UNITED STATE SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ____________
COMMISSION FILE NUMBER 1-2199
ALLIS-CHALMERS ENERGY INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 39-0126090
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
------------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 369-0550
--------------
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
At November 13, 2003 were 19,633,340 shares of Common Stock outstanding.
ALLIS-CHALMERS ENERGY INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
-----------------
PART I
Item Page
---- ----
1. Financial Statements
Restated Consolidated Statements of Operations for the three months and nine months ended
September 30, 2003 and 2002..............................................................................4
Restated Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002......................5
Restated Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002.....6
Notes to Restated Consolidated Financial Statements......................................................7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................21
4. Controls and Procedures.................................................................................28
PART II
6. Exhibits and Reports on Form 8-K........................................................................31
Signatures and Certifications....................................................................................32
2
INTRODUCTORY NOTE
Allis-Chalmers Energy Inc. is filing this Amendment No. 2 to the Company's
Quarterly report on Form 10-Q for the quarter ended September 30, 2003 to
reflect the restatement of our financial results resulting from an error in the
application of SFAS No. 128 EARNINGS PER SHARE. The restatement is discussed in
more detail in Note 2 to the accompanying consolidated financial statements.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 4. CONTROLS AND PROCEDURES
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Unaffected items have not been repeated in this Amendment No. 2.
PLEASE NOTE THAT THE INFORMATION CONTAINED IN THIS AMENDMENT NO. 2,
INCLUDING THE FINANCIAL STATEMENTS AND THE NOTES THERETO, DOES NOT REFLECT
EVENTS OCCURRING AFTER THE ORIGINAL FILING DATE. SUCH EVENTS INCLUDE, AMONG
OTHERS, THE EVENTS DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEARS
ENDED DECEMBER 31, 2004 AND 2003, OUR QUARTERLY REPORTS ON FORM 10-Q FOR THE
PERIODS ENDED MARCH 31, 2005 AND JUNE 30, 2005 AND OUR CURRENT REPORTS ON FORM
8-K FILED SUBSEQUENT TO THE ORIGINAL FILING DATE. FOR A DESCRIPTION OF THESE
EVENTS, PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE THE ORIGINAL FILING
DATE INCLUDING ALL AMENDMENTS THERETO.
3
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)(in thousands)
See Explanatory Note
September 30, December 31,
2003 2002
------------- -------------
Assets
Cash and cash equivalents $ 120 $ 146
Trade receivables, net 7,291 4,409
Lease deposit -- 525
Lease receivable, current 180 180
Prepaid and other current assets 1,014 317
------------- -------------
Total current assets 8,605 5,577
Property, plant and equipment, net 31,982 17,124
Goodwill 7,829 7,829
Other intangible assets, net 2,254 2,650
Debt issuance costs, net 554 515
Lease receivable 936 1,042
Other assets 6 41
------------- -------------
Total assets $ 52,166 $ 34,778
============= =============
Liabilities and Shareholders' Equity
Current maturities of long-term debt $ 3,278 $ 13,890
Trade accounts payable 4,844 2,106
Accrued employee benefits and payroll taxes 405 280
Accrued interest 547 811
Accrued expenses 1,183 1,506
------------- -------------
Total current liabilities 10,257 18,593
Accrued postretirement benefit obligations 635 670
Long-term debt, less current portion 24,860 7,331
Other long-term liabilities 270 270
Redeemable warrants 1,500 1,500
Redeemable convertible preferred stock 4,390 3,821
------------- -------------
Total liabilities 41,912 32,185
Minority interest 3,980 1,584
Common shareholders' equity:
Common stock, $.15 par value (110,000,000 shares authorized; 19,633,340
issued and outstanding at September 30, 2003 and December 31, 2002) 2,945 2,945
Capital in excess of par value 9,260 7,237
Accumulated (deficit) (5,911) (9,173)
------------- -------------
Total shareholders' equity 6,274 1,009
------------- -------------
Total liabilities and shareholders' equity $ 52,166 $ 34,778
============= =============
The accompanying Notes are an integral part of the Financial Statements.
4
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per share)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(Restated) (Restated)
(in thousands, except per share)
Sales $ 8,089 $ 4,775 $ 22,428 $ 12,265
Cost of sales 6,060 3,841 16,261 10,046
------------- ------------- ------------- -------------
Gross Margin 2,029 934 6,167 2,219
Marketing and administrative expense 1,351 886 3,759 2,696
Corporate reorganization costs -- 495 -- 495
Abandoned acquisition/private placement costs -- 233 -- 233
------------- ------------- ------------- -------------
Income/ (loss) from operations 678 (680) 2,408 (1,205)
Other Income (expense)
Interest expense (521) (558) (1,797) (1,581)
Minority interest (4) (105) (315) (145)
Factoring costs on note receivable -- (191) -- (191)
Settlement of lawsuit 1,034 -- 1,034 --
Sale of investment in AirComp 2,433 -- 2,433 --
Other 10 29 (164) 107
------------- ------------- ------------- -------------
Net income/(loss) before income taxes 3,630 (1,505) 3,599 (3,015)
------------- ------------- ------------- -------------
Provision for income taxes (93) -- (343) --
------------- ------------- ------------- -------------
Net income/ (loss) 3,537 (1,505) 3,256 (3,015)
------------- ------------- ------------- -------------
Preferred stock dividend (88) (87) (569) (232)
------------- ------------- ------------- -------------
Net income/ (loss) attributed to common shares $ 3,449 $ (1,592) $ 2,687 $ (3,247)
============= ============= ============= =============
Net income/ (loss) per common share, basic $ 0.18 $ (0.08) $ 0.14 $ (0.18)
============= ============= ============= =============
Net income/ (loss) per common share, diluted $ 0.12 $ (0.08) $ 0.12 $ (0.18)
============= ============= ============= =============
Weighted average number of common shares
outstanding
Basic 19,633 19,633 19,633 18,506
============= ============= ============= =============
Diluted 29,844 19,633 29,018 18,506
============= ============= ============= =============
The accompanying Notes are an integral part of the Financial Statements.
5
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaduited)(in thousands)
Nine Months Ended
September 30,
2003 2002
------------ ------------
(Restated)
Cash flows from operating activities:
Net income (loss) $ 3,256 $ (3,015)
Adjustments to reconcile net (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization expense 2,099 1,755
(Gain) loss on settlement of lawsuit (1,034) --
(Gain) loss on sale of interest in AirComp (2,433) --
Amortization of discount on debt 442 200
Minority interest in income of subsidiary 315 145
Changes in working capital:
Decrease (increase) in accounts receivable (2,882) 304
Decrease (increase) in due from related party -- 51
Decrease (increase) in other current assets (697) 910
Decrease (increase) in other assets 35 925
Decrease (increase) in lease deposit 525 --
Decrease (increase) in lease receivable 106
(Decrease) increase in accounts payable 2,738 863
(Decrease) increase in accrued interest (264) 125
(Decrease) increase in accrued expenses (323) (914)
(Decrease) increase in other long-term liabilities -- (124)
(Decrease) increase in accrued employee benefits and payroll taxes 90 (784)
------------ ------------
Net cash provided by operating activities 1,973 441
------------ ------------
Cash flows from investing activities:
Acquisition of Jens, net of cash acquired -- (7,762)
Acquisition of Strata, net of cash acquired -- (373)
Purchase of equipment (5,086) (250)
Proceeds from sale of equipment 700 --
------------ ------------
Net cash (used) by investing activities (4,386) (8,385)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,616 8,657
Repayments of long-term debt (6,925) --
Debt issuance costs (304) (755)
------------ ------------
Net cash provided by financing activities 2,387 7,902
------------ ------------
Net (decrease) in cash and cash equivalents (26) (42)
Cash and cash equivalents at beginning of year 146 152
------------ ------------
Cash and cash equivalents at end of period $ 120 $ 110
============ ============
Supplemental information - interest paid $ 1,796 $ 1,177
============ ============
6
ALLIS-CHALMERS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
Non-cash investing and financing transactions in connection with the acquisition
of Jens' Oilfield Service, Inc. for the nine months ended September 30, 2002:
Fair value of net assets acquired $ (11,204)
Goodwill and other intangibles (1,235)
Note payable to prior owner 4,000
Value of common stock issued 677
-----------
Net cash paid to acquire subsidiary $ (7,762)
-----------
Non-cash investing and financing transactions in connection with the acquisition
of Strata Directional Technology, Inc. for the nine months ended September 30,
2002:
Fair value of net assets acquired $ (2,073)
Goodwill and other intangibles (5,019)
Issuance of preferred stock 3,500
Value of common stock issued 3,219
-----------
Net cash paid to acquire subsidiary $ (373)
-----------
Non-cash investing and financing transactions in connection with the formation
of AirComp LLC and other activities during the nine months ended September 30,
2003 include the following:
Amortization of discount on debt $ 442
(Gain) on settlement of debt
$ (1,034)
Purchase of equipment financed through assumption of debt or accounts
payable as of September 30, 2003 $ 906
Non-cash investing and financing transaction on connection with the
formation of AirComp:
Contribution of debt by M-I to joint venture $ 4,818
Contribution of plant, property and equipment by M-I to joint venture
$ 10,268
(Gain) on sale of investment in AirComp $ (2,433)
Increase in minority interest $ 2,063
Difference of Company's investment cost basis in AirComp and their share
of underlying equity of net assets of AirComp $ 955
Net cash paid in connection with the joint venture $ --
The accompanying Notes are an integral part of the Financial Statements.
7
ALLIS-CHALMERS CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(UNAUDITED AND RESTATED)
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
PLEASE NOTE THAT THESE FINANCIAL STATEMENTS AND THE NOTES THERETO DO NOT REFLECT
EVENTS OCCURRING AFTER NOVEMBER 13, 2003. FOR A DESCRIPTION OF THESE EVENTS,
PLEASE READ OUR EXCHANGE ACT REPORTS FILED SINCE THE DATE OF THE ORIGINAL
FILING.
EXPLANATORY NOTE
This Amendment No. 1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 (the "Original Filing"), includes restatements
related to our unaudited consolidated financial statements for the period ended
September 30, 2003. The restatement is discussed in Note 2.
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in Allis-Chalmers Corporation's ("Allis-Chalmers" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 2002,
and the Current Reports on Form 8-K filed on February 20, 2003, June 12, 2003,
July 16, 2003, and September 16, 2003 respectively.
All normal and recurring adjustments considered necessary for a fair
presentation of the results of operations have been included in the unaudited
financial statements. In addition, all non-recurring adjustments necessary to
prevent the financial statements from being misleading have been included in the
unaudited financial statements. The results of operations for any interim period
are not necessarily indicative of the Company's operating results for a full
year.
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Compressed Air
Inc. ("Mountain Air"), a Texas corporation, acquired certain assets of Mountain
Air Drilling Service Co., Inc. ("MADSCO"), whose business consisted of providing
equipment and trained personnel in the four corner areas of the southwestern
United States. Mountain Air primarily provides compressed air equipment and
related products and services including trained operators to companies in the
business of drilling for natural gas.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
merger, all of OilQuip's outstanding common stock was converted into 2,000,000
shares of Allis-Chalmers' common stock.
For legal purposes, the Company acquired OilQuip, the parent company of Mountain
Air. However, for accounting purposes, OilQuip was treated as the acquiring
company in a reverse acquisition of Allis-Chalmers. The financial statements
prior to the merger reflect the operations of OilQuip. As a result of the
merger, the fixed assets and intangible assets of Allis-Chalmers were increased
by $2,691,000.
On February 6, 2002, the Company acquired 81% of the outstanding stock of Jens'
Oilfield Service, Inc. ("Jens'"), which supplies highly specialized equipment
and operations to install casing and production tubing required to drill and
complete oil and gas wells. The Company also purchased substantially all the
outstanding common stock and preferred stock of Strata Directional Technology,
Inc. ("Strata"), which provides high-end directional and horizontal drilling
services for specific targeted reservoirs that cannot be reached vertically.
8
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp L.L.C. ("AirComp"). We
contributed substantially all of our compressed air drilling assets with an
estimated net book value of approximately $6.3 million to AirComp.
Simultaneously, AirComp acquired the compressed air drilling assets of M-I with
an appraised value $10.3 million as determined by a third party appraisal. We
own 55% and M-I L.L.C. owns 45% of AirComp. We consolidated AirComp into our
financial statements for the quarter ended September 30, 2003.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be predicted
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts reserves, recoverability of long-lived assets, useful lives
used in depreciation and amortization, income taxes and related valuation
allowances, and insurance and legal accruals. The accounting estimates used in
the preparation of the consolidated financial statements may change as new
events occur, as more experience is acquired, as additional information is
obtained and as the Company's operating environment changes.
AIRCOMP AND SALE OF INTEREST IN VENTURE
The Company has adopted SEC Staff Accounting Bulletin (SAB) No.51, Accounting
for Sales of Stock by a Subsidiary, to account for its investment in AirComp.
AirComp operates in a manner similar to a joint venture but has been accounted
for and consolidated as a subsidiary under SFAS No. 141, BUSINESS COMBINATIONS.
Pursuant to SAB No. 51, the Company has recorded its own contribution of assets
and liabilities at its historical cost basis. Since liabilities exceeded assets,
the Company's basis in AirComp was a negative amount. The Company has accounted
for the assets contributed from M-I at a fair market value as determined by an
outside appraiser. The Company gave M-I a 45% interest in AirComp in exchange
for the assets contributed. As a result of the formation of the venture and its
retention of 55% interest in the venture, the Company realized an immediate gain
to the extent of its negative basis and its 55% interest in the combined assets
and liabilities of the venture. In accordance with SAB No. 51, the Company has
recorded its negative basis investment in AirComp as an addition to equity and
its share of the combined assets and liabilities realized from M-I assets as
non-operating income.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FINANCIAL ACCOUNTING STANDARDS BOARD ("FASB") issued SFAS No.
146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("SFAS No.
146"). SFAS No. 146 requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of
commitment to an exit or disposal plan. The provisions of SFAS No. 146 will
apply to any exit or disposal activities initiated by the Company after December
31, 2002. SFAS No. 146 is not expected to have a material effect on the results
of operations or financial position of the Company.
SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.
9
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT NO. 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 149"). SFAS No.
149 amends certain portions of SFAS No. 133 and is effective for all contracts
entered into or modified after September 30, 2003 on a prospective basis. SFAS
No. 149 is not expected to have a material effect on the results of operations
or financial position of the Company because the Company currently has no
derivatives or hedging contracts.
In September 2003, the FASB approved SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY (SFAS
No. 150). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after September 15, 2003. The effect on the
Company's financial position include the fact that beginning on July 1, 2003,
the redeemable convertible preferred stock and the redeemable warrants will be
classified as liabilities and not shown in the mezzanine equity section of the
balance sheet. The adoption of SFAS No. 150 could also affect the Company's debt
covenant calculations, which are currently in compliance as of September 30,
2003.
NOTE 2 - RESTATEMENT
EARNINGS PER SHARE RESTATEMENT
The Company understated diluted earnings per share due to an incorrect
calculation of its weighted shares outstanding for the third and fourth quarters
of 2003, for each of the first three quarters of 2004, for the year ended
December 31, 2004 and the for the quarter ended March 31, 2005. In addition, the
Company understated basic earnings per share due to an incorrect calculation of
its weighted average basic shares outstanding for the quarter ended September
30, 2004. Consequently, the Company has restated its financial statements for
each of those periods. The incorrect calculation resulted from a mathematical
error and an improper application of SFAS 128, EARNINGS PER SHARE. The effect of
the restatement is to reduce weighted average diluted shares outstanding for
each period and to reduce weighted average basic shares outstanding for the
quarter ended September 30, 2004. Consequently, weighted average diluted
earnings per share were increased for each period and weighted average basic
earnings per share was increased for the quarter ended September 30, 2004.
A restated earnings per share calculation for the quarter ended September 30,
2003 reflecting the above adjustments to our results as previously presented or
restated (see below), is presented below. The amounts are in thousands except
for share amounts:
THREE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------
AS AS
REPORTED ADJUSTMENTS RESTATED
-------------- -------------- --------------
Income/(loss) per common share - diluted $ 0.12 $ -- $ 0.12
Weighted average number of common shares outstanding:
Diluted 28,805 1,039 29,844
-------------- -------------- --------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------------------------
AS AS
REPORTED ADJUSTMENTS RESTATED
-------------- -------------- --------------
Income/(loss) per common share - diluted $ 0.08 $ 0.04 $ 0.12
Weighted average number of common shares outstanding:
Diluted 28,805 213 29,018
-------------- -------------- --------------
10
AIRCOMP RESTATEMENT
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. The Company originally accounted for the formation of
AirComp as a joint venture, but in February 2005 determined that the transaction
should have been accounted for using purchase accounting pursuant to SFAS No.
141, BUSINESS COMBINATIONS and accounting for the sale of an interest in a
subsidiary in accordance with SAB No. 51. Consequently, the Company has restated
the financial statements for the three quarters ended September 30, 2003, to
reflect the following adjustments:
INCREASE IN BOOK VALUE OF FIXED ASSETS. Under joint venture accounting, the
Company originally recorded the value of the assets contributed by M-I to
AirComp at M-I's historical cost of $6,932,000. Under purchase accounting, the
Company increased the recorded value of the assets contributed by M-I by
approximately $3,337,000 to $10,269,000 to reflect their fair market value as
determined by a third party appraisal. In addition, under joint venture
accounting, the Company established negative goodwill which reduced fixed assets
in the amount of $1,550,000. The negative goodwill was amortized by the Company
over the lives of the related fixed assets. Under purchase accounting, the
Company increased fixed assets by $1,550,000 to reverse the negative goodwill
previously recorded and reversed amortization expenses recorded in 2004.
Therefore, fixed assets were increased by a total of $4,887,000.
INCREASE IN NET INCOME. As a result of the increase in fixed assets during the
nine months ended September 30, 2003, a gain on sale of investment in a
subsidiary of $2,433,000 was recorded. Depreciation expense related to the fixed
assets increased by $49,000 and minority interest expense decreased by $22,000,
resulting in increase in net income attributable to common stockholders of
$2,406,000.
The accompanying financial statements have also been restated from the
previously filed financial statements to reflect a change in estimate of the
recoverability of foreign taxes paid in 2003.
A restated consolidated balance sheet at September 30, 2003, and a restated
consolidated statement of operations and a restated consolidated statement of
cash flows for the nine months ended September 30, 2003, reflecting the above
adjustments, is presented below. The amounts are in thousands, except for share
amounts:
At September 30, 2003
---------------------
As As
Reported Adjustments Restated
--------- ----------- ---------
ASSETS
Cash and cash equivalents $ 120 $ 120
Trade receivables, net of allowance for
doubtful accounts 7,291 7,291
Lease Receivable, current 180 180
Prepaid expenses and other 1,014 1,014
--------- ---------
Total current assets 8,605 8,605
Property and equipment, net of accumulated
depreciation 27,144 4,838 31,982
Goodwill 7,829 7,829
Other intangible assets, net of accumulated
amortization 2,254 2,254
Debt issuance costs, net of accumulated
amortization 554 554
Lease receivable, less current portion 936 936
Other Assets 6 6
--------- --------- ---------
Total Assets $ 47,328 $ 4,838 $ 52,166
========= ========= =========
11
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term debt $ 3,278 $ 3,278
Trade accounts payable 4,844 4,844
Accrued salaries, benefits and payroll taxes 405 405
Accrued interest 547 547
Accrued expenses 1,183 1,183
Accounts payable, related parties -- --
--------- ---------
Total current liabilities 10,257 10,257
Accrued postretirement benefit obligations 635 635
Long-term debt, net of current maturities 24,860 24,860
Other long-term liabilities 270 270
Redeemable warrants 1,500 1,500
Redeemable convertible preferred stock
including accrued dividends 4,390 4,390
--------- ---------
Total liabilities 41,912 41,912
Commitments and Contingencies
Minority interests 2,503 1,477 3,980
COMMON STOCKHOLDERS' EQUITY
Common stock 2,945 2,945
Capital in excess of par value 8,285 955 9,240
Accumulated (deficit) (7,975) 2,406 (5,569)
--------- --------- ---------
Total stockholders' equity 2,913 3,361 6,274
--------- --------- ---------
Total liabilities and stockholders' equity $ 47,328 $ 4,838 $ 52,166
========= ========= =========
Three Months September 30, 2003
-------------------------------
As As
Reported Adjustments Restated
--------- ----------- ---------
Revenues $ 8,089 -- $ 8,089
Cost of revenues 6,011 49 6,060
--------- --------- ---------
Gross margin 2,078 (49) 2,029
General and administrative expense 1,351 -- 1,351
--------- --------- ---------
Income/ (loss) from operations 727 (49) 678
Other income (expense):
Interest income -- -- --
Interest expense (521) -- (521)
Minority interests in income of subsidiaries (26) 22 (4)
Settlement on lawsuit 1,034 -- 1,034
Gain on sale of stock in a subsidiary -- 2,433 2,433
Other 10 -- 10
--------- --------- ---------
Total other income (expense) 497 2,455 2,952
--------- --------- ---------
Net income/ (loss) before income taxes 1,224 2,406 3,630
Provision for foreign income tax (93) -- (93)
--------- --------- ---------
Net income/ (loss) 1,131 2,406 3,537
Preferred stock dividend (88) -- (88)
--------- --------- ---------
Net income attributed to common stockholders $ 1,043 $ 2,406 $ 3,449
========= ========= =========
Income/ (loss) per common share - basic $ 0.05 $ 0.18
========= =========
Income/ (loss) per common share - diluted $ 0.04 $ 0.12
========= =========
Weighted average number of common shares
outstanding:
Basic 19,633 19,633
========= =========
Diluted 28,805 28,805
========= =========
12
Nine Months September 30, 2003
------------------------------
As As
Reported Adjustments Restated
--------- ----------- ---------
Revenues $ 22,428 -- $ 22,428
Cost of revenues 16,212 49 16,261
--------- --------- ---------
Gross margin 6,216 (49) 6,167
General and administrative expense 3,759 -- 3,759
--------- --------- ---------
Income/ (loss) from operations 2,457 (49) 2,408
Other income (expense):
Interest income -- -- --
Interest expense (1,797) -- (1,797)
Minority interests in income of subsidiaries (337) 22 (315)
Settlement on lawsuit 1,034 -- 1,034
Gain on sale of stock in a subsidiary -- 2,433 2,433
Other (164) -- (164)
--------- --------- ---------
Total other income (expense) (1,264) 2,455 1,191
--------- --------- ---------
Net income/ (loss) before income taxes 1,193 2,406 3,599
Provision for foreign income tax (343) -- (343)
--------- --------- ---------
Net income/ (loss) 850 2,406 3,256
Preferred stock dividend (569) -- (569)
--------- --------- ---------
Net income attributed to common stockholders $ 281 $ 2,406 $ 2,687
========= ========= =========
Income/ (loss) per common share - basic $ 0.01 $ 0.14
========= =========
Income/ (loss) per common share - diluted $ 0.01 $ 0.09
========= =========
Weighted average number of common shares
outstanding:
Basic 19,633 19,633
========= =========
Diluted 28,805 28,805
========= =========
13
Nine Months September 30, 2003
------------------------------
As As
Reported Adjustment Restated
--------- ----------- ---------
Cash flows from operating activities:
Net income/ (loss) $ 850 $ 2,406 $ 3,256
Adjustments to reconcile net income/ (loss) to
net cash provided by operating activities:
Depreciation and amortization expense 2,050 49 2,099
(Gain) / loss on settlement of lawsuit (1,034) -- (1,034)
(Gain) / loss on sales on interest in AirComp -- (2,433) (2,433)
Amortization of discount on debt 442 -- 442
Minority interest in income of subsidiaries 337 (22) 315
Changes in working capital:
Decrease (increase) in accounts receivable (2,882) -- (2,882)
Decrease (increase) in other current assets (697) -- (697)
Decrease (increase) in other assets 35 -- 35
Decrease (increase) in lease deposit 525 -- 525
Decrease (increase) in lease receivable 106 -- 106
Increase (decrease) in accounts payable 2,738 -- 2,738
Increase (decrease) in accrued interest (264) -- (264)
Increase (decrease) in accrued expenses (323) -- (323)
Increase (decrease) in accrued employee benefits
and payroll taxes 90 -- 90
--------- --------- ---------
Net cash provided by operating activities 1,973 -- 1,973
Cash flows from investing activities:
Purchase of equipment (5,086) (5,086)
Proceeds from sale of equipment 700 700
--------- ---------
Net cash (used) by investing activities (4,386) (4,386)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,616 9,616
Repayments of long-term debt (6,925) (6,925)
Debt issuance costs (304) (304)
--------- ---------
Net cash provided (used) by financing activities 2,387 2,387
--------- ---------
Net increase (decrease) in cash and cash
equivalents (26) (26)
Cash and cash equivalents:
Beginning of the year 146 146
--------- ---------
End of the year $ 120 $ 120
========= =========
Supplemental information:
Interest paid $ 1,796 $ 1,796
========= =========
14
NOTE 3 - ACQUISITIONS
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp L.L.C. ("AirComp"). The
formation of AirComp has created the second largest provider of compressed air
and related products and services for the drilling, workover, completion, and
transmission segments of the oil, gas and geothermal industries.
The Company contributed substantially all of its compressed air drilling assets
with an estimated net book value of approximately $6.3 million to AirComp.
Simultaneously, AirComp acquired the compressed air drilling assets of M-I with
an appraised value $10.3 million as determined by a third party appraisal. In
addition, AirComp issued a subordinated note to M-I in the amount of $4.8
million. The Company owns 55% and M-I L.L.C. owns 45% of AirComp. The Company
consolidated AirComp into its financial statements for the quarter ended
September 30, 2003.
In connection with the transaction, AirComp obtained bank financing of $8
million (matures on September 27, 2007), of which $7.3 million was distributed
to the Company to extinguish the outstanding Mountain Compressed Air debt,
approximately $2.4 million of the $7.3 million was used to purchase equipment
Mountain Compressed Air was leasing prior to the transaction and $700,000 was
applied to pay transaction costs and for working capital. The debt bears
interest at a floating rate, currently LIBOR plus 2.25%, which is payable
quarterly and quarterly principal of $285,714 starting in the third quarter of
2003, the balance of the debt is due on September 27, 2007. AirComp has the
ability to borrow an additional $1.4 million under its credit agreements with
the bank. AirComp's bank debt is secured by substantially all of the assets of
AirComp. In addition to the bank financing, AirComp issued a note to M-I L.L.C.
for in the amount of $4.8 million bearing an annual interest rate of 5% in
conjunction with the joint venture. The note is due and payable when M-I sells
its interest in AirComp.
The Company has guaranteed all of Mountain Compressed Air's obligations under
the joint venture agreement, and Mountain Compressed Air has guaranteed up to $2
million of AirComp's debt including AirComp's obligations under the note issued
to M-I L.L.C. Additionally, all of the $13 million assets of AirComp are
collateralized by the debt.
As a result of the repayment of Mountain Compressed Air's outstanding debt in
connection with the AirComp transaction, the Company became compliant with all
of its loan covenants with its Bank Lenders, except for a certain debt covenant
at AirComp. The Company has obtained a waiver for that covenant default.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the joint venture of AirComp LLC on the Company's
results of operations, based on the historical statements of operations, as if
the transactions had occurred as of the beginning of the period presented.
Nine Months
Ended September 30,
-------------------
2003 2002
------------- -------------
(in thousands)
Revenues $ 24,150 $ 14,233
Operating income /(loss) $ 2,694 $ (379)
Net income/ (loss) $ 3,411 $ (2,883)
Net income/ (loss) per common share, basic $ 0.17 $ (0.16)
Net income/ (loss) per common share, diluted $ 0.12 $ (0.16)
15
NOTE 4 - LONG-TERM DEBT
Long-term debt is primarily a result of the costs of the acquisitions of certain
assets of Jens' Oilfield Service, Inc., Strata Directional Technology, Inc. and
the newly created joint venture between Mountain Air and M-I L.L.C, AirComp LLC.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.
The debt agreements are as follows:
MOUNTAIN AIR
NOTES PAYABLE TO WELLS FARGO - EQUIPMENT LEASING - A term loan in the original
amount of $267,000 at an interest rates of 5%, interest payable monthly, with
monthly principal payments of $5,039 due on the last day of the month. The
maturity date of the loan is June 30, 2008.
NOTE PAYABLE TO SELLER OF MOUNTAIN AIR DRILLING SERVICE COMPANY ("MADSCO") - A
note to the sellers of MADSCO assets in the original amount of $2,200,000 at
5.75% simple interest was reduced to $1,469,151 as a result of the settlement of
a legal action by the Company against the sellers. The principal and accrued
interest is due on September 30, 2007 in the amount of $1,863,195. See Note 6
for information regarding the modification to the terms of this agreement.
JENS'
NOTE PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the amount of
$4,042,396 at a floating interest rate (7.25% at September 30, 2003) with
monthly principal payments of $67,373. The maturity date of the loan is February
1, 2007. The balance at September 30, 2003 was $2,830,000.
NOTE PAYABLE TO WELLS FARGO - REAL ESTATE NOTE - A real estate loan in the
amount of $532,000 at floating interest rate (7.0% at September 30, 2003) with
monthly principal payments of $14,778. The principal will be due on February 1,
2005. The balance at September 30, 2003 was $251,000.
LINE OF CREDIT WITH WELLS FARGO - At September 30, 2003, Jens had a $1,000,000
line of credit at Wells Fargo bank, of which $418,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating rate plus 3% (7.25% at September 30, 2003) for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted portion.
SUBORDINATED NOTE PAYABLE TO SELLER OF JENS' -A subordinated seller's note in
the amount of $4,000,000 at 7.5% simple interest. At September 30, 2003,
$375,000 of interest was accrued and was included in accrued interest. The
principal and interest are due on January 31, 2006. The note is subordinated to
the rights of Wells Fargo.
NOTE PAYABLE TO SELLER OF JENS' FOR NON-COMPETE AGREEMENT - In conjunction with
the purchase of Jens' (Note 3), the Company agreed to pay a total of $1,234,560
to the Seller of Jens' in exchange for a non-compete agreement signed
simultaneously. The Company is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of September 30, 2003, the balance was
approximately $823,000, including $247,000 classified as short-term.
STRATA
VENDOR FINANCING - On September 15, 2003, Strata entered into a short-term
vendor financing agreement with a major supplier of drilling motors for the
purchase of drilling motor rentals. The agreement provides for the payment of
the principal amount of $70,781 plus interest at a rate of 8.0%. Payment of the
principal and interest on the note is due monthly; however, the Company may make
payments with respect to principal and interest at any time without penalty. As
of September 30, 2003, the outstanding balance, including accrued interest, was
approximately $849,375. All amounts must be repaid on or prior to October 31,
2004
16
LINE OF CREDIT WITH WELLS FARGO - At September 30, 2003, Strata has a $2,500,000
line of credit at Wells Fargo bank, of which $1,099,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating interest rate plus 1/2% (7.25% at September 30, 2003) for the committed
portion. Additionally, the Company pays a 0.5% fee for the uncommitted portion.
ALLIS-CHALMERS
NOTES PAYABLE TO WELLS FARGO - SUBORDINATED DEBT AND AMORTIZATION OF REDEEMABLE
WARRANT - Subordinated debt secured to partially finance the acquisitions of
Jens' and Strata in the amount of $3,000,000 at 12% interest payable monthly.
The principal will be due on January 31, 2005. In connection with incurring the
debt, the Company issued redeemable warrants valued at $900,000, which have been
recorded as a discount to the subordinated debt and as a liability (see
REEDEMABLE WARRANTS below). The discount is amortizable over three years
beginning February 6, 2002 as additional interest expense.
NOTES PAYABLE TO CERTAIN FORMER DIRECTORS - The Allis-Chalmers Board established
an arrangement by which to compensate former and continuing Board members who
had served from 1989 to March 31, 1999 without compensation. Pursuant to the
arrangement in 1999, Allis-Chalmers issued promissory notes totaling $325,000 to
current or former directors and officers. The notes bear interest at the rate of
5%, compounded quarterly, and are due March 28, 2005. At September 30, 2003, the
notes are recorded at $382,000, including accrued interest.
REDEEMABLE WARRANTS - Associated with the issuance of the $2 million
Subordinated debt recorded by Mountain Air and the $3 million Subordinated debt
recorded by Allis-Chalmers (collectively, the "subordinated debt"), the Company
has issued redeemable warrants that are exercisable into a maximum of 1,165,000
shares of the Company's common stock at an exercise price of $0.15 per share
("Warrants A and B") and non-redeemable warrants that are exercisable into a
maximum of 335,000 shares of the Company's common stock at $1.00 per share
("Warrant C"). Warrants A and B are subject to cash redemption provisions
("puts") of $600,000 and $900,000, respectively, at the discretion of the
warrant holders beginning at the earlier of the final maturity date of the
subordinated debt or three years from the closing of the subordinated debt
(January 31, 2004 and January 31, 2005, respectively). Warrant C does not
contain any such puts or provisions. In addition, previously issued warrants to
purchase common stock of Mountain Air were cancelled. The Company has recorded a
liability of $600,000 at Mountain Air and $900,000 at Allis-Chalmers for a total
of $1,500,000 and is amortizing the effects of the puts to interest expense over
the life of the related subordinated debt instruments.
AIRCOMP LLC
LINE OF CREDIT WITH WELLS FARGO - a $1,000,000 line of credit at Wells Fargo
bank, of which $590,000 was outstanding at September 30, 2003. Interest accrues
at a rate equal to the LIBOR rate plus 1.5% to 2.25% (3.59% at September 30,
2003) for the committed portion and is payable quarterly starting in September
2003. Additionally, the Company pays a 0.5% fee for the uncommitted portion. The
committed line of credit is due on June 27, 2007
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the original amount of
$8,000,000 at variable interest rates related to the Prime or LIBOR rates (4.09%
at September 30, 2003), interest payable quarterly, with quarterly principal
payments of $286,000 due on the last day of the quarter beginning in July 2003.
The maturity date of the loan is June 27, 2007 and the balance at September 30,
2003 was $7,714,000
NOTE PAYABLE TO WELLS FARGO - EQUIPMENT TERM LOAN - A delayed draw term loan in
the amount of $1,000,000 with interest at a rate equal to the LIBOR rate plus
2.0% to 2.75%, with quarterly payments of interest currently and quarterly
payments of principal equal to 5% of the outstanding balance commencing in the
first quarter of 2005. The maturity date of the loan is June 27, 2007. AirComp
has not yet drawn down on this note and the there was no outstanding balance at
September 30, 2003.
17
NOTE PAYABLE TO M-I L.L.C. - SUBORDINATED DEBT - Subordinated debt in the amount
of $4,818,000 bearing an annual interest rate of 5% in conjunction with the
joint venture. The note is due and payable when M-I sells its interest in
AirComp.
NOTE 5 - PREFFERRED SHARES AND WARRANTS
On March 6, 2002, the Company issued 3,500,000 shares of Series A 10% Cumulative
Convertible Preferred Stock, (the "Preferred Stock"), to Energy Spectrum
Partners, LP. ("Energy Spectrum") in connection with the acquisition (the
"Strata Acquisition") from Energy Spectrum of substantially all of the common
stock and preferred stock of Strata Directional Technology, Inc.
In accordance with the Certificate of Designation, Preferences and Rights of the
Preferred Stock (the "Certificate") the Preferred Stock is convertible into a
number of shares of the Company's common stock determined by dividing the
"Liquidation Value" of the Preferred Stock, which is $1.00 per share, by the
"Conversion Price" of the Preferred Stock. The Conversion Price was initially
$0.75, but in accordance with the Certificate was reduced on February 1, 2003,
to an amount equal to 75% of the market price calculated in accordance with the
Certificate, or $0.19.
By letter agreement dated February 19, 2003, a copy of which is attached as an
exhibit to Form 8-K filed on February 20, 2003, Energy Spectrum agreed to
increase the Conversion Price to $0.50, to vote for an amendment to the
Company's Certificate of Incorporation to reflect the increase in the Conversion
Price, and that prior to the amendment of the Company's Certificate of
Incorporation if any Preferred Stock is converted into the Company's common
stock the Conversion Price for such conversion shall be $0.50. The letter
agreement reduced the number of shares of common stock into which the Preferred
Stock is convertible from 18,421,053 to 7,000,000 shares.
The Conversion Price is subject to adjustment pursuant to Section 11 of the
Certificate in the event of a stock split, stock dividend, reclassification, or
similar event, or in the event any other distribution is made in respect of the
Company's common stock. Section 11 also provides that in the event the Company
sells shares of the Company's common stock for less than the Conversion Price,
the Conversion Price will be reduced to such sales price.
In connection with the Strata Acquisition, the Company issued to Energy Spectrum
a warrant to purchase 437,500 shares of the Company's common stock at an
exercise price of $0.15 per share, and the Company agreed that if the Company
did not redeem all but one share of the Preferred Stock on or prior to February
6, 2003, the Company would issue Energy Spectrum an additional warrant to
purchase 875,000 shares of the Company's common stock at an exercise price of
$0.15 per share. On February 19, 2003, the Company issued such warrant, a copy
of which is attached as an exhibit to the Form 8-K filed on February 20, 2003.
Effective July 1, 2003, the Company recorded the redeemable convertible
preferred stock as a long-term liability in response to the adoption of SFAS No.
150.
NOTE 6 - SHAREHOLDERS' EQUITY
In connection with the formation of AirComp in July 2003, the Company recorded
$955,000, as the effect of the consolidation of the AirComp venture in which the
Company realized a benefit by elimination of its negative investment in the cost
basis of the venture. The business combination was accounted for as a purchase.
As a result, the Company recognized the benefit of $955,000 as an increase in
its stockholders equity rather than period income.
NOTE 7 - SEGMENT INFORMATION
The Company has three segments, Casing Services (Jens), Directional Drilling
Services (Strata) and Compressed Air Drilling Services (Mountain Air and
AirComp). All of the segments provide services to the petroleum industry. The
revenues and operating income by segment are presented below:
18
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands)
Revenues:
Casing Services $ 2,559 $ 2,197 $ 7,712 $ 5,445
Directional Drilling Services 3,353 1,785 10,336 4,058
Compressed Air Drilling Services 2,177 793 4,380 2,762
--------- --------- --------- ---------
Total revenues $ 8,089 $ 4,775 $ 22,428 $ 12,265
Operating income/ (loss):
Casing Services $ 913 $ 749 $ 3,079 $ 1,707
Directional Drilling Services 120 (44) 613 (187)
Compressed Air Drilling Services 122 (269) 3 (716)
General Corporate (477) (1,116) (1,277) (2,009)
--------- --------- --------- ---------
Total operating income/(loss) $ 678 $ (680) $ 2,408 $ (1,205)
Depreciation and Amortization Expense:
Casing Services $ 345 $ 332 $ 1,035 $ 863
Directional Drilling Services 56 48 175 165
Compressed Air Drilling Services 291 231 811 690
General Corporate 18 12 78 36
--------- --------- --------- ---------
Total depreciation & amortization expense $ 710 $ 623 $ 2,099 $ 1,754
Interest Expense:
Casing Services $ 146 $ 152 $ 469 $ 420
Directional Drilling Services 42 51 166 139
Compressed Air Drilling Services 164 185 655 554
General Corporate 169 170 507 468
--------- --------- --------- ---------
Total interest expense $ 521 $ 558 $ 1,797 $ 1,581
Capital Expenditures:
Casing Services $ 973 $ 114 $ 1,215 $ 144
Directional Drilling Services 850 -- 893 --
Compressed Air Drilling Services 1,765 49 2,259 127
General Corporate 3 -- 19 9
--------- --------- --------- ---------
Total capital expenditures $ 3,591 $ 163 $ 4,386 $ 280
At September 30, 2003 the total assets for the Casing Services, Directional
Drilling Services, Compressed Air Drilling Services and General Corporate
segments are $17,361,000, $9,122,000, $24,515,000 and $1,169,000, respectively.
19
NOTE 8 - SETTLEMENT ON LAWSIUT
On July 15, 2003, the Company entered into a settlement agreement with the
former owners of Mountain Air Drilling Service Company (the "Sellers"). As of
the date of the agreement, the Company owed the Sellers a total of $2,563,195
including $2.2 million in principal and $363,195 in accrued interest. As part of
the settlement agreement, the note payable to the Sellers was reduced from $2.2
million to $1.5 million. The note payable no longer accrues interest and the due
date of the note payable was extended from February 6, 2006 to September 30,
2007. The lump-sum payment due the Sellers at that date will be $1,863,195. The
Company recorded a one-time gain on the reduction of the note payable to the
Sellers of $1,034,000 in the third quarter of 2003. The gain was calculated by
discounting the note payable to $1,469,152 using a present value calculation and
accreting the note payable to $1,863,195, the amount due in September 2007. The
Company will record interest expense totaling $394,043 over the life of the note
payable beginning July 2003.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
BACKGROUND
----------
The Company was incorporated in 1913 under Delaware law. The Company reorganized
in bankruptcy in 1988, and sold all of the Company's major businesses. In May
2001, the Company consummated a merger in which the Company acquired OilQuip
Rentals, Inc. (OilQuip) and its wholly owned subsidiary, Mountain Compressed
Air, Inc. ("Mountain Air"), in exchange for shares of the Company's common
stock, which upon issuance represented over 85% of the Company's outstanding
common stock. In February 2002, the Company acquired approximately 81% of the
capital stock of Jens' Oilfield Service, Inc. ("Jens'") and all of the capital
stock of Strata Directional Technology, Inc. ("Strata").
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp L.L.C. ("AirComp"). The
formation of AirComp has created the second largest provider of compressed air
and related products and services for the drilling, workover, completion, and
transmission segments of the oil, gas and geothermal industries.
Through AirComp, Jens' and Strata, and through additional acquisitions in the
oil and natural gas drilling services industry, the Company intends to exploit
opportunities in the oil and natural gas service and rental industry. Currently,
the Company receives 80% to 85% of the Company's revenues from natural gas
drilling services and the balance from oil drilling services; however, most of
the Company's services can be utilized for either activity.
CRITICAL ACCOUNTING POLICIES
----------------------------
We have identified the policies below as critical to the Company's business
operations and the understanding of the Company's results of operations. The
impact and any associated risks related to these policies on the Company's
business operations is discussed throughout Management's Discussion and Analysis
of Financial Condition and Results of Operations where such policies affect the
Company's reported and expected financial results. For a detailed discussion on
the application of these and other accounting policies, see Note 1 in the Notes
to the Consolidated Financial Statements. Note that the Company's preparation of
this Quarterly Report on Form 10-Q requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the Company's
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
REVENUE RECOGNITION. Our revenue recognition policy is significant because the
Company's revenue is a key component of the Company's results of operations. In
addition, the Company's revenue recognition policy determines the timing of
certain expenses, such as commissions and royalties. We follow very specific and
detailed guidelines in measuring revenue; however, certain judgments affect the
application of the Company's revenue policy. Revenue results are difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause the Company's operating results to vary significantly from quarter to
quarter and could result in future operating losses. Revenues are recognized by
the Company and its subsidiaries as services are provided.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
21
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review and to estimate present value calculation factors.
These forecasts require assumptions about demand for the Company's products and
services, future market conditions and technological developments. Significant
and unanticipated changes to these assumptions could require a provision for
impairment in a future period.
GOODWILL AND OTHER INTANGIBLES - The Company has recorded approximately
$10,083,000 of goodwill and other identifiable intangible assets. The Company
performs purchase price allocations when it makes a business combination.
Business combinations and subsequent purchase price allocations have been
recorded for purchase of the Mountain Air, Strata and Jens' operating segments.
The excess of the purchase price after allocation of fair values to tangible
assets are allocated to goodwill and other identifiable intangibles.
Subsequently, the Company has performed its initial impairment tests and annual
valuation tests in accordance with Financial Accounting Standards Board No. 141,
BUSINESS COMBINATIONS, and Financial Accounting Standards Board No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These valuations required the use of
third-party valuation experts who in turn developed assumptions to value the
carrying value of the individual reporting units. Significant and unanticipated
changes to these assumptions could require a provision for impairment in a
future period.
AIRCOMP AND SALES ON INTEREST IN VENTURE - The Company has adopted SEC Staff
Accounting Bulletin (SAB) No.51, Accounting for Sales of Stock by a Subsidiary,
to account for its investment in AirComp. AirComp operates in a manner similar
to a joint venture but has been accounted for and consolidated as a subsidiary
under SFAS No. 141, BUSINESS COMBINATIONS. Pursuant to SAB No. 51, the Company
has recorded its own contribution of assets and liabilities at its historical
cost basis. Since liabilities exceeded assets, the Company's basis in AirComp
was a negative amount. The Company has accounted for the assets contributed from
M-I at a fair market value as determined by an outside appraiser. The Company
gave M-I a 45% interest in AirComp in exchange for the assets contributed. As a
result of the formation of the venture and its retention of 55% interest in the
venture, the Company realized an immediate gain to the extent of its negative
basis and its 55% interest in the combined assets and liabilities of the
venture. In accordance with SAB No. 51, the Company has recorded its negative
basis investment in AirComp as an addition to equity and its share of the
combined assets and liabilities realized from M-I assets as non-operating
income.
EXTINGUISHMENT OF DEBT - Pursuant to SFAS No. 140, SFAS No. 145 and Emerging
Issues Task Force No. 96-19, the Company has recorded the settlement of the
Sellers' Note for MCA as an ordinary item in the period of extinguishment.
According to the aforementioned pronouncements, debt is considered to be
extinguished when the debtor has repaid the creditor, the debtor has been
legally released as the primary obligor on the debt, or when the debt is
substantially modified. As the debtor, the Company's obligation to the Sellers
of MCA was substantially modified. The amount recorded to income for the 3 month
period ended September 30, 2003 was the difference between the carrying value of
the debt prior to modification and the present value of the modified debt terms
as discounted back from its maturity date.
RESTATEMENT
-----------
The Company understated diluted earnings per share due to an incorrect
calculation of its weighted shares outstanding for the third and fourth quarters
of 2003, for each of the first three quarters of 2004, for the year ended
December 31, 2004 and the for the quarter ended March 31, 2005. In addition, the
Company understated basic earnings per share due to an incorrect calculation of
its weighted average basic shares outstanding for the quarter ended September
30, 2004. Consequently, the Company has restated its financial statements for
each of those periods. The incorrect calculation resulted from a mathematical
22
error and an improper application of SFAS 128, EARNINGS PER SHARE. The effect of
the restatement is to reduce weighted average diluted shares outstanding for
each period and to reduce weighted average basic shares outstanding for the
quarter ended September 30, 2004. Consequently, weighted average diluted
earnings per share were increased for each period and weighted average basic
earnings per share was increased for the quarter ended September 30, 2004. As a
result, earnings per share were increased in each period in inverse proportion
to the decrease in shares outstanding. See Note 2 to our consolidated financial
statements included in Part I, Item 1.
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SEC
Staff Accounting Bulletin ("SAB") No. 51 "Accounting for Sales of Stock by a
Subsidiary". Consequently, we have restated our financial statements for the
year ended December 31, 2003 and for the three quarters ended September 30, 2003
and 2004.
RESULTS OF OPERATIONS
---------------------
Results of operations for 2003 and 2002 reflect the business operations of
Allis-Chalmers and its subsidiaries Jens' Oilfield Service, Inc., which supplies
highly specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells ("Casing Services"), and
Strata Directional Technology, Inc., which provides high-end directional and
horizontal drilling services for specific targeted reservoirs that cannot be
reached vertically ("Directional Drilling Services") and its joint venture
AirComp, which provides air drilling services to natural gas exploration
operations ("Compressed Air Drilling Services"). The results from the Casing
Services and the Directional Drilling Services operations are included from
February 1, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002:
---------------------------------------------------------------------
HISTORICAL COMPARISON
Sales for the three months ended September 30, 2003 totaled $8,089,000. In the
comparable period of 2002, revenues were $4,775,000. Revenues for the three
months ended September 30, 2003 for the Casing Services, Directional Drilling
Services, and Compressed Air Drilling Services segments were $2,559,000,
$3,353,000 and $2,177,000, respectively. Revenues for the three months ended
September 30, 2002 for the Casing Services, Directional Drilling Services, and
Compressed Air Drilling Services segments were $2,197,000, $1,785,000 and
$793,000, respectively. Revenues for the third quarter of 2003 increased over
the third quarter of 2002 due to the increased activity in the drilling market
and increased market share in the Casing Services primarily in Mexico due to the
increase drilling activity by PEMEX. Directional Drilling Services also
increased market share as did Compressed Air Drilling Services as a result of to
the joint venture between Mountain Air and M-I Air Drilling and the
consolidation of the results of operations of AirComp into the consolidated
financial statements of the Company.
Gross margin ratio, as a percentage of sales, was 25.1% in the third quarter of
2003 compared with 19.6% in the third quarter of 2002. The gross margin
increased in the third quarter of 2003 as compared to the third quarter of 2002,
due to an increase in market share and increased pricing in the Casing Services,
Directional Drilling Services, and Compressed Air Drilling Services segments.
The increase in profit margin resulted because the Company's revenues increased
at a greater rate than its expenses because many of its costs are fixed and do
not increase with revenues.
Marketing and administrative expense was $1,351,000 in the third quarter of 2003
compared with $886,000 in the third quarter of 2002. The marketing and
administrative expenses increased in 2003 compared to 2002 due to the increased
costs associated with the joint venture AirComp and the hiring of additional
sales force.
23
Operating income for the three months ended September 30, 2003 totaled $678,000.
For the three months ended September 30, 2002, the operating (loss) was
($680,000). Operating income (loss) for the three months ended September 30,
2003 for the Casing Services, Directional Drilling Services, Compressed Air
Drilling Services and General Corporate segments were $913,000, $120,000,
$122,000 and ($477,000), respectively. Operating income (loss) for the three
months ended September 30, 2002 for the Casing Services, Directional Drilling
Services, Compressed Air Drilling Services and General Corporate segments were
$749,000, ($44,000), ($269,000) and ($1,116,000), respectively. In the third
quarter of 2002, the Company in response to the default of its debt covenants,
the Company reorganized itself in order to contain costs and recorded charges
related to the reorganization in the amount of $495,000. Such organizational
changes included reduction of personnel, the deployment of turn-around
consultants and a terminated rent obligation. These charges consisted of related
payroll costs for terminated employees of $307,000, consulting fees of $113,000,
and costs associated with a terminated rent obligation of $75,000. The Company
also recorded costs related to abandoned acquisitions and equity raise in the
amount of $233,000 consisting of legal fees associated with abandoned
acquisition of $82,000 and costs related to a abandoned private placement in the
amount of $150,000.
We had net income attributed to common shareholders of $3,449,000 for the third
quarter of 2003 compared with a loss of($1,592,000) per common share, for the
third quarter of 2002. We recorded a one-time gain on the reduction of the note
payable of $1,034,000 in the third quarter of 2003 as a result of settling
lawsuit against the formers owners of Mountain Air Drilling Service Company. The
gain was calculated by discounting the note payable to $1,469,152 using a
present value calculation and accreting the note payable to $1,863,195, the
amount due in September 2007. We will record interest expense totaling $394,043
over the life of the note payable beginning July 2003. In addition, we also
recorded a one-time non-operating gain on the sale of an interest in a
subsidiary of $2.4 million in connection with the formation of AirComp. We have
adopted a policy that any gain or loss in the future incurred on the sale in the
stock of a subsidiary would be recognized as such in the income statement.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SEPTEMBER 30, 2002:
--------------------------------------------------------------------
HISTORICAL COMPARISON
Sales for the nine months ended September 30, 2003 totaled $22,428,000. In the
comparable period of 2002, revenues were $12,265,000. Revenues for the nine
months ended September 30, 2003 for the Casing Services, Directional Drilling
Services, and Compressed Air Drilling Services segments were $7,712,000,
$10,336,000 and $4,380,000, respectively. Revenues for the nine months ended
September 30, 2002 for the Casing Services, Directional Drilling Services, and
Compressed Air Drilling Services segments were $5,445,000, $4,058,000 and
$2,762,000, respectively. The sales for the Casing Services and Directional
Drilling segments for 2002 were from February 1, 2002 through September 30,
2002. Revenues for the first nine months of 2003 increased over the first nine
months of 2002 due to the increased activity in the drilling market and the
Company's continued efforts to increase market share in the Casing Services
primarily in Mexico due to the increase drilling activity by PEMEX. Directional
Drilling Services also increased market share as did Compressed Air Drilling
Services as a result of the joint venture between Mountain Air and M-I Air
Drilling and the consolidation of the results of operation of AirComp into the
consolidated financial statements of the Company.
Gross margin ratio, as a percentage of sales, was 27.5% in the first nine months
of 2003 compared with 18.1 % in the first nine months of 2002. The gross margin
increased in the first nine months of 2003 as compared to the first nine months
of 2002, which included Casing Services and Directional Drilling from February
1, 2002 through September 30, 2002, due to an increase in market share and
increased pricing in the Casing Services, Directional Drilling Services, and
Compressed Air Drilling Services segments. The increase in profit margin results
resulted because the Company's revenues increased at a greater rate than its
expenses because many of its costs are fixed and do not increase with revenues.
24
Marketing and administrative expense was $3,759,000 in the first nine months of
2003 compared with $2,696,000 in the first nine months of 2002. The marketing
and administrative expenses increased in 2003 compared to 2002 due to the
increased costs associated with the joint venture AirComp and the hiring of
additional sales force. The marketing and administrative expenses for the Casing
Services and Directional Drilling segments for the period ended September 30,
2002 were from February 1, 2002 through September 30, 2002.
Operating income for the nine months ended September 30, 2003 totaled
$2,408,000. For the nine months ended September 30, 2002, the operating (loss)
was ($1,205,000). Operating income (loss) for the nine months ended September
30, 2003 for the Casing Services, Directional Drilling Services, Compressed Air
Drilling Services and General Corporate segments were $3,079,000, $613,000,
$3,000 and ($1,277,000), respectively. Operating income (loss) for the nine
months ended September 30, 2002 for the Casing Services, Directional Drilling
Services, Compressed Air Drilling Services and General Corporate segments were
$1,707,000, ($187,000), ($716,000) and ($2,009,000), respectively. The operating
income (loss) for the Casing Services and Directional Drilling segments was from
February 1, 2002 through September 30, 2002 (post merger period). In the third
quarter of 2002, the Company in response to the default of its debt covenants,
the Company reorganized itself in order to contain costs and recorded charges
related to the reorganization in the amount of $495,000. The Company also
recorded costs related to abandoned acquisitions and equity raise in the amount
of $233,000 consisting of legal fees associated with abandoned acquisition of
$82,000 and costs related to a abandoned private placement in the amount of
$150,000.
We had a net income attributed to common stockholders' of $2,687,000 for the
first nine months of 2003 compared with a loss of ($3,247,000) for the first
nine months of 2002. The Company recorded a one-time gain on the reduction of
the note payable of $1,034,000 in the third quarter of 2003 as a result of
settling lawsuit against the formers owners of Mountain Air Drilling Service
Company. The gain was calculated by discounting the note payable to $1,469,152
using a present value calculation and accreting the note payable to $1,863,195,
the amount due in September 2007. The Company will record interest expense
totaling $394,043 over the life of the note payable beginning July 2003. In
addition, we also recorded a one-time non-operating gain on the sale of an
interest in a subsidiary of $2.4 million in connection with the formation of
AirComp. The Company has adopted a policy that any gain or loss in the future
incurred on the sale in the stock of a subsidiary would be recognized as such
in the income statement.
PRO FORMA COMPARISON
The pro forma results of operations set forth below includes results of
operations of the Company for all of the first nine months of 2003 and 2002 as
if the AirComp transaction had occurred as of the beginning of the periods
presented. These pro forma financial statements should be read in conjunction
with the historical financial statements included herein.
Pro forma sales in the first nine months of 2003 totaled $24,150,000 compared
with pro forma sales of $14,233,000 for the first nine months of 2002. Revenues
for the first nine months of 2003 increased over the first nine months of 2002
due to the increase activity in the drilling market and the Company's continued
efforts to increase market share in the Casing Services primarily in Mexico due
to the increase drilling activity by PEMEX. Directional Drilling Services also
increased market share as did Compressed Air Drilling as a result of the joint
venture between Mountain Air and M-I Air Drilling and the consolidation of the
results of operation of AirComp into the consolidated financial statements of
the Company.
Pro forma gross profit totaled $6,287,000 for a pro forma gross profit margin of
26.0% of sales in the nine months ended September 30, 2003. Pro forma gross
profit for the comparable nine months in the prior year totaled $3,278,000 for a
gross profit margin of 23.0% of sales. The increase in profit margin results
resulted because the Company's revenues increased at a greater rate than its
expenses because many of its costs (including certain financing and equipment
costs) are fixed and do not increase with revenues.
25
The Company's pro forma net income attributed to common shareholders' was
$2,842,000 or $0.14 per common share, for the first nine months of 2003 compared
to a pro forma net loss of ($2,883,000), or ($0.16) per common share, for the
first nine months of 2002. The Company recorded a one-time gain on the reduction
of the note payable of $1,034,000 in the third quarter of 2003 as a result of
settling lawsuit against the formers owners of Mountain Air Drilling Service
Company. The gain was calculated by discounting the note payable to $1,469,152
using a present value calculation and accreting the note payable to $1,863,195,
the amount due in September 2007. The Company will record interest expense
totaling $394,043 over the life of the note payable beginning July 2003. In
addition, we also recorded a one-time non-operating gain on the sale of an
interest in a subsidiary of $2.4 million in connection with the formation of
AirComp.
SCHEDULE OF CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's obligations and commitments to make
future payments under its notes payable, operating leases, employment contracts
and consulting agreements for the periods specified as of September 30, 2003.
Payments due by Period
----------------------------------------------------------------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
----- ------ --------- --------- -----
Note payable $30,476,000 $ 2,648,000 $16,508,000 $11,320,000 $ --
Interest Payments on note payable 1,523,000 132,000 825,000 566,000 --
Operating Lease 1,140,000 228,000 456,000 456,000 --
Employment Contracts 1,754,000 1,180,000 574,000 -- --
Total Contractual Cash Obligations $34,893,000 $ 4,188,000 $18,363,000 $12,342,000 $ --
============ ============ ============ ============ ============
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
Cash and cash equivalents totaled $120,000 at September 30, 2003, a decrease
from $146,000 at December 31, 2002 primarily due to the management of cash
reserves on a daily basis. Cash flows provided by operations totaled $1,973,000
in the first nine months of 2003 compared to the $441,000 generated in the prior
year.
Net trade receivables at September 30, 2003 were $7,291,000. This increased
significantly from the December 31, 2002 balance of $4,409,000 due to the
increase in operating activity and increased activities with customers with
longer payment cycles.
Net property, plant and equipment were $31,982,000 at September 30, 2003. The
increase in plant, property and equipment is due to the assets purchased from
M-I Air Drilling in connection with the formation of AirComp. Capital
expenditures for the nine months ended September 30, 2003 were $4,386,000
including $2.4 million for the purchase of an operating lease at Mountain Air
contributed to AirComp on July 2, 2003. Capital expenditures for fiscal year
2003 are projected to be approximately $3,500,000 excluding the purchase of the
operating lease at Mountain Air.
Trade accounts payable at September 30, 2003 was $4,844,000. This increased
significantly from the December 31, 2002 balance of $2,106,000 due to the
increase in operating activity, increased capital expenditures at Jens' and an
increase in accounts receivable resulting in less cash available to pay
payables. The Company is investigating additional financing or other methods of
financing its accounts receivable.
26
Other current liabilities, excluding the current portion of long-term debt, were
$2,135,000 including interest in the amount of $547,000, accrued salary and
benefits in the amount of $405,000, and accrued expenses of $1,183,000. All of
these balance sheet accounts increased significantly from the December 31, 2002
balances due to the increase in revenues and operations.
Long-term debt was $28,138,000 at September 30, 2003 including current
maturities. The increase in the long-term debt is attributable to the financing
of AirComp of approximately $13.3 million.
In addition to the debt discussed above, the Company had available lines of
credit totaling $2,865,000 at September 30, 2003, of which $1,031,000 was
available and unused. In addition, AirComp had available $638,000 of unused
credit at September 30, 2003.
Our long-term capital needs are to refinance the Company's existing debt,
provide funds for existing operations, and redeem the Series A Preferred Stock
(which is subject to mandatory redemption on February 1, 2004) and to secure
funds for acquisitions in the oil and gas equipment rental and services
industry. In order to pay the Company's debts as they become due, including the
amounts due to the Bank Lenders and the amounts required to redeem the Series A
Preferred Stock described above the Company will require additional financing,
which may include the issuance of new warrants or other equity or debt
securities, as well as secured and unsecured loans. Any new issuance of equity
securities would dilute existing shareholders.
By letter agreement dated February 19, 2003, Energy Spectrum agreed to increase
the Conversion Price to $0.50, to vote for an amendment to the Company's
Certificate of Incorporation to reflect the increase in the Conversion Price,
and that prior to the amendment of the Company's Certificate of Incorporation if
any Preferred Stock is converted into the Company's common stock the Conversion
Price for such conversion shall be $0.50. The letter agreement reduces the
number of shares of common stock into which the Preferred Stock is convertible
from 18,421,053 to 7,000,000 shares.
In connection with the Strata Acquisition, the Company issued to Energy Spectrum
a warrant to purchase 437,500 shares of the Company's common stock at an
exercise price of $0.15 per share, and the Company agreed that if the Company
did not redeem all but one share of the Preferred Stock on or prior to February
6, 2003, the Company would issue Energy Spectrum an additional warrant to
purchase 875,000 shares of the Company's common stock at an exercise price of
$0.15 per share. On February 19, 2003, the Company issued such warrant.
RECENT DEVELOPMENTS - JOINT VENTURE WITH M-I L. L.C.
We entered into a joint venture agreement with a division of M-I L.L.C., and
related financing on July 2, 2003 and formed AirComp. Through our subsidiary,
Mountain Compressed Air, Inc., we contributed substantially all of our
compressed air drilling assets with an estimated net book value of approximately
$6,300,000 million to AirComp. Simultaneously, Aircomp acquired the compressed
air drilling assets of M-I with an appraised value $10,269,000 as determined by
a third party appraisal. We own 55% and M-I L.L.C. will own 45% of AirComp.
In connection with the transaction, AirComp obtained bank financing of $8
million (matures on September 27, 2007), of which $7.3 million was distributed
to the Company to extinguish the outstanding Mountain Compressed Air debt,
approximately $2.4 million of the $7.3 million was used to purchase equipment
the Company was leasing and $700,000 will be used by AirComp to pay transaction
costs and working capital. The debt bears interest at a floating rate, currently
LIBOR plus 0.5% annually. AirComp has the ability to borrow an additional $2
million under its credit agreement with the bank. AirComp's bank debt is secured
by substantially all of the assets of AirComp. The Company has guaranteed all of
Mountain Compressed Air's obligations under the joint venture agreement, and
Mountain Compressed Air has guaranteed up to 55% of AirComp's debt.
As a result of the repayment of Mountain Compressed Air's outstanding debt in
connection with the AirComp transaction, the Company became compliant with all
of its loan covenants with its Bank Lenders, except for a certain debt covenant
at AirComp. The Company has obtained a waiver for that covenant default.
27
Along with the bank financing, AirComp issued a note to M-I L.L.C. for in the
amount of $4.8 million bearing an annual interest rate of 5% in conjunction with
the joint venture. The note is due and payable when M-I sells its interest in
AirComp.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements (within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934) regarding the Company's business,
financial condition, results of operations and prospects. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates and similar expressions
or variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Report on Form 10-Q.
Although forward-looking statements in this Report on Form 10-Q reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors the Company currently knows about. Consequently,
forward-looking statements are inherently subject to risks and uncertainties,
and actual results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors that could cause
or contribute to such differences in results and outcomes include, but are not
limited to, those discussed elsewhere in this Report on Form 10-Q, in the
Company's Annual Report on Form 10K (including without limitation in the "Risk
Factors" Section), and in the Company's other SEC filings and publicly available
documents. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report on
Form 10-Q. We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our reports under the Securities Exchange Act of 1934, as amended, are
recorded processed, summarized and reported within the time periods specified in
the SEC's rules and forms, and that such information is accumulated and
communicated to management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosures. Our internal control system is designed to provide reasonable
assurance regarding the preparation and fair presentation of published financial
statements. All internal controls systems are designed based in part upon
certain assumptions about the likelihood of future events, and, no matter how
well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation and may not prevent or detect
all misstatements.
Management, including our chief executive officer and our chief financial
officer, has evaluated the effectiveness of our "disclosure controls and
procedures" (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this Report (the "Evaluation Date"). Management has
concluded that, as of the Evaluation Date, due to the deficiencies described
below, our controls and procedures over financial reporting were not effective
to enable us to record, process, summarize, and report information required to
be included in our SEC filings within the required time period, and to ensure
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial accounting officer, to
allow timely decisions regarding required disclosure. As described below, we are
taking steps to remediate the deficiencies in our control over the financial
reporting process.
28
On August 4, 2005, our Board of Directors, upon the recommendation of the Audit
Committee of our Board of Directors, concluded that our previously issued
financial statements for the periods from July 1, 2003 through March 31, 2005,
were required to be restated to correct the understatement of net income per
share which resulted from a miscalculation of the number of basic and diluted
shares outstanding on a weighted average basis in accordance with SFAS No. 128,
EARNINGS PER SHARE. The deficient resulted from errors discovered by our
independent accountants on August 1, 2005, while reviewing our financial
statements for the quarter ended June 30, 2005. The major components of the
errors were as follows:
o For all periods involved we had not applied the treasury stock
method of accounting for options and warrants as prescribed in
SFAS No. 128. Specifically, we overstated diluted shares
outstanding because we failed to reduce diluted shares
outstanding by the number of shares that could be purchased
with the proceeds to us from the exercise of dilutive warrants
and options.
o In 2003 and 2004, we overstated diluted shares by not
correctly calculating the number of common shares into which
our preferred stock was convertible; by not app1ying the "if
converted" method of calculating diluted net earnings which
requires that dividends actually paid on preferred stock be
added to net income attributed to common shares in calculating
diluted earnings per common share; and by continuing to report
the preferred shares as dilutive after the preferred shares
were converted to common stock on April 2, 2004.
o During the third quarter of 2004, we misstated the number of
common shares outstanding on a weighted average basis due to a
mathematical error in calculating the number of days certain
shares issued during the quarter were outstanding.
In addition, in March 2005, we restated our financial statements for the year
ended December 31, 2003 and for the three quarters ended September 30, 2004,
relating to our acquisition of a 55% interest in our AirComp, LLC subsidiary in
2003. We originally accounted for the formation of AirComp as a joint venture,
but in February 2005, determined that the transaction should have been accounted
for using purchase accounting pursuant to SFAS No. 141, BUSINESS COMBINATIONS
and accounting for the sale of an interest in a subsidiary in accordance with
SAB No. 51.
We have restated our financial statements as set forth in Note2 to the
Consolidated Financial Statements contained in Part I Item 1.
Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No. 2
identifies a number of circumstances that, because of their likely significant
negative effect on internal control over financial reporting, are to be regarded
as at least significant deficiencies as well as strong indicators that a
material weakness exists, including the restatement of previously-issued
financial statements to reflect the correction of a misstatement. Management
evaluated the impact of the restatement of our previously-issued financial
statements on our assessment of our system of internal control and has concluded
that the restatements resulted from the lack of sufficient experienced
accounting personnel resulting in a lack of effective control over the financial
reporting process.
We have implemented a number of actions that we believe address the deficiencies
in our financial reporting process, including the following:
o The addition of experienced accounting personnel with
appropriate experience and qualifications to perform quality
review procedures and to satisfy our financial reporting
obligation. During August 2004, we hired a new chief financial
officer and in October of 2004 we hired a full-time general
counsel. In March 2005, we hired a certified public accountant
as our financial reporting manager and in July 2005 we hired
as chief accounting officer a certified public accountant who
has significant prior experience as a chief accounting officer
of a publicly traded company.
29
o In the fourth quarter of 2004, we engaged an independent
internal controls consulting firm which is in the process of
documenting, analyzing, identifying and correcting weaknesses
and testing our internal controls and procedures, including
our controls over internal financial reporting.
o Our audit committee dismissed our prior independent auditors
in October 2004 and engaged new independent auditors who we
believe have greater experience with publicly traded
companies.
o We are in the process of implementing new accounting software
to facilitate timely and accurate reporting.
CHANGE IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There were no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15 and 15d-15(f) under the Exchange Act) that
occurred during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
30
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: A report on Form 8-K was filed on July 15, 2003,
reporting the Company's entering into a joint venture agreement with a division
of M-I L.L.C., and related financing on July 2, 2003. A Report 8-K/A was filed
on September 16, 2003, which included pro forma financial statements for the
periods ending December 31, 2002 and June 31, 2003 relating to the joint venture
agreement with a division of M-I L.L.C.
31
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allis-Chalmers Energy, Inc.
(Registrant)
/s/ Munawar H. Hidayatallah
---------------------------
Munawar H. Hidayatallah
Chief Executive Officer
And Chairman
August 16, 2005
32