payable to stockholders, due on
demand, unsecured, bearing an
interest rate of 0% $ 437,342 $ 220,696 $ 99,000
Loan payable to Marquis Bit Co, LLC,
due on demand, unsecured, bearing
an interest rate of 0% 257,439 257,439 --
Loan payable to various related
entities (related due to certain
Company stockholders owning
majority interest in
entities), due on demand,
unsecured bearing an interest
rate of 0% 73,500 189,000 110,000
------------- ------------- -------------
$ 768,281 $ 667,135 $ 209,000
============= ============= =============
A summary of related party transactions for the seven months ended July
31, 2004 and years ended December 31, 2003 and 2002 follows:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Amount paid, or accrued, to Marquis Bit
Co, LLC for the fabrication of
drill bits. $ 680,573 $ 1,271,242 $ 62,472
============= ============= =============
F-66
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3: ACCOUNTS RECEIVABLE
At July 31, 2004, December 31, 2003 and 2002, accounts receivable are
comprised of the following:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Accounts receivable $ 831,086 $ 713,644 $ 550,161
Allowance for doubtful accounts (4,888) (9,178) (2,829)
------------- ------------- -------------
Total $ 826,198 $ 704,466 $ 547,332
============= ============= =============
NOTE 4: INVENTORIES
At July 31, 2004, December 31, 2003 and 2002, inventories are comprised
of the following:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Air hammers $ 376,627 $ 346,321 $ 292,719
Finished drill bits 757,040 607,478 52,229
Drill bits in process 452,018 151,563 --
Raw materials 126,780 40,708 --
------------- ------------- -------------
Total $ 1,712,465 $ 1,146,070 $ 344,948
============= ============= =============
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
At July 31, 2004, December 31, 2003 and 2002, property, plant, and
equipment are comprised of the following:
December 31,
------------------------------
July 31, 2004 2003 2002
------------- ------------- -------------
Equipment $ 99,721 $ 95,995 $ 58,956
Transportation equipment 427,714 395,331 336,304
Equipment under capital lease 19,678 -- --
------------- ------------- -------------
Total 547,113 491,326 395,260
Less: accumulated depreciation
Accumulated depreciation 247,966 245,653 172,043
Accumulated amortization 3,280 -- --
------------- ------------- -------------
Net property, plant, and equipment $ 295,867 $ 245,673 $ 223,217
============= ============= =============
F-67
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5: PROPERTY, PLANT AND EQUIPMENT (continued)
Property, plant, and equipment include a capitalized lease. The
following schedule, by year, of the future minimum payments under these
leases, together with the present value of the net minimum payments as
of July 31, 2004:
Amount
----------
Year ending July 31, $ --
2005 4,788
2006 4,788
2007 4,788
2008 4,788
2009 and thereafter 2,793
----------
Total minimum lease payments 21,945
Less amount representing interest 3,625
----------
Total present value of minimum lease payments 18,320
Less current portion of such obligations 3,447
----------
Long-term obligations $ 14,873
==========
NOTE 6: LONG TERM DEBT AND RELATED MATTERS
Long-term debt at July 31, 2004, and December 31, 2003 and 2002,
consist of the following:
December 31,
------------------------------
July 31, 2004 2003 2002
-------------- ------------- -------------
Various notes payable to banks and
financing companies for transportation
equipment, due in installments through
February, 2010 at fixed interest rates
ranging from 0.0% to 10.95%,
collateralized by transportation equipment $ 209,788 $ 147,312 $ 173,675
Variable interest rate (currently 7.25%)
note payable, due in monthly installments
of $7,315 including interest through
September 2005, collateralized by
equipment (including equipment currently
owned by Marquis Bit Co, LLC) with
depreciated costs of $261,783, inventory,
and accounts and notes receivable. This
note is personally guaranteed by a
stockholder of the Company 249,792 290,577 356,719
F-68
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: LONG TERM DEBT AND RELATED MATTERS (continued)
December 31,
------------------------------
July 31, 2004 2003 2002
-------------- ------------- -------------
4.0% note payable, due in monthly
installments of $1,181 including interest,
through November 2005, collateralized by
accounts receivable and equipment
(including equipment currently owned by
Marquis Bit Co, LLC) with depreciated
costs of $26,406. This note is personally
guaranteed by a shareholder of the Company 18,689 26,425 38,965
Variable interest rate (Carlsbad National
Bank base rate) line of credit agreement,
$200,000 limit, expiring June 2005,
collateralized by accounts receivable,
equipment, and inventory 175,000 -- --
Miscellaneous notes payable, varying interest
rates, due various dates -- 16,859 5,700
-------------- ------------- -------------
Subtotal 691,468 483,176 577,061
Less current maturities 341,184 171,561 164,535
-------------- ------------- -------------
Total $ 350,284 $ 311,615 $412,526,000
============== ============= =============
The maturities of long-term debt for each of the succeeding five years
subsequent to July 31, 2004, are as follows: 2005 - $341,184; 2006 -
$251,410; 2007 - $42,471; 2008 - $17,095; and 2009 and beyond - $1,109.
NOTE 7: STOCKHOLDERS' EQUITY
At July 31, 2004, December 31, 2003 and 2002, the number of authorized
and issued common stock and related par value and dividends paid are as
follows:
December 31,
------------------------------
July 31, 2004 2003 2002
-------------- ------------- -------------
Common stock authorized 1,000,000 1,000,000 1,000,000
Common stock issued 1,000 1,000 1,000
Common stock outstanding 1,000 1,000 1,000
Common stock, per share par value $ 1.00 $ 1.00 $ 1.00
Cash dividends paid on common stock $ 386,198 $ 127,000 $ 398,000
F-69
DIAMOND AIR DRILLING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8: DEPENDENCE ON KEY CUSTOMERS
DEPENDENCE ON KEY CUSTOMERS. For the seven months ended July 31, 2004,
the three largest customers accounted for 48% of sales. For the Year
ended December 31, 2003, the three largest customers accounted for 45%
of sales. For the Year ended December 31, 2002, the two largest
customers accounted for 37% of sales.
NOTE 9: EMPLOYEE BENEFIT PLANS
The company has a retirement savings Simple plan in which substantially
all employees may participate. The company's expense for the plan
was $10,413 for the seven months ended July 31, 2004 and $18,305 and
$16,701 for the years ended December 31, 2003 and 2002, respectively.
NOTE 10: SUBSEQUENT EVENT
Effective October 31, 2004 the Company sold substantially all its
assets realizing a gain of approximately $2.1 million and ceased
operations. As of December 31, 2004 the Company was liquidated by
paying all liabilities and distributing the remaining assets to its
shareholders.
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment of $19,678, $0, and $0 during the seven
months ended July 31, 2004, and the years ended December 31, 2003 and
2002, respectively, under capital lease obligations.
NOTE 12. PATENT PENDING
Included in other assets at 7/31/04 are $15,389 of costs associated
with obtaining a patent for special bit retainers fabricated for the
Company by Marquis Bit Co., LLC. The patent is currently pending.
F-70
INDEPENDENT AUDITOR'S REPORT
To the Members
of Marquis Bit Co., LLC
We have audited the accompanying balance sheets of Marquis Bit Co., LLC (a New
Mexico Limited Liability Company) (the Company) as of July 31 2004, and December
31, 2003 and 2002 and the related statements of income, members' equity, and
cash flows for the seven months ended July 31, 2004, the year ended December 31,
2003 and the period from inception, October 1, 2002 through December 31, 2002.
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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.
In our report dated September 14, 2004, we expressed an opinion that, except for
the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to observe the work in process inventory taken as of
December 31, 2003, the financial statements referred to in first paragraph
present fairly, in all material respects, the financial position, results of
operations and cash flows in conformity with accounting principals generally
accepted in the United States of America. Subsequently, the Company has provided
us additional information regarding the work in process inventories as of
December 31, 2003 and also 2002 and we were able to satisfy ourselves about the
unbilled receivables related to this work in process using alternative
procedures. Accordingly, our present opinion on the financial statements
referred to in the first paragraph, as presented herein, is different from that
expressed in our previous report.
In our opinion the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Marquis Bit
Co., LLC as of July 31, 2004 and December 31, 2003 and 2002, and the results of
its operations and its cash flows for the seven months ended July 31, 2004 and
the year ended December 31, 2003 and the period from inception, October 1, 2002
through December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
The Company and its affiliate, Diamond Air Drilling Services, Inc, are
controlled by common ownership who have the ability to influence the volume and
price of business done between each company. As discussed in Note 2, the Company
and its affiliate have engaged in significant transactions with each other. We
have audited the financial statements of Diamond Air Drilling Services, Inc.
under a separate report dated January 12, 2005.
/s/ Accounting & Consulting Group, LLP
--------------------------------------
Accounting & Consulting Group, LLP
Carlsbad, New Mexico,
January 12, 2005
F-71
INDEPENDENT AUDITOR'S REPORT
To the Members
Of Marquis Bit Co., LLC
We have audited the accompanying balance sheets of Marquis Bit Co., LLC (a New
Mexico Limited Liability Company) as of July 31, 2004, and December 31, 2003 and
2002 and the related statements of income, members equity, and cash flows for
the seven months ended July 31, 2004, the year ended December 31, 2003 and the
period from inception, October 1, 2002 through December 31, 2002. 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
We did not observe the taking of the work in process inventory as of December
31, 2003, which directly correlates to the Company's unbilled receivables
(stated at $124,107) at that date since those dates were prior to the time we
were initially engaged as auditors for the Company. We were unable to satisfy
ourselves about the work in process quantities by other auditing procedures.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary had we been able to observe the work in
process inventory taken as of December 31, 2003, the financial statements
referred to in the first paragraph present fairly, in all material respects, the
financial position of Marquis Bit Co., LLC as of July 31, 2004 and December 31,
2003 and 2002, and the results of its operations and its cash flows for the
seven months ended July 31, 2004 and the year ended December 31, 2003 and the
period from inception, October 1, 2002 through December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
The Company and its affiliate, Diamond Air Drilling Services, Inc, are
controlled by common ownership who have the ability to influence the volume and
price of business done between each company. As discussed in Note 2, the Company
and its affiliate have engaged in significant transactions with each other. We
have audited the financial statements of Diamond Air Drilling Services, Inc.
under a separate report dated September 14, 2004.
/s/ Accounting & Consulting Group, LLP
--------------------------------------
Accounting & Consulting Group, LLP
Carlsbad, New Mexico
September 14, 2004
F-72
MARQUIS BIT CO., LLC
BALANCE SHEETS
JULY 31, 2004, DECEMBER 31, 2003 AND 2002
July 31, December 31, December 31,
2004 2003 2002
--------------- --------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 5,223 $ 1,504
Accounts receivable (Note 2) 358,368 303,358 48,694
Unbilled receivables 329,191 107,435 15,875
Related party notes receivable (Note 2) 257,439 257,439 --
Prepaid expenses 5,623 -- 3,269
--------------- --------------- ---------------
TOTAL CURRENT ASSETS 950,621 673,455 69,342
--------------- --------------- ---------------
Property, Plant and Equipment, net (Note 3) 261,783 305,472 386,704
Other Assets 1,323 1,485 1,011
--------------- --------------- ---------------
TOTAL ASSETS $ 1,213,727 $ 980,412 $ 457,057
=============== =============== ===============
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Bank overdraft $ 9,305 $ -- $ --
Accounts payable 15,890 38,640 46,854
Accrued expenses 14,597 9,076 6,580
Loans from related parties (Note 2) 114,836 125,020 122,119
--------------- --------------- ---------------
TOTAL CURRENT LIABILITIES 154,628 172,736 175,553
--------------- --------------- ---------------
Loans from Related Parties, net of current
portion (Note 2) 182,844 234,607 317,002
Commitments and Contingencies -- -- --
--------------- --------------- ---------------
TOTAL LIABILITIES 337,472 407,343 492,555
MEMBERS' EQUITY 876,255 573,069 (35,498)
--------------- --------------- ---------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,213,727 $ 980,412 $ 457,057
=============== =============== ===============
The accompanying notes are an integral part of these financial statements.
F-73
MARQUIS BIT CO., LLC
STATEMENTS OF INCOME AND MEMBERS' EQUITY
FOR THE SEVEN MONTHS ENDED JULY 31, 2004
AND YEAR ENDED DECEMBER 31, 2003 AND THE PERIOD FROM INCEPTION,
OCTOBER 1, 2002 THROUGH DECEMBER 31, 2002
July 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
SALES $ 697,245 $ 1,238,695 $ 78,347
COST OF GOODS SOLD 307,058 525,593 65,947
-------------- -------------- --------------
GROSS PROFIT 390,187 713,102 12,400
-------------- -------------- --------------
Selling, general, and administrative 33,504 67,423 35,424
Depreciation and amortization 43,689 86,232 7,242
Interest expense 11,008 23,053 5,232
-------------- -------------- --------------
Total Costs and Expenses 88,201 176,708 47,898
-------------- -------------- --------------
OPERATING INCOME (LOSS) 301,986 536,394 (35,498)
Other income 1,200 72,173 --
-------------- -------------- --------------
NET INCOME (LOSS) 303,186 608,567 (35,498)
Members' equity, beginning of period 573,069 (35,498) --
-------------- -------------- --------------
MEMBERS' EQUITY, END OF PERIOD 876,255 573,069 (35,498)
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-74
MARQUIS BIT CO., LLC
STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 2004 AND YEAR ENDED
DECEMBER 31, 2003 AND THE PERIOD FROM INCEPTION, OCTOBER 1, 2002
THROUGH DECEMBER 31, 2002
July 31, December 31, December 31,
2004 2003 2002
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 303,186 $ 608,567 $ (35,498)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 43,689 86,232 7,242
Change in operating assets and liabilities:
Accounts receivable (276,766) (346,224) (64,569)
Prepaid expenses (5,623) 3,269 (3,269)
Other assets 162 (474) (1,011)
Accounts payable (22,750) 18,794 19,846
Accrued payroll and employee benefits 5,521 2,496 6,580
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 47,419 372,660 (70,679)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to others -- (257,439) --
Capital expenditures on property, plant, and
equipment -- (32,008) (80,088)
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES -- (289,447) (80,088)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loans from related parties (120,058) (84,682) (34,259)
Proceeds from loans from related parties 58,111 5,188 186,530
Net increase in bank overdrafts 9,305 -- --
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (52,642) (79,494) 152,271
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,223) 3,719 1,504
Cash and Cash Equivalents at Beginning of Period 5,223 1,504 --
-------------- -------------- --------------
Cash and Cash Equivalents at End of Period $ -- $ 5,223 $ 1,504
============== ============== ==============
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Property and equipment acquired with
long-term debt $ -- $ -- $ 286,850
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-75
MARQUIS BIT CO., LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: Marquis Bit Co., LLC (the Company) is a manufacturing
facility located in Carlsbad, New Mexico established in October 2002
for the purpose of fabricating premium hammer bits for Diamond Air
Drilling Services, Inc. (a related party due to common ownership). The
Company charges a set fee to fabricate drill bits using raw materials
supplied by Diamond Air Drilling Services, Inc. Accordingly, the
Company carries no raw materials or work in process inventory. The
Articles of Incorporation provides that the Company is to dissolve on
February 11, 2034.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash
balances and highly liquid investments with an initial maturity of
three months or less. The Company places its temporary cash investments
with a high credit quality financial institution. At times such
deposits may be in excess of the Federal Deposit Insurance Corporation
(FDIC) insurance limit.
TRADE ACCOUNTS RECEIVABLE. Trade receivables and loans receivable are
carried at their estimated collectible amounts. Trade credit is
generally extended on a short-term basis; thus trade receivables do not
bear interest.
UNBILLED RECEIVABLES. Unbilled receivables represent fabricated bits in
process in the current period but not billed to the customer until
future dates, usually within one month.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
recorded at cost less depreciation and amortization. Depreciation is
provided over the estimated useful life of each class of depreciable
asset and is computed using the double declining balance method or the
straight line method, whichever method management believes to be
appropriate for each particular asset. Estimated useful lives for
equipment and leasehold improvements range from three to fifteen years.
Betterments and large renewals which extend the life of the asset are
capitalized whereas maintenance and repairs and small renewals are
expensed as incurred.
REVENUE RECOGNITION. Revenue is recognized in the financial statements
as work progresses and when collectibility is reasonably assured.
INCOME TAXES. As a limited liability company, the Company's taxable
income or loss is allocated to members in accordance with their
respective percentage of ownership. Therefore, no provision or
liability for income taxes has been included in the financial
statements.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles 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. Actual
results could differ from those estimates.
F-76
MARQUIS BIT CO., LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 2: RELATED-PARTY TRANSACTIONS
The members of the Company and entities under their control
periodically loan money to the Company for operations, or borrow money
from the Company to fund the operations of other related entities.
A summary of accounts receivables from related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
================================================
Trade accounts receivable from
Diamond Air Drilling Services, Inc.
(related due to common ownership) $ 358,368 $303,358 $ 48,694
Unbilled receivables from Diamond Air
Drilling Services, Inc. (related due to
common ownership) 329,191 107,435 15,875
------------------------------------------------
Total accounts receivable from
related parties $ 687,559 $410,793 $ 64,569
================================================
A summary of loans due from related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
================================================
Loan receivable from Diamond Air
Drilling Services, Inc. (related due to
common ownership), due upon demand,
bearing interest of 0%, unsecured
Entire balance considered current $ 257,439 $257,439 $ --
------------------------------------------------
F-77
MARQUIS BIT CO., LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 2: RELATED-PARTY TRANSACTIONS (continued)
A summary of loans due to related entities follows:
December 31,
------------------------------
July 31, 2004 2003 2002
================================================
Loans payable to members, due on
demand, unsecured, bearing an
interest rate of 0% $ 29,200 $ 25,188 $ 25,000
Loan payable to various related
entities (related due to certain
Company stockholders owning
majority interest in entities), due on
demand, unsecured bearing an
interest rate of 0% -- 17,437 18,437
Loan payable to Diamond Air Drilling
Services, Inc. (related due to common
ownership), variable interest rate
(currently 7.25%) payable in monthly
installments of $7,315 maturing
September 2005, unsecured 268,480 317,002 395,684
------------------------------------------------
Subtotal 297,680 359,627 439,121
Less current maturities 114,836 125,020 122,119
------------------------------------------------
Loans from related parties $ 182,844 $ 234,607 $ 317,002
================================================
The maturities of loans from related parties for each of the succeeding
five years subsequent to July 31, 2004, are as follows: 2005 -
$114,836; 2006 - $182,844; and 2007 and beyond - $0.
A summary of related party transactions for the seven months ended July
31, 2004, the year ended December 31, 2003 and the period from
inception, October 1, 2002 through December 31, 2002 follows:
December 31,
------------------------------
July 31, 2004 2003 2002
================================================
Amount received, or accrued, from
Diamond Air Drilling Services, Inc.
(related due to common ownership)
for the fabrication of drill bits. $ 697,245 $ 1,238,695 $ 78,347
================================================
F-78
MARQUIS BIT CO., LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
At July 31, 2004, December 31, 2003 and 2002, property, plant, and
equipment are comprised of the following:
December 31,
------------------------------
July 31, 2004 2003 2002
================================================
Manufacturing equipment $ 386,789 $ 386,789 $ 381,789
Computer equipment 9,942 9,942 9,942
Leasehold improvements 2,215 2,215 2,215
------------------------------------------------
Total 398,946 398,946 393,946
Less:
Accumulated depreciation 133,550 91,126 7,061
Amortization of leasehold improvements 3,613 2,348 181
------------------------------------------------
Net property, plant, and equipment $ 261,783 $ 305,472 $ 386,704
================================================
The above property, plant, and equipment is pledged as collateral for a
loan initially borrowed by Diamond Air Drilling Services, Inc. and used
to loan to the Company for equipment acquisitions. (See Note 2).
NOTE 4: DEPENDENCE ON KEY CUSTOMERS
As discussed in Note 2, the Company has been contracted by Diamond Air
Drilling Services, Inc. to fabricate bits for Diamond Air Drilling
Services, Inc. For the seven months ended July 31, 2004, the year ended
December 31, 2003 and the period from inception, October 1, 2002
through December 31, 2002, Diamond Air Drilling Services, Inc.
accounted for 100% of the Company's sales.
NOTE 5: EMPLOYEE BENEFIT PLANS
The company has a retirement savings Simple plan in which substantially
all employees may participate. The company's expense for the plan
was $2,736 for the seven months ended July 31, 2004 and $0 and $0 for
the years ended December 31, 2003 and 2002, respectively.
NOTE 6: SUBSEQUENT EVENTS
Effective October 31, 2004 the Company sold substantially all its
assets at book value and ceased operations. As of December 31, 2004
paying all liabilities and distributing the remaining assets to its
shareholders effectively liquidated the Company.
NOTE 7: RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Certain errors resulting in unbilled receivables being understated as
of 2002 and overstated as of 2003 were discovered due to additional
information being provided by the Company. The corrections of these
errors resulted in a $15,875 increase in the net income for 2002;
$32,547 decrease in net income for 2003 and $16,672 increase in net
income for 2004.
F-79
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
The Members
Downhole Injection Services, LLC
(A Texas Limited Liability Company)
We have audited the accompanying balance sheets of Downhole Injection Services,
LLC (a Texas Limited Liability Company) as of November 30, 2004 and December 31,
2003 and the related statements of operations and members' equity, and cash
flows for the eleven months and year then ended. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 opinions.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Downhole Injection Services,
LLC at November 30, 2004 and December 31, 2003, and the results of its
operations and its cash flows for the eleven months and the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ JOHNSON, MILLER & CO.
-------------------------
Midland, Texas
February 4, 2005
F-80
FINANCIAL STATEMENTS
DOWNHOLE INJECTION SERVICES, LLC
BALANCE SHEETS
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
ASSETS
2004 2003
----------- -----------
CURRENT ASSETS
Cash and cash equivalents (note A12) $ 71,881 20,064
Accounts receivable, net of allowance of $10,000 and $10,000
Customers 1,242,346 466,435
Employees -- 2,447
Inventories (note A8) 295,040 189,287
Prepaid expenses 155,626 60,263
----------- -----------
Total current assets 1,764,893 738,496
PROPERTY AND EQUIPMENT, NET (notes A8, A9 and C) 719,322 682,564
OTHER ASSETS (notes A9, A10 and D) 4,617 55,400
----------- -----------
Total assets $2,488,832 1,476,460
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable (note E) $ 757,406 159,846
Current portion of capitalized lease obligations (note F) 45,735 67,367
Accounts payable 1,002,375 572,238
Accrued expenses 105,333 78,583
Sales tax payable 21,937 9,340
Interest payable 19,827 4,314
----------- -----------
Total current liabilities 1,952,613 891,688
DEFERRED REVENUE 197,400 197,400
NOTES PAYABLE, net of current portion (note E) 17,070 103,744
CAPITALIZED LEASE OBLIGATIONS, net of current portion (note F) 66,702 --
COMMITMENTS AND CONTINGENCIES (notes G and H)
MEMBERS' EQUITY 255,047 283,628
----------- -----------
Total liabilities and members' equity $2,488,832 1,476,460
=========== ===========
The accompanying summary of accounting policies and footnotes are an integral
part of these financial statements.
F-81
DOWNHOLE INJECTION SERVICES, LLC
STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 2004
AND THE YEAR ENDED DECEMBER 31, 2003
2004 2003
------------ ------------
Sales $ 4,792,719 3,835,414
Cost of sales 3,875,646 3,050,921
------------ ------------
Gross profit 917,073 784,493
General and administrative expenses 871,927 792,603
------------ ------------
Income (loss) from operations 45,146 (8,110)
Other income (expense)
Interest income 22 403
Interest expense (73,749) (41,673)
Impairment loss on patent (note D) -- (983,278)
------------ ------------
(73,727) (1,024,548)
NET LOSS (28,581) (1,032,658)
Members' equity - beginning of period 283,628 1,316,286
------------ ------------
Members' equity - end of period $ 255,047 283,628
============ ============
The accompanying summary of accounting policies and footnotes are an integral
part of these financial statements.
F-82
DOWNHOLE INJECTION SERVICES, LLC
STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 2004
AND THE YEAR ENDED DECEMBER 31, 2003
2004 2003
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (28,581) (1,032,658)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 326,034 283,765
Impairment loss on patent -- 983,278
Change in account balances
(Increase) decrease in accounts receivable - trade (775,911) 69,523
Decrease in accounts receivable - employees 2,447 2,722
Increase in inventories (105,753) (51,145)
(Increase) decrease in prepaid expenses (95,363) 46,792
Increase (decrease) in accounts payable 430,137 (73,388)
Increase (decrease) in accrued expenses 26,750 (39,028)
Increase (decrease) in sales tax payable 12,597 (5,268)
Increase in deferred revenue -- 135,000
Increase in interest payable 15,513 4,314
------------ ------------
Net cash (used in) provided by operating activities (192,130) 323,907
------------ ------------
Cash flows provided by (used in) investing activities
Purchase of property, plant and equipment (174,305) (137,267)
------------ ------------
Net cash used in investing activities (174,305) (137,267)
------------ ------------
Cash flows provided by (used in) financing activities
Issuance of notes payable 1,090,335 --
Repayments on notes payable (579,449) (171,830)
Repayments of capital lease obligations (92,634) (119,594)
------------ ------------
Net cash provided by (used in) financing activities 418,252 (291,424)
------------ ------------
Net increase (decrease) in cash and cash equivalents 51,817 (104,784)
Cash and cash equivalents
Beginning of period 20,064 124,848
------------ ------------
End of period $ 71,881 20,064
============ ============
Supplemental disclosure of cash flow information
Interest paid $ 58,236 37,359
============ ============
Non-cash investing and financing activities:
Acquisition of property and equipment through
capital lease financing $ 137,704 --
Acquisition of Ener-Coil, L.L.C. (see note B) -- --
The accompanying summary of accounting policies and footnotes are an integral
part of these financial statements.
F-83
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. FORMATION OF COMPANY
Downhole Injection Services, LLC (the "Company") is a Texas limited liability
company, which was formed February 1, 2004 by a business combination, which has
been accounted for as a purchase. The Company is owned 60% by the former members
of Ener-Coil, L.L.C. (a Texas limited liability company) and 40% by a
multinational integrated oil company and two individuals. All of the assets and
liabilities of Ener-Coil, L.L.C. and Downhole Injection Services, LLC (an
Oklahoma limited liability company) were contributed to the Company in exchange
for the interest outlined above.
2. NATURE OF OPERATIONS
The Company is primarily engaged in the installation of coiled tubing for the
injection of chemical applications in existing oil and gas wells. These
operations are identical to those provided by the Company's predecessor. The
Company also will move existing customer tubing and repair, service, and store
customer tubing for future use. The Company's principal office is located in
Midland, Texas and services are offered from three branch offices located in
Texas.
3. PRODUCT, GEOGRAPHIC LOCATION AND CUSTOMER CONCENTRATIONS
Product and geographic statistics, as a percentage of revenues, are as follows:
2004
--------
Type of Services Rendered:
Installation of Tubing 60%
Removal and Repair of Customer
Owned Tubing 37%
Rental and Other 3%
Geographic Location of Services Rendered:
Texas 47%
Oklahoma 7%
Louisiana 16%
United Arab Emirates 3%
Other Locations 27%
4. SUPPLIER CONCENTRATION
The Company purchases substantially all of its tubing from two vendors. However,
the tubing is generally available from a variety of sources.
5. REVENUE RECOGNITION AND DEFERRED REVENUE
The Company recognizes revenue on jobs upon the completion of services
performed. Amounts which are invoiced prior to the completion of services are
treated as deferred revenue until the completion of services.
6. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE
The Company maintains an allowance for losses on trade receivable at an amount
evaluated by management as sufficient to provide for future losses.
F-84
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
7. INVENTORY
Inventory is valued at the lower of cost or market using the average cost
method.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost for purchased assets.
Depreciation and amortization expense are computed using straight-line
depreciation methods over their estimated useful lives.
Maintenance and repairs are charged to expense as incurred. Costs and related
allowances for depreciation of property and equipment sold or otherwise retired
are eliminated from the accounts and the resulting gain or loss on dispositions
are reflected in income.
9. LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of the carrying value of
its long-lived assets and identifiable intangibles and whenever events or
changes in circumstances indicate that the carrying amount of the asset
9. LONG-LIVED ASSETS (CONTINUED)
may not be recoverable. Examples of events or changes in circumstances that
indicate that the recoverability of the carrying amount of an asset should be
assessed include but are not limited to the following: a significant decrease in
the market value of an asset, a significant change in the extent or matter in
which an asset is used or a significant physical change in an asset, a
significant adverse change in legal factors or in the business climate that
could affect the value of an asset or an adverse action or assessment by a
regulator, an accumulation of costs significantly in excess of the amount
originally expected to acquire or construct an asset, and/or a current period
operating or cash flow loss combined with a history of operating or cash flow
losses or a projection or forecast that demonstrates continuing losses
associated with an asset used for the purpose of producing revenue.
10. INTANGIBLE ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 142
requires that goodwill and other intangible assets with indefinite lives no
longer be amortized. These intangible assets are tested for impairment at least
annually. If there is an impairment, the amount is expensed and the intangible
assets are written down accordingly.
Before implementation of SFAS No. 142, intangible assets were amortized by the
straight-line method over the estimated useful lives, ranging from 15 to 40
years.
11. INCOME TAXES
The Company is treated as a partnership for federal tax purposes. As such, the
federal income tax liability is borne by the members of the Company. No
provision for federal income tax liability is provided in these statements. A
provision has been made for the state income and franchise tax where applicable.
Taxable income will differ from net income under accounting principles generally
accepted in the United States of America due to differences in amortization,
depreciation, and disallowance of certain expenses for income tax purposes over
lives which generally are longer than the estimated useful lives used by the
Company for book purposes.
F-85
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
12. CASH FLOW AND NON-CASH INVESTING AND FINANCING TRANSACTIONS
For purposes of the Statement of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
13. ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Advertising costs totaled $5,167 and
$23,658 for the eleven months ended November 30, 2004 and year ended December
31, 2003, respectively.
14. MANAGEMENT'S 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. Actual results could differ from those estimates.
NOTE B - MERGER OF RELATED ENTITIES
Effective February 1, 2004, the Company acquired the assets and liabilities of
Ener-Coil, L.L.C., pre-merger owner of 43.5% of the Company.
NOTE B - MERGER OF RELATED ENTITIES (CONTINUED)
This merger has been accounted for under the purchase method of accounting. The
Company agreed to give the previous owners of Ener-Coil, L.L.C. an additional
16.5% of the Company for all of the assets and liabilities of Ener-Coil, L.L.C.
except for its original investment in the Company. The purchase price has been
allocated based on the estimated fair values of the 16.5% additional interest
acquired by the previous Ener-Coil members as follows:
Accounts receivable $ 360,327
Other current assets 39,305
Property, plant and equipment 154,679
Notes payable (533,929)
Accounts payable and accrued expenses (20,382)
--------------
$ --
==============
For purposes of financial reporting, the Company has accounted for the
acquisition as if it took place on January 1, 2004.
F-86
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE C - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
November December
30, 2004 31, 2003
------------ ------------
Computer Equipment $ 115,649 115,137
Machinery and Equipment 1,318,938 1,082,616
Vehicles 203,813 128,638
Furniture and Fixtures 50,451 50,451
------------ ------------
1,688,851 1,376,842
Less accumulated depreciation (969,529) (694,278)
------------ ------------
$ 719,322 682,564
============ ============
Depreciation expense totaled $275,251 for the eleven months ended November 30,
2004 and $228,365 for the year ended December 31, 2003.
NOTE D - AMORTIZABLE INTANGIBLES
The Company assumed a non-compete agreement for approximately $276,999.
Amortization has been calculated using the straight line method based on a life
of 5 years, the length of the non-compete period.
Total amortization expense was $50,783 and $55,400 for the eleven months ended
November 30, 2004 and year ended December 31, 2003.
On November 25, 2003, the Company lost a patent infringement lawsuit. As a
result, the Company recorded a patent impairment charge of approximately
$983,000.
NOTE E - NOTES PAYABLE
Notes payable are comprised of the following:
November
30, 2004
------------
Promissory note payable to Michael Weaver, 4 months of
$7,750, interest rate at 0%, unsecured $ 7,750
Revolving line of credit with Bank of America, with maximum
borrowings of $600,000, matures March 8, 2005, interest
rate variable, collateralized by substantially all of
the Company's assets 585,822
Promissory note payable to PAS, Inc. and W.T. Butler Enterprises,
58 months of $3,500 each, interest rate at 6%, unsecured 1,566
Promissory note payable Robert Patterson, former shareholder,
24 months of $2,436, interest rate at 0% collateralized by
certain specific assets of the Company 12,315
F-87
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE E - NOTES PAYABLE (CONTINUED)
Promissory note payable to Herb Sostek, 24 months of
$6,648, interest rate at 6%, unsecured 45,620
Promissory note payable to Local Bank of Oklahoma, 60 payments
of $2,219, interest rate at 6.75%, collateralized by
certain specific assets of the Company 43,778
Promissory note payable to Ford Motor Credit Corp, 36 payments
of $1,137, interest rate at 0% collateralized by
2003 Ford F350 14,783
Promissory note payable to Local Bank of Oklahoma, 60 Payments
of $2,147, interest rate at 6.75%, collateralized by
equipment $ 62,842
------------
774,476
Less - Current Portion (757,406)
------------
$ 17,070
============
December
31, 2003
------------
Promissory note payable to PAS, Inc. and W.T. Butler Enterprises,
58 months of $3,500 each, interest rate at 6%, unsecured $ 76,208
Promissory note payable to Herb Sostek, 24 months of
$6,648, interest rate at 6%, unsecured 41,168
Promissory note payable to Local Bank of Oklahoma, 60 payments of
$2,219, interest rate at 6.75%, collateralized by certain
specific assets of the Company 62,931
Promissory note payable to Ford Motor Credit Corp, 60 payments of
$798.94, interest rate at 9.25% collateralized by
1999 Ford F350 2,360
Promissory note payable to Local Bank of Oklahoma, 60 Payments
of $2,147, interest rate at 6.75%, collateralized by
certain specific assets of the Company 80,923
------------
263,590
Less - Current Portion (159,846)
------------
$ 103,744
============
F-88
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE E - NOTES PAYABLE (CONTINUED)
For the succeeding five years, aggregate maturities applicable to long-term debt
outstanding at November 30, 2004 are as follows:
November 30,
2005 $ 757,406
2006 17,070
-----------
$ 774,476
=============
NOTE F - CAPITAL LEASES
The Company has acquired certain equipment through leasing arrangements, which
qualify as capital leases. The equipment acquired has been capitalized and is
subject to depreciation (see Note A). The present value of the lease obligations
have been recorded as liabilities and are summarized below at November 30, 2004:
Present Value
of Obligation
-------------
Capital lease payable to Outsource Lease, 60 monthly
payments of $3,710 commencing April 11, 2002, interest
rate at 10.67%, collateralized by tubing unit $ 21,259
Capital lease payable to Outsource Lease, 60 monthly payments
of $865 commencing April 29, 2002, interest rate at 10.67%,
collateralized by computer network 91,178
--------------
112,437
Less - Current Portion 45,735
--------------
$ 66,702
==============
Future minimum lease payments for these capital leases are as follows:
Year Total Payment
---- -------------
2005 $ 54,900
2006 54,900
2007 21,232
------------
Total Future Minimum Lease Payments 131,032
Total Amount Representing Interest 18,595
------------
Present Value of Lease Obligation $ 112,437
============
The Company utilizes leased equipment in its daily operations which have been
capitalized. Capitalized costs of the equipment are $237,065 and $187,785 and
accumulated depreciation is $80,164 and $75,114 at November 30, 2004 and
December 31, 2003, respectively.
F-89
DOWNHOLE INJECTION SERVICES, LLC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 30, 2004 AND DECEMBER 31, 2003
NOTE G - OPERATING LEASES
The Company conducts certain parts of its operations from leased premises
pursuant to operating leases, which will expire during 2005.
Management expects that in the normal course of business, the lease will be
renewed or replaced by other leases.
Total rental expense was $174,869 for the eleven months ended November 30, 2004
and $143,774 for the year ended December 31, 2003.
For the succeeding five year period, future minimum lease commitments under
non-cancelable operating leases with terms in excess of one year are:
2005 $ 166,235
2006 132,245
2007 60,161
2008 30,000
2009 10,000
-----------
$ 398,641
===========
As of November 30, 2004, the Company has leased four trucks from Ford Motor
Credit under a cancelable master lease agreement. The lease may be canceled by
the Company by return of the trucks to the lessor along with a premium for early
termination as determined by formula. The term of the lease is for 48 months
from the date of delivery to the Company. Insurance, taxes, and operating
expenses are paid by the Company.
For 2004, rentals paid under this agreement totaled $50,458. As of December 31,
2004, the Company's monthly lease commitment under this agreement is $5,027.
The future annual minimum lease commitment, assuming no early termination, is
$60,323.
NOTE H - SUBSEQUENT EVENT
Effective December 1, 2004, the members of the Company entered into a buy sell
agreement with a third party. The members agreed to sell all of their equity
interest for $1,100,000 cash, 508,466 shares of the third party company's stock
and assumption of all of the Company's present and future obligations.
F-90
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Delta Rental Service, Inc.
Scott, Louisiana
We have audited the accompanying Balance Sheets of Delta Rental Service, Inc. (a
Louisiana corporation) as of December 31, 2004 and 2003 and the related
Statements of Income, Retained Earnings and Cash Flows for the twelve months
then ended. 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 auditing standards generally accepted
in the United States of America. 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 financial position of Delta Rental Service, Inc. as
of December 31, 2004 and 2003 and the results of their operations and cash flows
for the twelve months then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ WRIGHT, MOORE, DEHART,
DUPUIS & HUTCHINSON, L.L.C.
Certified Public Accountants
March 23, 2005
F-91
DELTA RENTAL SERVICE, INC.
BALANCE SHEETS
DECEMBER 31,
2004 2003
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 891,338 $ 705,553
Accounts Receivable 1,095,587 713,929
Prepaid Insurance 13,838 14,067
Prepaid Income Taxes -- 51,411
Current Deferred Tax Asset -- 77,595
------------- -------------
Employee Advances
Total Current Assets 2,000,763 1,562,555
------------- -------------
PROPERTY AND EQUIPMENT
Office Equipment 33,624 32,407
Rental Equipment 3,699,987 3,341,816
Transportation Equipment 144,260 144,260
Yard Equipment 77,211 77,211
------------- -------------
Total 3,955,082 3,595,694
Less: Accumulated Depreciation (2,610,143) (2,307,864)
------------- -------------
Net Property and Equipment 1,344,939 1,287,830
------------- -------------
OTHER ASSETS
Cash Surrender Value of Life Insurance 38,261 35,446
------------- -------------
Total Other Assets 38,261 35,446
------------- -------------
TOTAL ASSETS $ 3,383,963 $ 2,885,831
============= =============
The accompanying notes are an integral part of this statement.
F-92
DELTA RENTAL SERVICE, INC.
BALANCE SHEETS
DECEMBER 31,
2004 2003
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 53,949 $ 40,829
Payroll Liabilities Payable 17,157 16,063
Sales Tax Payable 12,308 3,487
Accrued Interest Expense 3,734 4,244
Income Taxes Payable 92,448 --
Current Portion of Stockholder Loan 93,994 87,674
------------- -------------
Total Current Liabilities 273,590 152,297
------------- -------------
LONG-TERM LIABILITIES
Stockholder Loan (Less Current Portion) 547,784 641,775
Long-Term Deferred Tax Liability 353,147 311,762
------------- -------------
Stockholder Loan
Total Long-Term Liabilities 900,931 953,537
------------- -------------
Total Liabilities 1,174,521 1,105,834
------------- -------------
STOCKHOLDERS' EQUITY
Common Stock (No Par Value, 300,000 Shares Authorized,
27,083 Shares Issued and 8,333 Outstanding) 27,083 27,083
Additional Paid-In Capital 64,574 64,574
Retained Earnings 3,117,785 2,688,340
Less: Treasury Stock (18,750 Shares at Cost) (1,000,000) (1,000,000)
------------- -------------
Total Stockholders' Equity 2,209,442 1,779,997
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,383,963 $ 2,885,831
============= =============
The accompanying notes are an integral part of this statement.
F-93
DELTA RENTAL SERVICE, INC.
STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31,
2004 2003
------------- -------------
REVENUES $ 3,249,338 $ 2,662,091
COST OF REVENUES
Direct 796,194 766,196
------------- -------------
GROSS PROFIT 2,453,144 1,895,895
ADMINISTRATIVE EXPENSES
General and Administrative 1,798,414 1,926,173
Depreciation 30,061 31,678
------------- -------------
Total Administrative Expenses 1,828,475 1,957,851
------------- -------------
INCOME (LOSS) FROM OPERATIONS 624,669 (61,956)
------------- -------------
OTHER INCOME (EXPENSES)
Interest Expense (48,503) (61,177)
Interest Income 4,064 2,234
Life Insurance Dividends 930 930
Gain on Sale of Assets 113,435 354,382
------------- -------------
Total Other Income (Expenses) 69,926 296,369
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 694,595 234,413
------------- -------------
PROVISION FOR INCOME TAXES
Current 146,170 --
Deferred 118,980 134,274
------------- -------------
Total Income Tax Provision 265,150 134,274
------------- -------------
NET INCOME $ 429,445 $ 100,139
============= =============
The accompanying notes are an integral part of this statement.
F-94
DELTA RENTAL SERVICE, INC.
STATEMENTS OF RETAINED EARNINGS
TWELVE MONTHS ENDED DECEMBER 31,
2004 2003
-------------- --------------
BEGINNING BALANCE $ 2,688,340 $ 2,588,201
NET INCOME 429,445 100,139
-------------- --------------
ENDING BALANCE $ 3,117,785 $ 2,688,340
============== ==============
The accompanying notes are an integral part of this statement.
F-95
DELTA RENTAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED DECEMBER 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 429,445 $ 100,139
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities:
Depreciation and Amortization 346,615 308,587
Gain on Sale of Assets (113,435) (354,382)
Change in Assets and Liabilities:
Accounts Receivable (381,658) (7,963)
Prepaid Expenses 51,640 62,610
Accounts Payable and Accrued Expenses 114,973 (29,129)
Deferred Taxes 118,980 134,274
------------ ------------
Total Adjustments 137,115 113,997
------------ ------------
Net Cash Provided By Operating Activities 566,560 214,136
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Equipment (480,371) (781,152)
Proceeds from Sale of Assets 190,082 522,911
Cash Surrender Value - Life Insurance (2,815) (2,816)
------------ ------------
Net Cash Used In Investing Activities (293,104) (261,057)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal Payments on Treasury Stock Note -- (506,036)
Proceeds From Long-Term Debt -- --
Proceeds From Stockholder Note Payable -- 450,000
Principal Payments Stockholder Note Payable (87,671) (20,550)
------------ ------------
Net Cash Used in Financing Activities (87,671) (76,586)
------------ ------------
The accompanying notes are an integral part of this statement.
F-96
DELTA RENTAL SERVICE, INC.
STATEMENTS OF CASH FLOWS - CONTINUED
TWELVE MONTHS ENDED DECEMBER 31,
2004 2003
------------- -------------
NET INCREASE (DECREASE) IN CASH 185,785 (123,507)
CASH AT BEGINNING OF YEAR 705,553 829,060
------------- -------------
CASH AT END OF YEAR $ 891,338 $ 705,553
============= =============
SUPPLEMENTAL DISCLOSURES:
Interest Paid $ 49,013 $ 84,650
============= =============
Income Taxes Paid $ 2,311 $ 37,460
============= =============
The accompanying notes are an integral part of this statement.
F-97
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Delta Rental Service, Inc. (the Company) is
incorporated in the State of Louisiana. The Company leases pipe,
tubulars and other equipment to the service companies of the petroleum
exploration and production industry. The Company's facility is located
in Scott, Louisiana, and leases equipment to companies primarily in the
Louisiana Gulf Coast Region.
REPORTING PERIOD - The Company typically reports its financial position
and results of operations based on its federal income tax fiscal year
end of March 31. The accompanying financial statements present the
Company's financial position as of December 31, and the results of
operations and cash flows for the twelve months ended December 31.
INCOME TAXES - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of
accrued taxes plus deferred taxes related primarily to the differences
between the bases of certain assets and liabilities for financial and
tax reporting. The deferred taxes represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
PROPERTY AND EQUIPMENT - Property and equipment of the Company are
stated at cost. Expenditures for property and equipment which
substantially increase the useful lives of existing assets are
capitalized at cost and depreciated. Routine expenditures for repairs
and maintenance are expensed as incurred.
Depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets for financial reporting
purposes. For income tax purposes, depreciation is computed by use of
the Modified Accelerated Cost Recovery System (MACRS).
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
debt instruments purchased with an original maturity of three months or
less to be cash equivalents. The Company had no cash equivalents at
December 31, 2004 and 2003.
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. Actual results could differ from those
estimates.
ACCOUNTS RECEIVABLE - The Company generally does not require
collateral, and the majority of its trade receivables are unsecured.
The carrying amount for accounts receivable approximates fair value.
F-98
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(A) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ADVERTISING - Advertising costs are charged to operations when
incurred. Advertising expense for the twelve month periods ended
December 31, 2004 and 2003 was $3,272 and $1,884, respectively.
(B) CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at two separate financial
institutions. Accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000 per institution. Balances in excess of
insured limits at December 31, 2004 and 2003 were $692,208 and $507,438
respectively.
(C) ACCOUNTS RECEIVABLE
The balance in Accounts Receivable is comprised of billed invoices as
well as unbilled rentals which crossed accounting periods. The
breakdown of accounts receivable at December 31, is as follows:
2004 2003
------------ ------------
Billed Accounts Receivable $ 699,442 $ 407,556
Accrued Unbilled Revenue 396,145 306,373
------------ ------------
Total $ 1,095,587 $ 713,929
============ ============
(D) INCOME TAXES
Income tax expense consists of the following at December 31:
2004 2003
------------ ------------
Current
Federal $ 128,548 $ --
States 17,622 --
------------ ------------
Total Current Income Tax Expense 146,170 --
Deferred 118,980 134,274
------------ ------------
Total Income Tax Expense $ 265,150 $ 134,274
============ ============
The effective tax on pre-taxable income is approximately 34 percent
federal and 6 percent for the various states. The primary reason for
the difference between the effective tax rates and the statutory
marginal rates is due to various book to tax timing differences, and
non-deductible expenses for income tax purposes.
F-99
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(D) INCOME TAXES - CONTINUED
Deferred income taxes are a result of timing differences between book
and taxable incomes as well as net operating loss carryforwards. The
major timing differences for deferred income taxes at December 31 are
as follows:
2004 2003
------------- -------------
Depreciation Timing Difference $ 882,867 $ 779,405
Net Operating Loss Carry-Forward -- (163,311)
Charitable Contribution Carryover -- (30,678)
------------- -------------
882,867 585,416
Blended Federal and State Rates 40% 40%
------------- -------------
Deferred Income Tax Liability (Net) $ 353,147 $ 234,167
============= =============
These amounts have been presented in the Company's financial statements
as follows:
2004 2003
------------- -------------
Current Deferred Tax Asset $ -- $ (77,595)
Long-Term Deferred Tax Liability 353,147 311,762
------------- -------------
Total $ 353,147 $ 234,167
============= =============
(E) EMPLOYEE BENEFIT PLANS
The Company adopted a profit sharing retirement plan for its employees
effective April 1, 1979. The plan was restated to update its terms,
provisions and conditions effective April 1, 2003. The restated plan
continues to be for the exclusive benefit of the employees of the
Company. An employee is eligible to participate upon the completion of
one year of eligible service and the attainment of age 21. The Company
determines annually the amount of current or accumulated profits to be
contributed to the plan. The plan vests one hundred percent (100%)
after six or more years of continuing service.
Contributions to the plan for the twelve months ended December 31, 2004
and 2003 were $147,744 and $133,382 respectively.
F-100
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(F) NOTE PAYABLE STOCKHOLDER
The Company has a note payable to the stockholder dated August 29,
2003, payable in monthly installments of $3,955, bearing interest at
6.982 % per annum, due August 1, 2010. The balance at December 31, 2004
and 2003 is $641,778 and $729,449, respectively.
Future maturities on this note are as follows:
Twelve Months Ending December 31,
2005 $ 93,994
2006 100,772
2007 108,038
2008 115,827
2009 124,178
Later 98,969
------------
Total $ 641,778
============
(G) COMPENSATED ABSENCES
Employees of the Company are entitled to paid vacation and paid sick
days, depending on length of service. No unused vacation or sick leave
is payable to an employee upon separation. The Company's policy is to
recognize the costs of compensated absences when actually paid to
employees. Accordingly, no accruals have been made.
(H) RELATED PARTY TRANSACTIONS
The Company's operations are conducted in a facility owned by its
stockholders. The Company entered into a formal lease agreement for the
facilities on June 6, 2000. The lease agreement requires rental
payments of $6,000 per month and expires on June 30, 2005. For the
twelve month periods ended December 31, 2004 and 2003, $72,000 per
period was paid to the stockholders for rent.
Minimum future lease payments under the lease are as follows:
Twelve Months Ending December 31,
2005 $ 36,000
------------
Total $ 36,000
============
F-101
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(I) MAJOR CUSTOMERS
Customers comprising ten percent (10%) or more of the Company's
revenues or accounts receivable balances for the periods ended December
31 are as follows:
For the twelve months ended December 31, 2003:
Percentage of
Sales Percentage of Total Accounts
Amount Total Revenue Receivable
------------------ ----------------- -----------------
Customer A $ 488,589 18.35% 14.39%
Customer B $ 401,265 15.07% 9.85%
Customer C $ 296,570 11.14% 11.71%
Customer D $ 269,963 10.14% 9.61%
For the year ended December 31, 2004:
Percentage of
Sales Percentage of Total Accounts
Amount Total Revenue Receivable
------------------ ----------------- -----------------
Customer A $ 549,678 16.92% 14.31%
Customer B $ 528,474 16.26% 22.51%
Customer C $ 329,160 10.13% 6.40%
Customer D $ 308,133 9.48% 13.15%
(J) SUBSEQUENT EVENTS
Subsequent to the balance sheet date, but prior to the date of this
report, the Company's stockholders entered into a purchase agreement
whereby they have agreed to sale all of their interest in the Company
to a third-party. The sale is scheduled to close in April, 2005.
F-102
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Capcoil Tubing Services, Inc.
P.O. Box 2280 Kilgore, Texas
We have audited the balance sheets of Capcoil Tubing Services, Inc. (a Texas
corporation), as of December 31, 2004 and 2003, and the related statements of
operations and retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 financial position of Capcoil Tubing Services, Inc.
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/S/ CURTIS BLAKELY & CO., PC
----------------------------
Kilgore, Texas
March 16, 2005
F-103
CAPCOIL TUBING SERVICES, INC.
BALANCE SHEETS
ASSETS
DECEMBER 31,
2004 2003
------------ ------------
CURRENT ASSETS:
Cash and Cash Equivalents $ 348,674 $ 45,857
Accounts Receivable 538,658 818,736
Inventory 386,685 384,431
Prepaid Expenses 107,703 92,306
------------ ------------
TOTAL CURRENT ASSETS 1,381,720 1,341,330
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture, Fixtures and Equipment 11,343 5,870
Software 3,127 3,127
Production Equipment 2,078,897 1,709,196
Vehicles 172,720 107,442
Production Equipment Under Construction 94,332 -0-
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 2,360,419 1,825,635
Less: Accumulated Depreciation (433,800) (221,451)
------------ ------------
NET PROPERTY AND EQUIPMENT 1,926,619 1,604,184
------------ ------------
OTHER ASSETS:
Organizational Costs 12,057 18,085
------------ ------------
TOTAL ASSETS $ 3,320,396 $ 2,963,599
============ ============
(The accompanying notes are an integral part of these financial statements.)
F-104
CAPCOIL TUBING SERVICES, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
2004 2003
------------ ------------
CURRENT LIABILITIES:
Current Portion of Long-term Debt $ 445,924 $ 431,452
Current Portion of Obligation Under Capital Lease 447 -0-
Current Portion of Long-term Debt - Related Party 22,824 -0-
Accounts Payable - Trade 383,762 891,508
Accrued Interest Payable 4,018 -0-
Accrued Wages 6,400 -0-
Short-term Borrowings 430,314 422,321
Short-term Borrowings - Related Party 130,000 -0-
------------ ------------
TOTAL CURRENT LIABILITIES 1,423,689 1,745,281
------------ ------------
LONG-TERM DEBT, LESS CURRENT MATURITIES:
Long-term Debt 471,451 451,262
Long-term Debt - Related Party 31,213 -0-
Obligation Under Capital Lease 2,880 -0-
------------ ------------
TOTAL LONG-TERM DEBT 505,544 451,262
------------ ------------
TOTAL LIABILITIES 1,929,233 2,196,543
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock - $1 Par Value
100,000 Shares Authorized
1,000 Shares Issued and Outstanding 600,000 600,000
Additional Paid-in Capital 50,000 50,000
Retained Earnings 741,163 117,056
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,391,163 767,056
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,320,396 $ 2,963,599
============ ============
(The accompanying notes are an integral part of these financial statements.)
F-105
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31,
2004 2003
------------- -------------
REVENUE $ 5,774,442 $ 5,478,666
Cost of Sales and Services 4,371,316 4,523,702
------------- -------------
Gross Profit 1,403,126 954,964
------------- -------------
OPERATING EXPENSES:
General and Administrative 159,677 131,254
Depreciation 35,456 24,648
Insurance 228,112 186,125
Lease Expense 29,250 27,000
Salaries - Administration 126,520 89,287
Taxes 126,222 68,838
Interest 73,782 51,380
------------- -------------
TOTAL OPERATING EXPENSES 779,019 578,532
------------- -------------
NET INCOME 624,107 376,432
RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD 117,056 (259,376)
------------- -------------
RETAINED EARNINGS - END OF PERIOD $ 741,163 $ 117,056
============= =============
(The accompanying notes are an integral part of these financial statements.)
F-106
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 624,107 $ 376,432
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 218,375 170,317
Change in Assets and Liabilities:
Accounts Receivable 280,078 (595,486)
Inventory (428,090) 298,810
Prepaids (15,395) (32,465)
Accounts Payable and Accruals (42,242) 95,417
------------- -------------
TOTAL ADJUSTMENTS 12,726 (63,407)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 636,833 313,025
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Plant and Equipment (462,998) (541,551)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (462,998) (541,551)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of Short-term Borrowings (101,736) (124,513)
Payments of Long-term Debt (519,383) (377,668)
Payments of Capital Lease Obligation (89) -0-
Proceeds From Short-term Debt Borrowing 239,729 223,578
Proceeds From Long-term Debt Borrowing 510,461 441,265
Proceeds From Additional Paid-in Capital -0- 50,000
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 128,982 212,662
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 302,817 (15,864)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 45,857 61,721
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 348,674 $ 45,857
============= =============
(The accompanying notes are an integral part of these financial statements.)
F-107
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
---------------------
The Corporation began business in 2001, and is engaged in the business of oil
and gas well servicing. The Corporation currently provides coil tubing services
with capabilities from 1/4" capillary tubing to 1" coil tubing. Services include
the ability to deliver and inject nitrogen into wells. Most of the work is
service work related to existing wells in the field, but some work is performed
in relation to drilling activity.
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 in the financial
statements and accompanying notes. Actual results could differ from these
estimates. Among other things, estimates are used in accounting for
depreciation.
REVENUE RECOGNITION
-------------------
Revenues and expenses are recorded when services are rendered and expenses are
incurred and collectibility is reasonably assured. Customers are billed as
services are rendered.
CASH AND CASH EQUIVALENTS
-------------------------
For purposes of the Statement of Cash Flows, the Corporation considers cash and
cash equivalents to include cash on hand and demand deposits.
ACCOUNTS RECEIVABLE
-------------------
Trade receivables are reported in the balance sheets at outstanding principal
less any allowances for doubtful accounts. Trade receivables are short-term and
interest is not accrued. Trade receivables are written off at the time they are
deemed uncollectible. An allowance for uncollectible trade receivables is
recorded when deemed appropriate based on a review of aged receivables and
expected recoveries. The allowance for doubtful accounts was $-0- at December
31, 2004 and 2003.
INVENTORY
---------
Inventories, which consist principally of (i) products which are consumed in the
Corporation's services provided to customers, (ii) spare parts for equipment
used in providing these services and (iii) manufactured components and
attachments for equipment used in providing services, are stated primarily at
the lower of weighted-average cost or market. Cost primarily represents invoice
costs. The Corporation regularly reviews inventory quantities on hand.
F-108
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated substantially at original cost. Additions,
replacements, and renewals of property determined to be units of property are
charged to the property and equipment accounts. The replacement of property and
equipment determined not to be a unit of property and the cost of maintenance
and repairs are charged to operating expense. Property and equipment is stated
at cost and when sold or retired, a gain or loss is recognized. Depreciation
expense is computed using the straight-line composite method based on estimated
service lives of the various classes of depreciable property.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate their carrying value may not be recoverable. When such
events or circumstances arise, an estimate of the future undiscounted cash flows
produced by the asset, or the appropriate grouping of assets, is compared to the
asset's carrying value to determine if any impairment exists pursuant to the
requirements of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No. 144). If the asset is determined to be impaired,
the impairment loss is measured based on the excess of its carrying value over
its fair value.
INTERNAL USE SOFTWARE
---------------------
In accordance with Statement of Position (SOP) 98-1, the Corporation capitalizes
software developed or obtained for internal use. These capitalized costs are
included in property and equipment. Initial operating system software is
amortized over the life of the associated hardware. Application software is
amortized over a useful life of three years.
ASSET RETIREMENT OBLIGATIONS
----------------------------
Effective January 1, 2003, the Corporation adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations". This statement provides the accounting for the
cost of legal obligations associated with the retirement of long-lived assets.
SFAS No. 143 requires that companies recognize the fair value of a liability for
asset retirement obligations in the period in which the obligations are incurred
and capitalize that amount as part of the book value of the long-lived asset.
The Corporation has no legal obligation to remove assets. Therefore, the
adoption of SFAS No. 143 did not have a material effect on the Corporation's
financial statements.
INCOME TAXES
------------
The Corporation is a Subchapter S Corporation under the Internal Revenue Code.
The taxable income or losses of the Corporation are includable in the tax return
of the stockholder for federal income tax purposes. The Corporation is subject
to state income tax.
Deferred state income taxes should be recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. However,
management considers their amount to be immaterial and thus deferred state
income taxes are not recorded on the Corporation's financial statements.
NOTE 2 - ORGANIZATIONAL COSTS:
Organizational costs represent the unamortized balance of organizational costs.
The organizational costs were incurred in 2001 and are being amortized over 5
years. Amortization for both 2004 and 2003 totaled $6,028.
F-109
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT:
Net property and equipment at December 31, 2004 and 2003 was composed of the
following:
DEPRECIATION
RATE (%) 2004 2003
------------ ------------ ------------
Furniture, fixtures, and equipment 20% $ 11,343 $ 5,870
Software 33% 3,127 3,127
Production equipment 10% - 20% 2,078,897 1,709,196
Vehicles 20% 172,720 107,442
Production equipment under construction N/A 94,332 -0-
------------ ------------
Total Property and Equipment 2,360,419 1,825,635
Less: Accumulated Depreciation (433,800) (221,451)
------------ ------------
Net Property and Equipment $ 1,926,619 $ 1,604,184
============ ============
Substantially all of the plant is pledged as security for long-term debt to
various lenders.
Depreciation expense was $212,347 and $164,289 for the years ended December 31,
2004 and 2003, respectively, of which $182,919 and $145,669 was included in cost
of sales in 2004 and 2003.
NOTE 4 - CAPITAL LEASE OBLIGATIONS:
The Corporation leases office equipment with a lease term through October 2007.
This obligation has been recorded in the accompanying financial statements at
the present value of future minimum lease payments, discounted at an interest
rate of 20 percent. Capitalized costs of $3,416, less accumulated depreciation
of $-0- at December 31, 2004, are included in property and equipment in the
accompanying financial statements. Depreciation expense for this equipment for
2004 was $-0-.
Obligation under capital leases consist of the following:
2004
-----------
Total $ 3,327
Less: Current portion (447)
-----------
Long-Term Portion $ 2,880
===========
The future minimum lease payments under the capital leases and the net present
value of the future minimum lease payments are as follows for the year ended
December 31, 2004:
2004
-----------
2005 $ 1,072
2006 1,072
2007 1,072
2008 1,072
2009 894
-----------
5,182
Less: Amount representing interest (1,855)
-----------
Present Value of Future Minimum Lease payments $ 3,327
===========
F-110
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - SHORT-TERM BORROWINGS:
Short-term borrowings at December 31, 2004 and 2003 are comprised of the
following:
CREDITOR TERMS COLLATERAL 2004 2003
-------- ----- ---------- ---- ----
Texas Bank & Trust $350,000 line-of-credit expiring Equipment $ 349,923 $ 350,000
December 2005 bearing interest at
prime (5.25 percent at December 31,
2004).
Texas Bank & Trust $375,000 line of credit expiring Equipment -0- 3,029
December 2004 bearing interest at prime.
AICCO, Inc. Due $11,760 per month through July None 80,391 -0-
2005 including interest at 7.15
percent.
AICCO, Inc. Due $10,114 per month through July None -0- 69,292
2004 including interest at 6.50 --------- ---------
percent.
Total Short-Term Borrowings $ 430,314 $ 422,321
========= =========
NOTE 6 - SHORT-TERM BORROWINGS - RELATED PARTY:
Short-term borrowings from related parties at December 31, 2004 and 2003 are
comprised of the following:
CREDITOR TERMS COLLATERAL 2004 2003
-------- ----- ---------- ---- ----
M Bar Ranch, L.P. $130,000 promissory note, interest of None $ 130,000 $-0-
8 percent and principal due at
maturity date - August 2005.
A stockholder of the corporation holds an interest in M Bar Ranch, L.P.
Interest expense of $4,018 has been accrued on this short-term borrowing at
December 31, 2004.
F-111
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM NOTES PAYABLE:
Long-term notes payable to unrelated parties are comprised of the following:
CREDITOR TERMS COLLATERAL 2004 2003
-------- ----- ---------- ---- ----
Texas Bank & Trust Due $6,048 per month through Equipment - $ 117,138 $ 183,232
August 2006, including interest Accounts
at prime (5.25% at December 2004)
Texas Bank & Trust Due $7,037 per month through Equipment - 176,501 251,566
March 2007, including interest Accounts
at prime (5.25% at December 2004)
Texas Bank & Trust Due $7,000 per month through Equipment - 101,957 179,620
March 2006, including interest Accounts
at prime (5.25% at December 2004)
Texas Bank & Trust Due $30,000 per month through Equipment - -0- 171,541
June 2004, including interest Accounts
at prime (Pd in full at December 2004)
Texas Bank & Trust Due $7,407 per month through Equipment - 191,125 -0-
March 2007, including interest Accounts
at prime (5.25% at December 2004)
Texas Bank & Trust Due $6,100 per month through Equipment - 195,082 -0-
October 2007, including interest Accounts
at prime (5.25% at December 2004)
Navistar Due $1,055 per month through Equipment 11,046 22,004
November 2005, including interest
at 9.95 percent.
Navistar Due $1,055 per month through Equipment 11,046 21,075
November 2005, including interest
at 9.95 percent
Navistar Due $998 per month through Equipment 24,405 -0-
June 2007, including interest at 11.50 percent.
Ford Motor Credit Due $738 per month through Vehicle 12,275 20,641
May 2006, including interest at 2.90 percent.
Ford Motor Credit Due $1,112 per month through Vehicle 21,211 33,035
August 2006, including interest at 5.50 percent.
F-112
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM NOTES PAYABLE: (CONTINUED)
Long-term notes payable to unrelated parties are comprised of the following: (continued)
Creditor Terms Collateral 2004 2003
-------- ----- ---------- ---- ----
Ford Motor Credit Due $1,173 per month through Vehicle 35,007 -0-
July 2007, including interest at 2.90 percent.
Ford Motor Credit Due $730 per month through Vehicle 20,582 -0-
August 2007, including interest at 7.25 percent. --------- ---------
Total Long-Term Notes Payable 917,375 882,714
Current Maturities (445,924) (431,452)
--------- ---------
Long-Term Notes Payable,
Net of Current Maturities $ 471,451 $ 451,262
========= =========
Payments on the notes are due monthly in the approximate amount of $40,453. The
maturities of long-term debt for each of the three years succeeding the balance
sheet date are as follows:
2005 $ 445,924
2006 349,064
2007 122,387
---------
Total $ 917,375
=========
NOTE 8 - LONG-TERM NOTE PAYABLE - RELATED PARTY:
Creditor Terms Collateral 2004 2003
-------- ----- ---------- ---- ----
M Bar Ranch, L.P. Due $2,194 per month through Vehicle $ 54,037 $-0-
March 2007, including interest at 8.00 percent.
Current Maturities (22,824) -0-
--------- ----
Long-Term Note Payables - Related Party,
Net of Current Maturities $ 31,213 $-0-
========= ====
The maturities of long-term debt for each of the three years succeeding the
balance sheet date are as follows:
2005 $ 22,824
2006 24,719
2007 6,494
---------
Total $ 54,037
=========
Interest of $3,779 and principal of $8,986 was paid to the related party on the
note in 2004.
F-113
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - OPERATING LEASES:
The Corporation has various cancelable and noncancelable operating leases for
building space, storage facilities and equipment. The noncancelable lease
expired March 2005, but was renewed through March 2007.
Future minimum rental payments for the next five years are as follows:
2005 $ 27,000
2006 27,000
2007 5,625
Rental expense under operating leases was $29,250 in 2004 and $27,000 in 2003.
NOTE 10 - RELATED PARTY TRANSACTIONS:
The Corporation has received loans from affiliates and owners. These
transactions are described in previous footnotes to these financial statements.
NOTE 11 - CONCENTRATION OF CREDIT RISK:
Financial instruments that potentially subject the Corporation to significant
concentrations of credit risk consists primarily of cash equivalents and trade
accounts receivable. The estimated fair value of such financial instruments at
December 31, 2004 and 2003 approximate their carrying value as reflected in the
balance sheet. At December 31, 2004, the Corporation had deposits in checking
accounts which exceed federally insured limits by $248,674. The Corporation has
not experienced any material credit losses on its financial instruments.
Revenues from one customer represent 32 percent and 47 percent of total revenues
in 2004 and 2003, respectively. A second customer represented 14 percent of
total revenues in 2004. No other customers or entity accounted for more than 10
percent of 2004 or 2003 revenues.
A majority of the Corporation's trade receivables are derived from large oil and
gas production companies. Concentration of credit risk with respect to
receivables is considered to be limited due to its customer base. However, 30
percent of trade receivables is due from one customer at December 31, 2004. The
Corporation performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral to secure accounts receivable.
The Corporation is exposed to credit loss in the event of nonperformance by
customers on trade receivables. The Corporation does not anticipate significant
nonperformance by customers on trade receivables.
The Corporation's sales are concentrated primarily in east Texas and northern
Louisiana.
Note 12 - Additional Cash Flow Information:
2004 2003
----------- -----------
Cash paid during the year:
Interest $ 69,764 $ 51,380
F-114
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - SIGNIFICANT NONCASH TRANSACTIONS:
The Corporation purchased equipment and vehicles in 2004 and 2003 and incurred
$97,620 and $92,463, respectively, in debt relative to these purchases.
NOTE 14 - SUBSEQUENT EVENT:
Effective April 1, 2005, the stockholders of the Corporation signed a letter of
intent to sell their interests in the Corporation to Allis-Chalmers Energy, Inc.
Effective January 1, 2005, the Corporation revoked its S Corporation election
for federal tax purposes and will be taxed as a C Corporation.
F-115
INDEPENDENT AUDITOR'S REPORT
ON ADDITIONAL INFORMATION
To the Stockholders
of Capcoil Tubing Services, Inc.
Our report on our audits of the basic financial statements of Capcoil Tubing
Services, Inc. for December 31, 2004 and 2003, appears on page 3. These audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The additional information on pages 17 and 18 is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/S/ CURTIS BLAKELY & CO., PC
----------------------------
LONGVIEW, TEXAS
MARCH 16, 2005
F-116
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS
WITH ADDITIONAL INFORMATION
YEAR ENDED DECEMBER 31,
2004 2003
------------ ------------
REVENUE $ 5,774,442 $ 5,478,666
COST OF SALES AND SERVICES:
Inventory Purchases 2,684,319 3,400,025
Wages 854,041 546,858
Contract Services 153,192 152,432
Location Expenses 84,709 58,027
Repairs and Maintenance 132,846 70,024
Depreciation 182,919 145,669
Fuel and Oil 114,112 74,836
Freight 14,432 11,646
Sales Commissions 15,352 323
Sales Expense 13,307 10,827
Supplies 61,494 28,165
Other Expenses 12,082 6,676
Equipment Leases and Rentals 48,511 18,194
------------ ------------
TOTAL COST OF GOODS SOLD 4,371,316 4,523,702
------------ ------------
GROSS PROFIT 1,403,126 954,964
------------ ------------
GENERAL AND ADMINISTRATIVE:
Accounting 41,794 22,456
Telephone 26,939 19,842
Auto 17,955 15,203
Consulting 15,100 15,012
Advertising and Promotional 12,715 6,847
License and Fees 10,719 7,110
Office Supplies 7,818 7,644
Utilities 7,582 6,397
Janitorial 5,542 2,953
Office Expense 4,248 3,332
Postage 4,084 4,556
Other General and Administrative 1,643 829
Meals 1,393 1,899
Contract Service - Office 1,145 16,779
Contributions 1,000 395
------------ ------------
TOTAL GENERAL AND ADMINISTRATIVE 159,677 131,254
------------ ------------
F-117
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS
WITH ADDITIONAL INFORMATION
YEAR ENDED DECEMBER 31,
2004 2003
------------ ------------
DEPRECIATION AND AMORTIZATION:
Depreciation Expense 29,428 18,620
Amortization Expense 6,028 6,028
------------ ------------
TOTAL DEPRECIATION AND AMORTIZATION 35,456 24,648
------------ ------------
INSURANCE EXPENSE:
Insurance - General 119,039 118,023
Insurance - Health 65,583 40,792
Insurance - Workmen's Compensation 41,445 25,265
Insurance - Keyman Life 2,045 2,045
------------ ------------
TOTAL INSURANCE 228,112 186,125
------------ ------------
LEASE OF BUILDINGS AND STORAGE FACILITIES 29,250 27,000
------------ ------------
SALARIES - ADMINISTRATIVE
Salaries - Officers 89,115 77,769
Salaries - Office Employees 37,405 11,518
------------ ------------
TOTAL SALARIES - ADMINISTRATIVE 126,520 89,287
------------ ------------
TAX EXPENSE:
Taxes - Payroll 78,536 52,205
Taxes - Property 43,495 13,926
Taxes - Other 2,501 1,832
Taxes - State Franchise 1,690 875
------------ ------------
TOTAL TAX EXPENSE 126,222 68,838
------------ ------------
INTEREST 73,782 51,380
------------ ------------
TOTAL OPERATING EXPENSES 779,019 578,532
------------ ------------
NET INCOME $ 624,107 $ 376,432
============ ============
F-118
ALLIS-CHALMERS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The pro forma financial statements set forth below illustrate the
effects of the following transactions:
CAPCOIL TUBING SERVICES, INC. TRANSACTION. On May 1, 2005, the Company acquired
100% of the outstanding stock of Capcoil Tubing Services, Inc., a Texas
corporation, based in Kilgore, Texas from four shareholders for approximately
$2,750,000 in cash, 168,161 shares of Company's Common Stock and payment of
Capcoil secured debt in the amount of $1,190,783. The total investment by the
Company in Capcoil is valued at approximately $4,700,000. Capcoil is a company
headquartered in Kilgore, Texas that is engaged in the sale, installation and
service of small diameter capillary tubing and larger diameter coil tubing for
servicing producing oil and gas wells. Both types of tubing are installed in
wells and used as a delivery system for chemicals and other agents to enhance
production from existing oil and gas wells.
DELTA RENTAL SERVICE, INC. TRANSACTION. On April 1, 2005, the Company acquired
100% of the outstanding stock of Delta Rental Service, Inc., a Louisiana
corporation from three shareholders in Lafayette, Louisiana for approximately
$4,650,000 in cash, 223,114 shares of Company's Common Stock and issuance of two
promissory notes from the Company in the aggregate principal amount of $350,000.
The total investment by the Company in Delta is $6,000,000. Delta is a rental
tool company headquartered in Lafayette, Louisiana and rents specialty rental
items to the oil and gas industry such as hevi-wate spiral drill pipe, spacer
spools and assorted handling tools.
DOWNHOLE INJECTION SERVICES LLC TRANSACTION. On December 10, 2004, the Company,
through its 55% owned subsidiary, AirComp, acquired all the equity interests in
Downhole Injection Services, LLC from an investor group for approximately
$1,100,000 in cash, 508,466 shares of registrants Common Stock and payment or
assumption of approximately $950,000 of debt. Downhole is headquartered in
Midland, Texas and provides solutions to downhole chemical treating problems
through the installation of small diameter, stainless steel coiled tubing into
producing oil and gas wells.
DIAMOND AIR TRANSACTION. On November 10 2004, the Company, through its 55% owned
subsidiary, AirComp, purchased substantially all the assets of Diamond Air
Drilling Services, Inc. and Marquis Bit Co., L.L.C. for $4,600,000 in cash and
the assumption of approximately $450,000 in liabilities. The Company and its
joint-venture partner M-I L.L.C. contributed $2,530,000 and $2,070,000,
respectively, to the equity of AirComp. Diamond Air and Marquis manufacture
hammer bits and provides air hammer and hammer bits and related services
required to drill and complete oil and gas wells.
The accompanying unaudited pro forma consolidated condensed financial statements
are based on the historical statements of operations and statements of financial
position of the Company and the acquired subsidiaries as of and for the year
ended December 31, 2004 and the three months ended March 31, 2005. The unaudited
pro forma consolidated condensed financial statements illustrate the effects of
the Acquisition Transactions on our results of operations and financial position
as if the transactions had occurred as of the beginning of the periods
presented.
Certain information normally included in the financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The unaudited pro forma consolidated condensed financial
statements should be read in conjunction with our consolidated financial
statements appearing elsewhere herein.
F-119
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
AS OF MARCH 31, 2005
(In thousands, except per share data)
ALLIS-
CHALMERS DELTA
CONSOLIDATED DELTA PURCHASE
HISTORICAL HISTORICAL ADJUSTMENTS
------------ ---------- -------------
ASSETS
Cash and cash equivalents $ 5,999 $ 169 $ (4,650) (a)
Trade Receivables 16,402 936 --
Inventories, net 2,464 -- --
Lease receivable, net 180 -- --
Prepaids and other current assets 1,976 160 --
------------ ---------- -------------
Total Current Assets 27,021 1,265 (4,650)
Net Property, plant and equipment 39,493 1,342 3,531 (b)
(75) (c)
Goodwill 11,776 -- --
Other intangibles, net 4,891 -- --
Debt issuance costs, net 635 -- --
Lease receivable 485 -- --
Other assets 75 -- --
------------ ---------- -------------
Total Assets $ 84,376 $ 2,607 $ (1,194)
============ ========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 4,109 $ -- $ --
Trade accounts payable 5,698 32 --
Accrued employee benefits 811 -- --
Accrued interest 460 -- --
Accrued expenses 2,300 401 --
Accounts payable, related parties 200 -- --
------------ ---------- -------------
Total Current Liabilities 13,578 433 --
Accrued postretirement benefit obligations 676 -- --
Long-term debt 28,750 -- 350 (d)
Other long-term liabilities 129 373 --
------------ ---------- -------------
43,133 806 350
Minority Interest 4,567 -- --
Shareholders' equity
Common stock 136 (973) 973 (e)
2 (f)
Capital in excess of par value 40,331 65 (65) (e)
998 (f)
Accumulated earnings (deficit) (3,791) 2,709 (2,709) (e)
(743) (g)
------------ ---------- -------------
Total Shareholders' Equity 36,676 1,801 (1,544)
------------ ---------- -------------
Total Liabilities and Shareholders' Equity $ 84,376 $ 2,607 $ (1,194)
============ ========== =============
See notes to unaudited pro forma consolidated financial statements.
F-120
(continued on next page)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
AS OF MARCH 31, 2005
(In thousands, except per share data)
(continued from above)
PRO FORMA
CAPCOIL ALLIS-
CAPCOIL PURCHASE CHALMERS
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
ASSETS
Cash and cash equivalents 184 (2,750) (h)
(1,191) (i) $ (2,239)
Trade Receivables 1,021 -- 18,359
Inventories, net 334 -- 2,798
Lease receivable, net -- -- 180
Prepaids and other current assets 79 -- 2,215
----------- ----------- ------------
Total Current Assets 1,618 (3,941) 21,313
Net Property, plant and equipment 1,982 926 (j)
(99) (c) 47,100
Goodwill - 11,776
Other intangibles, net 11 1,509 (k) 6,411
Debt issuance costs, net 635
Lease receivable 485
Other assets 11 -- 86
----------- ----------- ------------
Total Assets 3,622 (1,605) $ 87,806
=========== =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt 598 (598) (i) $ 4,109
Trade accounts payable 449 -- 6,179
Accrued employee benefits 20 -- 831
Accrued interest 4 -- 464
Accrued expenses 185 -- 2,886
Accounts payable, related parties - -- 200
----------- ----------- ------------
Total Current Liabilities 1,256 (598) 14,669
Accrued postretirement benefit obligations -- -- 676
Long-term debt 794 500 (l)
(593) (i) 29,801
Other long-term liabilities 7 -- 509
------------ ----------- ------------
257 (691) 45,655
Minority Interest 4,567
Shareholders' equity
Common stock 600 (600) (e)
2 (m) 140
Capital in excess of par value 50 (50) (e)
748 (m) 42,077
Accumulated earnings (deficit) 915 (915) (e)
(99) (c) (4,633)
------------ ----------- -------------
Total Shareholders' Equity 1,565 (914) 37,584
------------ ----------- ------------
Total Liabilities and Shareholders' Equity 3,622 (1,605) $ 87,806
============ =========== ============
See notes to unaudited pro forma consolidated financial statements.
F-121
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(In thousands, except per share data)
ALLIS-
CHALMERS DELTA
CONSOLIDATED DELTA PURCHASE
HISTORICAL HISTORICAL ADJUSTMENTS
----------- ----------- -----------
Sales $ 19,334 $ 821 $ --
Cost of Sales 13,699 211 75 (c)
----------- ----------- -----------
Gross Profit 5,635 610 (75)
Marketing and
Administrative Expense 3,388 985 (665) (g)
----------- ----------- -----------
Income (Loss) from Operations 2,247 (375) 590
Other Income
Interest Income -- 3 --
Interest Expense (521) (11) 11 (n)
Settlement on lawsuit 115 -- --
Other 33 116 --
----------- ----------- -----------
Income (Loss) Before Taxes 1,874 (267) 601
Minority Interest (144) -- --
Taxes (163) (142) 142 (o)
----------- ----------- -----------
Net income/ (loss) attributed to
common shares $ 1,567 $ (409) $ 743
=========== =========== ===========
Pro forma net income (loss)
per common share
Basic $ 0.11
==========
Diluted $ 0.09
==========
Weighted average shares
outstanding
Basic 13,632
==========
Diluted 17,789
==========
See notes to unaudited pro forma consolidated financial statements.
F-122
(continued below)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(In thousands, except per share data)
(continued from above)
PRO FORMA
CAPCOIL ALLIS-
CAPCOIL PURCHASE CHALMERS
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
Sales $ 1,534 $ 21,689
Cost of Sales 959 99 (c) 15,043
------------ ----------- ------------
Gross Profit 575 (99) 6,646
Marketing and
Administrative Expense 281 -- 3,989
------------ ----------- ------------
Income (Loss) from Operations 294 (99) 2,657
Other Income
Interest Income -- 3
Interest Expense (20) 20 (n) (521)
Settlement on lawsuit -- -- 115
Other -- -- 149
------------ ----------- ------------
Income (Loss) Before Taxes 274 (79) 2,403
Minority Interest -- -- (144)
Taxes (101) 101 (o) (163)
------------ ----------- ------------
Net income/ (loss) attributed to
common shares $ 173 $ 22 $ 2,096
============ =========== ============
Pro forma net income (loss)
per common share
Basic $ 0.15
============
Diluted $ 0.12
============
Weighted average shares
outstanding
Basic 13,632
============
Diluted 17,789
============
See notes to unaudited pro forma consolidated financial statements.
F-123
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2004
(In thousands, except per share data)
ALLIS-
CHALMERS DELTA
CONSOLIDATED DELTA PURCHASE
HISTORICAL HISTORICAL ADJUSTMENTS
------------ ---------- -------------
ASSETS
Cash and cash equivalents $ 7,344 $ 891 $ (4,650) (a)
Trade Receivables 12,986 1,096 --
Inventories, net 2,373 -- --
Lease receivable, net 180 -- --
Prepaids and other current assets 1,495 14 --
------------ ---------- -------------
Total Current Assets 24,378 2,001 (4,650)
Net Property, plant and equipment 37,679 1,345 3,541 (b)
(298) (c)
Goodwill 11,776 -- --
Other intangibles, net 5,057 -- --
(163) (q)
Debt issuance costs, net 685 -- --
Lease receivable 558 -- --
Other assets 59 38 --
------------ ---------- -------------
Total Assets $ 80,029 $ 3,384 $ (1,407)
============ ========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 5,541 $ 94 $ (94) (p)
Trade accounts payable 5,694 54 --
Accrued employee benefits 615 17 758 (q)
Accrued interest 470 4 --
Accrued expenses 1,852 105 --
Accounts payable, related parties 740 -- --
------------ ---------- -------------
Total Current Liabilities 14,419 274 664
Accrued postretirement benefit obligations 687 -- --
Long-term debt 24,932 548 (548) (p)
Other long-term liabilities 129 353 --
------------ ---------- -------------
40,660 1,175 116
Minority Interest 4,423 -- --
524 (r)
Shareholders' equity
Common stock 136 (973) 973 (e)
2 (f)
Capital in excess of par value 40,331 65 (65) (e)
998 (f)
642 (p)
Accumulated earnings (deficit) (5,358) 3,117 (3,117) (e)
(524) (r) (956) (g)
(163) (q)
------------ ---------- -------------
Total Shareholders' Equity 33,422 2,209 (1,523)
------------ ---------- -------------
Total Liabilities and Shareholders' Equity $ 80,192 $ 3,384 $ (1,407)
============ ========== =============
See notes to unaudited pro forma consolidated financial statements.
F-124
(continued on next page)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2004
(In thousands, except per share data)
(continued from above)
PRO FORMA
CAPCOIL ALLIS-
CAPCOIL PURCHASE CHALMERS
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ----------- ------------
ASSETS
Cash and cash equivalents $ 349 $ (2,750) (h)
(1,191) (i) $ (7)
Trade Receivables 539 -- 14,621
Inventories, net 387 -- 2,760
Lease receivable, net -- -- 180
Prepaids and other current assets 107 -- 1,616
----------- ----------- -----------
Total Current Assets 1,382 (3,941) 19,170
Net Property, plant and equipment 1,926 926 (j)
(396) (c) 44,723
Goodwill -- -- 11,776
Other intangibles, net 12 1,509 (j)
6,415
Debt issuance costs, net -- -- 685
Lease receivable -- -- 558
Other assets -- -- 97
----------- ----------- -----------
Total Assets $ 3,320 $ (1,902) $ 83,424
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 600 $ (600) (i) $ 4,541
Trade accounts payable 384 -- 6,132
Accrued employee benefits 6 -- 1,396
Accrued interest 4 -- 478
Accrued expenses -- -- 1,957
Accounts payable, related parties -- -- 740
----------- ----------- ---------
Total Current Liabilities 994 (600) 16,244
Accrued postretirement benefit obligations -- -- 687
Long-term debt 935 500 (l)
(591) (i) 25,776
Other long-term liabilities -- -- 482
------------ ----------- -----------
1,929 (691) 43,189
Minority Interest
4,947
Shareholders' equity
Common stock 600 (600) (e)
2 (m) 140
Capital in excess of par value 50 (50) (e)
748 (m)
(174) 42,545
Accumulated earnings (deficit) 741 (741) (e)
(396) (c)
(7,397)
------------ ----------- ------------
Total Shareholders' Equity 1,391 (1,211) 35,288
------------ ----------- ------------
Total Liabilities and Shareholders' Equity $ 3,320 $ (1,902) $ 83,424
============ =========== ============
See notes to unaudited pro forma consolidated financial statements.
F-125
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(In thousands, except per share data)
ALLIS-
CHALMERS DIAMOND
CONSOLIDATED DIAMOND PURCHASE
HISTORICAL HISTORICAL ADJUSTMENTS
----------- ----------- -----------
Sales $ 47,726 $ 5,584 $ --
Cost of Sales 35,300 3,565 --
----------- ----------- -----------
Gross Profit 12,426 2,018 --
Marketing and
Administrative Expense 8,199 664 163 (q)
----------- ----------- -----------
Income (Loss) from Operations 4,227 1,354 (163)
Other Income
Interest Income 32 - --
Interest Expense (2,808) (59) 59 (n)
Other 272 (26) --
----------- ----------- -----------
Income (Loss) Before Taxes 1,723 1,269 (104)
Minority Interest (321) -- (524)
Taxes (514) -- 265 (r)
----------- ----------- -----------
Net Income/ (Loss) 888 1,269 (628)
Preferred Dividend (124) -- --
----------- ----------- -----------
Net income/ (loss) attributed to
common shares $ 764 $ 1,269 $ (628)
=========== =========== ===========
Pro forma net income (loss)
per common share
Basic $ 0.10
==========
Diluted $ 0.06
==========
Weighted average shares
outstanding
Basic 7,930
==========
Diluted 11,959
==========
See notes to unaudited pro forma consolidated financial statements.
F-126
(continued below)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(In thousands, except per share data)
DOWNHOLE
DOWNHOLE PURCHASE DELTA
HISTORICAL HISTORICAL HISTORICAL
----------- ----------- -----------
Sales $ 4,793 $ -- $ 3,249
Cost of Sales 3,876 -- 826
----------- ----------- -----------
Gross Profit 917 -- 2,423
Marketing and
Administrative Expense 872 83 (q) 1,798
----------- ----------- -----------
Income (Loss) from Operations 45 (83) 625
Other Income
Interest Income -- -- 4
Interest Expense (74) 74 (n) (49)
Other -- -- 114
----------- ----------- -----------
Income (Loss) Before Taxes (29) (9) 694
Minority Interest -- -- --
Taxes -- -- (265)
----------- ----------- -----------
Net Income/ (Loss) (29) (9) 429
Preferred Dividend -- -- --
----------- ----------- -----------
Net income/ (loss) attributed to
common shares $ (29) $ (9) $ 429
=========== =========== ===========
See notes to unaudited pro forma consolidated financial statements.
F-127
(continued below)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(In thousands, except per share data)
DELTA CAPCOIL
PURCHASE CAPCOIL PURCHASE
ADJUSTMENTS HISTORICAL ADJUSTMENTS
----------- ------------ -----------
Sales $ -- $ 5,774 $ --
Cost of Sales 298 (c) 4,400 396 (c)
----------- ------------ -----------
Gross Profit (298) 1,374 (396)
Marketing and
Administrative Expense (940) (g) 676 --
----------- ------------ -----------
Income (Loss) from Operations 642 698 (396)
Other Income
Interest Income -- -- --
Interest Expense 49 (n) (74) 74 (n)
Other -- -- --
----------- ------------ -----------
Income (Loss) Before Taxes 691 674 (322)
Minority Interest -- -- --
Taxes 265 (o) -- --
----------- ------------ -----------
Net Income/ (Loss) 956 624 (322)
Preferred Dividend -- -- --
------------ ----------- -----------
Net income/ (loss) attributed to
common shares $ 956 $ 624 $ (322)
============= =========== ===========
See notes to unaudited pro forma consolidated financial statements.
F-128
(continued below)
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(In thousands, except per share data)
(continued from above)
PRO FORMA
ALLIS-
CHALMERS
CONSOLIDATED
------------
Sales $ 67,126
Cost of Sales 48,661
------------
Gross Profit 18,464
Marketing and
Administrative Expense 11,515
------------
Income (Loss) from Operations 6,949
Other Income
Interest Income 36
Interest Expense (2.808)
Other 360
------------
Income (Loss) Before Taxes 4,537
Minority Interest (845)
Taxes (514)
------------
Net Income/ (Loss) 3,178
Preferred Dividend (124)
------------
Net income/ (loss) attributed to
common shares $ 3,054
============
Pro forma net income (loss)
per common share
Basic $ 0.39
============
Diluted $ 0.26
============
Weighted average shares
outstanding
Basic 7,930
============
Diluted 11,959
============
See notes to unaudited pro forma consolidated financial statements.
F-129
ALLIS-CHALMERS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical financial
statements of the Company:
a.) Reduction in cash of $4,650,000 paid to the sellers of Delta at
closing.
b.) Recognition of fair value of assets in connection with the
acquisition of Delta.
c.) Increase in depreciation due to the increase in the fair value of
assets acquired.
d.) To record sellers notes payable to former owners of Delta.
e.) Elimination of Delta's and Capcoil's equity for consolidation
purposes.
f.) Recognition of the issuance of 223,114 shares of common stock at
$4.48 per share.
g.) Elimination of the year end bonus paid to the employees of Delta.
h.) Reduction in cash of $2,750,000 paid to the sellers of Delta at
closing.
i.) Reduction in cash of $1,191,000 paid to the note holders of Capcoil
to extinguish the debt as of September 30, 2004.
j.) Recognition of fair value of assets in connection with the
acquisition of Capcoil.
k.) Recognition of goodwill and other intangible assets in connection
with the acquisition of Capcoil.
l.) To record non-compete notes payable to the former owners of
Capcoil.
m.) Recognition of the issuance of 168,161 shares of common stock at
$4.46 per share.
n.) Reduction interest expense due to the reduction on debt not
assumed.
o.) Elimination of tax provision due to the Company's net operating
losses to offset the income form operations thus reducing the
amount of federal income tax liability.
p.) Elimination of debt not assumed.
q.) Increase in amortization due to the increase in other intangible
asset value of acquired company.
r.) To record minority interest in Diamond Air's income.
F-130
03471-00015-1477731.1