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ALLIS-CHALMERS CORPORATION
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ALLIS-CHALMERS CORPORATION
8150 Lawndale Avenue
Houston, Texas 77012
September 28, 2001
Dear Allis-Chalmers Stockholder:
We are pleased to report that, on May 9, 2001, OilQuip Rentals, Inc.,
an oil and gas equipment rental company, merged into a subsidiary of
Allis-Chalmers Corporation. In the merger, Allis-Chalmers acquired all of the
capital stock of OilQuip. We believe that the combination of Allis-Chalmers and
OilQuip will allow our business to grow and generate positive cash flow.
In the merger, all of OilQuip's outstanding common stock was converted
into 400,000 shares of our common stock and the right to receive 9,600,000
shares of our common stock upon the filing of an amendment to our Amended and
Restated Certificate of Incorporation to authorize the issuance of such shares.
At the special meeting, our shareholders will be asked to approve such
amendment. Once the filing is made the shareholders of OilQuip prior to the
merger, including Munawar H. Hidayatallah, the President and Chief Executive
Officer of Allis-Chalmers, will own 86.3% of our outstanding common stock.
Accordingly, we invite you to attend a special meeting of our
stockholders to be held at 10:00 a.m., local time, on October 12, 2001, at our
executive offices located at 8150 Lawndale Avenue, Houston, Texas.
At our special meeting, we will ask you to:
o Approve and adopt our Amended and Restated Certificate of
Incorporation;
o Elect our board of directors to hold office until the next annual
meeting of our stockholders and until the election and
qualification of their respective successors; and
o Consider and transact such other business as may properly come
before our special meeting or any adjournment or postponement
thereof.
Certain of our stockholders, who hold an aggregate of 1,392,351 shares
of our common stock, or 70% of our outstanding common stock, have entered into
an agreement and proxy and appointed Munawar H. Hidayatallah, as his or its
irrevocable proxy to vote all of his or its shares in favor of the approval and
adoption of our Amended and Restated Certificate of Incorporation and the
election of the nominees for director named in this proxy statement to our board
of directors. Accordingly, the approval and adoption of our Amended and Restated
Certificate of Incorporation and the election of the nominees for director named
in this proxy statement to our board of directors by our stockholders is
expected to occur irrespective of whether, or the manner in which, you vote your
shares of our common stock.
This proxy statement is first being mailed to our stockholders on or
about October 1, 2001. Please give it your careful attention. Accordingly,
whether or not you plan to attend our special 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.
Your prompt cooperation is greatly appreciated during this important
and exciting time for us.
Sincerely,
/s/ Munawar H. Hidayatallah
Munawar H. Hidayatallah
President, Chief Executive Officer and
Chairman
ALLIS-CHALMERS CORPORATION
8150 LAWNDALE AVENUE
HOUSTON, TEXAS 77012
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 12, 2001
To Allis-Chalmers Stockholders:
A special meeting of our stockholders will be held on October 12,
2001 at 10:00 a.m., local time, at our executive offices located at 8150
Lawndale Avenue, Houston, Texas, for the following purposes:
o To consider and vote upon a proposal to approve our Amended
and Restated Certificate of Incorporation which amends our
current certificate of incorporation as follows: (i) increases
the number of authorized shares of our capital stock from
2,000,000 to 110,000,000, (ii) deletes certain provisions
which are no longer relevant or have been moved into our
by-laws and (iii) makes other technical changes.
o To elect our board of directors until the next annual meeting
of our stockholders and until the election and qualification
of their respective successors.
o To consider and transact any other business that may properly
come before the special meeting or any adjournment of
postponement of the special meeting.
Our board of directors has fixed the close of business on Wednesday,
September 26, 2001, as the record date for determination of our stockholders
entitled to notice of, and to vote at, our special meeting and any adjournment
or postponement thereof. Accordingly, only holders of record of shares of our
voting common stock at the close of business on such date will be entitled to
notice of, and to vote at, our special meeting and any adjournment or
postponement thereof.
By Order of the Board of Directors,
/s/ Joseph P. Bartlett
Joseph P. Bartlett
Secretary
September 28, 2001
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING,
PLEASE COMPLETE, DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE
RETURN STAMPED ENVELOPE PROVIDED.
PROXY STATEMENT
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ALLIS-CHALMERS CORPORATION
8150 LAWNDALE AVENUE
HOUSTON, TEXAS 77012
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SPECIAL MEETING OF STOCKHOLDERS
To be held on October 12, 2001
GENERAL INFORMATION
The enclosed proxy is solicited by and on behalf of our board of
directors for use at the special meeting of our stockholders to be held on
October 12, 2001 at 10:00 a.m., local time, at our executive offices located at
8150 Lawndale Avenue, Houston, Texas and any postponement or adjournment of the
special meeting. The matters to be considered and acted upon at the special
meeting are described in the foregoing notice of special meeting of stockholders
and this document. This proxy statement and the related form of proxy are being
mailed on or about October 1, 2001 to our stockholders of record on September
26, 2001.
You may revoke the authority granted by your execution of a proxy at
any time before the effective exercise of such proxy by delivering a duly
executed proxy bearing a later date or by filing a written revocation with our
assistant secretary at our executive offices located at 8150 Lawndale Avenue,
Houston, Texas 77012. Presence at our special meeting does not of itself revoke
your proxy unless you shall, in writing, so notify our secretary at our special
meeting at any time prior to the voting of your proxy.
All shares of our common stock represented by executed and unrevoked
proxies will be voted in accordance with their terms. Proxies submitted without
specification will be voted for the approval and adoption of our amended and
restated certificate of incorporation and for the election of the nominees for
director to our board of directors. Our management is not aware of any other
matter to be presented at our special meeting, but if any other matter is
properly presented, the persons named in the proxy will vote on any such matters
according to their best judgment.
All costs and expenses of our special meeting and this solicitation,
including the cost of preparing and mailing this proxy statement, will be borne
by us. In addition to solicitation by use of mails, our directors, officers and
regular employees (who will not be specifically compensated for such services)
may solicit proxies personally or by telephone or other means of communication.
Although there is no formal agreement to do so, we also will reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries for their
reasonable expenses in forwarding proxy materials to their principals.
TABLE OF CONTENTS
SUMMARY TERM SHEET..........................................................................................................1
OVERVIEW.................................................................................................................1
THE COMPANIES............................................................................................................1
Allis-Chalmers (see page 16)..........................................................................................1
OilQuip (see page 19).................................................................................................1
OUR SPECIAL MEETING......................................................................................................2
Time, Date and Place of Meeting (see page 15).........................................................................2
Matters to be Considered (see page 15)................................................................................2
Record Date; Voting Rights; Vote Required (see page 15)...............................................................2
Voting Agreements; Security Ownership of Management (see page 27 and 38)..............................................2
THE MERGER...............................................................................................................2
Effective Time of the Merger..........................................................................................3
Merger Consideration (see page 29)....................................................................................3
Obligations following the Consummation of the Merger..................................................................3
No Appraisal Rights (see page 31).....................................................................................3
Interests of Certain Persons in the Merger; Certain Relationships and Related Transactions (see pages 26 and 58)......4
Certain Effects of the Merger.........................................................................................4
Plans for Our Business After the Merger (see page 27).................................................................4
Material Federal Income Tax Consequences (see page 27)................................................................4
Accounting Treatment of the Merger (see page 27)......................................................................4
Regulatory Approvals (see page 31)....................................................................................4
ALLIS-CHALMERS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA..............................................................5
OILQUIP SELECTED SUMMARY FINANCIAL DATA.....................................................................................6
MOUNTAIN COMPRESSED AIR, INC. SELECTED SUMMARY FINANCIAL DATA...............................................................7
UNAUDITED SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION........................................................8
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..................................................................10
MARKET PRICE OF AND DIVIDENDS ON ALLIS-CHALMERS COMMON STOCK...............................................................10
RISK FACTORS AND OTHER CONSIDERATIONS......................................................................................11
FORWARD-LOOKING STATEMENTS.................................................................................................14
OUR SPECIAL MEETING........................................................................................................15
Matters to be Considered.............................................................................................15
Record Date: Quorum; Voting At The Special Meeting...................................................................15
BUSINESS OF ALLIS-CHALMERS.................................................................................................16
Machine Repair.......................................................................................................16
Other Data...........................................................................................................16
LEGAL PROCEEDINGS.......................................................................................................17
Reorganization Proceedings Under Chapter 11 of the United States Bankruptcy Code.....................................17
Environmental Liabilities............................................................................................17
BUSINESS OF OILQUIP........................................................................................................19
General..............................................................................................................19
Industry Overview....................................................................................................19
Competition..........................................................................................................20
Customers............................................................................................................20
Suppliers............................................................................................................21
Employees............................................................................................................21
Facilities...........................................................................................................21
Insurance............................................................................................................21
Federal Regulations and Environmental Matters........................................................................22
New Accounting Pronouncements........................................................................................22
THE MERGER.................................................................................................................24
Overview.............................................................................................................24
Background of the Merger.............................................................................................24
Reasons for the Merger...............................................................................................24
Interests of Certain Persons in the Merger...........................................................................26
Security Ownership of Certain Beneficial Owners and Management Upon Filing of Our Amended and Restated
Certificate of Incorporation.........................................................................................26
Voting Agreements....................................................................................................27
Material Federal Income Tax Consequences.............................................................................27
Accounting Treatment of the Merger...................................................................................27
Plans for Our Business After the Merger..............................................................................27
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.................................................................................29
The Merger...........................................................................................................29
Merger Consideration.................................................................................................29
The Surviving Corporation............................................................................................29
Representations and Warranties.......................................................................................29
Certain Post-Closing Obligations.....................................................................................31
ESTIMATED FEES AND EXPENSES................................................................................................31
NO DISSENTING STOCKHOLDERS' RIGHTS.........................................................................................31
PROPOSAL 1: APPROVAL OF OUR AMENDED AND RESTATED CERTIFICATE OF INCORPORATION..............................................32
General..............................................................................................................32
Purpose and Effect of our Amended and Restated Certificate of Incorporation..........................................32
Shareholder Approval.................................................................................................33
Recommendation of our Board of Directors.............................................................................33
PROPOSAL 2: ELECTION OF DIRECTORS..........................................................................................34
Shareholder Approval.................................................................................................35
Recommendation of our Board of Directors.............................................................................35
INFORMATION RELATING TO OUR BOARD OF DIRECTORS AND ITS COMMITTEES..........................................................36
Meetings of Our Board of Directors; Committees.......................................................................36
Executive Committee..................................................................................................36
Compensation Committee...............................................................................................36
Audit Committee......................................................................................................36
Compensation of Directors............................................................................................37
Section 16(a) Beneficial Ownership Reporting Compliance..............................................................38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................................38
ii
INFORMATION RELATING TO OUR EXECUTIVE OFFICERS.............................................................................41
Executive Compensation...............................................................................................42
Long-Term Stock Incentive Plan.......................................................................................42
Retirement Plan......................................................................................................42
Employment, Severance and Other Agreements With Management...........................................................42
ALLIS-CHALMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................43
Overview.............................................................................................................43
Results of Operations for the Six-Month Periods Ended June 30, 2001 and 2000.........................................46
Financial Condition and Liquidity at June 30, 2001 and December 31, 2000.............................................47
Results of Operations for the Quarters Ended March 31, 2001 and 2000.................................................49
Financial Condition and Liquidity at March 31, 2001 and December 31, 2000............................................50
Results of Operations for the Years Ended December 31, 2000, 1999 and 1998...........................................51
Liquidity and Capital Resources at December 31, 2000, 1999 and 1998..................................................51
Financial Condition..................................................................................................53
Accounting Changes...................................................................................................53
OILQUIP'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................54
Overview.............................................................................................................54
Results of Operations for the Quarters Ended March 31, 2001 and 2000.................................................54
Results of Operations for the Period from February 4, 2000 to December 31, 2000......................................54
Liquidity and Capital Resources......................................................................................54
MOUNTAIN AIR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................56
Overview.............................................................................................................56
Results of Operations for the Period from January 1, 2001 to February 6, 2001 and the Quarter Ended March
31, 2000.............................................................................................................56
Results of Operations for the Years Ended December 31, 2000, 1999 and 1998...........................................56
Liquidity and Capital Resources at December 31, 2000, 1999 and 1998..................................................57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................................58
INDEPENDENT ACCOUNTANTS....................................................................................................58
STOCKHOLDER PROPOSALS......................................................................................................60
WHERE YOU CAN FIND MORE INFORMATION ABOUT US...............................................................................60
OTHER MATTERS..............................................................................................................61
ANNUAL REPORTS AND FINANCIAL STATEMENTS....................................................................................61
INDEX TO FINANCIAL STATEMENTS.............................................................................................F-1
Annex A: Agreement and Plan of Merger
Annex B: Agreement and Proxy
Annex C: Amended and Restated Certificate of Incorporation
iii
SUMMARY TERM SHEET
This summary term sheet describes the most material terms of the merger
transaction and the proposals to be considered by our stockholders at the
special meeting and provides references to other pages of this proxy statement
for you to obtain further information. You should carefully read this entire
proxy statement and the other documents we refer you to for a more complete
understanding of the matters being considered at the special meeting. In
addition, we incorporate by reference important business and financial
information about us into this proxy statement. You may obtain the information
incorporated by reference into this proxy statement without charge by following
the instructions in the section entitled "Where You Can Find More Information
About Us" that begins on page 60 of this proxy statement.
OVERVIEW
o On May 9, 2001, we consummated the merger of our wholly-owned subsidiary,
Allis-Chalmers Acquisition Corp., with and into OilQuip Rentals, Inc., with
OilQuip as the surviving corporation. Please see the section entitled "The
Merger" beginning on page 24.
o In exchange for all of the outstanding shares of OilQuip's common stock,
the former stockholders of OilQuip received 400,000 shares of our common
stock, and the right to receive 9,600,000 shares of our common stock on the
date our Amended and Restated Certificate of Incorporation is filed with
the Secretary of State of the State of Delaware. Please see the section
entitled "Certain Provisions of the Merger Agreement" beginning on page 29.
o Our special meeting has been called in order to present our Amended and
Restated Certificate of Incorporation to our shareholders for approval.
Please see the section entitled "Our Special Meeting" beginning on page 15
THE COMPANIES
Allis-Chalmers (see page 16)
o Allis-Chalmers Corporation, a Delaware corporation, is a holding company
for OilQuip Rentals, Inc.
o Our principal executive offices are located at 8150 Lawndale Avenue,
Houston, Texas 77012 and our telephone number is (713) 928-6200.
OilQuip (see page 19)
o OilQuip Rentals, Inc., a Delaware corporation, is involved in the oil and
natural gas exploration and drilling industry through its wholly-owned
subsidiary Mountain Compressed Air, Inc. and in the machine repair business
through Mountain Compressed Air's wholly-owned subsidiary Houston Dynamic
Service, Inc. Prior to the merger, Houston Dynamic was a wholly-owned
subsidiary of Allis-Chalmers.
o The principal executive offices of OilQuip are located at 8150 Lawndale
Avenue, Houston, Texas 77012 and OilQuip's telephone number is (713)
928-6200.
OUR SPECIAL MEETING
Time, Date and Place of Meeting (see page 15)
Our special meeting will be held at our executive offices located at
8150 Lawndale Avenue, Houston, Texas, on October 12, 2001, starting at
10:00 a.m., local time.
Matters to be Considered (see page 15)
Our special meeting has been called for our stockholders to:
o Approve and adopt our Amended and Restated Certificate of
Incorporation;
o Elect our board of directors to hold office until the next
annual meeting of our stockholders and until the election and
qualification of their respective successors; and
o Consider and transact such other business as may properly come
before our special meeting or any adjournment or postponement
thereof.
Record Date; Voting Rights; Vote Required (see page 15)
o Only holders of record on our books at the close of business on the
September 26, 2001 record date are entitled to notice of, and to vote at,
our special meeting. On the September 26, 2001 record date, there were
1,988,128 shares of our common stock outstanding.
o Our stockholders vote together as a single class on all matters submitted
to a vote of stockholders, with each share of common stock outstanding
being entitled to one vote.
o At our special meeting, the approval and adoption of our Amended and
Restated Certificate of Incorporation will require a majority of the votes
represented and entitled to vote on the matter to be voted in favor of this
matter. At our special meeting, the election of the directors will the
affirmative vote of a majority of our outstanding common stock, and the
persons receiving the highest number of votes for each director position
will be elected as director. Our stockholders are not entitled to cumulate
their votes on any matter to be considered at our special meeting.
Voting Agreements; Security Ownership of Management (see page 27 and 38)
o Certain of our stockholders, who hold an aggregate of 1,392,351 shares of
our common stock, or 70% of our outstanding common stock, have entered into
an agreement and proxy and appointed Munawar H. Hidayatallah, as his or its
irrevocable proxy to vote all of his or its shares in favor of the approval
and adoption of our Amended and Restated Certificate of Incorporation and
the election of the nominees for director named in this proxy statement to
our board of directors. Accordingly, the approval and adoption of our
Amended and Restated Certificate of Incorporation and the election of the
nominees for director named in this proxy statement to our board of
directors by our stockholders is expected to occur irrespective of whether,
or the manner in which, our other stockholders vote their shares of our
common stock.
o After our Amended and Restated Certificate of Incorporation is filed with
the Secretary of State of the State of Delaware, our officers and directors
as a group will hold an aggregate of 9,407,251 shares of our common stock,
or approximately 78.5% of our common stock outstanding.
THE MERGER
On May 9, 2001, pursuant to the Agreement and Plan of Merger dated May
9, 2001 by and among us, Allis-Chalmers Acquisition Corp. and OilQuip Rentals,
Inc., OilQuip merged with and into Allis-Chalmers Acquisition Corp., our
wholly-owned subsidiary, with OilQuip as the surviving corporation. In the
merger, OilQuip's outstanding common stock was converted into 400,000 shares of
our common stock
2
and the right to receive 9,600,000 shares of our common stock upon the filing of
our Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware. Pursuant to the terms of the merger agreement:
o the membership of our board of directors was determined in
accordance with the merger agreement.
o our executive officers were appointed in accordance with the
merger agreement.
o we agreed to use our best efforts to adopt our Amended and
Restated Certificate of Incorporation.
Upon the filing of our Amended and Restated Certificate of
Incorporation, former stockholders of OilQuip Rentals shall be entitled to
receive an additional 9,600,000 shares of our common stock in accordance with
the merger agreement.
Effective Time of the Merger
On May 9, 2001, Allis-Chalmers Acquisition Corp. merged with and into
OilQuip, with OilQuip as the surviving corporation pursuant to the merger
agreement. The merger became effective when the certificate of merger was duly
filed with the Secretary of State of the State of Delaware, on May 9, 2001.
Merger Consideration (see page 29)
At the effective time of the merger, the former OilQuip shareholders
received 400,000 shares of our common stock and the right to receive 9,600,000
shares of our common stock on the date when our Amended and Restated Certificate
of Incorporation is filed with the Secretary of State of the State of Delaware.
Obligations following the Consummation of the Merger Pursuant to the merger
agreement, we are obligated to:
o use our best efforts to adopt our Amended and Restated
Certificate of Incorporation and file it with the Secretary of
the State of Delaware;
o within one year following the merger, commence a rights
offering pursuant to which we shall offer our stockholders,
other than former OilQuip shareholders, the right to acquire
an aggregate of 1,000,000 shares of our common stock at a
purchase price not in excess of $2.00 per share (such right to
be tolled during periods when the fair market value of our
common stock is less than $2.00, or if the fair market value
of our common stock does not exceed $2.00 for 18 months, no
rights offering will be done);
o evaluate the feasibility of listing shares of our common stock
on an exchange;
o if shares of our common stock are listed on an exchange, to
register shares of our common stock held by former OilQuip
shareholders on a Registration Statement on Form S-3; and
o identify and appoint an independent committee of our board of
directors to resolve any claims with respect to the merger and
the merger agreement.
No Appraisal Rights (see page 31)
Our stockholders were not entitled to appraisal rights under Section
262 of the Delaware General Corporation Law (the "DGCL") in connection with the
merger.
3
Interests of Certain Persons in the Merger; Certain Relationships and Related
Transactions (see pages 26 and 58)
You should be aware that certain of our directors had conflicts of
interest at the time the merger agreement was negotiated, executed and
consummated. These conflicts of interest were disclosed to and discussed by our
board of directors prior to its approval of the merger. In addition, subsequent
to the merger, options to purchase shares of common stock were granted to one of
our directors in connection with services provided by such director to OilQuip.
Certain Effects of the Merger
o Following the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, and the
issuance of the shares of our common stock pursuant to the merger
agreement, the pre-merger shares will constitute approximately 13.7% of the
outstanding shares of our common stock, and the shares of our common stock
issuable in the merger to the former OilQuip shareholders will constitute
approximately 86.3% of the outstanding shares of our common stock.
o At such time, Mr. Hidayatallah and Colebrooke Investments Limited
("Colebrooke") will collectively own approximately 66.9% of the then
outstanding shares of our common stock.
o Voting together, these two shareholders will control all decisions
regarding our business that require stockholder approval following the date
our Amended and Restated Certificate of Incorporation is filed with the
Secretary of the State of Delaware.
Plans for Our Business After the Merger (see page 27)
We seek to provide our stockholders with above-average returns on their
investment through the pursuit of strategic acquisition, investment and
technological opportunities that will enhance our long-term value while
improving the market shares, offerings and profitability of our existing
businesses.
Material Federal Income Tax Consequences (see page 27)
The merger was tax-free to us and to the former OilQuip shareholders.
However, given the ownership change, our substantial net operating loss
carryforwards will be limited in the future.
Accounting Treatment of the Merger (see page 27)
For legal and organizational purposes, we believe that the merger will
be treated as a purchase of OilQuip by us. For accounting purposes, the
transaction will be presented as a reverse acquisition whereby Oil Quip
purchased us.
Regulatory Approvals (see page 31)
Other than the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, there are no
federal or state regulatory requirements that we must comply with, or approvals
relating thereto that we must obtain, in connection with the transactions
described herein.
4
ALLIS-CHALMERS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Our selected historical consolidated financial data for the years ended
December 31, 1996, 1997, 1998, 1999 and 2000 and the periods ended June 30, 2001
are derived from and should be read in conjunction with our audited historical
consolidated financial statements and the notes thereto included in this
document, and "Allis-Chalmers' Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 43.
Pursuant to our plan of reorganization, in July 1992, we effected a
1-for-15 reverse stock split which decreased our outstanding common stock from
15,164,195 to 1,003,596 shares. Pursuant to the terms of the PBGC Agreement (see
"Allis-Chalmers' Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 43), in June 1999 we issued 585,100 shares of our
common stock to the PBGC increasing our total shares outstanding to 1,588,128 as
of March 31, 1999. Per share amounts in the accompanying financial statements
reflect the reverse stock split and issuance of shares of our common stock
pursuant to our agreement with the Pension Benefit Guaranty Corporation that is
described in "Allis-Chalmers' Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 43.
Year Ended December 31, Six Months Ended
(in millions, except per share data) June 30,
Statement of Operations Data: 1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ----
Sales $4.1 $4.1 $5.0 $4.4 $4.6 $-- $2.6
Net income (loss) (1.7) (66.5) 0.6 (0.1) (0.2) (0.2) (1.0)
Per Share Data:
Net (loss) income per common share,
basic and diluted $(1.72) $(66.34) $0.62 $(0.08) $(0.12) ($0.43) $1.77
Weighed average number of common
shares outstanding, basic and diluted 1,003,128 1,003,128 1,003,128 1,588,128 1,588,128 400,000 589,435
BALANCE SHEET DATA
Year Ended December 31, June 30,
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
(in millions, except per share data)
Total assets $3.4 $2.7 $2.6 $2.5 $2.1 $15.4
Long-term debt classified as:
Current 0.1 0.1 0.1 0.1 0.2 1.1
Long Term 0.3 0.2 0.2 0.2 0.3 7.4
Stockholders' deficit (13.6) (68.0) (67.4) (66.5) (66.7) 4.8
Book value per share $(13.56) $(67.79) $(67.19) $(41.84) $(41.96) $2.41
5
OILQUIP SELECTED SUMMARY FINANCIAL DATA
OilQuip was formed in February 2000 for the purpose of acquiring
businesses in the oil and natural gas exploration and drilling industry. In
2000, OilQuip investigated potential acquisitions and conducted no active
business. The following selected financial data of OilQuip should be read in
conjunction with OilQuip's audited financial statements and the notes thereto
included in this document, and "OilQuip's Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 54.
The equity and per share data has been presented so as to give effect
to the recapitalization of the Company, which occurred in the reverse
acquisition of Allis-Chalmers on May 9, 2001. Under the recapitalization, the
original number of shares outstanding of the formerly private company are
considered to have been exchanged for the 400,000 shares of Allis-Chalmers that
were issued on the date of the reverse acquisition to the owners of OilQuip
Rentals, Inc. As a result, the 400,000 shares are presented in place of the
originally issued shares of the private company. In addition, pro forma per
share data is presented that includes an additional 9,600,000 shares of
Allis-Chalmers that will be issued in the future after shareholder approval of
the increase in the maximum authorized number of shares of Allis-Chalmers.
Year Ended December 31, 2000
(in millions, except share and per share data)
Statement of Operations Data:
Revenue $0.0
Net income (loss) $(0.6)
Per Share Data:
Net income (loss) per common share, basic and
diluted $(1.57)
=======
Weighted average number of common shares
outstanding, basic and diluted 400,000
=======
Pro forma net income (loss) per common share,
basic and diluted. $(0.06)
=======
Pro forma weighed average number of common
shares outstanding, basic and diluted 10,000,000
==========
BALANCE SHEET DATA
Year Ended December 31, 2000
(in millions, except per share data)
Total assets $2.4
Long-term debt classified as:
Current 0.1
Long Term 0.0
Stockholders' equity 2.3
Book value per share $5.87
6
MOUNTAIN COMPRESSED AIR, INC. SELECTED SUMMARY FINANCIAL DATA
On January 29, 2001 OilQuip formed a subsidiary, Mountain Compressed
Air, Inc. ("MCA"), which acquired the operations of Mountain Air Drilling
Service Co., Inc. ("Mountain Air"). The table below sets forth Mountain Air's
financial data for the years ended December 31, 1996, 1997, 1998, 1999 and 2000.
The summary financial data provided below is derived from and should be read in
conjunction with Mountain Air's audited consolidated financial statements and
notes thereto included with this document and "Mountain Air Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 56.
The equity and per share data has been presented so as to give effect
to the recapitalization of the Company, which occurred in the reverse
acquisition of Allis-Chalmers on May 9, 2001. Under the recapitalization, the
original number of shares outstanding of the formerly private company are
considered to have been exchanged for the 400,000 shares of Allis-Chalmers that
were issued on the date of the reverse acquisition to the owners of OilQuip
Rentals, Inc. As a result, the 400,000 shares are presented in place of the
originally issued shares of the private company. In addition, pro forma per
share data is presented that includes an additional 9,600,000 shares of
Allis-Chalmers that will be issued in the future after shareholder approval of
the increase in the maximum authorized number of shares of Allis-Chalmers.
Year Ended December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in millions, except share and per share data)
Statement of Operation Data:
Revenues $4.2 $5.9 $6.8 $6.4 $5.7
Net income (loss) (0.1) 2.8 2.5 2.0 2.4
Per Share Data:
Net income (loss) per common share, basic
and diluted $(0.27) $7.02 $6.20 $5.09 $6.03
Weighted average number of common shares
outstanding, basic and diluted 400,000 400,000 400,000 400,000 400,000
Pro forma net income (loss) per common
share, basic and diluted $(0.01) $0.28 $0.25 $0.20 $0.24
Pro forma weighted average number of common
shares outstanding, basic and diluted 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
BALANCE SHEET DATA
Year Ended December 31,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in millions, except per share data)
Total assets $2.1 $2.2 $2.6 $2.7 $2.7
Long-term debt classified as:
Current 0.0 0.0 0.0 0.0 0.0
Long Term 0.0 0.0 0.0 0.0 0.0
Stockholders' equity 0.8 1.9 2.1 2.3 2.4
Book value per share $1.97 $4.74 $5.31 $5.71 $6.03
7
UNAUDITED SUMMARY PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
Our summary unaudited pro forma combined condensed financial
information has been derived from the unaudited pro forma combined condensed
financial statements included elsewhere in this proxy statement. This data is
not necessarily indicative of the combined results of operations or financial
position that would have occurred if the merger had occurred at the beginning of
each period presented or on the dates indicated, nor is it necessarily
indicative of our future operating results or financial position. The data set
forth below should be read in conjunction with our audited financial statements
(and unaudited interim financial statements), including the notes thereto, which
are included elsewhere in this proxy statement.
The following summary pro forma consolidated statement of operations
data present the historical financial information of Allis-Chalmers, as adjusted
for the merger with OilQuip, pursuant to the merger agreement. OilQuip was
formed in February 2000 to fund and acquire targets to operate as subsidiaries.
In February 2001, OilQuip, through its subsidiary MCA, acquired the assets of
Mountain Air, and OilQuip is currently a holding company for MCA. Allis-Chalmers
later contributed its wholly-owned subsidiary Houston Dynamic Service, Inc.
("HDS") to MCA. In the future, the operations of MCA and HDS will comprise the
continuing operations of Allis-Chalmers.
The following summary pro forma consolidated statement of operations
for the year ended December 31, 2000 combines the historical financial
information of Allis-Chalmers for the year ended December 31, 2000 with the
historical financial information of Mountain Air and the historical financial
information of OilQuip for the period from its inception in February 2000
through December 31, 2000, as if the acquisition had occurred at the beginning
of 2000.
The following summary pro forma consolidated statement of operations
has been prepared by management, based on the historical financial statements of
Allis-Chalmers, OilQuip and Mountain Air. This summary may not be indicative of
the results that actually would have occurred if the combination had been in
effect on the dates indicated or which may occur in the future.
8
UNAUDITED SUMMARY PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 2000
In Thousands
Except Share and
Per Share Data
Revenue $ 10,244
Operating profit 216
Profit (loss) before income taxes (642)
Net profit (loss) (675)
Net profit (loss) attributable to common stockholders (675)
Basic and diluted (loss) per share (0.06)
Weighted average shares outstanding:
Basic and diluted $ 11,588,128
9
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
MARKET PRICE OF AND DIVIDENDS ON ALLIS-CHALMERS COMMON STOCK
Market Information. There is no established public trading market for
the common stock. It is not certain when or if trading in the common stock will
commence or on which registered stock exchange or quotation system, if any, the
common stock may eventually be listed or quoted. At the present time,
Allis-Chalmers does not intend to file a listing application to any registered
national stock exchange or Nasdaq for trading or quotation of the common stock.
The following table sets forth, for the periods indicated, the high and
low bid information for the common stock, as determined from sporadic quotations
on the Over-the -Counter Bulletin Board, as well as the total number of shares
of common stock traded during the periods indicated:
CALENDAR QUARTER HIGH LOW VOLUME
---------------- ---- --- ------
1999
First Quarter............................... $5.00 $2.00 10,500
Second Quarter.............................. 4.88 1.06 10,500
Third Quarter............................... 4.00 2.00 1,300
Fourth Quarter.............................. 7.50 2.25 6,700
2000
First Quarter............................... 3.63 1.50 3,500
Second Quarter.............................. 4.13 2.00 25,200
Third Quarter............................... 3.50 2.06 15,300
Fourth Quarter.............................. 3.25 1.44 9,700
2001
First Quarter............................... 1.75 1.44 12,100
Second Quarter.............................. 2.50 1.30 18,600
Third Quarter (through September 17, 2001) 1.85 1.07 6,200
Holders. As of September 26, 2001, there were approximately 6,875
holders of our common stock. For information regarding the effect of the
transaction described in this proxy statement on the amount and percentage of
present holdings of the common stock of Allis-Chalmers owned beneficially by our
management and 5% beneficial owners, please refer to the section entitled
"Information Relating to Our Board of Directors and Its Committees--Security
Ownership of Certain Beneficial Owners and Management" beginning on page 38.
Dividends. No dividends were declared or paid during 1999 or 2000, and
no dividends have been declared or paid during 2001. No dividends are
anticipated to be declared or paid in the foreseeable future.
10
RISK FACTORS AND OTHER CONSIDERATIONS
In addition to the other information contained in this proxy statement,
you should consider the following factors carefully.
Your equity interest will be diluted.
Prior to the merger, we had 1,588,128 shares of common stock
outstanding. As of the September 26, 2001 record date, there were 1,988,128
shares of our common stock outstanding. Upon the filing of our Amended and
Restated Certificate of Incorporation with the Secretary of State of the State
of Delaware, there will be 11,588,128 shares of our common stock outstanding. As
a result, each share of our common stock that you hold will represent a
substantially smaller percentage ownership interest in us than you currently
hold. Upon the filing of our Amended and Restated Certificate of Incorporation
with the Secretary of State of the State of Delaware, the pre-merger shares will
constitute approximately 13.7% of the then outstanding shares of our common
stock.
Low prices for oil and natural gas may adversely affect the demand for our
services and products.
The natural gas exploration and drilling business is highly cyclical.
Exploration and drilling activity declines as marginally profitable projects
become uneconomic and either are delayed or eliminated. A decline in the number
of North American oil rigs would adversely affect our business. Accordingly,
when oil and natural gas prices are relatively low, our revenues and income will
suffer. The oil and gas industry is extremely volatile and subject to change
based on political and economic factors outside our control.
If our revenues do not increase substantially, we may never become profitable.
Historically, we have not generated enough revenues to obtain positive
cash flows and to grow our business. We hope to increase revenues. However, we
may not achieve increased revenues, or they may be delayed. Even if we do
achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.
We may not be able to successfully integrate the business of Mountain Air.
Our management has begun to integrate the business of HDS and MCA. The
integration of the businesses will be complex and time consuming and may disrupt
our future business. We may encounter substantial difficulties, costs and delays
involved in integrating common information and communication systems, operating
procedures, financial controls and human resources practices, including:
o potential incompatibility of business cultures;
o uncertainties in realizing the synergies of the merger;
o the loss of key employees;
o obsolescence of our technologies; and
o the diversion of the attention of management from other
business concerns.
11
If the integration of the businesses goes poorly and disrupts our
business, our future financial performance may not be as strong as we
anticipated when we agreed to the merger.
Two shareholders effectively control us.
Immediately after the filing of our Amended and Restated Certificate of
Incorporation, Mr. Hidayatallah and Colebrooke will own approximately 66.9% of
the then outstanding shares of our common stock. Voting together, Mr.
Hidayatallah and Colebrooke will have the power to control the outcome of
substantially all matters requiring stockholder approval, including the election
of our directors. Certain corporate actions will be impossible without the
support of at least one of these two shareholders. In addition, the
concentration of ownership could have the effect of delaying or preventing a
change in control of the Company.
No natural person controls Colebrooke, and no OilQuip shareholder or
current executive officer or director of the Company, including Mr.
Hidayatallah, has a financial interest in Colebrooke. The owner of all of
Colebrooke's shares is Jupiter Trust, a Guernsey trust. The corporate trustee of
Jupiter Trust is the Ansbacher Trust Company ("Ansbacher"), a Guernsey trust in
which action is taken upon majority vote of such trust's three directors,
Messrs. Robert Bannister and Phillip Retz and Ms. Rachel Whatley. Such directors
have absolute discretion to take action and make investment decisions on behalf
of Ansbacher and can be deemed to control Ansbacher, which has sole voting and
dispository power over the shares of Colebrooke, subject to the agreement and
proxy which provides Mr. Hidayatallah with certain voting power with respect to
the charter amendments to be approved at the meeting of shareholders. There are
no individuals directors of Colebrooke; the corporate director for Colebrooke is
Plaiderie Corporate Directors One Limited, a Guernsey Company ("Plaiderie").
Plaiderie is wholly-owned by Ansbacher Guernsey Limited ("Ansbacher Limited"), a
controlled registered bank in Guernsey. The ultimate parent of Ansbacher Limited
is First Rand Limited ("First Rand"), a publicly-owned company listed on the
Johannesburg Stock Exchange. First Rand can be deemed to control Plaiderie.
Our success is dependent upon our ability to successfully acquire and integrate
additional businesses.
Part of our growth strategy is to acquire companies operating in the
natural gas exploration and production industry. However, there can be no
assurance that we will be successful in acquiring any additional companies. Our
successful acquisition of new companies will depend on various factors,
including our ability to obtain financing, the competitive environment for
acquisitions, our ability to integrate and improve the operations and other
aspects of the acquired companies, and our ability to retain and attract
customers. There can be no assurance that we will be able to acquire and
successfully operate any particular business, that we will be able to expand
into areas which we have targeted or that our expansion will not adversely
affect our business. The various risks associated with our acquisition of
businesses and uncertainties regarding the profitability of such operations
could have a material adverse effect on our financial condition and results of
operations.
Failure to obtain additional financing could cause our business to suffer.
Expansion of our operations through the acquisition of additional
companies will require substantial amounts of capital. The availability of
financing may affect our ability to expand. We may seek additional borrowings,
and may seek to issue debt or equity securities to finance our expansion.
12
There can be no assurance that funds for such expansion, whether from equity or
debt financings or other sources, will be available or, if available, will be on
terms satisfactory to us. We may also enter into strategic partnerships for the
purpose of developing new businesses. Our future growth may be limited if we are
unable to complete acquisitions or strategic partnerships.
Competition from companies with greater financial, technological and operating
resources could cause our business to suffer.
The natural gas equipment rental and service industry is highly
competitive. Despite recent consolidation activities, the industry remains
highly fragmented. Some of our competitors are significantly larger and have
greater financial, technological and operating resources than we do. In
addition, a number of individual and regional operators compete with us
throughout our existing and targeted markets. These competitors compete with us
both for customers and for acquisitions of other businesses. This competition
may cause our business to suffer.
Our customers' credit risks could cause our business to suffer.
The majority of our customers are engaged in the energy industry. This
concentration of customers may impact our overall exposure to credit risk,
either positively or negatively, in that customers may be similarly affected by
changes in economic and industry conditions. We perform ongoing credit
evaluations of our customers and do not generally require collateral in support
of our trade receivables.
We are vulnerable to personal injury and property damage.
Our services are used for the exploration and production of natural
gas. These operations are subject to inherent hazards that can cause personal
injury or loss of life, damage to or destruction of property, equipment, the
environment and marine life, and suspension of operations. Litigation arising
from an accident at a location where our products or services are used or
provided may result in our being named as a defendant in lawsuits asserting
potentially large claims. We maintain customary insurance to protect our
business against these potential losses. However, it is possible that we could
become subject to material uninsured liabilities.
Government regulations could cause our business to suffer.
We are also subject to various federal, state and local laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have in recent years become more stringent and
have generally sought to impose greater liability on a larger number of
potentially responsible parties. Although we are not aware of any proposed
material changes in any such statutes, rules or regulations, any changes could
cause our business to suffer.
Labor costs or the unavailability of skilled workers could cause our business to
suffer.
We are dependent upon the available labor pool of skilled employees. We
are also subject to the Fair Labor Standards Act, which governs such matters as
a minimum wage, overtime and other working conditions. A shortage in the labor
pool or other general inflationary pressures or changes in applicable laws and
regulations could require us to enhance our wage and benefits packages. There
can be no assurance that our labor costs will not increase. Any increase in our
operating costs could cause our business to suffer.
13
We may be subject to certain environmental liabilities.
Since the consummation of the Plan of Reorganization on December 2,
1988, a number of parties, including the Environmental Protection Agency (the
"EPA"), have asserted that we are responsible for the cleanup of hazardous waste
sites. These assertions have been made only with respect to our pre-bankruptcy
activities. While we believe such claims are barred by the terms of the Plan of
Reorganization, if we do not prevail with respect to these claims, we may become
subject to material environmental liabilities. Please see the section entitled
"Business of Allis-Chalmers - Environmental Liabilities" on page 17 for a more
detailed discussion of the foregoing.
FORWARD-LOOKING STATEMENTS
This proxy statement, including information included or incorporated by
reference in this proxy statement, contains forward-looking statements relating
to our financial condition, results of operations, plans, objectives, future
performance and business, as well as forward-looking statements relating to the
merger. These statements include, without limitation, statements preceded by,
following by or that include the words "believes," "expects," "anticipates,"
"estimates" or similar expressions. Forward-looking statements are speculative,
uncertain and not based on historical facts. Because forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those considerations in "Risk Factors And
Other Considerations" on page 11. From time to time we update the various
factors that are considered by us in making our forward-looking statements and
the assumptions used by us in those statements. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, performance or achievements. Moreover, neither
we nor any other person assumes responsibility for the accuracy and completeness
of these forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this proxy statement to conform
such statements to actual results.
14
OUR SPECIAL MEETING
WE ARE FURNISHING THIS PROXY STATEMENT TO OUR STOCKHOLDERS IN
CONNECTION WITH THE SOLICITATION OF PROXIES BY OUR BOARD OF DIRECTORS FOR USE AT
THE SPECIAL MEETING TO BE HELD ON OCTOBER 12, 2001, AT OUR EXECUTIVE OFFICES
LOCATED AT 8150 LAWNDALE AVENUE, HOUSTON, TEXAS, COMMENCING AT 10:00 A.M.,
LOCAL TIME, AND AT ANY ADJOURNMENTS OR POSTPONEMENTS OF THE MEETING.
Matters to be Considered
We are holding the special meeting for the following purposes:
o Approve and adopt our Amended and Restated Certificate of
Incorporation;
o Elect our board of directors to hold office until the next
annual meeting of our stockholders and until the election and
qualification of their respective successors; and
o Consider and transact such other business as may properly come
before our special meeting or any adjournment or postponement
thereof.
OUR BOARD OF DIRECTORS HAS APPROVED OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND OUR NOMINEES FOR DIRECTOR
Record Date: Quorum; Voting At The Special Meeting
The presence at our special meeting, in person or by proxy, of the
holders of a majority of the total number of votes entitled to be cast on the
matter at our special meeting will constitute a quorum for the transaction of
business by such holders. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business. Abstentions and broker non-votes will have no effect on the outcome
of the approval and adoption of the election of directors but will have the
effect of votes against the approval and adoption of our Amended and Restated
Certificate of Incorporation.
Only holders of record on our books at the close of business on the
September 26, 2001 record date are entitled to notice of, and to vote at, our
special meeting. On the September 26, 2001 record date, there were 1,988,128
shares of our common stock outstanding.
Our stockholders vote together as a single class on all matters
submitted to a vote of stockholders, with each share of common stock outstanding
being entitled to one vote. At our special meeting, the approval and adoption of
our Amended and Restated Certificate of Incorporation will require a majority of
the votes represented and entitled to vote on the matter to be voted in favor of
this matter. At our special meeting, the election of the directors will the
affirmative vote of a majority of our outstanding common stock, and the persons
receiving the highest number of votes for each director position will be elected
as director. Our stockholders are not entitled to cumulate their votes on any
matter to be considered at our special meeting.
15
BUSINESS OF ALLIS-CHALMERS
Our principal business activities prior to the merger were as follows:
Machine Repair
HDS, now a subsidiary of MCA, services and repairs various types of
mechanical equipment, including compressors (centrifugal, rotary, axial and
reciprocating), pumps, turbines, engines, heat exchangers, centrifuges, rollers,
gears, valves, blowers, kilns, crushers and mills. Services provided include
emergency repair, disassembly, inspection, repair testing, parts duplication,
machining, balancing, metalizing, milling, grinding, boring, welding,
modification, reassembly, field machining, maintenance, alignment, field
service, installation, startup and training.
HDS serves various industrial customers, including those in the
petrochemical, chemical, refinery, utility, waste and waste treatment, minerals
processing, power generation, pulp and paper and irrigation industries.
Sales of the machine repair business operated by HDS were $4,552,000 in
2000, $4,370,000 in 1999 and $5,021,000 in 1998.
HDS employed 37 people on December 31, 2000. It operates out of a
facility in Houston, Texas which was purchased by HDS in 1990. The facility
includes a repair shop and office space.
Other Data
Competition in our machine repair business consists of nine major
original equipment manufacturers ("OEM") and numerous smaller independent
competitors. Many of these competitors have special strengths in certain product
areas because of customer preferences for OEM suppliers or because specialized
patented technologies are offered. The principal methods of competition are
price, quality, delivery, customer service and warranty.
The principal raw materials and purchased components used in the
machine repair business are alloy and stainless steels, castings and forgings,
aluminum, copper, gears and other basic materials. Alternative sources of supply
exist or could be developed for all of these raw materials and components. This
business is highly labor intensive.
Some of our products, processes and systems are covered by patents
owned by or licensed to us. No particular product, process or system is
dependent on a singly fundamental patent, the loss of which would jeopardize our
business. We license the use of a number of trademarks, from which we receive
income.
During the past three years, Entergy and Amoco Chemical were the only
customers who accounted for 10% or more of our total sales during any one year.
Entergy generated 25% of our fiscal 2000 sales and Amoco Chemical generated 14%
of our fiscal 2000 sales. Entergy generated 13% of our fiscal 1999 sales and
Amoco Chemical generated 24% of our fiscal 1998 sales.
Expenditures relating to compliance with federal, state and local
environmental protection laws are not expected to have a material effect on our
capital expenditures, results of operations, financial
16
condition or competitive position. We are not aware of any present statutory
requirements concerning environmental quality that would necessitate capital
outlays which would materially affect us.
We had 41, 37 and 47 employees at December 31, 2000, 1999, and 1998,
respectively.
For more detailed information, you should read in their entirety our
audited historical consolidated financial statements and the notes thereto
included in this document, and "Allis-Chalmers' Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 43.
We have no foreign operations or significant export sales.
LEGAL PROCEEDINGS
Reorganization Proceedings Under Chapter 11 of the United States Bankruptcy
Code.
On June 29, 1987, we and 17 of our domestic subsidiaries filed separate
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code. The Plan of Reorganization was confirmed by the Bankruptcy
Court on October 31, 1988 after acceptance by our creditors and stockholders,
and our plan of reorganization was consummated on December 2, 1988.
At confirmation of our plan of reorganization, the United States
Bankruptcy Court approved the establishment of the A-C Reorganization Trust as
the primary vehicle for distributions and the administration of claims under our
plan of reorganization, two trust funds to service health care and life
insurance programs for retired employees and a trust fund to process and
liquidate future product liability claims. Cash of approximately $400 million
and other assets with a net book value of $38 million were distributed to our
creditors or transferred to the trusts, and the trusts assumed responsibility
for substantially all remaining cash distributions to be made to holders of
claims and interests pursuant to our plan of reorganization. We were thereby
discharged of all debts that arose before confirmation of our plan of
reorganization, and all of our capital stock was canceled and made eligible for
exchange for shares of the reorganized company.
We do not administer any of the aforementioned trusts and retain no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to our plan of reorganization.
Environmental Liabilities
As part of the Plan of Reorganization, we made a cash payment of $4.5
million to the EPA in settlement of the EPA's claims for cleanup costs at all
sites where we were alleged to have disposed of hazardous waste. The EPA
settlement included both past and future cleanup costs at these sites and
released us of liability for claims of contribution or indemnity which may be
asserted by other potentially responsible parties against us in connection with
these specific sites.
In addition to the EPA settlement, we negotiated settlements of various
environmental claims which had been asserted by certain state environmental
protection agencies. These settlements, totaling approximately $200,000, were
approved by the Bankruptcy Court.
Since consummation of the Plan of Reorganization on December 2, 1988, a
number of parties, including the EPA, have asserted that we are responsible for
the cleanup of hazardous waste sites. These
17
assertions have been made only with respect to our pre-bankruptcy activities. A
bankruptcy discharge defense has been asserted by us in each instance. No claims
have been asserted against us involving our post-bankruptcy operations. In
connection with the merger, the A-C Reorganization Trust confirmed its
responsibility with respect to administering pre-bankruptcy environmental
matters and, as a result, we do not believe that any of the EPA assertions will
adversely affect us.
Although the law in this area is still somewhat unsettled, three
Federal Courts of Appeal have held that a debtor can be discharged of
environment cleanup liabilities related to its pre-bankruptcy activities. We
therefore believe as a result of these precedents that we will prevail in our
position that our liability to the EPA and third parties for pre-bankruptcy
environment cleanup costs has been fully discharged. However, there can be no
assurance that we will not be subject to environmental claims relating to our
current or discontinued business and that such claims will not adversely affect
us.
The EPA and certain state agencies also continue to request information
in connection with various waste disposal sites in which products manufactured
by us before consummation of the Plan of Reorganization were ultimately disposed
of by other parties. Although we have been discharged of liabilities with
respect to hazardous waste sites, we are under a continuing obligation to
provide information with respect to our products to federal and state agencies.
The A-C Reorganization Trust, under its mandate to provide Plan of
Reorganization implementation services to us, has responded to these
informational requests because pre-bankruptcy activities are involved.
18
BUSINESS OF OILQUIP
General
The business of OilQuip is conducted through its subsidiary, MCA. MCA
is a leading natural gas exploration and drilling rental company providing
equipment and trained personnel in the southwestern United States, and is the
successor to Mountain Air, whose assets MCA acquired in February 2001. MCA
primarily provides compressed air equipment and trained operators to companies
drilling for natural gas. MCA believes that it has a 50% to 60% share of the
market for compressed air services in the San Juan basin of New Mexico
MCA's products and services are almost exclusively geared towards air
drilling. Air drilling is a method of rotary drilling that uses compressed air,
mist or foam as the circulation medium, rather than mud, and is used primarily
in formations containing small amounts of water. As the bit drills, the
compressors provide air to move the cuttings away from the bit's teeth and lift
them to the surface for disposal. Air, unlike mud, exerts very low pressure on
the bottom of the hole. As a result, the drilling rate can be dramatically
increased. Air drilling equipment is also favored in natural gas exploration and
production in many areas where formations are stable enough to allow drilling
with air or where lost circulation conditions do not allow the use of drilling
fluids as a method of removing drilled cuttings from the well bore.
With over 30 years of drilling experience, MCA's specialists have
developed extensive knowledge of down-hole conditions and have developed highly
specialized mists and foams, which provide more efficient and safer air
drilling. MCA has been a pioneer in developing highly technical equipment,
procedures and processes to increase rate of penetration, bit life, and to
successfully drill "lost circulation" zones. MCA is recognized as the industry
expert for horizontal applications and under-balanced drilling. Due to the
technical nature of the equipment, a highly trained staff of field service
personnel, parts inventory and a diversified fleet of natural gas compressors
are often necessary to perform such functions in the most economic and safe
manner. MCA has a fleet of 35 identical Gardner-Denver two-stage reciprocating
compressors, powered by Caterpillar diesel engines. MCA uses a piston type air
compressor, which results in low fuel consumption and reliable performance. We
believe MCA is the leader in its market due to its successful 25 year operating
history of providing equipment and services for natural gas production in the
San Juan basin and Rocky Mountain regions of the United States.
Product technology is an increasingly important aspect of MCA's
products and services. Improving technology helps MCA provide customers with
more efficient, higher margin and cost-effective tools to find and produce
natural gas. MCA believes that its new products and services will reduce
customers' drilling and production costs through more efficient and accurate air
drilling techniques. MCA maintains its own repair and maintenance facilities and
replacement parts inventory.
Industry Overview
The most critical factor in assessing the outlook for the oil equipment
and services industry is worldwide supply and demand for natural gas. The
natural gas equipment and service industry is cyclical in nature, and depends
upon demand for natural gas. Its peaks and valleys are further apart than those
of many other cyclical industries. This is primarily a result of the industry
being driven by commodity demand and corresponding price increases. As demand
increases, producers raise their prices. The price
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escalation enables oil producers to increase their capital expenditures. The
increased capital expenditures ultimately result in stronger revenues and
profits for service and equipment companies such as MCA.
Natural gas prices have surged in 2001. Analysts project that natural
gas prices will be maintained in the near term as a result of the inability of
current supply to meet increased demand. Demand is expected to continue to
increase due to economic expansion, record-high electricity demand, and the
addition of predominantly gas-fired new electric generating capacity. MCA's
management believes that the current cycle will continue at least through 2003.
Gas producers tend to focus on their core competencies of identifying
gas reserves, which has resulted in the extensive outsourcing of drilling and
service functions. The use of service companies allows gas companies to avoid
the capital and maintenance costs of the equipment in what is already a capital
intensive industry.
As drilling becomes increasingly more technical and costly, exploration
and production companies are increasingly demanding higher quality equipment and
service from equipment and service providers. Companies that can meet customer's
demands will continue to earn new and repeat business, and major gas companies
are currently consolidating their supplier base to streamline their purchasing
operations and generate economies of scale by purchasing from just a few
suppliers. Producers are favoring larger suppliers that provide a comprehensive
list of products and services. Since many businesses in the highly fragmented
oilfield industry lack sufficient size (most businesses generate annual revenues
less than $15 million), lack depth of management (most businesses are
family-owned and managed) and have unsophisticated production techniques and
control capabilities, MCA believes that it offers customers crucial advantages
over its competitors.
Competition
MCA experiences significant competition in all areas of its business.
In general, the markets in which MCA competes are not dominated by a single
company or a small number of companies. Rather, a large number of companies
offer services that overlap and are competitive with MCA's services and
products. MCA's management believes that the principal competitive factors in
its business are technical capabilities, management experiences, past
performance and price. While MCA has considerable experience, there are many
other companies that have comparable skills. Many of MCA's competitors are
larger and have greater financial resources than MCA.
Customers
MCA services customers in the New Mexico, Colorado, the Gulf of Mexico,
Utah, Wyoming, Texas, Louisiana, California and Nevada. MCA has relied on
existing relationships and owners/operators' personal contacts to generate sales
and has not implemented a formalized sales and marketing effort. MCA has no
dedicated sales and marketing personnel because it has historically operated at
or near capacity. Further, MCA's management believes that no one employee is key
to the company's relationship with key customers. However, MCA is reliant on one
customer for more than 50% of its revenues, and a loss of this customer would
cause its business to suffer. Through our overall acquisition strategy, we are
seeking to reduce customer concentration.
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Suppliers
MCA purchases its equipment from a number of suppliers and at auctions
on an opportunistic, price/value basis. The equipment provided by these
suppliers is customized and often times overhauled by MCA in order to improve
performance. As a result of purchasing the majority of its equipment at auction,
MCA is not significantly dependent upon any one supplier.
Employees
MCA's operations are managed by Ron and Linda Huskey who serve as the
Chief Operating Officer and Chief Financial Officer, respectively, of MCA, and
who were the owners of MCA's predecessor, Mountain Air. Each has more than 40
years' experience in the compressed air services industry. MCA has entered into
employment agreements with Ron and Linda Huskey which provide for annual salary
of $100,000 and $64,000, respectively, and have a term of 3 years. In addition,
MCA has approximately 45 employees, with extensive experience in the compressed
air drilling industry.
MCA maintains good relations with its non-union workforce and actively
trains employees across various functions. MCA's management believes that the
cross-functional training is crucial in maintaining a motivated workforce and
maximizing efficiency. Employees showing a higher level of skill are trained on
the more technically complex equipment and given greater responsibility. All
employees are responsible for on-going quality assurance. MCA's management
believes that its internal development of employees solidifies its relationship
with its direct labor force.
Facilities
MCA operates from two leased facilities located in the Rocky Mountain
region of the United States. The following table provides a brief overview of
MCA's facilities.
==================================================================================================================
OilQuip Rentals, Inc.
Facilities
------------------------------------------------------------------------------------------------------------------
FACILITY LOCATION SQUARE FEET OWN/LEASE/JV(1) FUNCTION
----------------------------- ------------------------- ----------- --------------- ---------------------
Mountain Air - Headquarters Grand Junction, Colorado 11,100 Lease HQ, Warehouse, Repair
Mountain Air - San Juan Basin Farmington, New Mexico N/A Lease Storage Yard
==================================================================================================================
Insurance
MCA currently carries a variety of insurance for its operations. MCA is
partially self-insured for certain claims in amounts that we believe to be
customary and reasonable.
Although MCA believes that it currently maintains insurance coverage
that is adequate for the risks involved, there is always a risk that its
insurance may not be sufficient to cover any particular loss or that insurance
may not cover all losses. For example, it is possible that an adverse claim
could arise that is in excess of our coverage. Finally, insurance rates have in
the past been subject to wide fluctuation, and changes in coverage could result
in increases in our cost or higher deductibles and retentions.
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Federal Regulations and Environmental Matters
MCA's operations are subject to federal, state and local laws and
regulations relating to the energy industry in general and the environment in
particular. Environmental laws have in recent years become more stringent and
have generally sought to impose greater liability on a larger number of
potentially responsible parties. While we are not currently aware of any
situation involving an environmental claim that would likely have a material
adverse effect on MCA, it is always possible that an environmental claim could
arise that could cause its business to suffer.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. Currently, the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operations.
In December 1999, the Securities and Exchange Commission (the "SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. The adoption of this bulletin
did not have a material impact on MCA's financial position or results of
operations. In conjunction with the adoption of SAB No. 101, MCA adopted
Emerging Issues Task Force ("EITF") 00-10 Accounting for Shipping and Handling
Fees and Costs. The adoption of this authoritative guidance did not have a
material impact on MCA's financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting
Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes new accounting and reporting standards
requiring that all derivative instruments, including derivative
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instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability, depending on the rights or obligations under the
contracts, at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. For a qualifying cash flow hedge, the changes
in fair value of the derivative instrument are initially recognized in other
comprehensive income and then are reclassified into earnings in the period that
the hedged transaction affects earnings. For a qualifying fair value hedge, the
changes in fair value of the derivative instrument are offset against the
corresponding changes for the hedged item through earnings. Such accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results of the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting treatment. SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, was issued in June 2000
and amends certain provisions of SFAS No. 133. These statements are effective
for all fiscal years beginning after June 15, 2000. The adoption of the new
standards did not have a material effect on our business.
23
THE MERGER
Overview
For a description of the principal terms of the merger and the merger
agreement see "Certain Provisions of the Merger Agreement." A copy of the merger
agreement is attached to the document as Annex A.
Background of the Merger
The terms of the merger agreement were the result of negotiations
between our representatives and representatives of OilQuip. The following is a
brief discussion of the events that led to the negotiation and execution of the
merger agreement.
Our board considered a number of potential acquisitions over a period
of more than twelve years, since the date most of our assets were liquidated
pursuant to the Plan of Reorganization. Despite these efforts, we had been
unable to consummate a transaction which our board of directors felt would
obtain the maximum benefit for shareholders. A key component in the recent
determination of our board of directors in seeking an acquisition was the
release of Allis-Chalmers from its liability to the PBGC of approximately $67
million.
In the third quarter of 2000, Mr. Hidayatallah, the chief executive
officer of OilQuip, approached our board of directors about the possibility of a
merger. Mr. Hidayatallah was acquainted with at least two of the members of our
board of directors, Messrs. Nederlander and Toboroff (see "The Merger -
Interests of Certain Persons in the Merger" on page 26), and our board of
directors was informed of these relationships and authorized negotiations to
commence. During the fourth quarter of 2000, Mr. Hidayatallah and our executive
officers negotiated the financial terms of a merger which would satisfy the PBGC
criteria for releasing Allis-Chalmers from its liability to the PBGC and would
provide value to our shareholders. The number of shares to be issued to OilQuip
shareholders was determined after reviewing the relative earnings and net worths
of Allis-Chalmers and OilQuip, the potential for growth of each company and the
trading value of the Allis-Chalmers shares. Our board of directors believed that
OilQuip (including the assets of Mountain Air, the acquisition of which assets
was pending during the negotiations and was a condition to the merger) had
significantly greater revenues, profitability and prospects than Allis-Chalmers.
In fact, we estimated that, without the merger, we only had sufficient cash flow
and access to capital to maintain our operations until mid-to-late 2001. As a
result, a non-binding letter of intent with respect to the merger was executed
on January 17, 2001, and our board of directors unanimously approved and
ratified the letter of intent on January 23, 2001. On February 12, 2001, we
entered into a confidentiality agreement with OilQuip. From February 2001
through April 2001, the parties conducted due diligence investigations of the
other parties and negotiated the terms of the merger agreement.
Reasons for the Merger
On April 23, 2001, our board of directors held a meeting to review the
terms and conditions of the merger and the merger agreement. After a discussion
of the terms of the transaction, a review of the financial statements of
OilQuip, a report on the business of Allis-Chalmers and disclosure of potential
conflicts of Messrs. Nederlander and Toboroff, those members of our board of
directors present at the meeting and constituting a quorum unanimously:
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o determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement, were
advisable, fair to and in the best interests of our
stockholders;
o approved and authorized in all respects the merger, the merger
agreement and the transactions contemplated by the merger
agreement and authorized the execution and delivery of the
merger agreement;
o approved our Amended and Restated Certificate of
Incorporation;
o recommended that our stockholders approve our Amended and
Restated Certificate of Incorporation; and
o recommended that our stockholders elect the nominees for
directors described herein.
Our board of directors approved the merger at this time and believed
that the merger consideration was fair because our board determined:
o we had made a concerted effort to consummate an extraordinary
transaction during the past twelve years without success;
o we believed that, without a merger, Allis-Chalmers would not
have sufficient cash to survive as a going concern past the
third quarter of 2001;
o due to our poor financial condition, a transaction was
necessary for our survival;
o OilQuip was the only bidder which made a formal offer and our
board of directors did not believe that there was a reasonable
likelihood that another transaction could be consummated that
would provide greater benefits to our shareholders;
o the merger consideration represented a premium to our stock
price and our board of directors did not believe that our
stock price would increase materially for the foreseeable
future based upon our historical stock prices; and
o the merger would be beneficial to our current stockholders.
Our board of directors determined not to engage an outside financial
advisor to render an opinion as to the fairness of the transaction from a
financial point of view. This decision was made primarily for cost reasons,
given the declining state of our business.
It should be noted that, while our board of directors' only meetings to
assess the fairness of the merger from a financial point of view occurred on
January 23, 2001 and April 23, 2001, members of our board of directors were
familiar with, and participated in the negotiation of, the terms of the merger
since fall 2000. Therefore, our board of directors had the opportunity to assess
the fairness of the merger for several months prior to the execution of the
merger agreement.
On May 9, 2001, we consummated the merger.
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Interests of Certain Persons in the Merger
You should be aware that certain of our directors had at the time the
merger agreement was negotiated and executed, interests, described in this
document, that presented them with direct conflicts of interest in connection
with the merger. These conflicts were disclosed to and discussed by our board of
directors prior to its approval of the merger. Specifically, Robert E.
Nederlander was a beneficial owner of shares of our common stock and shares of
OilQuip common stock. Mr. Nederlander paid $87,500 for his shares of OilQuip
common stock and will be receiving 250,000 shares of our common stock in the
merger. In addition, Robert E. Nederlander, Leonard Toboroff, Alan Tessler and
David Groshoff agreed to remain on our board of directors after the merger.
Finally, Munawar Hidayatallah has acted as a financial advisor to Riddell Sports
Inc., a corporation controlled by Mr. Nederlander.
Security Ownership of Certain Beneficial Owners and Management Upon Filing of
Our Amended and Restated Certificate of Incorporation
As a result of the issuance of an additional 9,600,000 shares of our
common stock, the beneficial ownership of the outstanding shares of our common
stock as of the date our Amended and Restated Certificate of Incorporation is
filed with the Secretary of State of the State of Delaware of each person known
by us to beneficially own 5% or more of the outstanding shares of our common
stock is expected to be as follows:
Name Number of Shares Percentage Ownership
---- ---------------- --------------------
Munawar H. Hidayatallah
1875 Century Park East
Suite 600
Los Angeles, CA 90067 4,375,000 37.8%
Colebrooke Investments, Inc.(1)
LaPlaiderie House
St. Peter Port
Guernsey GY13DQ 3,375,000 29.1%
Saeed M. Sheikh (2)
c/o Star Trading & Marine, Inc.
1050 17th Street, N.W.
Suite 450
Washington, DC 20036 1,000,000 8.6%
Pension Benefit Guaranty Corporation
c/o Pacholder Associates, Inc.
8044 Montgomery Road
Suite 382
Cincinnati, OH 45236 585,100 5.0%
26
-------------
(1) No natural person controls Colebrooke, and no OilQuip shareholder or
current executive officer or director of the Company, including Mr.
Hidayatallah, has a financial interest in Colebrooke. The owner of all
of Colebrooke's shares is Jupiter Trust, a Guernsey trust. The
corporate trustee of Jupiter Trust is the Ansbacher Trust Company
("Ansbacher"), a Guernsey trust in which action is taken upon majority
vote of such trust's three directors, Messrs. Robert Bannister and
Phillip Retz and Ms. Rachel Whatley. Such directors have absolute
discretion to take action and make investment decisions on behalf of
Ansbacher and can be deemed to control Ansbacher, which has sole voting
and dispository power over the shares of Colebrooke, subject to the
agreement and proxy which provides Mr. Hidayatallah with certain voting
power with respect to the charter amendments to be approved at the
meeting of shareholders. There are no individuals directors of
Colebrooke; the corporate director for Colebrooke is Plaiderie
Corporate Directors One Limited, a Guernsey Company ("Plaiderie").
Plaiderie is wholly-owned by Ansbacher Guernsey Limited ("Ansbacher
Limited"), a controlled registered bank in Guernsey. The ultimate
parent of Ansbacher Limited is First Rand Limited ("First Rand"), a
publicly-owned company listed on the Johannesburg Stock Exchange. First
Rand can be deemed to control Plaiderie.
(2) Mr. Sheikh is one of our directors.
Voting Agreements
Certain of our stockholders, who hold an aggregate of 1,392,351 shares
of our common stock, or 70% of our outstanding common stock, have entered into
an agreement and proxy and appointed Munawar H. Hidayatallah as his or its
irrevocable proxy to vote all of his or its shares in favor of the approval and
adoption of our Amended and Restated Certificate of Incorporation and the
election of the nominees for director named in this proxy statement to our board
of directors. Accordingly, the approval and adoption of our Amended and Restated
Certificate of Incorporation and the election of the nominees for director named
in this proxy statement to our board of directors by our stockholders is
expected to occur irrespective of whether, or the manner in which, our other
stockholders vote their shares of our common stock.
A copy of the form of the agreement and proxy is attached to this
document as Annex B.
Material Federal Income Tax Consequences
The merger was tax-free to us and to the former OilQuip shareholders.
However, given the change in our ownership, our substantial net operating loss
carryforwards will be limited in the future.
Accounting Treatment of the Merger
For legal and organizational purposes, we believe that the merger and
the other transactions described in the merger agreement will be accounted for
as a purchase of OilQuip by us. For accounting purposes, the transaction will be
treated as a reverse acquisition whereby OilQuip purchased us.
Plans for Our Business After the Merger
Our primary objective is to provide our stockholders with above-average
returns on their investment through income growth and asset appreciation. We
seek to achieve this objective through the
27
pursuit of strategic acquisition, investment and technological opportunities
that will enhance our long-term value while improving the market shares,
offerings and profitability of our existing businesses. Our strategy for growth
is to focus on selected areas and markets in which there exist opportunities for
growth. Our objective is not to provide all products and services necessary for
the exploration and development of oil and gas reserves but rather to provide
complete product and service capabilities within specified market segments of
the industry in which we have competitive advantages or where significant growth
potential exists and in which we have the ability to enhance operating
efficiencies through combination with our other businesses.
We intend to investigate acquisition opportunities in the natural gas
exploration and drilling industry. We believe that significant consolidation
opportunities exist in the natural gas service industry, driven primarily by the
industry's fragmented nature, lack of well-maintained equipment and lack of
customer service. We intend to use Allis-Chalmers' former wholly-owned
subsidiary, HDS, now a subsidiary of MCA, as a centralized fabrication and
machining facility for our operations. If we are able to consolidate a number of
service providers, we believe that we can increase revenues for individual
providers, reduce costs, and increase the quality of customer service, in part
by reducing the time required to provide equipment and crews to producers. As
part of this strategy, we intend to invest in technology to provide our
customers products and services that reduce their cost of exploration and
production of natural gas.
In investigating potential acquisitions, we currently intend to seek to
acquire companies meeting the following criteria:
o revenues below $15 million, which we believe are less sought
after by larger rental and service companies, and thus are
available at more attractive prices
o EBITDA margins exceeding 30%
o operations both onshore and offshore in domestic markets and
in Mexico, which will enhance the operating efficiencies and
allow us to provide high quality services to customers in
those regions
o products and services complimentary to ours, which will
enhance our ability to provide a full array of services to our
customers
o strong management teams who are receptive to and able to carry
out our business strategies.
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CERTAIN PROVISIONS OF THE MERGER AGREEMENT
The following summarizes the material provisions of the merger
agreement. A copy of the merger agreement is attached to this document as Annex
A. This summary is qualified in its entirety by reference to the merger
agreement.
The Merger
The merger agreement provides that after satisfaction or, to the extent
permitted, waiver of all conditions to the merger, we and OilQuip have filed a
certificate of merger with the Secretary of State of the State of Delaware and
made all other filings or recordings required by Delaware law in connection with
the merger. The merger became effective on May 9, 2001, when the certificate of
merger was duly filed with the Secretary of State of the State of Delaware.
Pursuant to this certificate, Allis-Chalmers Acquisition was merged with and
into OilQuip, the separate existence of Allis-Chalmers Acquisition shall cease,
and OilQuip shall be the surviving corporation. As of May 9, 2001, the surviving
corporation possessed all the rights, privileges, powers and franchises and was
subject to all of the restrictions, disabilities and duties of OilQuip, all as
provided under Delaware law.
Merger Consideration
On May 9, 2001 all outstanding shares of OilQuip's common stock
immediately prior to the effective time were converted into 400,000 shares of
our common stock and the right to receive an additional 9,600,000 shares of our
common stock when our Amended and Restated Certificate of Incorporation is filed
with the Secretary of the State of Delaware.
The Surviving Corporation
On May 9, 2001, the certificate of incorporation and bylaws of OilQuip
as in effect immediately prior to the effective time, became the certificate of
incorporation and bylaws of the surviving corporation until duly amended in
accordance with applicable law. From and after May 9, 2001, until successors are
duly elected or appointed and qualified in accordance with applicable law or
their earlier death, resignation or removal, our directors and the officers of
OilQuip immediately as of the effective time shall be the directors and officers
of the surviving corporation.
Representations and Warranties
The merger agreement contains customary representations and warranties
of Allis-Chalmers relating to, among other things:
o organization, standing and similar corporate matters of
Allis-Chalmers and its subsidiaries;
o the authorization, execution, delivery, performance and
enforceability of the merger agreement;
o consents and approvals, no conflicts, breaches or violations
as a result of the merger agreement and related transactions;
o the capital structure of Allis-Chalmers and its subsidiaries;
o interests or investments in other entities;
o filing of tax returns and payment of taxes;
o title to properties and assets and encumbrances;
29
o title to real property and encumbrances;
o material contracts and enforceability;
o intellectual property and encumbrances;
o insurance;
o related party transactions;
o the absence of pending or threatened litigation;
o compliance with applicable laws, governmental approvals and
other consents, permits and licenses;
o environmental matters;
o employees and labor maters;
o benefit plans and other matters relating to the Employee
Retirement Income Security Act of 1974, as amended;
o documents filed by Allis-Chalmers with the SEC and the
accuracy of information contained in those documents and the
financial statements of Allis-Chalmers;
o bank accounts;
o brokers' fees and expenses; and
o full disclosure.
The merger agreement also contains customary representations and
warranties of OilQuip relating to, among other things:
o organization, standing and similar corporate matters of
OilQuip;
o the authorization, execution, delivery, performance and
enforceability of the merger agreement and related matters;
o consents and approvals, no breaches or violations as a result
of the merger agreement and related transactions;
o the absence of conflicts and required consents;
o the absence of pending or threatened litigation;
o the capital structure of OilQuip and MCA;
o financial statements;
o filing of tax returns and payment of taxes;
o permits and licenses;
o benefit plans and other matters relating to the Employee
Retirement Income Security Act of 1974, as amended;
o no additional obligations;
o the limited operations of OilQuip;
o the representations and warranties previously given by MCA to
OilQuip;
o compliance with applicable laws, governmental approvals and
other consents, permits and licenses;
o employees and labor matters;
o liabilities;
o environmental matters;
o title to real property and encumbrances;
o brokers fees and expense; and
o full disclosure.
30
Certain Post-Closing Obligations
Pursuant to the merger agreement, we agreed to amend our Certificate of
Incorporation to provide for, among other things, an increase in our authorized
capital stock. Our Amended and Restated Certificate of Incorporation will
authorize sufficient additional shares of our common stock to enable us to issue
the additional 9,600,000 shares of our common stock pursuant to the merger
agreement and to provide us the flexibility to issue additional shares of our
common stock and our preferred stock for the purpose of raising equity capital,
completing corporate transactions and issuing shares in connection with our
stock option or other employee benefit plans which may be adopted in the future.
Our Amended and Restated Certificate of Incorporation, authorizing an additional
98,000,000 shares of our common stock and 10,000,000 shares of our preferred
stock, would facilitate our ability to accomplish these goals and other business
and financial objectives in the future without the necessity of delaying such
activities for further stockholder approval, except as may be required in
particular cases by our charter documents, applicable law or the rules of any
stock exchange or other system on which our common stock may be listed.
ESTIMATED FEES AND EXPENSES
Upon consummation of the merger, we assumed all costs and expenses of
OilQuip incurred in connection with the merger.
The following are the fees and expenses incurred in connection with the
merger:
OilQuip's attorneys' fees and expenses: $100,000
Allis-Chalmers attorneys' fees and expenses: $125,000
NO DISSENTING STOCKHOLDERS' RIGHTS
Our stockholders were not entitled to appraisal rights under Section
262 of the DGCL in connection with the merger.
REGULATORY APPROVALS
Other than the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, there are no
federal or state regulatory requirements that we must comply with, or approvals
relating thereto that we must obtain, in connection with the transactions
described herein.
31
PROPOSAL 1: APPROVAL OF OUR AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
General
Pursuant to our obligations in the merger agreement, our stockholders
are being asked to approve and adopt our Amended and Restated Certificate of
Incorporation to (i) increases the number of authorized shares of our capital
stock from 2,000,000 to 110,000,000, (ii) deletes certain provisions which are
no longer relevant or have been moved into our by-laws and (iii) makes other
technical changes. The full text of the proposed Certificate of Incorporation is
attached to this document as Annex C. The text of the Amended and Restated
Certificate of Incorporation is subject to change as may be required by the
Secretary of State of the State of Delaware.
Our current certificate of incorporation provides that:
o we are authorized to issue 2,000,000 shares of our common
stock, $.15 par value per share. At the September 26, 2001
record date, 1,988,128 shares of our common stock were issued
and outstanding.
o actions must be taken by our stockholders at a meeting and may
not be taken by written consent in lieu of a meeting.
Purpose and Effect of our Amended and Restated Certificate of Incorporation
Our Amended and Restated Certificate of Incorporation will authorize
sufficient additional shares of our common stock to enable us to issue the
additional 9,600,000 shares of our common stock pursuant to the merger agreement
and to provide us the flexibility to issue additional shares of our common stock
and our preferred stock for the purpose of raising equity capital, completing
corporate transactions and issuing shares in connection with stock option or
other employee benefit plans which may be adopted in the future. Our Amended and
Restated Certificate of Incorporation, authorizing an additional 98,000,000
shares of our common stock and 10,000,000 shares of our preferred stock, would
facilitate our ability to accomplish these goals and other business and
financial objectives in the future without the necessity of delaying such
activities for further stockholder approval, except as may be required in
particular cases by our charter documents, applicable law or the rules of any
stock exchange or other system on which our common stock may be listed. We have
no agreement to issue additional shares of our common stock or preferred stock
other than shares of our common stock issuable pursuant to the merger agreement.
As of the date of this proxy statement, there are no shares of
preferred stock outstanding. Upon the filing of our Amended and Restated
Certificate of Incorporation with the Secretary of State of the State of
Delaware, our board of directors will be authorized, without further stockholder
approval, to issue from time to time up to an aggregate of 10,000,000 shares of
preferred stock in one or more series. The board of directors may fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each of these series, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of these series.
The existence of authorized but unissued and unreserved common stock
and preferred stock could complicate or discourage an attempt to obtain control
of us by means of a proxy contest, tender offer,
32
merger or otherwise. Future issuances of additional shares of our common stock
or preferred stock, or securities convertible into our common stock or preferred
stock, whether pursuant to a corporate transaction, would have the effect of
diluting the voting or other rights of existing shareholders, including by
diluting earnings per share and book value per share. However, the availability
of additional shares of our common stock or shares of preferred stock could also
discourage or make more difficult efforts to obtain control of us.
In addition, our Amended and Restated Certificate of Incorporation did
not provide us with the flexibility to obtain our stockholders' written consent
to matters submitted for their review in lieu of holding a meeting of our
stockholders. We have deleted this restriction and have revised our by-laws to
provide us with the flexibility to do so.
Shareholder Approval
The affirmative vote of a majority of our outstanding shares of common
stock is required for approval and adoption of the Amended and Restated
Certificate of Incorporation at our special meeting.
Certain of our stockholders, who hold an aggregate of 1,392,351 shares
of our common stock, or 70% of our outstanding common stock, have entered into
an agreement and proxy and appointed Munawar H. Hidayatallah as his or its
irrevocable proxy to vote all of his or its shares in favor of the approval and
adoption of our Amended and Restated Certificate of Incorporation. Accordingly,
the approval and adoption of our Amended and Restated Certificate of
Incorporation by our stockholders is expected to occur irrespective of whether,
or the manner in which, you vote your shares of our common stock.
Recommendation of our Board of Directors
Our board of directors believes that the approval and adoption of our
Amended and Restated Certificate of Incorporation is in our best interest and
necessary to comply with the terms of the merger agreement and to provide us
flexibility over the upcoming years. Our board of directors therefore recommends
that you vote FOR the approval of and adoption of the Amended and Restated
Certificate of Incorporation. Our board of directors reserves the right to
withdraw the proposal to amend the Certificate of Incorporation, whether before
or after shareholder approval.
33
PROPOSAL 2: ELECTION OF DIRECTORS
Our certificate of incorporation provides that the number of directors
shall be fixed from time to time by the board of directors but shall not be less
than 3 or more than 15. Our board of directors has currently fixed the number of
directors at 7, and 7 directors will be elected at our special meeting, each
director to hold office until the next annual meeting of our stockholders and
until his successor is elected and is qualified.
Unless otherwise directed, all proxies (unless revoked or suspended)
will be voted for the nominees for director set forth below. If any nominee
shall be unwilling or unable to serve as director, all proxies will be voted for
the election of such other person as shall be determined by the persons named in
the proxy in accordance with their best judgment. We are not aware of any reason
why any nominee for director should become unavailable for election, or, if
elected, should be unable to serve as a director.
The names of the nominees for directors, and certain information about
them, are set forth below.
NAME AGE HAS BEEN A DIRECTOR FROM
---- --- ------------------------
Dr. Phillip David 69 May 2001
David Groshoff 29 October 1999
Munawar H. Hidayatallah 57 May 2001
Robert E. Nederlander 67 May 1989
Saeed Sheikh 65 May 2001
Leonard Toboroff 68 May 1989
Alan R. Tessler 64 September 1992
Dr. Phillip David has served as our director since May 2001. Since July 1996,
Dr. David has served as a director (equivalent to an officer) of Fairchild Corp.
NXT Ltd. (UK).
David Groshoff has served as our director since October 1999. Mr. Groshoff has
been employed by Pacholder Associates, Inc. since September 1997 and currently
serves as Assistant Vice President and Assistant General Counsel. From September
1995 until September 1997, Mr. Groshoff was a practicing attorney. Mr. Groshoff
serves on our board of directors on behalf of the Pension Benefit Guaranty
Corporation.
Munawar H. Hidayatallah has served as our director, President, Chief Executive
Officer and Chairman since May 2001. Mr. Hidayatallah was Chief Executive
Officer of OilQuip from its formation in February 2000 until May 2001. 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. From August 1999 until February 2000, Mr.
Hidayatallah worked as a consultant to IRI International, Inc. and Riddell
Sports, Inc.
Robert E. Nederlander has served as our director since May 1989. Mr. Nederlander
served as our Chairman of the Board from May 1989 to 1993, and as our Vice
Chairman from 1993 to 1996. Mr. Nederlander has been Chairman of the Board of
Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s Chief
Executive Officer from April 1988 through March 1993. From February 1992 until
June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim President and
Chief Operating Officer. Since November 1981, Mr. Nederlander has been President
and/or a director of the Nederlander
34
Organization, Inc., owner and operator of one of the world's largest chains of
legitimate theaters. Since December 1998, Mr. Nederlander is co-managing member
of the Nederlander Company LLC, operator of legitimate theaters in various
cities outside New York. Mr. Nederlander served as the Managing General Partner
of the New York Yankees from August 1990 until December 1991, and he has been a
limited partner since 1973. Since July 1995, Mr. Nederlander has served on the
Board of Directors of Cendant Corporation, formerly Hospitality Franchise
Systems, Inc. Mr. Nederlander is Chairman of the Board and Chief Executive
Officer of MEGO Financial Corporation since January 1988, and served as a
director of MEGO Mortgage Corp. from September 1996 until June 1998. Since
October 1985, Mr. Nederlander has been President of Nederlander Television and
Film Productions, Inc. In October 1996, Mr. Nederlander became a director of
News Communications Inc., a publisher of community oriented free circulation
newspapers.
Leonard Toboroff has served as our director since May 1989. Mr. Toboroff has
been our Vice Chairman of the Board and our Executive Vice President since May
1989; and a director and Vice Chairman of Riddell Sports, Inc. from April 1988
to the present; a practicing attorney continuously since 1961 to the present.
Mr. Toboroff is also a director of Engex Corp. and H-Rise Recycling Corp.
Saeed Sheikh has served as our director since May 2001. For the previous five
years Mr. Sheikh has served as President and a director of Star Trading &
Marine, Inc., a shipping firm.
Alan R. Tessler has served as our director since September 1992. Mr. Tessler
served as Chairman of the Board and Chief Executive Officer of the Company from
November 1993 until January 1996. Mr. Tessler is Chairman of the Board and Chief
Executive Officer of International Financial Group, Inc. since 1987; and
director of Data Broadcasting Corporation since June 1992. Mr. Tessler is also
Chairman of the Board of Enhance Financial Services Group, Inc., Chairman of the
Board and Chief Executive Office of JNET Enterprises, Inc., Chairman of the
Board of Interworld Corporation, and director of The Limited, Inc.
Shareholder Approval
At our special meeting, the election of the directors will the
affirmative vote of a majority of our outstanding common stock, and the persons
receiving the highest number of votes for each director position will be elected
as director. Our shareholders are not entitled to cumulate their votes in the
election of our directors.
Certain of our stockholders, who hold an aggregate of 1,392,351 shares
of our common stock, or 70% of our outstanding common stock, have entered into
an agreement and proxy and appointed Munawar H. Hidayatallah as his or its
irrevocable proxy to vote all of his or its shares in favor of the election of
the nominees for director named in this proxy statement to our board of
directors. Accordingly, the election of the nominees for director named in this
proxy statement to our board of directors by our stockholders is expected to
occur irrespective of whether, or the manner in which, you vote your shares of
our common stock.
Recommendation of our Board of Directors
Our board of directors recommends that you vote FOR the election of the
nominees for director named in this proxy statement. Our board of directors
reserves the right to withdraw the proposal to the
35
election of the nominees for director named in this proxy statement to our board
of directors, whether before or after shareholder approval.
INFORMATION RELATING TO OUR BOARD OF DIRECTORS AND ITS COMMITTEES
Meetings of Our Board of Directors; Committees
During fiscal 2000, our board of directors held 2 meetings. During
fiscal 2000, no incumbent director attended less than 75% of the aggregate
number of meetings of our board of directors and its committees on which he
served for such year. Our board of directors currently has 3 standing
committees: the Audit Committee, the Executive Committee and the Compensation
Committee. It is expected that committees will be reconstituted following the
special meeting.
Executive Committee
The current members of the Executive Committee are David Groshoff,
Robert E. Nederlander and Alan R. Tessler. The Executive Committee did not meet
during fiscal 2000. The Executive Committee is empowered to exercise all powers
of our board of directors in the management and affairs of our business with
certain exceptions. In practice, it meets only infrequently to take formal
action on specific matters when it would be impractical to call a meeting of our
board of directors.
Compensation Committee
The current member of the Compensation Committee is Alan R. Tessler.
The Compensation Committee did not meet during fiscal 2000. The general
functions of the Compensation Committee includes approval (or recommendations to
our board of directors) of the compensation arrangements for senior management,
directors and other key employees; review of benefit plans in which officers and
directors are eligible to participate; and periodic review of our equity
compensation plans and any grants under such plans.
Audit Committee
The current member of the Audit Committee is Robert E. Nederlander. The
Audit Committee did not meet during fiscal 2000. The general function of the
Audit Committee is to assist our board of directors in fulfilling its oversight
responsibilities by (i) monitoring the integrity of our financial reporting
process and systems of internal control regarding finance, accounting and legal
compliance; (ii) monitoring the independence and performance of our independent
auditors and internal auditing department; and (iii) providing an avenue of
communication between the independent auditors, management, the internal
auditing department and our board of directors.
The following report of the Audit Committee does not constitute
soliciting material and should not be deemed filed or incorporated by reference
into any of our other filings under the Securities Act or by the Exchange Act,
except to the extent we specifically incorporate this report by reference
therein.
The general function of the Audit Committee is to assist our board of
directors in fulfilling its oversight responsibilities by
36
o monitoring the integrity of our financial reporting process and
systems of internal control regarding finance, accounting and
legal compliance;
o monitoring the independence and performance of our independent
auditors and internal auditing department; and
o providing an avenue of communication between the independent
auditors, management, the internal auditing department and our
board of directors.
The Audit Committee has the authority to conduct any investigation
appropriate to fulfilling its responsibilities and it has direct access to the
independent auditors as well as anyone in the organization. The Audit Committee
has the ability to retain, at our expense, special legal, accounting, or other
consultants or experts it deems necessary in the performance of its duties.
The Audit Committee was not fully constituted during 2000 and 2001,
having only one member. Therefore, many of the functions of the Audit Committee
were performed by the full board. The Audit Committee did not meet in 2000 and
has not met to date in 2001 and therefore has not done any of the following:
o adopted a written charter
o reviewed and discussed the audited financial statements with
management (this was done by the full board)
o discussed with the independent auditors the matters required to
be discussed by SAS 61 (Statement on Auditing Standards,
Communications with Audit Committees) including the auditors
responsibility under Generally Accepted Auditing Standards,
Significant Accounting Policies, Management Judgements and
Accounting Estimates, Significant Audit Adjustments, as well as
any difficulties encountered in performing the audit or issues
discussed prior to retention, or any consultation with other
accountants
o received from the independent accountants, written disclosure
regarding the independent accountants' independence as required
by Independence Standards Board Standard No. 1 or discussed such
disclosure with the independent accountants
o recommend to the full board regarding the inclusion of the
audited financial statements in our Annual Report on Form 10-KSB.
The full board approved the inclusion of the audited financial
statements in our Annual Report on Form 10-KSB.
By the Audit Committee,
Robert E. Nederlander
Compensation of Directors
On March 31, 1999, our board of directors decided to establish an
arrangement by which to compensate former and continuing members of our board of
directors who had served from 1989 to March 31, 1999 without compensation. We
issued promissory notes in the amount of $25,000 each to
37
seven current or former directors and $150,000 to John T. Grigsby, Jr., our
former director and our former Executive Vice President and Chief Financial
Officer. These notes bear interest, payable in-kind, at the rate of five percent
(5%) and are due March 28, 2005. However, these notes may be prepaid at any time
at our discretion. In addition, the notes are canceled in the event of a
subsequent bankruptcy. Our board of directors also granted options on March 31,
1999 to purchase 2,000 shares of our common stock to the seven directors and an
option to purchase 10,000 shares to Mr. Grigsby. The exercise price for these
options is $2.75 per share. These options vested immediately and may be
exercised any time after our Amended and Restated Certificate of Incorporation
is filed with the Secretary of State of the State of Delaware, but prior to
March 28, 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of the outstanding shares of our
common stock, to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities on a timely
basis. Directors, executive officers and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16 reports.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and certain written representations that no other reports were
required, during fiscal 2000, all Section 16(a) filing requirements applicable
to our directors, executive officers and greater than 10% beneficial owners were
complied with on a timely basis.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth the beneficial ownership of the outstanding
shares of our common stock as of the September 26, 2001 record date held by our
management and by each person known by us to beneficially own 5% or more of the
outstanding shares of our common stock.
Percentage
Name Number of Shares Ownership
---- ---------------- ---------
Pension Benefit Guaranty Corporation
c/o Pacholder Associates, Inc.
8044 Montgomery Road
Suite 382
Cincinnati, OH 45236 585,100 29.4%
Robert E. Nederlander(1)(2)
c/o Riddell Sports Inc.
1450 Broadway, Suite 2001
New York, NY 10018 417,251 21.0%
Leonard Toboroff(1)(3)
c/o Riddell Sports Inc.
1450 Broadway, Suite 2001
New York, NY 10018 407,251 20.5%
38
Munawar H. Hidayatallah(4)
1875 Century Park East
Suite 600
Los Angeles, CA 90067 175,000 8.8%
Wells Fargo Bank
P.O. Box 60347
Los Angeles, CA 90060
Trustee under that certain Amended and
Restated Retiree Health Trust Agreement
for UAW Retired Employees of Allis-Chalmers
Corporation 136,406 6.9%
Colebrooke Investments, Inc. (5)
LaPlaiderie House
St. Peter Port
Guernsey GY13DQ 135,000 6.8%
Firstar Trust Company
777 East Wisconsin Avenue
Milwaukee, WI 53202
Trustee under that certain Amended and
Restated Retiree Health Trust Agreement for
Non-UAW Retired Employees of Allis-Chalmers 07
Corporation 101,977 5.1%
Saeed Sheikh(6) 40,000 2.0%
John T. Grigsby, Jr. (7) 10,000 *
Dr. Philip David 0 *
David Groshoff 0 *
Alan R. Tessler 0 *
All directors and executive officers as a group
(8 persons) 777,251 39.1%
-------------
(1) Messrs. Nederlander and Toboroff are beneficial owners of and have
shared voting power and shared dispositive power over the 407,251
shares of common stock held by AL-CH Company, L.P., a Delaware limited
partnership, of which the general partners are Q.E.N., Inc., a Michigan
corporation controlled by Mr. Nederlander, and Lenny Corp., a Delaware
corporation controlled by Mr. Toboroff.
(2) Includes 10,000 shares of our common stock held by RER Corp., a
Delaware corporation controlled by Mr. Nederlander. Mr. Nederlander is
the beneficial owner of and has sole voting
39
power and dispositive power over the 10,000 shares of common stock held
by RER Corp. Upon the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, RER
Corp. shall be entitled to receive an additional 240,000 shares of our
common stock. See "Certain Relationships and Related Transactions" on
page 58. Upon issuance of such shares, Mr. Nederlander will
beneficially own 657,251 shares, or 5.7%, of our common stock.
(3) In May 2001, Mr. Toboroff was granted options to purchase 500,000
shares of our common stock at an exercise price of $0.50 per share.
Such options will become immediately exercisable in full upon the
filing of our Amended and Restated Certificate of Incorporation with
the Secretary of State of the State of Delaware. See "Certain
Relationships and Related Transactions" on page 58. Upon the filing of
our Amended and Restated Certificate of Incorporation, Mr. Toboroff
will beneficially own 907,251 shares, or 7.8%, of our common stock.
(4) Upon the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, Mr.
Hidayatallah shall be entitled to receive an additional 4,200,000
shares of our common stock. Upon issuance of such shares, Mr.
Hidayatallah will beneficially own 4,375,000 shares, or 37.8%, of our
common stock.
(5) Colebrooke Investments, Inc. is a limited company organized under the
laws of Guernsey. Upon the filing of our Amended and Restated
Certificate of Incorporation with the Secretary of State of the State
of Delaware, Colebrooke Investments, Inc. shall be entitled to receive
an additional 3,240,000 shares of our common stock. Upon issuance of
such shares, Colebrooke Investments, Inc. will beneficially own
3,375,000 shares, or 29.1%, of our common stock.
(6) Upon the filing of our Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, Mr.
Sheikh shall be entitled to receive an additional 960,000 shares of our
common stock. Upon issuance of such shares, Mr. Sheikh will
beneficially own 1,000,000 shares, or 8.6%, of our common stock.
(7) Includes outstanding options exercisable within 60 days after September
26, 2001 to purchase 10,000 shares of our common stock.
40
INFORMATION RELATING TO OUR EXECUTIVE OFFICERS
The names of our current executive officers, and certain information
about them, are set forth below.
NAME AGE POSITION
---- --- --------
Munawar H. Hidayatallah 57 President, Chief Executive Officer and
Chairman since May 2001. Mr. Hidayatallah
founded OilQuip in February 2000 and has
significant experience in the oil field
service industry. Mr. Hidayatallah was the
Chief Financial Officer and a director of
IRI International, Inc. which was acquired
by National Oilwell, Inc. in early 2000.
From August 1999 until February 2000, Mr.
Hidayatallah worked as a consultant to IRI
International, Inc. and Riddell Sports, Inc.
John T. Grigsby, Jr., 60 Vice Chairman of the Board from May 1989
Chief Financial Officer until October 1999, and Executive Vice
President since October 1989 and Chief
Financial Officer since January 1996, having
previously served since December 1988 as our
Chairman and Chief Executive Officer. Prior
to that time and since July 1987, Mr.
Grigsby was employed by us as Managing
Director, Restructure Project. Mr. Grigsby
also serves as the A-C Reorganization
Trustee, as President of Thomson McKinnon
Securities, Inc. during the winddown and
liquidation of its affairs and President and
Chief Executive Officer of N.W. Liquidating,
Inc.
James J. Dietrich, 58 Mr. Dietrich commenced his employment with
Vice President us in 1976 and ultimately was responsible
for management of both the Engine and
Industrial Truck divisions. He continuously
has served under John T. Grigsby during both
the reorganization project and the A-C
Reorganization Trust of which he is the Vice
President and General Manager. Currently, he
is the President of HDS, one of our former
wholly-owned subsidiaries, now a subsidiary
of MCA, and has been responsible for its
operations since 1996.
Jeffrey I. Lehman, 52 Mr. Lehman commenced his employment with us
Treasurer and was elected to his current position in
February 1996. Since 1991, Mr. Lehman has
been employed by the A-C Reorganization
Trust during winddown and liquidation of
their affairs. He has also provided
financial consultation since 1985.
41
Executive Compensation
None of our officers received compensation of $100,000 or more during
2000. Mr. Grigsby, who effectively served as our chief executive officer during
2000, was not compensated by us during 1998, 1999 or 2000.
Long-Term Stock Incentive Plan
Our Long-Term Stock Incentive Plan (1989) provides for grants to
officers and key employees of stock options, stock appreciation rights,
performance shares, restricted stock, restricted stock units and other
stock-based awards. The maximum number of shares of our common stock which may
be granted with respect to stock-based awards is 50,000. Options to purchase
shares of our common stock may be granted at prices equal to but not less than
the fair market value at the date of grant, except that options to purchase up
to 13,333 shares of our common stock may be granted at a price which is not less
than the fair market value on October 25, 1989, the date on which our long-term
plan (1989) was approved by our stockholders. Options granted pursuant to the
plan are exercisable within a period not to exceed 10 years from date of grant.
The plan also provides for the discretionary grant of stock appreciation rights
which allow the holder to receive the difference between the exercise price and
the fair market value of the stock at the date of exercise in cash or shares of
our common stock.
No stock options or stock appreciation rights have been granted to date
under the plan.
Our board of directors granted 24,000 stock options during 2000 which
are not subject to the plan.
Retirement Plan
The Allis-Chalmers Consolidated Pension Plan covered four active
employees at the beginning of 2000. The Allis-Chalmers Consolidated Pension Plan
is a tax qualified defined benefit pension plan. Effective March 31, 1987, the
Allis-Chalmers Consolidated Pension Plan was capped and frozen, without further
increase in benefits provided by us after that date.
The retirement benefits paid under this plan are before any adjustment
for a surviving spouse's pension and are not subject to any social security
offset or other deductions.
Employment, Severance and Other Agreements With Management
Mr. Hidayatallah serves as our President, Chief Executive Officer and
Chairman of the Board of Directors pursuant to the terms of a three-year
employment agreement dated as of February 7, 2001 between OilQuip and Mr.
Hidayatallah. Under the terms of his employment agreement, Mr. Hidayatallah
receives an annual base salary of $250,000 per year, which shall increase to
$300,000 following an acquisition by OilQuip. In addition, our board of
directors may increase or decrease Mr. Hidayatallah base salary upon an annual
review, but in no event will Mr. Hidayatallah's base salary be less than
$200,000. In addition, Mr. Hidayatallah will receive incentive compensation
equal to 1 1/2% of the purchase price of any acquisitions OilQuip completes.
If Mr. Hidayatallah's employment agreement is terminated by us for any
reason other than "cause", as defined in Mr. Hidayatallah's employment
agreement, or disability, then he is entitled to receive his then current salary
for the 12 months following the date of his termination. If Hr. Hidayatallah
obtains
42
other employment during this 12 month period, then these severance payment will
be reduced by the compensation Mr. Hidayatallah receives from his new employer.
If Mr. Hidayatallah's employment agreement is terminated for a
disability, then he is entitled to the receive his then current salary for the 6
months following the date of his termination. OilQuip shall be no longer
obligated to make these severance payments if Mr. Hidayatallah receives benefits
under our disability insurance during this period.
If Mr. Hidayatallah's employment agreement is terminated by his death,
then his estate is entitled to receive any earned but unpaid salary and
incentive compensation.
Pursuant to the terms of his employment agreement, OilQuip obtained a
term life insurance policy on Mr. Hidayatallah's life. OilQuip is the
beneficiary of this insurance policy. OilQuip is obligated to use the proceeds
from this insurance policy to purchase shares of our common stock from Mr.
Hidayatallah's estate in the event of his death.
ALLIS-CHALMERS' MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion should be read in conjunction with our consolidated
financial statements including the notes to our consolidated financial
statements.
Overview
After emerging from Chapter 11 under the Plan of Reorganization, we
entered into an agreement with AL-CH Company, L.P. (the "Investor") pursuant to
which the Investor agreed to purchase 6,100,000 shares (on a pre-reverse stock
split basis) of our common stock (40% of the outstanding of our common stock)
for $3,750,000 in cash. The Investor is a limited partnership controlled by
Robert E. Nederlander and Leonard Toboroff, two of our directors.
We continue our efforts to conserve cash resources. However, the
expenses associated with the ongoing SEC and other governmental reporting as
well as legal, accounting and audit, insurance and costs associated with other
corporate requirements of a publicly held company will continue to make it
difficult for us, at our present size, to achieve positive cash flow. Our board
of directors believed that, without the merger, Allis-Chalmers would have ceased
to operate by the end of the third quarter of 2001.
As of the date of the Chapter 11 filings in June 1987, we sponsored 19
defined benefit plans providing pensions for substantially all of our United
States employees. Our pension plans for United States salaried employees were
capped and frozen effective March 31, 1987, so there have been no further
benefit accruals after that date. As a result of divestitures during our Chapter
11 proceedings, eight active plans were transferred to the buyers of the
businesses, leaving us as the sponsor of 11 plans, none of which permitted
additional benefit accruals. Effective January 1, 1989, our 11 remaining plans
were consolidated into a single plan, the Allis-Chalmers Consolidated Pension
Plan.
In 1994, our independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan. Primarily as a result of the changes
in mortality assumptions to reflect decreased mortality rates of our retirees,
the Allis-Chalmers Consolidated Pension Plan was underfunded on a present value
basis. In the
43
first quarter of 1996, we made a required cash contribution to the
Allis-Chalmers Consolidated Pension Plan in the amount of $205,000. We did not,
however, have the financial resources to make the other required payments during
1996 and 1997. Given our inability to fund such obligations with our current
financial resources, in February 1997, we applied to the PBGC for a "distress"
termination of the Allis-Chalmers Consolidated Pension Plan under Section
4041(c) of the Employee Retirement Income Security Act of 1974, as amended. The
PBGC approved the distress termination application in September 1997 and agreed
to a plan termination date of April 14, 1997. The PBGC became trustee of the
terminated Allis-Chalmers Consolidated Pension Plan on September 30, 1997.
Upon termination of the Allis-Chalmers Consolidated Pension Plan, we
and our subsidiaries incurred a liability to the PBGC for an amount equal to the
Allis-Chalmers Consolidated Pension Plan's unfunded benefit liabilities. We and
our subsidiaries also have liability to the PBGC, as trustee of the terminated
Allis-Chalmers Consolidated Pension Plan, for the outstanding balance of the
Allis-Chalmers Consolidated Pension Plan's accumulated funding deficiencies. The
PBGC has estimated that the unfunded benefit liabilities and the accumulated
funding deficiencies (together, the "PBGC Liability") total approximately $67.9
million. Effective March 31, 1999, we issued 585,100 shares of our common stock
to the PBGC, reducing the pension liability by the estimated fair market value
of the shares to $66.9 million.
In September 1997, we and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability which required, among other
things, satisfactory resolution of our tax obligations with respect to the
Allis-Chalmers Consolidated Pension Plan under Section 4971 of the Internal
Revenue Code of 1986, as amended. Section 4971(a) of the Code imposes, for each
taxable year, a first-tier tax of 10% on the amount of the accumulated funding
deficiency under a plan like the Consolidated Plan. Section 4971(b) of the Code
imposes an additional, second-tier tax equal to 100% of such accumulated funding
deficiency if the deficiency is not "corrected" within a specified period.
Liability for the taxes imposed under Section 4971 extends, jointly and
severally, to us and to our commonly-controlled subsidiary corporations.
Prior to its termination, the Allis-Chalmers Consolidated Pension Plan
had an accumulated funding deficiency in the taxable years 1995, 1996, and 1997.
Those deficiencies resulted in estimated first-tier taxes under the Code Section
4971(a) of approximately $900,000.
On July 16, 1998, we and the Internal Revenue Service (the "IRS")
reached an agreement in principle to settle our tax liability under Section 4971
of the Code for $75,000. Following final IRS approval of the settlement, we paid
this amount in full satisfaction of our tax liability on August 11, 1998.
In June 1999, but effective as of March 31, 1999, we and the PBGC
entered into an agreement for the settlement of the PBGC Liability (the "PBGC
Agreement"). Pursuant to the terms of the PBGC Agreement, we issued 585,100
shares of our common stock to the PBGC, or 35% of the total number of shares of
our common stock issued and outstanding on a fully-diluted basis, and we have a
right of first refusal with respect to the sale of the shares of our common
stock owned by the PBGC. In conjunction with the share issuance, we reduced the
pension liability to the PBGC based on the estimated fair market value of the
shares of our common stock issued on the effective date of March 31, 1999. In
accordance with the terms of the PBGC Agreement, we were required to and have
(i) decreased the size of our board of directors to seven members; (ii) caused a
sufficient number of our then current directors to resign; and (iii) caused
three designees of the PBGC, to be elected to our board of directors. The PBGC
has caused
44
us to amend our by-laws to conform to the terms of the PBGC Agreement.
Furthermore, we agreed to pay the PBGC's reasonable professional fees on the
90th day after a Release Event (as defined below). During the term of the PBGC
Agreement, we have agreed not to issue or agree to issue any shares of our
common stock or any "common stock equivalent" for less than fair value (as
determined by a majority of our board of directors). We also agreed not to merge
or consolidate with any other entity or sell, transfer or convey more than 50%
of our property or assets without the approval of a majority of our board of
directors and agreed not to amend our certificate of incorporation or by-laws.
We believe that we are in full compliance with the terms of the PBGC Agreement,
as amended to date.
In order to satisfy and discharge the PBGC Liability, the PBGC
Agreement provides that we must either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which makes available to us
at least $10 million of borrowings or (ii) consummate an acquisition, in a
single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million (a "Release Event"). If the 585,100 shares of our common stock are
disposed of by the PBGC prior to a Release Event and the final satisfaction and
discharge of the PBGC Liability, then the liability will be accreted by the
estimated fair market value, $1,024,000, of the shares issued to the PBGC. The
merger constituted a Release Event, which satisfied and discharged the PBGC
Liability.
In connection with the PBGC Agreement, and as additional consideration
for settling the PBGC Liability, the following agreements, each dated as of
March 31, 1999 were also entered into: (i) a Registration Rights Agreement
between us and PBGC (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement (the "Lock-Up Agreement") by and among us, the PBGC, the Investor,
Wells Fargo Bank, as trustee under that certain Amended and Restated Retiree
Health Trust Agreement for UAW Retired Employees of Allis-Chalmers Corporation
(the "UAW Trust"), and Firstar Trust Company, as trustee under that certain
Amended and Restated Retiree Health Trust Agreement for Non-UAW Retired
Employees of Allis-Chalmers Corporation (the "Non-UAW Trust").
The Registration Rights Agreement grants each holder of Registrable
Shares (defined in the Registration Rights Agreement to basically mean the
shares of our common stock issued to the PBGC under the PBGC Agreement) the
right to have their shares registered pursuant to the Securities Act of 1933, as
amended, on demand or incidental to a registration statement being filed by us.
In order to demand registration of registrable shares, a request for
registration by holders of not less than 20% of the Registrable Shares is
necessary. We may deny a request for registration of such shares if we
contemplate filing a registration statement within 90 days of receipt of notice
from the holders. The Registration Rights Agreement also contains provisions
that allow us to postpone the filing of any registration statement for up to 180
days. The Registration Rights Agreement contains indemnification language
similar to that usually contained in agreements of this kind. In connection with
the merger, the PBGC agreed to waive certain rights to have its shares
registered on Registration Statements on Forms S-1 and S-2.
The Lock-Up Agreement governs the transfer and disposition of shares of
our common stock and the voting of such shares, as well as grants the PBGC a
right of sale of its shares prior to the Investor, the UAW Trust and the Non-UAW
Trust. Commencing with the third anniversary of the date of the Merger and
continuing until the fifth anniversary of the date of the merger, each of the
Investor., the UAW Trust and the Non-UAW Trust agreed not to sell, transfer or
dispose of any shares of our common stock without first giving the PBGC an
opportunity to sell all or any portion of the shares of our common stock owned
45
by the PBGC. The foregoing right of the PBGC applies to the sale of our common
stock in a public offering or otherwise.
The Lock-Up Agreement also contains a voting component. During the term
of the Lock-Up Agreement, each party to the agreement agreed to vote, at any
meeting of our stockholders and in any written consent, all shares of our common
stock owned by it in favor of the election as directors the persons nominated by
the Nominating Committee of our board of directors and to refrain from taking
any action contrary to or inconsistent with such obligation. During the term of
the Lock-Up Agreement, each party to the agreement further agreed not to vote
its shares of our common stock or take any other action to amend our certificate
of incorporation or by-laws in a manner that is inconsistent with, or in breach
of, the PBGC Agreement. Each party further agreed that it will vote all of its
shares (i) in favor of certain specified amendments to our certificate of
incorporation, (ii) for the election of the persons designated by the PBGC to
serve on our board of directors and (iii) in favor of the election of our
directors who are committed to cause, and who do cause, one designee of the PBGC
to be appointed to the Nominating Committee of our board of directors and one
designee of the PBGC to be appointed as the Chairman of the Compensation
Committee of our board of directors.
In connection with the merger, the Lock-Up Agreement was terminated in
its entirety.
The acquisition environment has been unfavorable since the Investor's
1989 cash contribution and remained very difficult for us during 2000. The
problems continued to include our lack of cash for investment, limited
availability of debt financing for acquisitions and the financial exposure
associated with the Allis-Chalmers Consolidated Pension Plan. The merger will
provide additional cash for investment, additional debt financing availability
and has expunged the PBGC Liability.
Results of Operations for the Six-Month Periods Ended June 30, 2001 and 2000
Results of operations for 2001 and 2000 reflect the business operations
of OilQuip. The operations of HDS are included from the date of the merger on
May 9, 2001.
During the period February 4, 2000 (Inception) to December 31, 2000,
OilQuip was in the developmental stage. OilQuip's activities for 2000 consisted
of developing its business plan, raising capital and negotiating with potential
acquisition targets. Therefore, the results for operations for 2000 had no
sales, cost of sales, or marketing and administrative expenses that would be
reflective of the ongoing company.
Sales in the first six months of 2001 totaled $2,607,000. The reason
for the increase from the prior year was the merger in May 2001.
Pro forma sales in the first half of 2001 totaled $4,999,000, a slight
decrease from $5,208,000 in the first half of 2000. Sales at HDS increased to
$2,559,000 compared with $2,422,000 in the prior year. HDS continues to be
affected by volatile market conditions that prevail in the oil related fields of
refining, processing, chemical and petrochemical operating throughout the Gulf
coasts. Sales at MCA decreased to $2,440,000 compared with $2,786,000 in the
prior year due to difficulties experienced by MCA customers in obtaining
drilling permits. The permitting process has now returned to a normal schedule.
46
Gross margin, as a percentage of sales, was 27.8% in the first half of
2001.
Pro forma gross margin, as a percentage of sales was 29.4% in the first
half of 2001. Additional sales offset the additional cost of depreciation and
equipment lease to improve the margin results from actual.
Marketing and administrative expense was $1,418,000 in the first half
of 2001 compared with $172,000 in the prior year. Amortization expense was
$90,000 as a result of OilQuip's acquisition of certain assets of Mountain Air
in February 2001 and the merger between Allis-Chalmers and OilQuip in May 2001.
The primary reason for the increase from the prior year was the merger in May
2001 and issuance of stock options to a director. A significant portion of the
Company's administrative expenses relates to expenses for Securities and
Exchange Commission and other governmental reporting as well as legal,
accounting and audit, tax, insurance and other corporate requirements of a
publicly held company.
Pro forma marketing and administrative expense was $2,228,000 in the
first half of 2001. Amortization expense was $160,000 as a result of OilQuip's
acquisition of certain assets of Mountain Air in February 2001 and the merger in
May 2001. A significant portion of the Company's administrative expenses relates
to expenses for Securities and Exchange Commission and other governmental
reporting as well as compensation, legal, accounting and audit, tax, insurance
and other corporate requirements of a publicly held company.
The Company incurred a net loss of $1,041,000, or $1.77 loss per common
share, in the first half of 2001 compared with a loss by OilQuip of $172,000, or
$0.43 loss per common share, in the same period of 2000.
The Company incurred a pro forma net loss of $1,204,000, or $.10 loss
per common share, for the six months ended June 30, 2001.
Financial Condition and Liquidity at June 30, 2001 and December 31, 2000
Cash and cash equivalents totaled $228,000 at June 30, 2001, an
increase from $4,000 for OilQuip at December 31, 2000 mainly due to OilQuip's
acquisition of certain assets of Mountain Air in February 2001 and the merger in
May 2001.
Other current assets include a lease deposit in the amount of $701,000,
a result of the sale/leaseback to help finance OilQuip's acquisition of certain
assets of Mountain Air in February 2001.
Net trade receivables at June 30, 2001 were $1,616,000. This increased
significantly from the December 31, 2000 balance for OilQuip due to OilQuip's
acquisition of certain assets of Mountain Air in February 2001 and the merger in
May 2001.
Inventory at June 30, 2001 was $80,000, consistent with HDS' normal
inventory, which has always been minimal. MCA carries no inventory.
Net property, plant and equipment was $8,289,000 at June 30, 2001, as a
result of OilQuip's acquisition of certain assets of Mountain Air in February
2001 and the merger in May 2001. Included is $2.7 million of replacement parts
for which no depreciation has been taken. When put into service, depreciation
will be taken on these replacement parts. Minimal purchases were made after the
acquisition
47
and the merger.
Trade accounts payable at June 30, 2001 were $435,000. This increased
significantly from the December 31, 2000 balance due to OilQuip's acquisition of
certain assets of Mountain Air in February 2001 and the merger in May 2001.
Other current liabilities, excluding the current portion of long term
debt, were $815,000 consisting of taxes in the amount of $136,000, accrued
salary and benefits in the amount of $441,000, and legal and professional
expenses in the amount of $70,000. Included in salary and benefits is deferred
compensation in the amount of $161,000 due the president of the Company. All of
these balance sheet accounts increased significantly from December 31, 2000
balances for OilQuip due to the merger in May 2001.
Long term debt was $7,441,000 at June 30, 2001. Long-term debt is
primarily a result of the cost of OilQuip's acquisition of certain assets of
Mountain Air in February 2001:
o A term loan in the amount of $3,550,000 at 8%, interest payable monthly,
with quarterly principal payments of $147,916.67 due on the last day of
April, July, October and January. The maturity date of the loan is February
7, 2004.
o A sellers note in the amount of $2,200,000 at 5.75% simple interest. The
principal and interest are due on February 6, 2004.
o Subordinated debt in the amount of $2,000,000 at 12% interest payable
quarterly commencing on April 1, 2001. The principal will be due upon on
January 31, 2004.
An addition to the above acquisition debt, there is also debt resulting
from the Board's decision to establish an arrangement by which to compensate
former and continuing Board members who had served from 1989 to March 31, 1999
without compensation. Allis-Chalmers issued promissory notes in the amount of
$25,000 each to seven current or former directors and $150,000 to John T.
Grigsby, Jr., a former director and current Executive Vice President and Chief
Financial Officer of Allis-Chalmers. The notes bear interest at the rate of five
percent (5%) and are due March 28, 2005; however, the notes may be prepaid at
any time at the discretion of Allis-Chalmers. In addition, the notes are
canceled in the event of a subsequent bankruptcy of Allis-Chalmers.
On May 31, 2001, the Board granted to Leonard Toboroff, a director of
Allis-Chalmers, subject to shareholder approval of certain amendments to the
Certificate, an option to purchase 500,000 shares of common stock at $0.50 per
share. The option was granted for services provided by Mr. Toboroff to OilQuip
prior to the Merger, including providing financial advisory services, assisting
in OilQuip's capital structure and assisting OilQuip in finding strategic
acquisition opportunities. Allis-Chalmers has recorded $500,000 of compensation
expense for this option grant. The Board was apprised of Mr. Toboroff's services
to OilQuip prior to its approval of the Merger.
In addition, the Board granted options to purchase 2,000 shares of our
common stock to the seven directors and an option to purchase 10,000 shares to
Mr. Grigsby. The option price was determined to be $2.75 per share. The options
vested immediately and may be exercised any time prior to March 28, 2010.
The A-C Reorganization Trust, pursuant to the Plan of Reorganization,
funds all costs incurred by
48
us which relate to implementation of the Plan of Reorganization. Such costs
include an allocated share of certain expenses for our employees, professional
fees and certain other administrative expenses.
The EPA and certain state environmental protection agencies have
requested information in connection with several potential hazardous waste
disposal sites in which products manufactured by us before consummation of the
Plan of Reorganization were disposed. The EPA has claimed that we are liable for
cleanup costs associated with several additional sites. In addition, certain
third parties have asserted that we are liable for cleanup costs or associated
EPA fines in connection with additional sites. In each instance the
environmental claims asserted against us involve our pre-bankruptcy operations.
Accordingly, we have taken the position that all cleanup costs or other
liabilities related to these sites were discharged in the bankruptcy. No
environmental claims have been asserted against us involving our post-bankruptcy
operations. However, there can be no assurance that we will not be subject to
environmental claims relating to our current or discontinued business and that
such claims will not adversely affect us. See "Business of Allis-Chalmers -
Legal Proceedings" on page 17.
Our principal sources of cash in the second quarter included earnings
from the operations of HDS and MCA. The cash requirements needed for the
administrative expenses associated with being a publicly held company are
significant, and we will continue to use cash generated by operations to fund
such expenses.
Following the merger on May 9, 2001, we announced our intent to
investigate acquisition opportunities in the natural gas exploration and
drilling industry and to use HDS as a centralized fabrication and machining
facility for our future operations. Except to the extent we are able to
consummate acquisitions using our common stock as consideration, additional
funds will be required to consummate any acquisitions. As a result of the
merger, we will also have funds from the operations of OilQuip to the extent
OilQuip generates cash flow, and may have the ability to raise additional funds.
However, to date, management has not determined the impact of the merger on our
ability to obtain additional funds, and there can be no assurance that any such
additional funds will be available.
Results of Operations for the Quarters Ended March 31, 2001 and 2000
Results of operations for 2001 and 2000 reflect the business operations
of HDS and does not include the operations of OilQuip.
Sales in the first quarter of 2001 totaled $1,337,000, a significant
increase from $824,000 in the first quarter of 2000. Two major jobs from regular
customers accounted for the majority of the increase.
Gross margin, as a percentage of sales, was 36% in the first quarter of
2001, an increase from 23.7% in 2000 due to the type of work performed, better
pricing, and continued cost reduction efforts.
Marketing and administrative expense was $391,000 in the first quarter
of 2001 compared with $295,000 in the prior year. A significant portion of our
administrative expenses relates to expenses for Securities and Exchange
Commission and other governmental reporting as well as legal, accounting and
audit, tax, insurance and other corporate requirements of a publicly held
company.
We incurred a net profit of $85,000, or $.05 per common share, in the
first quarter of 2001 compared with a net loss of $104,000, or $.07 per common
share, in the same period of 2000.
49
Financial Condition and Liquidity at March 31, 2001 and December 31, 2000
Cash and cash equivalents totaled $192,000 at March 31, 2001, a
decrease from $358,000 at December 31, 2000 mainly due to increased receivables
resulting from our significant sales increase.
Net trade receivables at March 31, 2001 were $883,000, reflecting an
increase from the December 31, 2000 level of $549,000. This increase was in line
with the significant increase in sales as well as being partially due to the
timing of the jobs.
Inventory at March 31, 2001 was $192,000, an increase from $122,000 at
year end 2000.
Net property, plant and equipment was $1,018,000 at March 31, 2001, a
decrease from $1,055,000 at year end 2000. There were no significant purchases
of capital items in the first quarter of 2001.
Trade accounts payable at March 31, 2001 were $283,000, an increase
from $208,000 at December 31, 2000.
Other current liabilities were $97,000 at March 31, 2001, no
significant change from $106,000 at December 31, 2000.
Long term debt was $341,000 at March 31, 2001, an increase from
$337,000 at December 31, 2000 due to interest on the debt discussed below. This
debt resulted from our board of directors' decision to establish an arrangement
by which to compensate former and continuing members of our board of directors
who had served from 1989 to March 31, 1999 without compensation. We issued
promissory notes in the amount of $25,000 each to seven current or former
directors and $150,000 to John T. Grigsby, Jr., a former director and current
Executive Vice President and Chief Financial Officer. The notes bear interest at
the rate of five percent (5%) and are due March 28, 2005; however, the notes may
be prepaid at any time at our discretion. The notes are canceled in the event of
a subsequent bankruptcy of Allis-Chalmers. In addition, our board of directors
granted options to purchase 2,000 shares of our common stock to the seven
directors and an option to purchase 10,000 shares to Mr. Grigsby. The option
price was determined to be $2.75 per share. The options vested immediately and
may be exercised any time prior to March 28, 2010.
The A-C Reorganization Trust, pursuant to our plan of reorganization,
funds all of our costs related to implementation of our plan of reorganization.
Such costs include an allocated share of certain expenses for our employees,
professional fees and certain other administrative expenses.
Our principal source of cash in the first quarter included earnings
from the operations of HDS. The cash requirements needed for the administrative
expenses associated with being a publicly held company are significant, and we
will continue to use cash generated by operations to fund such expenses.
Following the merger, we announced our intent to investigate acquisition
opportunities in the natural gas exploration and drilling industry and to use
HDS as a centralized fabrication and machining facility for our future
operations. Except to the extent we are able to consummate acquisitions using
our common stock as consideration, additional funds will be required to
consummate any acquisition. As a result of the OilQuip merger, we will also have
funds from the operations of OilQuip to the extent OilQuip generates cash flow,
and may have the ability to raise additional funds. However, to date, our
management has not determined the impact of the merger on its ability to obtain
additional funds, and there can be no assurance that any such additional funds
will be available.
50
Results of Operations for the Years Ended December 31, 2000, 1999 and 1998
Results of operations for 2000, 1999 and 1998 reflect the business
operations of our former sole operating subsidiary, HDS, now a subsidiary of
MCA.
Sales totaled $4.6 million in 2000, compared with $4.4 million in 1999
and $5.0 million in 1998. The increase in sales in 2000 from 1999 was due to
slightly better pricing on a better mix of products serviced. The decrease in
sales in 2000 and 1999 from 1998 was due to the volatile market conditions that
prevailed in the oil related fields of refining, processing, chemicals, and
petrochemicals operations throughout the Gulf coast.
Gross margins, as a percentage of sales, were 27.2%, 24.2% and 29.7% in
2000, 1999 and 1998, respectively. The increase in 2000 was due to the better
pricing and continued cost reduction efforts.
Marketing and administrative expense was $1.4 million, $1.5 million and
$1.7 million in 2000, 1999 and 1998, respectively. Marketing and administrative
expense was 31.0% of sales in 2000 compared with 35.4% in 1999 and 33.6% in
1998. The decrease in marketing and administrative expense was due to reduced
corporate overhead and acquisition costs. There were additional costs incurred
in 1999 and 1998 in pursuit of corporate acquisitions and certain engineering
costs at HDS. A significant portion of our administrative expense continues to
relate to expenses for Securities and Exchange Commission and other governmental
reporting as well as the legal, accounting and audit, insurance and other
requirements of a publicly held company.
Interest income in each of the years resulted mainly from earnings on
short-term investments. Interest expense primarily relates to a real estate
loan, the proceeds of which were used to purchase the shop and office building
from which HDS operates and additional financing for capital improvements at
HDS.
We had a net loss of $189,000, or $.12 per share of our common stock in
2000, compared with a net loss of $113,000, or $.08 per common share, in 1999
and net income of $618,000, or $.62 per common share, in 1998. Net income in
1998 included income of $825,000 as a result of the settlement of a $900,000 IRS
liability for $75,000.
Liquidity and Capital Resources at December 31, 2000, 1999 and 1998
At December 31, 2000, we had cash and short-term investments totaling
$358,000, compared with $501,000 at December 31, 1999 and $223,000 at December
31, 1998. The increase in 1999 was principally the result of our plan of
reorganization implementation reimbursement.
Trade receivables at December 31, 2000 were $549,000, compared with
$570,000 at December 31, 1999 and $796,000 at December 31, 1998. The decrease
from December 31, 1998 was the result of the addition of a $102,000 reserve
relating to a warranty claim, decreased sales in 1999 and 2000, and certain
major projects completed and billed by HDS near the end of 1998.
Inventory at December 31, 2000 was $122,000, compared with $157,000 at
December 31, 1999 and $127,000 at December 31, 1998. In 1999, inventory was
unusually high as one job totaling approximately $81,000 was not completed until
January 2000.
51
Net property, plant and equipment at December 31, 2000 was $1,055,000,
compared with $1,170,000 at December 31, 1999 and $1,308,000 at December 31,
1998. We purchased only $35,000 of capital equipment during 2000 and have not
purchased any significant capital items since 1998. In 1998, approximately
$234,000 was invested in machinery and equipment acquisitions while
approximately $119,000 was spent to improve HDS' facilities, including air
conditioning and upgrading its telephone system. The expenditures for additional
or upgrades of machinery and tooling were necessary to reduce production costs
by decreasing downtime and increasing production efficiency output, helping to
position us for further growth through the increased capacity and service
capabilities we offer to the marketplace.
Current maturities of long-term debt were $212,000 at December 31,
2000, compared with $60,000 at December 31, 1999 and at December 31, 1998. The
majority of the current maturities represent payments on the real estate loan
refinanced by HDS in August 1996. The proceeds of the original loan were used in
1990 for the purchase of the land and building in which HDS operates its
business in Houston, Texas. The amount refinanced is required to be repaid in
monthly installments of $3,278 through August 20, 2001, when the remaining
unpaid balance is due. At December 31, 2000, the interest rate on the note was
11.5%. This rate is subject to adjustments during the term of the note in
accordance with increases or decreases in the prime rate. The note is
collateralized by the HDS facility, having a net book value of $421,000 at
December 31, 2000, and our guaranty.
Trade accounts payable at December 31, 2000 were $208,000 compared with
$461,000 at December 31, 1999 and $291,000 at December 31, 1998. During December
1999, our payables were higher than normal due to timing fluctuations in the
payment of vendor invoices.
Other current liabilities were $106,000 at December 31, 2000 compared
with $281,000 at December 31, 1999 and $312,000 at December 31, 1998 due to a
$128,000 decrease in the legal reserve as well as a reduction in the accruals of
the franchise tax and legal expense.
Our principal sources of cash include earnings from operations. The
cash requirements needed for the administrative expenses associated with being a
publicly held company are significant, and management believes that we will
continue to use a substantial portion of its cash balances generated by HDS for
these purposes in 2001.
The A-C Reorganization Trust, pursuant to the Plan of Reorganization,
funds all costs incurred by us which relate to implementation of the Plan of
Reorganization. Such costs include an allocated share of certain expenses for
our employees, professional fees and certain other administrative expenses.
The EPA and certain state environmental protection agencies have
requested information in connection with several potential hazardous waste
disposal sites in which products manufactured by us before consummation of the
Plan of Reorganization were disposed. The EPA has claimed that we are liable for
cleanup costs associated with several additional sites. In addition, certain
third parties have asserted that we are liable for cleanup costs or associated
EPA fines in connection with additional sites. In each instance the
environmental claims asserted against us involve our pre-bankruptcy operations.
Accordingly, we have taken the position that all cleanup costs or other
liabilities related to these sites were discharged in the bankruptcy. No
environmental claims have been asserted against us involving our post-bankruptcy
operations. However, there can be no assurance that we will not be subject to
environmental claims relating to our current or discontinued business and that
such claims will not adversely affect us. See "Business of Allis-Chalmers -
Legal Proceedings" on page 17.
52
Financial Condition
Shareholders' deficit at December 31, 2000 was $66.7 million. A
three-year comparison of shareholders' deficit follows:
(in millions) 2000 1999 1998
---- ---- ----
January 1 $(66.5) $(67.4) $(68.0)
Net income (loss) (0.2) (0.1) 0.6
Issuance of common stock 0.0 1.0 0.0
--- --- ---
December 31 $(66.7) $(66.5) $(67.4)
======= ======= =======
Accounting Changes
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." This issuance delayed the
effective date of SFAS 133 for us until the first quarter of 2001. SFAS 133
requires all derivative instruments, as defined by the statement, to be recorded
on the balance sheet as assets or liabilities, measured at fair value, and any
change in fair value to be recorded within net income or comprehensive income.
The adoption of this statement did not have a material effect on our net
earnings or financial position.
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. Currently, the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operations.
53
OILQUIP'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with OilQuip's
audited financial statements and notes thereto appearing elsewhere herein. As
discussed in "Pro Forma Financial Information," as a result of the acquisition
of the assets of Mountain Air on February 6, 2001, results for periods prior to
December 31, 2000 are not indicative of results OilQuip expects in future
periods.
Results of Operations for the Quarters Ended March 31, 2001 and 2000
Results of operations for the first quarter of 2001 include the
business operations of OilQuip's then sole operating subsidiary, MCA, whose
business primarily consists of providing compressed air equipment and trained
operators to companies in the business of drilling for natural gas. The results
of operations reflect the operating results of MCA attributable to the business
and assets purchased from Mountain Air for the period February 6, 2001 through
March 31, 2001. There is no comparative prior period of operations as OilQuip
was not formed until February of 2000, and did not incur material expenses or
generate income or revenues during the first quarter of 2000.
Revenues in the first quarter of 2001 (for the period February 6, 2001
through March 31, 2001) totaled $606,000.
Gross margin, as a percentage of sales, was 31% in the first quarter of
2001.
Marketing and administrative expense was $313,000 in the first quarter
of 2001. A significant portion of OilQuip's administrative expenses related to
payroll for personnel provided with equipment to customers in the business of
drilling for natural gas and leasing of certain equipment. OilQuip believes
these costs should decrease as a percentage of future revenues as OilQuip
expands and achieves economies of scale. There is no assurance, however, that
said expansion or economies of scale will be achieved and leasing of certain
equipment.
OilQuip incurred a net loss of $270,000 in the first quarter of 2001,
primarily due to general and administrative expenses of OilQuip as a holding
company.
Results of Operations for the Period from February 4, 2000 to December 31, 2000
During 2000, OilQuip conducted no active business, but incurred
expenses of $244,000 in connection with the investigation of acquisitions and
$383,000 for general and administrative expenses.
Liquidity and Capital Resources
OilQuip's cash and cash equivalents totaled $205,000 at March 31, 2001,
an increase from $4,000 at December 31, 2000.
Net trade receivables were $524,000 at March 31, 2001, as a result of
the revenues from MCA's operations, as compared with $20,000 at December 31,
2000.
54
At March 31, 2001, net property, plant, and equipment was $6.4 million,
relating to MCA's acquisition of Mountain Air's assets. Included is $2.7 million
of replacement parts, for which no depreciation is taken. When put into service,
depreciation will be taken on these replacement parts. At December 31, 2000,
there were no fixed assets.
Simultaneously with MCA's purchase of assets from Mountain Air, MCA
sold of $3.5 million of certain assets acquired in the purchase from Mountain
Air. MCA leased the same assets back for a term of five years as an operating
lease. No gain or loss was recognized in this transaction.
Net trade accounts payable were $219,000 at March 31, 2001, an increase
of $207,000 from December 31, 2000. This increase was due to the activity
generated by the acquisition of assets from Mountain Air.
The current portion of debt was $647,000 at March 31, 2001, the amount
owed on MCA's term debt, payable within the next year. Long-term debt was $6.6
million at March 31, 2001, resulting from loans obtained to complete MCA's
acquisition.
MCA issued redeemable warrants in connection with borrowings needed to
acquire the assets of Mountain Air, which entitle the holders to acquire
approximately 14% of the common stock of MCA on a fully-diluted basis, for a
nominal exercise price. The warrants are redeemable at the option of the holders
for $600,000 and were valued at $600,000. MCA also issued warrants to certain
unaffiliated consultants, which entitle the holders to acquire approximately
5.7% of the common stock of MCA on a fully-diluted basis, for a nominal exercise
price. The consultant's warrants were valued at $200,000.
In connection with the acquisition of Mountain Air's assets, MCA
entered into financing agreements with Wells Fargo Bank Texas, N.A. which
include a revolving line of credit in the amount of $500,000, all of which was
available at March 31, 2001.
OilQuip expects to incur capital expenditures for normal replacement of
equipment of boosters and compressors. While capital expenditures may fluctuate
from time to time, OilQuip generally expects to spend approximately 4% of
revenues on equipment repair and replacements.
55
MOUNTAIN AIR'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with Mountain
Air's audited financial statements and notes thereto appearing elsewhere herein.
Seasonal factors have not had a significant effect on Mountain Air's operating
results.
Results of Operations for the Period from January 1, 2001 to February 6, 2001
and the Quarter Ended March 31, 2000
Results of operations for the quarter ended March 31, 2001, reflect the
operations of Mountain Air only for the period from January 1, 2001 through
February 6, 2001, the date its assets were sold to MCA, and thus are not fully
comparable with prior periods.
Sales in the period from January 1, 2001 through February 6, 2001 were
$493,000, compared to $1,315,000 in the first quarter of 2000.
Gross margins as a percentage of sales were approximately 57% and 58%
in the period from January 1, 2001 through February 6, 2001 and in the first
quarter of 2000, respectively.
Marketing and administrative expense was $165,000 and $199,000 in the
period from January 1, 2001 through February 6, 2001 and in the first quarter of
2000, respectively.
Mountain Air had net income of $114,000 and $567,000 in the period from
January 1, 2001 through February 6, 2001 and in the first quarter of 2000,
respectively.
Results of Operations for the Years Ended December 31, 2000, 1999 and 1998
Results of operations for 2000, 1999, and 1998 reflect the operations
of Mountain Air.
Sales totaled $5.7 million in 2000, compared with $6.4 million in 1999
and $6.7 million in 1998. The decrease in sales was primarily due to a change in
working hours in the oil fields, which changed from operating 24 hours a day, 7
days a week to 12 hours a day, 5 days a week with limited weekend work. Mountain
Air is reliant on one customer, Burlington Resources, who accounted for 69.3% of
sales in 2000, 54.6% of sales in 1999 and 52.5% of sales in 1998.
Gross margins as a percentage of sales were 52.8%, 41.2%, and 45.4% in
2000, 1999, and 1998, respectively. The increase in gross margin in 2000 as
compared with 1999 and 1998 was a result of the reduction of operating hours
which reduced operating salaries, which included a high percentage of overtime.
In addition, the reduction of hours greatly reduced work that was not as
profitable.
General and administrative expense was $613,000, $622,000, and $579,000
in 2000, 1999, and 1998, respectively.
56
Interest income in each of the years resulted mainly from earnings on
short-term investments. Interest expense in 1999 and 1998 related to notes
payable to related party at 10.25% secured by vehicles. These notes were paid
off in March 1998 and July 1999.
Mountain Air had net income of $2.4 million in 2000 compared with a net
income of $2.0 million in 1999 and net income of $2.5 million in 1998.
Liquidity and Capital Resources at December 31, 2000, 1999 and 1998
At December 31, 2000 Mountain Air had cash and short-term investments
totaling $634,000, an increase from $502,000 at December 31, 1999.
Trade receivables at December 31, 2000 were $610,000 compared with
$452,000 and $720,000 at December 31, 1999 and December 31, 1998, respectively.
Net property, plant and equipment at December 31, 2000 was $1.4 million
as compared to $1.6 million at December 31, 1999 and $1.5 million in 1998.
Minimal purchases were made in 2000 compared with 1999 and 1998 when compressor
and booster additions were added to field inventory.
Distributions to Mountain Air owner/shareholders were $2.3 million,
$1.9 million and $2.2 million for years ended December 31, 2000, December 31,
1999 and December 31, 1998, respectively. These distributions were consistent
with Mountain Air's election to be treated as an S corporation.
Accounts payable at December 31, 2000 was $69,000 as compared with
$244,000 and $238,000 at December 31, 1999 and 1998, respectively. Purchases
usually made late in the year were postponed in 2000 due to the pending sale of
Mountain Air's assets.
Accrued expenses at December 31, 2000 were $134,000 as compared with
$139,000 and $173,000 at December 31, 1999 and 1998 respectively.
Other current liabilities at December 31, 2000 were $100,000 as
compared with $0 and $16,000 at December 31, 1999 and 1998, respectively. The
$100,000 was for the deposit received in connection with the acquisition of
Mountain Air's assets by OilQuip on February 6, 2001.
57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our board of directors issued promissory notes totaling $325,000 as
compensation to certain current and former directors. This transaction is
reflected as marketing and administrative expense of $325,000 in the
accompanying financial statements for fiscal 2000. Our board of directors did
not receive any compensation for their services as our executive officers for
the period April 1, 1999 through December 31, 2000. In connection with the
resignation of Richard Lichtenstein from our board of directors on May 9, 2001,
he was paid a directors' fee of $7,500 which fee was specifically approved by
our board of directors.
In conjunction with the promissory notes issued to certain current and
former directors, our board of directors granted stock options to these same
individuals. Options to purchase 24,000 shares of our common stock were granted
with an exercise price of $2.75. These options vested immediately and may be
exercised any time prior to March 28, 2010. During 2000, no stock options were
exercised. No compensation expense has been recorded for these options which
were issued with an exercise price approximately equal to the fair value of our
common stock at the date of grant. These stock options were not dilutive to our
net loss per share in fiscal 2000. Had compensation expense for these options
granted during fiscal 2000 been determined based on option fair value at the
grant date, as prescribed by SFAS No. 123, "Accounting for Stock Based
Compensation," the effect on our net loss during fiscal 2000 would not have been
material.
On May 31, 2001, options to purchase 500,000 shares of our common
stock, with an exercise price of $0.50 per share, were granted to our director
Leonard Toboroff in connection with services provided by Mr. Toboroff, including
providing financial advisory services to OilQuip, introducing OilQuip to us,
assisting in the capital structure of OilQuip and assisting OilQuip in finding
strategic acquisition opportunities through the introduction of OilQuip to
equity sources. Such options will be issued and exercisable in full upon the
filing of our Amended and Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware.
During 1999, we received payments totaling $400,000 as reimbursement
for expenditures we incurred in prior years on behalf of the A-C Reorganization
Trust. These payments are included as other income in the accompanying financial
statements for fiscal 1999.
Mr. Hidayatallah advanced OilQuip a total of $538,106 by paying
OilQuip's expenses during 2000. Effective December 31, 2000, Mr. Hidayatallah
forgave the outstanding balance and $538,106 was recorded as additional paid-in
capital of OilQuip. As of December 31, 2000, OilQuip has paid personal expenses
of $104,640 on behalf of Mr. Hidayatallah. Mr. Hidayatallah repaid these amounts
in January 2001.
INDEPENDENT ACCOUNTANTS
The financial statements of Allis-Chalmers as of December 31, 2000 and
1999 and for each of the three years for the period ended December 31, 2000,
included in this proxy, have been audited by PricewaterhouseCoopers LLP ("PWC"),
independent accountants, as stated in their report appearing herein. By letter
dated July 10, 2001 and received by Allis-Chalmers on July 11, 2001, PWC
resigned as the independent accountants to Allis-Chalmers.
58
PWC's reports on the financial statements of Allis-Chalmers for the two
most recent fiscal years did not contain any adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle except that PWC's reports for each of the past two fiscal
years included an explanatory paragraph which noted that, as of September 30,
1997, Allis-Chalmers and its subsidiaries incurred an estimated liability to the
PBGC for unfunded benefit liabilities and accumulated funding deficiencies
totaling approximately $68 million. Such qualified opinions noted that
Allis-Chalmers did not have the financial resources to fund this liability to
the PBGC. Such qualified opinions also noted that the matter raised substantial
doubt about Allis-Chalmers' ability to continue as a going concern.
During Allis-Chalmers' two most recent fiscal years and the subsequent
interim period preceding the resignation of PWC, there were no disagreements
with PWC on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
PWC's satisfaction, would have caused PWC to make reference to the subject
matter of the disagreements in connection with its audit reports with respect to
financial statements of Allis-Chalmers for 2000 and 1999. The term
"disagreement" is utilized in accordance with Instruction 4 to Item 304 of
Regulation S-K. Allis-Chalmers requested PWC to furnish a letter to the
Securities and Exchange Commission stating whether PWC agrees with the
statements made by Allis-Chalmers herein and in our Current Report on Form 8-K/A
filed on July 17, 2001 announcing PWC's resignation. Such letter is attached as
an exhibit to our Current Report on Form 8-K/A.
PWC has not audited, reviewed or had any other involvement with any of
the financial statements or related financial information included in this proxy
statement other than with respect to the historical financial statements of
Allis-Chalmers.
At this time, Allis-Chalmers is investigating various accounting firms,
including Gordon, Hughes & Banks, LLP, in search of a new firm for this fiscal
year and therefore no independent public accountants can be solicited for
election, approval or ratification.
A representative of PWC is not expected to be present at our special
meeting.
Audit Fees
PWC has billed Allis-Chalmers in the aggregate amount of $38,200,
including $3,200 for out-of-pocket expenses, for professional services rendered
for the audit of our annual financial statements for 2000 and the reviews of the
financial statements included in our Quarterly Reports on Form 10-QSB for 2000.
Financial Information Systems Design and Implementation Fees
PWC has not billed Allis-Chalmers for professional services rendered in
2000 for financial information systems design and implementation, as described
in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X.
All Other Fees
PWC has not billed Allis-Chalmers for professional services rendered in
2000, other than the services described in the previous two paragraphs.
59
Audit Committee Consideration
As there were no non-audit services provided by PWC as described in the
previous two paragraphs, the Audit Committee did not need to consider whether
the provision of such services is compatible with maintaining PWC's
independence.
STOCKHOLDER PROPOSALS
Stockholder proposals for presentation at our next annual meeting of
stockholders to be held in 2002 must be received by us at our principal
executive offices for inclusion in our 2002 proxy statement and form of proxy
relating to that meeting no later than January 15, 2002 in accordance with Rule
14a-8(e) promulgated under the Exchange Act. Such proposals must also meet the
other requirements of the rules of the SEC relating to stockholders' proposals.
This proxy statement confers discretionary authority to vote on any stockholder
proposal with respect to which we did not receive notice a reasonable time
before mailing of this proxy statement in accordance with Rule 14a-4(c) under
the Exchange Act.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We are subject to the informational requirements of the Exchange Act
and, accordingly, file reports, documents and other information with the SEC. We
have filed with the SEC a Current Report on Form 8-K with an event date of May
9, 2001, as amended on July 17, 2001, with respect to the merger described in
this proxy statement. The Form 8-K and its exhibits, as well as any reports,
proxy statements and other information filed by us, can be inspected and copied
at the Public Reference Room maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information regarding the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site on the World Wide Web at "http://www.sec.gov"
which contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. Reports and other
information concerning us can also be inspected at the offices of the National
Association of Securities Dealers, Inc., Reports Section, 1735 K Street, N.W.,
Washington, D.C. 20006.
Shares of our common stock are presently traded on the OTC Bulletin
Board under the symbol "ACLM."
The SEC allows us to "incorporate by reference" into this proxy
statement documents filed with the SEC by Allis-Chalmers. This means that we can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be a part of this proxy
statement, and later information that we file with the SEC will update and
supersede that information. We incorporate by reference the documents listed
below and any documents filed by Allis-Chalmers under the Exchange Act after the
date of this proxy statement and before the date of our special meeting:
FILING PERIODS
------------------------------- -----------------------------------------------
Annual Report on Form 10-K Year ended December 31, 2000
Quarterly Report on Form 10-Q Quarters ended March 31, 2001 and June 30, 2001
Current Report on Form 8-K Filed May 15, 2001, as amended by Form 8-K/A
filed on July 17, 2001
60
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS DOCUMENT IN CONNECTION WITH
THE SOLICITATION OF PROXIES MADE BY THIS DOCUMENT, AND, IF GIVEN OR MADE, THE
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY US OR ANY OTHER PERSON.
OTHER MATTERS
It is not expected that any other matters will be brought before our
Special Meeting. However, if any other matters are presented, it is the
intention of the persons named in the proxy to vote the proxy in accordance with
their best judgment.
ANNUAL REPORTS AND FINANCIAL STATEMENTS
Our Annual Report on Form 10-K is being furnished simultaneously
herewith; however, it is not to be considered a part of this proxy statement. We
will also furnish a copy of any exhibit to our Annual Report on Form 10-K as
listed thereon, upon your request and upon payment of our reasonable expenses of
furnishing such exhibit. Requests should be directed to Allis-Chalmers
Corporation, 8150 Lawndale Avenue, Houston, Texas 77012, Attention: Secretary.
ALL STOCKHOLDERS ARE URGED TO MARK, SIGN AND SEND IN THEIR PROXIES WITHOUT
DELAY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL AND YOUR COOPERATION
WILL BE APPRECIATED.
By Order of the Board of Directors,
/s/ Munawar H. Hidayatallah
Munawar H. Hidayatallah
President, Chief Executive Officer and Chairman
September 28, 2001
61
INDEX TO FINANCIAL STATEMENTS
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Unaudited Summary Pro Forma Combined Condensed Financial Information F-3
Pro Forma Consolidated Statement of Operations - Year Ended December 31, 2000 F-4
Pro Forma Consolidated Statement of Operations - Six Months Ended June 30, 2001 F-5
Notes to Unaudited Pro Forma Consolidated Financial Statements F-6
ALLIS-CHALMERS CORPORATION
Independent Accountants' Report F-10
Consolidated Statements of Operations - Three Years ended December 31, 2000 F-11
Consolidated Statements of Financial Condition - Years ended December 31,
2000, 1999 and 1998 F-12
Consolidated Statements of Cash Flows - Three Years ended December 31, 2000 F-13
Notes to Financial Consolidated Statements F-14
MOUNTAIN AIR DRILLING SERVICE CO., INC.
Independent Auditor's Report F-26
Independent Auditors' Report F-27
Balance Sheet - December 31, 2000 F-28
Statements of Operations - Three Years ended December 31, 2000 F-29
Statements of Shareholders' Equity - Three Years ended December 31, 2000 F-30
Statements of Cash Flows - Three Years ended December 31, 2000 F-31
Notes to Consolidated Financial Statements F-32
OILQUIP RENTALS, INC.
Independent Auditors' Report F-36
Balance Sheet - December 31, 2000 F-37
Statement of Operations - For the Period February 4, 2000 through
December 31, 2000 F-38
Statement of Cash Flows - For the Period February 4, 2000 through
December 31, 2000 F-39
Statement of Stockholders' Equity - For the Period February 4, 2000
through December 31, 2000 F-40
Notes to Financial Statements F-41
ALLIS-CHALMERS CORPORATION (UNAUDITED)
Statement of Financial Condition - June 30, 2001 and 2000 F-48
Consolidated Statement of Operation - Six Months Ended June 30, 2001 and 2000 F-49
Consolidated Statement of Cash Flows - Six Months Ended June 30, 2001 and 2000 F-50
Notes to Consolidated Financial Statements F-52
Statement of Financial Condition - March 31, 2001 and 2000 F-59
Consolidated Statement of Operation - Quarter Ended March 31, 2001 and 2000 F-60
Consolidated Statement of Cash Flows - Quarter Ended March 31, 2001 and 2000 F-61
Notes to Consolidated Financial Statements F-62
MOUNTAIN AIR DRILLING SERVICE CO., INC. (UNAUDITED)
Statements of Operation - Period from January 1, 2001 to February 6, 2001 and
Quarter Ended March 31, 2000 F-66
Statements of Cash Flows - Period from January 1, 2001 to February 6, 2001 and
Quarter Ended March 31, 2000 F-67
Notes to Financial Statements F-68
F-1
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
OILQUIP RENTALS, INC. (UNAUDITED)
Consolidated Balance Sheet - March 31, 2001 F-69
Consolidated Statement of Operations - Quarter Ended March 31, 2001 F-70
Consolidated Statement of Cash Flows - Quarter Ended March 31, 2001 F-71
Notes to Consolidated Financial Statements F-73
F-2
UNAUDITED SUMMARY PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
Our summary unaudited pro forma combined condensed financial
information has been derived from the audited and unaudited financial statements
included elsewhere in this proxy statement. This data is not necessarily
indicative of the combined results of operations or financial position that
would have occurred if the merger had occurred at the beginning of each period
presented or on the dates indicated, nor is it necessarily indicative of our
future operating results or financial position. The data set forth below should
be read in conjunction with our (audited) financial statements (and unaudited
interim financial statements), including the notes thereto, which are included
elsewhere in this proxy statement or incorporated herein by reference.
The accompanying pro forma consolidated financial statements present
the historical financial information of Allis-Chalmers, as adjusted for the
merger with OilQuip, pursuant to the merger agreement. OilQuip was formed in
February 2000 to fund and acquire targets to operate as subsidiaries. In
February 2001, OilQuip, through its subsidiary MCA acquired the assets of
Mountain Air Drilling Service Co., Inc., and OilQuip is currently a holding
company for MCA. In the future, the operations of Allis-Chalmers' wholly-owned
subsidiary, Houston Dynamic Services, and OilQuip's wholly-owned subsidiary MCA
will comprise the continuing operations of Allis-Chalmers.
The accompanying pro forma consolidated statement of operations for the
year ended December 31, 2000 combines the historical financial information of
Allis-Chalmers for the year ended December 31, 2000 with the historical
financial information of Mountain Air for the year ended December 31, 2000 and
the historical financial information of OilQuip for the period from its
inception in February 2000 through December 31, 2000, as if the acquisition had
incurred at the beginning of 2000. The accompanying pro forma consolidated
statement of operations for the six months ended June 30, 2001 combines the
historical financial information of OilQuip with the historical financial
information of Allis-Chalmers for the six months ended June 30, 2001, and
Mountain Air for the period of January 1, 2001 through February 7, 2001, as if
the acquisition had occurred at January 1, 2001.
The pro forma consolidated financial statements have been prepared by
management, based on the historical financial statements of Allis-Chalmers,
OilQuip and Mountain Air. These pro forma consolidated financial statements may
not be indicative of the results that actually would have occurred if the
combination had been in effect on the dates indicated or which may be obtained
in the future.
F-3
ALLIS-CHALMERS CONSOLIDATED
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 2000
(EXCEPT FOR OILQUIP FOR WHICH THE PERIOD IS FEBRUARY 9, 2000 TO DECEMBER 31, 2000)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
OILQUIP MOUNTAIN OILQUIP PRO ALLIS- PRO FORMA
RENTALS AIR DRILLING ADJUSTMENTS FORMA TOTAL CHALMERS ADJUSTMENTS TOTAL
------- ------------ ----------- ----------- ------------ ----------- ---------
Revenues $-- $5,692 $-- $5,692 $4,552 $-- $10,244
Cost of Revenues -- 2,689 923 (4)(5) 3,612 3,315 139 (9) 7,066
------- ------------ ----------- ----------- ------------ ----------- ---------
Gross Profit -- 3,003 (923) 2,080 1,237 (139) 3,178
General and Administrative Expenses 627 613 -- 1,240 1,413 2,653
Amortization -- -- 156 (6) 156 -- 153 (9) 309
------- ------------ ----------- ----------- ------------ ----------- ---------
Income (Loss) from Operations (627) 2,390 (1,079) 684 (176) (292) 216
Other Income (Expense)
Interest Income -- 21 -- 21 8 29
Interest Expense -- -- (868)(7) (868) (38) (906)
Miscellaneous Income -- 2 -- 2 17 19
------- ------------ ----------- ----------- ------------ ----------- ---------
Income (Loss) before Income Tax (627) 2,413 (1,947)(8) (161) (189) (292) (642)
Provision for Income Taxes -- -- (3) 33 (8) 33 -- (1)(2) -- 33
------- ------------ ----------- ----------- ------------ ----------- ---------
Net Income (Loss) $(627) $2,413 $(1,980) $(194) $(189) $(292) $(675)
======= ============ =========== =========== ============ =========== =========
Basic and Diluted Earnings (Loss)
per Share $(0.12) $(0.06)
============ =========
Weighted Average Shares Outstanding
Basic and Diluted 1,588,128 11,588,128
============ =========
*See notes to unaudited pro forma combined consolidated
F-4
ALLIS CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
AS OF JUNE 30, 2001
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
OILQUIP MOUNTAIN AIR OILQUIP PRO ALLIS- PRO FORMA
RENTALS DRILLING(11) ADJUSTMENTS FORMA TOTAL CHALMERS ADJUSTMENTS TOTAL
--------- ------------ -------------- ----------- ----------- ------------- -------------
Revenues $1,947 $493 $-- $2,440 $2,559 $-- $4,999
Cost of Revenues 1,374 214 120 (4)(5) 1,708 1,790 30 (9) 3,528
--------- ------------ -------------- ----------- ----------- ------------- -------------
Gross Profit 573 279 (120) 732 769 (30) 1,471
General and Administrative Expenses 600 165 -- 765 1,303 2,068
Amortization 60 -- 15 (6) 75 30 55 (9) 160
--------- ------------ -------------- ----------- ----------- ------------- -------------
Income (Loss) from Operations (87) 114 (135) (108) (564) (85) (757)
Other Income (Expense)
Interest Income 1 -- -- 1 3 4
Interest Expense (347) -- (87)(7) (434) (19) (453)
Miscellaneous Income 2 -- -- 2 66,876 (10) (66,876) (10) 2
--------- ------------ -------------- ----------- ----------- ------------- -------------
Income (Loss) before Income Tax (431) 114 (222) (539) 66,296 (66,961) (1,204)
Provision for Income Taxes -- -- -- -- -- -- --
--------- ------------ -------------- ----------- ----------- ------------- -------------
Net Income (Loss) $(431) $114 $(222) $(539) $66,296 $(66,961) $(1,204)
========= ============ ============== =========== =========== ============= =============
Basic and Diluted Earnings (Loss)
per Share $(0.10)
=============
Weighted Average Shares Outstanding
Basic and Diluted 11,588,128
=============
F-5
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying pro forma consolidated financial statements are presented to
reflect the merger of OilQuip and Allis-Chalmers, accounted for as a reverse
acquisition, with the pre-merger operation of Allis-Chalmers and OilQuip
becoming the ongoing operations of the combined entities.
In February 2001, OilQuip, through its subsidiary Mountain Compressed Air, Inc.
("MCA"), acquired the assets of Mountain Air Drilling Service Co., Inc. OilQuip
is currently a holding company for MCA.
The accompanying pro forma consolidated statements of operations combines the
historical operations of Allis-Chalmers, OilQuip and Mountain Air Drilling
Service Co., Inc. for the year ended December 31, 2000 and the six months ended
June 30, 2001 as if the acquisition had occurred at January 1 of each of the
periods presented.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. Currently, the Company is assessing but has not yet determined
how the adoption of SFAS 141 and SFAS 142 will impact its financial position and
results of operations.
F-6
NOTE 2 - PRO FORMA ADJUSTMENTS
(1) Allis-Chalmers emerged from Chapter 11 proceedings on October 31, 1988
under a Plan of Reorganization which was consummated on December 2,
1988. The Plan of Reorganization established the A-C Reorganization
Trust to settle claims and to make distributions to creditors and
certain shareholders. Allis-Chalmers transferred cash and certain other
property to the A-C Reorganization Trust on December 2, 1998. Payments
made by Allis-Chalmers to the A-C Reorganization Trust did not generate
tax deductions for Allis-Chalmers upon the transfer but generated
deductions for Allis-Chalmers as payments are made by the A-C
Reorganization Trust to holders of claims. Taxable loss of $921,000 was
included in 2000.
The Plan of Reorganization also created a trust to process and
liquidate product liability claims. Payments made by the A-C
Reorganization Trust to the product liability trust did not generate
current tax deductions for Allis-Chalmers. Future income and deductions
will be available to Allis-Chalmers as the product liability trust
earns interest on its investments and makes payments to liquidate
claims. Taxable income of $781,000 was included in 2000.
Allis-Chalmers believes the above-named trusts are grantor trusts and
therefore includes the income or loss of these trusts in
Allis-Chalmers' income or loss for tax purposes, resulting in an
adjustment of the tax basis of net operating and capital loss
carryforwards. The income or loss of these trusts is not included in
Allis-Chalmers' results of operations for financial reporting purposes.
(2) Tax carryforwards at December 31, 2000 are estimated to consist of net
operating losses of $319 million expiring 2001 through 2019, investment
tax credits of $16,000 expiring in 2001 and energy tax credits of
$141,000 expiring 2001 through 2002. We believe that in connection with
the merger Allis-Chalmers' retention of the net operating losses or tax
credits will be limited, if any.
(3) Mountain Air Drilling Service Co., Inc., effective January 1, 1988,
filed Articles of Incorporation and elected to be treated as a S
Corporation. No past provisions for income taxes were made as the
taxable income or loss of a S corporation is passed through to its
partnership/shareholders without being taxed at the entity level.
Effective with the merger, their income will be included in the tax
calculation.
(4) The equipment lease expense of certain assets acquired in the sale of
Mountain Air, which became part of a sale/leaseback to help finance the
acquisition. Concurrent with the acquisition, OilQuip, through its
wholly-owned subsidiary, MCA, sold a portion of the acquired assets to
Wells Fargo for $3,500,000 and leased back those assets. The lease term
is for 5 years, expiring on February 8, 2006, with monthly lease
payments during the term equaling $56,574. At the end of the term, the
lessee is entitled to purchase the equipment from Wells Fargo at a
price calculated at the lesser of fair market value or $700,000. In
accordance with Statement of Financial Accounting Standard No. 13, the
lease has been recorded as an operating lease.
F-7
(5) Additional depreciation expense on assets acquired and adjusted to fair
value from the purchase of certain assets of Mountain Air and
additional corporate administrative expenses.
(6) Amortization expense for goodwill and other intangibles, net, as a
result of the acquisition of certain assets of Mountain Air Drilling
Service Co., Inc. Goodwill is being amortized over 20 years.
(7) Interest costs as a result of the cost of the acquisition of certain
assets of Mountain Air Drilling Service Co., Inc.
o A term loan in the amount of $3,550,000 at 8%, interest payable
monthly, with quarterly principal payments of $147,916.67 due on
the last day of April, July, October and January. The maturity
date of the loan is February 7, 2004.
o A sellers note in the amount of $2,200,000 at 5.75% simple
interest. The principal and interest are due on February 6, 2004.
o Subordinated debt in the amount of $2,000,000 at 12% with
interest payable quarterly and principal due on January 31, 2004.
o Deferred financing costs are being amortized over 3 years, the
length of the term loan.
(8) Provisions for income taxes had Mountain Air Drilling operations and
OilQuip Rentals been part of Allis-Chalmers for the entire year ending
December 31, 2000. This includes state taxes of $33,000 and no federal
income taxes. Computation of the federal income tax indicates the
retention of only $1,077,000 of the tax carryforwards as noted in
footnote 2.
(9) For legal purposes, Allis-Chalmers acquired OilQuip, the parent company
of MCA. However, for accounting purposes OilQuip was treated as the
acquiring company in a reverse acquisition of Allis-Chalmers. As a
result the fixed assets, and goodwill and other intangibles of
Allis-Chalmers are increased by $2,515,000. Goodwill and other
intangibles are being amortized over 10 years and the fixed assets are
being depreciated over 10 years and the building over 20 years. The
total number of outstanding shares of Allis-Chalmers was 1,588,128 as
of the date the reverse acquisition was agreed to and announced. Such
shares were valued at $1.75 per share, based on the average value of
the shares in the month prior to the announcement of the transaction.
This indicates a purchase price of approximately $2,779,000. The assets
acquired and liabilities assumed were recorded at estimated fair values
as determined by management based on information currently available
and on current assumptions as to future operations. Allis-Chalmers has
obtained independent appraisals of the fair values of the acquired real
estate and property, plant and equipment. Allis-Chalmers has also
completed the review and determination of the fair values of the other
assets acquired and liabilities assumed. A summary of the assets
acquired and liabilities assumed in the reverse acquisition follows:
F-8
Estimated fair values
Assets acquired $3,196,000
Liabilities assumed (1,977,000)
Goodwill (amortized by the straight-line method
over 10 years) 1,560,000
-------------
Purchase price $2,779,000
(10) Upon termination of the Allis-Chalmers Consolidated Pension Plan (the
"Plan"), Allis-Chalmers and its subsidiaries incurred a liability to
the Pension Benefit Guaranty Company (the "PBGC") for an amount equal
to the Plan's unfunded benefit liabilities, which, together with the
Plan's accumulated funding deficiencies, totaled approximately $67.9
million (together, the "PBGC Liability"). Effective March 31, 1999,
Allis-Chalmers issued 585,100 shares of its common stock to the PBGC,
reducing the pension liability by the estimated fair market value of
the shares to $66.9 million. In September 1997, Allis-Chalmers and the
PBGC entered into an agreement in principle for the settlement of the
PBGC Liability, which detailed certain events (each, a "Release Event")
that would need to occur in order to satisfy and discharge the PBGC
Liability. The merger with OilQuip constituted a Release Event, which
satisfied and discharged the PBGC Liability. Allis-Chalmers recorded
other income as a result of the merger. For a more detailed
description, please see Allis-Chalmers Note 2--Post Retirement
Obligation--Pension Plan.
(11) Certain assets of Mountain Air Drilling Service Co., Inc. were acquired
on February 7, 2001 by MCA, which is a subsidiary of OilQuip. Mountain
Air Drilling Service Co., Inc.'s operational data is for the period
January 1, 2001 through February 6, 2001.
F-9
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and
Shareholders of Allis-Chalmers Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Allis-Chalmers Corporation and its subsidiaries at December 31, 2000
and 1999,and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company's
application for a distress termination of the Allis-Chalmers Consolidated
Pension Plan (the "Consolidated Plan") was approved by the Pension Benefit
Guaranty Corporation ("PBGC") on September 30, 1997. At such date, the PBGC
became the trustee of the Consolidated Plan and the Company and its subsidiaries
incurred an estimated liability to the PBGC for unfunded benefit liabilities and
accumulated funding deficiencies totaling approximately $68 million. Effective
March 31, 1999, the Company issued 585,100 shares to the PBGC reducing the
pension liability by the estimated fair market value of the shares to
approximately $67 million. The Company does not have the financial resources to
fund this liability to the PBGC. This matter raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to this matter are described in Note 9 to the consolidated financial statements.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
March 9, 2001
F-10
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
STATEMENT OF OPERATIONS
Years Ended December 31
-----------------------
(In thousands, except per share)
-----------------------------
2000 1999 1998
---- ---- ----
Sales $4,552 $4,370 $5,021
Cost of sales 3,315 3,312 3,530
------- ------- -------
Gross Margin 1,237 1,058 1,491
Marketing and administrative expense 1,413 1,546 1,689
------- ------- -------
Loss from Operations (176) (488) (198)
Other income (expense):
Interest income 8 7 33
Interest expense (38) (34) (50)
Other (Note 11, 9) 17 402 833
------- ------- -------
Net Income (Loss) $ (189) $ (113) $ 618
======= ======= =======
Net Income (Loss) per Common Share $ (.12) $ (.08) $ .62
(Basic and Diluted)
======= ======= =======
STATEMENT OF ACCUMULATED DEFICIT
Years Ended December 31
-----------------------
2000 1999 1998
---- ---- ----
(In thousands)
Accumulated deficit beginning of year $(75,786) $(75,673) $(76,291)
Net income (loss) (189) (113) 618
--------- --------- ---------
Accumulated deficit end of year $(75,975) $(75,786) $(75,673)
========= ========= =========
The accompanying Notes are an integral part of the Financial Statements
F-11
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
STATEMENT OF FINANCIAL CONDITION
December 31,
---------------------------------
2000 1999
---------- ----------
(In thousands, except share data)
Assets
Cash and cash equivalents $358 $501
Trade receivables, net (Note 3) 549 570
Inventories, net 122 157
Other current assets 44 66
---------- ----------
Total Current Assets 1,073 1,294
Net property, plant and equipment (Note 4) 1,055 1,170
---------- ----------
Total Assets $2,128 $2,464
========== ==========
Liabilities and Shareholders' Deficit
Current maturities of long-term debt $212 $60
Trade accounts payable 208 461
Accrued employee benefits 143 120
Accrued pension liability (Note 9) 66,877 66,877
Other current liabilities 106 281
---------- ----------
Total Current Liabilities 67,546 67,799
Accrued postretirement benefit obligations
(Note 9) 889 927
Long-term debt (Note 6) 337 193
Commitments and contingent liabilities
(Note 10) - -- --
Shareholders' deficit (Note 7)
Common stock ($.15 par value,
authorized 2,000,000 shares,
outstanding 1,588,128 at December 238 238
31, 2000 and December 31, 1999) 9,093 9,093
Capital in excess of par value
Accumulated deficit (accumulated deficit of
$424,208 eliminated on December 2,
1988) (75,975) (75,786)
---------- ----------
Total Shareholders' Deficit (66,644) (66,455)
---------- ----------
Total Liabilities and Shareholders' Deficit $2,128 $2,464
========== ==========
The accompanying Notes are an integral part of the Financial Statements.
F-12
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
Years Ended December 31
------------------------------------------------
2000 1999 1998
----------- ------------ ------------
(In thousands, except share data)
Cash flows from operating activities:
Net (loss) income $(189) $(113) $618
Adjustments to reconcile net (loss) income to net cash
provided (used) by operating activities:
Depreciation 150 165 149
Notes payable issued for director compensation, 337 0 0
including interest payable in-kind
Gain on sale of equipment
Changes in working capital: 0 (2) 0
Decrease (increase) in accounts receivable 21 226 (113)
Decrease (increase) in inventories 35 (30) (26)
Decrease in other current assets 22 46 9
(Decrease) increase in accounts payable (253) 170 72
(Decrease) increase in other current liabilities (152) (66) 60
Decrease in accrued pension liability 0 0 (900)
Other (38) (54) (9)
----------- ------------ ------------
Net cash provided (used) by operating activities (67) 342 (140)
Cash flows from investing activities:
Capital expenditures
Proceeds from sale of equipment (7) (21) (353)
Net cash used by investing 0 16 3
----------- ------------ ------------
activities
(7) (5) (350)
Cash flows from financing activities:
Net proceeds from issuance of
long-term debt
Payment of long-term debt 0 0 66
(69) (59) (52)
----------- ------------ ------------
Net cash provided (used) by (69) (59) 14
financing activities
Net increase (decrease) in cash and cash equivalents (143) 278 (476)
Cash and cash equivalents at beginning of year 501 223 699
----------- ------------ ------------
Cash and cash equivalents at end of year $358 $501 $223
=========== ============ ============
Supplemental information - interest paid $38 $34 $50
=========== ============ ============
Noncash investing and financing activities:
Purchase of equipment under capital lease obligation $28 $29 $0
=========== ============ ============
Issuance of common stock in partial settlement of accrued
pension liability $0 $1,024 $0
=========== ============ ============
Issuance of notes payable for Director compensation $325 $0 $0
=========== ============ ============
The accompanying Notes are an integral part of the Financial Statements.
F-13
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. EMERGENCE FROM CHAPTER 11
Allis-Chalmers Corporation ("Allis-Chalmers") emerged from Chapter 11
proceedings on October 31, 1988 under a plan of reorganization which was
consummated on December 2, 1988. Allis-Chalmers was thereby discharged of all
debts that arose before confirmation of its First Amended and Restated Joint
Plan of Reorganization (Plan of Reorganization), and all of its capital stock
was cancelled and made eligible for exchange for shares of common stock of the
reorganized company (Common Stock). Claims asserted against Allis-Chalmers and
allowed by the Bankruptcy Court beyond those recorded prior to the consummation
date amounted to approximately $483 million. Such amounts were subsequently
recorded by Allis-Chalmers in 1988. Because total recorded liabilities
discharged at consummation exceeded the book value of assets and common stock
distributed to creditors and the various trusts at that date, extraordinary
income of $388.1 million was recorded. See the Plan of Reorganization and the
First Amended Disclosure Statement dated September 14, 1988 for additional
information regarding distributions to holders of claims and interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Allis-Chalmers through its wholly-owned subsidiary, Houston Dynamic
Service, Inc., services and repairs various types of mechanical equipment,
including compressors, pumps, turbines, engines, heat exchangers, centrifuges,
rollers, gears, valves, blowers, kilns, crushers and mills.
Principles of Consolidation
The consolidated financial statements include the accounts of
Allis-Chalmers and its subsidiaries. All significant intercompany transactions
have been eliminated.
Revenue Recognition.
During the fourth quarter of 2000, Allis-Chalmers adopted Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". The adoption of SAB 101 did not have a significant impact on
revenue recognized by Allis-Chalmers.
Fair Value of Financial Instruments
The carrying amounts in the Statement of Financial Condition for cash
and cash equivalents, trade receivables, trade accounts payable, and long-term
debt approximate fair market value.
F-14
Inventories
Inventories are stated at the lower of cost, determined by the
first-in, first-out method, or market.
Properties and Depreciation
Plant and equipment used in the business are stated at cost and
depreciated on the straight-line basis over the estimated useful lives of the
assets which generally range from 40 years for buildings, 3 to 12 years for
machinery and equipment and 3 to 12 years for tools, patterns, furniture and
fixtures. Maintenance and repairs are expensed as incurred. Expenditures which
significantly increase asset values or extend useful lives are capitalized.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount may not be
recoverable. Measurement of any impairment losses are recognized based on the
estimated fair value of the asset.
Income Taxes
Deferred income taxes are determined on the liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109 (See
Note 5).
Statement of Cash Flows
For purposes of the Statement of Cash Flows, Allis-Chalmers considers
all highly liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Major Customers
Entergy accounted for 25% of sales and Amoco Chemical 14% of sales in
2000. In 1999, Entergy accounted for 13% of total sales and in 1998, Amoco
Chemical accounted for 24% of total sales.
New Accounting Standards
On June 29, 2001, the Financial Accounting Standards Board (FASB) voted
in favor of FASB Statement No. 142 (FAS 142), "Goodwill and Other Tangible
Assets." FASB expects to release FAS 142 in the last half of July 2001. FAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach. Upon adoption of FAS 142,
F-15
goodwill will be tested at the reporting unit annually and whenever events or
circumstances occur indicating that goodwill might be impaired. Amortization of
goodwill, including goodwill recorded in past business combinations, will cease.
The adoption date for the Company will be January 1, 2002. The Company has not
yet determined what the impact of FAS 142 will be on its results of operations
and financial position.
NOTE 3. TRADE RECEIVABLES
December 31,
---------------------------
2000 1999
---------- ----------
(thousands)
Trade accounts receivable $569 $692
Allowance for doubtful receivables (20) (122)
---------- ----------
$549 $570
========== ==========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
December 31,
---------------------------
2000 1999
---------- ----------
(thousands)
Land and buildings $545 $545
Machinery and equipment 1,575 1,550
Tools, patterns, furniture, fixtures and
leasehold improvements 731 721
---------- ----------
2,851 2,816
Accumulated depreciation (1,796) (1,646)
---------- ----------
$1,055 1,170
========== ==========
NOTE 5. INCOME TAXES
Temporary differences are differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. A valuation allowance is established for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.
F-16
The following table depicts the temporary differences as of December
31, 2000 and 1999:
2000 1999
---------- ----------
(millions)
Net future tax deductible items $35 $35
Net operating loss carryforwards and 112 123
other tax credits
Valuation allowance (147) (158)
---------- ----------
Net deferred taxes $ - $-
========== ==========
Net future tax deductible items relate primarily to estimated future
bankruptcy claim payments to be made by Allis-Chalmers' two grantor trusts.
Gross deferred tax liabilities at December 31, 2000 and 1999 are not material.
The Plan of Reorganization established the A-C Reorganization Trust to
settle claims and to make distributions to creditors and certain shareholders.
Allis-Chalmers transferred cash and certain other property to the A-C
Reorganization Trust on December 2, 1988. Payments made by Allis-Chalmers to the
A-C Reorganization Trust did not generate tax deductions for Allis-Chalmers upon
the transfer but generate deductions for Allis-Chalmers as payments are made by
the A-C Reorganization Trust to holders of claims.
The Plan of Reorganization also created a trust to process and
liquidate product liability claims. Payments made by the A-C Reorganization
Trust to the product liability trust did not generate current tax deductions for
Allis-Chalmers. Future deductions will be available to Allis-Chalmers as the
product liability trust makes payments to liquidate claims.
Allis-Chalmers believes the above-named trusts are grantor trusts and
therefore includes the income or loss of these trusts in Allis-Chalmers' income
or loss for tax purposes, resulting in an adjustment of the tax basis of net
operating and capital loss carry forwards. The income or loss of these trusts is
not included in Allis-Chalmers' results of operations for financial reporting
purposes.
Tax carryforwards at December 31, 2000 are estimated to consist of net
operating losses of $319 million expiring 2001 through 2019, investment tax
credits of $16,000 expiring in 2001 and energy tax credits of $141,000 expiring
2001 through 2002.
During 1990, Allis-Chalmers initiated litigation against the Internal
Revenue Service ("IRS") in the United States Bankruptcy Court for the Southern
District of New York, challenging the validity and retroactive applicability of
proposed regulations issued by the IRS on August 13, 1990. On January 2, 1992
the IRS issued final regulations under Sections 269 and 382 of the Internal
Revenue Code of 1986 relating to the use of net operating loss carryforwards
following corporate reorganizations under the Bankruptcy Code.
Following issuance of the final regulations Allis-Chalmers withdrew its
retroactivity challenge because the final regulations were made retroactive only
to August 14, 1990 and are
F-17
not applicable to a plan of reorganization that was completed before then.
Allis-Chalmers' Plan of Reorganization was consummated on December 2, 1988.
Allis-Chalmers, however, continued to challenge the validity of other provisions
of the regulations.
On June 8, 1992, the Bankruptcy Court issued a decision denying
Allis-Chalmers' motion for a judgment against the IRS with respect to the
application of Section269 of the IRS Code to Allis-Chalmers. The Court also
granted the IRS's motion to dismiss Allis-Chalmers' complaint challenging the
regulations. The Court entered judgment pursuant to its decision on June 29,
1992 and, consistent with the advice of its counsel, Allis-Chalmers decided not
to appeal that judgment.
Although Allis-Chalmers was unable to obtain a judgment that would have
prevented the IRS from applying Section 269 to Allis-Chalmers, the Court's
ruling leaves Allis-Chalmers in substantially the same position it was in prior
to issuance of the final regulations. The possibility of an IRS challenge under
Section 269 of the Internal Revenue Code to Allis-Chalmers' use of its
pre-petition net operating loss carryforwards has always existed and, in light
of the Court's ruling, that possibility continues to exist.
The Court, however, stated that, should the IRS ever seek to use its
new Section 269 regulations to limit Allis-Chalmers' use of its net operating
loss carryforwards, nothing in its opinion would prejudice Allis-Chalmers' right
to defend itself by using the Court's confirmation finding that the primary
purpose of Allis-Chalmers' Plan of Reorganization was not tax avoidance. While
Allis-Chalmers' common stock is subject to trading restrictions which are
designed to maximize the likelihood of preserving its net operating loss
carryforwards, a change in ownership of Allis-Chalmers could also limit the use
of its net operating loss carryforwards.
NOTE 6. LONG-TERM DEBT
December 31,
2000 1999
-------- --------
(thousands)
Notes payable to certain current and former Directors $337 $0
Real estate loan 173 203
Capital lease obligations 39 50
-------- --------
549 253
Less amounts classified as current 212 60
-------- --------
$337 $193
======== ========
During March 2000, Allis-Chalmers' Board of Directors approved an
arrangement to compensate former and continuing Directors who had served from
1989 to March 31,1999 without compensation. Allis-Chalmers issued promissory
notes in the amount of $25,000 each to seven current or former directors and
$150,000 to John T. Grigsby, Jr., a former director and
F-18
current Executive Vice President and Chief Financial Officer. The notes bear
interest, payable in-kind, at five percent (5%) and are due March 28, 2005,
however, may be prepaid at any time at the discretion of Allis-Chalmers. In
addition, the notes are canceled in the event of a subsequent bankruptcy of
Allis-Chalmers.
The real estate loan relates to the 1990 purchase of the land and
building in Houston, Texas which had previously been leased by HDS. In August
1996, HDS refinanced this loan which is required to be repaid in monthly
installments of $3,278 through August 20, 2001 when the remaining unpaid balance
is due. At December 31, 2000 and 1999, the interest rate on the loan was 11.5%
and 10.5%, respectively. The rate will be adjusted during the term of the loan
in accordance with increases or decreases in the prime rate. The loan is
collateralized by the HDS facility, (having a net book value of $421,000 at
December 31, 2000) and Allis-Chalmers' guaranty.
Obligations under capital lease arrangements totaled $39,000 and
$50,000 at December 31, 2000 and 1999, respectively.
NOTE 7. SHAREHOLDERS' DEFICIT
During 1999, Allis-Chalmers issued 585,100 shares of common stock to
the PBGC (See Note 9). This transaction was recorded as an increase in common
stock and capital in excess of par value of $86,000 and $938,000, respectively,
and a reduction of the accrued pension liability of $1,024,000.
NOTE 8. LONG-TERM STOCK INCENTIVE PLAN
Allis-Chalmers' Long-Term Stock Incentive Plan (1989) provides for the
grant of stock options, stock appreciation rights, performance shares,
restricted stock, restricted stock units and other stock-based awards. Under the
plan the maximum number of shares which may be granted with respect to
stock-based awards is 50,000. Options may be granted at prices equal to or not
less than the fair market value at date of grant, except that options to
purchase up to 13,333 shares may be granted at a price which is not less than
the fair market value on October 25, 1989, the date on which the plan was
approved by shareholders. Options are exercisable within a period not to exceed
10 years from date of grant. The plan also provides for the discretionary grant
of stock appreciation rights which allow the holder to receive, in cash or
shares of common stock, the difference between the exercise price and the fair
market value of the stock at the date of exercise. No stock options or stock
appreciation rights have been granted to date under this plan. As is discussed
in Note 11, Allis-Chalmers' Board of Directors granted 24,000 stock options
during 2000 which are not subject to this plan.
NOTE 9. PENSION AND POSTRETIREMENT BENEFIT OBLIGATIONS
Pensions
As of the date of the Chapter 11 filings in June 1987, Allis-Chalmers
sponsored 19 defined benefit plans providing pensions for substantially all U.S.
employees. The pension plan for U.S. salaried employees was capped and frozen
effective March 31, 1987, so there have been no further benefit accruals after
that date. As a result of divestitures during the Chapter 11
F-19
proceedings, eight active plans were transferred to the buyers of the
businesses, leaving Allis-Chalmers as sponsor of 11 plans, none of which
permitted additional benefit accruals. Effective January 1, 1989, the 11
remaining plans were consolidated into a single plan, the Allis-Chalmers
Consolidated Pension Plan (Consolidated Plan).
In 1994, Allis-Chalmers' independent pension actuaries changed the
assumptions for mortality and administrative expenses used to determine the
liabilities of the Consolidated Plan. Primarily as a result of the changes in
mortality assumptions to reflect decreased mortality rates of Allis-Chalmers'
retirees, the Consolidated Plan was underfunded on a present value basis. In the
first quarter of 1996, the Company made a required cash contribution to the
Consolidated Plan in the amount of $205,000. Allis-Chalmers did not, however,
have the financial resources to make the other required payments during 1996 and
1997. Given the inability of Allis-Chalmers to fund such obligations with its
current financial resources, in February 1997, Allis-Chalmers applied to the
Pension Benefit Guaranty Corporation ("PBGC") for a "distress" termination of
the Consolidated Plan under section 4041(c) of the Employee Retirement Income
Security Act of 1974, as amended (ERISA). The PBGC approved the distress
termination application in September 1997 and agreed to a plan termination date
of April 14, 1997. The PBGC became trustee of the terminated Consolidated Plan
on September 30, 1997.
Upon termination of the Consolidated Plan, Allis-Chalmers and its
subsidiaries incurred a liability to the PBGC for an amount equal to the
Consolidated Plan' s unfunded benefit liabilities. Allis-Chalmers and its
subsidiaries also have a liability to the PBGC, as trustee of the terminated
Consolidated Plan, for the outstanding balance of the Consolidated Plan's
accumulated funding deficiencies. As of September 30, 1997, the PBGC estimated
that the unfunded benefit liabilities and the accumulated funding deficiencies
(together, the "PBGC Liability") totaled approximately $67.9 million. Effective
March 31, 1999, the Company issued 585,100 shares of common stock reducing the
pension liability by the estimated fair market value of the shares to $66.9
million.
In September 1997, Allis-Chalmers and the PBGC entered into an
agreement in principle for the settlement of the PBGC Liability which required,
among other things, satisfactory resolution of Allis-Chalmers' tax obligations
with respect to the Consolidated Plan under Section 4971 of the Internal Revenue
Code of 1986, as amended (Code). Section 4971(a) of the Code imposes, for each
taxable year, a first-tier tax of 10% on the amount of the accumulated funding
deficiency under a plan like the Consolidated Plan. Section 4971(b) of the Code
imposes an additional, second-tier tax equal to 100% of such accumulated funding
deficiency if the deficiency is not "corrected" within a specified period.
Liability for the taxes imposed under section 4971 extends, jointly and
severally, to Allis-Chalmers and to its commonly-controlled subsidiary
corporations.
Prior to its termination, the Consolidated Plan had an accumulated
funding deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies
resulted in estimated first-tier taxes under Code section 4971(a) of
approximately $900,000. On July 16, 1998, Allis-Chalmers and the Internal
Revenue Service (IRS) reached an agreement in principal to settle
Allis-Chalmers' tax liability under Code Section 4971 for $75,000. Following
final IRS approval, payment of this amount was made on August 11, 1998 and a
gain of $825,000 was recorded as other income in the accompanying 1998 Statement
of Operations.
F-20
In June 1999, but effective as of March 31, 1999, Allis-Chalmers and
the PBGC entered into an agreement for the settlement of the PBGC Liability (the
"PBGC Agreement").
Pursuant to the terms of the PBGC Agreement, Allis-Chalmers issued
585,100 shares of its common stock to the PBGC, or 35% of the total number of
shares issued and outstanding on a fully-diluted basis, and Allis-Chalmers has a
right of first refusal with respect to the sale of the shares of common stock
owned by the PBGC. In conjunction with the share issuance, Allis-Chalmers
reduced the pension liability to the PBGC based on the estimated fair market
value of the shares issued on the effective date of March 31, 1999. In
accordance with the terms of the PBGC Agreement, Allis-Chalmers was required to
and has (i) decreased the size of the Board of Directors of Allis-Chalmers (the
Board) to seven members; (ii) caused a sufficient number of then current
directors of Allis-Chalmers to resign from the Board and all committees thereof;
and (iii) caused three designees of the PBGC, to be elected to the Board. The
PBGC has caused Allis-Chalmers to amend its By-laws(By-laws) to conform to the
terms of the PBGC Agreement. Furthermore, Allis-Chalmers agreed to pay the
PBGC's reasonable professional fees on the 90th day after a Release Event (as
hereinafter defined). During the term of the PBGC Agreement, Allis-Chalmers has
agreed not to issue or agree to issue any common stock of Allis-Chalmers or any
"common stock equivalent" for less than fair value(as determined by a majority
of the Board). Allis-Chalmers also agreed not to merge or consolidate with any
other entity or sell, transfer or convey more than 50% of its property or assets
without majority Board approval and agreed not to amend its Amended and Restated
Certificate of Incorporation (Certificate) or By-laws.
In order to satisfy and discharge the PBGC Liability, the PBGC
Agreement provides that Allis-Chalmers must either: (i) receive, in a single
transaction or in a series of related transactions, debt financing which makes
available to Allis-Chalmers at least $10 million of borrowings or (ii)
consummate an acquisition, in a single transaction or in a series of related
transactions, of assets and/or a business where the purchase price (including
funded debt assumed) is at least $10 million (Release Event). Allis-Chalmers
continues to pursue various strategic alternatives to facilitate the
consummation of a Release Event. If the 585,100 shares are disposed of by the
PBGC prior to a Release Event and the final satisfaction and discharge of the
PBGC Liability, the liability will be accreted by the estimated fair market
value, $1,024,000, of the shares issued to the PBGC.
In connection with the PBGC Agreement, and as additional consideration
for settling the PBGC Liability, the following agreements, each dated as of
March 31, 1999 were also entered into: (i) a Registration Rights Agreement
between Allis-Chalmers and the PBGC (the "Registration Rights Agreement"); and
(ii) a Lock-Up Agreement by and among Allis-Chalmers, the PBGC, AL-CH Company,
L.P., a Delaware limited partnership ("AL-CH"), Wells Fargo Bank, as trustee
under that certain Amended and Restated Retiree Health Trust Agreement for UAW
Retired Employees of Allis-Chalmers Corporation (the "UAW Trust"), and Firstar
Trust Company, as trustee under that certain Amended and Restated Retiree Health
Trust Agreement for Non-UAW Retired Employees of Allis-Chalmers Corporation (the
"Non-UAW Trust")(the "Lock-Up Agreement").
The Registration Rights Agreement grants each holder of Registrable
Shares (defined in the Registration Rights Agreement to basically mean the
shares of common stock issued to the
F-21
PBGC under the PBGC Agreement) the right to have their shares registered
pursuant to the Securities Act of 1933, as amended, on demand or incidental to a
registration statement being filed by Allis-Chalmers. In order to demand
registration of Registrable Shares, a request for registration by holders of not
less than 20% of the Registrable Shares is necessary. Allis-Chalmers may deny a
request for registration of such shares if Allis-Chalmers contemplates filing a
registration statement within 90 days of receipt of notice from the holders. The
Registration Rights Agreement also contains provisions that allow Allis-Chalmers
to postpone the filing of any registration statement for up to 180 days. The
Registration Rights Agreement contains indemnification language similar to that
usually contained in agreements of this kind.
The Lock-Up Agreement governs the transfer and disposition of shares of
Allis-Chalmers' common stock and the voting of such shares, as well as grants
the PBGC a right of sale of its shares prior to AL-CH, the UAW Trust and the
Non-UAW Trust.
Pursuant to the Lock-Up Agreement, unless the Board has terminated the
common stock transfer restrictions set forth in Article XIII of Allis-Chalmers'
Certificate, AL-CH, the UAW Trust and the Non-UAW Trust each agreed that, during
the period commencing on March 31, 1999 and ending on the third anniversary of
the Release Event, it will not, directly or indirectly, sell, transfer, assignor
dispose of any shares of Company stock it beneficially owns. Commencing with the
third anniversary of the Release Event and continuing until the fifth
anniversary of the Release Event, each of AL-CH, the UAW Trust and the Non-UAW
Trust agreed not to sell, transfer or dispose of any shares of Company stock
without first giving the PBGC an opportunity to sell all or any portion of the
shares of Company stock the PBGC owns. The foregoing right of the PBGC applies
to the sale of Company stock in a public offering or otherwise.
The Lock-Up Agreement also contains a voting component. During the term
of the Lock-Up Agreement, each party to the agreement agreed to vote, at any
meeting of Allis-Chalmers stockholders and in any written consent, all shares of
Company stock owned by it in favor of the election as directors of
Allis-Chalmers the persons nominated by the Nominating Committee of the Board
and to refrain from taking any action contrary to or inconsistent with such
obligation. During the term of the Lock-Up Agreement, each party to the
agreement further agreed not to vote its shares of Company stock or take any
other action to amend Allis-Chalmers' Certificate or By-laws in a manner that is
inconsistent with, or in breach of, the PBGC Agreement. Each party further
agreed that it will vote all of its shares (i) in favor of certain specified
amendments to Allis-Chalmers' Certificate, (ii) for the election of the persons
designated by the PBGC (each, a PBGC Director) to serve on the Board and (iii)
in favor of the election of Company directors who are committed to cause, and
who do cause, one PBGC Director to be appointed to the Nominating Committee of
the Board and one PBGC Director to be appointed as the Chairman of the
Compensation Committee of the Board.
Medical and Life
Pursuant to the Plan of Reorganization, Allis-Chalmers assumed the
contractual obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI
for 50% of the actual cost of medical and life insurance claims for a select
group of retirees (SMI Retirees) of the prior Simplicity Manufacturing Division
of Allis-Chalmers.
F-22
Net postretirement benefit expense for the years ended December 31,
2000, 1999 and 1998 included the following components (in thousands):
2000 1999 1998
------ ------ ------
Service cost $ - $ - $ -
Interest cost 32 41 53
Recognized actuarial gain (49) (37) (22)
------ ------ ------
Net periodic postretirement benefit cost $(17) $ 4 $ 31
====== ====== ======
The change in benefit obligation and plan assets and reconciliation of
funded status for the years ended December 31, 2000 and 1999 are as follows (in
thousands):
Change in APBO 2000 1999
-------- --------
Benefit obligation at beginning of year $ 464 $ 606
Interest cost 32 41
Actuarial gain (18) (125)
Benefits paid (22) (58)
-------- --------
Benefit obligation at end of year
$ 456 $ 464
======== ========
Change in Plan Assets
Fair value of plan assets at beginning of year $ - $ -
Employer contribution 22 58
Benefits paid (22) (58)
-------- --------
Fair value of plan assets at end of year $ - $ -
======== ========
Reconciliation of Funded Status Benefit obligation at $(456) $(464)
end of year
Fair value of plan assets at end of year - -
-------- --------
Funded status (456) (464)
Unrecognized net actuarial gain (433) (463)
-------- --------
Accrued Benefit Cost $(889) $(927)
======== ========
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was assumed to be 7.5% for 2001.
The assumed rate decreases each year until an ultimate rate of 5.0% is reached
at December31, 2006. The health care cost trend rate has a significant effect on
the amounts reported. For example, a one percentage point increase in the
healthcare cost trend rate would increase the accumulated postretirement benefit
obligation by approximately $24,000 at December 31, 2000. The discount rate used
in
F-23
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 2000 and 7.25% at December 31, 1999.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
Substantially all litigation proceedings pending against Allis-Chalmers
were resolved pursuant to emergence from the Chapter 11 proceedings in 1988.
Various loans, lease agreements and other commitments and contractual
obligations of Allis-Chalmers were also satisfied pursuant to the Plan of
Reorganization. Allis-Chalmers knows of no significant pre-Plan of
Reorganization lawsuits presently pending against it or its subsidiaries which
have not been assumed by the various trusts or other entities.
Allis-Chalmers is a party to litigation matters and claims, which are
normal in the course of its operations, and, while the results of litigation and
claims cannot be predicted with certainty, management believes that the final
outcome of such matters will not have a material adverse effect on
Allis-Chalmers' consolidated financial position.
Environmental Matters
The Environmental Protection Agency ("EPA") and certain state
environmental protection agencies have requested information in connection with
several potential hazardous waste disposal sites in which products manufactured
by Allis-Chalmers before consummation of the Plan of Reorganization were
disposed. The EPA has claimed that Allis-Chalmers is liable for cleanup costs
associated with several additional sites. In addition, certain third parties
have asserted that Allis-Chalmers is liable for cleanup costs or associated EPA
fines in connection with additional sites. In each instance the environmental
claims asserted against Allis-Chalmers involve its prebankruptcy operations.
Accordingly, Allis-Chalmers has taken the position that all cleanup costs or
other liabilities related to these sites were discharged in the bankruptcy. No
environmental claims have been asserted against Allis-Chalmers involving its
postbankruptcy operations.
Allis-Chalmers Consolidated Pension Plan
Contributions to the Consolidated Plan were required starting in 1996
due to a change in the mortality assumptions used in calculating the present
value of the pension benefits expected to be paid and the assumptions used in
calculating the future administrative expenses compared with the projections of
the mortality and administrative expense assumptions used in the Plan of
Reorganization for funding the Consolidated Plan. Contributions were projected
to be $2.5 million in 1996, then increasing to $3.1 million in 1997 and $8.1
million in 1998. After paying one installment of $205,000 on January 15, 1996,
Allis-Chalmers failed to make any subsequent payments. Allis-Chalmers' failure
to make required quarterly contributions starting in April 1996, resulted in the
filing of a lien by the PBGC against Allis-Chalmers. Given the inability of
Allis-Chalmers to fund such obligations with its current financial resources, in
February 1997, Allis-Chalmers applied to the PBGC for a "distress" termination
of the Consolidated Plan under section 4041(c) of ERISA. The PBGC approved the
distress termination application in September 1997 and agreed to a plan
termination date of April 14, 1997. The PBGC became trustee of the terminated
Consolidated Plan on September 30, 1997.
F-24
For additional information regarding the Consolidated Plan, see Note 9.
NOTE 11. RELATED PARTY TRANSACTIONS
As is discussed in Note 6, during 2000, Allis-Chalmers' Board of
Directors issued promissory notes totaling $325,000 as compensation to certain
current and former Directors. This transaction is reflected as marketing and
administrative expense of $325,000 in the accompanying 2000 Statement of
Operations. Allis-Chalmers' Board of Directors did not receive any compensation
for their services as executive officers of Allis-Chalmers for the period April
1,1999 through December 31, 2000.
In conjunction with the promissory notes issued to certain current and
former Directors, Allis-Chalmers' Board of Directors also granted stock options
to these same individuals. Options to purchase 24,000 shares of common stock
were granted with an exercise price of $2.75. These options vested immediately
and may be exercised any time prior to March 28, 2010. During 2000, no stock
options were exercised. No compensation expense has been recorded for these
options which were issued with an exercise price approximately equal to the fair
value of the common stock at the date of grant. These stock options were not
dilutive to Allis-Chalmers' net loss per share in 2000. Had compensation expense
for options granted during 2000 been determined based on option fair value at
the grant date, as prescribed by SFAS No. 123, "Accounting for Stock Based
Compensation", the effect on Allis-Chalmers' net loss during 2000 would not have
been material.
During 1999, Allis-Chalmers received payments totaling $400,000 as
reimbursement for expenditures Allis-Chalmers incurred in prior years on behalf
of the A-C Reorganization Trust. These payments are included as other income in
the accompanying Statement of Operations.
NOTE 12. QUARTERLY FINANCIAL DATA
(unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------- -------------------------- --------------------------- ---------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Sales $ 824 $1,052 $1,503 $1,598 $1,084 $1,249 $ 909 $ 894 $ 943 $1,221 $1,340 $1,326
Gross Margin 195 339 486 511 249 312 171 212 273 360 258 420
Net Income (Loss) (104) (57) 137 18 (137) (197) (123) (122) 680* 20 203 (2)
Per Common Share
(basic and
diluted) $(0.07) $(0.06) $0.14 $0.01 $(0.09) $(0.20) $(0.08) $(0.08) $0.68 $0.02 $0.13 $0.00
*Net income in the third quarter of 1998 included income of $825,000 as a result
of a $900,000 IRS liability settled for $75,000.
F-25
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mountain Air Drilling Service Co., Inc.
Grand Junction, Colorado
We have audited the accompanying balance sheet of Mountain Air Drilling Service
Co., Inc. as of December 31, 2000, and the related statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial portion of Mountain Air Drilling Service
Co., Inc. as of December 31, 2000, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounted principles.
WHEELER WASOFF, P.C.
Denver, Colorado
April 24, 2001
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Mountain Air Drilling Service Co., Inc.
Grand Junction, Colorado
We have audited the accompanying balance sheets of Mountain Air Drilling Service
Co., Inc. as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mountain Air Drilling Service
Co., Inc. as of December 31, 1999 and 1998, and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
Gordon, Hughes & Banks, LLP
Lakewood, Colorado
July 21, 2000
F-27
MOUNTAIN AIR DRILLING SERVICE CO., INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
2000 1999 1998
---- ---- ----
ASSETS
Current Assets
Cash $ 634 $ 502 $ 301
Accounts receivable - trade 610 452 720
Other current assets 40 127 31
-------- --------- ---------
Total Current Assets 1,284 1,081 1,052
Property and Equipment, net 1,430 1,584 1,500
-------- --------- ---------
Total Assets $ 2,714 $ 2,665 $ 2,552
======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 69 $ 244 $ 238
Accrued expenses 134 139 173
Deposits and other 100 - 16
-------- --------- ---------
Total Current Liabilities 303 383 427
-------- --------- ---------
SHAREHOLDERS' EQUITY
Common stock: no par value, 10,000 shares
Authorized; 2,000 shares issued and outstanding
(400,000 actual and 10,000,000 pro forma shares
issued and outstanding as restated for
recapitalization on May 9, 2001, see Note 5) 60 60 60
Additional paid in capital 1,835 1,835 1,835
Retained earnings 516 387 230
-------- --------- ---------
Total Shareholders' Equity 2,411 2,282 2,125
-------- --------- ---------
Total Liabilities and Shareholders' Equity $ 2,714 $ 2,665 $ 2,552
======== ========= =========
The accompanying notes are an integral part of the financial statements.
F-28
MOUNTAIN AIR DRILLING SERVICE CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Years Ended December 31,
------------------------
2000 1999 1998
---- ---- ----
Revenue
Equipment rental $ 2,761 $ 3,004 $ 3,182
Operator revenue 2,158 2,461 2,658
Supply sales 523 626 660
Subcontract revenue 191 301 104
Other revenue 59 37 153
---------- ---------- ----------
5,692 6,429 6,757
Cost of revenue 2,689 3,779 3,687
---------- ---------- ----------
Gross profit 3,003 2,650 3,070
General and administrative expenses 613 622 579
---------- ---------- ----------
Income from operations 2,390 2,028 2,491
---------- ---------- ----------
Other income (expense)
Interest income 21 8 -
Interest (expense) - (1) (14)
Miscellaneous income 2 2 2
---------- ---------- ----------
23 9 (12)
---------- ---------- ----------
Net income $ 2,413 $ 2,037 $ 2,479
========== ========== ==========
Net income per common share, basic and diluted $6.03 $5.09 $6.20
========== ========== ==========
Weighted average number of common shares
outstanding, basic and diluted 400,000 400,000 400,000
========== ========== ==========
Pro forma net income per common
share, basic and diluted $0.24 $0.20 $0.25
========== ========== ==========
Pro forma weighted average number of common
shares outstanding, basic and diluted 10,000,000 10,000,000 10,000,000
========== ========== ==========
The accompanying notes are an integral part of the financial statements.
F-29
MOUNTAIN AIR DRILLING SERVICE CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT FOR SHARES)
COMMON STOCK
ADDITIONAL
PARTNERSHIP PAID IN RETAINED
EQUITY SHARES AMOUNT CAPITAL EARNINGS
------ -------- ------ ------- --------
Balance, January 1, 1998 $1,895 - $- $-
Transfer partnership equity to common stock (1,895) 400,000 60 1,835 $-
Net income - - - - 2,479
Distributions - - - - (2,249)
------ ------- ------ ------- --------
Balance, December 31, 1998 - 400,000 60 1,835 230
Net Income - - - - 2,037
Distributions - - - - 1,880
------ ------- ------ ------- --------
Balance, December 31, 1999 - 400,000 60 1,835 387
Net Income - - - - 2,413
Distributions - - - - (2,284)
------ ------- ------ ------- --------
Balance, December 31, 2000 $- 400,000 60 1,835 $516
====== ======= ====== ======= ========
F-30
MOUNTAIN AIR DRILLING SERVICE CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net income $ 2,413 $2,037 $ 2,479
Adjustments to reconcile net income to cash
provided by operations
Depreciation 283 260 220
Changes in assets and liabilities
Decrease (increase) in accounts receivable (158) 267 (22)
Decrease (increase) in prepaid and other assets 87 (95) (10)
(Decrease) increase in accounts payable (175) 6 82
(Decrease) increase in accrued expenses (5) (34) 46
Increase in deposits 100 - -
-------- --------- ---------
Net cash flows provided by operating activities 2,545 2,441 2,795
-------- --------- ---------
Cash flows from investing activities
Purchase of property and equipment (129) (344) (389)
-------- --------- ---------
Net cash flows (used) by investing activities (129) (344) (389)
-------- --------- ---------
Cash flows from financing activities
Distributions paid in cash (2,284) (1,880) (2,249)
Proceeds from debt - - 143
Repayment of long term debt - (16) (174)
-------- --------- ---------
Net cash flows (used) by financing activities (2,284) (1,896) (2,280)
-------- --------- ---------
Net increase in cash 132 201 126
Cash, beginning of year 502 301 175
-------- --------- ---------
Cash, end of year $ 634 $ 502 $ 301
======== ========= =========
Cash paid in interest $ - $ 1 $ 14
======== ========= =========
The accompanying notes are an integral part of the financial statements.
F-31
MOUNTAIN AIR DRILLING SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Mountain Air Drilling Service Co., Inc. (Mountain Air) was formed in 1975 as a
Colorado general partnership to provide service to the drilling industry.
Effective January 1, 1998, Mountain Air filed Articles of Incorporation with the
State of Colorado and became an S Corporation.
Mountain Air provides the lease of equipment and manpower to the oil and gas
industry. Mountain Air's customers consist primarily of businesses with well
sites in Colorado, New Mexico, Utah, Nevada and Wyoming.
Property and Equipment
Property and equipment represents the cost of equipment in use in the operations
of Mountain Air.
Equipment in assembly represents the direct cost of components used in the
equipment being constructed and does not include any internal labor or
administrative costs. This equipment will be used in the normal operations of
Mountain Air and will be reclassified to field equipment and depreciated as it
is completed and placed in service.
Equipment not in service represents the cost of various parts and components
that have been purchased for use in field equipment as needed. These components
will be used in the normal operations of Mountain Air and will be reclassified
to field equipment and depreciated as they are added to operating equipment.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized. When property and equipment are sold or otherwise
disposed of, the asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations.
The cost of property and equipment currently in service is depreciated over the
estimated useful lives of the related assets, which range from three to ten
years. Depreciation is computed on the straight-line method for financial
reporting purposes. Depreciation expense charged to operations was $283,000,
$260,000, and $220,000 for the years ended December 31, 2000, 1999, and 1998,
respectively.
Income Taxes
Mountain Air was originally formed as a Colorado general partnership and
effective January 1, 1998, Mountain Air filed Articles of Incorporation and
elected to be treated as a S Corporation. The taxable income or loss of a
partnership and S Corporation is passed through to its
F-32
partners/shareholders without being taxed at the entity level. Accordingly, no
provision for income taxes has been made in the accompanying financial
statements.
Cash Equivalents
For the purpose of reporting cash flows, Mountain Air considers as cash
equivalents all highly liquid investments with a maturity of three months or
less at the time of purchase. On occasion, Mountain Air has cash in banks in
excess of federally insured amounts.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Advertising
Mountain Air has the policy of expensing nondirect-response advertising costs as
incurred. Total advertising costs charged to operations were $31,000, $44,000
and $95,000 during the years ended December 31, 2000, 1999, and 1998,
respectively.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2000 1999 1998
---- ---- ----
(in thousands)
Field equipment $ 2,865 $ 2,779 $ 2,463
Shop equipment 88 88 88
Vehicles and trucks 179 179 179
Office furniture and equipment 45 57 66
Equipment in assembly 63 63 106
Equipment not in service 685 630 568
-------- --------- ---------
3,925 3,796 3,470
Less accumulated depreciation (2,495) (2,212) (1,970)
-------- --------- ----------
$ 1,430 $ 1,584 $ 1,500
======== ========= =========
NOTE 3. RELATED PARTY TRANSACTIONS
Mountain Air leases the shop and administrative office space in Colorado from a
partnership whose partners are the stockholders of Mountain Air. The current
lease agreement requires a monthly rent payment of $8,500 and expires December
31, 2001. Rent expense charged to operations under the lease was $102,000,
$102,000, and $77,000 during the years ended December 31, 2000, 1999, and 1998,
respectively.
F-33
Mountain Air has financed the purchase of various vehicles with a partnership
whose partners are the stockholders of Mountain Air. Interest paid on these
obligations totaled $1,000 and $14,000 during the years ended December 31, 1999
and 1998, respectively. Notes related to these vehicles were paid off in March
1998 and July 1999.
Mountain Air paid salaries of $180,000 to its officers for 2000, 1999, and 1998.
Mountain Air incurred expenses on behalf of its officers of $47,000 and $59,000
for 2000 and 1999, respectively.
NOTE 4. LEASE COMMITMENTS
Shop and administrative office space in Colorado is leased under a commitment
with a related party and as described in Note 3.
Mountain Air is obligated under a lease agreement for shop and administrative
space in New Mexico on a month to month basis, currently at $500 per month; and
also leases field equipment on a month to month basis when required to perform
services for customers.
Minimum future lease payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2000 for each of the
next five years are:
Year ended December 31, 2001 $102,000
Rent expense charged to operations, including related party amounts, was
$108,000, $102,000 and $79,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 5. SHAREHOLDERS EQUITY
Mountain Air was originally formed as a Colorado general partnership and
effective January 1, 1998, Mountain Air filed Articles of Incorporation and
elected to be treated as an S Corporation. The income or loss of a partnership
and S Corporation is passed through to its partners/shareholders.
The equity and per share data has been presented so as to give effect to the
recapitalization of the Company, which occurred in the reverse acquisition of
Allis-Chalmers on May 9, 2001. Under the recapitalization, the original number
of shares outstanding of the formerly private company are considered to have
been exchanged for the 400,000 shares of Allis-Chalmers that were issued on the
date of the reverse acquisition to the owners of OilQuip Rentals, Inc. As a
result, the 400,000 shares are presented in place of the originally issued
shares of the private company. In addition, pro forma per share data is
presented that includes an additional 9,600,000 shares of Allis-Chalmers that
will be issued in the future after shareholder approval of the increase in the
maximum authorized number of shares of Allis-Chalmers.
NOTE 6. MAJOR CUSTOMERS
Mountain Air had equipment and manpower rental income from one customer,
Burlington Resources, which accounted for approximately 69.3%, 54.6% and 52.5%
of total revenue during the years ended December 31, 2000, 1999 and 1998,
respectively.
F-34
NOTE 7. FINANCIAL INSTRUMENTS
Fair Value
The carrying amount reported in the balance sheet for cash, accounts receivable,
prepaid expenses, accounts payable and accrued liabilities approximates fair
value because of the immediate or short-term maturity of these financial
instruments.
Concentration of Credit Risk
Statement of Financial Accounting Standards No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", requires disclosure of
significant concentration of credit risk regardless of the degree of such risk.
Mountain Air maintains its cash balances in one financial institution. The cash
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. Uninsured balances totaled approximately $530,000, $400,000, and
$200,000 as of December 31, 2000, 1999, and 1998, respectively. Mountain Air's
cash balances in the financial institution are covered by a sweep account
arrangement, with excess funds invested overnight. During the investment period,
the Federal Deposit Insurance Corporation does not insure the funds.
NOTE 8. SEGMENT REPORTING
Mountain Air has one reportable segment, the leasing of equipment and manpower
to the oil and gas industry. All revenues and assets of Mountain Air are
attributable to this segment.
NOTE 9. COMPREHENSIVE INCOME
There are no adjustments necessary to net income as presented in the
accompanying statements of operations to derive comprehensive income in
accordance with SFAS No. 130, "Reporting Comprehensive Income."
NOTE 10. RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current year
presentation.
NOTE 11. SALE OF BUSINESS
On February 6, 2001, Mountain Air completed the sale of certain assets pursuant
to an Asset Purchase Agreement with Mountain Compressed Air, Inc., a non-related
entity, for $12,200,000. As of December 31, 2000, Mountain Air had received a
deposit of $100,000 from the purchaser in contemplation of the sale, and an
additional $100,000 had been placed in escrow by the purchaser with a selling
agent. Subsequent to December 31, 2000, the escrow was released directly to the
shareholders of Mountain Air.
F-35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
OilQuip Rentals, Inc. (A Development Stage Company)
Los Angeles, California
We have audited the accompanying balance sheet of OilQuip Rentals, Inc. (A
Development Stage Company) as of December 31, 2000 and the related statements of
operations, stockholders' equity and cash flows for the period from February 4,
2000 (Inception) to December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OilQuip Rentals, Inc. (A
Development Stage Company) as of December 31, 2000 and the results of its
operations and cash flows for the period from February 4, 2000 (Inception) to
December 31, 2000, in conformity with generally accepted accounting principles.
GORDON, HUGHES & BANKS, LLP
Englewood, Colorado
May 15, 2001
F-36
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS
Cash $ 4
Common stock subscribed 1,838
Other receivable 20
Due from related party 104
-------
Total current assets 1,966
Business acquisition costs 379
Deferred financing costs 15
-------
Total assets $ 2,360
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 12
-------
Total liabilities 12
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized and
9,875 shares issued and outstanding at December 31, 2000
(400,000 actual and 10,000,000 pro forma shares issued and
outstanding as restated for recapitalization on May 9, 2001,
see Note 4) 60
Additional paid in capital 2,915
(Deficit) accumulated during development stage (627)
-------
Total stockholders' equity 2,348
Total liabilities and stockholders' equity $ 2,360
=======
See accompanying summary of accounting policies and notes to the financial
statements.
F-37
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 4, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cumulative
During
Development
Stage
----------------------
Revenue $ -
Operating expenses:
Abandoned acquisition costs 244
General and administrative 383
----------------------
Total operating expenses 627
----------------------
Net (loss) $(627)
======================
Net (loss) per common share (basic and diluted) $(1.57)
======================
Weighed average number of common shares
outstanding, basic and diluted 400,000
======================
Pro forma net (loss) per common
share (basic and diluted) $(0.06)
======================
Pro forma weighted average number of common
shares outstanding, basic and diluted 10,000,000
======================
See accompanying summary of accounting policies and notes to the financial
statements.
F-38
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 4, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000
(IN THOUSANDS)
Cumulative
During
Development
Stage
----------------
Cash flows from operating activities:
Net (loss) $(627)
Adjustments to reconcile net (loss) to cash
provided by operating activities:
Abandoned acquisition costs 244
Contributed Services 250
Change in assets and liabilities: 538
(Increase) in other receivables (20)
Due from related party (104)
Increase in accounts payable 12
----------------
Net cash provided by operating activities 293
----------------
Cash flows from investing activities:
Business Acquisition costs (624)
----------------
Net cash (used) by investing activities (624)
----------------
Cash flows from financing activities:
Proceeds from issuance of common stock 350
Deferred financing costs (15)
----------------
Net cash provided by financing activities 335
----------------
Net increase in cash 4
Cash, beginning of period -
----------------
Cash, end of period $ 4
================
See accompanying summary of accounting policies and notes to he financial
statements.
F-39
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FEBRUARY 4, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000
Accumulated
(Deficit)
Common Stock Additional During the
------------ Paid-in Development
Shares Amount Capital Stage Total
Balances, February 4, 2000 (Inception) -- $-- $-- $-- $--
Issuance of common stock subscribed at 4,250 42 399,958 - 400,000
$94 per share
Issuance of common stock for conversion 1,000 10 249,990 - 250,000
of notes payable at $250 per share
Issuance of common stock for cash at 307 3 99,997 - 100,000
$326 per share
Issuance of common stock subscribed at 3,068 31 999,969 - 1,000,000
$326 per share
Issuance of common stock subscribed at 1,250 13 437,488 - 437,500
$350 per share
Contributed capital - - 788,106 - 788,106
Effect of Recapitalization on May 9, 2001
390,125 59,901 (59,901) - -
Net (loss) - - (627,295) (627,295)
------- ------- ---------- ---------- ----------
-
Balances, December 31, 2000 400,000 $60,000 $2,915,606 $(627,295) $2,348,311
======= ======= ========== ========== ==========
See accompanying summary of accounting policies and notes to the financial
statements.
F-40
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
Note 1 - Nature Of Business And Summary Of Significant Accounting Policies
Nature Of Business And Organization
OilQuip Rentals, Inc., a Delaware corporation (the "Company" or "OilQuip"), was
incorporated on February 4, 2000. During the period February 4, 2000 (Inception)
to December 31, 2000, the Company has been in the development stage. The
Company's activities since inception have consisted of developing its business
plan, raising capital and negotiating with potential business acquisition
targets. During the development stage, the Company has had no revenues and has
expensed general and administrative costs in the amount of $382,893 and
acquisition costs of $244,402 related to abandoned acquisition targets.
Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Cash And Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash or cash equivalents for the purpose of
presentation in the statement of cash flows.
Concentration Of Credit Risk And Financial Instruments
Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of
Information About Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", requires disclosure
of significant concentrations of credit risk regardless of the degree of such
risk. Financial instruments with significant credit risk include cash and
receivables.
The Company transacts its business with one financial institution. The amount on
deposit in that financial institution did not exceed the $100,000 federally
insured limit at December 31, 2000. Management believes that the financial
institution is financially sound.
Receivables at December 31, 2000 include common stock subscriptions receivable,
amounts due from a related party and a financing deposit, all of which have been
collected in 2001.
Business acquisition costs
The Company capitalizes direct costs and deposits associated with successful
business acquisitions and expenses acquisition costs for unsuccessful
acquisition efforts.
F-41
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
Deferred Financing Costs
Deferred financing costs are direct expenditures incurred to obtain credit
instruments from a bank. These costs will be amortized to interest expense over
the expected term of the related debt instruments after the instruments were
activated in February 2001. The amortization will be on a straight-line basis
since the principal is payable at the end of the debt term.
Income Taxes
The Company accounts for deferred income taxes in accordance with the liability
method as required by SFAS No. 109, "Accounting for Income Taxes." Deferred
income taxes are recognized for the tax consequences in future years for
differences between the tax bases of assets and liabilities and their financial
reporting amounts at the end of each period, based on enacted laws and statutory
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the expected realizable amount. The provision (benefit)
for income taxes consists of the current tax provision (benefit) and the change
during the period in deferred tax assets and liabilities. Any liability for
actual taxes to taxing authorities is recorded as income tax liability.
Impairment Of Long-Lived Assets
The Company adheres to the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
The Company reviews the carrying value of its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable through undiscounted net cash flows. Impairment is calculated based
on fair value of the asset, generally using net discounted cash flows. Any
long-lived assets to be disposed of are reported at the lower of the carrying
amount or fair value less estimated costs to sell.
Capital Structure
The Company utilizes SFAS No. 129, "Disclosure of Information about Capital
Structure", which requires companies to disclose all relevant information
regarding their capital structure.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income" requires the presentation and
disclosure of all changes in equity from non-owner sources as "Comprehensive
Income". The Company had no items of comprehensive income in the period from the
date of inception through December 31, 2000.
F-42
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
Stock Based Compensation
The Company follows Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" in accounting for stock based
compensation. Under APB No. 25, the Company recognizes no compensation expense
related to employee or director stock options unless options are granted with an
exercise price below fair value on the day of grant. SFAS No. 123, "Accounting
for Stock- Based Compensation" provides an alternative method of accounting for
stock-based compensation arrangements for employees and directors, based on fair
value of the stock-based compensation utilizing various assumptions regarding
the underlying attributes of the options and stock. Stock, options or warrants
issued to consultants and outsiders are recorded at fair value under SFAS No.
123. The Financial Accounting Standards Board encourages, but does not require,
entities to adopt the fair-value based method. The Company will continue its
accounting under APB No. 25 for employees and directors but uses the
disclosure-only provisions of SFAS No. 123 for any options or warrants issued to
employees and directors. No options or warrants have been granted or are
outstanding as of December 31, 2000.
Segments Of An Enterprise And Related Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" replaces the industry segment approach under previously issued
pronouncements with the management approach. The management approach designates
the internal organization that is used by management for allocating resources
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. At present, the Company only operates in one segment.
Pension And Other Post Retirement Benefits
SFAS No. 132, "Employers' Disclosures about Pension and Other Post Retirement
Benefits" requires certain disclosures about employers' pension and other post
retirement benefit plans and specifies the accounting and measurement or
recognition of those plans. SFAS No. 132 requires disclosure of information on
changes in the benefit obligations and fair values of the plan assets that
facilitates financial analysis. This standard currently has no impact on the
Company.
Derivative Instruments And Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Currently, as the Company has no derivative
instruments, the adoption of SFAS No. 133 has no impact on the Company's
financial condition or results of operations.
F-43
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
Mortgage Backed Securities Retained After The Securitization Of Mortgage Loans
By Mortgage Banking Enterprises
The Financial Accounting Standards Board recently issued SFAS No. 134,
"Accounting for Mortgage Backed Securities Retained after the Securitization of
Mortgage Loans Held by Mortgage Banking Enterprises". SFAS No. 134 establishes
new reporting standards for certain activities of mortgage banking enterprises.
The Company believes this statement has no impact on its financial statements.
Note 2 - Business Acquisition Costs
On June 6, 2000, the Company signed a letter of intent to purchase the business
and certain assets of Mountain Air Drilling Service Co., Inc. ("Mountain Air").
During 2000, a total of $200,000 was paid to secure the letter of intent to
purchase Mountain Air. The acquisition was completed in February 2001.
As of December 31, 2000, the Company has capitalized additional acquisition
expenses associated with the Mountain Air business and asset purchase. These
costs include due diligence expenses, audit fees and legal fees totaling
$179,529 incurred during 2000.
During 2000, the Company pursued two other business acquisition targets and
incurred acquisition expenses and paid deposits totaling $244,402. The
acquisition negotiations for these two targets have terminated and the Company
has expensed these costs.
Note 3 - Related Party Transactions
The President and majority stockholder of the Company advanced the Company a
total of $538,106 by paying expenses of the Company during 2000. Effective
December 31, 2000, the President and majority stockholder forgave the
outstanding balance and the amount was recorded as additional paid-in capital of
the Company.
As of December 31, 2000, the Company has paid personal expenses on behalf of the
President and majority stockholder of $104,640. The President and majority
stockholder repaid these amounts in January 2001.
Note 4 - Stockholders' Equity
During 2000, investors subscribed to 4,250 shares of common stock for $400,000
($94 per share), 3,068 shares of common stock for $1,000,000 ($326 per share)
and 1,250 shares of common stock for $437,500 ($350 per share). As of December
31, 2000, $1,837,500 in subscriptions receivable was outstanding. The entire
amount was received from the investors in cash in January and February 2001.
F-44
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
During 2000, the Company issued 1,000 shares of common stock for $250,000 ($250
per share)
During 2000, the Company recorded $250,000 in compensation expense for services
contributed by the Company's President and majority stockholder.
During 2000, the Company's President and majority stockholder advanced an
aggregate of $538,106 by paying corporate expenses on the Company's behalf. The
amount has been recorded as a contribution to the Company's capital.
The equity and per share data has been presented so as to give effect to the
recapitalization of the Company, which occurred in the reverse acquisition of
Allis-Chalmers on May 9, 2001. Under the recapitalization, the original number
of shares outstanding of the formerly private company are considered to have
been exchanged for the 400,000 shares of Allis-Chalmers that were issued on the
date of the reverse acquisition to the owners of OilQuip Rentals, Inc. As a
result, the 400,000 shares are presented in place of the originally issued
shares of the private company. In addition, pro forma per share data is
presented that includes an additional 9,600,000 shares of Allis-Chalmers that
will be issued in the future after shareholder approval of the increase in the
maximum authorized number of shares of Allis-Chalmers.
Note 5 - Lease Commitments
As of December 31, 2000, the Company has no lease commitments. The Company rents
office space on a month-to-month basis. There are no minimum future rental
commitments over the next five years. Rent expense was $12,445 for the period
ending December 31, 2000.
Note 6 - Income Taxes
There is no current or deferred tax expense for the period from February 4, 2000
(inception) to December 31, 2000 due to net losses from operations.
Deferred income tax assets and liabilities are recorded to reflect the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end. Deferred
income tax assets are recorded to reflect the tax consequences on future years
of income tax carryforward benefits, reduced by valuation allowance for future
benefit amounts not expected to be realized by the Company.
At December 31, 2000, the company's net deferred income tax asset is comprised
of the following:
Net operating loss benefit carryforward $ 128,360
Valuation allowance for the deferred tax asset (128,360)
---------
Net deferred income tax asset $ -
=========
F-45
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
As of December 31, 2000, the Company had an operating loss carryforward of
approximately $600,000. The operating loss carryforward expires 2020.
Note 7 - Subsequent Events
On January 25, 2001, OilQuip formed a subsidiary, Mountain Compressed Air, Inc.
("Mountain Compressed"), a Texas corporation. On February 6, 2001, Mountain
Compressed acquired the business and certain assets of Mountain Air, a private
company, for $10,000,000 (including the $200,000 deposit paid in 2000) in cash
and a $2,200,000 promissory note to the sellers (interest at 5 3/4 percent and
principal and interest due February 6, 2006). The acquisition was accounted for
by the purchase method of accounting. The assets acquired and liabilities
assumed were recorded at estimated fair values as determined by the Company's
management based on information currently available and on current assumptions
as to future operations. The Company has obtained preliminary independent
appraisals of the fair values of the acquired property, plant and equipment. The
Company also completed the review and determination of the fair values of the
other assets acquired and liabilities assumed. A summary of the assets acquired
and liabilities assumed in the acquisition follows:
Estimated fair values
Assets acquired $10,319,000
Liabilities assumed (741,000)
Goodwill (amortized by the straight-line method
over 20 years) 2,622,000
------------
Purchase price $12,200,000
In order to make the acquisition, the Company borrowed amounts from a bank under
two debt instruments: (1) a $3,550,000 term loan, 8% interest payable monthly,
quarterly principal payments of $147,917 and maturity on February 6, 2006 and
(2) a subordinated $2,000,000 note, interest at 13%, interest payable quarterly
and principal due January 31, 2004. In connection with the subordinated note,
Mountain Compressed issued warrants to the note holder for the purchase of
1,350,000 shares of Mountain Compressed common stock exercisable for five years
at $.01 per share. At December 31, 2000, Mountain Compressed had 8,030,000
shares outstanding and owned by OilQuip. The note holder has the right to
require Mountain Compressed to redeem the shares for up to $600,000 in cash in
five years.
In connection with the acquisition, Mountain Compressed also issued a warrant to
the outside acquisition consultants for the purchase of 620,000 shares of
Mountain Compressed common stock exercisable for five years at $.01 per share.
The transaction was valued at $200,000.
Mountain Compressed sold part of its assets it acquired from Mountain Air to a
leasing company for $3,500,000 and leased back those assets. The lease term is
for 5 years, expiring on February 8, 2006, with monthly lease payments during
the term equaling $56,574. At the end of the term,
F-46
OILQUIP RENTALS, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
the lessee is entitled to purchase the equipment from Wells Fargo at a price
calculated at the lesser of fair market value or $700,000. In accordance with
Statement of Financial Accounting Standard No. 13, the lease has been recorded
as an operating lease. The lease payments are as follows:
2001 $ 565,740
2002 678,888
2003 678,888
2004 678,888
2005 678,888
2006 113,148
----------
$3,394,440
==========
On May 9, 2001, OilQuip was acquired by Allis-Chalmers Corporation ("A-C"), a
public company. In the transaction, OilQuip stockholders will receive 1,000
shares of A-C common stock for each share of OilQuip common stock. In total,
approximately 10 million shares of A-C common stock will be exchanged for all of
the outstanding common stock of OilQuip. After the merger is complete, OilQuip
stockholders will own approximately 86% of the common stock of A-C. For
accounting purposes, the merger will be recorded as a reverse acquisition
whereby OilQuip will be treated as the acquirer. Since A-C is an operating
company, OilQuip will record the transaction under purchase accounting with the
recognition of goodwill. The total number of outstanding shares of A-C was
1,588,128 as of the date the reverse acquisition was agreed to and announced.
Such shares were valued at $1.75 per share, based on the average value of the
shares in the month prior to the announcement of the transaction. This indicates
a purchase price of approximately $2,779,000. The assets acquired and
liabilities assumed were recorded at estimated fair values as determined by
management based on information currently available and on current assumptions
as to future operations. A-C has obtained independent appraisals of the fair
values of the acquired real estate and property, plant and equipment. A-C has
also completed the review and determination of the fair values of the other
assets acquired and liabilities assumed. A summary of the assets acquired and
liabilities assumed in the reverse acquisition follows:
Estimated fair values
Assets acquired $3,196,000
Liabilities assumed (1,977,000)
Goodwill (amortized by the straight-line method
over 10 years) 1,560,000
----------
Purchase price $2,779,000
F-47
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF FINANCIAL CONDITION
June 30, December 31,
2001 2000
-------- ------------
(thousands)
Assets
Cash and cash equivalents $ 228 $ 4
Trade receivables, net 1,616 -
Inventories, net 80 -
Common stock subscribed - 1,838
Due from related party 80 104
Other current assets 823 20
--------- ---------
Total Current Assets 2,827 1,966
Net property, plant and equipment 8,289
Goodwill and other intangibles, net 4,329 -
Other assets - 394
--------- ---------
Total Assets $ 15,445 $ 2,360
========= =========
Liabilities and Shareholders' Equity
Current maturities of long-term debt 1,094 -
Trade accounts payable 435 -
Accrued employee benefits 440 -
Other current liabilities 374 -
--------- ---------
Total Current Liabilities 2,343 12
Accrued postretirement benefit obligations 875 -
Long-term debt 7,441 -
Shareholders' equity (See Note 6)
Common stock (1,988,128 actual and 10,000,000 pro forma
shares issued and outstanding at June 30, 2001, as
restated for recapitalization on May 9, 2001, see Note 6;
and 1,588,128 actual and 10,000,000 pro forma shares issued
and outstanding at December 31, 2000) 298 60
Capital in excess of par value 6,156 2,915
Accumulated deficit (1,668) (627)
--------- ---------
Total Shareholders' Equity 4,786 2,348
--------- ---------
Total Liabilities and Shareholders' Equity $ 15,445 $ 2,360
========= =========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-48
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
------------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
(thousands, except per share)
Sales $ 2,001 $ 0 $ 2,607 $ 0
Cost of Sales 1,412 0 1,881 0
---------- -------- --------- ---------
Gross Margin 589 0 726 0
Marketing and administrative expense 1,131 111 1,418 172
---------- -------- --------- ---------
Income/(Loss) from Operations (542) (111) (692) (172)
Other income (expense)
Interest income 1 0 1 0
Interest expense (258) 0 (352) 0
Other 28 0 2 0
---------- -------- --------- ---------
Net Income/(Loss) $ (771) $ (111) $ (1,041) $ (172)
========== ========= ========== ========
Net Income/(Loss) per Common Share $ (.66) $ (.28) $ (1.77) $ (.43)
========== ========= ========== ========
Weighted average number of common shares
outstanding, basic and diluted 1,162,627 400,000 589,435 400,000
========== ========= ========== ========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-49
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
Six Months Ended
June 30
--------------------------------
2001 2000
---------- ----------
Thousands
Cash flows from operating activities:
Net loss $ (1,041) $ (172)
Adjustments to reconcile net loss to net cash (used) by operating
activities:
Depreciation and amortization 322 -
Issuance of stock options and related compensation
expense 500 -
Changes in operating assets and liabilities:
Trade receivables, net (604) -
Inventories 17 -
Trade accounts payable 471 -
Other current items (495) 249
Other (6) -
--------- ----------
Net cash provided (used) by operating activities (836) 77
Cash flows from investing activities:
Acquisitions, net of cash acquired (9,730) (310)
Capital expenditures (141) -
Proceeds from sale of equipment 3,549 -
--------- ----------
Net cash (used) by investing activities (6,322) (310)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 5,866 -
Proceeds from issuance of common stock 1,838 250
Debt issuance costs (190) -
Payments of long-term debt (132) -
--------- ----------
Net cash provided by financing activities 7,382 250
--------- ----------
Net increase in cash and cash equivalents 224 17
Cash and cash equivalents at beginning of period 4 -
--------- ----------
Cash and cash equivalents at end of period $ 228 $ 17
========= ==========
Supplemental information - interest paid $ 258 $ -
========= ==========
F-50
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS CONTINUED
Non-cash investing and financing transactions in connection with the acquisition
of Mountain Air assets:
Fair value of net assets acquired $ (9,970)
Goodwill and other intangibles (2,656)
Note payable to prior owner 2,200
Other adjustments 579
--------
Net cash paid to acquire subsidiary $ (9,847)
--------
Non-cash investing transactions in connection with the merger of Allis-Chalmers
and OilQuip Rentals, Inc.:
Value of common stock exchanged 2,779
Fair value of net assets, less cash received (1,102)
Goodwill and other intangibles (1,560)
-------
Net cash received in acquisition 117
-------
Business acquisitions, net of cash received $(9,730)
=======
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-51
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - 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, 2000,
and the Current Reports on Forms 8-K and 8-K/A filed on May 15, 2001 and July
17, 2001, respectively.
On May 9, 2001, OilQuip Rentals, Inc., an oil and gas rental company
("OilQuip"), merged into a subsidiary of Allis-Chalmers. In the merger, all of
OilQuip's outstanding common stock was converted into 400,000 shares of
Allis-Chalmers' common stock and the right to receive the remaining 9,600,000
shares of Allis-Chalmers' common stock upon the filing of an amendment to the
Amended and Restated Certificate of Incorporation ("Certificate") to authorize
the issuance of such shares.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Compressed Air, Inc. ("MCA"). However, for accounting purposes OilQuip
was treated as the acquiring company in a reverse acquisition of Allis-Chalmers.
As a result, the fixed assets, goodwill and other intangibles of Allis-Chalmers
are increased by $2,515,000. Goodwill and other intangibles are being amortized
over 10 years and the fixed assets are being depreciated over 10 years, except
for a building which is being depreciated over 20 years.
OilQuip was incorporated on February 4, 2000 to find and acquire targets to
operate as subsidiaries.
During the period February 4, 2000 (Inception) to February 6, 2001, OilQuip had
been in the development stage. OilQuip's activities through February 6, 2001
consisted of developing its business plan, raising capital and negotiating with
potential acquisition targets.
On February 6, 2001, OilQuip, through its subsidiary MCA, acquired certain
assets of Mountain Air Drilling Service Co., Inc. ("Mountain Air"), whose
business consists of providing equipment and trained personnel in the four
corner areas of the southwestern United States. MCA primarily provides
compressed air equipment and trained operators to companies in the business of
drilling for natural gas.
Restatement
The Company had expected to record expense for the issuance of stock options for
500,000 shares of common stock to a director in the third quarter 2001 after
shareholders approved an increase of authorized shares of common stock for the
Company. The increase in authorized shares is necessary to accommodate any
future exercise of the options. After further review of the transaction and
recent accounting standards, the Company has determined to record expense of
$500,000 for the issuance of the stock options in the second quarter instead of
when the authorization of additional shares is approved. Accordingly, the
administrative expense and net
F-52
loss for the quarter and six months ended June 30, 2001 has been increased by
$500,000. The effect of the restatement is to increase net loss to $771,000
($0.66 per share) and $1,041,000 ($1.77 per share) for the quarter and six
months ended June 30, 2001, respectively.
Use Of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Actual results could differ from those estimates.
All adjustments considered necessary for a fair presentation of the results of
operations 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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB Statement
No. 141, Business Combinations ("SFAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, the companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at the date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$4,100,000 and other intangible assets is $230,000. Amortization expense during
the six-month period ended June 30, 2001 was $91,000. Currently, the Company is
assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.
F-53
NOTE 2 - POSTRETIREMENT OBLIGATIONS--PENSION PLAN
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan"). Primarily as
a result of the changes in mortality assumptions to reflect decreased mortality
rates of the Company's retirees, the Consolidated Plan was underfunded on a
present value basis. In the first quarter of 1996, the Company made a required
cash contribution to the Consolidated Plan in the amount of $205,000. The
Company did not, however, have the financial resources to make the other
required payments during 1996 and 1997. Given the inability of the Company to
fund such obligations with its current financial resources, in February 1997,
the Company applied to the Pension Benefit Guaranty Corporation ("PBGC") for a
"distress" termination of the Consolidated Plan under section 4041(c) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The PBGC
approved the distress termination application in September 1997 and agreed to a
plan termination date of April 14, 1997. The PBGC became trustee of the
terminated Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, the Company and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated Plan's
unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also had
liability to the PBGC, as trustee of the terminated Consolidated Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC estimated that the unfunded benefit liabilities and the accumulated
funding deficiencies (together, the "PBGC Liability") total approximately $67.9
million. Effective March 31, 1999, the Company issued 585,100 shares to the PBGC
reducing the pension liability by the estimated fair market value of the shares
to $66.9 million.
In September 1997, the Company and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability which required, among other
things, satisfactory resolution of the Company's tax obligations with respect to
the Consolidated Plan under Section 4971 of the Internal Revenue Code of 1986,
as amended ("Code"). Section 4971(a) of the Code imposes, for each taxable year,
a first-tier tax of 10% on the amount of the accumulated funding deficiency
under a plan like the Consolidated Plan. Section 4971(b) of the Code imposes an
additional, second-tier tax equal to 100% of such accumulated funding deficiency
if the deficiency is not "corrected" within a specified period. Liability for
the taxes imposed under Section 4971 extends, jointly and severally, to the
Company and to its commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding
deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies
resulted in estimated first-tier taxes under Code Section 4971(a) of
approximately $900,000.
On July 16, 1998, the Company and the Internal Revenue Service ("IRS") reached
an agreement in principal to settle the Company's tax liability under Code
Section 4971 for $75,000. Following final IRS approval, payment of this amount
was made on August 11, 1998.
In June 1999, but effective as of March 31, 1999, the Company and the PBGC
entered into an agreement for the settlement of the PBGC Liability (the "PBGC
Agreement"). Pursuant to the terms of the PBGC Agreement, the Company issued
585,100 shares of its common stock to the PBGC, or 35% of the total number of
shares issued and outstanding on a fully-diluted basis, and
F-54
the Company has a right of first refusal with respect to the sale of the shares
of common stock owned by the PBGC. In conjunction with the share issuance, the
Company reduced the pension liability to the PBGC based on the estimated fair
market value of the shares issued on the effective date of March 31, 1999. In
accordance with the terms of the PBGC Agreement, the Company was required to and
has (i) decreased the size of the Board of Directors of the Company (the
"Board") to seven members; (ii) caused a sufficient number of then current
directors of the Company to resign from the Board and all committees thereof;
and (iii) caused three designees of the PBGC, to be elected to the Board. The
PBGC has caused the Company to amend its By-laws ("By-laws") to conform to the
terms of the PBGC Agreement. Furthermore, the Company agreed to pay the PBGC's
reasonable professional fees on the 90th day after a Release Event (as defined
below). During the term of the PBGC Agreement, the Company agreed not to issue
or agree to issue any common stock of the Company or any "common stock
equivalent" for less than fair value (as determined by a majority of the Board).
The Company also agreed not to merge or consolidate with any other entity or
sell, transfer or convey more than 50% of its property or assets without
majority Board approval and agreed not to amend its Certificate or By-laws. In
connection with the Merger, substantially all of the covenants set forth in the
PBGC Agreement were terminated.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provides that the Company must either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which makes available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million ("Release Event"). If the 585,100 shares are disposed of by the PBGC
prior to a Release Event and the final satisfaction and discharge of the PBGC
liability, then the liability will be accreted by the estimated fair market
value, $1,024,000, of the shares issued to the PBGC. The merger with OilQuip
(the "Merger") on May 9, 2001 (as described in Note 1) constituted a Release
Event, which satisfied and discharged the PBGC Liability.
In connection with the PBGC Agreement, and as additional consideration for
settling the PBGC Liability, the following agreements, each dated as of March
31, 1999 were also entered into: (i) a Registration Rights Agreement between the
Company and PBGC (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement by and among the Company, the PBGC, AL-CH Company, L.P., a Delaware
limited partnership ("AL-CH"), Wells Fargo Bank, as trustee under that certain
Amended and Restated Retiree Health Trust Agreement for UAW Retired Employees of
Allis-Chalmers Corporation (the "UAW Trust"), and Firstar Trust Company, as
trustee under that certain Amended and Restated Retiree Health Trust Agreement
for Non-UAW Retired Employees of Allis-Chalmers Corporation (the "Non-UAW
Trust") (the "Lock-Up Agreement").
The Registration Rights Agreement grants each holder of Registrable Shares
(defined in the Registration Rights Agreement to basically mean the shares of
common stock issued to the PBGC under the PBGC Agreement) the right to have
their shares registered pursuant to the Securities Act of 1933, as amended, on
demand or incidental to a registration statement being filed by the Company. In
order to demand registration of Registrable Shares, a request for registration
by holders of not less than 20% of the Registrable Shares is necessary. The
Company may deny a request for registration of such shares if the Company
contemplates filing
F-55
a registration statement within 90 days of receipt of notice from the holders.
The Registration Rights Agreement also contains provisions that allow the
Company to postpone the filing of any registration statement for up to 180 days.
The Registration Rights Agreement contains indemnification language similar to
that usually contained in agreements of this kind. In connection with the
Merger, the PBGC agreed to waive certain rights to have its shares registered on
Registration Statements on Forms S-1 and S-2 for a twelve (12) month period
after the Merger.
The Lock-Up Agreement governs the transfer and disposition of shares of the
Company's common stock and the voting of such shares, as well as grants the PBGC
a right of sale of its shares prior to AL-CH, the UAW Trust and the Non-UAW
Trust.
Pursuant to the Lock-Up Agreement, unless the Board has terminated the common
stock transfer restrictions set forth in Article XIII of the Company's
Certificate, AL-CH, the UAW Trust and the Non-UAW Trust each agreed that, during
the period commencing on March 31, 1999 and ending on the third anniversary of
the Release Event, it will not, directly or indirectly, sell, transfer, assign
or dispose of any shares of Company stock it beneficially owns. Commencing with
the third anniversary of the Release Event and continuing until the fifth
anniversary of the Release Event, each of AL-CH, the UAW Trust and the Non-UAW
Trust agreed not to sell, transfer or dispose of any shares of Company stock
without first giving the PBGC an opportunity to sell all or any portion of the
shares of Company stock the PBGC owns. The foregoing right of the PBGC applies
to the sale of Company stock in a public offering or otherwise.
The Lock-Up Agreement also contains a voting component. During the term of the
Lock-Up Agreement, each party to the agreement agreed to vote, at any meeting of
the Company stockholders and in any written consent, all shares of Company stock
owned by it in favor of the election as directors of the Company the persons
nominated by the Nominating Committee of the Board and to refrain from taking
any action contrary to or inconsistent with such obligation. During the term of
the Lock-Up Agreement, each party to the agreement further agreed not to vote
its shares of Company stock or take any other action to amend the Company's
Certificate or By-laws in a manner that is inconsistent with, or in breach of,
the PBGC Agreement. Each party further agreed that it will vote all of its
shares (i) in favor of certain specified amendments to the Company's
Certificate, (ii) for the election of the persons designated by the PBGC (each,
a PBGC Director) to serve on the Board and (iii) in favor of the election of
Company directors who are committed to cause, and who do cause, one PBGC
Director to be appointed to the Nominating Committee of the Board and one PBGC
Director to be appointed as the Chairman of the Compensation Committee of the
Board. In connection with the Merger, the Lock-Up Agreement was terminated in
its entirety.
The acquisition environment has been unfavorable since a cash contribution was
made to the Company in 1989 and remained very difficult for the Company during
2001. The problems continued to include the Company's lack of cash for
investment, limited availability of debt financing for acquisitions and the
financial exposure associated with the Consolidated Plan. The Merger provides
additional cash for investment, additional debt financing availability and has
expunged the PBGC Liability.
F-56
NOTE 3 - ACQUISITIONS
On January 25, 2001, OilQuip formed a subsidiary, MCA, a Texas corporation. On
February 6, 2001, MCA acquired the business and certain assets of Mountain Air,
a private company, for $10,000,000 (including a $200,000 deposit paid in 2000)
in cash and a $2,200,000 promissory note to the sellers (with interest at 5 3/4
percent and principal and interest due February 6, 2006). The acquisition was
accounted for using the purchase method of accounting. Goodwill of $2,656,000
was recorded with the acquisition.
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 400,000
shares of Allis-Chalmers' common stock and the right to receive the remaining
9,600,000 shares of Allis-Chalmers' common stock upon the filing of an amendment
to the Amended and Restated Certificate of Incorporation to authorize the
issuance of such shares. The acquisition was accounted for using the purchase
method of accounting. Goodwill of $1,560,000 was recorded with the Merger.
NOTE 4 - LEASE COMMITMENTS
On February 6, 2001, MCA, a subsidiary of OilQuip, completed the purchase of
certain assets pursuant to an Asset Purchase Agreement with Mountain Air. A
portion of the purchased equipment was sold to a leasing company. The leasing of
the equipment is being accounted for as an operating lease. Lease payments
totaling $3,480,000 will be made over a period of six years.
The Company rents office space on a five-year lease, which expires February 5,
2006. Rent expense for the second quarter of 2001 was $18,000. The Company has
no further lease obligations.
NOTE 5 - LONG-TERM DEBT
Long-term debt is primarily a result of the cost of the acquisition of certain
assets of Mountain Air.
o A term loan in the amount of $3,550,000 at 8%, interest payable
monthly, with quarterly principal payments of $147,916.67 due on the
last day of April, July, October and January. The maturity date of the
loan is February 7, 2004.
o A sellers note in the amount of $2,200,000 at 5.75% simple interest.
The principal and interest are due on February 6, 2004.
o Subordinated debt in the amount of $2,000,000 at 12% interest payable
quarterly commencing on April 1, 2001. The principal will be due upon
on January 31, 2004.
In addition to the above acquisition debt, there is also debt resulting from the
Board's decision to establish an arrangement by which to compensate former and
continuing Board members who had served from 1989 to March 31, 1999 without
compensation. The Company issued promissory notes in the amount of $25,000 each
to seven current or former directors and $150,000 to John T. Grigsby, Jr. a
former director and current Executive Vice President and
F-57
Chief Financial Officer of the Company. The notes bear interest at the rate of
five percent (5%) and are due March 28, 2005; however, the notes may be prepaid
at any time at the discretion of the Company. In addition, the notes are
canceled in the event of a subsequent bankruptcy of the Company.
NOTE 6 - SHAREHOLDERS' EQUITY
The changes in shareholders' equity in 2001 were as follows:
OilQuip Rentals, Inc. balance 12/31/00 $ 2,348,000
Fair Value of Warrants Issued in Conjunction with MCA 200,000
Acquisition
Allis-Chalmers - OilQuip Merger/Reorganization 2,779,000
Retained Earnings Six Months ended June 30 (541,000)
-----------
Total Shareholders' Equity $ 4,786,000
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of MCA.
However, for accounting purposes OilQuip was treated as the acquiring company in
a reverse acquisition of Allis-Chalmers. The business combination was accounted
for as a purchase. As a result, $2,779,000, the value of the Allis-Chalmers
common stock outstanding at the date of acquisition, was added to shareholders'
equity, which reflects the recapitalization of Allis-Chalmers and the
reorganization of the combined company.
The equity and per share data has been presented so as to give effect to the
recapitalization of the Company, which occurred in the reverse acquisition of
Allis-Chalmers on May 9, 2001. Under the recapitalization, the original number
of shares outstanding of the formerly private company are considered to have
been exchanged for the 400,000 shares of Allis-Chalmers that were issued on the
date of the reverse acquisition to the owners of OilQuip Rentals, Inc. As a
result, the 400,000 shares are presented in place of the originally issued
shares of the private company. In addition, pro forma per share data is
presented that includes an additional 9,600,000 shares of Allis-Chalmers that
will be issued in the future after shareholder approval of the increase in the
maximum authorized number of shares of Allis-Chalmers.
On May 31, 2001, the Board granted to Leonard Toboroff, a director of
Allis-Chalmers, subject to shareholder approval of certain amendments to the
Certificate, an option to purchase 500,000 shares of common stock at $0.50 per
share. The option was granted for services provided by Mr. Toboroff to OilQuip
prior to the Merger, including providing financial advisory services, assisting
in OilQuip's capital structure and assisting OilQuip in finding strategic
acquisition opportunities. Allis-Chalmers has recorded $500,000 of compensation
expense for this option grant. The Board was apprised of Mr. Toboroff's services
to OilQuip prior to its approval of the Merger.
F-58
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
March 31, December 31,
2001 2000
---- ----
(In thousands)
ASSETS
Cash and Cash Equivalents $ 192 $ 358
Trade Receivables, Net 883 549
Inventories, Net 192 122
Other current assets 29 44
------- -------
Total Current Assets 1,296 1,073
Net Property, Plant and Equipment 1,018 1,055
------- -------
Total Assets $2,314 $ 2,128
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Maturities of Long-Term Debt $ 195 $ 212
Trade Accounts Payable 283 208
Accrued Employee Benefits 199 143
Accrued Pension Liability 66,877 66,877
Other current liabilities 97 106
------- -------
Total Current Liabilities 67,651 67,546
Accrued Postretirement Benefit Obligations 881 889
Long-Term Debt 341 337
Shareholders' Equity
Common stock
($.15 par value, authorized 2,000,000 shares,
1,588,128 shares outstanding at March 31, 2001
and December 31, 2000) 238 238
Capital in Excess of Par Value 9,093 9,093
Accumulated Deficit
(Accumulated Deficit of $424,208 eliminated
on December 2, 1988) (75,890) (75,975)
------- -------
Total Shareholders' Equity (66,559) (66,644)
------- -------
Total Liabilities and Shareholders' Equity $ 2,314 $ 2,128
======= =======
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-59
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF OPERATIONS
Three Months Ended March 31,
2001 2000
---- ----
(In thousands, except per share)
Sales $1,337 $ 824
Cost of Sales 853 629
--------- ---------
Gross Margin 484 195
Marketing and Administrative Expenses 391 295
--------- ---------
Income (Loss) from Operations 93 (100)
Other Income (Expenses)
Interest Income 0 2
Interest Expense (8) (6)
Other 0 0
--------- ---------
Net Income (Loss) $ 85 $ (104)
========= =========
Net Income (Loss) per Common Share $ .05 $ (.07)
========= =========
Weighed average number of common shares
outstanding, basic and diluted 1,588,128 1,588,128
========= =========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-60
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOWS
Three Months Ended March 31,
2001 2000
---- ----
(In thousands)
Cash flows from operating activities
Net Income (Loss) $ 85 $ (104)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 42 41
Change in working capital:
(Increase) decrease in receivables, net (334) 36
Increase in inventories (70) (27)
Increase (decrease) in trade accounts payable 75 (254)
Increase in other current items 45 51
Other (8) 3
------- -------
Net cash (used) provided by
operating activities (165) (254)
Cash flows from investing activities
Capital expenditures (5) 0
Cash flows from financing activities
Net proceeds from issuance of long-term debt 4 0
Payment of long-term debt 0 (17)
------- -------
Net cash (used) provided by
financing activities 4 (17)
------- -------
Net (decrease) in cash and cash equivalents (166) (271)
Cash and cash equivalents at beginning of period 358 501
------- -------
Cash and cash equivalents at end of period $ 192 $ 230
======= =======
Supplemental information - interest paid $ 8 $ 6
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-61
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - 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 the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.
All adjustments considered necessary for a fair presentation of the results of
operations 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.
On June 29, 2001, the Financial Accounting Standards Board (FASB) voted in favor
of FASB Statement No. 142 (FAS 142), "Goodwill and Other Tangible Assets." FASB
expects to release FAS 142 in the last half of July 2001. FAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Upon adoption of FAS 142, goodwill will be tested at the reporting
unit annually and whenever events or circumstances occur indicating that
goodwill might be impaired. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease. The adoption date for the
Company will be January 1, 2002. The Company has not yet determined what the
impact of FAS 142 will be on its results of operations and financial position.
NOTE 2 - POSTRETIREMENT OBLIGATIONS--PENSION PLAN
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan"). Primarily as
a result of the changes in mortality assumptions to reflect decreased mortality
rates of the Company's retirees, the Consolidated Plan was underfunded on a
present value basis. In the first quarter of 1996, the Company made a required
cash contribution to the Consolidated Plan in the amount of $205,000. The
Company did not, however, have the financial resources to make the other
required payments during 1996 and 1997. Given the inability of the Company to
fund such obligations with its current financial resources, in February 1997,
the Company applied to the Pension Benefit Guaranty Corporation ("PBGC") for a
"distress" termination of the Consolidated Plan under section 4041(c) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The PBGC
approved the distress termination application in September 1997 and agreed to a
plan termination date of April 14, 1997. The PBGC became trustee of the
terminated Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, the Company and its subsidiaries
incurred a liability to the PBGC for an amount equal to the Consolidated Plan's
unfunded benefit liabilities. Allis-Chalmers and its subsidiaries also had
liability to the PBGC, as trustee of the terminated Consolidated Plan, for the
outstanding balance of the Consolidated Plan's accumulated funding deficiencies.
The PBGC estimated that the unfunded benefit liabilities and the accumulated
funding deficiencies (together, the "PBGC Liability") total approximately $67.9
million.
F-62
Effective March 31, 1999, the Company issued 585,100 shares to the PBGC reducing
the pension liability by the estimated fair market value of the shares to $66.9
million.
In September 1997, the Company and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability, which required, among other
things, satisfactory resolution of the Company's tax obligations with respect to
the Consolidated Plan under Section 4971 of the Internal Revenue Code of 1986,
as amended ("Code"). Section 4971(a) of the Code imposes, for each taxable year,
a first-tier tax of 10% on the amount of the accumulated funding deficiency
under a plan like the Consolidated Plan. Section 4971(b) of the Code imposes an
additional, second-tier tax equal to 100% of such accumulated funding deficiency
if the deficiency is not "corrected" within a specified period. Liability for
the taxes imposed under section 4971 extends, jointly and severally, to the
Company and to its commonly-controlled subsidiary corporations.
Prior to its termination, the Consolidated Plan had an accumulated funding
deficiency in the taxable years 1995, 1996, and 1997. Those deficiencies
resulted in estimated first-tier taxes under Code section 4971(a) of
approximately $900,000.
On July 16, 1998, the Company and the Internal Revenue Service ("IRS") reached
an agreement in principal to settle the Company's tax liability under Code
Section 4971 for $75,000. Following final IRS approval, payment of this amount
was made on August 11, 1998.
In June 1999, but effective as of March 31, 1999, the Company and the PBGC
entered into an agreement for the settlement of the PBGC Liability (the "PBGC
Agreement"). Pursuant to the terms of the PBGC Agreement, the Company issued
585,100 shares of its common stock to the PBGC, or 35% of the total number of
shares issued and outstanding on a fully-diluted basis, and the Company has a
right of first refusal with respect to the sale of the shares of common stock
owned by the PBGC. In conjunction with the share issuance, the Company reduced
the pension liability to the PBGC based on the estimated fair market value of
the shares issued on the effective date of March 31, 1999. In accordance with
the terms of the PBGC Agreement, the Company was required to and has (i)
decreased the size of the Board of Directors of the Company (the "Board") to
seven members; (ii) caused a sufficient number of then current directors of the
Company to resign from the Board and all committees thereof; and (iii) caused
three designees of the PBGC, to be elected to the Board. The PBGC has caused the
Company to amend its By-laws ("By-laws") to conform to the terms of the PBGC
Agreement. Furthermore, the Company agreed to pay the PBGC's reasonable
professional fees on the 90th day after a Release Event (as defined below).
During the term of the PBGC Agreement, the Company agreed not to issue or agree
to issue any common stock of the Company or any "common stock equivalent" for
less than fair value (as determined by a majority of the Board). The Company
also agreed not to merge or consolidate with any other entity or sell, transfer
or convey more than 50% of its property or assets without majority Board
approval and agreed not to amend its Amended and Restated Certificate of
Incorporation ("Certificate") or By-laws.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provides that the Company must either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which makes available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets
F-63
and/or a business where the purchase price (including funded debt assumed) is at
least $10 million ("Release Event"). If the 585,100 shares are disposed of by
the PBGC prior to a Release Event and the final satisfaction and discharge of
the PBGC liability, then the liability will be accreted by the estimated fair
market value, $1,024,000, of the shares issued to the PBGC. The merger with
OilQuip Rentals, Inc. (the "Merger") on May 9, 2001 (as described in the current
Report on Form 8-K dated May 15, 2001) constituted a Release Event, which
satisfied and discharged the PBGC Liability.
In connection with the PBGC Agreement, and as additional consideration for
settling the PBGC Liability, the following agreements, each dated as of March
31, 1999 were also entered into: (i) a Registration Rights Agreement between the
Company and PBGC (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement by and among the Company, the PBGC, AL-CH Company, L.P., a Delaware
limited partnership ("AL-CH"), Wells Fargo Bank, as trustee under that certain
Amended and Restated Retiree Health Trust Agreement for UAW Retired Employees of
Allis-Chalmers Corporation (the "UAW Trust"), and Firstar Trust Company, as
trustee under that certain Amended and Restated Retiree Health Trust Agreement
for Non-UAW Retired Employees of Allis-Chalmers Corporation (the "Non-UAW
Trust") (the "Lock-Up Agreement").
The Registration Rights Agreement grants each holder of Registrable Shares
(defined in the Registration Rights Agreement to basically mean the shares of
common stock issued to the PBGC under the PBGC Agreement) the right to have
their shares registered pursuant to the Securities Act of 1933, as amended, on
demand or incidental to a registration statement being filed by the Company. In
order to demand registration of Registrable Shares, a request for registration
by holders of not less than 20% of the Registrable Shares is necessary. The
Company may deny a request for registration of such shares if the Company
contemplates filing a registration statement within 90 days of receipt of notice
from the holders. The Registration Rights Agreement also contains provisions
that allow the Company to postpone the filing of any registration statement for
up to 180 days. The Registration Rights Agreement contains indemnification
language similar to that usually contained in agreements of this kind. In
connection with the Merger, the PBGC agreed to waive certain rights to have its
shares registered on Registration Statements on Forms S-1 and S-2 for a twelve
(12) month period after the Merger.
The Lock-Up Agreement governs the transfer and disposition of shares of the
Company's common stock and the voting of such shares, as well as grants the PBGC
a right of sale of its shares prior to AL-CH, the UAW Trust and the Non-UAW
Trust.
Pursuant to the Lock-Up Agreement, unless the Board has terminated the common
stock transfer restrictions set forth in Article XIII of the Company's
Certificate, AL-CH, the UAW Trust and the Non-UAW Trust each agreed that, during
the period commencing on March 31, 1999 and ending on the third anniversary of
the Release Event, it will not, directly or indirectly, sell, transfer, assign
or dispose of any shares of Company stock it beneficially owns. Commencing with
the third anniversary of the Release Event and continuing until the fifth
anniversary of the Release Event, each of AL-CH, the UAW Trust and the Non-UAW
Trust agreed not to sell, transfer or dispose of any shares of Company stock
without first giving the PBGC an opportunity
F-64
to sell all or any portion of the shares of Company stock the PBGC owns. The
foregoing right of the PBGC applies to the sale of Company stock in a public
offering or otherwise.
The Lock-Up Agreement also contains a voting component. During the term of the
Lock-Up Agreement, each party to the agreement agreed to vote, at any meeting of
the Company stockholders and in any written consent, all shares of Company stock
owned by it in favor of the election as directors of the Company the persons
nominated by the Nominating Committee of the Board and to refrain from taking
any action contrary to or inconsistent with such obligation. During the term of
the Lock-Up Agreement, each party to the agreement further agreed not to vote
its shares of Company stock or take any other action to amend the Company's
Certificate or By-laws in a manner that is inconsistent with, or in breach of,
the PBGC Agreement. Each party further agreed that it will vote all of its
shares (i) in favor of certain specified amendments to the Company's
Certificate, (ii) for the election of the persons designated by the PBGC (each,
a PBGC Director) to serve on the Board and (iii) in favor of the election of
Company directors who are committed to cause, and who do cause, one PBGC
Director to be appointed to the Nominating Committee of the Board and one PBGC
Director to be appointed as the Chairman of the Compensation Committee of the
Board. In connection with the Merger, the Lock-Up Agreement was terminated in
its entirety.
The acquisition environment has been unfavorable since the Investor's 1989 cash
contribution to the Company and remained very difficult for the Company during
2001. The problems continued to include the Company's lack of cash for
investment, limited availability of debt financing for acquisitions and the
financial exposure associated with the Consolidated Plan. The Merger provides
additional cash for investment, additional debt financing availability and has
expunged the PBGC Liability.
F-65
MOUNTAIN AIR DRILLING SERVICE CO., INC.
STATEMENTS OF OPERATION
(UNAUDITED)
Period January 1, Three Months
2001 through Ended
February 6, 2001 March 31, 2000
---------------- --------------
(In thousands)
Sales $ 493 $ 1,315
Cost of Sales 214 560
---------- ----------
Gross Margin 279 755
Marketing and Administrative Expenses 165 199
---------- ----------
Income from Operations 114 556
Other Income (Expenses)
Interest Income 0 5
Interest Expense 0 0
Other 0 6
---------- ----------
Net Income $ 114 $ 567
========== ==========
Net income per common share, basic and diluted $0.29 $1.42
========== ==========
Weighted average number of common shares
outstanding, basic and diluted 400,000 400,000
========== ==========
Pro forma net income per common share,
basic and diluted $0.01 $0.06
========== ==========
Pro forma weighted average number of
common shares outstanding, basic and diluted 10,000,000 10,000,000
========== ==========
This interim statement is unaudited.
The accompanying notes are an integral part of the Financial Statements.
F-66
MOUNTAIN AIR DRILLING SERVICE CO., INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Period January 1, Three Months
2001 through Ended
February 6, 2001 March 31, 2000
---------------- --------------
(In thousands)
Cash flows from operating activities
Net Income (Loss) $ 114 $ 567
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 7 16
Change in working capital:
Decrease in receivables, net 35 37
Increase (decrease) in trade accounts payable 41 (39)
Decrease in other current items 55 127
------ ------
Net cash provided by operating activities 252 708
Cash flows from investing activities
Capital expenditures (5) (23)
Distribution to shareholders 0 (700)
------ ------
Net (decrease) in cash and cash equivalents 247 (15)
Cash and cash equivalents at beginning of period 634 502
------ ------
Cash and cash equivalents at end of period $ 881 $ 487
====== ======
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
F-67
MOUNTAIN AIR DRILLING SERVICE CO., INC.
NOTES TO FINANCIAL STATEMENTS
ITEM 1. NOTES
NOTE 1 - ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the
consolidated financial statements and related notes, management's discussion and
analysis and other information included elsewhere in this proxy statement for
the period from January 1, 2001 to February 6, 2001.
All adjustments considered necessary for a fair presentation of the
results of operation 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.
NOTE 2 - EARNINGS PER SHARE
The equity and per share data has been presented so as to give effect
to the recapitalization of the Company, which occurred in the reverse
acquisition of Allis-Chalmers on May 9, 2001. Under the recapitalization, the
original number of shares outstanding of the formerly private company are
considered to have been exchanged for the 400,000 shares of Allis-Chalmers that
were issued on the date of the reverse acquisition to the owners of OilQuip
Rentals, Inc. As a result, the 400,000 shares are presented in place of the
originally issued shares of the private company. In addition, pro forma per
share data is presented that includes an additional 9,600,000 shares of
Allis-Chalmers that will be issued in the future after shareholder approval of
the increase in the maximum authorized number of shares of Allis-Chalmers.
F-68
OILQUIP RENTALS, INC.
AND ITS CONSOLIDATED SUBSIDIARY
UNAUDITED BALANCE SHEET
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
Assets
CURRENT ASSETS
Cash $205
Accounts receivable, net 524
Other current assets 40
-----------------
Total current assets 769
Property and equipment, net 6,422
Goodwill and other intangibles, net 2,768
Other Assets 701
-----------------
Total Assets $10,660
=================
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Debt - current portion $647
Accounts payable 219
Accrued expenses 271
Other current liabilities 75
-----------------
Total current liabilities 1,212
Long-term debt 6,569
-----------------
Total liabilities 7,781
Redeemable warrant 600
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 10,000,000 shares authorized and 9,875
shares issued and outstanding at December 31, 2000 (400,000 actual
and 10,000,000 pro forma shares issued and outstanding as restated
for recapitalization on May 9, 2001, see Note 5) 60
Additional paid in capital 3,116
(Deficit) accumulated during development stage (627)
Retained Earnings (270)
-----------------
Total stockholders' equity 2,279
-----------------
Total liabilities and stockholders' equity $10,660
=================
See notes to financial statements.
F-69
OILQUIP RENTALS, INC.
AND ITS CONSOLIDATED SUBSIDIARY
UNAUDITED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 2001
(IN THOUSANDS)
Revenue $ 606
Cost of Sales 420
--------------------
Gross Profit 186
Marketing and Administrative Expenses 313
Amortization 22
--------------------
(Loss) from Operations (149)
Other Income (Expenses)
Interest Expense (95)
Miscellaneous (26)
--------------------
(Loss) before Income Taxes (270)
Provision for Income Tax -
--------------------
Net Income (Loss) $ (270)
====================
Net (loss) per common share, basic and diluted $(0.68)
====================
Weighted average number of common shares outstanding, basic and diluted 400,000
====================
Pro forma net (loss) per common share, basic and diluted $(0.03)
====================
Pro forma weighted average number of common shares
outstanding, basic and diluted 10,000,000
====================
See notes to financial statements.
F-70
OILQUIP RENTALS, INC.
AND ITS CONSOLIDATED SUBSIDIARY
UNAUDITED STATEMENT OF CASH FLOWS
QUARTER ENDED MARCH 31, 2001
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss) $ (270)
Adjustments to reconcile net (loss) to cash provided by operating activities:
Depreciation and amortization 71
Change in working capital:
(Increase) in receivables, net (504)
Increase in accounts payable 478
Increase in other current items 207
(Increase) in lease deposit (701)
Other 0
---------
Net cash (used) provided by operating activities (719)
Cash flows from investing activities:
Investment in acquisition of business (9,813)
Capital expenditures (51)
Proceeds from sale of equipment 3,549
---------
Net cash (used) provided by operating activities (6,315)
Cash flows from financing activities:
Common stock subscription received 1,838
Net proceeds from issuance of long-term debt 5,550
Deferred financing cost (153)
----------
Net cash (used) provided by operating activities 7,235
---------
Net increase (decrease) in cash and cash equivalents 201
Cash and cash equivalents, beginning of period 4
---------
Cash and cash equivalents, end of period $ 205
=========
Supplemental information - interest paid $ 95
=========
See notes to financial statements.
F-71
OILQUIP RENTALS, INC.
AND ITS CONSOLIDATED SUBSIDIARY
UNAUDITED STATEMENTOF CASH FLOWS
QUARTER ENDED MARCH 31, 2001
(CONTINUED)
(IN THOUSANDS)
NON-CASH INVESTING AND FINANCING TRANSACTIONS IN CONNECTION
with the acquisition of Mountain Air assets:
Fair value of net assets acquired $ 9,970
Goodwill and other intangibles 2,622
Note payable to prior owner (2,200)
Other adjustments (579)
--------
Net cash paid to acquire subsidiary $ 9,813
=======
See notes to financial statements.
F-72
OILQUIP RENTALS, INC
AND ITS CONSOLIDATED SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
ITEM 1. NOTES
NOTE 1 - ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included elsewhere in this proxy statement for the period from
February 4, 2000 to December 31, 2000.
All adjustments considered necessary for a fair presentation of the results of
operation 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.
NOTE 2 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature Of Business And Organization
OilQuip Rentals, Inc. and Subsidiary, a Delaware corporation (the "Company") was
incorporated on February 4, 2000 to find and acquire targets to operate as
subsidiaries.
During the period February 4, 2000 (Inception) to February 6, 2001, the Company
had been in the development stage. The Company's activities through February 6,
2001 have consisted of developing its business plan, raising capital and
negotiating with potential acquisition targets.
On February 6, 2001, the Company, through its subsidiary Mountain Compressed
Air, Inc. ("MCA"), acquired certain assets of Mountain Air Drilling Service Co.,
Inc., whose business consists of providing equipment and trained personnel in
the four corner areas of the southwestern United States. MCA primarily provides
compressed air equipment and trained operators to companies in the business of
drilling for natural gas.
Property and Equipment
On February 6, 2001, the Company, through its subsidiary MCA, acquired certain
assets of Mountain Air Drilling Service Co., Inc., mainly consisting of boosters
and compressors used in the business of drilling for natural gas. These assets
are being depreciated over their estimated life, ten years.
Deferred Financing Costs
Debt acquisition costs are direct expenditures incurred with regard to
borrowings. These costs are being amortized to interest expense over six years,
the expected term of the related debt instruments after the instruments have
been activated.
F-73
Goodwill and Other Intangibles
On February 6, 2001, MCA, a subsidiary of OilQuip, completed the purchase of
certain assets pursuant to an Asset Purchase Agreement with Mountain Air
Drilling Service Co., Inc., a non-related entity. OilQuip obtained an appraisal
on all the assets acquired, which was the determining factor in the calculation
of goodwill and other intangibles. Goodwill and other intangibles are being
amortized over a period not in excess of twenty years.
Long-Term Debt
Long-term debt is as a result of the cost of the acquisition of certain assets
of Mountain Air Drilling Service Co., Inc.
o A term loan in the amount of $3,550,000 at 8%, interest payable
monthly, with quarterly principal payments of $147,916.67 due on the
last day of April, July, October, and January. The maturity date of
the loan is February 7, 2007.
o A sellers note in the amount of $2,200,000 at 5.75% simple interest.
The principal and interest are due on February 6, 2006.
o Subordinated debt in the amount of $2,000,000 at 13% with interest
payable quarterly commencing on April 1, 2001. The principal will be
due upon on January 31, 2004.
NOTE 3 - INVESTMENT ACQUISITION COST
The Company has capitalized expenses associated with the cost to acquire
Mountain Air Drilling Service Co., Inc. These costs include a payment of
$200,000 to secure the letter of intent, audit fees, feasibility study, and
legal fees totaling $179,529 during 2000. See Note 8 for further discussion of
this acquisition.
During 2000, the Company pursued two other acquisition targets and incurred
acquisition costs totaling $234,402. As of December 31, 2000, acquisition
negotiations for these two targets have ceased, and the Company has expensed the
costs as abandoned.
NOTE 4 - LEASE COMMITMENTS
On February 6, 2001, MCA, a subsidiary of OilQuip, completed the purchase of
certain assets pursuant to an Asset Purchase Agreement with Mountain Air
Drilling Service Co., Inc. A portion of the purchased equipment was sold to a
leasing company. The leasing of the equipment is being accounted for as an
operating lease. Lease payments totaling $3,480,000 will be made over a period
of six years.
The Company rents office space on a five-year lease, which expires February 5,
2006. Rent expense for the first quarter of 2001 was $18,000. The Company has no
further lease obligations.
F-74
NOTE 5 - SUBSEQUENT EVENTS
On May 9, 2001, OilQuip Rentals, Inc., an oil and gas rental company, merged
into a subsidiary of Allis-Chalmers Corporation. In the merger, all of OilQuip's
outstanding common stock was converted into 400,000 shares of Allis-Chalmers'
common stock and the right to receive the remaining 9,600,000 shares of
Allis-Chalmers' common stock upon the filing of an amendment to the Amended and
Restated Certificate of Incorporation to authorize the issuance of such shares.
The equity and per share data has been presented so as to give effect to the
recapitalization of the Company, which occurred in the reverse acquisition of
Allis-Chalmers on May 9, 2001. Under the recapitalization, the original number
of shares outstanding of the formerly private company are considered to have
been exchanged for the 400,000 shares of Allis-Chalmers that were issued on the
date of the reverse acquisition to the owners of OilQuip Rentals, Inc. As a
result, the 400,000 shares are presented in place of the originally issued
shares of the private company. In addition, pro forma per share data is
presented that includes an additional 9,600,000 shares of Allis-Chalmers that
will be issued in the future after shareholder approval of the increase in the
maximum authorized number of shares of Allis-Chalmers.
NOTE 6 - PRO FORMA RESULTS
As discussed in Note 1, the Company acquired certain assets of Mountain Air
Drilling Service, Co., Inc. ("Mountain Air") on February 6, 2001. The following
pro forma results are presented as if the acquisition of the certain assets of
Mountain Air occurred at the beginning of fiscal year 2000.
PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
OILQUIP MOUNTAIN ADJUSTMENTS PRO FORMA
RENTALS AIR TOTAL
Revenues $-- $5,692 $-- $5,692
Cost of revenues -- 2,689 923 (1)(2) 3,612
--------------------------------------------------------------------------
Gross profit -- 3,003 (923) 2,080
General &
administrative 627 613 -- 1,240
Amortization -- -- 156 (3) 156
--------------------------------------------------------------------------
Income (loss) from (627) 2,390 (1,079) 684
operations
Other income (expense)
-- 23 (868)(4) (845)
--------------------------------------------------------------------------
Income (loss) before $(627) $2,413 (1,947) $(161)
income tax
Net income (loss) per
common share, basic and
diluted $(0.40)
Weighted average number
of common shares
outstanding, basic and
diluted
400,000
=======
F-75
PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 2000 (IN THOUSANDS)
OILQUIP MOUNTAIN ADJUSTMENTS PRO FORMA
RENTALS AIR TOTAL
ASSETS
Total Current Assets 1,966 1,284 301 3,551
Property and Equipment, net
-- 1,430 4,829 (5) 6,259
Goodwill and Other Intangibles
394 -- 2,240 (5) 2,634
------ ------ ------ -------
Total Assets $2,360 $2,714 $7,370 $12,444
====== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Total Current Liabilities 12 303 1,479 1,794
Long-Term Debt --- -- 7,838 (4)(5) 7,838
Total Stockholders' Equity
2,348 2,411 (1,947) 2,812
Total Liabilities and
Stockholders' Equity $2,360 $2,714 $7,370 $12,444
====== ====== ====== =======
(1) The equipment lease expense of certain assets acquired in the sale of
Mountain Air, which became part of a sale/leaseback to help finance the
acquisition. Concurrent with the acquisition, OilQuip, through its
wholly-owned subsidiary, MCA, sold a portion of the acquired assets to
Wells Fargo for $3,500,000 and leased back those assets. The lease term
is for 5 years, expiring on February 8, 2006, with monthly lease
payments during the term equaling $56,574. At the end of the term, the
lessee is entitled to purchase the equipment from Wells Fargo at a
price calculated at the lesser of fair market value or $700,000. In
accordance with Statement of Financial Accounting Standard No. 13, the
lease has been recorded as an operating lease.
(2) Additional depreciation expense on assets acquired and adjusted to fair
value from the purchase of certain assets of Mountain Air and
additional corporate administrative expenses.
(3) Amortization expense for goodwill and other intangibles, net, as a
result of the acquisition of certain assets of Mountain Air. Goodwill
is being amortized over 20 years.
(4) Interest costs as a result of the debt agreements entered into finance
the acquisition of certain assets of Mountain Air.
(5) Balance sheet adjustment as of date of acquisition.
F-76
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ALLIS-CHALMERS CORPORATION,
ALLIS-CHALMERS ACQUISITION CORP.,
AND OILQUIP RENTALS, INC.,
May 9, 2001
THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT") is entered into as of
the 9th day of May, 2001, by and among ALLIS-CHALMERS CORPORATION, a Delaware
corporation ("A-C"), ALLIS-CHALMERS ACQUISITION CORP., a Delaware corporation
wholly owned by A-C ("Acquisition"), and OILQUIP RENTALS, INC., a Delaware
corporation ("OilQuip").
R E C I T A L S
- - - - - - - -
A. The Board of Directors of each of A-C, OilQuip and Acquisition believe
that it is in the best interests of each company and its respective stockholders
to consummate the reorganization provided for herein, pursuant to which A-C will
directly acquire all of the capital stock of OilQuip (the "OilQuip Common
Stock") through a merger of Acquisition with and into OilQuip, with OilQuip
being the surviving corporation (as hereinafter defined in Section 1.1, the
"Merger").
B. Pursuant to the written consent of the holders of all capital stock of
OilQuip and Acquisition made in accordance with Section 228 of the Delaware
General Corporation Law ("DGCL"), the stockholders of OilQuip and Acquisition
have approved the Merger.
C. For federal income tax purposes, it is intended that the Merger qualify
as a reorganization under the provisions of Section 368(a)(1)(A) and 368
(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code").
D. Concurrently with the execution hereof, in order to induce A-C to enter
into this Agreement, certain stockholders of OilQuip are entering into share
transfer restriction agreements (the "Share Transfer Restriction Agreements")
providing for certain restrictions on the transfer of the shares of A-C Common
Stock (as hereinafter defined) received in connection with the Merger, all upon
the terms and conditions specified therein.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the covenants, representations and
warranties set forth herein, and for other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, the parties agree as
follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions hereof, and in
accordance with the DGCL, at the Effective Time (as defined in Section 1.3
hereof), (a) Acquisition shall be merged with and into OilQuip, (b) the separate
corporate existence of Acquisition shall cease, and (c) OilQuip shall continue
as the surviving corporation (the "Surviving Corporation") in the Merger under
the laws of the State of Delaware under the name OilQuip Rentals, Inc. (the
"Merger").
1.2 Closing and Closing Date. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") will take place at the
offices of Swidler Berlin Shereff Friedman, LLP, 405 Lexington Avenue, New York,
New York 10174 at 10:00 a.m. local time, on (a) the next business day after the
last to be fulfilled or waived of the conditions set forth in Article VIII shall
be fulfilled or waived in accordance herewith, or (b) at such other time, date
or place as OilQuip and A-C may agree in writing. The date on which the Closing
occurs is referred to herein as the "Closing Date".
1.3 Effective Time of the Merger. On the Closing Date, the parties hereto
shall cause a certificate of merger, or other appropriate documentation,
satisfying the requirements of the DGCL (the "Certificate of Merger") to be
filed with the office of the Secretary of State of the State of Delaware in
accordance with the provisions of the DGCL. When used herein, the term
"Effective Time" shall mean the date and time when the Certificate of Merger has
been accepted for filing by the Secretary of State of the State of Delaware or
such date and time as otherwise specified in the Certificate of Merger.
1.4 Effect of the Merger. The Merger shall, from and after the Effective
Time, have the effects provided in Section 259 of the DGCL. If at any time after
the Effective Time, any further action is deemed necessary or desirable to carry
out the purposes of this Agreement, the parties hereto agree that the Surviving
Corporation and its proper officers and directors shall be authorized to take,
and shall take, any and all such action.
ARTICLE II
THE SURVIVING CORPORATION
2.1 Certificate of Incorporation. The Certificate of Incorporation of
OilQuip shall be the Certificate of Incorporation of the Surviving Corporation
after the Effective Time, until thereafter changed or amended as provided
therein or by applicable law.
2.2 Bylaws. The bylaws of OilQuip as in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable law.
2.3 Board of Directors and Officers. The board of directors and officers of
OilQuip immediately prior to the Effective Time shall be the board of directors
and officers, respectively, of the Surviving Corporation, effective as of the
Effective Time, and until the earlier of their respective resignations or the
time that their respective successors are duly elected or appointed and
qualified.
ARTICLE III
CONVERSION OF SHARES
3.1 Merger Consideration. As of the Effective Time, by virtue of the Merger
and without any action on the part of Acquisition, OilQuip, or A-C:
(a) Each share of OilQuip Common Stock, issued and outstanding
immediately prior to the Effective Time will be converted, without any action on
the part of the holders thereof (the "Shareholders"), into (i) 40 shares of the
common stock, par value $0.15 per share, of A-C ("A-C Common Stock"), and (ii)
the right to receive 960 shares of Common Stock on the Amendment Date (as
defined in Section 7.11); provided that no fractional shares of A-C Common Stock
shall be delivered (and the number of shares of A-C Common Stock to be delivered
to any Shareholder shall be rounded down to the nearest whole number) and the
Shareholders shall not be entitled to cash in lieu of fractional shares;
provided further that no more than an aggregate of 10,000,000 shares of A-C
Common Stock shall be issued or issuable at the Effective Time and on the
Amendment Date pursuant to the Merger. Immediately following the Effective Time,
the Shareholders shall deliver to A-C the certificates representing the OilQuip
Common Stock, and A-C shall cause A-C's transfer agent to deliver to the
Shareholders certificates representing the A-C Common Stock described in (i)
above in accordance with Exhibit A hereto; and immediately following the
Amendment Date, A-C shall cause A-C's transfer agent to deliver to the
Shareholders certificates representing the A-C Common Stock described in clause
(ii) above in accordance with Exhibit A. The A-C Common Stock issued pursuant to
this Section 3.1(a) shall be duly authorized, fully paid and non-assessable. The
Shareholders shall have no right to transfer or assign the right to receive the
A-C Common Stock prior to the issuance thereof.
(b) Each share of Acquisition Common Stock issued and outstanding
immediately prior to the Effective Time will be converted, without any action on
the part of the holder thereof, into one (1) duly and validly issued, fully paid
and non-assessable share of OilQuip Common Stock. All shares of A-C Common Stock
issued in accordance with Section 3.1 shall be deemed to be in full satisfaction
of all rights pertaining to shares of OilQuip Common Stock held by the
Shareholders, and shall be duly authorized, fully paid and non-assessable.
3.2 No Further Rights. From and after the Effective Time, holders of
certificates theretofore evidencing OilQuip Common Stock shall cease to have any
rights as stockholders of OilQuip, except as provided herein or by applicable
law.
3.3 Tax Consequences. It is intended by the parties hereto that the Merger
shall constitute a reorganization within the meaning of Sections 368(a)(1)(A)
and 368(a)(2)(E) of the Code. The parties hereto adopt this Agreement as a "plan
of reorganization" within the meaning of Section 1.368-2(g) and 1.368-3(a) of
the Income Tax Regulations.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF OILQUIP
OilQuip represents and warrants to A-C as follows:
4.1 Organization, etc. OilQuip is a corporation duly organized and validly
existing and in good standing under the laws of the State of Delaware, and is
qualified or licensed to do business and is in good standing as a foreign
corporation in each other
jurisdictions in which the conduct of its business or the ownership of property
requires such qualification or licensing, except where failure to be so
qualified or licensed would not have a material adverse effect on the financial
condition or operations of OilQuip and its subsidiary, Mountain Compressed Air,
Inc. ("MCA"), taken as a whole (for OilQuip, a "Material Adverse Effect"). MCA
is duly organized and validly existing and in good standing under the laws of
the State of Texas, and is qualified or licensed to do business and is in good
standing as a foreign corporation in each other jurisdictions in which the
conduct of its business or the ownership of property requires such qualification
or licensing, except where failure to be so qualified or licensed would have a
Material Adverse Effect on OilQuip. Except for MCA, OilQuip does not own, of
record or beneficially, the securities of any other entity.
4.2 Authority. OilQuip has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder, and such action
has been duly authorized by all necessary action of OilQuip's Board of Directors
and stockholders.
4.3 Enforceability. This Agreement has been duly executed and delivered by
OilQuip and constitutes a legal, valid and binding obligation of OilQuip
enforceable in accordance with its terms, subject to: (i) judicial principles
respecting election of remedies or limiting the availability of specific
performance, injunctive relief, or other equitable remedies; (ii) bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect generally relating to or affecting creditors' rights; and (iii) public
policy concerns (including, without limitation, the ability of a court to refuse
to enforce unconscionable covenants, indemnification provisions or similar
provisions).
4.4 No Violation. The execution and the delivery by OilQuip of this
Agreement does not and will not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in a violation of, or (iv) require any notice, filing, authorization,
consent or approval not heretofore obtained pursuant to, any binding written or
oral agreement or instrument including, without limitation, any charter, bylaw,
trust instrument, indenture or evidence of indebtedness, lease, contract or
other obligation or commitment (each, a "Contractual Obligation") binding upon
OilQuip or MCA or any of their properties or assets, or any law, rule,
regulation, restriction, order, writ, judgment, award, determination, injunction
or decree of any court or government, or any decision or ruling of any
arbitrator (each, a "Requirement of Law") binding upon or applicable to OilQuip
or MCA or any of their properties or assets.
4.5 Litigation. There are no pending or overtly threatened actions, claims,
investigations, suits or proceedings by or before any governmental authority,
arbitrator, court or administrative agency which would have a Material Adverse
Effect on OilQuip.
4.6 Capitalization. Exhibit A hereto sets forth the record holders of all
outstanding shares of the OilQuip Common Stock (the "Issued Shares") and the
number of Issued Shares owned by such Shareholder. OilQuip has authorized Ten
Million shares of Common Stock, par value $0.01 per share, and has authorized no
other class of stock.
No shares of the OilQuip Common Stock are held in the
treasury of OilQuip. The Issued Shares are duly authorized, validly issued,
outstanding, fully paid and nonassessable. OilQuip owns 100% of the outstanding
Common Stock of MCA. Except as set forth on Schedule 4.6, there do not exist any
other authorized or outstanding securities, options, warrants, calls,
commitments, rights to subscribe or other instruments, agreements or rights of
any character, or any pre-emptive rights, convertible into or exchangeable for,
or requiring or relating to the issuance, transfer or sale of, any shares of
capital stock or other securities of OilQuip or MCA.
4.7 Financial Statements. Attached as Schedule 4.7 hereto are the following
financial statements (the "OilQuip Financial Statements"):
(a) unaudited financial statements of Mountain Air Drilling, Inc.
("Mountain Air") for the year ended December 31, 2000;
(b) an unaudited compilation Balance Sheet, Statement of Income and
Retained Earnings and Statement of Cash Flows of OilQuip at and for the
year ended December 31, 2000, and
(c) an unaudited "opening" Statement of Financial Condition of OilQuip
as of February 7, 2001. Except for the financial statements described in
(b) which are a compilation, the OilQuip Financial Statements are internal
statements prepared by management. Each of the OilQuip Financial Statements
(a) is complete and correct and presents fairly in all material respects
the consolidated financial condition of OilQuip MCA and Mountain Air, (b)
discloses all liabilities of OilQuip, Mountain Air and MCA that are
required to be reflected or reserved against under generally accepted
accounting principles, whether liquidated or unliquidated, fixed or
contingent, and (c) has been prepared in accordance with generally accepted
accounting principles consistently applied. Since February 7, 2001 there
has been no change which would have a Material Adverse Effect on OilQuip,
nor has OilQuip, Mountain Air or MCA mortgaged, pledged, granted a security
interest in or otherwise encumbered any of its assets or properties.
OilQuip has guaranteed certain of MCA's obligations and pledged its shares
of MCA capital stock as securities for such obligations.
4.8 Income Tax Returns. OilQuip has no knowledge of any pending assessments
or adjustments of the income tax payable of OilQuip or MCA (either itself or as
successor to Mountain Drilling) with respect to any year.
4.9 Permits, Franchises. OilQuip or MCA possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable them to conduct the business in which they are now engaged
in compliance with applicable law, except where failure to do so would not have
a Material Adverse Effect on OilQuip.
4.10 ERISA. OilQuip and MCA each is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974,
as amended or recodified from time to time ("ERISA"); neither OilQuip nor MCA
(either itself or as successor to Mountain Drilling) has violated, in any
material respect, any provision of any defined benefit employee pension benefit
plan (as defined in ERISA) maintained or contributed to by OilQuip or
MCA (each, a "Plan"); no Reportable Event as defined in ERISA has occurred
and is continuing with respect to any Plan initiated by OilQuip or MCA; OilQuip
and MCA each has met its minimum funding requirements under ERISA with respect
to each Plan; and each Plan will be able to fulfill its benefit obligations as
they come due in accordance with the Plan documents and under generally accepted
accounting principles.
4.11 Other Obligations. Neither OilQuip nor MCA is in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
4.12 Environmental Matters. OilQuip and MCA each has been in compliance in
all material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of OilQuip's or MCA's
operations and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any
of the same may be amended, modified or supplemented from time to time
(collectively, "Environmental Laws"). None of the operations of OilQuip or MCA
is the subject of any federal or state investigation evaluating whether any
remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment. To
the knowledge of OilQuip, neither OilQuip nor MCA has any material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment. This Section 4.12, together with the
representations and warranties of Mountain Drilling (as defined in Section 4.15
below) in the Purchase Agreement (as defined in Section 4.15 below) shall be the
only representations and warranties of OilQuip and MCA concerning environmental
matters, and no other representation and warranty in this Agreement shall apply
to environmental matters.
4.13 Real Property; Leases. Neither OilQuip nor MCA owns any real property.
Schedule 4.13 sets forth a complete and accurate list of each lease, sublease or
other arrangement pursuant to which either OilQuip or MCA leases or subleases
real property (collectively, the "Leased Premises"). Unless otherwise noted on
Schedule 4.13, OilQuip or MCA is the sole lessee or sublessee under each of the
leases and subleases listed on Schedule 4.13 and each such lease and sublease is
valid and in full force and effect and enforceable in accordance with its terms
and has not been further supplemented, amended or modified. Unless otherwise
noted on Schedule 4.13, there exists no material event of default or event,
occurrence, condition or act, including without limitation, the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereunder, which constitutes or would constitute (with notice or lapse of time
or both) a material default in any respect under any of the leases or subleases
on Schedule 4.13.
Neither OilQuip or MCA has received any notice of any event of default or any
event, occurrence, condition or act, including without limitation, the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereunder, which constitutes or would constitute (with notice or
lapse of time or both) a default in any respect under any of the leases or
subleases on Schedule 4.13.
4.14 No Consent Required. OilQuip's execution, delivery and performance of
this Agreement does not require the consent of approval of any other person or
entity which has not been obtained, including, without limitation, any
regulatory authority or governmental body of the United States of America or any
state thereof or any political subdivision of the United States of America or
any state thereof.
4.15 Limited Operations. OilQuip has not conducted any material business
operations other than: the formation of MCA, the acquisition through MCA
(including the financing of such acquisition) of the assets of Mountain Air
Drilling Service Co., Inc. ("Mountain Drilling"), the lease of its current
office at 1875 Century Park East, Suite 600, Los Angeles, CA 90067, the
engagement of Munawar Hidayatallah as Chief Executive Officer, the engagement of
Jeffrey Friedman as a financial advisor and the negotiation of this Agreement.
Since the acquisition of the assets of Mountain Drilling, such assets have been
operated in the ordinary course of business and there has been no material
change in the business of Mountain Drilling. To the knowledge of OilQuip, after
due inquiry of the officers of MCA, except as set forth on Schedule 4.15 hereto
the representations and warranties of Mountain Drilling set forth in the Asset
Purchase Agreement dated as of February 6, 2001, by and among Mountain
Compressed Air, Inc., a Texas corporation, Mountain Drilling and Rod Huskey and
Linda Huskey (the "Purchase Agreement"), are true and correct as of the date
hereof (without regard to any knowledge qualification set forth in the Purchase
Agreement), and there has been no material adverse development in the business
of MCA since the date of the Purchase Agreement.
4.16 Brokers. Except for the Friedman financial advisor agreement described
in Section 4.15, all negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by OilQuip directly with
A-C without the intervention of any person on behalf of OilQuip in such manner
as to give rise to any valid claim against A-C or OilQuip for a finder's fee,
brokerage commission or similar payment.
4.17 Full Disclosure. No representation, warranty, schedule or certificate
of OilQuip made or delivered pursuant to this Agreement contains or will contain
any untrue statement of fact, or omits or will omit to state a material fact the
absence of which makes such representation, warranty or other statement
misleading.
ARTICLE V
ADDITIONAL REPRESENTATION AND WARRANTY RELATING TO THE SHAREHOLDERS
OilQuip hereby represents and warrants to A-C that each Shareholder owns of
record the shares of OilQuip Common Stock indicated opposite such Shareholder's
name on Exhibit A hereto.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF A-C AND ACQUISITION
A-C and Acquisition each represent and warrant to OilQuip as follows:
6.1 Organization, etc. A-C is a corporation, duly organized and validly
existing and in good standing under the laws of the State of Delaware, and is
qualified or licensed to do business and is in good standing as a foreign
corporation in each other jurisdictions in which the conduct of its business or
the ownership of property requires such qualification or licensing, except where
failure to be so qualified or licensed would not have a material adverse effect
on the financial condition or operations of A-C and its Subsidiaries (as defined
below), taken as a whole (for A-C and its Subsidiaries, a "Material Adverse
Effect"). Each company (each, a "Subsidiary") listed on Schedule 6.1 hereof is
duly organized and validly existing and in good standing under the laws of the
jurisdiction of its organization, and is qualified or licensed to do business
and is in good standing as a foreign corporation in each other jurisdiction in
which the conduct of its business or the ownership of property requires such
qualification or licensing, except where failure to be licensed would not have a
Material Adverse Effect on A-C. Except for the Subsidiaries, A-C does not own,
of record or beneficially, the securities of any other entity. A true and
correct copy of the Certificate of Incorporation and Bylaws of A-C, as currently
in effect, is attached as Schedule 6.1 hereto.
6.2 Authority. A-C has the corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder, and such action
has been duly authorized by all necessary action of A-C's Board of Directors.
The issuance and sale of the A-C Common Stock to the Shareholders has been duly
authorized and if, as and when delivered to the Shareholders, such shares will
be duly and validly issued and outstanding, fully paid and nonassessable and
will be free of any Encumbrance (as defined below), other than those imposed
pursuant to this Agreement and securities laws of general application. As used
in this Agreement, "Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right of way,
encroachment, private building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title.
6.3 Enforceability. This Agreement has been duly executed and delivered by
A-C and constitutes a legal, valid and binding agreement and obligation of A-C
and Acquisition enforceable against each in accordance with its terms subject
to: (i) judicial principles respecting election of remedies or limiting the
availability of specific performance, injunctive relief, or other equitable
remedies; (ii) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect generally relating to or affecting
creditors' rights; and (iii) public policy concerns (including, without
limitation, the ability of a court to refuse to enforce unconscionable
covenants,
indemnification provisions or similar provisions).
6.4 No Violation. Except as set forth on Schedule 6.4, the execution and
the delivery by A-C and Acquisition of this Agreement does not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in a violation of, or (iv) require
any notice, filing, authorization, consent or approval not heretofore obtained
pursuant to, any Contractual Obligation binding upon A-C or any Subsidiary or
any of their properties or assets, or any Requirement of Law binding upon or
applicable to A-C or any Subsidiary or any of their properties or assets, except
for such conflicts, defaults or violations, filings, authorizations, consents or
approvals which would not have a Material Adverse Effect on A-C.
6.5 Litigation. Except as set forth on Schedule 6.5, there are no pending
or overtly threatened actions, claims, orders, decrees, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which would have a Material Adverse Effect on A-C.
6.6 Capitalization. The authorized capital stock of A-C consists of
2,000,000 shares of A-C Common Stock, 1,588,128 shares of which have been
validly issued as of the date hereof, and such issued shares are fully paid and
nonassessable. A-C owns 100% of the common stock of each of the Subsidiaries.
Except as set forth on Schedule 6.6 hereto, there do not exist any other
authorized or outstanding securities, options, warrants, calls, commitments,
rights to subscribe or other instruments, agreements or rights of any character,
or any pre-emptive rights, convertible into or exchangeable for, or requiring or
relating to the issuance, transfer or sale of, any shares of capital stock or
other securities of A-C or any Subsidiary.
6.7 Annual Report; Financial Statements. A-C's Annual Report on Form 10-K
for the year ended December 31, 2000 (the "Report") was filed with the
Securities and Exchange Commission (the "SEC") on April 2, 2001. The Report
complied in all material respects with the rules of the SEC applicable to such
Report on the date filed with the SEC, and the Report did not contain, on the
date of filing with the SEC, any untrue statement of a material fact, or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances in which they were made, not materially misleading. The Report
has not been amended, nor as of the date hereof has A-C filed any Report on Form
8-K since April 2, 2001. All of the consolidated financial statements included
in the Report (the "A-C Financial Statements"): (i) have been prepared from and
on the basis of, and are in accordance with, the books and records of A-C and
with generally accepted accounting principles applied on a basis consistent with
prior accounting periods; (ii) fairly and accurately present in all material
respects the consolidated financial condition of A-C as of the date of each such
A-C Financial Statement and the results of its operations for the periods
therein specified; and (iii) are accompanied by the audit (going concern)
opinion of A-C's independent public accountants. Except as set forth in Schedule
6.7 or in the A-C Financial Statements, as of the date hereof, A-C has no
liabilities other than (i) liabilities which are reflected or reserved against
in the A-C Financial Statements and which remain outstanding and undischarged as
of the date hereof, (ii) liabilities arising in the ordinary course of
business of A-C since December 31, 2000, (iii) liabilities incurred as a result
of the transactions contemplated by this Agreement or (iv) liabilities which
were not required by generally accepted accounting principles to be reflected or
reserved on the A-C Financial Statements. Since the date of filing of the Annual
Report, there has not been any event or change which has or will have a Material
Adverse Effect on A-C and A-C has no knowledge of any event or circumstance that
would reasonably be expected to result in such a Material Adverse Effect.
6.8 Release by Pension Benefit Guaranty Corporation. Subject to the
execution of the PBGC Letter, the Merger will be deemed to constitute a "Release
Event" as such is defined under that certain agreement dated February 28, 1999,
entered into by and between the Pension Benefit Guaranty Corporation ("PBGC")
and A-C, and will be effective to terminate and fully release A-C and the
Subsidiaries from any and all further obligation under those certain pension
funding liabilities carried on the books and records of A-C prior to the Closing
having an aggregate principal obligation as of December 31, 2000 of
approximately $66.9 million.
6.9 Income Tax Returns. A-C and the Subsidiaries have filed all federal and
state income tax returns which are required to be filed, and have paid, or made
provision for the payment of, all taxes which have become due pursuant to said
returns or pursuant to any assessment received by A-C or any Subsidiary, except
such taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided. A-C has no knowledge of any pending
assessments or adjustments of the income tax payable of A-C or its Subsidiaries
with respect to any year.
6.10 Permits, Compliance With Law. A-C and each Subsidiary possesses, and
will hereafter possess, all permits, consents, approvals, franchises and
licenses required and rights to all trademarks, trade names, patents, and
fictitious names, if any, necessary to enable them to conduct the business in
which it is now engaged in compliance with applicable law, except where failure
to do so would not have a Material Adverse Effect on A-C. A-C and each
Subsidiary are in compliance with all Requirements of Law in the conduct of its
business and corporate affairs, except where failure to comply, singly or in the
aggregate, would not have a Material Adverse Effect on A-C.
6.11 ERISA. Except as set forth on Schedule 6.11, A-C and each Subsidiary
is in compliance in all material respects with all applicable provisions of
ERISA; A-C and each Subsidiary has not violated any provision of any Plan
maintained or contributed to by it; no Reportable Event as defined in ERISA has
occurred and is continuing with respect to any Plan initiated by A-C or any
Subsidiary; A-C and each Subsidiary has met its minimum funding requirements
under ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles. Schedule 6.11 describes each
Plan maintained by A-C and each of its Subsidiaries.
6.12 Contracts. Schedule 6.12 sets forth a description of each agreement,
contract lease, license evidence of indebtedness, mortgage, indenture, security
agreement, or other instrument, whether written or oral (collectively,
"Contracts"), which provides
for payments to or by A-C or any Subsidiary in excess of $25,000, or is
otherwise material to the operations of A-C or any Subsidiary. Neither A-C nor
any Subsidiary is in default on any Contract, except for such defaults which
would not have a Material Adverse Effect on A-C.
6.13 Environmental Matters. Except as set forth on Schedule 6.13, since
January 1, 1989, A-C and its subsidiaries (including the Subsidiaries) have at
all times been in compliance in all material respects with all applicable
Environmental Laws. Except as set forth on Schedule 6.13, none of the operations
of A-C or any Subsidiary is the subject of any federal or state investigation
evaluating whether any remedial action involving a material expenditure is
needed to respond to a release of any toxic or hazardous waste or substance into
the environment. To A-C's knowledge, except as set forth on Schedule 6.13,
neither A-C nor any Subsidiary has received notice of any actual or threatened
claim, investigation, proceeding, order or decree in connection with any release
of any toxic or hazardous waste or substance into the environment. This Section
6.13 shall be the sole representation and warranty of A-C concerning
environmental matters, and no other representation and warranty in this
Agreement shall apply to environmental matters.
6.14 Trademarks, etc. A-C and the Subsidiaries own, have sufficient title
to, or have the right to use (or can obtain the right to use on reasonable
commercial terms), all patents, trademarks, service marks, trade names,
copyrights, licenses, trade secrets or other proprietary rights (collectively,
the "Proprietary Rights") necessary to their business as now conducted without
infringing upon the right of any person. Except for employee confidentiality
agreements with employees and consultants, there are no outstanding material
options, licenses or agreements relating to intellectual property rights of A-C
or any Subsidiary necessary to their business as now conducted, nor is A-C or
any Subsidiary bound by or a party to any material options, licenses or
agreements with respect to the Proprietary Rights of any other person or entity.
Neither A-C nor any Subsidiary has received any communications alleging that A-C
has violated or, by conducting its business as proposed, would violate, any of
the Proprietary Rights of any other person or entity. A-C and the Subsidiaries
are not aware of any material violation by a third party of any of their
Proprietary Rights necessary to their business as now conducted.
6.15 Real Property. Schedule 6.15 sets forth all of the real property which
is owned and/or leased by each of A-C and the Subsidiaries (collectively, the
"Real Property"). The Real Property constitutes all of the real property now
used in and necessary for the conduct of the business of A-C and the
Subsidiaries as presently conducted. A-C has delivered to OilQuip true and
complete copies of all leases relating to such properties (the "Leases"). The
Leases are in full force and effect and are valid, binding, and enforceable in
accordance with their terms, and no event of default has occurred which (whether
with or without notice, lapse of time or both or the happening or occurrence of
any other event) would constitute a default on the part of any party. Except as
set forth in Schedule 6.15, all real property, buildings and structures owned or
used by A-C and the Subsidiaries are in good condition and suitable for the
purpose or purposes for which it is being used, reasonable wear and tear
excepted, and is in such
condition and repair as to permit the continued operation of said businesses.
None of the Real Property, buildings or structures is in need of material
maintenance or repairs except for ordinary, routine maintenance and repairs.
6.16 Employees. Except as set forth on Schedule 6.16, all employees of A-C
and each Subsidiary are employed "at will" and may be terminated without payment
of severance or incurrence of any other liability of A-C or the Subsidiaries; no
employee of A-C is in violation of any term of any material employment contract,
confidentiality agreement or any other material contract or agreement relating
to the right of any such employee to be employed by A-C or any Subsidiary; and
neither A-C nor any Subsidiary has any employee severance agreement covering any
of its employees. There are no labor disputes or union organization activities
pending or threatened between A-C or the Subsidiaries and their employees. A-C
and the Subsidiaries require each employee and consultant to execute an employee
inventions and proprietary rights assignment and confidentiality agreement, and
copies of such agreements have been made available to OilQuip.
6.17 Insurance. A-C and the Subsidiaries currently maintain, in full force
and effect, all insurance policies that are reasonably required to be maintained
for the conduct of its business or the ownership of its properties (both real
and personal) (collectively, the "Insurance Policies"). True and complete copies
of all Insurance Policies have been made available to OilQuip. A-C (a) is not in
default regarding the provisions of any Insurance Policy; (b) has paid all
premiums due thereunder; and (c) has not failed to present any notice or
material claim thereunder in a due and timely fashion. The coverage provided by
the Insurance Policies, with respect to any insured act or event occurring on or
prior the Effective Date, will not in any way be affected by or terminate or
lapse by reason of the transactions contemplated hereby. Schedule 6.17 sets
forth a listing of all policies maintained by A-C and a listing, by policy, of
all outstanding claims and the amount thereof made by A-C under each such
policy.
6.18 Bank Accounts. Schedule 6.18 sets forth the names and locations of all
banks, trust companies, savings and loan associations, stock brokerages and
other financial institutions at which A-C and Acquisition maintain accounts of
any nature, or safe deposit boxes, and the name of all persons authorized to
draw thereon or make withdrawals therefrom.
6.19 Title to Properties. The assets owned or leased by A-C and its
Subsidiaries are all of the assets necessary to conduct the business of A-C and
its Subsidiaries as currently being conducted. A-C and its Subsidiaries have
good and marketable title to substantially all of the assets they own, real and
personal, movable and immovable, tangible and intangible, free and clear of all
Encumbrances, except for: (a) liens for taxes not yet due and payable, (b)
Encumbrances described on Schedule 4.19 hereto, or (c) minor imperfections of
title and encumbrances, if any, which (i) are not substantial in amount, (ii) do
not detract from the value of the property subject thereto, impair the
operations of the business of A-C, or the use or license of certain of the
assets of A-C, and (iii) have arisen in the ordinary course of business
consistent with past practice.
6.20 Related Party Transactions. Except for those contracts described on
Schedule 6.20 hereto, no existing contract of A-C or its Subsidiaries is with or
for the direct benefit of (i) any party owning, or formerly owning, beneficially
or of record, directly or indirectly, in excess of five percent of the
outstanding capital stock of A-C, (ii) any director, officer or similar
representative of A-C, (iii) any natural person related by blood, adoption or
marriage to any party described in (i) or (ii), or (iv) any entity in which any
of the foregoing parties has, directly or indirectly, at least a five percent
beneficial interest (a "Related Party"). Without limiting the generality of the
foregoing, no Related Party, directly or indirectly, owns or controls any
material assets or material properties which are used in A-C's business and to
the knowledge of A-C, no Related Party, directly or indirectly, engages in or
has any significant interest in or connection with any business which is, or has
been within the last two years, a competitor, customer or supplier of A-C or has
done business with A-C or which currently sells or provides products or services
which are similar or related to the products or services sold or provided in
connection with the Business.
6.21 Brokers. The transactions contemplated hereby have been carried out by
A-C directly with OilQuip and the Shareholders without the intervention of any
person on behalf of A-C in such manner as to give rise to any valid claim
against A-C or OilQuip for a finder's fee, brokerage commission or similar
payment.
6.22 Securities Law Matters. To the best of its knowledge and except for
A-C's failure to hold annual meetings of its stockholders, since January 1, 1999
A-C has filed all reports, registration statements, proxy statements and other
materials, together with any amendments required to be made with respect
thereto, that were required to be filed with (i) the SEC under the Securities
Act or the Exchange Act of 1934, as amended (all such reports and statements are
collectively referred to herein as the "Securities Filings"), and (ii) any
applicable state securities authorities. To the knowledge of A-C, no such
Securities Filing, as of the date it was filed, contained any untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Subject to the accuracy of the representations set forth
in the Shareholder Representation Letters attached as Exhibit B hereto, the
offer and sale of the Shares to the Shareholders will be exempt from the
Securities Act.
6.23 Full Disclosure. No representation, warranty, schedule or certificate
of A-C made or delivered pursuant to this Agreement contains or will contain any
untrue statement of fact, or omits or will omit to state a material fact the
absence of which makes such representation, warranty or other statement
misleading.
ARTICLE VII
COVENANTS OF THE PARTIES
7.1 Access Pending Closing; Exclusivity.
(a) Access to A-C. A-C shall (i) give to OilQuip and its counsel,
accountants and other representatives reasonable access, during normal business
hours,
throughout the period prior to the Effective Date to all of the books,
contracts, commitments and other records of A-C and shall furnish OilQuip during
such period with all information concerning A-C that OilQuip may reasonably
request; and (ii) afford to OilQuip and its representatives, agents, employees
and independent contractors reasonable access, during normal business hours, to
the properties of A-C, in order to conduct inspections at their expense to
determine that A-C is operating in compliance with all applicable federal,
state, local and foreign statutes, rules and regulations, and all material
building, fire and zoning laws or regulations and that the assets of A-C are
substantially in the condition and of the capacities represented and warranted
in this Agreement; provided, however, that in every instance described in (i)
and (ii), OilQuip shall make arrangements with A-C reasonably in advance and
shall use their reasonable best efforts to avoid interruption and to minimize
interference with the normal business and operations of A-C. Any such
investigation or inspection by OilQuip shall not be deemed a waiver of, or
otherwise limit, the representations, warranties or covenants of A-C contained
herein.
(b) Exclusivity to OilQuip. Until either the Agreement is terminated or
consummated, A-C agrees not to solicit any other inquiries, proposals or offers
to purchase or otherwise acquire, in a merger transaction or another type of
transaction, the business of A-C or the shares of capital stock of A-C. A-C
further agrees to advise OilQuip promptly of any such inquiry or offer.
(c) Access to OilQuip. OilQuip shall (i) give to A-C and to A-C's
counsel, accountants and other representatives reasonable access, during normal
business hours, throughout the period prior to the Effective Date, to all of the
books, contracts, commitments and other records of OilQuip and shall furnish A-C
during such period with all information concerning OilQuip that A-C may
reasonably request; and (ii) afford to A-C and to A-C's representatives, agents,
employees and independent contractors reasonable access, during normal business
hours, to the properties of OilQuip in order to conduct inspections at A-C's
expense to determine that OilQuip is operating in compliance with all applicable
federal, state, local and foreign statutes, rules and regulations, and all
material building, fire and zoning laws or regulations and that the assets of
OilQuip are substantially in the condition and of the capacities represented and
warranted in this Agreement; provided, however, that in every instance described
in (i) and (ii), A-C shall make arrangements with OilQuip reasonably in advance
and shall use its reasonable best efforts to avoid interruption and to minimize
interference with the normal business and operations of OilQuip. Any such
investigation or inspection by A-C shall not be deemed a waiver of, or otherwise
limit, the representations, warranties or covenants of OilQuip contained herein.
(d) Exclusivity to A-C. Until either this Agreement is terminated or
consummated, OilQuip agrees not to make, directly or indirectly, any other
inquiries, proposals or offers to purchase or otherwise acquire, in a merger
transaction or another type of transaction, the business or the shares of
capital stock of any other company. OilQuip furthers agree to advise A-C
promptly of any such inquiry or offer.
7.2 Operation of the Business. Between the date of this Agreement and the
Effective Date, each of A-C and OilQuip will conduct its business only in the
ordinary course of business, and will:
(a) except as set forth in Section 7.11, not amend its charter or
bylaws;
(b) not increase the compensation or benefits (including, without
limitation, salary, bonus and commission schedules) of any personnel, except for
non-key management personnel in the ordinary course of business;
(c) use its reasonable best efforts to preserve intact its current
business organization, keep available the services of its personnel, and
maintain the relations and good will with suppliers, customers, landlords,
creditors, employees, agents, and others having business relationships with it
consistent with its sound business judgment and past practices;
(d) not issue or sell any debt or equity securities, (including upon
the exercise of currently outstanding options, warrants and other rights)
declare, set aside or pay any dividend or distribution in respect of its
securities, or directly or indirectly redeem or repurchase any outstanding
securities;
(e) not sell, assign, transfer, convey, lease or otherwise dispose of
or subject to any Encumbrance any of its assets, except for sales of inventory
and used equipment, in each case in the ordinary course of business consistent
with past practice
(f) not acquire by merger or consolidation with, or merge or
consolidate with, or purchase substantially all of the assets of, or otherwise
acquire any material assets or business of any person;
(g) not make any loans or advances to any person, except in the
ordinary course of business nor discharge any debt prior to the scheduled
maturity thereof;
(h) not make any payment or enter into any agreement or other
transaction with any officer or director of such party, or MCA or any
Subsidiary, other than employment compensation and benefits on the terms
currently in effect;
(i) not fail to comply in any material respect with all Requirements of
Law applicable to its business;
(j) not make any operational changes or developments of a material
nature; and
(k) not enter into, amend or terminate any Contract which is or would
be required to be disclosed in Schedule 6.12 hereto.
7.3 Reasonable Best Efforts. Each of the parties hereto shall use its
reasonable best efforts to take promptly, or cause to be taken, all actions,
necessary, proper or advisable to consummate the transactions contemplated
hereby (including
obtaining all necessary waivers, consents and approvals) on or before May 9,
2001 or as soon as practicable thereafter. Without limiting the generality of
the foregoing, A-C shall use its reasonable best efforts to fulfill the
conditions set forth in Section 8.2 and OilQuip shall use its reasonable best
efforts to fulfill the conditions set forth in Section 8.1.
7.4 Notification of Certain Matters. A-C, Acquisition, and OilQuip shall
each give prompt notice to the other parties of the occurrence or non-occurrence
of any event, the occurrence or non-occurrence of which is likely to cause any
conditions set forth in Article VIII not to be satisfied; provided, however,
that the delivery of any notice pursuant to this Section 7.4 shall not limit or
otherwise affect any remedies available to the party receiving such notice and
no disclosure pursuant to this Section 7.4 shall be deemed to amend or
supplement any written disclosure previously made by one party thereafter, or
prevent or cure any misrepresentations, breach of warranty or breach of
covenant, unless the recipient party shall agree in writing to accept the
disclosures set forth in any such notice.
7.5 Additional Documents and Further Assurances. Each party hereto, at the
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement, the
Merger and the transactions contemplated hereby.
7.6 Registration of the A-C Common Stock.
(a) Following the Effective Time, A-C shall evaluate the feasibility of
listing the A-C Common Stock on an exchange. Moreover, A-C shall use its
reasonable efforts to cause (i) the A-C Common Stock to be eligible for listing
on a national securities exchange or the Nasdaq Market System, and (ii) the A-C
Common Stock to be approved for listing on such exchange, as soon as practicable
after the Effective Date. The obligations of A-C under Section 7.6 shall be
conditioned upon such listing, and the date of such listing is referred to
herein as the "Listing Date".
(b) Following the Listing Date and until the second anniversary of the
Listing Date, the Shareholders shall have the right to require A-C to file with
the SEC, at A-C's sole cost and expense, on no more than one occasion, a
registration statement on Form S-3 (or such other form as the SEC may from time
to time prescribe for such purposes) covering as many of the Shares as the
Shareholders elect to include therein (the "Shareholders Registration
Statement") and to cause the Shareholders Registration Statement to be declared
effective by the SEC within 90 days thereafter and to maintain the effectiveness
of the Shareholders Registration Statement until the earlier of (i) the
completion of the offering covered by the Shareholders Registration Statement,
(ii) the first anniversary of the effectiveness of the Shareholders Registration
Statement and (iii) the date the Shareholders shall become entitled to sell the
Shares pursuant to subsection (k) of Rule 144; in the event A-C proposes to
register an underwritten offering of its Common Stock for its own account under
the Act, it shall have the right to delay or suspend the filing or effectiveness
of the Shareholders Registration Statement for up to an aggregate of 120 days in
any 12-month period to facilitate such registration. If the
Shareholders propose to effect an underwritten offering, A-C shall enter into an
Underwriting Agreement in customary form with the managing underwriter selected
by the Shareholders.
Notwithstanding the foregoing, in the event of a material development in the
business of A-C, A-C shall advise the Shareholders of such event and the
Shareholders shall cease using the prospectus included in the Shareholders
Registration Statement until forty-eight (48) hours following the public
disclosure of such event. A-C shall promptly disclose all such material
developments, provided that it shall be entitled to delay such disclosure for a
reasonable period of time for valid business purposes, not to exceed five (5)
business days without the consent of the Shareholders, which consent shall not
be unreasonably withheld.
(c) If, at any time or from time to time, A-C determines to register
any of its securities for its own account or the account of any other
shareholder, other than a registration relating to employee benefit plans (or
the resale of securities acquired pursuant thereto) or a transaction pursuant to
Rule 145 of the SEC, A-C shall include in such registration such number of the
Shares as the Shareholders shall request in writing within ten (10) business
days following receipt of notice of such registration, provided that, if such
registration is underwritten, it shall be a condition that the Shareholders
participate in such underwriting and enter into an underwriting agreement in
customary form with the managing underwriter selected by A-C. If the managing
underwriter determines that market forces require limitation of the number of
shares to be underwritten, the number of Shares owned by the Shareholders to be
included in the registration may be limited or eliminated, provided that the
Shareholders shall be treated on at least a pari passu basis with all other
shareholders participating in such registration (other than those shareholders
exercising demand registration rights).
(d) All registration expenses (including legal fees) in connection with
the registrations contemplated by this Section 7.6 shall be borne by A-C, but
all selling expenses of the Shareholders (including broker fees, underwriting
commissions and the cost of any special legal counsel representing the
Shareholders) shall be borne by the Shareholders. In connection with any such
registration statement, the Shareholders shall promptly furnish A-C with such
written representations, information and consents regarding the Shareholders,
the Shares and the intended method of distribution of the Shares as shall be
necessary for inclusion in the Registration Statement.
(e) A-C shall enter into customary agreements (including
indemnification agreements) and do such other things as OilQuip shall reasonably
request in connection with the registration of the A-C Common Stock pursuant to
this Section.
7.7 Rights Offering. Within one year following the Effective Date, A-C
shall file a registration statement on Form S-3 with respect to a rights
offering (the "Rights Offering") pursuant to which it shall offer holders of A-C
Common Stock (other than the holders of the A-C Common Stock issued pursuant to
this Agreement) the right to acquire in the aggregate 1,000,000 shares of Common
Stock at a purchase price not in excess of $2.00 per share (equitably adjusted
for any reverse stock split or other
recapitalization), and A-C shall thereafter take all steps necessary to (a)
cause the SEC to declare such registration statement effective, (b) maintain the
effectiveness of the registration statement until the Rights Offering is
completed, and (c) complete the Rights Offering. Notwithstanding the foregoing,
A-C's obligation to effect the Rights Offering shall be tolled during any period
during which the fair market value of the A-C Common Stock is less than $2.00
(equitably adjusted for any reverse stock split or other recapitalization and
shall be cancelled if the fair market value of the A-C Common Stock remains less
than $2.00 (equitable adjusted for a reverse stock split or other
recapitalization) for more than 18 months following the Effective Date. As used
herein, the fair market value of the A-C Common Stock shall be equal to the
average price of the A-C Common Stock during the 30 trading days ending on the
2nd trading day preceding the date of evaluation. The price of the A-C Common
Stock on any trading day shall mean the mean between the closing bid and ask
price for the A-C Common Stock, as quoted by NASDAQ or any exchange on which the
A-C Common Stock is then traded.
7.8 Expenses. Each party shall bear its own costs and expenses in
connections with the negotiation and consummation of this Agreement.
7.9 Public Disclosures. A-C and OilQuip shall consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or the Merger or the transactions contemplated hereby
or thereby and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law.
7.10 Tax Treatment. OilQuip and A-C shall each report the Merger as a tax
free reorganization and shall not take, and shall use commercially reasonable
efforts to prevent any of their respective subsidiaries or affiliates from
taking, any actions that could prevent the Merger from qualifying, as a tax free
reorganization under the provisions of Section 368(a) of the Code.
7.11 Charter Amendment. A-C shall use its best efforts to amend its
certificate of incorporation as set forth on Exhibit C hereto as soon as
practicable following the Effective Date, and shall take all actions reasonably
requested by the Shareholders to effect such amendment.
7.12 Independent Committee.
(a) Following the Effective Date, A-C shall use reasonable efforts to
identify and cause to be appointed to the Board of Directors of A-C one or more
persons who are independent of the Shareholders and who shall be delegated
authority to review and approve A-C's performance of its obligations and the
enforcements of its rights hereunder, including the rights offering described in
Section 7.7 (the "Independent Committee").
(b) The Independent Committee shall be authorized and empowered to (i)
compromise on behalf of A-C with OilQuip and the Shareholders any claims
asserted under this Agreement, and (ii) to take such further actions related to
the rights and
obligations of A-C set forth in this Article VII. For purposes hereof, a person
shall be deemed to be an "independent director" if he or she (A) has never been
an executive officer or employee of, or consultant to, Oil Quip or its
subsidiaries and affiliates and does not serve as an executive officer or
employee of, or consultant to, A-C, following the Effective Date, (B) is not a
Shareholder, (C) is not a family member (i.e., parent, sibling, grandparent,
mother-in-law, father-in-law, spouse, former spouse, child, stepchild,
grandchild or any other blood or legal relative) of any executive officer or any
employee or consultant described in clause (A) above or of any Shareholder, and
(D) is free from any other relationship that, in the good faith opinion of the
Board of Directors of A-C, would interfere with the exercise of independent
judgment in carrying out the responsibilities of an independent director under
this Section 7.12.
ARTICLE VIII
CONDITIONS TO THE MERGER
8.1 Conditions to Obligations of A-C and Acquisition. The obligations each
of A-C and Acquisition to consummate and effect the Merger and the other
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Date of each of the following conditions, any of which
may be waived, in writing, exclusively by A-C:
(a) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there by any action taken, or any statute, rule, regulation,
injunction order or decree enacted, entered, enforced, promulgated, issued or
deemed applicable to the Merger which makes the consummation of the Merger
illegal.
(b) Legal Opinion. A-C shall have received the opinion of Spolin
Silverman Cohen & Bartlett LLP, counsel to OilQuip, in the form attached hereto
as Exhibit D hereto.
(c) Representations and Warranties. The representations and warranties
of OilQuip in this Agreement shall be true and correct in all respects on and as
of the Effective Date as though such representations and warranties were made on
and as of such time, except for those representations and warranties which
address matters only as of a particular date (which shall be true and correct
only as of such date), and for such inaccuracies as individually or in the
aggregate would not have a Material Adverse Effect on OilQuip.
(d) Covenants. OilQuip shall have performed and complied in all
material respects with all covenants and obligations of this Agreement required
to be performed and complied with by OilQuip as of the Effective Date.
(e) Tender of Shares of OilQuip Common Stock. All shares of QilQuip
Common Stock shall have been delivered to A-C for exchange into shares of A-C
Common Stock.
(f) Certificate of OilQuip. A-C shall have been provided with a
certificate executed on behalf of OilQuip by its Chief Executive Officer to the
effect that, as of the Effective Date, the conditions set forth in Sections
8.1(c) and 8.1(d) have been met with respect to OilQuip.
(g) Shareholder Representation Letters. A-C shall have received the
Shareholder Representation Letters in the form of Exhibit B hereto.
8.2 Conditions to the Obligations of OilQuip. The obligations of OilQuip to
consummate and effect the Merger and the other transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Date of each
of the following conditions, any of which may be waived, in writing, exclusively
by OilQuip:
(a) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, seeking any of the foregoing be pending;
nor shall there by any action taken, or any statute, rule, regulation,
injunction order or decree enacted, entered, enforced, promulgated, issued or
deemed applicable to the Merger which makes the consummation of the Merger
illegal.
(b) Legal Opinion. OilQuip shall have received the opinion of Swidler
Berlin Shereff Friedman, LLP, counsel to A-C, in the form attached hereto as
Exhibit E hereto.
(c) Representations and Warranties. The representations and warranties
of A-C and Acquisition in this Agreement shall be true and correct in all
respects and as of the Effective Date as though such representations and
warranties were made on and as of the Effective Date, except for those
representations and warranties which address matters only as of a particular
date (which shall be true and correct only as of such date), and for such
inaccuracies as individually or in the aggregate would not have a Material
Adverse Effect on A-C or Acquisition.
(d) Covenants. A-C and Acquisition shall have performed and complied in
all material respects with all covenants and obligations of this Agreement
required to be performed and complied with by them as of the Effective Date.
(e) A-C Board of Directors. A-C shall have caused such resignations and
appointments as are necessary to establish those officers and directors
identified in Exhibit F. hereto as the officers and directors of A-C and the
Subsidiaries.
(g) Trustee's Letter. On or prior to the Closing, A-C shall have
received a letter from the trustee of the Allis-Chalmers Corp. Reorganization
Trust in the form of Exhibit G hereto and shall have entered into a Service
Agreement in the form of Exhibit H hereto.
(g) PBGC. A-C shall have received a letter and a Termination Agreement,
each in the form of Exhibit I hereto, executed by all parties.
(h) Agreement and Proxy. The PBGC and AL-CH, L.P. shall have executed
and delivered to the Shareholders an Agreement and Proxy in the form of Exhibit
J hereto.
(i) Certificate of A-C. OilQuip and each Shareholder shall have been
provided with a certificate executed on behalf of each of A-C and Acquisition by
its President or Chief Executive Officer, as of the Effective Date, certifying
that the conditions set forth in Sections 8.2(c) and 8.2(d) have been met.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 Termination Events. This Agreement may, by notice given prior to or at
the Closing, be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by A-C if a material breach of any provision of this Agreement has
been committed by OilQuip, and such breach has not been waived and such breach
(if curable) is not cured within 10 days after notice thereof, or if any of the
conditions in Section 8.1 has not been satisfied on May 31, 2001 (or other date
specified in this Agreement with respect to any such condition) or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of A-C to comply with its obligations under this Agreement) and A-C
has not waived such condition on or before the Effective Date.
(b) by OilQuip if a material breach of any provision of this Agreement
has been committed by A-C, and such breach has not been waived and such breach
(if curable) is not cured within 10 days after notice thereof, or if any of the
conditions in Section 8.2 has not been satisfied on May 31, 2001 (or other date
specified in this Agreement with respect to any such condition) or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of OilQuip to comply with its obligations under this Agreement) and
OilQuip has not waived such condition on or before the Effective Date.
(c) by mutual consent of OilQuip and A-C.
(d) by any party if the Closing has not occurred (other than through
the failure of any party seeking to terminate this Agreement to comply fully
with its obligations under this Agreement) on or before the later of May 31,
2001, or such later date as the parties may agree upon.
9.2 Effect of Termination Prior to the Effective Date, termination shall be
the parties' exclusive remedy for a breach of any representation, warranty or
covenant.
ARTICLE X
GENERAL PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified (return
receipt requested) or overnight mail or sent via facsimile (with acknowledgment
of complete transmission) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice); provided,
however, that notices sent by mail will not be deemed given until received:
(a) if to OilQuip: OilQuip Rentals, Inc.
1875 Century Park East, Suite 600
Los Angeles, CA 90067
Attn: Munawar Hidayatallah
Fax: (310) 407-5499
with a copy to: Spolin Silverman Cohen & Bartlett LLP
1620 26th Street, Suite 2000 North
Santa Monica, California 90404
Attn: Joseph P. Bartlett
Fax: (310) 586-2444
(b) if to A-C or Acquisition: Allis-Chalmers Corporation
c/o William Vital
4180 Cherokee Drive
Brookfield, WI 53045
Fax: (262) 781-4842
Allis-Chalmers Corporation
2255 Glades Road
Suite 307E
Boca Raton, FL 33431
Attn: John Grigsby/Jim Dietrich
Fax: (561) 994-3298
and Allis-Chalmers Corporation
c/o Houston Dynamic Service, Inc.
8150 Lawndale
Houston, TX 77012
Attn: James Dietrich
Fax: (713) 928-2903
with a copy to: Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York 10174
Attn: Adam M. Fox
Fax: (212) 891-9507
10.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
10.3 Counterparts; Facsimile Signatures. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart. This Agreement
may be executed by facsimile, and a facsimile signature shall have the same
force and affect as an original signature on this Agreement.
10.4 Entire Agreement. This Agreement and the documents, Schedules and
instruments referred to herein and to be delivered pursuant hereto constitute
the entire agreement between the parties pertaining to the subject matter
hereof, and supersede all other prior contemporaneous agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof, except for the Confidentiality Letter
Agreement between A-C and OilQuip dated as of February 12, 2001. There are no
other representations or warranties, whether written or oral, between the
parties in connection with the subject matter hereof, except as expressly set
forth herein.
10.5 Assignments; Parties in Interest. Neither this Agreement nor any of
the rights, interests or obligations hereunder may be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing herein, express or
implied, is intended to or shall confer upon any person not a party hereto any
right, benefit or remedy of any nature whatsoever under or by reason hereof,
except as otherwise provided herein.
10.6 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal, void
or unenforceable, the remainder of this Agreement will continue in full force
and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.
10.7 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
10.9 Rights of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement,
and therefor, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
10.10 Third Party Beneficiaries. The Shareholders are direct third-party
beneficiaries of the obligations of A-C hereunder.
10.11 Specific Performance. The parties hereto agree that irreparable
damage could occur in the event any provision of this Agreement, including
Article III hereof, was not performed in accordance with the terms hereof.
Without limiting the generality of the foregoing, A-C hereby acknowledges that
(i) the obligation of A-C to issue shares of A-C Common Stock to the
Shareholders is fundamental and required for the protection of the Shareholders
and to preserve for the Shareholder the benefits of the Merger, (ii) the A-C
Common Shares are of a unique character, and (iii) a breach of such obligation
will result in irreparable harm and damages to the Shareholders which cannot be
adequately compensated by a monetary award. Accordingly, A-C hereby expressly
agrees that, should the Merger be consummated, in addition to all other remedies
available to law or in equity, the Shareholders shall be entitled to the
immediate remedy of specific performance, a temporary and/or permanent
restraining order, preliminary injunction or such other form of injunctive or
equitable relief as may used by the court to competent jurisdiction to restrain
or enjoin any of the parties hereto from breaching any representations,
warranties, covenants or restrictions set forth in Article III of this
Agreement, or to specifically enforce the terms and provisions of Article III
hereof. A-C further agrees that neither the Shareholders nor any other Person
shall be required to obtain, furnish or post any bond or similar instrument in
connection with or as a condition to obtaining any remedy referred to in Section
10.11, and A-C irrevocably waives any right it may have to require the
obtaining, furnishing or posting of any such bond or similar instrument. If any
legal action or other legal proceeding relating to this Agreement or the
enforcement of any provision of this Agreement is brought by a party hereto, the
prevailing party shall be entitled to recover reasonable attorneys' fees, costs
and disbursements (in addition to any other relief to which the prevailing party
nay be entitled). The foregoing rights shall be in addition to any other right
or remedy any person hereto may have at law or in equity.
10.12 Arbitration.
(a) Rules of Arbitration. All disputes arising in connection with this
Agreement, other than matters pertaining to equitable relief, shall be finally
settled by arbitration by the American Arbitration Association ("AAA") in Los
Angeles, California, in accordance with the rules of the AAA; except that, to
the extent necessary to render the decision of the Arbitrator enforceable in the
courts of the State of California, the arbitration rules set forth in the
California Code of Civil Procedure, Section 1280 et seq. (the "Rules of
Arbitration") and the provisions of Section 1283.05 of the Rules of Arbitration
concerning rights of discovery shall govern. Judgment on the award rendered by
the arbitration panel (the "Arbitration Panel") may be entered in any court of
competent jurisdiction.
(b) Initiation of Arbitration. Any party which desires to initiate
arbitration proceedings may do so by delivering written notice to the other
party (the "Arbitration Notice") specifying (x) the nature of the dispute or
controversy to be arbitrated; (y) the name and address of the arbitrator
appointed by the party initiating such arbitration; and (z) such other matters
as may be required by the Rules of Arbitration. The party who receives an
Arbitration Notice shall appoint an arbitrator and notify the initiating party
of such arbitrator's name and address within 30 days after delivery of the
Arbitration Notice; otherwise, a second arbitrator shall be appointed at the
request of the party who delivered the Arbitration Notice. The two arbitrators
so appointed shall appoint a third arbitrator who shall be chairman of the
Arbitration Panel and the "neutral arbitrator" for purposes of the Rules of
Arbitration.
(c) Decisions Final. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review except to the extent set forth in the California Code of Civil
Procedure, (section) 1285 et seq.
(d) Injunctive Relief. Any proceeding for injunctive relief (including
temporary restraining orders, preliminary injunctions and permanent injunctions)
may be brought in any court of competent jurisdiction, and the parties consent
to the jurisdiction of the California courts for such purpose.
10.13 Knowledge Defined. As used herein, "knowledge" shall mean knowledge of a
particular fact or other matter, provided that (a) A-C shall be deemed to have
"knowledge" of all facts actually known to John Grigsby and Jim Dietrich, as
well as all facts in A-C's corporate records and files which reasonably would
have been discovered by or known to a person making a prudent review of such
files to determine the accuracy of any representation or warranty made by A-C in
this Agreement or compliance by A-C with any of the covenants in this Agreement,
and (b) OilQuip shall be deemed to have "knowledge" of all facts known to
Munawar Hidayatallah, as well as all facts in OilQuip's corporate records and
files (but not including corporate records and files of Mountain Drilling it
being agreed and acknowledged that OilQuip's and Munawar Hidayatallah's
knowledge regarding the business purchased from Mountain Air Drilling Service
Co., Inc. is limited to the representations, warranties and schedules delivered
to OilQuip in connection with the purchase of the assets of Mountain Drilling
and his due
inquiry of the officers of MCA) which would have been discovered by or known to
a person making a prudent review of such files to determine the accuracy of any
representation or warranty made by OilQuip in this Agreement or compliance by
A-C with any of the covenants in this Agreement.
IN WITNESS WHEREOF, A-C, OilQuip and Acquisition have caused this Agreement to
be signed and delivered by their respective duly authorized officers has signed
and delivered this Agreement, all as of the date first written above.
Allis-Chalmers Corporation
By: /s/ John T. Grigsby, Jr.
-------------------------------
John T. Grigsby, Jr.
Chief Financial Officer
Allis-Chalmers Acquisition Corp.
By: /s/ Robert E. Nederlander
-------------------------------
Robert E. Nederlander
President
OilQuip Rentals, Inc.
By: /s/ Munawar Hidayatallah
---------------------------------
Munawar Hidayatallah
President
ANNEX B
AGREEMENT AND PROXY
THIS AGREEMENT AND PROXY (this "Agreement") is entered into as of May 9,
2001 by and between the Pension Benefit Guaranty Corporation (the "PBGC"), both
individually and on behalf of the Allis-Chalmers Consolidated Pension Plan (the
"Plan"), AL-CH, L.P., a Delaware limited partnership ("AL-CH"), and the
shareholders (the "Shareholders") of OilQuip Rentals, Inc, a Delaware
corporation ("OilQuip"), named on Exhibit "A" hereto.
R E C I T A L S
- - - - - - - -
WHEREAS, A-C has entered into an Agreement and Plan of Merger (the "Merger
Agreement") with OilQuip which provides for a merger (the "Merger") of OilQuip
with and into a subsidiary of A-C in which A-C will issue to the Shareholders in
the aggregate 10,000,000 shares of the Common Stock of A-C (the "A-C Common
Stock"), 400,000 shares of which shall be issued on the Effective Date (as
defined in the Merger) and 9,600,000 of which shall be issued immediately
following the amendment of the certificate of incorporation of A-C to authorize
the issuance of such A-C Common Stock;
WHEREAS, the PBGC is the owner of 585,100 shares of the A-C Common Stock;
WHEREAS, AC-CH is the owner of 407,251 shares of the A-C Common Stock;
WHEREAS, the shareholders will be issued 400,000 shares of A-C Common Stock on
the Effective Date;
WHEREAS, it is a condition of OilQuip consummating the Merger Agreement that
each Shareholder, AL-CH and the PBGC (each, a "Grantor") execute and deliver
this Agreement to the Shareholders;
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto hereby agree as follows (capitalized terms used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement):
1. Voting of Shares and Proxy.
(a) Until the Expiration Date (as defined in Section 5(n) below), at every
meeting of the stockholders of the A-C called, and at every adjournment thereof,
and on every action or approval by written consent of the stockholders of A-C,
each Grantor shall cause all Shares (as defined in Section 1(b) below)
beneficially owned by such Grantor to be voted: (i) in favor of ratification of
the Merger Agreement, (ii) in favor of the adoption and approval of the
amendment to the Certificate of Incorporation of A-C in the form
attached as Exhibit B (such changes as the Shareholders shall reasonably request
in order to comply with any technical filing requirements of the state of
Delaware) (iii) in favor of any other action in furtherance of the actions
described in subsections (i) and (ii), and (iv) as directed by the shareholders
on any action which could adversely impact the rights of the Shareholders to
receive the A-C Common Stock issuable pursuant to the Merger Agreement. Prior to
the Expiration Date, the Grantors shall not enter into any agreement or
understanding with any Person to vote or give instructions in any manner
inconsistent with the terms of this Section 1(a).
(b) "Shares" shall mean: (i) all securities of A-C (including all shares of
A-C Common Stock and all options, warrants and other rights to acquire such
securities) beneficially owned by the Grantors as of the date of this Agreement;
(ii) all shares of A-C Common Stock issued to the shareholders on the Effective
Date, and (iii) all additional securities of A-C (including all shares of A-C
Common Stock and all additional options, warrants and other rights to acquire
such securities) of which the Grantors acquire beneficial ownership during the
period from the date of this Agreement through the Expiration Date.
(c) Concurrently with the execution of this Agreement, the Grantors are
delivering to the Shareholders a proxy in the form attached hereto as Exhibit
"C" (the "Proxy"), which shall be irrevocable to the fullest extent permissible
by law but subject to termination as stated therein, with respect to the Shares.
2. Restrictions on Transfer of Shares Prior to the Effective Time.
(a) At all times commencing with the execution of this Agreement and until
the Expiration Date, the Grantors hereby agrees not to, directly or indirectly,
take any of the following actions, except in accordance with subsection (b) of
this Section 2.
(i) tender any of the Shares or any securities convertible into or
exchangeable or exercisable for the Shares to any Person;
(ii) sell, pledge, grant an option with respect to, transfer, assign,
pledge, hypothecate or otherwise dispose of any of the Shares or any securities
convertible into or exchangeable or exercisable for the Shares or any interest
therein, or enter into any commitment relating thereto; or
(iii) deposit, or permit the deposit of, any of the Shares into a new
voting trust or depositary facility or enter into a new voting agreement or
arrangement with respect to any Shares in contravention of the obligations of
the Grantors under this Agreement or grant any proxy (other than the Proxy) with
respect thereto or enter into any commitment relating thereto (any transaction
referred to in clause (i), (ii) or (iii) is hereinafter referred to as a
"Transfer").
(b) Notwithstanding subsection (a) above, the Grantors may take an action
described in subsection (a) if (i) the Shareholders shall give their prior
written consent to such action (which shall not be unreasonably withheld), (ii)
the proposed transferee shall have executed a counterpart of this Agreement and
the Proxy and shall have agreed to hold
such Shares or interest in such Shares subject to all of the terms and
provisions of this Agreement, and (iii) the current voting trust agreement to
which A-C is a party (the "AL-CU Voting Agreement") may be amended to extend its
termination on _______ date.
3. Representations and Warranties of the Grantors. Each Grantor hereby
represents and warrants and covenants (severally and not jointly) to the
Shareholders as follows:
(a) In the case of AL-CH and the PBGC, the Grantor is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization and has the requisite power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as it is now being conducted, except where the failure to
be so organized, existing or in good standing or to have such power, authority
and governmental approvals would not prevent or delay the performance in any
respect by the Grantor of its obligations under this Agreement. Grantor has full
power and authority to make, enter into and carry out the terms of this
Agreement and the Proxy. In the case of AL-CH and the PBGC, the execution and
delivery of this Agreement and the Proxy and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate or other action on the part of the Grantor.
(b) Each of this Agreement and the Proxy has been duly executed and
delivered by or on behalf of the Grantor, and, subject to the execution of this
Agreement by the other parties hereto, constitutes the legal, valid and binding
obligation of the Grantor, enforceable against the Grantor in accordance with
its terms, except as may be limited by the effect of bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent transfers),
conservatorship, arrangement, moratorium or other laws affecting or relating to
the rights of creditors generally and except as enforcement thereof is subject
to general principals of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law).
(c) The execution and delivery of this Agreement and the Proxy by the
Grantors does not, and the performance of this Agreement and the Proxy by the
Grantors will not, (i) conflict with or violate the Certificate of Incorporation
or By-laws or other similar constituent documents of the Grantor, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to the Grantor or by which it or any of its properties is bound or affected, or
(iii) conflict with or result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to another party any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on the
Shares, pursuant to the AL-CH Voting Agreement or any other note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Grantor is a party or by which the
Grantor or any of its properties is bound or affected, except for any such
breaches, defaults or other occurrences that would not prevent or delay the
performance by the Grantor of its obligations under this Agreement.
(d) The Grantor is the registered and beneficial owner of the Shares
described in the Recitals hereto free and clear of any lien or encumbrance,
proxy or voting restriction other than pursuant to this Agreement and the AL-CH
Voting Agreement. Such Shares are all the securities of A-C owned of record or
beneficially by the Grantors on the date of this Agreement.
(e) The Grantor understands and acknowledges that the consummation of the
Merger Agreement by OilQuip will be effected (and that the Shareholder's consent
to the Merger was given) in reliance upon the Grantor's execution and delivery
of this Agreement and the Proxy.
4. Ownership of the Shares. Except as otherwise provided herein, all rights,
ownership and economic benefits of and relating to the Shares shall remain and
belong to the Grantors.
5. Miscellaneous.
(a) All notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement to any party hereunder
shall be in writing and deemed given upon (i) personal delivery, (ii)
transmitter's confirmation of a receipt of a facsimile transmission, (iii)
confirmed delivery by a standard overnight carrier or when delivered by hand or
(iv) when mailed in the United States by certified or registered mail, postage
prepaid, addressed at the following addresses (or at such other address for a
party as shall be specified by notice given hereunder):
if to Shareholders, to the addresses set forth on Exhibit "A" hereto to:
With a copy to:
Spolin Silverman Cohen & Bartlett LLP
1620 26th Street, Suite 2000 North
Santa Monica, CA 90404
Attn: Joseph B. Bartlett, Esq.
Fax: (310) 586-2444
If to the PBGC, to:
Pension Benefit Guaranty Corporation
c/o Pacholder Associates, Inc.
8044 Montgomery Road, Suite 382
Cincinnati, OH 45236
If to AL-CH, to:
Nederlander Organization, Inc.
1450 Broadway, 20th Floor
New York, New York 10022
Attn: Robert E. Nederlander
Fax: 212 586-5862
with a copy to:
Swidler Berlin Shereff Friedman, LLP
405 Lexington Avenue
New York, New York 10174
Attn: Adam M. Fox
Fax: (212) 891-9507
(b) Whenever the words "include," "includes" or "including" are used in
this Agreement they shall be deemed to be followed by the words "without
limitation." As used in this Agreement, the term "affiliate" shall have the
meaning set forth in Rule 12b-2 promulgated under the Exchange Act.
(c) The article and section headings contained in this Agreement are solely
for the purpose of reference, are not part of the agreement of the parties
hereto and shall not in any way affect the meaning or interpretation of this
Agreement.
(d) Any provision of this Agreement may be amended or waived by the parties
hereto if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by the Grantors and the Shareholders or, in the case
of a waiver, by the party against whom the waiver is to be effective.
(e) Each of the parties hereto hereby acknowledges that (i) the
representations, warranties, covenants and restrictions set forth in this
Agreement are necessary, fundamental and required for the protection of the
Shareholders and to preserve for the Shareholders the benefits of the Merger;
(ii) such covenants relate to matters which are of a unique character that gives
each such representation, warranty, covenant and restriction a unique value; and
(iii) a breach of any such representation, warranty, covenant or restriction, or
any other term or provision of this Agreement, will result in irreparable harm
and damages to the Shareholders which cannot be adequately compensated by a
monetary award. Accordingly, the Shareholders and the Grantors hereby expressly
agree that in addition to all other remedies available at law or in equity, the
Shareholders shall be entitled, in addition to any other remedy they may have at
law or in equity, to the immediate remedy of specific performance, a temporary
and/or permanent restraining order, preliminary injunction or such other form of
injunctive or equitable relief as may be used by any court of competent
jurisdiction to restrain or enjoin any of the parties hereto from breaching any
representations, warranties, covenants or restrictions set forth in this
Agreement, or to specifically enforce the terms and provisions hereof. The
Grantors further agree that neither the Shareholders nor any other Person shall
be required to obtain, furnish or post any bond or similar instrument in
connection with or as a condition to obtaining any remedy referred to in this
Agreement, and the Grantors irrevocably waive any right they may have to require
the obtaining, furnishing or posting of any such bond or similar instrument. If
any legal action or other legal proceeding relating to this Agreement or the
enforcement of any provision of this Agreement is brought against the Grantors,
the prevailing party shall be entitled to recover reasonable
attorneys' fees, costs and disbursements (in addition to any other relief to
which the prevailing party may be entitled).
(f) The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
(g) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware (regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof) as to all
matters, including matters of validity, construction, effect, performance and
remedies.
(h) If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated herein are not affected in any manner materially adverse to any
party hereto. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner.
(i) This Agreement, the AL-CH Voting Agreement, and the Proxy constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and supersede all other prior agreements or understandings, both written
and oral, between the parties or any of them with respect to the subject matter
hereof and thereof.
(j) This Agreement may be signed in any number of counterparts, each of
which shall be deemed an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Agreement may be executed
by facsimile, and a facsimile signature shall have the same force and effect as
an original signature. This Agreement shall become effective when each party
hereto shall have received counterparts hereof signed by all of the other
parties hereto.
(k) The Grantors shall execute and deliver, and cause to be executed and
delivered, any additional certificates, instruments and other documents, and
take and cause to be taken any additional actions as the Shareholders may deem
necessary, to carry out and effectuate the purpose and intent of this Agreement.
(l) All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined exclusively in any Delaware state or
federal court sitting in Newcastle County. The parties hereto hereby (i) submit
to the exclusive jurisdiction of any state or federal Court sitting in Newcastle
County for the purpose of any action arising out of or relating to this
Agreement brought by any party hereto, and (ii) irrevocably waive, and agree not
to assert by way of motion, defense, or otherwise, in any such action, any claim
that it is not subject personally to the jurisdiction of the above-named courts,
that its property is exempt or immune from attachment or execution, that the
action is brought in an inconvenient forum, that the venue of the action is
improper, or that this Agreement or the transactions contemplated hereby may not
be enforced
in or by any of the above-named courts.
(m) Any action to be taken by the Shareholders hereunder may be taken by
Shareholders representing a majority of the A-C Common Stock issued pursuant to
the Merger Agreement.
(n) This Agreement and the Proxy, and all obligations of the parties
hereunder and thereunder, shall terminate immediately, without any further
action being required, upon (i) any valid termination of the Merger Agreement
pursuant to its terms, (ii) the date A-C's Certificate of Incorporation is
amended as set forth in Section 1(a), and (iii) the date the Proxy is required
to terminate under the Delaware General Corporate Law, whichever First occurs
(the "Expiration Date").
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PENSION BENEFIT GUARANTY CORPORATION
By: /s/ Hazel Broadney
-----------------------------
Name: Hazel Broadney
Title: Acting Chief Executive Officer
AL-CH COMPANY, L.P.
By: Q.E.N., Inc., its general partner
By: /s/ Robert E. Nederlander
------------------------------
Robert E. Nederlander
President
STOCKHOLDERS
RER CORP
By: /s/ Robert E. Nederlander
-------------------------------
Name: Robert E. Nederlander
Title: President
/s/ Munawar H. Hidayatallah
--------------------------------
Munawar H. Hidayatallah
/s/ Saeed M. Sheikh
------------------------------
Saeed M. Sheikh
/s/ Howard S. Lorch
------------------------------
Howard S. Lorch
/s/ Jamie C. Lorch
------------------------------
Jamie C. Lorch
/s/ John L. Palazzola
------------------------------
John L. Palazzola
COLEBROOKE INVESTMENT
By: /s/ Plaiderie Corporate Director
-----------------------------------
Name: Plaiderie Corporate Directors One Limited
Title: Director
By: /s/ Jeffrey R. Freedman
------------------------------
Jeffrey R. Freedman
ANNEX C
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ALLIS-CHALMERS CORPORATION
Allis-Chalmers Corporation, a corporation organized and existing
under the laws of the State of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is Allis-Chalmers Corporation (the
"Corporation"). The Corporation was originally incorporated under the name
Allis-Chalmers Manufacturing Company. The original Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware (the "Secretary of State") on March 15, 1913, and was amended by the
Restated Certificate of Incorporation filed with the Secretary of State on
December 2, 1988, the Certificate of Amendment of Restated Certificate of
Incorporation filed with the Secretary of State on November 17, 1989, and
Certificate of Amendment of Amended and Restated Certificate of Incorporation
filed with the Secretary of State on July 8, 1992.
SECOND: Pursuant to Sections 242 and 245 of the General Corporation
Law of the State of Delaware, this Amended and Restated Certificate of
Incorporation restates and amends the provisions of the Corporation's
Certificate of Incorporation, as amended, in all respects.
THIRD: The text of the Amended and Restated Certificate of
Incorporation is hereby restated and amended to read in its entirety as follows:
I. The name of the Corporation is ALLIS-CHALMERS CORPORATION (hereinafter called
the "Corporation").
II. The registered office of the Corporation in the State of Delaware is located
at 1209 Orange Street in the City of Wilmington in the County of New Castle. The
name of its registered agent at such address is The Corporation Trust Company.
III. The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
IV. The total number of shares of all classes of stock which the Corporation
shall have authority to issue is one hundred and ten million (110,000,000)
shares, of which one hundred million (100,000,000) shares shall be common stock,
par value $0.15 per share (the "Common Stock") and ten million (10,000,000)
shares shall be preferred stock, par value $0.01 per share (the "Preferred
Stock").
A. Preferred Stock. The designations and the powers, preferences and
rights, and the qualifications, limitations or restrictions thereof, of each
class of Preferred Stock are as follows:
The Board of Directors of the Corporation (the "Board of Directors") is
expressly authorized at any time, and from time to time, to provide for the
issuance of shares of Preferred Stock in one or more series, with such voting
powers, full or limited, or without voting powers and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors, subject to the limitations prescribed by law
and in accordance with the provisions hereof, including (but without limiting
the generality thereof) the following:
(1) The designation of the series and the number of shares to
constitute the series;
(2) The dividend rate, if any, of the series, the conditions and dates
upon which such dividends shall be payable, the relation which such dividends
shall bear to the dividends payable on any other class or classes or stock, and
whether such dividends shall be cumulative or noncumulative;
(3) Whether the shares of the series shall be subject to redemption by
the Corporation and if made subject to such redemption, the times, prices and
other terms and conditions of such redemption;
(4) The terms and amount of any sinking fund provided for the purchase
or redemption of the shares of the series;
(5) Whether or not the shares of the series shall be convertible into
or exchangeable for shares of any other class or classes or of any other series
of any class or classes of stock of the Corporation, and if provision be made
for conversion or exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange;
(6) The extent, if any, to which the holders of the shares of the
series shall be entitled to vote with respect to the election of directors or
otherwise;
(7) The restrictions, if any, on the issue or reissue of any additional
Preferred Stock; and
(8) The rights of the holders of the shares of the series upon the
dissolution, liquidation, or winding up of the Corporation.
Subject to the prior or equal rights, if any, of the Preferred Stock of
any and all series stated and expressed by the Board of Directors in the
resolution or resolutions providing for the issuance of such Preferred Stock,
the holders of Common Stock shall be entitled (i) to receive dividends when and
as declared by the Board of Directors out of any funds legally available
therefor, (ii) in the event of any dissolution, liquidation or winding up of the
Corporation, to receive the remaining assets of the Corporation, ratably
according to the number of shares of common stock held, and (iii) to one vote
for each share of common stock held on all matters submitted to a vote of
stockholders. No
2
holder of Common Stock shall have any preemptive right to purchase or subscribe
for any part of any issue of stock or of securities of the corporation
convertible into stock of any class whatsoever, whether now or hereafter
authorized.
V. The Corporation shall have perpetual existence.
VI. The private property of the stockholders shall not be subject to the payment
of the debts of the Corporation to any extent whatever.
VII. The business and affairs of the Corporation shall be managed and controlled
by the Board of Directors, which shall contain of not more than fifteen (15) nor
fewer than three (3) directors, except as provided by law, the By-Laws of the
Corporation or this Amended and Restated Certificate of Incorporation.
VIII. The stockholders may adopt, amend or repeal any By-Laws of the Corporation
at any annual meeting, or at any special meeting, provided notice of any
proposed adoption, amendment or repeal of a By-Law is included in the notice of
such meeting. The Board may also adopt, amend or repeal any By-Laws of the
Corporation except any by-laws adopted or amended by the stockholders after the
date hereof.
IX. Indemnification.
A. Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he, or a person for whom he is the legal representative,
is or was a director, officer or employee of the Corporation or is or was
serving at the request of the Corporation as a director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, shall be indemnified
by the Corporation to the fullest extent permitted by the Delaware Corporation
Law as the same exists or may hereafter be amended, against all expense,
liability and loss (including settlement) reasonably incurred or suffered by
such person in connection with such service; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by him only if such proceeding was
authorized by the board of directors, either generally or in the specific
instance. The right to indemnification shall include the advancement of expenses
incurred in defending any such proceeding in advance of its final disposition in
accordance with procedures established from time to time by the board of
directors; provided, however, that if the Delaware General Corporation Law so
requires, the director, officer or employee shall deliver to the Corporation an
undertaking to repay all amounts so advanced if it shall ultimately be
determined that he is not entitled to be indemnified under this Article IX or
otherwise.
B. The rights of indemnification provided in this Article IX shall be
in addition to any rights to which any person may otherwise be entitled by law
or under any By-Law, agreement, vote of stockholders or disinterested directors,
or otherwise. Such rights shall continue as to any person who has ceased to be a
director, officer or employee
3
and shall inure to the benefit of his heirs, executors and administrators, and
shall be applied to proceedings commenced after the adoption hereof, whether
arising from acts or omissions occurring before or after the adoption hereof.
X. No Director shall be personally liable to the Corporation or any stockholders
for monetary damages for breach of fiduciary duty as a Director, except for any
matter in respect of which such Director (a) shall be liable under Section 174
of the Delaware General Corporation Law or any amendment thereto or successor
provision thereto; or (b) shall be liable by reason that in addition to any and
all other requirements for such liability, he (i) shall have breached his duty
of loyalty to the Corporation or its stockholders, (ii) shall not have acted in
good faith or, in failing to act, shall not have acted in good faith, (iii)
shall have acted in a manner involving intentional misconduct or a knowing
violation of law, or (iv) shall have derived an improper personal benefit.
Neither the amendment nor repeal of this Article X, nor the adoption of any
provision of the Certificate of Incorporation inconsistent with this Article X
shall eliminate or reduce the effect of this Article X in respect of any matter
occurring, or any cause of action, suit or claim that but for this Article X
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
XI. The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of the Delaware General Corporation Law.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been signed and alleged to under the penalties of perjury this
_______, 2001.
ALLIS-CHALMERS CORPORATION
By:_______________________________
Munawar H. Hidayatallah, President
4
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ALLIS-CHALMERS
CORPORATION
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS AND PROXY STATEMENT, EACH DATED SEPTEMBER 28, 2001, AND
DOES HEREBY APPOINT MUNAWAR H. HIDAYATALLAH, WITH FULL POWER OF SUBSTITUTION, AS
PROXY OR PROXIES OF THE UNDERSIGNED TO REPRESENT THE UNDERSIGNED AND TO VOTE ALL
SHARES OF COMMON STOCK OF ALLIS-CHALMERS CORPORATION (THE "COMPANY") WHICH THE
UNDERSIGNED WOULD BE ENTITLED TO VOTE IF PERSONALLY PRESENT AT THE SPECIAL
MEETING OF STOCKHOLDERS OF THE COMPANY TO BE HELD ON OCTOBER 12, 2001 AT 10:00
A.M., LOCAL TIME, AT OUR EXECUTIVE OFFICES LOCATED AT 8150 LAWNDALE AVENUE,
HOUSTON, TEXAS, AND AT ANY ADJOURNMENT(S) OR POSTPONEMENT(S) THEREOF, HEREBY
REVOKING ALL PROXIES HERETOFORE GIVEN WITH RESPECT TO SUCH STOCK:
[X] Please mark your
votes as in this
example.
VOTE FOR VOTE WITHHELD
all nominees listed AUTHORITY
at from all nominees Nominees:
1. ELECTION right except as Dr. Phillip David
OF DIRECTORS marked to the [ ] David Groshoff
contrary below Munawar H.
[ ] Hidayatallah
FOR, EXCEPT VOTE Robert E.
WITHHELD AS TO THE Nederlander
FOLLOWING NOMINEES Saeed Sheikh
(IF ANY): Leonard Toboroff
Alan R. Tessler
FOR AGAINST ABSTAIN
2. PROPOSAL TO APPROVE THE
AMENDED AND RESTATED CERTIFICATE [ ] [ ] [ ]
OF INCORPORATION.
3. IN THEIR DISCRETION, THE NAMED PROXIES MAY VOTE ON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE SPECIAL MEETING, OR ANY ADJOURNMENTS OR POSTPONEMENTS
THEREOF.
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE SPECIAL MEETING IN
ACCORDANCE WITH THE STOCKHOLDER'S SPECIFICATIONS ABOVE. THE PROXY CONFERS
DISCRETIONARY AUTHORITY IN RESPECT TO MATTERS NOT KNOWN OR DETERMINED AT THE
TIME OF THE MAILING OF THE NOTICE OF THE SPECIAL MEETING OF STOCKHOLDERS TO THE
UNDERSIGNED.
_________________________ _________________________ DATE ______________________
SIGNATURE OF STOCKHOLDER SIGNATURE IF HELD JOINTLY
NOTE: Please mark, date, sign and return this Proxy promptly using the enclosed
envelope. When shares are held by joint tenants, both should sign. If signing as
a attorney, executor, administrator, trustee or guardian, please give full
title. If a corporation or partnership, please sign in corporate or partnership
name by an authorized person.