UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
Securities and Exchange Act of 1934 (Amendment No. ____)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14-a6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Materials Pursuant to Section 240.14a-12
ALLIS-CHALMERS ENERGY INC.
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(Name of Registrant as Specified In Its Charter)
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[ALLIS-CHALMERS ENERGY INC. LOGO]
5075 WESTHEIMER ROAD, SUITE 890
HOUSTON, TEXAS 77056
Dear Fellow Stockholders:
You are cordially invited to attend the 2005 annual meeting of
stockholders of Allis-Chalmers Energy Inc., which will be held at our offices at
5075 Westheimer Road, Suite 890, Houston, Texas, 77056, on Thursday, August 11,
2005, at 10:00 a.m., Central Daylight Time.
This booklet includes our notice of annual meeting and our proxy
statement. The proxy statement describes the business that we will conduct at
the annual meeting and provides information about Allis-Chalmers Energy Inc.
Your vote is important. Please complete, date, sign and return the
enclosed proxy card promptly in accordance with the instructions set forth on
the card. This will ensure your proper representation at the meeting whether you
attend or not. Even if you plan on attending, it is a good idea to complete and
return the proxy card in case your plans change. If you do attend the annual
meeting and prefer to vote in person, you may do so.
For a period of at least ten days prior to the annual meeting, a
complete list of stockholders entitled to vote at the meeting will be open to
examination by any stockholder during regular business hours at the Company's
offices at 5075 Westheimer Road, Suite 890, Houston, Texas 77056.
We look forward to seeing you at the meeting.
Sincerely,
/S/ MUNAWAR H. HIDAYATALLAH
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Munawar H. Hidayatallah
Chairman of the Board and Chief Executive Officer
ALLIS-CHALMERS ENERGY INC.
5075 WESTHEIMER ROAD, SUITE 890
HOUSTON, TEXAS 77056
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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 11, 2005
TO THE STOCKHOLDERS OF ALLIS-CHALMERS ENERGY INC.:
Notice is hereby given that the 2005 annual meeting of stockholders of
Allis-Chalmers Energy Inc., a Delaware corporation (the "Company"), will be held
on Thursday, August 11, 2005 at 10:00 a.m., Central Daylight Time at our offices
located at 5075 Westheimer Road, Suite 890, Houston, Texas, 77056, for the
following purposes:
1) To elect ten (10) directors to serve for a one-year term expiring at
the 2006 annual meeting of stockholders;
2) To approve an amendment to our Certificate of Incorporation to
increase the authorized number of shares of our common stock from 20,000,000
shares to 100,000,000 shares and to increase our preferred stock from 10,000,000
shares to 25,000,000 shares;
3) To approve an amendment to our 2003 Incentive Stock Plan to increase
the number of shares of our common stock that may be issued under the plan from
2,400,000 to the lesser of 3,000,000 shares or 15% of our outstanding common
stock calculated on a fully-diluted basis;
4) To ratify the appointment of UHY Mann Frankfort Stein & Lipp CPAs,
LLP as our accountants for the fiscal year ending December 31, 2005; and
5) To transact such other business as may properly come before the
annual meeting.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice, which is first being mailed to our
stockholders on or about July 21, 2005. Please give it your careful
attention. Accordingly, whether or not you plan to attend our annual meeting,
please promptly mark, sign and date the enclosed proxy and return it in the
enclosed postage-paid envelope to assure that your shares will be represented at
the special meeting.
By Order of our board of directors,
/S/ MUNAWAR H. HIDAYATALLAH
---------------------------
Munawar H. Hidayatallah,
Chairman of the Board and
Chief Executive Officer
Houston, Texas
July 21, 2005
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ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE
YOUR REPRESENTATION AT THE ANNUAL MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE
PREPAID IF MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. THIS WILL
ENSURE YOUR PROPER REPRESENTATION AT THE MEETING WHETHER YOU ATTEND OR NOT. IF
YOU DO ATTEND THE ANNUAL MEETING AND PREFER TO VOTE IN PERSON, YOU MAY DO SO.
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Table of Contents
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Page
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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING.........................................................1
The Annual Meeting.............................................................................................1
When and Where is the Annual Meeting?..........................................................................1
Voting and Proxy Procedures....................................................................................1
Quorum and Required Votes......................................................................................3
PROPOSAL 1: ELECTION OF DIRECTORS...........................................................................4
Nominees for Election For a One-Year Term Expiring at the 2005 Annual Meeting..................................4
Meetings Of Our Board Of Directors; Committees.................................................................6
Audit Committee................................................................................................6
Compensation Committee ........................................................................................6
Nominating Committee...........................................................................................7
Section 16(a) Beneficial Ownership Reporting Compliance........................................................7
Code of Ethics.................................................................................................7
PROPOSAL 2: APPROVAL OF THE PROPOSAL TO INCREASE THE NUMBER OF AUTHORIZED
COMMON STOCK AND PREFERRED STOCK................................................................7
Purpose of the Amendment.......................................................................................8
Description of Capital Stock...................................................................................8
Common Stock...................................................................................................9
Preferred Stock................................................................................................9
PROPOSAL 3: APPROVAL OF AMENDMENT TO 2003 INCENTIVE STOCK PLAN.............................................10
Plan Administrator............................................................................................10
Shares Reserved...............................................................................................10
Benefits Issued Under the Plan................................................................................11
Participation in the Plan.....................................................................................11
Description Of Benefits.......................................................................................11
General Provisions Of Awards..................................................................................12
Directors' Fees...............................................................................................13
Adjustments In Certain Events.................................................................................13
Amendment Or Termination Of The Plan..........................................................................13
Exercise; Withholding Payments................................................................................13
Sequential Exercise...........................................................................................14
Accounting....................................................................................................14
Federal Income Tax Consequences...............................................................................14
PROPOSAL 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS............................................15
Change In Principal Accountant................................................................................15
Principal Accounting Fees and Services........................................................................16
Report of the Audit Committee of the Board of Directors.......................................................16
PRINCIPAL HOLDERS OF COMMON STOCK................................................................................17
Stockholders Agreement........................................................................................19
INFORMATION REGARDING EXECUTIVE OFFICERS.........................................................................20
COMPENSATION OF EXECUTIVE OFFICERS...............................................................................22
Summary Compensation Table....................................................................................22
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values..............................23
Employment Agreements With Management.........................................................................24
Board Compensation............................................................................................25
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS...................................................25
General.......................................................................................................25
Overview and Policies for 2004................................................................................26
Summary.......................................................................................................26
Compensation Committee Interlocks and Insider Participation...................................................26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................27
PERFORMANCE GRAPH................................................................................................28
OTHER INFORMATION................................................................................................29
Deadline for Receipt of Shareholder Proposals for Our Next Meeting............................................29
APPENDIX A: CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION
OF ALLIS-CHALMERS ENERGY INC.
APPENDIX B: ALLIS-CHALMERS ENERGY INC. 2003 INCENTIVE STOCK PLAN, AS
AMENDED MAY 25, 2005
ALLIS-CHALMERS ENERGY INC.
5075 WESTHEIMER ROAD, SUITE 890
HOUSTON, TEXAS 77056
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PROXY STATEMENT
FOR THE 2005 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 11, 2005
QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
THE ANNUAL MEETING
WHY DID YOU SEND ME THIS PROXY STATEMENT?
We sent you this proxy statement and the enclosed proxy card because
our board of directors is soliciting your proxy to vote at the 2005 annual
meeting of stockholders. This question and answer section summarizes selected
information contained elsewhere in this proxy statement, but does not contain
all of the information that may be important to you. We urge you to read the
entire proxy statement carefully, including the attached appendices.
You do not need to attend the annual meeting to vote your shares.
Instead, you may simply complete, sign and return the enclosed proxy card.
WHEN AND WHERE IS THE ANNUAL MEETING?
The 2005 annual meeting of the stockholders of Allis-Chalmers
Energy Inc. will be held on Tuesday, August 11, 2005, at 10:00 a.m., Central
Daylight Time, at our offices located at 5075 Westheimer Road, Suite 890,
Houston, Texas, 77056.
WHAT AM I BEING ASKED TO VOTE UPON?
You are being asked to approve (i) the election of ten (10) directors
to serve until the next annual meeting of the stockholders, (ii) an amendment to
our Certificate of Incorporation to increase the authorized number of shares of
our common stock from 20,000,000 shares to 100,000,000 shares and to increase
our preferred stock from 10,000,000 shares to 25,000,000 shares, (iii) an
amendment to our 2003 Incentive Stock Plan to increase the number of shares of
our common stock that may be issued under the plan from 2,400,000 to the lesser
of 3,000,000 shares or 15% of our outstanding common stock calculated on a
fully-diluted basis, and (iv) the ratification of our appointment of independent
auditors for the fiscal year ending December 31, 2005.
VOTING AND PROXY PROCEDURES
WHO MAY VOTE AT THE MEETING?
Only stockholders of record at the close of business on June 14, 2005,
the record date for the meeting, are entitled to receive notice of and to
participate in the annual meeting. If you were a stockholder of record on that
date, you will be entitled to vote all of the common shares that you held on
that date at the meeting, or any postponements or adjournments of the meeting.
We are mailing this proxy statement to stockholders on or about July 21, 2005.
WHAT ARE THE VOTING RIGHTS OF THE HOLDERS OF ALLIS-CHALMERS ENERGY INC. STOCK?
Each share of Common Stock is entitled to one vote per share on all
matters.
Your proxy card indicates the number of shares that you owned as of the
record date.
WHO IS SOLICITING MY PROXY?
Our board of directors is soliciting proxies to be voted at the annual
meeting.
1
HOW DO I VOTE BY PROXY?
Whether you plan to attend the annual meeting or not, we urge you to
complete, sign and date the enclosed proxy card and return it promptly in the
envelope provided. Returning the proxy card will not affect your right to attend
the annual meeting and vote in person.
If you properly fill in your proxy card and send it to us in time to
vote, your "proxy" (ONE OF THE INDIVIDUALS NAMED AS PROXIES ON YOUR PROXY CARD)
will vote your shares as you have directed. Unless otherwise directed in the
proxy card, your proxy will vote your shares as recommended by our board of
directors as follows:
o FOR the election of the ten nominees proposed by our board of
directors;
o FOR the amendment to the Certificate of Incorporation to
increase the authorized number of shares of our common stock
from 20,000,000 shares to 100,000,000 shares and to increase
our preferred stock from 10,000,000 shares to 25,000,000
shares;
o FOR the amendment to our 2003 Incentive Stock Plan to increase
the number of shares of our common stock that may be issued
under the plan from 2,400,000 to the lesser of 3,000,000
shares or 15% of our outstanding common stock calculated on a
fully-diluted basis;
o FOR ratification of the appointment of UHY Mann Frankfort
Stein & Lipp CPAs, LLP as our independent auditors for the
fiscal year ending December 31, 2005.
If any other matter is presented, your proxy will vote in accordance
with his best judgment. At the time this proxy statement went to press, we
knew of no matters that needed to be acted on at the annual meeting other than
those discussed in this proxy statement.
MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
Yes. You may change your vote at any time before your proxy is voted at
the annual meeting. You can do this in one of three ways:
o First, you can send a written notice to our corporate
secretary, stating that you would like to revoke your proxy.
o Second, you can complete and submit a later-dated proxy card.
o Third, you can attend the meeting and vote in person. Your
attendance at the annual meeting will not alone revoke your
proxy-you must vote at the meeting.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD?
It indicates that your shares are held in more than one account, such
as two brokerage accounts registered in different names. You should complete
each of the proxy cards to ensure that all of your shares are voted. We
encourage you to register all of your brokerage accounts in the same name and
address for better stockholder service. You may do this by contacting our
transfer agent, Continental Stock Transfer and Trust Company, at 17 Battery
Place, 8th Floor, New York, New York 10004, Telephone: (212) 509-4000.
HOW DO I VOTE IN PERSON?
If you plan to attend the annual meeting and vote in person, we will
give you a ballot when you arrive. However, if your shares are held in the name
of your broker, bank or other nominee, you must bring an account statement or
letter from the nominee indicating that you were the beneficial owner of the
shares on the record date.
2
QUORUM AND REQUIRED VOTES
HOW MANY VOTES ARE NEEDED TO HOLD THE MEETING?
A majority of the outstanding votes as of the record date must be
represented at the meeting in order to hold the meeting and conduct business.
This is called a quorum.
Shares are counted as present at the annual meeting if:
o The stockholder is present and votes in person at the meeting,
or
o The stockholder has properly submitted a proxy card, or
o Under certain circumstances, the stockholder's broker votes
the shares.
WHO WILL COUNT THE VOTE?
Allis-Chalmers Energy Inc.'s transfer agent, Continental Stock Transfer
and Trust Company, will tally the vote, which will be certified by an Inspector
of Election.
IS MY VOTE CONFIDENTIAL?
Allis-Chalmers Energy Inc. has a policy of vote confidentiality.
Proxies, ballots and voting tabulations are available for examination only by
the Inspector of Election and tabulators. Your vote cannot be disclosed to our
board of directors or management except as may be required by law and in other
limited circumstances.
HOW MANY VOTES MUST THE NOMINEES HAVE TO BE ELECTED?
We use the phrase "for" vote to mean a vote for a director. Directors
will be elected by a plurality of votes, meaning that the ten nominees who
receive the greatest number of "for" votes in the election of directors will be
elected.
HOW ARE PROXIES SOLICITED?
Proxies may be solicited by mail, telephone, or other means by our
officers, directors and other employees. No additional compensation will be paid
to these individuals in connection with proxy solicitations. We will pay for
distributing and soliciting proxies and will reimburse banks, brokers and other
custodians their reasonable fees and expenses for forwarding proxy materials to
stockholders.
WHO CAN HELP ANSWER MY QUESTIONS?
If you would like additional copies of this proxy statement (which
copies will be provided to you without charge) or if you have questions,
including the procedures for voting your shares, you should contact:
Allis-Chalmers Energy Inc.
5075 Westheimer Road, Suite 890
Houston, Texas 77056
(713) 369-0550
Attention: Theodore F. Pound III,
General Counsel
3
PROPOSAL 1
ELECTION OF DIRECTORS
Our Bylaws provide that our board of directors shall consist of a
number of directors determined by our board of directors but not less than three
or more than 15. Currently, our board of directors has ten directors. Each of
the nominees for election to the board of directors is currently a director of
the Company. If elected at the annual meeting, each of the nominees will be
elected to hold office until the next annual meeting of the stockholders and
until his successor has been elected and takes office. Vacancies existing in our
board of directors may be filled by a majority vote of the remaining directors.
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the annual meeting. The ten
persons receiving the highest number of votes will be elected as directors.
Shares represented by executed proxies will be voted, if authority to do so is
not withheld, for the election of the nominees named below. In the event that
any nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as may be nominated by our board of directors. Each person nominated for
election has agreed to serve if elected, and we have no reason to believe that
any nominee will be unable to serve.
Mr. Whitener has been designated as a nominee to be elected as director
pursuant to the stockholders agreement described in "Principal Holders of Common
Stock -- Stockholders Agreement." The parties to the stockholders agreement have
agreed to vote for such nominee. The parties to the stockholder agreement
control approximately 41% of the common stock entitled to vote at the annual
meeting.
Set forth below is biographical information for each person nominated.
NOMINEES FOR ELECTION FOR A ONE-YEAR TERM EXPIRING AT THE 2005 ANNUAL MEETING.
NAME AGE DIRECTOR SINCE
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Jeffrey R. Freedman 58 January 2005
Victor F. Germack 65 January 2005
David A. Groshoff 33 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. 52 February 2003
Robert E. Nederlander 72 May 1989
Leonard Toboroff 72 May 1989
Thomas O. Whitener, Jr. 58 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 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 designate
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.
4
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 a director of BPZ Energy,
a Houston based exploration and production company with properties in Peru and
Ecuador, and was Chief Executive Officer of BPZ Energy from September 2004 until
May 2005. 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 United Fuel and Energy and BPZ Energy, which is a public company.
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 Overhill Farms,
Inc., Consumer Portfolio Services, Inc., Wave Systems Corp., Levcor
International, Inc. and Positron Corporation. He also serves as Chairman of the
Board of Trustees and Executive Committee of the Strang Cancer Prevention Center
and as Chairman Emeritus 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 November 2002 and as
Vice-Chairman since February 2005 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. 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, Inc. 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.
5
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.
See "Principal Holders of Common Stock" for a description of a stockholders
agreement pursuant to which certain persons may be nominated and elected as
directors.
MEETINGS OF OUR BOARD OF DIRECTORS; COMMITTEES
During the fiscal year ended December 31, 2004, our board of directors held six
meetings. Our board of directors currently has three standing committees: the
Audit Committee, the Nominating Committee and the Compensation Committee. The
Audit Committee met eight times and the Compensation Committee met eight times
during 2004. The Nominating Committee was established in 2005. No director
attended less than 75% of the aggregate number of meetings of the Board of
Directors and committees of the board of directors on which he or she served
during 2004. Stockholders may communicate their views to our board of directors
by writing to the board of directors or any individual director. Such
communications should be sent care of our General Counsel, Theodore F. Pound,
III, at 5075 Westheimer Road, Suite 890, Houston, Texas 77056. All
communications will be provided to the directors to whom such communications are
directed. It is not currently known which of our directors will be present at
the annual meeting.
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 and evaluating (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 independent auditors have unrestricted access and report directly to the
Audit Committee. The Audit Committee meets privately with, and has unrestricted
access to, the independent auditors and all of our personnel. The Audit
Committee has selected UHY Mann Frankfort Stein & Lipp CPAs, LLP as our
independent auditors for the fiscal year ended December 31, 2005.
The Board adopted a written Audit Committee charter in March 2002 which was
amended in May 2004. The charter is reviewed annually and revised as
appropriate.
COMPENSATION COMMITTEE
The Compensation Committee consists of two independent, non-employee directors,
who currently are Thomas E. Kelly and Thomas O. Whitener. The Compensation
Committee met eight times during the fiscal year ended December 31, 2004. The
general functions of the Compensation Committee includes making recommendations
to our board of directors with respect to the compensation arrangements for
senior management, directors and other key employees, including the
administration of our 2003 Incentive Stock Plan. The Report of the Compensation
Committee is included elsewhere in this proxy statement.
6
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
does not have a charter. The Nominating Committee consists of Mr. Nederlander,
as Chairman, and Mr. Freedman, both of whom are independent as defined for such
purpose by the American Stock Exchange. 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. The Company has no formal
procedure pursuant to which stockholders may recommend nominees to our Board of
Directors or Nominating Committee and the board of directors believes that the
lack of a formal procedure will not hinder the consideration of qualified
nominees. Any stockholder desiring to suggest a nominee or otherwise communicate
with members of our Nominating Committee should contact our General Counsel,
Theodore F. Pound III, at (713) 369-0550.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers,
as well as beneficial owners of 10% or more of the Company's common stock, to
file reports concerning their ownership of Company equity securities with the
Securities and Exchange Commission and the Company. Based solely upon
information provided to the Company by individual directors, executive officers
and such beneficial owners, the Company believes that during the fiscal year
ended December 31, 2004, all its directors, executive officers and beneficial
owners of 10% or more of its common stock complied with the Section 16(a) filing
requirements, except that director John E. McConnaughy Jr. filed a Form 4 that
was due on December 1, 2004, two days late; director David A. Groshoff filed a
Form 4 that was due on April 6, 2004 one day late and stockholder Energy
Spectrum filed a Form 4 that was due on April 6, 2004 one day late.
CODE OF ETHICS
The Company has adopted a Code of Ethics applicable to all executive officers
and directors of the Company and each of its subsidiaries, including the
Company's principal executive officer, principal financial officer, principal
accounting officer and controller, and persons performing similar functions. The
purpose of the Code of Ethics is: (i) to deter wrongdoing; (ii) to promote
honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; (iii) to
promote full, fair, accurate, timely, and understandable disclosure in reports
and documents that we file with the Securities and Exchange Commission or
otherwise communicate to the public; (iv) to promote compliance with applicable
governmental laws, rules and regulations; (v) to promote prompt internal
reporting of violations of the code to an appropriate person; and (vi) to
promote accountability for adherence to the code.
The Company will provide a copy of the Code of Ethics without charge to any
person upon request. Requests may be made to the Company's Chief Accounting
Officer in writing to the Company's address shown on the first page of this
report or by calling (713) 369-0550.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE.
PROPOSAL 2
APPROVAL OF THE PROPOSAL TO INCREASE OUR AUTHORIZED
COMMON STOCK AND PREFERRED STOCK
On May 25, 2005, our board of directors adopted, subject to stockholder
approval at the annual meeting, a resolution approving an amendment to our
Certificate of Incorporation to increase the authorized number of shares of our
common stock from 20,000,000 shares to 100,000,000 shares and to increase our
preferred stock from 10,000,000 shares to 25,000,000 shares. The amendment will
become effective when the Certificate of Amendment to our Certificate of
Incorporation is filed with the Secretary of State of the State of Delaware. We
will file the Certificate of Amendment promptly after (and if) our stockholders
approve the amendment. A copy of the Certificate of Amendment is attached to
this proxy statement as Appendix A.
7
PURPOSE OF THE AMENDMENT
We believe that there are significant opportunities for consolidation
in our business. In the past several years we have made a number of
acquisitions, in many cases utilizing shares of our common stock. We currently
have outstanding 14,020,958 shares of common stock and options, warrants and
other rights exercisable for an additional 4,263,198 shares of common stock.
Therefore, we have authorized 1,715,844 unissued and unreserved shares of common
stock. While we have not entered into any agreements or commitments for
acquisitions that would require the issuance of shares of common stock, nor are
there currently any discussions or negotiations relating to such an issuance,
our acquisition strategy contemplates the use of our equity securities as
consideration for acquisitions, and we are in the process of evaluating a number
of potential acquisitions, one or more of which may ultimately involve the
issuance of equity securities. In addition, we may effect private or public
offerings of our securities to raise additional funds. We believe that the
availability of additional shares may allow us to move quickly to take advantage
of strategic opportunities or to obtain equity financing. However, we have no
current plans to issue any common stock or preferred stock except as follows: On
June 24, 2005, we filed a registration statement for an underwritten public
offering of our common stock. We currently anticipate that approximately 4.3
million shares of our common stock will be offered for sale, including up to
approximately 1.6 million shares to be sold by us and approximately 2.7 million
to be sold by selling stockholders. This proxy statement shall not be deemed to
constitute an offering of any shares.
The Company's preferred stock is commonly referred to as "blank check"
preferred stock because the stock would have such voting, dividend and
conversion rights, and such other designations, preferences, participation and
other special rights, and such qualifications, limitations or restrictions, as
the board of directors may designate for each class or series issued from time
to time.
We cannot state the actual effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock until the Board
of Directors determines the specific rights of the holders of such preferred
stock. However, the effects might include, among other things, restricting
dividends on or repurchases of the common stock, diluting the voting power of
the common stock, reducing the market price of the common stock, or impairing
the liquidation rights of the common stock, in each case without further action
by our stockholders. Holders of our common stock will not have preemptive rights
with respect to the preferred stock unless otherwise determined by our Board of
Directors.
Both the common stock and the preferred stock would be available for
issuance without further action by our stockholders, except as may be required
by applicable law or pursuant to the requirements of the American Stock Exchange
or such other exchange upon which such securities are then trading.
The board of directors believes that the increase in the number of
authorized shares of common stock and preferred stock is advisable and in the
best interests of the Company and its stockholders for several reasons. The
availability of increased numbers of shares of common stock and preferred stock
will provide the board the maximum flexibility in structuring acquisitions,
joint ventures, strategic alliances, capital-raising and other corporate
transactions. The authorization and issuance of additional preferred stock would
also afford the Company greater flexibility in responding to unsolicited
acquisition proposals and hostile takeover bids. The issuance of preferred
stock, in particular, could have the effect of making it more difficult,
expensive or time consuming for a third party to acquire a majority of our
outstanding voting stock or otherwise effect a change in control, and could
ultimately increase the amount paid to our stockholders in connection with a
change in control. We are not aware of any pending or threatened efforts to
acquire control of the Company.
The proposal to amend our Certificate of Incorporation will be adopted
if a majority of the outstanding shares of common stock vote in favor of it.
Abstentions and broker non-votes will be counted as present for purposes of
determining if a quorum is present but will have the same effect as a negative
vote on the proposal.
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.
8
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.
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 authorize or issue any shares of preferred stock.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2.
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PROPOSAL 3
APPROVAL OF AMENDMENT TO 2003 INCENTIVE STOCK PLAN
The Allis-Chalmers Energy Inc. 2003 Incentive Stock Plan was approved
by our stockholders on November 25, 2003. Under the plan, the following rights
may be granted, which we refer to herein as benefits: (a) stock appreciation
rights; (b) restricted stock; (c) performance awards; (d) incentive stock
options; (e) nonqualified stock options; and (f) stock units. The purpose of the
plan is to provide employees, directors and others providing services to us with
an increased incentive to make significant and extraordinary contributions to
our long-term performance and growth, to align the interest of participants with
stockholders and to retain persons providing valuable services to us.
We are the issuer of the securities offered pursuant to the plan. As of
July 18, 2005, the closing sale price of the common stock on the American Stock
Exchange was $6.11 per share. The plan is not subject to any provisions of the
Employee Retirement Income Security Act of 1974 and is not qualified under
Section 401(a) of the Code.
The plan currently authorizes us to grant options and other awards to
purchase an aggregate of up to 2,400,000 shares of common stock, which may be
authorized but unissued or treasury shares. At the recommendation of the
Compensation Committee, our board of directors on May 25, 2005, unanimously
adopted, subject to stockholder approval, and recommends that the stockholders
approve, an amendment to increase the number of shares with respect to which
options and other awards may be granted under the plan from 2,400,000 to the
lesser of 3,000,000 shares or 15% of the number of shares of common stock
outstanding from time to time, calculated on a fully-diluted basis, i.e., giving
effect to the exercise and conversion of all outstanding warrants, options and
other rights exercisable for or convertible into common stock.
While we have no specific plans to issue additional options to our
employees, our business strategy includes the acquisition of companies with
strong management teams to whom we may grant options as part of an overall
incentive compensation package. We may also grant additional options to
employees of our existing businesses, including our executive officers.
Therefore, the Compensation Committee of the board of directors and the board of
directors believe that it is in our best interest and in the best interests of
stockholders to authorize additional shares of common stock to be issued
pursuant to the plan in order to allow us to continue to use stock options as a
key component of compensation.
THE MAJOR FEATURES OF THE PLAN ARE SUMMARIZED BELOW, BUT THIS IS ONLY A
SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL
TEXT OF THE PLAN, WHICH IS ATTACHED HERETO AS APPENDIX B.
PLAN ADMINISTRATOR
The administrator of the plan is our Compensation Committee. Thomas O.
Whitener has served as a member of the Compensation Committee since 2002. Thomas
E. Kelly has served on the Compensation Committee since January 2005. The
authority to interpret and administer the plan, including the authority to
select persons eligible to participate in the plan, to grant benefits in
accordance with the plan, and to establish the timing, pricing, amount and other
terms and conditions of such grants may be exercised by the administrator in its
sole discretion.
SHARES RESERVED
Subject to certain adjustment provisions relating to changes in capital
stock, the maximum number of shares of our common stock that may be issued under
the plan, as amended, may not exceed the lesser of 3,000,000 shares or 15% of
the number of shares of common stock outstanding from time to time, calculated
on a fully-diluted basis, i.e., giving effect to the exercise and conversion of
all outstanding warrants, options and other rights exercisable for or
convertible into common stock. Shares of our common stock underlying outstanding
stock options, stock appreciation rights and performance awards will reduce the
plan maximum while such stock options, stock appreciation rights and performance
awards are outstanding or once such shares have been issued. Shares of our
common stock underlying expired, canceled or forfeited stock options, stock
appreciation rights and performance awards shall be added back to the plan
maximum. Restricted stock issued pursuant to the plan will reduce the plan
maximum while outstanding even while subject to restrictions. Shares of
restricted stock shall be added to the plan maximum if such restricted stock is
forfeited.
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BENEFITS ISSUED UNDER THE PLAN
To date, options to purchase 1,926,866 shares have been issued under
the plan. We have no current plans to issue any options and cannot determine the
amount of future benefits which will be granted to participants under the plan.
PARTICIPATION IN THE PLAN
Participants in the plan will consist of such officers, key employees,
directors and service providers of the Company or any subsidiary as the
administrator in its sole discretion shall determine. The administrator will
determine and fix the number of shares of stock with respect to which each
participant may be granted stock options and other benefits and the number of
shares of restricted stock which each participant may be awarded, except that no
incentive option may be granted under the plan to any one participant if the
aggregate fair market value of stock underlying incentive options which are
exercisable for the first time by such participant during any calendar year
under any plan maintained by the Company (or any parent or subsidiary
corporation of the Company) exceeds $100,000. Each grant or award under the plan
is to be evidenced by a written agreement, which will contain such provisions as
may be approved by the Compensation Committee.
DESCRIPTION OF BENEFITS
INCENTIVE STOCK OPTIONS. Incentive options are stock options to
purchase shares of our common stock at not less than 100% (110% if the optionee
owns stock possessing more than 10% of the combined voting power of all owners
of our common stock) of the fair market value of the shares on the date the
option is granted , subject to such terms and conditions set forth in an option
agreement as may be established by the administrator in its sole discretion that
conforms to the requirements of Section 422 of the Internal Revenue Code.
NONQUALIFIED STOCK OPTIONS. Nonqualified options are stock options that
do not conform to the requirements of Section 422 of the Internal Revenue Code.
Nonqualified options will enable holders to purchase shares of our common stock
at purchase prices established by the administrator on the date the options are
granted, subject to such terms and conditions set forth in an option agreement
as may be established by the administrator in its sole discretion.
STOCK APPRECIATION RIGHTS. A stock appreciation right, referred to as a
SAR, is the right to receive all or a portion of the difference between the fair
market value of a share of our common stock at the time of exercise of the SAR
and the exercise price of the SAR established by the administrator, subject to
such terms and conditions set forth in a SAR agreement as may be established by
the administrator in its sole discretion.
RESTRICTED STOCK. Restricted stock is our common stock issued or
transferred under the plan (other than upon exercise of stock options or as
performance awards) at any purchase price less than the fair market value
thereof on the date of issuance or transfer, or as a bonus, subject to such
terms and conditions set forth in a restricted stock agreement as may be
established by the administrator in its sole discretion.
PERFORMANCE AWARDS. Performance awards are common stock, monetary units
or some combination thereof, to be issued without any payment therefore, in the
event that certain performance goals established by the administrator are
achieved over a period of time designated by the administrator, but not in any
event more than five years.
STOCK UNITS. A Stock Unit represents the right to receive a share of
our common stock at a designated time in the future, subject to such terms and
conditions set forth in a stock unit agreement as may be established by the
administrator in its sole discretion.
We have not previously issued and have no current plan to issue
nonqualified stock options, stock appreciation rights, restricted stock,
performance awards or stock units.
11
GENERAL PROVISIONS OF AWARDS
TERM; EXERCISE. No right will have a term in excess of ten years, and
rights may become exercisable in one or more installments over a specified
period of service measured from the grant date, and, as described below, will
generally be forfeited if not excercised within a certain period of time
following the date that the participant ceases to provide services to us. In the
discretion of the administrator, the exercise price for options may be paid in
cash or by delivery of shares of common stock then owned by the participant.
TRANSFERABILITY. Benefits are generally neither transferable nor
assignable by the optionee other than by will or by the laws of descent and
distribution following an optionee's death, provided, however, that nonqualified
options may be transferred to certain family members or entities in which the
participant and the participant's family members own 80% of all interests.
CESSATION OF SERVICE. In the discretion of the administrator, benefits
may be conditioned upon the continuation of service for the Company, provided
that, in the case of incentive options: (a) should a participant cease to remain
in our service for any reason other than death or permanent disability, any
unexercised incentive option held by the participant will terminate three (3)
months following termination of employment; and (b) should a participant die or
become permanently disabled, any unexercised incentive options will terminate
twelve (12) months following the date of the participant's death or disability.
ACCELERATION OF RIGHTS UPON CHANGE IN CONTROL. Our stock option
agreements generally provide, and agreements for other benefits granted in the
future may provide, that a benefit to the extent outstanding at the time of a
change in control but not otherwise fully exercisable, will automatically
accelerate so that such benefit will, immediately prior to the effective date of
such change in control, become fully exercisable for all the shares of our
common stock at the time subject to the benefit and may be exercised for any or
all of those shares as fully vested shares. For this purpose, change in control
is defined as:
(a) The acquisition by any individual, entity or group, or a
Person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
other than an excluded person (defined as any person who beneficially owned more
than 10% of our outstanding shares at any time prior to March 6, 2003), of
ownership of more than 50% of either: (i) the then outstanding shares of our
Common Stock, referred to as our outstanding common stock; or (ii) the combined
voting power of our then outstanding voting securities entitled to vote
generally in the election of directors, referred to as our outstanding voting
securities; or
(b) Individuals who, as of the date of approval of the plan by
our board of directors, constitute our board of directors, referred to as the
"incumbent board," cease for any reason to constitute at least a majority of our
board of directors; provided, however, that any individual becoming a director
whose election, or nomination for election by our stockholders, was approved by
a vote of at least a majority of the directors then comprising the incumbent
board shall be considered as though such individual were a member of the
incumbent board, but excluding, as a member of the incumbent board, any such
individual whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Securities Exchange Act of 1934) or other
actual or threatened solicitation of proxies or consents by or on behalf of a
person other than our board of directors; or
(c) Approval by our stockholders of a reorganization, merger
or consolidation, in each case, unless, following such reorganization, merger or
consolidation, (i) more than 50% of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the outstanding common stock and outstanding voting
securities immediately prior to such reorganization, merger or consolidation, in
substantially the same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, as the case may be, or at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were members of the incumbent
board at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
12
(d) Approval by our stockholders of (i) our complete
liquidation or dissolution or (ii) the sale or other disposition of all or
substantially of our assets, other than to a corporation, with respect to which
following such sale or other disposition, (A) more than 50% of, respectively,
the then outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election for directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the outstanding
common stock and outstanding voting securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the outstanding common
stock and outstanding voting securities, as the case may be; or (B) at least a
majority of the members of the board of directors of such corporation were
members of the incumbent board at the time of the execution of the initial
agreement or action of the board of directors providing for such sale or other
disposition of assets.
DIRECTORS' FEES
The plan specifically authorizes the administrator to grant benefits to
directors as compensation for services as directors, including grants to
directors who are members of our Compensation Committee or otherwise acting as
the administrator.
ADJUSTMENTS IN CERTAIN EVENTS
The number of shares subject to each outstanding stock option or stock
appreciation right or restricted stock award, the option price with respect to
outstanding stock options, the grant value with respect to outstanding stock
appreciation rights and the aggregate number of shares remaining available under
the plan will be subject to adjustment by the administrator to reflect events
such as stock dividends, stock splits, recapitalizations, mergers,
consolidations or reorganizations of or by us. We effected a one-to-five reverse
stock split on June 10, 2004. As a result, the number of shares authorized to be
issued pursuant to the plan and the number of shares subject to each outstanding
option were each reduced to one-fifth of the number of shares prior to the
reverse stock split, and the exercise price of each outstanding option was
increased to a price equal to five times the exercise price in effect prior to
the reverse stock split.
AMENDMENT OR TERMINATION OF THE PLAN
Our board of directors may terminate or amend the plan at any time,
provided that our board of directors may not, without stockholder approval,
amend the plan so as to increase the maximum number of shares in the aggregate
which are subject to the plan, change the class of persons eligible to be
participants under the plan or materially increase the rights accruing to
participants under the plan, and our board of directors may not, without the
consent of the holder of a benefit, reduce or impair any benefit previously
granted or awarded under the plan.
Unless sooner terminated by our board of directors, the plan will
terminate on February 25, 2013. Termination of the plan will not affect the
validity or expiration date of any then outstanding benefit.
EXERCISE; WITHHOLDING PAYMENTS
The administrator shall specify in its grants of stock options or other
benefits the time or times at which benefits will be exercisable. At the time of
exercise of any stock option granted pursuant to the plan, the participant must
pay the full option price of all shares purchased in cash or, with the consent
of the administrator, in common stock.
We may become obligated to pay amounts for income tax withholding upon
the exercise of a nonqualified option or stock appreciation right, or upon the
award of restricted stock or the expiration of restrictions applicable to
restricted stock, or upon a disqualifying disposition of shares acquired upon
exercise of an incentive option. In such event, we may defer making payment or
delivery of any benefit until the participant has made an acceptable arrangement
with respect to such obligation. With the consent of the administrator, a
participant may satisfy such withholding obligations by electing to reduce the
number of shares of common stock deliverable to the participant upon exercise of
a stock option or stock appreciation right or award of restricted stock.
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SEQUENTIAL EXERCISE
Successive stock options and stock appreciation rights may be granted
to the same participant, whether or not any stock option or stock appreciation
right previously granted to such participant remains unexercised. A stock option
or stock appreciation right may be exercised even though stock options and stock
appreciation rights previously granted to such participant remain unexercised.
ACCOUNTING
Option grants made to officers and other employees under the Plan
having a fixed exercise price that is at least equal to the fair market value of
the underlying stock on the date of grant and giving the holder a right to
purchase a fixed number of shares will not result under current accounting rules
in any direct charge to our reported earnings. However, the fair market value of
those awards is required to be disclosed in the notes to our financial
statements, and we must also disclose in our financial statement notes the pro
forma impact those awards would have upon our reported earnings and earnings per
share if the fair value of those awards at the time of grant were treated as a
compensation expense over the life of the option. 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.
FEDERAL INCOME TAX CONSEQUENCES
The rules governing the tax treatment of stock options, stock
appreciation rights, restricted stock and shares acquired upon the exercise of
stock options and stock appreciation rights are quite technical. Therefore, the
description of federal income tax consequences set forth below is necessarily
general in nature and does not purport to be complete. Moreover, the statutory
provisions are subject to change, as are their interpretations, and their
application may vary in individual circumstances. Finally, the tax consequences
under applicable state and local income tax laws may not be the same as under
the federal income tax laws.
INCENTIVE OPTIONS. Incentive options granted pursuant to the plan are
intended to qualify as incentive stock options within the meaning of Section
422A of the Code. If the participant makes no disposition of the shares acquired
pursuant to exercise of an incentive option within one year after the transfer
of shares to such participant and within two years from grant of the option,
such participant will realize no taxable income as a result of the grant or
exercise of such option, and any gain or loss that is subsequently realized may
be treated as long-term capital gain or loss, as the case may be. Under these
circumstances, we will not be entitled to a deduction for federal income tax
purposes with respect to either the issuance of the incentive options or the
issuance of shares upon their exercise.
If shares acquired upon exercise of incentive options are disposed of
prior to the expiration of the above time periods, the participant will
recognize ordinary income in the year in which the disqualifying disposition
occurs, the amount of which will generally be the lesser of (i) the excess of
the market value of the shares on the date of exercise over the option price, or
(ii) the gain recognized on such disposition. Such amount will ordinarily be
deductible by us for federal income tax purposes in the same year, provided that
the amount constitutes reasonable compensation and that we satisfy certain
federal income tax withholding requirements. In addition, the excess, if any, of
the amount realized on a disqualifying disposition over the market value of the
shares on the date of exercise will be treated as capital gain.
NONQUALIFIED OPTIONS. A participant who acquires shares by exercise of
a nonqualified option generally realizes as taxable ordinary income, at the time
of exercise, the difference between the exercise price and the fair market value
of the shares on the date of exercise. Such amount will ordinarily be deductible
by us in the same year, provided that the amount constitutes reasonable
compensation and that we satisfy certain federal income tax withholding
requirements. Subsequent appreciation or decline in the value of the shares on
the sale or other disposition of the shares will generally be treated as capital
gain or loss.
STOCK APPRECIATION RIGHTS. A participant generally will recognize
ordinary income upon the exercise of a stock appreciation right in an amount
equal to the amount of cash received and the fair market value of any securities
received at the time of exercise, plus the amount of any taxes withheld. Such
amount will ordinarily be deductible by us in the same year, provided that the
amount constitutes reasonable compensation and that we satisfy certain federal
income tax withholding requirements.
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RESTRICTED STOCK. A participant granted shares of restricted stock
under the plan is not required to include the value of such shares in ordinary
income until the first time such participant's rights in the shares are
transferable or are not subject to substantial risk of forfeiture, whichever
occurs earlier, unless such participant timely files an election under Section
83(b) of the Code to be taxed on the receipt of the shares. In either case, the
amount of such income will be equal to the excess of the fair market value of
the stock at the time the income is recognized over the amount (if any) paid for
the stock. We will ordinarily be entitled to a deduction, in the amount of the
ordinary income recognized by the participant, for our taxable year in which the
participant recognizes such income, provided that the amount constitutes
reasonable compensation and that we satisfy certain federal income tax
withholding requirements.
Approval of the amendment to the plan requires the affirmative vote of
a majority of those present, in person or represented by proxy, and entitled to
vote at the annual meeting. Abstentions are not affirmative votes and,
therefore, will have the same effect as a vote against the proposal. Broker
non-votes will not be treated as entitled to vote on the matter and thus, will
not affect the outcome of the voting on the proposal.
OUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 3.
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee of our board of directors has appointed UHY Mann
Frankfort Stein & Lipp CPAs, LLP as our independent public accountants to audit
our financial statements for the fiscal year ending December 31, 2005, and has
further directed that management submit the selection of independent public
accountants for ratification by the stockholders at the annual meeting. UHY Mann
Frankfort Stein & Lipp CPAs, LLP acted as our independent public accountants and
audited our financial statements for the year ended December 31, 2004. The Audit
Committee chose UHY Mann Frankfort Stein & Lipp CPAs, LLP to act as our
independent public accountants because the Audit Committee believes that UHY
Mann Frankfort Stein & Lipp CPAs, LLP has significant resources and significant
expertise in the oil and gas service industry. Representatives of UHY Mann
Frankfort Stein & Lipp CPAs, LLP are expected to be present at the annual
meeting and will have the opportunity to make a statement if they desire to do
so. They will also be available to answer questions regarding our financial
statements and operations. UHY Mann Frankfort Stein & Lipp CPAs, LLP has
represented to us that it is independent with respect to the Company within the
meaning of the published rules and regulations of the Securities and Exchange
Commission.
CHANGE IN PRINCIPAL ACCOUNTANT
On October 5, 2004, our Audit Committee dismissed Gordon, Hughes &
Banks, LLP as our independent public accountants and engaged UHY Mann Frankfort
Stein & Lipp CPAs, LLP as our independent public accountants to review our
financial statements beginning with the quarter ending September 30, 2004, and
to audit our financial statement for the year ending December 31, 2004.
Gordon, Hughes & Banks, LLP acted as our independent public accountants
and audited our financial statements for the years ended December 31, 2003 and
2002. The reports of Gordon, Hughes & Banks, LLP on our financial statements for
the past two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle except as follows: in its Independent Auditor's Report dated March 4,
2003, relating to our financial statements for the year ended December 31, 2002,
Gordon, Hughes & Banks, LLP qualified its opinion on our financial statements
with the assumption that we would continue as a going concern. The basis for the
"going concern" exception was our potential inability to refinance our bank debt
which totaled approximately $14.2 million on March 31, 2003, and was subject to
repayment on June 30, 2003. We refinanced this debt prior to June 30, 2003.
During our two most recent fiscal years and through the date hereof,
there have been no disagreements with Gordon, Hughes & Banks, LLP on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Gordon, Hughes & Banks, LLP, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
During our two most recent fiscal years and through the date hereof,
there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
Gordon, Hughes & Banks, LLP has indicated to us that it concurs with
the foregoing statements as they relate to Gordon, Hughes & Banks, LLP and has
furnished a letter to the Securities and Exchange Commission to this effect. A
copy of this letter is attached as an exhibit to the Form 8-K we filed with the
Securities and Exchange Commission on October 6, 2004, relating to the
appointment of UHY Mann Frankfort Stein & Lipp CPAs, LLP as our independent
15
public accountants. During our two most recent fiscal years and through the date
we engaged UHY Mann Frankfort Stein & Lipp CPAs, LLP, we did not consult UHY
Mann Frankfort Stein & Lipp CPAs, LLP regarding: (i) the application of
accounting principles to a specified transaction (completed or proposed); (ii)
the type of audit opinion that might be rendered on our financial statements; or
(iii) any matter that was either the subject of a disagreement as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions or
a reportable event as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the aggregate fees we paid for services
performed in 2003 and 2004 to our independent accountant, Gordon, Hughes &
Banks, LLP, and to UHY Mann Frankfort Stein & Lipp CPAs, LLP, which became our
independent auditor in October 2004:
DESCRIPTION OF FEES TO
GORDON HUGHES BANK, LLP 2004 2003
----------------------- ------- -------
Audit Fees (1) $ 0 $79,081
Audit Related Fees (2) $ 0 $ 6,545
Tax Fees $ 0 $ 0
All Other Fees (4) $58,754 $ 0
UHY MANN FRANKFORT STEIN & LIPP CPAS, LLP
-----------------------------------------
Audit Fees (1) $204,453 $ 0
Audit Related Fees $ 0 $ 0
Tax Fees (3) $ 15,028 $ 2,928
All Other Fees (4) $ 14,000 $ 0
(1) Includes fees paid for audit of our annual financial statements and reviews
of the related quarterly financial statements. 100% of these services and fees
were pre-approved by our Audit Committee.
(2) Includes fees paid for assurance and related services that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported under "Audit Fees." These services include issuance of
consents and other accounting and reporting consultations. 100% of these
services and fees were pre-approved by our Audit Committee.
(3) Includes tax planning and tax return preparation fees. These services were
not pre-approved by our Audit Committee.
(4) Includes fees related to the review and issuance of consents related to our
registration statement on Form S-1 which was declared effective by the
Securities and Exchange Commission on March 8, 2005. These services were
pre-approved by our Audit Committee.
PRE-APPROVAL POLICIES AND PROCEDURES The Company adopted a policy that
the Audit Committee must approve in advance all audit and non-audit services
provided by the Company's independent accounts. All of the audit and
audit-related services, and the fees therefor, provided by Gordon, Hughes &
Banks, LLP and UHY Mann Frankfort Stein & Lipp CPAs, LLP in 2003 and 2004 were
pre-approved by the Audit Committee, except that tax fees paid to UHY Mann
Frankfort Stein & Lipp CPAs, LLP prior to their being engaged as our independent
public accountants were not pre-approved by our Audit Committee.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee is responsible for overseeing the Company's
financial reporting process, reviewing the financial information that will be
provided to stockholders and others, monitoring internal accounting controls,
selecting our independent auditors and providing to our board of directors such
additional information and materials as we may deem necessary to make our board
of directors aware of significant financial matters. We operate under a written
Audit Committee Charter adopted by our board of directors in March 2002 and
revised in May 2004.
We have reviewed and discussed the audited financial statements of the
Company for the fiscal year ended December 31, 2004 with management and UHY Mann
Frankfort Stein & Lipp CPAs, LLP, our independent auditor for the fiscal year
ended December 31, 2004. In addition, we have discussed with UHY Mann Frankfort
Stein & Lipp CPAs, LLP the matters required to be discussed by Statement on
Auditing Standards No. 61 (Communications with Audit Committee). We also have
received the written disclosures and the letter from UHY Mann Frankfort Stein &
Lipp CPAs, LLP, as required by the Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and we have discussed the
independence of UHY Mann Frankfort Stein & Lipp CPAs, LLP with that firm. We
also have considered the non-audit services provided by UHY Mann Frankfort Stein
& Lipp CPAs, LLP prior to 2004 and determined that the services provided are
compatible with maintaining their independence.
16
We, the members of the Audit Committee, are not professionally engaged
in the practice of auditing or accounting nor are we experts in the fields of
accounting or auditing, including determination of auditor independence. We
rely, without independent verification, on the information provided to us and on
the representations made by management and the independent auditors.
Accordingly, our oversight does not provide an independent basis to determine
that management has maintained appropriate accounting and financial reporting
principles or appropriate internal controls and procedures designed to assure
compliance with accounting standards and applicable laws and regulations.
Furthermore, our considerations and discussions referred to above do not assure
that the audit of our financial statements has been carried out in accordance
with auditing standards generally accepted in the United States of America, or
that the financial statements are presented in accordance with accounting
principles generally accepted in the United States of America.
Based upon the discussions referred to above, the Audit Committee
recommended to the board of directors that our audited financial statements be
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
RESPECTFULLY SUBMITTED BY:
MEMBERS OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
John E. McConnaughy, Jr.
David A. Groshoff
Victor F. Germack
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 July 20, 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
ownership is calculated in accordance with the rules of the Securities and
Exchange Commission; accordingly, each party to the stockholders agreement
described below beneficially owns all 7,343,005 shares of common stock owned
collectively by the parties to all stockholders agreement.
Beneficial
Number of Shares Ownership
Beneficially Owned Percentage
------------------ ----------
Energy Spectrum Partners LP (1) 7,343,005 47.1%
Munawar H. Hidayatallah (2) 7,343,005 47.1%
Robert E. Nederlander (3) 7,343,005 47.1%
Leonard Toboroff (4) 7,343,005 47.1%
Thomas O. Whitener, Jr. (1) 7,343,005 47.1%
Jeffrey R. Freedman (5) 98,000 *%
David Groshoff (6) 4,000 *%
Thomas E. Kelly (7) 94,201 *%
Jens H. Mortensen, Jr. (8) 7,343,005 47.1%
John E. McConnaughy, Jr. (9) 300,000 2.3%
David Wilde (10) 175,000 *
Todd C. Seward (11) 20,000 *
All directors and executive officers as a group 8,183,873 51.0%
(15 persons) (12)
Palo Alto Investors (13) 1,666,667 11.9%
Steve Emerson (14) 1,174,000 8.4%
Christopher Engel (15) 7,343,005 1.9%
Donald Engel (16) 7,343,005 1.5%
* less than one percent
-----------
17
(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 2,311,062 shares
of our common stock, warrants to purchase 262,500 shares of common stock, and an
option to purchase 6,000 shares of common stock. Energy Spectrum is also deemed
to beneficially own 4,763,443 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.
(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 6,031,338 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)
6,627,411 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) 6,647,412 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. 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)
5,775,747 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.
18
(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 options 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. Seward's' address
is 5075 Westheimer, Suite 890, Houston, TX 77056.
(12) Includes the shares described in Notes (1) through (11).
(13) 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.
(14) 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.
(15) Shares include (i) 77,461 shares owned by this stockholder, (ii) 99,950
shares which may be issued upon the exercise of warrants owned by this
stockholder, (iii) 36,251 shares owned by the Engel Defined Benefit Plan and
(iv) 46,776 shares which may be issued upon the exercise of warrants owned by
the Engel Defined Benefit Plan. Christopher Engel exercises investment and
voting authority with respect to securities owned by Engel Defined Benefit Plan.
Shares listed as beneficially owned include 7,082,567 shares 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.
(16) Shares owned directly include 92,953 shares owned by this stockholder and
119,940 shares which may be issued upon the exercise of warrants owned by this
stockholder. Shares listed as beneficially owned include 7,165,594 shares 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.
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; 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 and Mortensen. 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.
19
INFORMATION REGARDING EXECUTIVE OFFICERS
The names of our current executive officers, and certain information about them,
are set forth below. Except as set forth in the written employment agreements
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 companies. From August
1999 until February 2000, Mr.
Hidayatallah worked as a consultant to
IRI International, Inc. and Riddell
Sports Inc.
Jens H. Mortensen 52 Jens H. Mortensen, Jr. has served as our
director since November 2002 and as
Vice-Chairman since February 2005 and
served as our President and Chief
Operating Officer from February 2003
until 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. 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.
DavidWilde 50 David Wilde became our President and
Chief Operating Officer in February
2005. Mr. Wilde was President and Chief
Executive Officer 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 30
years' experience in the directional
drilling and rental tool sectors of the
oil service industry.
20
Victor M. Perez 52 Victor M. 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.
Bruce Sauers 41 Bruce Sauers has served as our Vice
President and Chief Accounting Officer
since July 2005. From July 2004 until
July 2005, Mr. Sauers served as a
consultant performing controller
services for a number of companies
including a publicly held oil and gas
service company. From July 2003 until
June 2004, Mr. Sauers served as
controller for HMT, Inc., which provides
products and services for above-ground
storage tanks. From February 2003 until
July 2003, Mr. Sauers served as
assistant controller at Todco, which
provides offshore oil and gas services.
From August 2002 until January 2003, Mr.
Sauers acted as a consultant preparing
filings with the Securities and Exchange
Commission. From December 2001 through
June 2002, Mr. Sauers was corporate
controller at OSCA, Inc., an
international oil and gas service
company, and from December 1996 until
December 2001 was a corporate controller
at UTI Energy Corp., which provided
services to oil and gas exploration
companies.
Todd C. Seward 43 Todd C. 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 20 years of experience in all
aspects of accounting, financial and
treasury management.
Alya Hidayatallah 30 Alya Hidayatallah became our Vice
President in April 2005. From February
2000 until April 2004 Ms. Hidayatallah
was a Financial Analyst and Senior
Financial Analyst in the Financial
Restructuring Group of Houlihan Lokey
Howard & Zuken. Ms. Hidayatallah has a
degree in Business Economics from the
University of California at Los Angeles
awarded in 1997. Ms. Hidayatallah is Mr.
Hidayatallah's daughter.
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 David K. 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.
21
Theodore F. Pound III 51 Theodore F. Pound III 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 been
our lead counsel in each of our
acquisitions beginning in 2001.
COMPENSATION OF EXECUTIVE OFFICERS
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.
SUMMARY OF COMPENSATION TABLE
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)
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 (6) 2002 $ 146,393 $ 0 $ 0 0
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' (7)
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 attainment of certain strategic
objectives set forth in his 2004 employment agreement (see, "Employment
Agreements with Management," below).
(6) Mr. Wilde was President and Chief Executive Officer of Strata, one of our
subsidiaries, until February 2005 when he was named our President and Chief
Operating Officer.
(7) Mr. Mortensen served as our President and Chief Operating Officer from
February 2003 until February 2005.
(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 $32,500 was paid in 2005.
22
The following table provides information concerning stock options granted to the
named executive officers during 2004. All the grants were options to purchase
shares of common stock and were made under our 2003 Incentive Stock Plan. No
benefits other than stock options have been granted under the 2003 Incentive
Stock Plan. No options were exercised during 2004.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERMS(3)
% OF TOTAL
NUMBER OF OPTIONS/SARS EXERCISE
SECURITIES GRANTED PRICE
UNDERLYING TO PER
OPTIONS/SARS EMPLOYEES SHARE EXPIRATION
NAME GRANTED(1) IN 2004 ($/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 grant of the option 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.
The following table sets forth information regarding options held by our chief
executive officer and the four other most highly compensated executive officers
at December 31, 2004.
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 $ 573,348 $286,674
Jens H. Mortensen, Jr. 66,667 33,333 $ 143,337 $ 71,669
David Wilde 103,334 106,666 $ 145,170 $ 75,335
Todd C. Seward 20,000 10,000 $ 43,000 $ 21,500
(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.
23
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
in the 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 and 50% of which may be awarded in the discretion of the board of
directors. 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.
24
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.
David Bryan was appointed as the President and Chief Operating Officer of Strata
in February 2005 pursuant to the terms of a three-year employment agreement
dated as of April 1, 2004. Under the terms of the employment agreement, Mr.
Bryan receives an annual base salary of $150,000 subject to annual review and
potentially an increase by our Board. In addition, Mr. Bryan is entitled to
receive a bonus based on Strata's earnings before taxes, interest and
depreciation provided that Strata met designated minimum earnings targets and
provided further that such bonus shall not exceed 60% of Mr. Bryan's base
salary. The bonus calculation is subject to adjustment in subsequent years.
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 for this purpose. 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 for services as
directors. Directors are 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.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of our Board is a standing committee currently
comprised of two non-employee directors, Thomas O. Whitener, Jr. and Thomas E.
Kelly. The committee serves as an administrative arm of our Board to make
recommendations to our board of directors regarding executive compensation. The
following is the report of the Compensation Committee describing compensation
policies and rationale applicable to the Company's executive officers and others
with respect to the compensation for the fiscal year ended December 31, 2004.
GENERAL
After evaluating management's performance and the recommendation of the
Company's senior officers, we recommend compensation and pay levels for
executive officers to the full Board for approval. We also recommend stock
option grants to the board of directors, based upon the Company's performance
and the recommendations of the Company's senior officers.
25
OVERVIEW AND POLICIES FOR 2004
The goals of the Company are to attract, motivate, and retain the key executive
talent necessary to achieve the Company's business objectives and contribute to
the long-term success of the Company. To meet these goals, the compensation
program for our executive officers consists of the following components:
o Base Salary,
o Annual Bonus, and
o Long-Term Stock Option Incentives.
We believe that the use of bonuses and options allows the Company to attract and
retain the best employee talent available and to create a direct link between
compensation and the short-term and long-term performance of the Company. In
general, the Company incorporates vesting periods in options to encourage
employees to remain with the Company. The size of each option grant is based on
the recipient's position and tenure with the Company, the recipient's past
performance and the anticipated contribution to be made by the recipient. We
believe the overall compensation paid to each of our executive employees is
reasonable in light of their skills, performance and the compensation paid to
similar executives in our industry.
In fiscal year 2004, we reviewed the compensation of the Company's key executive
officers by evaluating the Company's performance along with each executive's
scope of responsibility, prior experience, performance, and expected
contribution to the Company's future success. We also took into account the
Committee's subjective assessment of the salaries for similar positions at
comparable companies. At higher compensation levels, individual and Company
performance will be given greater weight, along with competitive considerations.
In establishing compensation for executives other than Mr. Hidayatallah, we took
into account Mr. Hidayatallah's recommendations. We generally did not establish
or review objective measures of performance.
In establishing bonuses, the Committee considers the same factors as are
considered in reviewing each executive's overall compensation, with an increased
emphasis on Company performance.
The Compensation Committee will consider the effect of Code Section 162(m) on
the compensation paid to the Company's executive officers. Code Section 162(m)
disallows a tax deduction for any publicly held corporation to the extent
compensation for any of its named executive officers exceeds $1 million, unless
compensation is performance-based or qualifies for another exemption. Where
reasonably practicable, the Company will seek to qualify the compensation paid
to our executive officers for an exemption from the deductibility limitations of
Code Section 162(m). Stockholder approval of the material terms of the Option
Plan is expected to preserve potential corporate tax deductions under Code
Section 162(m).
SUMMARY
The Company's compensation policies will evolve over time as the Company moves
to attain the near-term goals it has set for itself while maintaining its focus
on building long-term shareholder value.
Members of the Compensation Committee:
Thomas O. Whitener, Jr.
Thomas E. Kelly
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board currently consists of Messrs. Kelly and
Whitener. Mr. Saeed M. Sheikh served as a member of the Compensation Committee
until his resignation as a director in December 2004. None 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.
Mr. Whitener is a principal of Energy Spectrum, from whom we acquired Strata in
February 2002. On April 2, 2004, Energy Spectrum converted all of its Series A
Preferred Stock, including accrued dividend rights, into 1,718,089 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. Mr.
Kelly received 117,138 shares of our common stock and $306,800 for his interest
in Downhole.
26
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 2004, the Company owed Mr. Hidayatallah for advances to the
Company 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 an
annual 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.
Mr. Mortensen leases to Jens' a yard in Pearsall, Texas and received $28,800 in
rental payments for such property in 2004. 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 of equipment and other supplies to
the Company in 2004. Management of the Company believes these transactions were
on terms at least as favorable to the Company as could have been obtained from
unrelated third parties.
On September 30, 2004, we issued 1,300,000 shares of our common stock to Jens H.
Mortensen, our President, Chief Operating Officer and a director, pursuant to a
merger between Jens' Oilfield Service, Inc. and a newly formed subsidiary of the
Company. As a result of the merger, we acquired Mr. Mortensen's 19% interest and
now own 100% of Jens' Oilfield Service, Inc.
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 director 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. In May
2004, we also issued to Mr. Freedman a warrant to purchase 3,000 shares of
common stock at an exercise price of $0.75 per share, in consideration of a loan
made to the Company in 2002. This warrant has been exercised.
In April 2004, we completed a private placement of 620,000 shares of common
stock and warrants to purchase 800,000 shares of common stock to the following
investors: Christopher Engel; Donald Engel; the Engel Investors Defined Benefit
Plan; RER Corp., a corporation wholly-owned by director Robert Nederlander; and
Leonard Toboroff, a director. The investors invested $1,550,000 in exchange for
620,000 shares of common stock for a purchase price equal to $2.50 per share,
and invested $450,000 in exchange for warrants to purchase 800,000 shares of
common stock at an exercise price of $2.50 per share, expiring on April 1, 2006.
Concurrently with this transaction, Energy Spectrum Partners LP, the holder of
all outstanding shares of our Series A Preferred 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.
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, Jeffrey R. Freedman 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 a registration statement which we filed with the Securities and Exchange
Commission and which was declared effective on March 8, 2005. We also allowed
director John E. McConnaughy, Jr. and executive officers Theodore F. Pound III
and Dave Wilde to register the sale of shares of common stock owned by them in
the registration statement.
27
In connection with the April 2004 private placement described above and the
exchange by Energy Spectrum of its preferred stock for common stock, we entered
into a stockholders agreement with the investors in the April 2004 private
placement, Energy Spectrum, Jens H. Mortensen, Jr., our President and a former
director, Saeed M. Sheikh, our director, and Munawar H. Hidayatallah, our Chief
Executive Officer and Chairman of the board of directors. The stockholders
agreement requires the parties to vote for the election to the board of
directors of us three persons nominated by Energy Spectrum, two persons
nominated by the investors in the April 2004 private placement and one person
nominated by Messrs. Hidayatallah, Mortensen and Sheikh. The stockholders
agreement also provides that in the event we have not completed a public
offering of its shares prior to September 30, 2005, then, at the request of
Energy Spectrum, we will retain an investment banking firm to identify
candidates for a transaction involving the sale of us or its assets. 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.
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.
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.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in the
cumulative return to the shareholders of the Company's Common Stock with the
cumulative return of the Nasdaq Market Index and the CoreData Services Oil and
Gas Equipment and Services index for the period commencing January 1, 1999 and
ending on December 31, 2004. The CoreData Services Oil and Gas Equipment and
Services Index is an index of approximately 75 oil and gas equipment and
services providers, and in the Company's performance graph for the year ended
December 31, 2002, was referred to as the Media General Financial Services Oil
and Gas Equipment and Services Index. The information contained in the
performance graph shall not be deemed to be "soliciting material" or to be
"filed" with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act or
Exchange Act, except to the extent that the Company specifically incorporates it
by reference into such filing.
The graph assumes that $100 was invested on January 1, 1999 in the Company's
Common Stock and in each index, and that all dividends were reinvested. No
dividends have been declared or paid on the Company's Common Stock. Shareholder
returns over the indicated period should not be considered indicative of future
shareholder returns.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
------------------------ FISCAL YEAR ENDING ---------------------
COMPANY/INDEX/MARKET 12/31/1999 12/29/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004
Allis-Chalmers Energy, Inc. 100.00 47.93 31.67 17.00 86.67 133.67
Oil & Gas Equipment/Svcs 100.00 138.01 97.18 90.41 110.29 151.37
NASDAQ Market Index 100.00 62.85 50.10 34.95 52.55 56.97
28
OTHER INFORMATION
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR OUR NEXT MEETING
If you want to submit proposals for possible inclusion in our proxy
materials for the 2006 annual meeting of stockholders, you must do so on or
before March 23, 2006. Our Secretary must receive proposals at 5075 Westheimer
Road, Suite 890, Houston, Texas, 77056. It is suggested that any such proposal
be submitted by certified mail, return receipt requested.
If you wish to present a proposal before the 2006 annual meeting, but
do not wish to have the proposal considered for inclusion in our proxy statement
and proxy card, you must give written notice to our Secretary at the address
noted above. The Secretary must receive such notice by August 11, 2005. If you
fail to provide timely notice of a proposal to be presented at the 2005 annual
meeting, the proxies designated by our board of directors will have
discretionary authority to vote on such proposal.
29
APPENDIX A
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
ALLIS-CHALMERS ENERGY INC.
Allis-Chalmers Energy Inc. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: The name of the Corporation is Allis-Chalmers Energy Inc.
SECOND: The date on which the Corporation's original Certificate of
Incorporation was filed with the Delaware Secretary of State is March 15, 1913.
THIRD: The board of directors of the Corporation, acting in accordance
with the provision of Sections 141 and 242 of the General Corporation Law of the
State of Delaware, adopted resolutions to amend Article Fourth of the
Certificate of Incorporation of the Corporation to read in its entirety as
follows:
"FOURTH. The total number of shares of capital stock which the
Corporation shall have the authority to issue is One Hundred Twenty Five Million
(125,000,000) shares, divided into One Hundred Million (100,000,000) shares of
common stock at a par value of $0.01 per share, and Twenty-Five Million
(25,000,000) shares of preferred stock at a par value of $0.01 per share. The
board of directors of the Corporation shall have the authority to issue such
shares of common stock and preferred stock in one or more classes or series,
with such voting powers, designations, preferences and relative, participating,
optional or other special rights, if any, and such qualifications, limitations
or restrictions thereof, if any, as shall be provided for in a resolution or
resolutions adopted by the board of directors of the Corporation and filed as a
Certificate of Designations pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware."
FOURTH: This Certificate of Amendment to Certificate of Incorporation
was submitted to the stockholders of the Corporation and was duly approved by
the required vote of stockholders of the Corporation in accordance with Sections
222 and 242 of the Delaware General Corporation Law. The total number of
outstanding shares entitled to vote or consent to this Amendment is 14,020,958
shares of Common Stock. A majority of the outstanding shares of Common Stock
voted in favor of this Certificate of Amendment to Certificate of Incorporation.
The vote required was a majority of the outstanding shares of Common Stock.
IN WITNESS WHEREOF, Allis-Chalmers Energy Inc. has caused this
Certificate of Amendment to be signed by its Chief Executive Officer as of
_________________________.
A-1
APPENDIX B
ALLIS-CHALMERS ENERGY INC.
2003 INCENTIVE STOCK PLAN
(as amended May 25, 2005)
1. PURPOSE. The purpose of the Allis-Chalmers Energy Inc. (the
"Corporation") Incentive Stock Plan (the "Plan") is to encourage key employees,
directors and service providers of the Corporation and such subsidiaries of the
Corporation as the Administrator designates to acquire common stock of the
Corporation (the "Common Stock") or to receive monetary payments based on the
value of such stock or based upon achieving certain goals on a basis mutually
advantageous to such individuals and the Corporation and thus provide an
incentive to contribute to the success of the Corporation and align the
interests of key employees, directors and service providers with the interests
of the shareholders of the Corporation.
2. ADMINISTRATION. The Plan shall be administered by a committee of two
or more directors, which the board of directors of the Corporation shall appoint
(the "Administrator"). The directors appointed to such committee shall be
Non-Employee Directors as defined in Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 ("Exchange Act") or any successor regulations.
The authority to select persons eligible to participate in the Plan, to
grant benefits in accordance with the Plan, and to establish the timing,
pricing, amount and other terms and conditions of such grants (which need not be
uniform with respect to the various Participants or with respect to different
grants to the same Participant), may be exercised by the Administrator in its
sole discretion.
Subject to the provisions of the Plan, the Administrator shall have
exclusive authority to interpret and administer the Plan, to establish
appropriate rules relating to the Plan, to delegate some or all of its authority
under the Plan and to take all such steps and make all such determinations in
connection with the Plan and the benefits granted pursuant to the Plan as he or
she may deem necessary or advisable.
The board of directors in its discretion may delegate and assign
specified duties and authority of the Administrator to any other committee and
retain other duties and authority. Also, the board of directors in its
discretion may appoint a separate committee of outside directors to make awards
that satisfy the requirements of Section 162(m) of the Internal Revenue Code.
3. SHARES RESERVED UNDER THE PLAN. Subject to the provisions of Section
12 (relating to adjustment for changes in capital stock) the maximum number of
shares that may be issued under this Plan shall be the lesser of 3,000,000
shares and 15% of the total number of shares of common stock outstanding from
time to time, assuming for this purpose the exercise of all outstanding options,
warrants and other securities exercisable for or convertible into shares of
common stock. Shares issued pursuant to the Plan may be authorized but unissued
or treasury shares.
As used in this Section 3, the term Plan Maximum shall refer to the
number of shares of Common Stock that are available for grant of awards pursuant
to the Plan. Stock underlying outstanding options, stock appreciation rights, or
performance awards will reduce the Plan Maximum while such options, stock
appreciation rights or performance awards are outstanding. Shares underlying
expired, canceled or forfeited options, stock appreciation rights or performance
awards shall be added back to the Plan Maximum. When the exercise price of stock
options is paid by delivery of shares of Common Stock, or if the Administrator
approves the withholding of shares from a distribution in payment of the
exercise price, the Plan Maximum shall be reduced by the net (rather than the
gross) number of shares issued pursuant to such exercise, regardless of the
number of shares surrendered or withheld in payment. If the Administrator
approves the payment of cash to an optionee equal to the difference between the
fair market value and the exercise price of stock subject to an option, or if a
stock appreciation right is exercised for cash or a performance award is paid in
cash the Plan Maximum shall be increased by the number of shares with respect to
which such payment is applicable. Restricted stock issued pursuant to the Plan
will reduce the Plan Maximum while outstanding even while subject to
restrictions. Shares of restricted stock shall be added back to the Plan Maximum
if such restricted stock is forfeited.
4. PARTICIPANTS. Participants will consist of such officers, key
employees, directors and service providers of the Corporation or any designated
subsidiary as the Administrator in its sole discretion shall determine.
Designation of a Participant in any year shall not require the Administrator to
designate such person to receive a benefit in any other year or to receive the
same type or amount of benefit as granted to the Participant in any other year
or as granted to any other Participant in any year. The Administrator shall
consider such factors as it deems pertinent in selecting Participants and in
determining the type and amount of their respective benefits.
B-1
5. TYPES OF BENEFITS. The following benefits may be granted under the
Plan: (a) stock appreciation rights ("SARs"); (b) restricted stock ("Restricted
Stock"); (c) performance awards ("Performance Awards"); (d) incentive stock
options ("ISOs"); (e) nonqualified stock options ("NQSOs"); and (f) Stock Units,
all as described below ("benefits").
The Administrator may (a) award benefits in the alternative so that
acceptance of or exercise of one benefit cancels the right of a Participant to
another and (b) award benefits in any combination or combinations and subject to
any condition or conditions consistent with the terms of the Plan that the
Administrator in its sole discretion shall determine.
6. STOCK APPRECIATION RIGHTS. A SAR is the right to receive all or a
portion of the difference between the fair market value of a share of Common
Stock at the time of exercise of the SAR and the exercise price of the SAR
established by the Administrator, subject to such terms and conditions set forth
in a SAR agreement as may be established by the Administrator in its sole
discretion. At the discretion of the Administrator, SARs may be exercised (a) in
lieu of exercise of an option, (b) in conjunction with the exercise of an
option, (c) upon lapse of an option, (d) independent of an option or (e) each of
the above in connection with a previously awarded option under the Plan. If the
option referred to in (a), (b) or (c) above qualified as an ISO pursuant to
Section 422 of the Internal Revenue Code of 1986 (Code), the related SAR shall
comply with the applicable provisions of the Code and the regulations issued
thereunder. At the time of grant, the Administrator may establish, in its sole
discretion, a maximum amount per share which will be payable upon exercise of a
SAR, and may impose conditions on exercise of a SAR. At the discretion of the
Administrator, payment for SARs may be made in cash or shares of Common Stock,
or in a combination thereof. SARs will be exercisable not later than ten years
after the date they are granted and will expire in accordance with the terms
established by the Administrator.
7. RESTRICTED STOCK. Restricted Stock is Common Stock issued or
transferred under the Plan (other than upon exercise of stock options or as
Performance Awards) at any purchase price less than the fair market value
thereof on the date of issuance or transfer, or as a bonus, subject to such
terms and conditions set forth in a Restricted Stock agreement as may be
established by the Administrator in its sole discretion. In the case of any
Restricted Stock:
(a) The purchase price, if any, will be determined by the
Administrator.
(b) The period of restriction shall be established by the
Administrator for any grants of Restricted Stock;
(c) Restricted Stock may be subject to (i) restrictions on the
sale or other disposition thereof; (ii) rights of the Corporation to reacquire
such Restricted Stock at the purchase price, if any, originally paid therefore
upon termination of the employee's employment within specified periods; (iii)
representation by the recipient that he or she intends to acquire Restricted
Stock for investment and not for resale; and (iv) such other restrictions,
conditions and terms as the Administrator deems appropriate.
(d) The Participant shall be entitled to all dividends paid
with respect to Restricted Stock during the period of restriction and shall not
be required to return any such dividends to the Corporation in the event of the
forfeiture of the Restricted Stock.
(e) The Participant shall be entitled to vote the Restricted
Stock during the period of restriction.
(f) The Administrator shall determine whether Restricted Stock
is to be delivered to the Participant with an appropriate legend imprinted on
the certificate or if the shares are to be issued in the name of a nominee or
deposited in escrow pending removal of the restrictions.
8. PERFORMANCE AWARDS. Performance Awards are Common Stock, monetary
units or some combination thereof, to be issued without any payment therefore,
in the event that certain performance goals established by the Administrator are
achieved over a period of time designated by the Administrator, but not in any
event more than five years. The goals established by the Administrator may
include return on average total capital employed, earnings per share, increases
in share price or such other goals as may be established by the Administrator.
In the event the minimum corporate goal is not achieved at the conclusion of the
period, no payment shall be made to the Participant. Actual payment of the award
earned shall be in cash or in Common Stock or in a combination of both, as the
Administrator in its sole discretion determines. If Common Stock is used, the
Participant shall not have the right to vote and receive dividends until the
goals are achieved and the actual shares are issued.
B-2
9. INCENTIVE STOCK OPTIONS. ISOs are stock options to purchase shares
of Common Stock at not less than 100% of the fair market value of the shares on
the date the option is granted (110% if the optionee owns stock possessing more
than 10% of the combined voting power of all owners of stock of the Corporation
or a subsidiary), subject to such terms and conditions set forth in an option
agreement as may be established by the Administrator in its sole discretion that
conform to the requirements of Section 422 of the Code. Said purchase price may
be paid (a) by check or (b), in the discretion of the Administrator, by the
delivery of shares of Common Stock then owned by the Participant, or (c), in the
discretion of the Administrator, by a combination of any of the foregoing, in
the manner provided in the option agreement. The aggregate fair market value
(determined as of the time an option is granted) of the stock with respect to
which ISOs are exercisable for the first time by an optionee during any calendar
year (under all option plans of the Corporation and its subsidiary corporations)
shall not exceed $100,000 or such other maximum applicable to ISOs as may be in
effect from time to time under the Code. ISOs shall be granted only to employees
of the Corporation and designated subsidiaries. The maximum term of an ISO shall
be ten years from the date it was granted (five years if the optionee owns more
than 10% of the total combined voting power of all classes of stock of the
Corporation or a subsidiary). No ISO shall be awarded after the date preceding
the tenth anniversary of the effective date of the Plan.
10. NONQUALIFIED STOCK OPTIONS. NQSOs are nonqualified stock options to
purchase shares of Common Stock at purchase prices established by the
Administrator on the date the options are granted, subject to such terms and
conditions set forth in an option agreement as may be established by the
Administrator in its sole discretion. The purchase price may be paid (a) by
check or (b), in the discretion of the Administrator, by the delivery of shares
of Common Stock then owned by the Participant, or (c), in the discretion of the
Administrator, by a combination of any of the foregoing, in the manner provided
in the option agreement. NQSOs shall be exercisable no later than ten years
after the date they are granted.
11. STOCK UNITS. A Stock Unit represents the right to receive a share
of Common Stock from the Corporation at a designated time in the future, subject
to such terms and conditions set forth in a Stock Unit agreement as may be
established by the Administrator in its sole discretion. The Participant
generally does not have the rights of a shareholder until receipt of the Common
Stock. The Administrator may in its discretion provide for payments in cash, or
adjustment in the number of Stock Units, equivalent to the dividends the
Participant would have received if the Participant had been the owner of shares
of Common Stock instead of the Stock Units.
12. ADJUSTMENT PROVISIONS.
(a) If the Corporation shall at any time change the number of
issued shares of Common Stock without new consideration to the Corporation (such
as by stock dividends or stock splits), the total number of shares reserved for
issuance under this Plan and the number of shares covered by each outstanding
benefit shall be adjusted so that the aggregate consideration payable to the
Corporation, if any, and the value of each such benefit shall not be changed.
Benefits may also contain provisions for their continuation or for other
equitable adjustments after changes in the Common Stock resulting from
reorganization, sale, merger, consolidation, issuance of stock rights or
warrants, or similar occurrence.
(b) Notwithstanding any other provision of this Plan, and
without affecting the number of shares reserved or available hereunder, the
board of directors may authorize the issuance or assumption of benefits in
connection with any merger, consolidation, acquisition of property or stock, or
reorganization upon such terms and conditions as it may deem appropriate.
13. CHANGE IN CONTROL. Notwithstanding any other provision of the Plan
to the contrary, in the event of a change in control of the Corporation, as
defined below, all outstanding SARs, ISOs and NQSOs shall be immediately fully
vested and exercisable and any restrictions on Restricted Stock issued under the
Plan shall lapse.
Change in control means:
(a) The acquisition on or after March 6, 2003 by any
individual, entity or group, or a Person (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Exchange Act) other than an excluded person (as defined
below), of ownership of more than 50% of either: (i) the then outstanding shares
of Common Stock ("Outstanding Common Stock"); or (ii) the combined voting power
of the then outstanding voting securities of the Corporation entitled to vote
generally in the election of directors ("Outstanding Voting Securities");
B-3
(b) Individuals who, as of the date of approval of the Plan by
the board of directors of the Corporation, constitute the board of directors of
the Corporation ("Incumbent Board") cease for any reason to constitute at least
a majority of the board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Corporation's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, as a member of the Incumbent Board, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board; or
(c) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation, in each case, unless, following such
reorganization, merger or consolidation, (i) more than 50% of, respectively, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities immediately prior to such
reorganization, merger or consolidation, in substantially the same proportions
as their ownership, immediately prior to such reorganization, merger or
consolidation of the Outstanding Corporation Common Stock and Outstanding
Corporation Voting Securities, as the case may be, or at least a majority of the
members of the board of directors of the corporation resulting from such
reorganization, merger or consolidation were members of the Incumbent Board at
the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or
(d) Approval by the stockholders of the Corporation of (i) a
complete liquidation or dissolution of the Corporation or (ii) the sale or other
disposition of all or substantially all of the assets of the Corporation, other
than to a corporation, with respect to which following such sale or other
disposition, (1) more than 50% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote generally in
the election for directors is then beneficially owned, directly or indirectly,
by all or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as the
case may be, or (2) at least a majority of the members of the board of directors
of such corporation were members of the Incumbent Board at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Corporation.
Excluded person means any Person who beneficially owns more than 10% of
the outstanding shares of the Corporation on the date hereof or at any time
prior to the first anniversary of the adoption of this plan.
14. NONTRANSFERABILITY. Each benefit granted under the Plan shall not
be transferable otherwise than by will or the laws of descent and distribution;
provided, however, NQSOs granted under the Plan may be transferred, without
consideration, to a Permitted Transferee (as defined below). Benefits granted
under the Plan shall be exercisable, during the Participant's lifetime, only by
the Participant or a Permitted Transferee. In the event of the death of a
Participant, exercise or payment shall be made only:
(a) By or to the Permitted Transferee, executor or
administrator of the estate of the deceased Participant or the person or persons
to whom the deceased Participant's rights under the benefit shall pass by will
or the laws of descent and distribution; and
(b) To the extent that the deceased Participant or the
Permitted Transferee, as the case may be, was entitled thereto at the date of
his death.
For purposes of this Section 14, Permitted Transferee shall include (i)
one or more members of the Participant's family, (ii) one or more trusts for the
benefit of the Participant and/or one or more members of the Participant's
family, or (iii) one or more partnerships (general or limited), corporations,
limited liability companies or other entities in which the aggregate interests
of the Participant and members of the Participant's family exceed 80% of all
interests. For this purpose, the Participant's family shall include only the
Participant's spouse, children and grandchildren.
B-4
15. TAXES. The Corporation shall be entitled to withhold the amount of
any tax attributable to any amounts payable or shares deliverable under the Plan
after giving the person entitled to receive such payment or delivery notice as
far in advance as practicable, and the Corporation may defer making payment or
delivery as to any benefit if any such tax is payable until indemnified to its
satisfaction. The person entitled to any such delivery may, with the consent of
the Administrator, elect to have such withholding satisfied by a reduction of
the number of shares otherwise so deliverable, such reduction to be calculated
based on a closing market price on the date of such notice.
16. TENURE. A Participant's right, if any, to continue to serve the
Corporation and its subsidiaries as an officer, employee, or otherwise, shall
not be enlarged or otherwise affected by his or her designation as a Participant
under the Plan.
17. RULES OF CONSTRUCTION. The terms of the Plan shall be constructed
in accordance with the laws of the State of Delaware; provided that the terms of
the Plan as they relate to ISOs shall be construed first in accordance with the
meaning under and in a manner that will result in the Plan satisfying the
requirements of the provisions of the Code governing incentive stock options.
18. DURATION, AMENDMENT AND TERMINATION. No benefit shall be granted
more than ten years after the date of adoption of this Plan; provided, however,
that the terms and conditions applicable to any benefit granted within such
period may thereafter be amended or modified by mutual agreement between the
Corporation and the Participant or such other person as may then have an
interest therein. Also, by mutual agreement between the Corporation and a
Participant hereunder, stock options or other benefits may be granted to such
Participant in substitution and exchange for, and in cancellation of, any
benefits previously granted such Participant under this Plan.
The board of directors may amend the Plan from time to time or
terminate the Plan at any time. However, no action authorized by this paragraph
shall reduce the amount of any existing benefit or change the terms and
conditions thereof without the Participant's consent. No amendment of the Plan
shall, without approval of the stockholders of the Corporation, (a) increase the
total number of shares which may be issued under the Plan or increase the amount
or type of benefits that may be granted under the Plan; or (b) modify the
requirements as to eligibility for benefits under the Plan.
19. GRANTS TO DIRECTORS. The Administrator shall be authorized to award
benefits in reasonable amounts as compensation for services provided by the
directors of the Company, including directors who serve on the Compensation
Committee or otherwise act as the Administrator. The foregoing sentence shall
not be deemed to limit or define the other circumstances in which benefits may
be awarded to directors of the Company.
20. EFFECTIVE DATE. This Plan shall become effective as of the date it
is adopted by the board of directors of the Corporation subject only to approval
by the holders of a majority of the outstanding voting stock of the Corporation
within twelve months before or after the adoption of the Plan by the board of
directors. In the event that the shareholders fail to approve the Plan within
twelve (12) months after its adoption by the Board, any grants made pursuant to
the Plan or sales of Option Shares that have already occurred shall be
rescinded, and no additional grants, sales or awards shall be made thereafter
under the Plan.
B-5
ALLIS-CHALMERS ENERGY INC.
ANNUAL MEETING OF SHAREHOLDERS
August 11, 2005
10:00 a.m. CST
5075 WESTHEIMER ROAD, SUITE 890
HOUSTON, TX 77056
PROXY
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
OF SHAREHOLDERS OF ALLIS-CHALMERS ENERGY INC. (THE "COMPANY") ON AUGUST 11,
2005.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify below.
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE TEN
NOMINEES TO BE ELECTED AS DIRECTORS TO SERVE FOR A ONE-YEAR TERM EXPIRING AT THE
2006 ANNUAL MEETING OF STOCKHOLDERS, "FOR" AMENDMENT OF THE CERTIFICATE OF
INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF OUR COMMON STOCK
FROM 20,000,000 SHARES TO 100,000,000 SHARES AND TO INCREASE OUR PREFERRED STOCK
FROM 10,000,000 SHARES TO 25,000,000 SHARES, "FOR" THE AMENDMENT OF THE 2003
INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF SHARES OF OUR COMMON STOCK THAT
MAY BE ISSUED UNDER THE PLAN FROM 2,400,000 TO THE LESSER OF 3,000,000 SHARES
AND 15% OF OUR OUTSTANDING COMMON STOCK OUTSTANDING FROM TIME TO TIME CALCULATED
ON A FULLY-DILUTED BASIS, AND "FOR" THE RATIFICATION OF THE APPOINTMENT OF UHY
MANN FRANKFORT STEIN & LIPP CPAS, LLP TO ACT AS OUR INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2005, EACH AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.
By signing the proxy, you revoke all prior proxies and appoint Munawar H.
Hidayatallah and Victor M. Perez, and each of them, as attorneys and proxies of
the undersigned with full power of substitution, to vote the undersigned's
shares on the matters shown on the reverse side, and at any and all
continuations, adjournments or postponements thereof with all powers that the
undersigned would possess if personally present, upon in respect of the
following matters and in accordance with the following instructions, with
discretionary authority as to any and all other matters that may properly come
before the annual meeting of Shareholders of the Company.
SEE REVERSE FOR VOTING INSTRUCTIONS.
PLEASE DETACH HERE
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
1. To amend the certificate of incorporation of the Company to increase the
authorized number of shares of our common stock from 20,000,000 shares to
100,000,000 shares and to increase the authorized number of shares of our
preferred stock from 10,000,000 shares to 25,000,000 shares.
|_| For |_| Against |_| Abstain
2. To elect directors to hold office until the Company's 2005 annual meeting of
Shareholders.
01 Jeffrey R. Freedman |_| Vote FOR all |_| Vote WITHHELD
02 Victor F. Germack Nominees from all Nominees
03 David A. Groshoff (except as marked)
04 Munawar H. Hidayatallah
05 Thomas E. Kelly
06 John E. McConnaughy, Jr.
07 Jens H. Mortensen
08 Robert E. Nederlander
09 Leonard Toboroff
10 Thomas O. Whitener, Jr.
+-------------------------------------+
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO | |
VOTE FOR ANY INDICATED NOMINEE, WRITE | |
THE NUMBER NEXT TO THE NAME(S) OF SUCH | |
NOMINEE(S) IN THE BOX PROVIDED TO +-------------------------------------+
THE RIGHT.)
3. To amend the 2003 Incentive Stock Plan to increase the number of shares of
our common stock that may be issued under the plan from 2,400,000 to the lesser
of 3,000,000 shares and 15% of our common stock outstanding from time to time
calculated on a fully-diluted basis.
|_| For |_| Against |_| Abstain
4. To ratify the appointment of UHY Mann Frankfort Stein & Lipp CPAs, LLP to act
as our independent public accountants for the fiscal year ending December 31,
2005.
|_| For |_| Against |_| Abstain
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
ADDRESS CHANGE? MARK BOX |_|
INDICATE CHANGES BELOW: DATE:______________________________________
SIGNATURE(S):______________________________
NAME OF STOCKHOLDER:_______________________
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON PROXY. IF HELD IN JOINT
TENANCY, ALL PERSONS MUST SIGN. TRUSTEES, ADMINISTRATORS, ETC., SHOULD INCLUDE
THEIR TITLE AND AUTHORITY. CORPORATIONS SHOULD PROVIDE FULL NAME OF CORPORATION
AND TITLE OF AUTHORIZED OFFICER SIGNING THE PROXY.