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UNITED STATE SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
______________
Commission file number 1-2199
ALLIS-CHALMERS CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 39-0126090
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7660 WOODWAY, SUITE 200, HOUSTON, TEXAS 77063
---------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 369-0550
--------------
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.15 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to ITEM
405 of Regulation S-K (ss.220.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of the
registrant, computed using the average of the bid and ask price of the common
stock of $1.40 per share on June 28, 2002, as reported on the OTC Bulletin
Board, was approximately $2,675,705 (affiliates included for this computation
only: directors, executive officers and holders of more than 5% of the
registrant's common stock).
At March 28, 2003, there were 19,633,340 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Information Statement to be filed by the registrant
on or prior to April 30, 2003 are incorporated by reference into Part III of
this Form 10-K.
2001 FORM 10-K CONTENTS
-----------------------
PART I
ITEM PAGE
---- ----
1. Business............................................................. 3
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of 11 Security Holders...............11
PART II
5. Market for Registrant's Common Equity 12 and Related
Stockholder Matters................................................12
6. Selected Financial Data..............................................12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
7A. Quantitative and Qualitative Disclosures about
Market Risk........................................................30
8. Financial Statements.................................................30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................61
PART III
10. Directors and Executive Officers of the Registrant..................61
11. Executive Compensation..............................................61
12. Security Ownership of Certain Beneficial Owners and Management......61
13. Certain Relationships and Related Transactions......................61
14. Controls and Procedures.............................................61
PART IV
15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...........................................................62
Signatures and Certifications................................................65
PART I.
ITEM 1. BUSINESS
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This document contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such
differences include, but are not limited to, the general condition of the oil
and natural gas drilling industry, demand for our oil and natural gas service
and rental products, and competition. Other factors are identified in our
Securities and Exchange Commission filings and elsewhere in this Form 10-K under
the heading "Risk Factors" located at the end of "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GENERAL
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We were incorporated in 1913 under Delaware law. We reorganized in bankruptcy in
1988, and sold all of our major businesses. In May 2001, we consummated a merger
in which we acquired OilQuip Rentals, Inc. (OilQuip) and its wholly owned
subsidiary, Mountain Compressed Air, Inc. ("Mountain Air"), in exchange for
shares of our common stock, which upon issuance represented over 85% of our
outstanding common stock. In February 2002, we acquired approximately 81% of the
capital stock of Jens' Oilfield Service, Inc. ("Jens'") and substantially all of
the capital stock of Strata Directional Technology, Inc. ("Strata"). In December
2001, we sold Houston Dynamic Services, Inc., which conducted a machine repair
business. Our business conducted in 2001 did not include the operations of Jens'
and Strata, which will be material to our continuing business operations.
Through Mountain Air, Jens' and Strata, and through additional acquisitions in
the oil and natural gas drilling services industry, we intend to exploit
opportunities in the oil and natural gas service and rental industry. Currently,
we receive 80% to 85% of our revenues from natural gas drilling services and the
balance from oil drilling services; however, most of our services can be
utilized for either activity. Mountain Air, Strata and Jens' had revenues of
approximately $3.7 million, $6.5 million and $7.8 million, respectively, during
the year ended December 31, 2002 (Strata and Jens' revenues represent results
for the period February 6, 2002 through December 31, 2002). See "Item 8.
Financial Statements," for additional asset, revenue and profit and loss
information for each of our subsidiaries.
INDUSTRY OVERVIEW
- -----------------
Oil and natural gas producers tend to focus on their core competencies of
identifying reserves, which has resulted in the extensive outsourcing of
drilling and service functions. The use of service companies allows gas
companies to avoid the capital and maintenance costs of the equipment in what is
already a capital intensive industry.
As drilling becomes increasingly more technical and costly, exploration and
production companies are increasingly demanding higher quality equipment and
service from equipment and service providers. 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. Companies that can meet customer's demands will continue to earn new
and repeat business. We believe many businesses in the highly fragmented
oilfield industry lack sufficient size (many businesses generate annual revenues
of less than $15 million), lack depth of management (many businesses are
family-owned and managed) and have unsophisticated production techniques and
control capabilities. Accordingly, we believe we can offer customers crucial
advantages over our competitors.
3
We believe that opportunities exist in the oil and gas service industry, and
that consolidation among larger oilfield service providers has created an
opportunity for us to compete effectively in certain niche markets which are
under-served by larger oilfield service and equipment companies and in which we
can provide better products and services than the smaller, fragmented
competitors currently providing a significant portion of the services in this
industry.
BUSINESS STRATEGY
- -----------------
Our strategy is based on broadening the geographic scope of our products and
services primarily within two areas of the oilfield services and equipment
industry: (a) casing and tubing handling services and equipment and (b) drilling
services. We intend to implement this growth strategy through internal expansion
and the acquisition of companies operating within these segments. We intend to
seek to identify and acquire companies with significant management and field
expertise, strong client relationships and high quality products and services.
With typically less than $20 million in revenues, each target company is likely
to have limited financial resources for expansion and few exit alternatives for
the owners. As discussed under "Risk Factors" at the end of "Item 7,
Management's Discussion and Analysis of Results of Operation and Financial
Condition", there can be no assurance that we will be able to complete any
further acquisitions.
DESCRIPTION OF SUBSIDIARIES' BUSINESSES
- ---------------------------------------
JENS' OILFIELD SERVICE, INC. Jens', founded in 1982, is headquartered in
Edinburg, Texas. Jens' supplies specialized equipment and trained operators to
install casing and tubing, change out drill pipe and retrieve production tubing
to both onshore and offshore drilling and workover operations. Most wells
drilled for oil and natural gas require some form of casing and tubing to be
installed in the completion phase of a well. Management believes that through
geographic expansion, the Company can optimize the utilization of both its
equipment and personnel by accessing additional niche markets underserved by the
larger oilfield service companies in the U.S. and Mexico.
Jens' has an extensive inventory of specialized equipment consisting of casing
tongs and laydown machines in various sizes, powered by diesel motors and driven
by hydraulic pumps. Non-powered equipment consists of elevators, slips, links
and projectors. Jens' also maintains a fleet of other revenue generating
equipment such as forklifts and delivery trucks that transport Jens' various
rental equipment and transfer the customers' casing from truck to pipe rack.
Jens' charges its customer for tong trucks, laydown trucks, and personnel on a
hourly basis portal to portal and rental equipment on a daily basis portal to
portal. The customer is liable for damaged or lost equipment.
Jens' has been operating in the Rio Grande Valley for over 20 years. Jens'
currently provides service primarily to South Texas and to Mexico. Although
there are two large companies, Frank's Casing Crew and Rental Tools Inc. and
Weatherford International Inc. ("Weatherford"), which have a substantial portion
of the casing crew market, it remains highly competitive and fragmented with at
least 30 casing crew companies working in the U.S. Jens' believes it has several
competitive advantages including:
o A well-established, loyal customer base in South Texas and Mexico
o An experienced management team with at least 15 years of service with
Jens'
o An extensive inventory of specialized equipment; (d) a reputation for
customer responsiveness
o Substantial drilling activity in South Texas, primarily a natural gas
market
o An excellent relationship with its Mexican joint venture partner
(discussed below), which enables Jens' to penetrate the Mexican market.
4
For the years ended December 31, 2002 and 2001, El Paso Energy Corp, accounted
for about approximately $1.4 million, or 18%, and approximately $1.2 million or
16%, respectively, of Jens' revenues. Jens' top ten customers accounted for $4.1
million, or 52%, and $4.2 million, or 42%, of revenues for the years ended
December 31, 2002 and 2001, respectively.
Jens' operates in Mexico through Jens' Mexican joint venture partner, Materiales
y Equipo Petroleo, S.A. de C.V. ("Maytep") in Villa Hermosa, Reynosa, Vera Cruz,
and Ciudad de Carmen, Mexico. Jens' provides substantially all of the necessary
equipment and Maytep provides all labor, repairs, maintenance, insurance, and
supervision for provision of the casing crew and torque turn service for
Petroleos Mexicanos ("Pemex"). Jens' has approximately $8.0 million of equipment
in Mexico, and has operated profitably in Mexico since 1997. In addition, Maytep
is responsible for the preparation of billing invoices, collection of Pemex
receivables, and the import and export of equipment. Bidding protocol for Pemex
requires that service providers with Mexican ownership like Maytep be awarded
contracts as long as they are reasonably competitive.
Maytep is responsible for payment to Jens', even if it is unable to collect
payment on a timely basis, though in the past the Company's receipt of payments
has been delayed for significant periods of time by failure of Pemex to pay
amounts due Maytep on a timely basis. Jens' primary competitors in Mexico are
South American Enterprises and Weatherford, both of which provide similar
operations.
For the years ended December 31, 2002, 2001 and 2000, Jens' Mexico operations
accounted for approximately $2.7 million, $2.4 and $2.2 million, respectively,
of Jens' revenues.
STRATA DIRECTIONAL TECHNOLOGY, INC. Strata Directional Technology, Inc.
("Strata"), founded in 1996, is headquartered in Houston, Texas. Energy Spectrum
Partners LP, a Dallas based private equity fund, ("Energy Spectrum") has been
Strata's equity sponsor since August 1997. Strata provides high quality
directional, horizontal and measure while drilling, or MWD, drilling services to
oil and gas companies operating both onshore and offshore in Texas and
Louisiana. Management believes there are several advantages to horizontal and
directional drilling applications including:
o Improved reservoir production performance beyond conventional vertical
wells
o Reduction of the number of field development wells
o Reduction of water and gas coning problems
o Improvement of total cumulative recoverable reserves
o Faster payouts to the E&P companies
Strata provides specialized directional drilling services in niche markets,
principally in the Gulf Coast region (Texas and Louisiana), including the Austin
Chalk, where specialized, technically focused applications are necessary.
Strata's teams of highly experienced personnel utilizing state of the art tools
and engineering provide services to customers both onshore and offshore.
Services provided include tailored well planning and engineering to meet
drilling performance and geological or reservoir targets set by the customer,
directional drilling tool configuration, well site directional drilling
supervisors and guidance operators, new well and reentry drilling, steerable
drilling, and log while drilling, or LWD.
Swift Energy and Anadarko Petroleum each accounted for more than 10% of Strata's
annual revenues in each of the last three years. Strata's top ten customers
accounted for $5.2 million, or 75%, and $9.8 million, or 75%, of revenues for
the years ended 2002 and 2001, respectively.
There are three directional drilling companies, Schlumberger, Halliburton and
Baker Hughes, who dominate the market both worldwide and in the U.S., as well as
numerous small regional players, including Strata. There are believed to be at
least 50 regional directional and horizontal drilling companies operating in the
U.S. Management estimates that the regional market companies account for
approximately 15% of the domestic market.
5
MOUNTAIN COMPRESSED AIR, INC. Mountain Air, whose predecessor was founded in
1975, is headquartered in Farmington, New Mexico. Mountain Air provides
compressed air equipment and trained operators to companies drilling for natural
gas in the southwestern U.S. Mountain Air and its predecessor have provided
equipment and services for natural gas drilling and workover in the San Juan
Basin and Rocky Mountain region of the U.S. for over 25 years. The primarily
fabrication facility is in Grand Junction while the administrative and field
equipment facility is in Farmington, New Mexico. Management believes that
underbalanced drilling provides a cost-effective alternative to traditional
drilling and workover methods for certain types of reservoirs. As underbalanced
drilling activity increases in North America, management believes its drilling
and workover operations will expand. Management believes that there are
opportunities for both organic and acquisition growth in this sector onshore and
offshore.
Air drilling is a method of rotary drilling that uses compressed air, mist or
foam as the circulation medium, rather than mud. It is used primarily in
formations containing small amounts of water and is favored in natural gas
formations that are stable enough to allow drilling with air, or where
conditions do not allow the use of drilling fluids. As the bit drills, the
compressors provide air to move the cuttings away from the drill 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, thus saving the customer substantial drilling expense.
Underbalanced air drilling has certain competitive advantages due to the speed
with which wells can be drilled utilizing air drilling technology compared to
traditional drilling with mud. Underbalanced air drilling's competitive
advantage over traditional drilling includes lower overall fuel and operating
costs due to quicker drilling and no additional mud or fluid costs. Mountain Air
is recognized regionally as an industry leader in underbalanced drilling. With
over 30 years of drilling experience, Mountain Air has developed extensive
knowledge of downhole conditions and specialized mists and foams, which provide
a more efficient and safer drilling method. It has been a pioneer in developing
highly technical equipment, procedures and processes to increase rate of
penetration and bit life, and to drill successfully in "lost circulation" zones.
Due to the highly technical nature of underbalanced drilling, a highly trained
staff of field service personnel, parts inventory and a diversified fleet of air
compressors are often necessary to perform such functions in the most economic
and safe manner.
Mountain Air has a fleet of 38 identical Gardner-Denver two-stage reciprocating
compressors that are powered by Caterpillar diesel engines and use a piston-type
compressor. Mountain Air's nearly exclusive use of a piston type air compressor
results in low fuel consumption and reliable performance, which sets it apart
form its competitors which generally use engines that consume significantly more
fuel.
Mountain Air provides air compressors, air boosters and mist pumps for both
underbalanced drilling and workover activities. Once a well has been drilled in
an under balanced process, any workover drilling activity will also use the same
process to avoid damaging the reservoir.
Mountain Air has concentrated its operations in New Mexico, Colorado and Utah.
However, it has performed work in Wyoming, Texas, Louisiana, California, Nevada
and the Gulf of Mexico. Mountain Air has relied on long-term relationships to
generate sales. As a result, it is dependent on a few select customers for the
majority of its revenues. Mountain Air's top three customers accounted for more
than 85% of annual revenues in each of the last three years. Burlington
Resources accounted for approximately 50% of revenues in 2002 and more than 65%
of revenues during 2001 and 2002.
6
Mountain Air maintains a substantial market share in its operating region and
has one major competitor, Weatherford. Management believes that its fuel
efficient equipment combined with its extensive knowledge of the geographic
region, expertise in air drilling applications, existing client relationships,
and team of skilled operators gives it a distinct competitive advantage in its
operating region. There are a number of other, larger and better capitalized
companies operating throughout the Southwest, and expanding into these regions
would require significant capital expenditures.
Cyclical Nature of Equipment Rental and Services Industry
- ---------------------------------------------------------
The oil and gas equipment rental and services industry is highly cyclical. The
most critical factor in assessing the outlook for the industry is worldwide
supply and demand for oil and natural gas (the supply and demand for oil and gas
are generally correlative). 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 escalation enables producers
to increase their capital expenditures. The increased capital expenditures
ultimately result in greater revenues and profits for services and equipment
companies.
After experiencing a strong market throughout most of 2000 and the first half of
2001, the energy services industry experienced a significant drop-off due to
lower demand for hydrocarbons (particularly natural gas), which the company
believes was largely a function of the U.S. recession, a warm winter and
increased inventory levels. This trend continued for most of 2002; however, in
the fourth quarter of 2002, the market experienced an increase in demand due to
a colder than expected winter and decreased inventory levels. Management
believes that energy services activity will rebound in 2003 due to increased
demand, declining production rates. Because of these market fundamentals for
natural gas, management believes the long-term trend of activity in the oilfield
services market are favorable; however, these factors could be more than offset
by other developments affecting the worldwide supply and demand for oil and
natural gas products.
COST CONTAINMENT PROGRAM. Upon consummation of the Jens' and Strata transactions
in February 2002, we implemented a company-wide cost containment program. The
program's goal was to lower each subsidiary's operating breakeven costs such
that the debt outstanding could be serviced at depressed revenue levels. These
measures included:
o Eliminating and consolidating a number of management and other
positions, and changing employment policies to reduce employee
idle time and overtime expenses.
o Entering into a lease transaction (with a sale option) all of
Strata's Measure While Drilling ("MWD") equipment to Target
MWD, Inc. and selling certain of Strata's drilling tools (such
as non-magnetic drill collars, crossover subs, float subs and
orienting subs) to Gammalloy Ltd., and negotiating a preferred
pricing structure and lease arrangement with each purchaser
which enables Strata to lease the equipment back on an
as-needed basis, market package jobs, reduce capital
expenditures, lower the cost of equipment per job, and expand
capabilities. The net proceeds of these transactions,
approximately $290,000, were used to reduce Strata's term
debt.
o Negotiating a lease arrangement for downhole drilling motors
with National Oilwell that further reduces Strata's capital
expenditure requirements and increases its competitiveness by
providing an extensive supply of downhole motors with
immediate availability;
Competition
- -----------
As discussed above, we experience significant competition in all areas of our
business. In general, the markets in which we compete are highly fragmented, and
a large number of companies offer services that overlap and are competitive with
our services and products. We believe that the principal competitive factors are
technical and mechanical capabilities, management experiences, past performance
and price. While we have considerable experience, there are many other companies
that have comparable skills. Many of our competitors are larger and have greater
financial resources than we do.
7
Suppliers
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MOUNTAIN AIR. Where possible, Mountain Air purchases equipment from a number of
suppliers and at auctions on an opportunistic basis. The equipment provided by
these suppliers is customized and often times overhauled by Mountain Air in
order to improve performance. In other instances, equipment must be made to
order. As a result of purchasing the majority of its equipment at auction,
Mountain Air is not significantly dependent upon any one supplier.
Strata
- ------
The equipment required for Strata's operations is generally leased, and Strata
has only a single supplier for most or all of each type of equipment it uses
(downhole motors, tubing, and MWD and LWD equipment), and is therefore dependent
upon these suppliers. However, other suppliers of such equipment are available.
Strata has entered into preferred leasing agreements with its current suppliers,
which assure the availability of equipment through 2006 for its tubing, MWD and
LWD equipment. Strata has an indefinite contract with its supplier of downhole
motors.
Jens'
- -----
Historically, Jens' has sought to purchase equipment at auction or on an
opportunistic basis; however, there is currently a shortage of casing and tubing
equipment, which is available new from four suppliers. Management believes there
is a six to eight month backlog on orders to these suppliers. However, Jens'
currently owns sufficient equipment for its projected operations over the next
12 months, and believes the shortage of equipment will result in increased
demand for its services.
Backlog
- -------
We do not have a backlog of orders because our customers utilize our services on
an as-needed basis without significant on-going commitments.
Employees
- ---------
Our strategy is to acquire Companies with strong management and to enter into
long-term employment contracts with key employees in order to preserve customer
relationships and assure continuity following acquisition. We believe we have
good relations with our employees, none of which are represented by a union. We
actively train employees across various functions, which we believe is crucial
to motivate our workforce and maximize efficiency. Employees showing a higher
level of skill are trained on the more technically complex equipment and given
greater responsibility. All employees are responsible for on-going quality
assurance.
At December 31, 2002, we had 143 employees, which included 22 Mountain Air
employees, 85 Jens' employees, 32 Strata employees and 4 employees of
Allis-Chalmers Corporation.
Insurance
- ---------
We carry a variety of insurance for our operations, and are partially
self-insured for certain claims in amounts that we believe to be customary and
reasonable. However, there is a risk that our insurance may not be sufficient to
cover any particular loss or that insurance may not cover all losses. Finally,
insurance rates have in the past been subject to wide fluctuation, and changes
in coverage could result in less coverage, increases in cost or higher
deductibles and retentions.
8
Federal Regulations and Environmental Matters
- ---------------------------------------------
Our operations are subject to federal, state and local laws and regulations
relating to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Because we provide services to companies producing oil and gas, which
are toxic substances, we may become subject to claims relating to the release of
such substances into the environment. While we are not currently aware of any
situation involving an environmental claim that would likely have a material
adverse effect on us, it is always possible that an environmental claim could
arise that could cause our business to suffer.
In addition to claims based on our current operations, we are from time to time
subject to environmental claims relating to our activities prior to our
bankruptcy in 1988 (See, "Item 2. Legal Proceedings").
Houston Dynamic Service, Inc.
- -----------------------------
Houston Dynamic Service, Inc which we sold on December 12, 2001, serviced and
repaired various types of mechanical equipment, including compressors, pumps,
turbines, engines and other machinery, providing repair, inspection, testing and
other services for various industrial customers, including those in the
petrochemical, chemical, refinery, utility, waste and waste treatment, minerals
processing, power generation, pulp and paper and irrigation industries.
Intellectual Property Rights
- ----------------------------
As part of our overall corporate strategy to focus on its core business of
providing services to the oil and gas industry and to increase shareholder
value, we are investigating the sale or license of our worldwide rights to
patents, trade names and logos for products and services outside the energy
sector.
ITEM 2. PROPERTIES
----------
Mountain Air leases an approximately 6,000 square foot facility in Grand
Junction, Colorado, which includes offices, shop and a warehouse. It also leases
an approximately 10,000 square foot facility in Farmington, New Mexico, which
includes offices, shop and a warehouse.
Jens' owns facilities located in Edinburg, Texas on approximately 8 acres. One
building has approximately 5,000 square foot of office space, 5,000 square feet
of additional expansion capacity and 2,500 square feet of storage capability.
Additionally, there is a 10,000 square foot mechanical repair, tool storage and
maintenance facility. In addition to the property above, Jens' lease yards
located in Victoria and Pearsall, Texas. The yard in Pearsall is owned by Jens
Mortensen, a current executive of the Company.
Strata leases office space and a shop in Houston, Texas. In connection with the
acquisition of Strata, we relocated our principal executive offices to Strata's
offices in Houston, Texas.
9
ITEM 3. LEGAL PROCEEDINGS
-----------------
Reorganization Proceedings Under Chapter 11 of the United States Bankruptcy
- ---------------------------------------------------------------------------
Code.
- -----
On June 29, 1987, we filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. Our plan of reorganization was confirmed by the
Bankruptcy Court after acceptance by our creditors and stockholders, and was
consummated on December 2, 1988.
At confirmation of our plan of reorganization, the United States Bankruptcy
Court approved the establishment of the A-C Reorganization Trust as the primary
vehicle for distributions and the administration of claims under our plan of
reorganization, two trust funds to service health care and life insurance
programs for retired employees and a trust fund to process and liquidate future
product liability claims. The trusts assumed responsibility for substantially
all remaining cash distributions to be made to holders of claims and interests
pursuant to our plan of reorganization. We were thereby discharged of all debts
that arose before confirmation of our plan of reorganization.
We do not administer any of the aforementioned trusts and retain no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to our plan of reorganization.
As part of our plan of reorganization, we settled U.S. Environmental Protection
Agency ("EPA") claims for cleanup costs at all known sites where we were alleged
to have disposed of hazardous waste. The EPA settlement included both past and
future cleanup costs at these sites and released us of liability to other
potentially responsible parties in connection with these specific sites. In
addition, we negotiated settlements of various environmental claims asserted by
certain state environmental protection agencies.
Subsequent to our bankruptcy reorganization, the EPA and state environmental
protection agencies have in certain cases asserted we are liable for cleanup
costs or fines in connection with several hazardous waste disposal sites
containing products manufactured by us prior to consummation of the Plan of
Reorganization. In each instance, we have taken the position that the cleanup
cost or other liabilities related to these sites were discharged in the
bankruptcy, and the cases have been disposed of without material cost. A number
of Federal Courts of Appeal have issued rulings consistent with this position
and based on such rulings we believe that we will continue to prevail in our
position that our liability to the EPA and third parties for claims for
environmental cleanup costs that had pre-petition triggers have been discharged.
However, there can be no assurance that we will not be subject to environmental
claims relating to pre-bankruptcy activities that would have a material, adverse
effect on us.
The EPA and certain state agencies continue from time to time request
information in connection with various waste disposal sites containing products
manufactured by us before consummation of the Plan of Reorganization that were
disposed of by other parties. Although we have been discharged of liabilities
with respect to hazardous waste sites, we are under a continuing obligation to
provide information with respect to our products to federal and state agencies.
The A-C Reorganization Trust, under its mandate to provide Plan of
Reorganization implementation services to us, has responded to these
informational requests because pre-bankruptcy activities are involved, and
therefore we do not incur material expenses as a result of responding to such
requests.
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 material environmental claims in the future.
10
We are named as a defendant from time to time in product liability lawsuits
alleging personal injuries resulting from our activities prior to our
reorganization involving asbestos. These claims are referred to and handled by a
special products liability trust formed to be responsible for such claims in
connection with our reorganization. As with environmental claims, we do not
believe we are liable for product liability claims relating to our business
prior to our bankruptcy; moreover, the products liability trust is defending
(and is responsible for costs associated with) all such claims. However, there
can be no assurance that we will not be subject to material product liability
claims in the future.
We are subject to legal proceedings, claims and litigation arising in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
-------------------------------------------------------------
MARKET INFORMATION. There is no established public trading market for the common
stock, which is traded on the Over the Counter Bulletin Board. We are
investigating listing our common stock on an exchange; however, we do not
currently meet the listing requirement of any national U.S. exchange.
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
- ----------------------------------------------------------------------------------------
2001 (# OF SHARES)
First Quarter............................... 1.75 1.44 12,100
Second Quarter.............................. 2.50 1.30 18,600
Third Quarter............................... 1.85 1.07 6,200
Fourth Quarter............................. 1.70 .90 8,200
2002
First Quarter............................... 1.25 .40 239,800
Second Quarter.............................. 2.00 .75 31,100
Third Quarter............................... 1.40 .75 15,400
Fourth Quarter............................. 1.01 .12 243,100
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
HOLDERS. As of March 27, 2003, there were approximately 6,800 holders of our
common stock. On March 27, 2003, the bid price for our common stock was $0.18,
and the last reported sale price was $0.75 on March 10, 2003.
DIVIDENDS. No dividends were declared or paid during the past three years, and
no dividends are anticipated to be declared or paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
As discussed in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation", in May 2001, for financial
reporting purposes, we were deemed to be acquired by OilQuip Rentals, Inc.
Accordingly, the following data for periods prior to May 2001 reflect only the
operations of OilQuip Rentals, Inc., which was incorporated in February 2000,
and, from February 2001, its subsidiary, Mountain Air.
12
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Year Ended December 31,
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA: 2002 2001 2000
---- ---- ----
Sales $ 17,990 $ 4,796 $ -
Income (loss) from continuing
Operations $ (3,969) $ (2,273) $ (627)
Net income (loss) $ (3,969) $ (4,577) $ (627)
Net income (loss) attributed to common
shareholders $ (4,290) $ (4,577) $ (627)
Per Share Data:
Net (loss) income per
common
share, basic and diluted $ (0.23) $ (1.15) $ (1.57)
Weighted average number of common
shares outstanding, basic and diluted 18,831 3,952 400
CONSOLIDATED BALANCE SHEET DATA
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Total Assets $ 34,778 $ 12,465 $ 2,360
Long-term debt classified as:
Current $ 13,890 $ 1,023 $ -
Long Term $ 7,731 $6,833 $ -
Stockholders' Equity $1,009 $1,250 $ 2,348
Book value per share $ 0.05 $0.32 $5.87
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
-------------------------------------------------
BACKGROUND
- ----------
Prior to 2001, we operated primarily through Houston Dynamic Services, Inc
("HDS"). In May 2001, as part of a strategy to acquire and develop businesses in
the natural gas and oil services industry, we consummated a merger (the "OilQuip
Merger") in which we acquired 100% of the capital stock of OilQuip Rentals, Inc.
("OilQuip"), which owned 100% of the capital stock of Mountain Air. In December
2001, we disposed of HDS, and in February 2002, we acquired substantially all of
the capital stock of Strata and approximately 81% of the capital stock of Jens'.
Our business conducted in 2001 did not include the operations of Jens' and
Strata.
For accounting purposes, the OilQuip Merger was treated as a reverse acquisition
of Allis-Chalmers and financial statements presented herein for periods prior to
May 2001 present the results of operations and financial condition of OilQuip.
As a result of the OilQuip Merger, the fixed assets, and goodwill and other
intangibles of Allis-Chalmers in existence immediately prior to the Merger (the
"Prior A-C Assets") were increased by $2,691,000.
13
CRITICAL ACCOUNTING POLICIES
- ----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in "Item 8 -- Financial Statements." Note that our preparation of
this Annual Report on Form 10-K requires us to make estimates and assumptions
that affect the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our financial statements, and
the reported amounts of revenue and expenses during the reporting period. There
can be no assurance that actual results will not differ from those estimates.
REVENUE RECOGNITION. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition policy determines the timing of certain expenses, such as
commissions and royalties. We follow very specific and detailed guidelines in
measuring revenue; however, certain judgments affect the application of our
revenue policy. Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. Revenues are recognized by the Company and its subsidiaries as services
are provided.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period.
GOODWILL AND OTHER INTANGIBLES - The Company has recorded approximately
$10,479,000 of goodwill and other identifiable intangible assets. The Company
performs purchase price allocations when it makes a business combination.
Business combinations and subsequent purchase price allocations have been
consummated for purchase of the Mountain Air, Strata and Jens' operating
segments. The excess of the purchase price after allocation of fair values to
tangible assets are allocated to goodwill and other identifiable intangibles.
Subsequently, the Company has performed its initial impairment tests and annual
impairment tests in accordance with Financial Accounting Standards Board No.
141, BUSINESS COMBINATIONS, and Financial Accounting Standards Board No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These valuations required the use of
third-party valuation experts who in turn developed assumptions to value the
carrying value of the individual reporting units. Significant and unanticipated
changes to these assumptions could require a provision for impairment in a
future period.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability associated with an asset retirement be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset. The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003.
14
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of SFAS No. 146 will apply to any exit or disposal activities
initiated by the Company after December 31, 2002. SFAS No. 146 is not expected
to have a material effect on the results of operations or financial position of
the Company.
SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.
In December 2002, the FASB approved SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO.
123 ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock based compensation using the methods detailed in the
stock-based compensation accounting policy.
RESULTS OF OPERATIONS
- ---------------------
Results of operations for 2001 and 2000 reflect the business operations of
OilQuip. From its inception on February 4, 2000 to February 6, 2001, OilQuip was
in the developmental stage. OilQuip's activities for the period prior to
February 6, 2001 consisted of developing its business plan, raising capital and
negotiating with potential acquisition targets. Therefore, the results for
operations for prior to February 6, 2001 reflect no sales, cost of sales, or
marketing and administrative expenses that would be reflective of an operating
company. On February 6, 2001, OilQuip acquired the assets of Mountain Air, which
provides air drilling services to natural gas exploration operations
("Compressed Air Drilling Services"). On May 9, 2001, OilQuip acquired the Prior
A-C Assets, including the operations of HDS. The results of operation of HDS,
which was sold in December 2001, are included in discontinued operations from
May 9, 2001. On February 6, 2002, Allis-Chalmers acquired 81% of the outstanding
stock for Jens' Oilfield Service, Inc., which supplies highly specialized
equipment and operations to install casing and production tubing required to
drill and complete oil and gas wells ("Casing Services"). On February 6, 2002,
the Company also purchased substantially all the outstanding common stock and
preferred stock of Strata Directional Technology, Inc., which provides high-end
directional and horizontal drilling services for specific targeted reservoirs
that cannot be reached vertically ("Directional Drilling Services"). The results
from these operations are included from February 1, 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001:
- ----------------------------------------------------------
Sales for the year 2002 totaled $17,990,000, reflecting the revenue of Jens' and
Strata, which were acquired in February, 2002. In the comparable period of 2001,
revenues were $4,796,000. Revenues for the year ended December 31, 2002 for the
Casing Services, Directional Drilling Services, and Compressed Air Drilling
Services segments were $7,796,000, $6,529,000 and $3,665,000, respectively.
Revenues for the Compressed Air Drilling Services segment decreased from
$4,796,000 for the year ended December 31, 2001 primarily due to lower revenues
resulting from the decline in revenues from Burlington Resources, from
$3,310,788 to $1,827,681. Burlington Resources represented 49.9% and 62.6% of
the Compressed Air Drilling Services revenues in 2002 and 2001, respectively.
Revenues also declined as a result of an overall downturn in the petroleum
industry. Rig counts in the Southwestern United States (in which most of the
Company's revenues are derived) provide a measure of oil and natural gas
drilling activities. These rig counts decreased from 1,275 on June 30, 2001 to
840 at June 30, 2002, based upon the Baker Hughes gulf coast region rig count.
15
Gross margin ratio, as a percentage of sales, was 17.1% for the year ended
December 31, 2002 compared with 30.5% for the year ended December 31, 2001. The
gross margin ratio declined as a result of the Jens' and Strata acquisitions in
2002 and lower gross margin ratios at Mountain Air resulting from lower
revenues. Because we have made significant investments in equipment and
personnel many of our costs are fixed, and as a result, our gross profit margins
are severely impacted by decreases in revenues.
General and administrative expense was $3,792,000 in 2002 compared with
$2,898,000 in 2001. The general administrative expenses increased in 2002
compared to 2001 due to the acquisition of Jens' and Strata. During the third
quarter of 2002, in response to the default of its debt covenants, the Company
restructured itself in order to contain costs and recorded charges related to
the reorganization in the amount of $495,000. These charges consisted of related
payroll costs for terminated employees of $307,000, consulting fees of $113,000,
and costs associated with a terminated rent obligation of $75,000. The Company
also recorded one-time charges for costs related to abandoned acquisitions and
an abandoned private placement in the amount of $233,000.
Operating income (loss) for the year 2002 totaled ($1,440,000), reflecting the
operating income (loss) of Jens' and Strata, which were acquired in February
2002. In the comparable period of 2001, operating income (loss) was
($1,433,000). Operating income (loss) for the year ended December 31, 2002 for
the Casing Services, Directional Drilling Services, Compressed Air Drilling
Services and General Corporate segments were $2,255,000, ($576,000), ($945,000)
and ($2,174,000), respectively. Operating income for the Compressed Air Drilling
Services segment decreased from income of $433,000 for the year ended December
31, 2001 primarily due to lower revenues resulting from the overall downturn in
the petroleum industry. Operating (loss) for the General Corporate segment
increased from ($1,866,000) for the year ended December 31, 2001. During the
third quarter of 2002, in response to the default of its debt covenants, the
Company reorganized itself in order to contain costs and recorded charges
related to the reorganization in the amount of $495,000. These charges consisted
of related payroll costs for terminated employees of $307,000, consulting fees
of $113,000, and costs associated with a terminated rent obligation of $75,000.
The Company also recorded one-time charges for costs related to abandoned
acquisitions and an abandoned private placement in the amount of $233,000.
We incurred a net loss attributed to common shareholders of ($4,290,000), or
($0.23) per common share, for the year ended December 31,2002 compared with a
loss of ($4,577,000), or ($1.15) per common share, for the year end December 31
2001. The net loss for 2002 included a discount given to the holder of the HDS
note in the amount of $191,000 as an incentive to pay-off the note in September
2002. During the third quarter of 2002, in response to the default of its debt
covenants, the Company reorganized itself in order to contain costs and recorded
charges related to the reorganization in the amount of $495,000. These charges
consisted of related payroll costs for terminated employees of $307,000,
consulting fees of $113,000, and costs associated with a terminated rent
obligation of $75,000. The Company also recorded one-time charges for costs
related to abandoned acquisitions and an abandoned private placement in the
amount of $233,000.
PRO FORMA RESULTS
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information. Pro forma results of operations set forth
below includes results of operations for all of 2002 and 2001. These financial
statements should be read in conjunction with the pro forma financial statements
included herein.
16
Pro forma sales for the year 2002 totaled $19,142,000, reflecting the revenue of
Mountain Air, Jens' and Strata. In the comparable period of 2001, pro forma
sales were $28,244,000. Pro forma revenues for the year ended December 31, 2002
for the Casing Services, Directional Drilling Services, and Compressed Air
Drilling Services segments were $8,500,000, $6,977,000 and $3,665,000,
respectively. Pro forma revenues for the year ended December 31, 2001 for the
Casing Services, Directional Drilling Services and Compressed Air Drilling
Services segments were $9,949,000, $12,986,000 and $5,289,000, respectively. The
decrease in 2002 compared to 2001 was primarily due to lower revenues resulting
from the overall downturn in the petroleum industry. Revenues for Casing
Services, Directional Drilling Services and Compressed Air Drilling Services
declined 17%, 47% and 37% in 2002 compared to 2001.
Pro forma gross margin, as a percentage of sales, was 18.4% for the year ended
December 31, 2002 compared with a pro forma gross margin of 33.8 % for the year
ended December 31, 2001. The gross margin ratio declined as a result of the
Jens' and Strata acquisitions in 2002 and lower gross margin ratios at Mountain
Air resulting from lower revenues.
Pro forma general and administrative expense was $3,040,000 in 2002 compared
with $4,719,000 in 2001. The pro forma general and administrative expense
decreased in 2002 due to cost reductions at Strata and Corporate.
The Company had pro forma operating (loss) for the year 2002 of ($401,000) as
compared to pro forma operating income of $4,089,000 in 2001. Pro forma
operating income (loss) for the year ended December 31, 2002 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $2,756,000, ($584,000), ($795,000) and
($1,778,000), respectively. The pro forma operating income for the year ended
December 31, 2001 for the Casing Services, Directional Drilling Services,
Compressed Air Drilling Services and General Corporate segments were $3,954,000,
$1,420,000, $581,000 and ($1,866,000), respectively. The decrease in pro forma
operating income for 2002 was primarily due to lower revenues resulting from the
overall downturn in the petroleum industry.
The Company incurred a pro forma net loss of ($4,431,000), or ($0.24) per common
share, for the year ended December 31, 2002 compared with a pro forma net loss
of ($71,000), or ($0.02) per common share, for the year ended December 31 2001.
The pro forma net loss for 2002 included a factoring discount given to the
holder of the HDS note in the amount of $191,000 as an incentive to pay-off the
note by September 30, 2002. During the third quarter of 2002, in response to the
default of its debt covenants, the Company reorganized itself in order to
contain costs and recorded charges related to the reorganization in the amount
of $495,000. These charges consisted of related payroll costs for terminated
employees of $307,000, consulting fees of $113,000, and costs associated with a
terminated rent obligation of $75,000. The Company also recorded one-time
charges for costs related to an abandoned acquisitions and an abandoned private
placement in the amount of $233,000.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO PERIOD FEBRUARY 4, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000:
- --------------------------------------------------------------------------------
Sales for the year 2001 totaled $4,796,000, reflecting the revenue of Mountain
Air following the acquisition of the assets from Mountain Air's predecessor,
Mountain Air Drilling, Inc. (the "Mountain Air Acquisition"). In the period
February 4, 2000 (inception) through December 31, 2000, OilQuip had no revenues.
17
Gross margin, as a percentage of sales, was 30.5% in 2001.
General and administrative expense was $2,898,000 in 2001 compared with $627,000
in the period February 4, 2000 (inception) through December 31, 2000 increasing
as a result of the Mountain Air Acquisition and the issuance of stock options in
2001.
We incurred a net loss from continuing operations of ($2,273,000), or ($0.57)
per common share, for the year 2001 compared with a loss by OilQuip of
($627,000), or ($1.57) per common share, for the period from February 4, 2000
(inception) through December 31, 2000. The Company incurred a net loss of
($4,577,000), or ($1.15) per common share, for the year 2001 compared with a
loss by OilQuip of ($627,000), or ($1.57) per common share, for the period
February 4, 2000 (inception) through December 31, 2000.
The loss from discontinued operations for 2001 of ($2,304,000) includes a loss
of ($2,013,000) on the sale of HDS.
PRO FORMA RESULTS
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information. Pro forma results of operations set forth
below includes results of operations for all of 2001 and 2000. These financial
statements should be read in conjunction with the pro forma financial statements
included herein.
Pro forma sales for the year 2001 totaled $28,224,000, reflecting the revenue of
Mountain Air, Jens' and Strata. In the comparable period of 2000, pro forma
sales were $24,653,000. Pro forma revenues for the year ended December 31, 2001
for the Casing Services, Directional Drilling Services, and Compressed Air
Drilling Services segments were $9,949,000, $12,986,000 and $5,289,000,
respectively. Pro forma revenues for the year ended December 31, 2000 for the
Casing Services, Directional Drilling Services and Compressed Air Drilling
Services segments were $7,400,000, $11,561,000 and $5,692,000, respectively. The
increase in 2001 compared to 2000 was primarily due to higher revenues resulting
from the overall upturn in the petroleum industry. Revenues for Casing Services
and Directional Drilling Services increased 34% and 12%, and revenues for
Compressed Air Drilling Services declined 8% in 2001 compared to 2000.
Pro forma gross margin, as a percentage of sales, was 33.8% for the year ended
December 31, 2001 compared with a pro forma gross margin of 26.7 % for the year
ended December 31, 2000. The gross margin ratio increased as a result of higher
gross margin ratios at each of Jens', Strata, and Mountain Air resulting from
higher revenues.
Pro forma general and administrative expense was $4,719,000 in 2001 compared
with $3,916,000 in 2000. The pro forma general and administrative expense
increased in 2001 due to higher employee costs.
The Company had pro forma operating income for the year 2001 of $4,089,000 as
compared to pro forma operating income of $2,678,000 in 2000. Pro forma
operating income (loss) for the year ended December 31, 2001 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $3,954,000, $1,420,000, $581,000 and
($1,866,000), respectively. The pro forma operating income for the year ended
December 31, 2000 for the Casing Services, Directional Drilling Services,
Compressed Air Drilling Services and General Corporate segments were $2,313,000,
$564,000, $742,000 and ($941,000), respectively. The increase in pro forma
operating income for 2001 was primarily due to higher revenues resulting from
the overall upturn in the petroleum industry.
18
The Company incurred a pro forma net loss of ($71,000), or ($0.02) per common
share, for the year ended December 31,2001 compared with a pro forma net income
of $269,000, or $0.67 per common share, for the year end December 31 2000. The
pro forma net loss for 2001 included increased employee costs, interest expense
and lower margins at Mountain Air.
SCHEDULE OF CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's obligations and commitments to make
future payments under its notes payable, operating leases, employment contracts
and consulting agreements for the periods specified as of December 31, 2002.
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- ----------------------- ----- ------ --------- --------- -------
Note payable $ 21,221,000 $ 13,890,000 $ 3,064,000 $ 4,267,000 $ -
Interest Payments on note payable 1,804,000 1,181,000 260,000 363,000 -
Operating Lease 2,990,000 1,232,000 1,589,000 169,000 -
Employment Contracts 1,916,000 1,180,000 736,000 - -
Total Contractual Cash Obligations $ 27,931,000 $ 17,483,000 $ 5,649,000 $ 4,799,000 $ -
========== ========== ========= ========= ========
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Cash and cash equivalents totaled $ 146,000 at December 31, 2002 as compared to
$152,000 at December 31, 2001.
Net trade receivables at December 31, 2002 were $4,409,000 as compared to
$973,000 at December 31, 2001, due to the Jens' and Strata Acquisitions.
Net property, plant and equipment were $17,124,000 at December 31, 2002 as
compared to $4,246,000 at December 31, 2001, as a result of Jens' and Strata
Acquisitions. Capital expenditures for the year 2002 were $518,000. Capital
expenditures for the year 2001 were $402,000. Capital expenditures for 2003 are
projected to be approximately $600,000.
Trade accounts payable at December 31, 2002 were $2,106,000 as compared to
$298,000 at December 31, 2001, primarily due the Jens' and Strata Acquisitions.
Other current liabilities, excluding the current portion of long-term debt, at
December 31, 2002 were $2,597,000 consisting of interest in the amount of
$811,000, accrued salary and benefits in the amount of $280,000, income taxes
payable of $45,000, accrued restructuring costs of $606,000, advance from
officers of the Company of $99,000, accrued operating expenses of $ 543,000, and
legal and professional expenses in the amount of $213,000. Included in accrued
restructuring costs was compensation in the amount of $244,000 due to former
employees of the Company. At December 31, 2001 other current liabilities,
excluding the current portion of long-term debt, were $1,637,000 consisting of
interest in the amount of $176,000, accrued salary and benefits in the amount of
$851,000, and legal and professional expenses in the amount of $610,000. All of
these balance sheet accounts increased significantly from December 31, 2001
balances due to the Jens' and Strata Acquisitions. Included in salary and
benefits payable at December 31, 2001 was deferred compensation in the amount of
$318,000 due the CEO of the Company.
19
Long-term debt including current maturities was $21,221,000 at December 31, 2002
as compared to $7,856,000 at December 31, 2001. The increase in long-term debt
was primarily a result of the cost of the Jens' and Strata Acquisitions in
February 2002. The long-term debt is as follows (as discussed below, all bank
debt may be accelerated and may be come due and payable, if the Company fails to
refinance the Mountain Air bank debt due on June 30, 2003):
MOUNTAIN AIR. At December 31, 2002, Mountain Air had the following debt
outstanding:
o A term loan payable to Wells Fargo Energy in the amount of $3,550,000 at a
floating interest rate with quarterly principal payments of $147,917 (the
interest rate was 5.25% at December 31, 2002). At December 31, 2002, the
outstanding amount due was $2,392,000. The maturity date of the loan is
June 30, 2003.
o A seller's 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 payable to Wells Fargo Energy Capital in the amount of
$2,000,000 at 12% interest. The principal will be due on June 30, 2003. In
connection with incurring the debt, the Company issued redeemable
warrants, which have been recorded as a liability of $600,000 and as
discount to the face amount of the debt. This amount is amortizable over
three years as additional interest expense. $200,000 of this debt was
amortized in 2002, and $183,000 of this debt was amortized in 2001.
o A delayed draw term loan payable to Wells Fargo Energy in the amount of
$282,291 at LIBOR plus 0.5% interest payable quarterly commencing on
November 30, 2001 (the interest rate was 4.75% at December 31, 2002). At
December 31, 2002, the outstanding amount due was $160,000. The principal
will be due on June 30, 2003.
o A $500,000 line of credit at Wells Fargo bank, of which $330,000 was
outstanding at December 31, 2002. The committed line of credit is due on
June 30, 2003. Interest accrues at a rate equal to the Prime rate plus
0.5% to 1.25% (4.75% at December 31, 2002) for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted portion.
JENS'. On December 31, 2002, Jens' had the following debt outstanding:
o A term loan payable to Wells Fargo Business Credit, Inc. in the amount of
$4,042,396 at a floating interest rate with monthly principal payments of
$67,373 (the interest rate was 8.75% at December 31, 2002). At December
31, 2002, the outstanding amount due was $3,369,000. The maturity date of
the loan is February 1, 2005.
o A seller's note payable to Jens Mortensen in the amount of $4,000,000 at
7.5% simple interest with quarterly interest payments. At December 31,
2002 $275,000 of interest was accrued and was included in accrued
interest. The principal and interest are due on January 31, 2006.
20
o A real estate loan payable to Wells Fargo Business Credit, Inc. in the
amount of $532,000 at a floating interest rate with monthly principal
payments of $14,778 (the interest rate was 8.75% at December 31, 2002). At
December 31, 2002, the outstanding amount due was $384,000. The principal
will be due on February 1, 2005.
o A $1,000,000 line of credit at Wells Fargo bank, of which $67,000 was
outstanding at December 31, 2002. The committed line of credit is due on
January 31, 2005. Interest accrues at a floating rate plus 3% (8.75% at
December 31, 2002) for the committed portion. Additionally, the Company
pays a 0.05% fee for the uncommitted portion.
o In conjunction with the purchase of Jens', the Company agreed to pay a
total of $1,234,560 to the Seller of Jens' in exchange for a non-compete
agreement. The Company is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of December 31, 2002, the balance due is
approximately $1,008,000 including $247,000 classified as short-term.
STRATA. On December 31, 2002, Strata had the following debt outstanding:
o A term loan payable to Wells Fargo Business Credit, Inc. in the amount of
$1,654,000 at a floating interest rate with monthly principal payments of
$27,567 (the interest rate was 9.25% at December 31, 2002). At December
31, 2002, the outstanding amount due was $1,041,000. The maturity date of
the loan is February 1, 2005. In addition to the monthly principal
payments, in June 2002, the Company entered into an agreement with Target
MWD to lease its MWD kits. According to the terms of the lease, Target MWD
is required to make monthly payments of $15,000 to $20,000, which are
being applied to reduce the outstanding principal balance of this loan.
o A $2,500,000 line of credit at Wells Fargo bank, of which $1,275,000 was
outstanding at December 31, 2002. The committed line of credit is due on
January 31, 2005. Interest accrues at a floating rate plus 3% (9.25% at
December 31, 2002) for the committed portion. Additionally, the Company
pays a 0.05% fee for the uncommitted portion.
o In 1996 and as amended in 2000 and 2002, Strata entered into a short-term
vendor financing agreement with a major supplier of drilling motors for
drilling motor rentals, motor lease costs and motor repair costs. The
agreement, as amended, provides for repayment of all amounts due no later
than September 30, 2003. Payment of the interest on the note is due
monthly; however, the Company may make payments with respect to principal
and interest at any time without bonus or penalty. The vendor financing
incurs interest at a rate of 8.0%. As of December 31, 2002, the
outstanding balance, including accrued interest, is approximately
$455,000.
o A note payable dated June 30, 1998, to a former shareholder of Strata
Directional Technology, Inc., bearing interest at 8% and payable in 60
equal monthly installments of $2,030 each. The note matures and will be
paid in full prior to June 30, 2003. The balance at December 31, 2002 was
approximately $12,000.
ALLIS-CHALMERS. At December 31, 2002, Allis-Chalmers had the following debt and
other obligations outstanding:
o Subordinated debt payable to Wells Fargo Energy Capital in the amount of
$3,000,000 at 12% interest. The principal amount is due on January 31,
2005. In connection with incurring the debt, the Company issued redeemable
warrants, which have been recorded as a liability of $900,000 and as a
discount to the face amount of the debt. This amount is amortizable over
three years beginning February 6, 2002, as additional interest expense.
$275,000 was amortized in 2002.
21
o In connection with the acquisition of Strata we issued 3,500,000 shares of
Series A 10% Cumulative convertible Preferred Stock. Those shares, along
with accrued and unpaid dividend rights, are redeemable at the option of
the holder on February 1, 2004, for $4,200,000.
o In 1999, we compensated former and continuing directors who had served
without compensation from 1989 to March 31, 1999 without compensation by
issuing promissory notes totaling $325,000. The notes bear interest at the
rate of 5% and are due March 28, 2005. At December 31, 2002, the principal
and accrued interest on these notes totaled approximately $370,000.
o Associated with the issuance of the $2 million Subordinated debt recorded
by Mountain Air and the $3 million Subordinated debt recorded by
Allis-Chalmers (collectively, the "subordinated debt"), the Company issued
redeemable warrants that are exercisable for a maximum of 1,165,000 shares
of the Company's common stock at an exercise price of $0.15 per share
("Warrants A and B") and non-redeemable warrants that are exercisable for
a maximum of 335,000 shares of the Company's common stock at $1.00 per
share ("Warrant C"). Warrants A and B are subject to cash redemption
provisions ("puts") of $600,000 and $900,000, respectively, at the
discretion of the warrant holders beginning at the earlier of the final
maturity date of the subordinated debt or three years from the closing of
the subordinated debt (January 31, 2004 and January 31, 2005,
respectively). Warrant C does not contain any such puts or provisions. In
addition, previously issued warrants to purchase common stock of Mountain
Air were cancelled. The Company has recorded a liability of $600,000 at
Mountain Air and $900,000 at Allis-Chalmers for a total of $1,500,000 and
is amortizing the effects of the puts to interest expense over the life of
the related subordinated debt instruments.
In addition to the debt discussed above, the Company had available lines of
credit totaling $4,000,000 at December 31, 2002, of which $1,672,000 was
outstanding as compared to an available line of credit totaling $775,00 at
December 31, 2001, of which $375,000 was outstanding. The increase in lines of
credit was due to the Jens' and Strata Acquisitions.
On July 16, 2002, our lenders declared the Company and our subsidiaries to be in
default under our numerous credit agreements with Wells Fargo Bank and its
affiliates (the Bank Lenders). The defaults resulted primarily from our failure
to meet financial covenants as a result of decreased revenues. As a result of
these defaults the Bank Lenders imposed default interest rates retroactive to
April 1, 2002, resulting in an increase of approximately $15,000 in monthly
interest payments. Additionally the Bank Lenders suspended interest payments
(aggregating $275,000 through December 31, 2002) on a $4.0 million subordinated
seller note issued to the Bank Lenders in connection with the Jens' acquisition,
which resulted in Jens' default under the terms of the subordinated seller note,
and suspended interest payments (aggregating $150,000 through December 31, 2002)
on a $3.0 million subordinated bank note issued in connection with the Jens'
acquisition, which resulted in Jens' default under the terms of such note.
Pursuant to the terms of inter-creditor agreements between our lenders, the
holders of such obligations are precluded from taking action to enforce such
obligations without the consent of the Bank Lenders.
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements (the "Forbearance Agreements"), which amended certain operating
covenants. In addition the Bank Lenders agreed to forbear from taking action
(but did not waive the underlying defaults) with respect to the alleged defaults
for a period of six months ending June 30, 2003 (the "Forbearance Period").
Pursuant to the Forbearance Agreements:
22
Mountain Air's obligations have been modified as follows:
o Mountain Air was allowed to apply a security deposit
to offset payments on its equipment lease, lowering
additional payments from $58,574 to $35,000 per month
during the Forbearance Period, after which lease
payments will return to $58,574 per month though
February 15, 2006, on which date a final payment of
$58,574 will be due.
o Principal payments on its senior debt have been
reduced during the Forbearance Period from $57,000 to
$45,000 per month.
o Interest payments on its subordinated debt have been
reduced during the Forbearance Period from 12% to 6%
(with the balance being accrued).
o All of Mountain Air's senior and subordinated debt of
approximately $4,882,000 will be due and payable on
June 30, 2003.
Jens' obligations have been amended as follows:
o During the Forbearance Period, Jens' has been allowed
to resume payments of $30,000 per month on its
subordinated debts to Wells Fargo Energy Capital.
o The interest rate on Jens' senior debt has been
increased to prime plus 3%.
o Jens' has been allowed to distribute $300,000 to
Allis-Chalmers Corporation to allow Allis-Chalmers
Corporation to pay legal, accounting and other
expenses in connection with the preparation of its
financial statements for the year ended December 31,
2002, its Securities and Exchange Commission filing,
and shareholder communications.
Strata's obligations have been amended as follows:
o The interest rate on Strata's term debt and revolving
debt has been increased to prime plus 3-1/2%.
The Company have made all outstanding principal and interest payments on all
senior debt to the Bank Lenders. We also believe the Company will be able to
comply with the terms of the Forbearance Agreements during the Forbearance
Period. However, on June 30, 2003, $4,882,000 of debt owed by Mountain Air will
become due and the forbearance with respect to Jens' and Strata's debts to the
Bank Lenders will expire. We are negotiating with the Bank Lenders to amend or
replace the Mountain Air credit agreements with the Bank Lenders, and in
connection with any amendment will seek a waiver of past defaults. However,
there can be no assurance that we will be able to amend the terms of or
refinance the outstanding debt to the Bank Lenders, or do so on favorable terms.
If we are unable to renegotiate or refinance the Company debt, the Bank Lenders
will have the right to accelerate all amounts due them (which totaled
$14,264,000, at March 31 2003), and to foreclose on the assets securing their
loans, which constitute substantially all of the assets of the Company. In such
event, we may be unable to continue operations. Accordingly, the bank debt and
the subordinated seller note are recorded as current liabilities on the
Company's financial statements, and as a result the Company had a working
capital deficit of $13,016,000 at December 31, 2002. Because of the foregoing
risks, our auditors have qualified their opinion regarding our financial
statements to include a "going concern" exception, which indicates that their
evaluation of our financial condition is premised upon the assumption that we
will continue operations and that based upon our current financial condition
there is a risk that we may not be able to do so.
23
Our long-term capital needs are to refinance our existing debt, provide funds
for existing operations, redeem the Series A Preferred Stock and to secure funds
for acquisitions in the oil and gas equipment rental and services industry. In
order to pay our debts as they become due, including the amounts due to the Bank
Lenders described above we will require additional financing within three
months, which may include the issuance of new warrants or other equity or debt
securities, as well as secured and unsecured loans. Any new issuance of equity
securities would further dilute existing shareholders.
RECENT DEVELOPMENTS --ACQUISITION OF JENS' OILFIELD SERVICE, INC. AND STRATA
DIRECTIONAL TECHNOLOGY, INC.
- --------------------------------------------------------------------------------
Jens' Oil Field Acquisition
- ---------------------------
In February 2002, we purchased 81% of the outstanding stock of Jens' for (i)
$10,250,000 in cash, (ii) a $4,000,000 note payable with a 7.5% interest rate
and the principal due in four years, (iii) $1,234,560 for a non-compete
agreement payable monthly for five years, (iv) an additional payment of $841,000
based upon Jens' working capital as of February 1, 2002 and (v) 1,397,849 shares
of our common stock. We entered into a three-year employment agreement with Mr.
Mortensen under which we will pay Mr. Mortensen a base salary of $150,000 per
year. We also entered into a Shareholders Agreement with Jens' and Mr. Mortensen
providing for restrictions against transfer of the stock of Jens' by us and Mr.
Mortensen, and providing Mr. Mortensen the option after February 1, 2003, to
exchange his shares of stock of Jens' for shares of our common stock with a
value equal to 4.6 times the trailing EBITDA (Earnings Before Interest, Tax,
Depreciation and Amortization) of Jens' determined in accordance with GAAP
(Generally Accepted Accounting Principles), less any inter-company loans or
third party investments in Jens', times nineteen percent (19%). Our common stock
will be valued based on the average closing bid price for the stock for the
preceding 30 days. Mr. Mortensen has a demand registration right pursuant to the
Shareholder Agreement that requires the Company to register his shares of the
Company under the Securities Act of 1933, as amended, which can be exercised
until August 1, 2005, at Mr. Mortensen's cost, along with piggyback registration
rights.
Strata Acquisition
- ------------------
We acquired 100% of the preferred stock and 95% of the common stock of Strata in
consideration for the issuance to Energy Spectrum Partners, LP ("Energy
Spectrum") of 6,559,863 shares of our common stock, warrants to purchase an
additional 437,500 shares of Company common stock at an exercise price of $0.15
per share and 3,500,000 shares of newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock"). In
addition, as a result of our failure to redeem the Series A Preferred Stock
prior to February 4, 2003, we issued to Energy Spectrum an additional warrant to
acquire 875,000 shares at an exercise price of $0.15 per share. Energy Spectrum,
which is now our largest shareholder, is a private equity fund headquartered in
Dallas, Texas. In May 2002, we purchased the remaining minority interest in
Strata in exchange for 87,500 shares of the Allis-Chalmers common stock.
The Series A Preferred Stock issued to Energy Spectrum in connection with the
Strata transaction is entitled to receive cumulative annual dividends of $ .10
per share payable in cash or additional shares of Series A Preferred Stock. No
dividends have been declared to date but the Company accrues the obligation to
issue additional shares of Series A Preferred Stock. Additionally, each share of
Series A Preferred Stock is convertible into two shares of our common stock. The
Series A Preferred Stock is also subject to anti-dilution in the event we issue
our common stock at a price below $ 0.50 per share and is subject to mandatory
redemption on the second anniversary date of issuance or earlier from the net
24
proceeds of new equity sales, and is subject to optional redemption by us at
anytime. At the option of Energy Spectrum, on February 1, 2004, we will be
obligated to redeem the Series A Preferred Stock, along with accrued and unpaid
dividend rights, for $4,200,000. Based on our current operations, it appears
unlikely that we will be able to secure financing to enable us to redeem the
Series A Preferred Stock, and we will therefore attempt to renegotiate its
terms. In addition, Energy Spectrum is entitled to appoint a number of directors
to our Board of Directors, which most closely approximates its percentage
ownership of our common stock on a fully-diluted basis. Currently, this entitles
Energy Spectrum to elect one-half, or five of our directors. Currently, three
persons designated by Energy Spectrum, Thomas O. Whitener, Jr., James W. Spann,
and Michael D. Tapp, serve on our board of directors. We also granted Energy
Spectrum registration rights, which includes two demand registrations at our
expense, and piggyback registration rights.
RISK FACTORS
This Annual Report on Form 10-K (including without limitation the following Risk
Factors) contains forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934) regarding our business, financial condition,
results of operations and prospects. Words such as expects, anticipates,
intends, plans, believes, seeks, estimates and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Annual
Report on Form 10-K.
Although forward-looking statements in this Annual Report on Form 10-K reflect
the good faith judgment of our management, such statements can only be based on
facts and factors we currently know about. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed below and elsewhere in this Annual Report on Form 10-K and in our
other SEC filings and publicly available documents. Readers are urged not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this Annual Report on Form 10-K. We undertake no obligation to
revise or update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Annual Report on Form 10-K.
Low prices for oil and natural gas will 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 operating 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.
We are highly leveraged and are in default under credit agreements with our
lenders.
- --------------------------------------------------------------------------------
As a result of acquisition financing, we are highly leveraged. At March 31,
2003, we had approximately $14,264,000 of lender debt outstanding. In 2002, we
defaulted under our credit agreements and as a result of such defaults in July
2002 our senior lenders required us to suspend payments on our subordinated
debt. Our lenders have agreed to forbear taking action with respect to our debt
until June 30, 2003, and we are attempting to refinance our debt. However, if we
fail to refinance our debt, our lenders could accelerate all outstanding debt
and foreclose upon the assets securing our debt, which constitute substantially
all of our assets. Our level of debt will impair our ability to obtain
additional financing, makes us more vulnerable to economic downturns and
declines in oil and natural gas prices, and makes us more vulnerable to
increases in interest rates. We may not maintain sufficient revenues to meet our
debt obligations or to fund our operations. Our lack of funds may limit our
flexibility in planning for, or reacting to, changes in our business and
industry, place us at a competitive disadvantage compared to our competitors
that have greater access to funds, limit our ability to borrow additional funds.
25
We are the subject of a going concern opinion from our independent auditors,
which means that we may not be able to continue operations unless we can obtain
additional funding.
- --------------------------------------------------------------------------------
As shown in the accompanying financial statements, we had a net loss of
$3,969,000 in 2002 and have $4,882,000 in debt due in June 2003. At December 31,
2002, our current liabilities exceeded our current assets by $13,016,000 and our
net worth was $1,009,000. These factors, among others, indicate that unless we
are successful in refinancing our debt, we may be unable to continue as a going
concern for a reasonable period of time. Our independent auditors have added an
explanatory paragraph to their audit opinion issued in connection with our
financial statements for the year ended December 31, 2002, which states that the
financial statements raise substantial doubt as to our ability to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
To service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
- --------------------------------------------------------------------------------
Our ability to fund operations, to make payments on or refinance our
indebtedness, and to fund planned acquisitions and capital expenditures will
depend on our ability to generate cash in the future. This ability, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.
Our failure to obtain additional financing may adversely affect us.
- -------------------------------------------------------------------
We must refinance debt becoming due in June 2003 in order to continue
operations. 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. 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.
Mandatory redemption of series a 10% cumulative convertible preferred stock.
- ----------------------------------------------------------------------------
We have outstanding 3,500,000 shares of Series A 10% Cumulative Convertible
Preferred Stock, (the "Preferred Stock"). Pursuant to the terms of the
certificate of Designation, Preferences and Rights of the preferred stock, the
company will be obligated on February 1, 2004 to redeem the outstanding
Preferred Stock, along with cumulative dividend rights, for $4,200,000.
We may have difficulties integrating acquired businesses.
- ---------------------------------------------------------
We may not be able to successfully integrate the business of our operating
subsidiaries or any business we acquire in the future. 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
incompatibility of business cultures and the loss of key employees and
customers. The various risks associated with our acquisition of businesses and
uncertainties regarding the profitability of such operations could have a
material adverse effect on us.
26
Our success is dependent upon our ability to acquire and integrate additional
businesses.
- --------------------------------------------------------------------------------
Our business strategy is to acquire companies operating in the oil and natural
gas equipment rental and services industry. However, there can be no assurance
that we will be successful in acquiring any additional companies. Our successful
acquisition of new companies will depend on various factors, including our
ability to obtain financing, the competitive environment for acquisitions, as
well as the integration issues described in the preceding paragraph. 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 that we have
targeted
We may not experience expected synergies.
- -----------------------------------------
We may not be able to achieve the synergies we expect from the combination of
businesses, including our plans to reduce overhead through shared facilities and
systems, to cross-market to the businesses' customers, and to access a larger
pool of customers due to the combined businesses' ability to provide a larger
range of services.
There is no trading market for our common stock
- -----------------------------------------------
Our common stock is not registered on any exchange or NASDAQ and is traded only
sporadically on the Over the Counter Bulletin Board. We are investigating
listing our common stock on an exchange; however, we do not currently meet the
listing requirement of any national U.S. exchange, and there can be no assurance
that we will be able to list our common stock on any exchange in the future
There can be no assurance that an active market for our common stock will
develop in the future.
We do not expect to pay dividends on our common stock
- -----------------------------------------------------
We have not within the last ten years paid, and have no intentions in the
foreseeable future to pay, any cash dividends on our common stock. Therefore an
investor in our common stock, in all likelihood, will realize a profit on his
investment only if the market price of our common stock increases in value.
Existing stockholders may be diluted in connection with additional financings.
- ------------------------------------------------------------------------------
We expect to issue additional equity securities to repay debt, in connection
with the acquisition of additional businesses, as well as in connection with
employee benefit plans and other plans. Such issuances will dilute the holdings
of existing stockholders. Such securities may be prior to or on a parity with,
our common stock.
Competition could cause our business to suffer.
- -----------------------------------------------
The natural gas equipment rental and services 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.
27
Our products and services may become obsolete.
- ----------------------------------------------
Our business success is dependent upon providing our customers efficient,
cost-effective oil and gas drilling equipment and technology. It is possible
that competing technologies may render our equipment and technologies obsolete,
and have a material adverse effect on us.
Our historical results are not an indicator of future operations.
- -----------------------------------------------------------------
Our business is conducted through three subsidiaries, one of which was acquired
in February 2001 and two of which were acquired in February 2002. As a result,
past performance is not indicative of future results and our likelihood of
success must be considered in light of the volatility of our industry, our
leveraged condition, competition, and other factors set forth herein.
We are controlled by a few stockholders.
- ----------------------------------------
A small number of stockholders effectively control us. Energy Spectrum Partners,
LP ("Energy Spectrum"), our President, Chief Executive Officer and Chairman
Munawar H. Hidayatallah, and Colebrook Investments, Inc. beneficially own
approximately 54.6%, 22.3% and 17.2%, respectively, of our common stock. The
shares of common stock beneficially owned by Energy Spectrum include 7,875,000
shares issuable upon the conversion of Series A Preferred Stock (the "Preferred
Stock"), including accrued dividend rights, and 1,312,500 shares of our common
stock issuable upon the exercise of outstanding warrants. In addition, at
February 28 2003, the Series A Preferred stock had accrued cumulative dividend
rights entitling it to receive either $379,167 in cash or $379,167 additional
shares of Preferred stock. As the holder of the Preferred Stock, Energy Spectrum
has the right to elect a number of directors to our Board of Directors, which
most closely reflects Energy Spectrum's ownership interest in our common stock
on a fully-diluted basis. Currently, Energy Spectrum is entitled to elect five
of our directors. Energy Spectrum and either Mr. Hidayatallah or Colebrook
Investments, Inc., voting together, will have the power to control the outcome
of all matters requiring stockholder approval, including the election of our
directors or a proposed change in control of the Company.
No natural person controls Colebrooke, and none of our officers or directors 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. There are no individual 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.
Dependence upon key personnel.
- ------------------------------
We are dependent upon the efforts and skills of our executives, including our
President, Chief Executive Officer and Chairman Munawar H. Hidayatallah, to
manage our business as well as to identify and consummate additional
acquisitions. In addition, our business strategy is to acquire businesses, which
are dependent upon skilled management personnel, and to retain such personnel to
operate the business. The loss of the services of Mr. Hidayatallah or one or
more of our key personnel at our operating subsidiaries could have a material
adverse effect on us. We do not maintain key man insurance on any of our
personnel. In addition, our development and expansion will require additional
experienced management and operations personnel. No assurance can be given that
we will be able to identify and retain such employees.
28
Our customers' credit risks could cause our business to suffer.
- ---------------------------------------------------------------
Our customers are engaged in the oil and natural gas drilling business in the
southwestern United States and Mexico. This concentration of customers may
impact our overall exposure to credit risk, in that customers may be similarly
affected by changes in economic and industry conditions.
We are vulnerable to personal injury and property damage.
- ---------------------------------------------------------
Our services are used for the exploration and production of oil and natural gas.
These operations are subject to inherent hazards that can cause personal injury
or loss of life, damage to or destruction of property, equipment, the
environment and marine life, and suspension of operations. Litigation arising
from an accident at a location where our products or services are used or
provided may 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, we could become subject to
material uninsured liabilities.
Government regulations could cause our business to suffer.
- ----------------------------------------------------------
We are subject to various federal, state and local laws and regulations relating
to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Although we are not aware of any proposed material changes in any 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.
We may be subject to certain environmental liabilities relating to discontinued
operations.
- --------------------------------------------------------------------------------
We were reorganized under the bankruptcy laws in 1988; since that time, 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. We
believe such claims are barred by applicable bankruptcy law; however, if we do
not prevail with respect to these claims, we could become subject to material
environmental liabilities.
We may be subject to certain products liability claims.
- -------------------------------------------------------
We were reorganized under the bankruptcy laws in 1988; since that time we have
been regularly named in products liability lawsuits primarily resulting from our
manufacture of products containing asbestos. In connection with our bankruptcy a
special products liability trust was established to be responsible for such
claims. We believe that claims against Allis-Chalmers Corporation are banned by
applicable bankruptcy law, and that the Products Liability trust will continue
to be responsible for these claims, and since 1988 no court has ruled that we
are responsible for such claims. However, if the products liability trust were
terminated and its funds disbursed, and if we did not prevail in our claim that
our bankruptcy bars claims against us, we could become subject to material
products liabilities related to our pre-bankruptcy activities. We have not
manufactured products containing asbestos since our bankruptcy.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS.
---------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
PAGE
----
Financial Statements:
Independent Auditors' Report 31
Consolidated Statements of Operations for the Years Ended
December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 32
Consolidated Balance Sheets as of December 31, 2002 and 2001 33
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 35
Notes to Consolidated Financial Statements 36
30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Allis-Chalmers Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Allis-Chalmers
Corporation as of December 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years then ended and 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allis-Chalmers Corporation as
of December 31, 2002 and 2001, and the results of their consolidated operations
and cash flows for each of the years ended December 31, 2002 and 2001, and the
period February 4, 2000 (Inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $3,969,000 during the year ended December 31,
2002, and, as of that date, had a working capital deficiency of $13,016,000 and
net worth of $1,009,000. As described more fully in Notes 1 and 8 to the
financial statements, the Company has obtained waivers on its loan covenant
violations through June 30, 2003. On that date, approximately $4,882,000 of
current debt becomes due. After June 30, 2003, if the Company continues to be in
default of its other loan covenants, the lenders may demand repayment of the
loans. Negotiations are presently under way to obtain revised loan agreements to
permit the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company cannot predict what the outcome of the
negotiations will be. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/S/ GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
March 7, 2003
31
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
Period from
February 4, 2000
Year Ended Year Ended through December
December 31, 2002 December 31, 2001 31, 2000
----------------- ----------------- -----------------
Revenues $ 17,990 $ 4,796 $ -
Cost of revenues 14,910 3,331 -
----------------- ----------------- -----------------
Gross margin 3,080 1,465 -
General and administrative expense 3,792 2,898 383
Personnel restructuring costs 495 - -
Abandoned acquisition/private placement costs 233 - 244
----------------- ----------------- -----------------
Total operating expenses 4,520 2,898 627
----------------- ----------------- -----------------
(Loss) from operations (1,440) (1.433) (627)
Other income (expense):
Interest income 49 41 -
Interest expense (2,256) (869) -
Minority interest (189) - -
Factoring costs on note receivable (191) - -
Other 58 (12) -
----------------- ----------------- -----------------
Total other income (expense) (2,529) (840) -
----------------- ----------------- -----------------
Net (loss) before income taxes (3,969) (2.273) (627)
Provision for income tax - - -
----------------- ----------------- -----------------
Net (loss) from continuing operations (3,969) (2,273) (627)
(Loss) from discontinued operations - (291) -
(Loss) on sale of discontinued operations - (2,013) -
----------------- ----------------- -----------------
Net (loss) from discontinued operations - (2,304) -
Net (loss) (3,969) (4,577) (627)
----------------- ----------------- -----------------
Preferred stock dividend (321) - -
----------------- ----------------- -----------------
Net (loss) attributed to common stockholders $ (4,290) $ (4,577) $ (627)
================= ================= =================
(Loss) per common share (basic and diluted)
Continuing operations $ (.23) $ (.57) $ (1.57)
Discontinued operations - (.58) -
----------------- ----------------- -----------------
Net (loss) per common share $ (.23) $ (1.15) $ (1.57)
================= ================= =================
Weighted average number of common shares outstanding:
Basic 18,831 3,952 400
================= ================= =================
Diluted 18,831 3,952 400
================= ================= =================
The accompanying Notes are an integral part of the Financial Statements
32
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31
2002 2001
------------- -------------
ASSETS
Cash and cash equivalents $ 146 $ 152
Trade receivables, net of allowance for doubtful accounts of
$32 and $0, respectively 4,409 973
Due from related party (Note 14) - 61
Lease deposit (Note 9) 525 -
Lease receivable, current (Note 13) 180 -
Prepaids and other current assets 317 153
------------- -------------
Total current assets 5,577 1,339
Property and equipment, net of accumulated depreciation of
$2,340 and $644 at December 31, 2002 and 2001, respectively 17,124 4,426
Goodwill 7,829 3,951
Other intangible assets, net of accumulated amortization of
$894 and $403 at December 31, 2002 and 2001, respectively 2,650 1,116
Debt issuance costs, net of accumulated amortization of
$331 and $79 at December 31, 2002 and 2001, respectively 515 180
Lease receivable, less current portion (Note 13) 1,042 -
Lease deposit (Note 9) - 701
Note receivable - 791
Other assets 41 141
------------- -------------
Total Assets $ 34,778 $ 12,465
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt (Note 8) $ 13,890 $ 1,023
Trade accounts payable 2,106 298
Accrued employee salaries, benefits and payroll taxes 280 851
Accrued interest 811 176
Accrued expenses 1,506 610
------------- -------------
Total current liabilities 18,593 2,958
Accrued postretirement benefit obligations (Note 3) 670 824
Long-term debt, net of current maturities (Note 8) 7,331 6,833
Other long-term liabilities 270 -
Minority interest 1,584 -
Redeemable warrants (Notes 8 and 12) 1,500 600
Redeemable convertible preferred stock, $0.01 par value
(4,200,000 shares authorized; 3,500,000 issued and
outstanding at December 31, 2002) ($1 redemption value)
including accrued dividends (Note 10) 3,821 -
COMMON STOCKHOLDERS' EQUITY (NOTE 10)
Common stock, $.15 par value (110,000,000 shares authorized;
19,633,340 and 11,588,128 issued and outstanding at
December 31, 2002 and 2001 respectively) 2,945 1,738
Capital in excess of par value 7,237 4,716
Accumulated (deficit) (9,173) (5,204)
------------- -------------
Total shareholders' equity 1,009 1,250
------------- -------------
Total liabilities and shareholders' equity $ 34,778 $ 12,465
============= =============
The accompanying Notes are an integral part of the Financial Statements.
33
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
PREFERRED STOCK COMMON STOCK CAPITAL IN
------------------------ ------------------------ EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, February 4, 2000
(Inception) - $ - - $ - $ - $ - $ -
Issuance of common stock subscribed
at $94 per share - - 4,250 - 400 - 400
Issuance of common stock for
conversion of notes payable at $250
per share - - 1,000 - 250 - 250
Issuance of common stock for cash at
$326 per share - - 307 - 100 - 100
Issuance of common stock subscribed
at $326 per share - - 3,068 - 1,000 - 1,000
Issuance of common stock subscribed
at $350 per share - - 1,250 - 438 - 438
Contributed capital and services - - - - 787 - 787
Retroactive effect of
Recapitalization on May 9, 2001 - - 390,125 60 (60) - -
Net (loss) - - - - (627) (627)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2000 - - 400,000 60 2,915 (627) 2,348
Issuance of common stock in
connection with Recapitalization - - 11,118,128 1,678 1,101 - 2,779
Issuance of stock options for
services - - - - 500 - 500
Issuance of stock purchase warrants
for services - - - - 200 - 200
Net (loss) - - - - - (4,577) (4,577)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 11,588,128 1,738 4,716 (5,204) 1,250
Issuance of common stock in
connection with the purchase of Jens' - - 1,397,849 210 420 - 630
Issuance of stock purchase warrants
in connection with the purchase of
Jens' - - - - 47 - 47
Issuance of preferred and common
stock in connection with the
purchase of Strata 3,500,000 3,500 6,559,863 984 1,968 - 2,952
Issuance of stock purchase warrants
in connection with the purchase of
Strata - - - - 267 - 267
Issuance of common stock in
connection with the purchase of
Strata - - 87,500 13 140 - 153
Accrual of preferred dividends - 321 - - (321) - (321)
Net (Loss) - - - - - (3,969) (3,969)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2002 3,500,000 $ 3,821 19,633,340 $ 2,945 $ 7,237 $ (9,173) $ 1,009
=========== =========== =========== =========== =========== =========== ===========
The accompanying Notes are an integral part of the Financial Statements.
34
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Period from
February 4, 2000
Year Ended Year Ended through
December 31, 2002 December 31, 2001 December 31, 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net (loss) $ (3,969) $ (4,577) $ (627)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation expense 1,837 621 -
Amortization expense 744 482 -
Abandoned acquisition costs - - 244
Contributed services - - 250
Issuance of stock options for services - 500 -
Amortization of discount on debt 475 183 -
Minority interest in income of subsidiary 189 - -
Loss on sale of property 119 - -
Changes in working capital:
Decrease (increase) in accounts receivable (713) (511) (124)
Decrease (increase) in due from related party 61 43 -
Decrease (increase) in other current assets 1,644 (139) 538
Decrease (increase) in other assets 902 - -
Decrease (increase) lease deposit 176 - -
(Decrease) increase in accounts payable 1,316 238 12
(Decrease) increase in accrued interest 651 176 -
(Decrease) increase in accrued expenses (339) 156 -
(Decrease) increase in other long-term liabilities (123) - -
(Decrease) increase in accrued employee
benefits and payroll taxes (788) 463 -
Discontinued operations
Loss on sale of HDS operations - 2,013 -
Operating cash provided (used) - 381 -
Depreciation and amortization - 124 -
---------------- ---------------- ----------------
Net cash provided by operating activities 2,182 153 293
Cash flows from investing activities:
Recapitalization, net of cash received - (88) -
Business acquisition costs - (141) (624)
Acquisition of MADSCO assets, net of cash Acquired - (9,534) -
Acquisition of Jens', net of cash acquired (8,120) - -
Acquisition of Strata, net of cash acquired (179) - -
Purchase of equipment (518) (402) -
Proceeds from sale-leaseback of equipment,
net of lease deposit - 2,803 -
Proceeds from sale of equipment 367 45 -
---------------- ---------------- ----------------
Net cash (used) by investing activities (8,450) (7,317) (624)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,683 5,832 -
Payments on long-term debt (4,079) (489) -
Proceeds from issuance of common stock, net - 1,838 350
Borrowings on lines of credit 7,050 375 (15)
Payments on lines of credit (5,804) - -
Debt issuance costs (588) (244) -
---------------- ---------------- ----------------
Net cash provided by financing activities 6,262 7,312 335
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (6) 148 4
Cash and cash equivalents at beginning of year 152 4 -
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 146 $ 152 $ 4
================ ================ ================
Supplemental information - interest paid $ 1,082 $ 802 $ -
================ ================ ================
The accompanying Notes are an integral part of the Financial Statements.
35
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On January 25, 2001, OilQuip formed a subsidiary, Mountain Air (Note 1), a Texas
corporation.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Air, acquired
certain assets of Mountain Air Drilling Service Co., Inc. ("MADSCO"), whose
business consists of providing equipment and trained personnel in the four
corner areas of the southwestern United States. Mountain Air primarily provides
compressed air equipment and trained operators to companies in the business of
drilling for natural gas. With the acquisition of MADSCO assets, OilQuip ceased
to be in the development stage.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers Corporation
("Allis-Chalmers" or the "Company"). In the merger, all of OilQuip's outstanding
common stock was converted into 400,000 shares of Allis-Chalmers' common stock
and the right to receive an additional 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. That authorization and issuance occurred on October 15, 2001.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Compressed Air, Inc. ("Mountain Air"). However, for accounting purposes
OilQuip was treated as the acquiring company in a reverse acquisition of
Allis-Chalmers. The financial statements prior to the merger, including those
for the period in 2000, are the financial statements of OilQuip. As a result of
the merger, the fixed assets, goodwill and other intangibles of Allis-Chalmers
were increased by $2,691,000.
On November 30, 2001, the Company entered into an agreement to sell its wholly
owned subsidiary, Houston Dynamic Service, Inc. ("HDS"), to the general manager
of HDS in a management buy-out. The sale of HDS was finalized on December 12,
2001.
In conjunction with the sale of HDS, the Company formally discontinued the
operations related to precision machining of rotating equipment, which was the
principal HDS business.
On February 6, 2002, Allis-Chalmers acquired 81% of the outstanding stock of
Jens' Oilfield Service, Inc. ("Jens'"), which supplies highly specialized
equipment and operations to install casing and production tubing required to
drill and complete oil and gas wells. The Company also purchased substantially
all the outstanding common stock and preferred stock of Strata Directional
Technology, Inc. ("Strata"), which provides high-end directional and horizontal
drilling services for specific targeted reservoirs that cannot be reached
vertically.
VULNERABILITIES AND CONCENTRATIONS
The Company provides oilfield services in several regions including the states
of Texas, New Mexico, Utah, and New Mexico and southern portions of Mexico. The
nature of the Company's operations and the many regions in which it operates
subject it to changing economic, regulatory and political conditions. The
company believes it is vulnerable to the risk of near-term and long-term severe
changes in the demand and subsequent price for oil and natural gas.
36
BASIS OF PRESENTATION AND LIQUIDITY
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. As shown in the accompanying financial statements, as of December 31,
2002, the Company has a negative working capital of $13,016,000 including
approximately $4,882,000 of debt principal payments due on June 30, 2003 and a
net worth of $1,009,000.
As further discussed in Note 8, on July 16, 2002, the Company's lenders declared
the Company and its subsidiaries to be in default under numerous credit
agreements with Wells Fargo Bank and its affiliates (the Bank Lenders).
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements, which amended certain operating covenants. In addition the Bank
Lenders agreed to forbear from taking action (but did not waive the underlying
defaults) with respect to the alleged defaults for a period of six months ending
June 30, 2003. As a result, $8,757,829 was classified from non-current to
current liabilities.
The Company's long-term capital needs are to refinance existing debt, provide
funds for existing operations, and redeem the Series A Preferred Stock and to
secure funds for acquisitions in the oil and gas equipment rental and services
industry. In order to pay debts as they become due, including the amounts due to
the Bank Lenders described above, additional financing will be required, which
may include the issuance and subsequent exercise of new warrants or other equity
or debt securities, as well as secured and unsecured loans. Any new issuance of
equity securities would further dilute existing shareholders.
These factors indicate that the Company may be unable to continue in existence.
The Company's financial statements do not include any adjustments related to the
carrying value of assets or the amount and classification of liabilities that
might be necessary should the Company be unable to continue in existence. The
Company's ability to establish itself as a going concern is dependent upon its
ability to refinance existing debt.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be perceived
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts, recoverability of long-lived assets, useful lives used in
depreciation and amortization, income taxes and related valuation allowances.
The accounting estimates used in the preparation of the consolidated financial
statements may change as new events occur, as more experience is acquired, as
additional information is obtained and as the Company's operating environment
changes.
37
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries. The Company's subsidiaries are Mountain Air, Jens', and
Strata. All significant inter-company transactions have been eliminated.
REVENUE RECOGNITION
The Company's revenue recognition policy is significant because revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions and royalties. The Company
follows very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of the revenue policy. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause operating results to vary significantly from quarter to
quarter and could result in future operating losses. Revenues are recognized by
the Company and its subsidiaries as services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company established an allowance for uncollectible trade accounts receivable
based on historical collection experience and management's evaluation of
collectibility of outstanding accounts receivable. As of December 31, 2002 and
2001, the Company had recorded an allowance of doubtful accounts of $31,000 and
$0, respectively. Bad debt expense was $31,000, and $0 for the years ended
December 31, 2002 and 2001, and $0 for the period from February 4, 2000
(Inception) thru December 31 2000.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment represents the cost of equipment in use in the operations
of the Company.
Maintenance and repairs are charged to operations when incurred. Refurbishments
and renewals are capitalized when the value of the equipment is enhanced for an
extended period. When property and equipment are sold or otherwise disposed of,
the asset account and related accumulated depreciation account are relieved, and
any gain or loss is included in operations.
The cost of property and equipment currently in service is depreciated over the
estimated useful lives of the related assets, which range from three to fifteen
years. Depreciation is computed on the straight-line method for financial
reporting purposes. Depreciation expense charged to operations was $1,837,000
for the year ended December 31, 2002, $621,000 for the year ended December 31,
2001 and $0 for the period from February 4, 2000 (Inception) through December
31, 2000.
38
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). Goodwill, including goodwill associated with equity method investments,
and intangible assets with infinite lives are no longer amortized, but tested
for impairment annually or more frequently if circumstances indicate that
impairment may exist. Intangible assets with finite useful lives are amortized
either on a straight-line basis over the asset's estimated useful life or on a
basis that reflects the pattern in which the economic benefits of the intangible
assets are realized.
The effects of adopting SFAS No.142 on the Company are that approximately
$7,829,000 of goodwill is no longer being amortized. The Company performs
impairment test on the carrying value of its goodwill at each reporting unit and
as of December 31, 2002, no evidence of impairment exists.
In 2001 and 2000, goodwill was amortized using the straight-line method over its
expected useful life.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
other intangibles, and certain other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recorded in the period in which it is
determined that the carrying amount is not recoverable. The determination of
recoverability is made based upon the estimated undiscounted future net cash
flows, excluding interest expense. The impairment loss is determined by
comparing the fair value, as determined by a discounted cash flow analysis, with
the carrying value of the related assets.
On January 1, 2002, the Company adopted SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS No. 144"). SFAS No. 144
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets and replaces SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 144
provides updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets and modifies the
accounting and reporting of discontinued operations. The adoption has had on the
Company's operations.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts receivable
and payable, and debt. The carrying values of cash and cash equivalents,
accounts receivable and payable approximate fair value. The Company believes the
fair values and the carrying value of the debt would not be materially different
due to the instruments' interest rates approximating market rates for similar
borrowings at December 31, 2002 and 2001.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of significant concentration of credit risk regardless
of the degree of such risk.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company does not have concentrations of credit risk within their
cash and cash equivalents as their deposits are at several financial
institutions.
Approximately 20% of the Company's revenues for the year ended December 31, 2002
were derived from two customers as compared to approximately 79% of the
Company's revenues for the year ended December 31, 2001, including one customer
that accounted for 65% of the Company's revenues in 2001. There were no revenues
for the period February 4, 2000 through December 31, 2000. Accounts receivable
at December 31, 2002 includes $706,000 as compared to $550,000 at December 31,
2001 from these two customers.
39
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized to
interest expense using straight-line or interest methods depending upon the
principal payment stream of each of the notes over the lives of the related
debt.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses for the year ended December 31, 2002 and 2001, and the period February
4, 2000 through December 31, 2000 totaled $96,500, $31,400 and $0, respectively.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or income tax returns. Under this
method, the deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
COMPREHENSIVE INCOME
There are no adjustments necessary to net loss as presented in the accompanying
statements of operations to derive comprehensive income in accordance with SFAS
No. 130, REPORTING COMPREHENSIVE INCOME.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current year
presentation.
PERSONNEL RESTRUCTURING COSTS
The Company has recorded and classified separately from recurring selling,
general and administrative costs those costs incurred to terminate and relocate
several members of management that occurred in September 2002.
BUSINESS ACQUISITION COSTS
The Company capitalizes direct costs associated with successful business
acquisitions and expenses acquisition costs for unsuccessful acquisition
efforts.
40
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.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using Accounting Principle
Board Opinion No. 25 ("APB No. 25"). Under APB 25, compensation expense is
recognized for stock options with an exercise price that is less than the market
price on the grant date of the option. For stock options with exercise prices at
or above the market value of the stock on the grant date, the Company adopted
the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). The Company also adopted the disclosure-only
provisions of SFAS No. 123 for the stock options granted to the employees and
directors of the Company. Accordingly, no compensation cost has been recognized
for these options other than $500,000 recognized in 2001 under APB No. 25. Had
compensation expense for the options granted been recorded based on the fair
value at the grant date for the options, consistent with the provisions of SFAS
123, the Company's net loss and net loss per share for the years ended December
31, 2002 and 2001 would have been increased to the pro forma amounts indicated
below. No options were issued to employees or directors in either of the years
ended December 31, 2002 and 2001 except 500,000 options issued and accounted for
under APB No. 25 (Note 11).
(in thousands, except
per share) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Net (loss): As reported $ (3,969) $ (4,577)
Pro forma (3,969) (4,717)
========== ==========
Net (loss) per share: As reported $ (0.23) $ (1.15)
Pro forma (0.23) (1.19)
========== ==========
There were no options granted in 2002. The fair value of the common stock
options granted during 2001, for disclosure purposes only, was estimated on the
grant dates using the Black Scholes Pricing Model and the following assumptions.
FOR THE YEAR ENDED DECEMBER 31,
2002 2001
---- ----
Expected dividend yield -- --
Expected price volatility -- 100%
Risk-free interest rate -- 5%
Expected life of options -- 4 years
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("SFAS No. 131"), 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 December 31, 2002, the
Company operates in three segments organized by service line including casing
services, directional drilling services and compressed air drilling services. At
December 31, 2001, the Company operated only one segment. Please see Note 15 for
further disclosure in accordance with SFAS No. 131.
41
PENSION AND OTHER POST RETIREMENT BENEFITS
SFAS No. 132, EMPLOYER'S DISCLOSURES ABOUT PENSION AND OTHER POST RETIREMENT
BENEFITS ("SFAS No. 132"), requires certain disclosures about employers' pension
and other post retirement benefit plans and specifies the accounting and
measurement or recognition of those plans. SFAS No. 132 requires disclosure of
information on changes in the benefit obligations and fair values of the plan
assets that facilitates financial analysis.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("SFAS No. 133"), establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. 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.
INCOME (LOSS) PER COMMON SHARE
The Company computes loss per common share in accordance with the provisions of
SFAS No. 128, EARNINGS PER SHARE ("SFAS No. 128"). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted earnings
per share. Basic earnings per share are measured as the income or loss available
to common stockholders divided by the weighted average outstanding common shares
for the period. Diluted earnings per share is similar to basic earnings per
share, but presents the dilutive effect on a per share basis of potential common
shares (e.g., convertible securities, stock options, etc.) as if they had been
converted at the beginning of the periods presented. Potential common shares
that have an anti-dilutive effect (e.g., those that increase income per share or
decrease loss per share) are excluded from diluted earnings per share.
The basic and diluted loss per common share for all periods presented herein was
computed by dividing the net loss attributable to common shares by the weighted
average outstanding common shares for the period. Potential common shares were
not included in the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS No. 143"). SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of long-lived assets
and the associated asset retirement costs. SFAS No. 143 requires that the fair
value of a liability associated with an asset retirement be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated retirement costs are capitalized as part of the carrying
amount of the long-lived asset and subsequently depreciated over the life of the
asset. The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
will adopt SFAS No. 143 for its fiscal year beginning January 1, 2003.
42
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of SFAS No. 146 will apply to any exit or disposal activities
initiated by the Company after December 31, 2002. SFAS No. 146 is not expected
to have a material effect on the results of operations or financial position of
the Company.
SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.
In December 2002, the FASB approved SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO.
123 ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock based compensation using the methods detailed in the
stock-based compensation accounting policy.
NOTE 2 - EMERGENCE FROM CHAPTER 11
Allis-Chalmers Corporation emerged from Chapter 11 proceedings on October 31,
1988 under a plan of reorganization, which was consummated on December 2, 1988.
The Company was thereby discharged of all debts that arose before confirmation
of its First Amended and Restated Joint Plan of Reorganization ("Plan of
Reorganization"), and all of its capital stock was cancelled and made eligible
for exchange for shares of common stock of the reorganized Company ("Common
Stock"). On May 9, 2001, the reverse merger with OilQuip described in Note 1
constituted the event whereby the exchange of shares of common stock of the
reorganized Company occurred.
NOTE 3 - PENSION AND POSTRETIREMENT BENEFIT OBLIGATIONS
Pension Plan
- ------------
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan"), and as a
result the Consolidated Plan was under funded on a present value basis. The
Company was unable to fund its obligations and in September 1997 obtained from
the Pension Benefit Guaranty Corporation ("PBGC") a "distress" termination of
the Consolidated Plan under section 4041(c) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The PBGC agreed to a plan
termination date of April 14, 1997. The PBGC became trustee of the terminated
Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, the Company and its subsidiaries
incurred a liability to the PBGC that the PBGC estimated to be approximately
$67.9 million (the "PBGC Liability")
In September 1997, the Company and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability, which required, among other
things, satisfactory resolution of the Company's tax obligations with respect to
the Consolidated Plan under Section 4971 of the Internal Revenue Code of 1986,
as amended ("Code"). In August 1998, the Company and the Internal Revenue
Service ("IRS") settled the Company's tax liability under Code Section 4971 for
$75,000.
43
In June 1999, the Company and the PBGC entered into an agreement for the
settlement of the PBGC Liability (the "PBGC Agreement"). Pursuant to the terms
of the PBGC Agreement, the Company issued 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 (the Company has a right of first refusal with
respect to the sale of such shares). In connection with the PBGC Agreement, the
Company and the PBGC entered into the following agreements: (i) a Registration
Rights Agreement (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement by and among Allis-Chalmers, the PBGC, and others. In connection with
the merger with OilQuip described below, the Lock-Up Agreement was terminated
and the Registration Rights Agreement was amended to provide the PBGC the right
to have its shares of common stock registered under the Securities Act of 1933
on Form S-3 during the 12 month period following the Merger (to the extent the
Company is eligible to use Form S-3 which it currently is not) and thereafter to
have its shares registered on Form S-1 or S-2.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provided that the Company had to either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which made available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million ("Release Event").
The merger with OilQuip (the "Merger") on May 9, 2001 (as described in Note 1)
constituted a Release Event, which satisfied and discharged the PBGC Liability.
In connection with the Merger, the Company and the PBGC agreed that the PBGC
should have the right to appoint one member of the Board of Directors of the
Company for so long as it holds at least 117,020 shares of the common stock. In
connection with the Merger, the Lock-Up Agreement was terminated in its
entirety. As of December 31, 2002 and 2001, the Company is no longer liable for
any obligations of the Consolidated Plan.
Medical and Life
- ----------------
Pursuant to the Plan of Reorganization, the Company assumed the contractual
obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI for 50% of
the actual cost of medical and life insurance claims for a select group of
retirees (SMI Retirees) of the prior Simplicity Manufacturing Division of
Allis-Chalmers. The actuarial present value of the expected retiree benefit
obligation is determined by an actuary and is the amount that results from
applying actuarial assumptions to (1) historical claims-cost data, (2) estimates
for the time value of money (through discounts for interest) and (3) the
probability of payment (including decrements for death, disability, withdrawal,
or retirement) between today and expected date of benefit payments. As of
December 31, 2002 and 2001, the Company has recorded post-retirement benefit
obligations of $670,000 and $824,000, respectively, associated with this
transaction.
NOTE 4 - ACQUISITIONS
On February 6, 2001, Mountain Air acquired the business and certain assets of
MADSCO, a private company, for $10,000,000 (including a $200,000 deposit paid in
2000) in cash and a $2,200,000 promissory note to the sellers (with interest at
5 3/4 percent and principal and interest due February 6, 2006). The acquisition
was accounted for using the purchase method of accounting. Goodwill of
$3,661,000 and other identifiable intangible assets of $800,000 were 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 initially into
400,000 shares of Allis-Chalmers' common stock plus 9,600,000 shares of
Allis-Chalmers' common stock issued on October 15, 2001. The acquisition was
accounted for using the purchase method of accounting as a reverse acquisition.
Goodwill of $290,000 and other identifiable intangible assets of $719,000 were
recorded in connection with the merger. Effective on the date of the merger,
OilQuip retroactively became the reporting company. As a result, financial
statements prior to the merger are those of OilQuip.
44
The Company completed two acquisitions and related financing on February 6,
2002.
The Company purchased 81% of the outstanding stock of Jens'. Jens' supplies
highly specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells. The Company also
purchased substantially all the outstanding common stock and preferred stock of
Strata. Strata provides high-end directional and horizontal drilling technology
for specific targeted reservoirs that cannot be reached vertically.
The purchase price for Jens' and Strata was (i) $10,250,000 in cash, (ii) a
$4,000,000 note payable due in four years, (iii) $1,234,560 for a non-compete
agreement payable for five years, (iv) 7,957,712 shares of common stock of the
Company, (v) 3,500,000 shares of a newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock") and (vi)
an additional payment estimated to be from $1,000,000 to $1,250,000, based upon
Jens' working capital on February 1, 2002. The actual working capital adjustment
was approximately $983,000. In addition, in connection with the Strata
acquisition, Energy Spectrum Partners, LP was issued warrants to purchase
437,500 shares of Company common stock at an exercise price of $0.15 per share.
In connection with the acquisition of Strata and Jens', the Company's bank
provided financing of $12,728,396 consisting of revolving credit facilities in
the amount of $3,500,000, term facilities in the amount of $5,696,396, a real
estate term loan in the amount of $532,000 and a subordinated loan in the amount
of $3,000,000.
The acquisitions were accounted for using the purchase method of accounting.
Goodwill of $4,168,000 and other identifiable intangible assets of $2,035,000
were recorded with the acquisitions.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information
(in thousands, except
per share) YEAR ENDED DECEMBER 31,
-----------------------
(UNAUDITED)
2002 2001 2000
---- ---- ----
Revenues $ 19,142 $ 28,224 $24,653
Operating income (loss) $ (401) $ 4,089 $2,678
Net income (loss) $ (4,431) $ (71) $ 269
(Loss) per common share $ (0.24) $ (0.02) $ 0.67
NOTE 5 - DISCONTINUED OPERATIONS
As discussed in Note 1, on December 12, 2001, the Company consummated the sale
of its wholly owned subsidiary, HDS, to the general manager of HDS (the
"Buyer"), in a management buy-out with an effective date of November 30, 2001.
Under the terms of the sale, the Company received a promissory note from the
Buyer in the amount of $790,500 due on November 30, 2007, secured by certain HDS
equipment. The note was to accrue interest at a rate of 7% through the payment
date. On September 30, 2002, the Company received cash in the amount of $600,000
and recorded $191,000 in factoring costs related to the early termination of the
promissory note from the buyer of HDS. A loss on the sale of approximately $2.0
million has been recorded in the year ended December 31, 2001.
45
In conjunction with the sale of HDS, the Company formally discontinued the
operations related to precision machining of rotating equipment, which was the
principal HDS business.
The operating results of the business sold have been reported separately as
discontinued operations in the accompanying statement of operations and consists
of the following:
Period May 9, 2001 through
November 30, 2001
(in thousands)
Revenues $1,925
Cost of sales 1,486
--------
Gross profit 439
Operating expenses 594
Depreciation and amortization 124
--------
(Loss) from operations (279)
Other (expense) income
Interest expense (12)
--------
(Loss) from discontinued operations $ (291)
========
Loss on sale of discontinued operations $(2,013)
========
NOTE 6 - PROPERTY AND OTHER INTANGIBLES ASSETS
Property and equipment is comprised of the following at December 31:
Depreciation
Period 2002 2001
------------- ---- ----
(in thousands)
Land $ 25 $ -
Building and improvements 706 -
Machinery and equipment 3 - 15 years 14,674 4,559
Tools, furniture, fixtures and leasehold
improvements 3 - 7 years 4,059 351
-------- --------
Total 19,464 4,910
Less: accumulated depreciation (2,340) (664)
-------- --------
Property and equipment, net $17,124 $ 4,246
======== ========
46
Other intangible assets are as follows at December 31:
Amortization
Period 2002 2001
------------- ---- ----
(in thousands)
Intellectual Property 20 years 1,009 719
Non-compete agreements 3 - 5 years 1,535 -
Other intangible assets 3 - 20 years 1,000 800
-------- --------
Total 3,254 1,519
Less: accumulated amortization (894) (403)
-------- --------
Other intangible assets, net $ 2,360 $ 1,116
======== ========
NOTE 7 - INCOME TAXES
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. A valuation allowance is established for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.
The Company has recorded a valuation allowance equal to the excess of deferred
tax assets over deferred tax liabilities as the Company was unable to determine
that it is more likely than not that the deferred tax asset will be realized.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carry forwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carry forwards, and could be triggered by an initial public
offering or by subsequent sales of securities by the Company or its
stockholders.
Deferred income tax assts and the related allowance as of December 31, 2002 and
2001 are as follows:
2002 2001
---- ----
(in thousands)
Deferred non-current income tax assets:
Net future tax deductible items $ 500 $ 498
Net operating loss carry forwards 2,030 1,170
A-C Reorganization Trust claims 35,000 35,000
--------- ---------
Total deferred non-current income tax assets 37,530 36,668
Valuation allowance (37,530) (36,668)
--------- ---------
Net deferred non-current income taxes $ - $ -
========= =========
48
Net operating loss carry forwards for tax purposes at December 31, 2002 and 2001
are estimated to be $5.9 million and $3 million, respectively, expiring through
2022.
Net future tax-deductible items relate primarily to differences in book and tax
depreciation and amortization and to compensation expense related to the
issuance of stock options. Gross deferred tax liabilities at December 31, 2002
and 2001 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. The
Company transferred cash and certain other property to the A-C Reorganization
Trust on December 2, 1988. Payments made by the Company to the A-C
Reorganization Trust did not generate tax deductions for the Company upon the
transfer but generate deductions for the Company as the A-C Reorganization Trust
makes payments to holders of claims.
The Plan of Reorganization also created a trust to process and liquidate product
liability claims. Payments made by the A-C Reorganization Trust to the product
liability trust did not generate current tax deductions for the Company. Future
deductions will be available to the Company as the product liability trust makes
payments to liquidate claims.
The Company believes the above-named trusts are grantor trusts and therefore
includes the income or loss of these trusts in the Company's income or loss for
tax purposes, resulting in an adjustment of the tax basis of net operating and
capital loss carry forwards. The income or loss of these trusts is not included
in the Company's results of operations for financial reporting purposes.
NOTE 8 - DEBT
Debt is as follows at December 31:
2002 2001
--------- ---------
(in thousands)
Notes payable to certain former Directors - Allis-Chalmers $ 370 $ 354
Note payable to Wells Fargo - Subordinated Debt - Allis-Chalmers, net 2,375 -
Line of Credit with Wells Fargo - Mountain Air 330 375
Note payable to Wells Fargo - Term Note-Mountain Air 2,392 3,062
Note payable to Wells Fargo - Subordinated Debt - Mountain Air, net 1,783 1,583
Note payable to Wells Fargo -Equipment Term Loan-Mountain Air 160 282
Note payable to Seller of Mountain Air Assets - Mountain Air 2,200 2,200
Note payable to Wells Fargo -Term Note - Strata 1,041 -
Line of Credit with Wells Fargo - Strata 1,275 -
Vendor financing - Strata 455 -
Note payable to former shareholder - Strata 12 -
Note payable to Wells Fargo -Term Note - Jens' 3,369 -
Note payable to Wells Fargo -Real Estate Note - Jens' 384 -
Line of Credit with Wells Fargo - Jens' 67 -
Note payable to Seller of Jens - Jens' 4,000 -
Note payable to Seller of Jens' for non-compete agreement - Jens' 1,008 -
--------- ---------
Total Debt 21,221 7,856
Less short-term debt and current maturities 13,890 1,023
--------- ---------
Long-term debt obligations $ 7,331 $ 6,833
========= =========
48
The debt above is stated as of December 31, 2002 and 2001, net of the remaining
put obligations totaling approximately $842,000 and $417,000 respectively that
are disclosed further in "REDEEMABLE WARRANTS" below. As of December 31, 2002
and 2001, the gross debt is equal to approximately $22,063,000 and $8,273,000,
respectively.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements. As of December 31, 2002, the Company's weighted
average interest rate for all of its outstanding debt is approximately 8.5%.
Maturities of debt obligations at December 31, 2002 are as follows: 2003 -
$13,890,000; 2004 - $2,447,000; 2005 - $617,000; 2006 - $4,247,000; 2007 -
$20,000.
The debt agreements are as follows:
MOUNTAIN AIR
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Mountain Air had a
$500,000 line of credit at Wells Fargo bank, of which $330,000 is outstanding.
The committed line of credit is due on June 30, 2003. Interest accrues at a rate
equal to the Prime rate plus 0.5% to 1.25% (4.75% at December 31, 2002) for the
committed portion. Additionally, the Company pays a 0.5% fee for the uncommitted
portion.
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the original amount of
$3,550,000 at variable interest rates related to the Prime or LIBOR rates (5.25%
at December 31, 2002), interest payable quarterly, with quarterly principal
payments of $147,917 due on the last day of April, July, October and January.
The maturity date of the loan is June 30, 2003 and the balance at December 31,
2002 is $2,392,000.
NOTE PAYABLE TO WELLS FARGO - SUBORDINATED DEBT AND AMORTIZATION OF REDEEMABLE
WARRANT - Subordinated debt in the amount of $2,000,000 with 12% interest
payable quarterly commencing on April 1, 2001. The principal will be due on June
30, 2003. In connection with incurring the debt, the Company issued redeemable
warrants valued at $600,000, which have been recorded as a discount to the
subordinated debt and as a liability (see REEDEMABLE WARRANTS below and Note
12). The discount is amortizable over three years as additional interest expense
of which $200,000 and $183,000 has been amortized for 2002 and 2001,
respectively.
NOTE PAYABLE TO WELLS FARGO - EQUIPMENT TERM LOAN - A delayed draw term loan in
the amount of $282,291 at LIBOR plus 0.5% interest payable quarterly commencing
on November 30, 2001 (interest rate of 4.75% at December 31, 2002). The
principal will be due on June 30, 2003. The balance as of December 31, 2002 is
$160,000.
NOTE PAYABLE TO SELLER OF MADSCO - A note to the seller of MADSCO assets in the
amount of $2,200,000 at 5.75% simple interest. The principal and interest are
due on February 6, 2006.
49
JENS'
NOTE PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the amount of
$4,042,396 at a floating interest rate (8.75% at December 31, 2002) with monthly
principal payments of $67,373. The maturity date of the loan is February 1,
2007. The balance at December 31, 2002 was $3,369,000. The debt is classified as
current on the accompanying consolidated balance sheet due to the defaults on
certain loan covenants as described in Note 1.
NOTE PAYABLE TO WELLS FARGO - REAL ESTATE NOTE - A real estate loan in the
amount of $532,000 at floating interest rate (8.75% at December 31, 2002) with
monthly principal payments of $14,778. The principal will be due on February 1,
2005. The balance at December 31, 2002 was $384,000. The debt is classified as
current on the accompanying consolidated balance sheet due to the defaults on
certain loan covenants as described in Note 1.
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Jens had a $1,000,000
line of credit at Wells Fargo bank, of which $67,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating rate plus 3% (8.75% at December 31, 2002) for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted portion. The debt
is classified as current on the accompanying consolidated balance sheet due to
the defaults on certain loan covenants as described in Note 1.
SUBORDINATED NOTE PAYABLE TO SELLER OF JENS' -A subordinated seller's note in
the amount of $4,000,000 at 7.5% simple interest. At December 31, 2002, $275,000
of interest was accrued and was included in accrued interest. The principal and
interest are due on January 31, 2006. The note is subordinated to the rights of
Wells Fargo.
NOTE PAYABLE TO SELLER OF JENS' FOR NON-COMPETE AGREEMENT - In conjunction with
the purchase of Jens' (Note 4), the Company agreed to pay a total of $1,234,560
to the Seller of Jens' in exchange for a non-compete agreement signed
simultaneously. The Company is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of December 31, 2002, the balance was
approximately $1,008,000 including $247,000 classified as short-term.
STRATA
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the amount of
$1,654,000 at a floating interest rate (9.25% at December 31, 2002) with monthly
principal payments of $27,567. The maturity date of the loan is February 1,
2005. In addition to the monthly principal payments, in June 2002, the Company
entered into a direct financing lease with a third party whereby a portion of
assets were sold by Strata. The payments from that third party, which are
expected to exceed $15,000 a month, are to be directly applied to the principal
of this note. See Note 13 for further information on the terms of the direct
financing lease. The note payable balance at December 31, 2002 was $1,041,000.
The debt is classified as current on the accompanying balance sheet due to the
circumstances surrounding defaults on certain loan covenants as described in
Note 1.
50
VENDOR FINANCING - In 1996 and as amended in 2000 and 2002, Strata entered into
a short-term vendor financing agreement with a major supplier of drilling motors
for drilling motor rentals, motor lease costs and motor repair costs. The
agreement, as amended, provides for repayment of all amounts due no later than
September 30, 2003. Payment of the interest on the note is due monthly; however,
the Company may make payments with respect to principal and interest at any time
without bonus or penalty. The vendor financing incurs interest at a rate of
8.0%. As of December 31, 2002, the outstanding balance, including accrued
interest, was approximately $455,000.
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Strata has a $2,500,000
line of credit at Wells Fargo bank, of which $1,275,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating interest rate plus 3% (9.25% at December 31, 2002) for the committed
portion. Additionally, the Company pays a 0.5% fee for the uncommitted portion.
The debt is classified as current on the accompanying balance sheet due to the
circumstances surrounding defaults on certain loan covenants as described in
Note 1.
NOTE PAYABLE WITH FORMER SHAREHOLDER - A note payable dated June 30, 1998, to a
former shareholder of Strata Directional Technology, Inc., bearing interest at
8% and payable in 60 equal monthly installments of $2,030 each. The note matures
and will be paid in full prior to June 30, 2003. The balance at December 31,
2002 is approximately $12,000.
ALLIS-CHALMERS
NOTES PAYABLE TO WELLS FARGO - SUBORDINATED DEBT AND AMORTIZATION OF REDEEMABLE
WARRANT - Subordinated debt secured to partially finance the acquisitions of
Jens' and Strata in the amount of $3,000,000 at 12% interest payable monthly.
The principal will be due on January 31, 2005. In connection with incurring the
debt, the Company issued redeemable warrants valued at $900,000, which have been
recorded as a discount to the subordinated debt and as a liability (see
REEDEMABLE WARRANTS below and Note 12). The discount is amortizable over three
years beginning February 6, 2002 as additional interest expense of which
$275,000 has been recognized for the year ended December 31, 2002. The debt is
classified as current on the accompanying balance sheet due to the defaults on
certain loan covenants as described in Note 1.
NOTES PAYABLE TO CERTAIN FORMER DIRECTORS - The Allis-Chalmers Board established
an arrangement by which to compensate former and continuing Board members who
had served from 1989 to March 31, 1999 without compensation. Pursuant to the
arrangement in 1999, Allis-Chalmers issued promissory notes totaling $325,000 to
current or former directors and officers. The notes bear interest at the rate of
5%, compounded quarterly, and are due March 28, 2005. At December 31, 2002, the
notes are recorded at $370,000, including accrued interest.
REDEEMABLE WARRANTS - Associated with the issuance of the $2 million
Subordinated debt recorded by Mountain Air and the $3 million Subordinated debt
recorded by Allis-Chalmers (collectively, the "subordinated debt"), the Company
has issued redeemable warrants that are exercisable into a maximum of 1,165,000
shares of the Company's common stock at an exercise price of $0.15 per share
("Warrants A and B") and non-redeemable warrants that are exercisable into a
maximum of 335,000 shares of the Company's common stock at $1.00 per share
("Warrant C"). Warrants A and B are subject to cash redemption provisions
("puts") of $600,000 and $900,000, respectively, at the discretion of the
warrant holders beginning at the earlier of the final maturity date of the
subordinated debt or three years from the closing of the subordinated debt
(January 31, 2004 and January 31, 2005, respectively). Warrant C does not
contain any such puts or provisions. In addition, previously issued warrants to
purchase common stock of Mountain Air were cancelled. The Company has recorded a
liability of $600,000 at Mountain Air and $900,000 at Allis-Chalmers for a total
of $1,500,000 and is amortizing the effects of the puts to interest expense over
the life of the related subordinated debt instruments.
51
FORBEARANCE AGREEMENTS
On July 16, 2002, the Company's lenders declared the Company and it's
subsidiaries to be in default under numerous credit agreements with Wells Fargo
Bank and its affiliates (the "Bank Lenders"). The defaults resulted primarily
from failures to meet financial covenants as a result of decreased revenues. As
a result of these defaults the Bank Lenders imposed default interest rates
retroactive to April 1, 2002, resulting in an increase of approximately $15,000
in monthly interest payments. Additionally the Bank Lenders suspended interest
payments (aggregating $275,000 through December 31, 2002) on a $4.0 million
subordinated seller note issued to the Bank Lenders in connection with the Jens'
acquisition, which resulted in Jens' default under the terms of the subordinated
seller note, and suspended interest payments (aggregating $150,000 through
December 31, 2002) on a $3.0 million subordinated bank note issued in connection
with the Jens' acquisition, which resulted in Jens' default under the terms of
such note. Pursuant to the terms of inter-creditor agreements between the
lenders, the holders of such obligations are precluded from taking action to
enforce such obligations without the consent of the Bank Lenders.
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements (the "Forbearance Agreements"), which amended certain operating
covenants. In addition the Bank Lenders agreed to forbear from taking action
(but did not waive the underlying defaults) with respect to the alleged defaults
for a period of six months ending June 30, 2003 (the "Forbearance Period").
Pursuant to the Forbearance Agreements:
Mountain Air's obligations have been modified as follows:
o Principal payments on its senior debt or term note
with Wells Fargo have been reduced during the
Forbearance Period from $57,000 to $45,000 per month.
o Interest payments on its subordinated debt agreement
with Wells Fargo have been reduced during the
Forbearance Period from 12% to 6% (with the balance
being accrued).
o Mountain Air was allowed to apply a security deposit
to offset payments due on its equipment lease,
lowering additional payments from $58,574 to $35,000
per month during the Forbearance Period, after which
lease payments will return to $58,574 per month
through February 15, 2006, on which date a final
payment of $58,574 will be due. (Note 9)
o All of Mountain Air's senior and subordinated debt of
approximately $4,882,000 will be due and payable on
June 30, 2003.
Jens' obligations have been amended as follows:
o During the Forbearance Period, Jens' has been allowed
to resume payments of $30,000 per month on its
subordinated debts to Wells Fargo Energy Capital.
o The interest rate on Jens' senior debt has been
increased to prime plus 3%.
o Jens' has been allowed to distribute $300,000 to
Allis-Chalmers Corporation to allow Allis-Chalmers
Corporation to pay legal, accounting and other
expenses in connection with the preparation of its
financial statements for the year ended December 31,
2002, its Securities and Exchange Commission filing,
and shareholder communications.
Strata's obligations have been amended as follows:
o The interest rate on Strata's term debt and revolving
debt has been increased to prime plus 3-1/2%.
52
The Company has made all outstanding principal and interest payments on all
senior debt to the Bank Lenders. On June 30, 2003, $4,882,000 of debt owed by
Mountain Air will become due and the forbearance with respect to Jens' and
Strata's debts to the Bank Lenders will expire. If the Company is unable to
renegotiate or refinance the Company debt, the Bank Lenders will have the right
to accelerate all amounts due them (which totaled $14,264,000, at March 31
2003), and to foreclose on the assets securing their loans, which constitute
substantially all of the assets of the Company. Accordingly, the bank debt and
the subordinated seller note are recorded as current liabilities on the
Company's financial statements.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On February 6, 2001, in conjunction with Mountain Air's purchase of certain
assets including rental equipment from MADSCO, a portion of the purchased
equipment was sold to a leasing company and leased back. The equipment lease is
being accounted for as an operating lease. Lease payments totaling $3,480,000
will be made over a period of six years. The lease expense for the years ended
December 31, 2002 and 2001 was $703,000 and $586,000, respectively. In January
2003, the Company entered into a forbearance agreement with the leasing company
and Mountain Air will apply a $525,000 security deposit to offset payments on
its equipment lease, lowering additional payments from $58,574 to $35,000 per
month during the Forbearance Period, after which lease payments will return to
$58,574 per month though February 15, 2006. The $525,000 security deposit has
been recorded as a current asset on the accompanying consolidated balance sheet.
The Company rents office space on a five-year lease, which expires February 5,
2006. The Company and its subsidiaries also rent certain other facilities and
shop yards for equipment storage and maintenance. Facility rent expense for the
years ended December 31, 2002 and 2001 was $303,000 and $90,000, respectively.
The Company has no further lease obligations.
At December 31, 2002, future minimum rental commitments for all operating leases
are as follows:
Operating Leases
-----------------
(in thousands)
Year ended:
December 31, 2003 $ 1,232
December 31, 2004 804
December 31, 2005 785
December 31, 2006 142
December 31, 2007 and thereafter 27
-----------------
Total $ 2,990
=================
53
NOTE 10 - SHAREHOLDERS' EQUITY
During the period from February 4, 2000 (Inception) through December 31, 2000,
OilQuip entered into several equity transactions. Various investors subscribed
to 4,250 shares of common stock for $400,000 ($94 per share), 307 shares of
common stock for $100,000 ($326 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. During 2000, OilQuip also issued 1,000 shares of
common stock for $250,000 ($250 per share). OilQuip also recorded $250,000 in
compensation expense for services contributed by the Company's Chief Executive
Officer and majority stockholder. The Chief Executive Officer and majority
stockholder also advanced an aggregate of $537,000 to the Company by paying
corporate expenses on the Company's behalf. These contributed amounts have been
recorded as a contribution to the Company's capital.
The equity and per share data on the financial statements for 2000 have been
presented so as to give effect to the recapitalization of the Company, which
occurred in the reverse acquisition of Allis-Chalmers on May 9, 2001. Under the
recapitalization, the original number of shares outstanding of the formerly
private OilQuip is considered to have been exchanged for the 400,000 shares of
Allis-Chalmers that were issued on the date of the reverse acquisition to the
owners of OilQuip. As a result, 390,125 shares are presented as if issued in
2000 to increase the outstanding shares of OilQuip at December 31, 2000 to
400,000.
On October 15, 2001, an additional 9,600,000 shares of Allis-Chalmers were
issued to the former owners of OilQuip after shareholder approval of the
increase in the maximum authorized number of shares of Allis-Chalmers. For legal
purposes, Allis-Chalmers acquired OilQuip, the parent company of Mountain Air.
However, for accounting purposes OilQuip was treated as the acquiring company in
a reverse acquisition of Allis-Chalmers. The business combination was accounted
for as a purchase. As a result, $2,779,000, the value of the Allis-Chalmers
common stock outstanding at the date of acquisition, was added to shareholders'
equity, which reflects the recapitalization of Allis-Chalmers and the
reorganization of the combined company.
On February 6, 2002, in connection with the acquisition of 81% of the
outstanding stock of Jens' (Note 4), the Company issued 1,397,849 shares of
common stock to the seller of Jens', an individual presently employed as the
President of the Company. The business combination was accounted for as a
purchase. As a result, $630,000, the fair value of the Company's common stock
issued at the date of the acquisition, was added to shareholders' equity.
On February 6, 2002, in connection with the acquisition of 95% of the
outstanding stock of Strata (Note 4), the Company issued 6,559,863 shares of
common stock to the seller of Strata, Energy Spectrum. The business combination
was accounted for as a purchase. As a result, $2,952,000, the fair value of the
Company's common stock issued at the date of the acquisition, was added to
shareholders' equity.
On May 31, 2002, the Company acquired the remaining 5% of the outstanding stock
of Strata and issued 87,500 shares of common stock to the seller, Energy
Spectrum. As a result, $153,000, the fair value of the Company's common stock
issued at the date of the purchase, was added to shareholders' equity.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. The Series A Preferred Stock has cumulative dividends
at ten percent per annum payable in additional shares of Series A Preferred
Stock or if elected and declared by the Company, in cash. Additionally, the
Series A Preferred Stock is convertible into common stock of the Company. The
Series A Preferred Stock is also subject to mandatory redemption on or before
February 4, 2004 or earlier from the proceeds from the net proceeds of new
equity sales and optional redemption by the Company at any time. The redemption
price of the Series A Preferred Stock is $1.00 per share plus accrued dividend
rights.
54
For the year ended December 31, 2002, the Company has accrued $321,000 of
dividends payable to the Series A Preferred Stock holders. No dividends have
been declared or paid to date.
NOTE 11 - STOCK OPTIONS
In 2000, in conjunction with the promissory notes issued to certain current and
former Directors (Note 8), Allis-Chalmers' Board of Directors also granted stock
options to these same individuals. Options to purchase 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
or 2001, none of the stock options were exercised. No compensation expense has
been recorded for these options that were issued with an exercise price
approximately equal to the fair value of the common stock at the date of grant.
On May 31, 2001, the Board granted to Leonard Toboroff, a former director of
Allis-Chalmers an option to purchase 500,000 shares of common stock at $0.50 per
share, exercisable for 10 years from October 15, 2001. The option was granted
for services provided by Mr. Toboroff to OilQuip prior to the merger, including
providing financial advisory services, assisting in OilQuip's capital structure
and assisting OilQuip in finding strategic acquisition opportunities. The
Company recorded compensation expense of $500,000 for the issuance of the option
for the year ended December 31, 2001.
A summary of the Company's stock option activity and related information is as
follows:
December 31, 2002 December 31, 2001 December 31, 2000
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Under Exercise Shares Under Exercise Shares Under Exercise
Option Price Option Price Option Price
---------------- -------------- --------------- ---------------- ----------------- --------------
Beginning balance 524,000 $ 0.60 24,000 $ 2.75 24,000 $ 2.75
Granted - - 500,000 0.50 - -
Canceled - - - - - -
Exercised - - - - - -
---------------- -------------- --------------- ---------------- ----------------- --------------
Ending balance 524,000 $ 0.60 524,000 $ 0.60 24,000 $ 2.75
================ ============== =============== ================ ================= ==============
The following table summarizes additional information about the Company's stock
options outstanding as of December 31, 2002:
Weighted Average Remaining Weighted Average Fair Value
Exercise Price Shares Under Option Contractual Life
- ---------------- -------------------- -------------------------- ---------------------------
$0.50 500,000 8.75 years $1.28
$2.75 24,000 7.25 years $1.97
- ----- ------ ---------- -----
$0.60 524,000 8.68 years $1.31
===== ======= ========== =====
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.
There were no stock options issued to employees or directors in either of the
years ended December 31, 2002 and 2001 other than those granted on May 31, 2001
to Leonard Toboroff.
55
NOTE 12 - STOCK PURCHASE WARRANTS
In conjunction with the Mountain Air purchase by OilQuip in February of 2001,
the Company issued a common stock warrant for 620,000 shares to a third-party
investment firm that assisted the Company in its initial identification and
purchase of the Mountain Air assets. The warrant entitles the holder to acquire
up to 620,000 shares of common stock of Mountain Air at an exercise price of
$.01 per share over a nine-year period commencing on February 7, 2001. The stock
purchase warrant has been recorded at a fair value of $200,000 for the year
ended December 31, 2001.
As more fully described in Note 8, Mountain Air and Allis-Chalmers issued two
warrants ("Warrants A and B") for the purchase of 1,165,000 total shares of the
Company's common stock at an exercise price of $0.15 per share and one warrant
for the purchase of 335,000 shares of the Company's common stock at an exercise
price of $1.00 per share ("Warrant C") in connection with their subordinated
debt financing. The holders may redeem Warrants A and B for a total of
$1,500,000 as of January 31, 2004 and January 31, 2005, respectively. The fair
value of Warrant C was established in accordance with the Black-Scholes
valuation model and as a result, $47,000 was added to shareholders' equity. The
following assumptions were utilized to determine fair value: no dividend yield;
expected volatility of 67.24%; risk free interest rate of 5%; and expected lives
of four years.
On February 6, 2002, in connection with the acquisition of substantially all of
the outstanding stock of Strata (Note 4), the Company issued a warrant for the
purchase of 437,500 shares of the Company's common stock at an exercise price of
$1.00 per share over the term of four years. The fair value of the warrant was
established in accordance with the Black-Scholes valuation model and as a
result, $267,000 was added to shareholders' equity. The following assumptions
were utilized to determine fair value: no dividend yield; expected volatility of
67.24%; risk free interest rate of 5%; and expected lives of four years.
NOTE 13 - LEASE RECEIVABLE
In June 2002, the Company's subsidiary, Strata, sold its measurement while
drilling (MWD) assets to a third party. Under the terms of the sale, the Company
will receive at least $15,000 per month for thirty-six months. The payments are
directly applied against the Term Note for Strata (Note 8) as a reduction of
principal obligations. After thirty-six months, the purchaser has the option to
pay the remaining balance or continue paying a minimum of $15,000 per month for
twenty-four additional months. After the expiration of the additional
twenty-four months, the purchaser must repay any remaining balance. This
transaction has been accounted for as a direct financing lease with the nominal
residual gain from the asset sale deferred into income over the life of the
lease. During the year ended December 31, 2002, the Company received a total of
$106,000 in payments from the third party related to this lease.
NOTE 14 - RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company owed the Chief Executive Officer and majority
stockholder of the Company $78,000 related to deferred compensation and for
advances to the Company totaling $49,000. Also the Company owed a former
Executive Vice President and shareholder of the Company $42,000 related to
deferred compensation and advances totaling $50,000.
At December 31, 2001, the Company owed the Chief Executive Officer and majority
stockholder of the Company $318,000 related to deferred compensation. At the
same time, this same individual owed the Company $61,000. These amounts were
settled in the first quarter of 2002 and as of December 31, 2002, there are no
loan amounts or other obligations due from Company officers or members of
management.
The President of the Company is the former owner of Jens' and currently holds a
19% minority interest in Jens'. This same individual is the holder of a
$4,000,000 subordinated note payable held by the Company and is also owed
$275,000 in accrued interest (Note 8).
The President of the Company and formerly the sole proprietor of Jens' owns a
shop yard, which he leases to the Company on a monthly basis. The total lease
payments to the President under the terms of the lease were $28,800 for the year
ended December 31, 2002.
In addition, the President of the Company and members of his family own 100% of
Tex-Mex Rental & supply Co., a Texas corporation, that sold approximately
$290,000 of equipment and other supplies to the Company in 2002. Management of
the Company believes these transactions were on terms at least as favorable to
the Company as could have been obtained from unrelated third parties
56
NOTE 15 - SEGMENT INFORMATION
The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(Mountain Air). All of the segments provide services to the petroleum industry.
The Company only operated in one reporting segment for the year ended December
31, 2001 and in no operating segments for the period from February 4, 2000
(Inception) through December 31, 2000. The revenues, operating income (loss),
depreciation and amortization, interest, capital expenditures and assets of each
of the reporting segments plus the Corporate function are reported below for the
year ended December 31, 2002:
(in thousands) Year ended December 31, 2002
REVENUES:
Casing services $ 7,796
Directional drilling services 6,529
Compressed air drilling services 3,665
------------------------------
Total revenues $ 17,790
==============================
OPERATING INCOME (LOSS):
Casing services $ 2,225
Directional drilling services (576)
Compressed air drilling services (945)
General corporate (2,174)
------------------------------
Total (loss) from operations $ (1,440)
==============================
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 1,265
Directional drilling services 295
Compressed air drilling services 955
General corporate 65
------------------------------
Total depreciation and amortization expense $ 2,580
==============================
INTEREST EXPENSE:
Casing services $ 643
Directional drilling services 215
Compressed air drilling services 761
General corporate 637
------------------------------
Total interest expense $ 2,256
==============================
CAPITAL EXPENDITURES:
Casing services $ 137
Directional drilling services 83
Compressed air drilling services 288
General corporate 10
------------------------------
Total capital expenditures $ 518
==============================
ASSETS:
Casing services $ 15,681
Directional drilling services 8,888
Compressed air drilling services 9,138
General corporate 1,071
------------------------------
Total assets $ 37,778
==============================
57
The following table contains the customers that represent more than 10% of the
revenues for each o f the three operating segments at December 31, 2002:
Casing Services El Paso Production Oil & Gas
Materiales Y Equipos Petroleros
Directional drilling services Anadarko Petroleum Corporation
Santos USA Corporation
El Paso Production Oil & Gas
Compressed air drilling services Burlington Reserves Oil & Gas Co., L.P.
Devon Energy Production Co.
Texaco Exploration and Production
NOTE 16 - SUPPLEMENTAL CASH FLOWS INFORMATION
February 4, 2000
(Inception) through
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ -----------
(in thousands)
Non-cash investing and financing transactions in connection
with the acquisition of Mountain Air assets:
Fair value of net assets acquired $ - $ (7,183) $ -
Goodwill and other intangibles - (4,551) -
Notes payable to Seller of Mountain Air - 2,200 -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ - $ (9,534) $ -
============ ============ ===========
Non-cash investing transactions in connection with the reverse
merger of Allis-Chalmers and OilQuip:
Fair value of common stock exchanged $ - $ (2,799) $ -
Fair value of net assets, net of cash received - 872 -
Goodwill and other intangibles - 1,819 -
------------ ------------ -----------
Net cash paid to consummate merger $ - $ (88) $ -
============ ============ ===========
Non-cash investing and financing transactions in connection
with the acquisition of Jens':
Fair value of net assets acquired $ (11,562) $ - $ -
Goodwill and other intangibles (1,235) - -
Note payable to Seller of Jens' Oilfield Service 4,000 - -
Value of common stock issued 630 - -
Fair value of warrants issued 47 - -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ (8,120) $ - $ -
============ ============ ===========
Non-cash investing and financing transactions in connection
with the acquisition of Strata:
Fair value of net assets acquired $ (2,383) $ - $ -
Goodwill and other intangibles (4,668) - -
Issuance of preferred stock 3,500 - -
Value of common stock issued 3,105 - -
Fair value of warrants issued 267 - -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ (179) $ - $ -
============ ============ ===========
Other non-cash investing and financing transactions:
Sale of property & equipment in connection with
the direct financing lease (Note $ 1,193 $ - $ -
58
NOTE 17 - QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except
per share amounts)
YEAR 2002
Revenues $ 3,253 $ 4,238 $ 4,775 $ 5,724
Operating income (loss) (201) (796) (608) 165
Net income (loss)
Continuing operations (640) (869) (1,505) (955)
Discontinued operations - - - -
-------- -------- -------- --------
Net income (loss) (640) (869) (1,505) (954)
Preferred stock dividend (58) (87) (87) (89)
-------- -------- -------- --------
Net income (loss) attributed to
common shares $ (698) $ (956) $(1,592) $(1,044)
======== ======== ======== ========
Income (loss) per common share
(Basic and diluted)
Continuing operations $ (0.04) $ (0.05) $ (0.08) $ (0.06)
Discontinued operations - - - -
-------- -------- -------- --------
Income (loss) per common share $ (0.04) $ (0.05) $ (0.08) $ (0.06)
======== ======== ======== ========
YEAR 2001
Revenues $ 606 $ 1,341 $ 1,521 $ 1,328
Operating income (loss) (150) (549) 35 (769)
Net income (loss)
Continuing operations (270) (775) (80) (1,148)
Discontinued operations - 4 (108) (2,200)
-------- -------- -------- --------
Net income (loss) from continuing
operations (270) (771) (188) (3,348)
Preferred stock dividend - - - -
-------- -------- -------- --------
Net income (loss) attributed to
common shares $ (270) $ (771) $ (188) $(3,348)
======== ======== ======== ========
Income (loss) per common share
(Basic and diluted)
Continuing operations $ (0.06) $ (0.19) $ (0.02) $ (0.30)
Discontinued operations - - (0.03) (0.55)
-------- -------- -------- --------
Income (loss) per common share $ (0.06) $ (0.19) $ (0.05) $ (0.85)
======== ======== ======== ========
59
NOTE 18 - LEGAL MATTERS
The Company is involved in various legal proceedings that arose in the ordinary
course of business. The legal proceedings are at different stages. Special
trusts established in connection with the Company's reorganization (See Note 2 -
Emergence From Chapter 11) counsel are vigorously defending the Company. In the
opinion of management and their legal counsel, the ultimate gain or loss, if
any, of the Company from all such proceedings can not be reasonably estimated at
this time.
NOTE 19 - SUBSEQUENT EVENTS
As disclosed in detail in Note 8, the Company and its Bank Lenders entered into
a series of Forbearance Agreements that became effective January 1, 2003. The
Forbearance Agreements expire on June 30, 2003. The financial effect on the
Company will be the acceleration of the amortization of debt issuance costs and
debt discount amounts from approximately the remaining one year periods to the
first six months of 2003.
On February 19, 2003, the Company entered into an agreement with the
shareholders of its Series A Preferred Stock establishing a new price for any
conversions of Series A Preferred Stock shares into common stock of the Company.
As agreed upon by all parties, the conversion price has been established at
$0.50 per share. This agreement reduces the number of shares of common stock
into which the Series A Preferred Stock is convertible from 18,421,053 to
7,000,000 shares.
Additionally, the Company issued a stock purchase warrant to Energy Spectrum
Partners, LP. This is in addition to the stock purchase warrant issued to Energy
Spectrum Partners, LP at the time of the acquisition of Strata in February 2002
(Notes 4 and 12). The additional warrant provides Energy Spectrum Partners, LP
with the option to purchase 875,000 shares of common stock at an exercise price
of $0.15 per share.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
---------------------------------------------------------------------
NONE.
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by Item 10 is incorporated by reference
from the section entitled "Election of Directors" and "Executive Compensation
and Other Matters" and other relevant portions of the Information Statement (the
"Information Statement") on Schedule 14C to be filed by the registrant not later
than 120 days following December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by Item 11 is incorporated by reference
from the section entitled "Executive Compensation and Other Matters" and other
relevant portions of the Information Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" and other relevant portions of the Information Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" and other
relevant portions of the Information Statement.
ITEM 14. CONTROLS AND PROCEDURES.
------------------------
(a). EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief
executive officer and our chief accounting officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation
Date") within 90 days prior to the filing date of this annual report, have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate to ensure that material information relating to the
registrant and its consolidated subsidiaries would be made known to them by
others within those entities.
(b). CHANGES IN INTERNAL CONTROLS. To our knowledge, there are no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the Evaluation Date.
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) List of Documents Filed
-----------------------
The Index to Financial Statements is included on page 30 of this report.
Financial statements Schedules not included in this report have been omitted
because they are not applicable or the required information is included in the
Financial Statements or Notes thereto.
(b) REPORTS ON FORM 8-K
-------------------
None.
(c) EXHIBITS
--------
The exhibits listed on the Exhibit Index located at Page 66 of this
Annual Report are filed as part of this Form 10K.
62
CERTIFICATIONS
I, Munawar H. Hidayatallah, Chief Executive Officer of the Company, certify
that:
(1) I have reviewed this annual report on Form 10-K of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 11, 2003 By: /S/ MUNAWAR H. HIDAYATALLAH
---------------------------
Munawar H. Hidayatallah
Chief Executive Officer
63
I, Todd C. Seward, Chief Accounting Officer of the Company, certify that:
(1) I have reviewed this annual report on Form 10-K of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 11, 2003 By: /s/ Todd C. Seward
-----------------------------
Todd C. Seward
Chief Accounting Officer
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on April 11, 2002.
/S/ MUNAWAR H. HIDAYATALLAH
-----------------------------------------------
Munawar H. Hidayatallah
President, Chief Executive Officer and Chairman
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this report has been signed on the date indicated by
the following persons on behalf of the registrant and in the capacities
indicated.
NAME TITLE DATE
- -------------------------------- ------------------------------------ ------------------
/S/ MUNAWAR H. HIDAYATALLAH Chairman and Chief Executive Officer April 11, 2003
- -------------------------------- (Principal Financial Officer and
Munawar H. Hidayatallah Principle Executive Officer)
/S/ JENS H. MORTENSEN President, Chief Operating Officer April 11, 2003
- -------------------------------- and Director
Jens H. Mortensen
/S/ TODD SEWARD Chief Accounting Officer April 11, 2003
- -------------------------------- (Principal Accounting Officer)
Todd Seward
/S/ DAVID A. GROSHOFF Director April 7, 2003
- --------------------------------
David A. Groshoff
/S/ SAEED SHEIKH Director April 8, 2003
- --------------------------------
Saeed Sheikh
/S/ LEONARD TOBOROFF Director April 8, 2003
- --------------------------------
Leonard Toboroff
/S/ JAMES W. SPANN Director April 7, 2003
- --------------------------------
James W. Spann
/S/ MICHAEL D. TAPP Director April 7, 2003
- --------------------------------
Michael D. Tapp
/S/ ROBERT E. NEDERLANDER Director April 9, 2003
- --------------------------------
Robert E. Nederlander
/S/ THOMAS O. WHITENER, JR. Director April 8, 2003
- --------------------------------
Thomas O Whitener, Jr.
65
EXHIBIT INDEX
2.1 First Amended Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code, which includes the First Amended and Restated
Joint Plan of Reorganization dated September 14, 1988
(incorporated by reference to the Company's Report on Form 8-K
dated December 1, 1988).
2.2 Agreement and Plan of Merger by and among Allis-Chalmers
Corporation, Allis-Chalmers Acquisition Corp. and OilQuip Rentals,
Inc. dated as of May 9, 2001(incorporated by reference to the
Company's Report on Form 8-K filed May 15, 2001).
2.3. Stock Purchase Agreement dated November 30, 2001 by and between
Clayton Lau and Mountain Compressed Air, Inc. (incorporated by
reference to the Company's Report on Form 8-K dated December 27,
2001).
2.4. Promissory Note executed by Clayton Lau dated November 30, 2001
(incorporated by reference to the Company's Report on Form 8-K
dated December 27, 2001).
2.5. Security Agreement dated November 30, 2001 by and between Clayton
Lau and Mountain Compressed Air, Inc., (incorporated by reference
to the Company's Report on Form 8-K dated December 27, 2001).
2.6. Stock Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation, a Delaware corporation ("Buyer") and
Jens H. Mortensen, Jr. (incorporated by reference to the Company's
Report on Form 8-K filed February 21, 2002).
2.7. Shareholder's Agreement among Jens' Oilfield Services, Inc., a
Texas corporation, Jens H. Mortensen, Jr., and Allis-Chalmers
Corporation (incorporated by reference to the Company's Report on
Form 10-K for the year ended December 31, 2001).
2.8. Stock Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation, Energy Spectrum Partners, LP, and
Strata Directional Technology, Inc. (incorporated by reference to
the Company's Report on Form 10-K for the year ended December 31,
2001).
2.9 Registration Rights Agreement dated by and among Allis-Chalmers
Corporation and Energy Spectrum Partners, LP (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 2001).
2.10 Shareholders' Agreement among Allis-Chalmers Corporation and the
Shareholders and Warrant holder signatories thereto dated February
1, 2002 (incorporated by reference to the Company's Report on Form
10-K for the year ended December 31, 2001).
3.1 Amended and Restated Certificate of Incorporation of
Allis-Chalmers Corporation (incorporated by reference to the
Company's Report on Form 10-K for the year ended December 31,
2001).
66
3.2 Certificate of Designation, Preferences and Rights of the SERIES A
10% CUMULATIVE CONVERTIBLE PREFERRED STOCK ($.01 Par Value) of
Allis Chalmers Corporation (incorporated by reference to the
Company's Report on Form 8-K filed February 21, 2002)
3.3 Amended and Restated By-laws of Allis-Chalmers Corporation
(incorporated by reference to the Company's Report on Form 10-K
for the year ended December 31, 2001).
*10.1 Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Wells Fargo Bank (incorporated by
reference to Exhibit C-1 of the First Amended and Restated Joint
Plan of Reorganization dated September 14, 1988 included in the
Company's Report on Form 8-K dated December 1, 1988).
*10.2 Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Firstar Trust Company (incorporated
by reference to Exhibit C-2 of the First Amended and Restated
Joint Plan of Reorganization dated September 14, 1988 included in
the Company's Report on Form 8-K dated December 1, 1988).
10.3 Reorganization Trust Agreement between Allis-Chalmers Corporation
and John T. Grigsby, Jr., Trustee (incorporated by reference to
Exhibit D of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in the Company's
Report on Form 8-K dated December 1, 1988).
10.4. Product Liability Trust Agreement between Allis-Chalmers
Corporation and Bruce W. Strausberg, Trustee (incorporated by
reference to Exhibit E of the First Amended and Restated Joint
Plan of Reorganization dated September 14, 1988 included in the
Company's Report on Form 8-K dated December 1, 1988).
*10.5 Allis-Chalmers Savings Plan (incorporated by reference to the
Company's Report on Form 10-K for the year ended December 31,
1988).
*10.6 Allis-Chalmers Consolidated Pension Plan (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 1988).
10.7 Agreement dated as of March 31, 1999, by and between
Allis-Chalmers Corporation and the Pension Benefit Guaranty
Corporation (incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended June 30, 1999).
10.8 Registration Rights Agreement dated as of March 31, 1999, by and
between Allis-Chalmers Corporation and the Pension Benefit
Guaranty Corporation (incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999).
10.9 Letter Agreement between Allis-Chalmers Corporation and the
Pension Benefit Guarantee Corporation dated as of May 9, 2001
(incorporated by reference to the Company's Report on Form 8-K
filed on May 15, 2002).
67
10.10 Termination Agreement between Allis-Chalmers Corporation, the
Pension Benefit Guarantee Corporation and others, dated as of May
9, 2001(incorporated by reference to the Company's Report on Form
8-K filed on May 15, 2002).
*10.11 Employment Agreement dated February 7, 2001 by and between Oil
Quip Rentals, Inc. and Munawar H. Hidayatallah (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.12 Asset Purchase Agreement entered into as of February 6, 2001 by
and among Mountain Compressed Air, Inc., Mountain Drilling Service
Co., Inc. and Rod and Linda Huskey with related Promissory Note.
*10.13 Option Agreement dated October 15, 2001 between Allis-Chalmers
Corporation and Leonard Toboroff (incorporated by reference to the
Company's Report on Form 10-Q for the quarter ended September 30,
2001).
10.14 Credit and Security Agreement dated February 1, 2002 by and
between Jens' Oil Field Service, Inc. and Wells Fargo Credit, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002).
10.15 Amended and Restated Credit and Security Agreement dated February
1, 2002 by and between Strata Directional Technology, Inc. and
Wells Fargo Credit, Inc. (incorporated by reference to the
Company's Report on Form 8-K filed February 21, 2002).
10.16 Credit Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Wells Fargo Energy Capital, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002)
10.17 Warrant Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Wells Fargo Energy Capital, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002).
*10.18 Employment Agreement dated February 1, 2002, by Jens' Oil Field
Service, Inc. and Jens H. Mortensen, Jr. (incorporated by
reference to the Company's Report on Form 8-K filed February 21,
2002).
10.19 Credit Agreement between Mountain Compressed Air, Inc., and Wells
Fargo Bank Texas NA, including Renewal Term Note, Renewed and
Extended Revolving Line of Credit Note, and Renewal Delayed Draw
Term Note, each dated February 6, 2001.
10.20 First Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated August 9, 2001.
10.21 Second Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated November 30, 2001.
68
10.22 Third Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated January 31, 2002.
10.23 Fourth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated April 30, 2002.
10.24 Fifth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated August 6, 2002.
10.25 Sixth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated January 1, 2003.
10.26 Forbearance Agreement and Second Amendment to Amended and Restated
Credit Agreement dated March 21, 2003, by and between Strata
Directional Technology, Inc., and Wells Fargo Credit, Inc.
10.27 Forbearance Agreement and First Amendment to Credit Agreement
between Jens' Oilfield Services, Inc., and Wells Fargo Credit,
Inc., dated March 21, 2003.
10.28 Forbearance Agreement between Mountain Compressed Air, Inc., and
Wells Fargo Equipment Finance, Inc., dated January 17, 2003.
10.29 Ratification of Previously Executed Security Agreement dated
August 9, 2001, by and between Mountain Compressed Air, Inc. and
Wells Fargo Energy Capital, Inc.
10.30 Subordination and Intercreditor Agreement by and among Mountain
Compressed Air, Inc., Wells Fargo Energy Capital, Inc. and Wells
Fargo Equipment Finance, Inc.
10.31 Credit Agreement dated as of February 6, 2001, by and between
Mountain Compressed Air, Inc. and Wells Fargo Energy Capital,
Inc., with related Term Note, Warrant Purchase Agreement and
Warrant.
10.32 First Amendment to Credit Agreement dated as of February 1, 2002,
by and between Mountain Compressed Air, Inc. and Wells Fargo
Energy Capital Inc.
10.33 Second Amendment to Credit Agreement dated as of February 1, 2003,
by and between Mountain Compressed Air, Inc. and Wells Fargo
Energy Capital Inc.
21.1 Subsidiaries of Allis-Chalmers Corporation.
69
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Compensation Plan or Agreement