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UNITED STATE SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
At May 17, 2004, there were 31,393,789 shares of common stock outstanding.
ALLIS-CHALMERS CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
-----------------
ITEM PAGE
- ---- ----
PART I
1. Financial Statements
Consolidated Statements of Operations for the three months ended
March 31, 2004 and 2003................................................. 3
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003... 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003................................................. 5
Noted to Consolidated Financial Statements............................... 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 11
4. Controls and Procedures.................................................. 15
PART II
1. Legal Proceedings........................................................ 16
6. Exhibits and Reports on Form 8-K......................................... 16
Signatures and Certifications............................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
Three Months Ended
March 31, 2004 March 31, 2003
---------------- ----------------
Revenues $ 9,661 $ 6,999
Cost of revenues 7,389 4,995
---------------- ----------------
Gross margin 2,272 2,004
General and administrative expense 1,103 981
---------------- ----------------
Income from operations 1,169 1,023
Other income (expense):
Interest expense (569) (637)
Minority interests in income of subsidiaries (95) (187)
Other 187 12
---------------- ----------------
Total other income (expense) (477) (812)
---------------- ----------------
Net income before income taxes 692 211
Provision for foreign income tax 103 158
---------------- ----------------
Net income 589 53
Preferred stock dividend (88) (394)
---------------- ----------------
Net income/(loss) attributed to common shareholders $ 501 $ (341)
================ ================
Income/(loss) per common share basic $ 0.03 $ (0.02)
================ ================
Income/(loss) per common share diluted $ 0.02 $ (0.02)
================ ================
Weighted average number of common shares outstanding:
Basic 19,633 19,633
================ ================
Diluted 28,808 19,633
================ ================
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
3
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2004 2003
-------------- --------------
ASSETS
Cash and cash equivalents $ 491 $ 1,299
Trade receivables, net 8,347 8,823
Lease receivable, current 180 180
Prepaids and other current assets 900 887
-------------- --------------
Total current assets 9,918 11,189
Property and equipment, net 27,270 26,339
Goodwill 7,661 7,661
Other intangible assets, net 2,158 2,290
Debt issuance costs, net 557 567
Lease receivable 722 787
Other assets 79 40
-------------- --------------
Total assets $ 48,365 $ 48,873
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 4,888 $ 5,150
Trade accounts payable 3,483 3,133
Accrued salaries, benefits and payroll taxes 885 591
Accrued interest 241 152
Accrued expenses 1,166 1,761
Accounts payable, related parties 467 787
-------------- --------------
Total current liabilities 11,130 11,574
Accrued postretirement benefit obligations 545 545
Long-term debt, net of current maturities 26,476 27,083
Other long-term liabilities 129 270
Redeemable warrants 1,500 1,500
Redeemable convertible preferred stock 4,259 4,171
-------------- --------------
Total liabilities 44,039 45,143
Commitments and Contingencies (Note 9 and Note 19)
Minority interests 2,618 2,523
COMMON SHAREHOLDERS' EQUITY
Common stock, $.15 par value (110,000,000 shares authorized;
19,633,340 issued and outstanding) 2,945 2,945
Capital in excess of par value 6,887 6,887
Accumulated (deficit) (8,124) (8,625)
-------------- --------------
Total shareholders' equity 1,708 1,207
-------------- --------------
Total liabilities and shareholders' equity $ 48,365 $ 48,873
============== ==============
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
4
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income/(loss) $ 589 $ 53
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation expense 480 464
Amortization expense 217 234
Amortization of discount on debt 75 183
Minority interest in income of subsidiaries 95 187
Changes in working capital:
Decrease (increase) in accounts receivable 476 (1,476)
Decrease (increase) in other current assets 13 (538)
Decrease (increase) lease deposit -- 101
(Decrease) increase in accounts payable 350 1,580
(Decrease) increase in accrued interest 89 274
(Decrease) increase in accrued expenses (595) (203)
(Decrease) increase in accrued salaries,
benefits and payroll taxes (26) 30
(Decrease) increase in other long-term liabilities (141) --
-------------- --------------
Net cash provided by operating activities 1,622 889
Cash flows from investing activities:
Purchase of equipment (1,411) (196)
-------------- --------------
Net cash (used) by investing activities (1,411) (196)
Cash flows from financing activities:
Repayments on long-term debt (944) (582)
Debt issuance costs (75) --
-------------- --------------
Net cash provided (used) by financing activities (1,019) (582)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (808) 111
Cash and cash equivalents at beginning of year 1,299 146
-------------- --------------
Cash and cash equivalents at end of period $ 491 $ 257
============== ==============
Supplemental information - interest paid $ 480 $ 454
============== ==============
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
5
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in Allis-Chalmers Corporation's ("Allis-Chalmers" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 2003
(the "Form 10-K").
All normal and recurring adjustments considered necessary for a fair
presentation of the results of operations have been included in the unaudited
financial statements. In addition, all non-recurring adjustments necessary to
prevent the financial statements from being misleading have been included in the
unaudited financial statements. The results of operations for any interim period
are not necessarily indicative of the Company's operating results for a full
year.
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Compressed Air
Inc. ("Mountain Air"), a Texas corporation, acquired certain assets of Mountain
Air Drilling Service Co., Inc. ("MADSCO"), whose business 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
related products and services and trained operators to companies in the business
of drilling for natural gas.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
merger, all of OilQuip's outstanding common stock was converted into 10,000,000
shares of Allis-Chalmers' common stock.
For legal purposes, we acquired OilQuip, the parent company of Mountain Air.
However, for accounting purposes, OilQuip was treated as the acquiring company
in a reverse acquisition of Allis-Chalmers. The financial statements prior to
the merger reflect the operations of OilQuip. As a result of the merger, the
fixed assets, goodwill and other intangibles of Allis-Chalmers were increased by
$2,691,000.
On February 6, 2002, we 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.
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C. ("M-I"), a
joint venture between Smith International and Schlumberger N.V. (Schlumberger
Limited), to form a Texas limited liability company named AirComp LLC
("AirComp"). Mountain Air contributed assets with a net book value of
approximately $6.3 million and M-I contributed assets with a net book value of
approximately $6.8 million to AirComp L.L.C.. In addition, the Company issued a
subordinated note to M-I in the amount of $4.8 million. The Company owns 55% and
M-I owns 45% of AirComp. Because the Company controls AirComp, the Company has
accounted for the joint venture as a business combination.
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 the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be predicted
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts, recoverability of long-lived assets and intangibles, 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries Mountain Air, Jens', and Strata and its joint venture, AirComp.
All significant inter-company transactions have been eliminated.
6
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. The Company follows
specific and detailed guidelines in measuring revenue. Revenues are recognized
by the Company and its subsidiaries as services are rendered, provided that
pricing is fixed or determinable and collection is reasonably assured. The
Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 104,
REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 104"), provides guidance
on the SEC staff's views on application of generally accepted accounting
principles to selected revenue recognition issues. The Company's revenue
recognition policy is in accordance with generally accepted accounting
principles and SAB No. 104.
RECLASSIFICATIONS AND RESTATEMENT OF FORM 10-Q
Certain prior period balances have been reclassified to conform to current year
presentation.
The accompanying 2003 financial statements have been restated from the
previously filed interim financial statements included in Form 10-Q for the
first, second and third quarters of 2003. As discussed in Note 7 in the
financial statements included in the Form 10-K, an adjustment was recorded in
the fourth quarter of 2003 to reflect a change in estimate of the recoverability
of foreign taxes paid in 2003. The effect of the significant fourth quarter
adjustment on the individual quarterly financial statements is as follows:
Three Months
Ended
March 31, 2003
--------------
Net income (loss) attributed to
common shareholders
Previously reported $ (183)
Adjustment (158)
Restated (341)
Net income (loss) per share, basic
and diluted
Previously reported $ (0.01)
Adjustment (0.01)
Restated (0.02)
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company discloses the results of its segments in accordance with SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
No. 131"). The Company designates the internal organization that is used by
management for allocating resources and assessing performance as the source of
the Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. At March 31, 2004
and 2003, the Company operated in three segments organized by service line:
casing services, directional drilling services and compressed air drilling
services.
NOTE 2 - ACQUISITIONS
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I, a joint venture
between Smith International and Schlumberger N.V. (Schlumberger Limited), to
form a Texas limited liability company named AirComp. The formation of AirComp
has created the second largest provider of compressed air and related products
and services for the drilling, workover, completion, and transmission segments
of the oil, gas and geothermal industries.
Mountain Air contributed assets with a net book value of approximately $6.3
million and M-I contributed assets with a net book value of approximately $6.8
million to AirComp L.L.C. In addition, the Company issued a subordinated note to
M-I in the amount of $4.8 million. The Company owns 55% and M-I owns 45% of
AirComp. Because the Company controls AirComp, the Company has accounted for the
joint venture as a business combination.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations as of March 31, 2003, based on the historical statements of
operations, as if the transaction had occurred as of the beginning of the period
presented.
7
THREE MONTHS ENDED MARCH 31,
----------------------------
(UNAUDITED)
(in thousands, except per share)
2003
----
Revenues $ 7,880
Operating income (loss) $ 1,096
Net income (loss) $ (260)
Net income (loss) per common share
Basic $ (.01)
Diluted $ (.01)
NOTE 3 - DEBT
Debt is as follows at March 31:
2004
---------
(in thousands)
Note payable to Wells Fargo - Equipment leasing - Mountain Air $ 235
Note payable to Seller of Mountain Air Drilling Service Company - Mountain Air 1,533
Note payable to Wells Fargo -Term Note - Jens' 4,127
Note payable to Wells Fargo -Real Estate Note - Jens' 163
Line of Credit with Wells Fargo - Jens' 281
Subordinated Note payable to Seller of Jens - Jens' 4,000
Note payable to Seller of Jens' for non-compete agreement - Jens' 700
Note payable to Texas State Bank - Term Note - Jens' 390
Vendor financing - Strata 1,746
Line of Credit with Wells Fargo - Strata 2,294
Notes payable to certain former Directors - Allis-Chalmers 390
Note payable to Wells Fargo - Subordinated Debt - Allis-Chalmers, net 2,750
Line of Credit to Wells Fargo - AirComp 445
Note payable to Wells Fargo - Term Note-AirComp 7,143
Note payable to Wells Fargo - Delayed Draw Term Note-AirComp 349
Subordinated Note payable to M-I L.L.C - AirComp 4,818
---------
Total debt 31,364
Less short-term debt and current maturities 4,888
---------
Long-term debt obligations $ 26,476
=========
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.
NOTE 4 - SEGMENT INFORMATION
The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(AirComp). All of the segments provide services to the petroleum exploration and
production industry. The revenues, operating income (loss), depreciation and
amortization, interest, capital expenditures and assets of each of the reporting
segments plus the Corporate function are reported below for the quarters ended
March 31, 2004 and 2003:
8
Three Months Ended March 31,
2004 2003
------------ ------------
(in thousands)
REVENUES:
Casing services $ 1,939 $ 2,509
Directional drilling services 5,253 3,480
Compressed air drilling services 2,469 1,010
------------ ------------
Total revenues $ 9,661 $ 6,999
============ ============
OPERATING INCOME (LOSS):
Casing services $ 442 $ 1,239
Directional drilling services 662 256
Compressed air drilling services 394 (107)
General corporate (329) (365)
------------ ------------
Total income/(loss) from operations $ 1,169 $ 1,023
============ ============
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 361 $ 345
Directional drilling services 101 62
Compressed air drilling services 210 261
General corporate 25 30
------------ ------------
Total depreciation and amortization expense $ 697 $ 698
============ ============
INTEREST EXPENSE:
Casing services $ 165 $ 163
Directional drilling services 75 63
Compressed air drilling services 159 243
General corporate 170 168
------------ ------------
Total interest expense $ 569 $ 637
============ ============
CAPITAL EXPENDITURES
Casing services $ 379 $ 62
Directional drilling services 705 8
Compressed air drilling services 326 115
General corporate 1 11
------------ ------------
Total capital expenditures $ 1,411 $ 196
============ ============
ASSETS:
Casing services $ 17,159 $ 16,160
Directional drilling services 11,459 9,975
Compressed air drilling services 18,396 9,190
General corporate 1,351 1,149
------------ ------------
Total assets $ 48,365 $ 36,474
============ ============
NOTE 5 - 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. In the
opinion of management and their legal counsel, the ultimate gain or loss, if
any, to the Company from all such proceedings can not be reasonably estimated at
this time.
NOTE 6 - SUBSEQUENT EVENTS
On March 15, 2004, the Company filed an application to list the common stock on
the American Stock Exchange. However, approval of listing of the common stock is
subject to numerous conditions, including that the Company effect a reverse
stock split resulting in an increase in the per share price to at least $3.00
per share, and meet certain other quantitative and qualitative standards. While
the stockholders and board of directors have approved a future reverse stock
split, there can be no assurance that the Company will meet the listing
requirements of the American Stock Exchange or any other exchange.
9
On April 2, 2004, the Company entered into the following transactions:
o In exchange for an investment of $2 million, the Company issued
3,100,000 shares of common stock for a purchase price equal to $0.50
per share, and warrants to purchase 4,000,000 shares of common stock
at an exercise price of $0.50 per share, expiring on April 1, 2006, to
an investor group (the "Investor Group") consisting of entities
affiliated with Donald and Christopher Engel and directors Robert
Nederlander and Leonard Toboroff. The aggregate purchase price for the
common stock was $1,550,000, and the aggregate purchase price for the
warrants was $450,000.
o Energy Spectrum converted its 3,500,000 shares of Series A 10%
Cumulative Convertible Preferred Stock, including accrued dividend
rights, into 8,590,449 shares of common stock.
o The Company, the Investor Group, Energy Spectrum, and director Saeed
Sheikh, and officers and directors Munawar H. Hidayatallah and Jens H.
Mortensen entered into a stockholders agreement pursuant to which the
parties have agreed to vote for the election to the board of directors
of the Company three persons nominated by Energy Spectrum, two persons
nominated by the Investor Group and one person nominated by Messrs.
Hidayatallah, Mortensen and Sheikh. In addition, the parties and the
Company agreed that in the event the Company has not effected a public
offering of its shares prior to September 30, 2005, then, at the
request of Energy Spectrum, the Company will retain an investment
banking firm to identify candidates for a transaction involving the
sale of the Company or its assets.
o Wells Fargo Credit, Inc. and Wells Fargo Energy Capital, Inc. extended
the maturity dates for certain obligations (which at March 31, 2004,
aggregated approximately $9,452,000) from January and February of 2005
to January and February of 2006. As a condition of the extension, the
Company made a $400,000 initial payment and agreed to make 24 monthly
principal payments in the amount of $25,000 each to Wells Fargo Energy
Capital, Inc. As part of the extension, the lenders waived certain
defaults including defaults relating to the failure of Jens' and
Strata to comply with certain covenants relating to the amount of
their capital expenditures, and amended certain covenants set forth in
the loan agreements. In addition, Wells Fargo Credit, Inc. increased
Strata's line of credit from $2.5 million to $4.0 million.
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 in our 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."
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in this Item 2 contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of risks and uncertainties, including, but not limited
to, those discussed herein , and in other reports filed with the Securities and
Exchange Commission, and in particular those discussed under "Risk Factors" in
our Annual Report on Form 10-K. You should not place undue reliance on these
forward-looking statements, which speak only as of the date of this report. We
are under no obligation to revise or update any forward-looking statements.
BACKGROUND
- ----------
Prior to May 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'.
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. (Schlumberger Limited)
to form a Texas limited liability company named AirComp LLC. Mountain Air
contributed assets with a net book value of approximately $6.3 million and M-I
contributed assets with a net book value of approximately $6.8 million to
AirComp. In addition, the Company issued a subordinated note to M-I in the
amount of $4.8 million. The Company owns 55% and M-I owns 45% of AirComp. We
have consolidated AirComp into our financial statements beginning with the
quarter ending September 30, 2003.
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 our Form 10-K. Note that our preparation of this Quarterly Report
on Form 10-Q requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, the 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. In order to estimate the collectibility of
amounts due from our customers, we make judgments regarding future events and
trends, based upon customer payment history and current credit worthiness , as
well as consideration of the overall business climate in which our customers
operate. Inherently, we are required to make frequent judgments and estimates
regarding our customers' ability to pay amounts due us in order to determine the
appropriate amount of valuation allowances required for doubtful accounts.
Provisions for doubtful accounts are recorded when it becomes evident that the
customers will not be able to make the required payments at either contractual
due dates or in the future. Over the past two years, reserves for doubtful
accounts, as a percentage of total accounts receivable before reserves, have
ranged from 1% to 2%. We believe that our reserve for doubtful accounts is
adequate to cover anticipated losses under current conditions; however, there
can be no assurance of such fact.
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. We follow specific and detailed guidelines in measuring revenue.
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 rendered,
provided that pricing is fixed or determinable and collection is reasonably
assured. The Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin SAB No. 104 ("SAB No. 104"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, provides guidance on the SEC staff's views on application of
generally accepted accounting principles to selected revenue recognition issues.
Our revenue recognition policy is in accordance with generally accepted
accounting principles and SAB No. 104.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
as to the value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the book
values of these assets are reviewed for impairment on an annual basis 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. Changes to these assumptions could require a
provision for impairment in a future period.
GOODWILL AND OTHER INTANGIBLES. The Company has recorded approximately
$7,661,000 of goodwill and $2,158,000 of other identifiable intangible assets.
The Company allocates purchase price to intangible assets when it makes a
business combination. The excess of the purchase price after allocation of fair
values to tangible assets is allocated to identifiable intangibles and
thereafter to goodwill. Purchase price allocations have been made to intangible
assets and goodwill in connection with the acquisition of the Mountain Air,
Strata and Jens' operating segments, as well as the reverse merger between the
Company and OilQuip. 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
11
Accounting Standards Board No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. The
initial valuations of intangibles related to the Mountain Air, Strata and Jens'
operating segments required the use of third-party valuation experts who in turn
developed assumptions to value the carrying amount of the individual reporting
units. Changes to these assumptions could require a provision for impairment in
future periods.
STOCK BASED COMPENSATION. The Company accounts for its stock-based compensation
using Accounting Principles Board's Opinion No. 25 ("APB No. 25"). Under APB No.
25, compensation expense is recognized for stock options with an exercise price
that is less than the market price on the grant date of the option. For stock
options with exercise prices at or above the market value of the stock on the
grant date, the Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS 123"). The Company has adopted the disclosure-only provisions of SFAS 123
for the stock options granted to the employees and directors of the Company.
Accordingly, no compensation expense has been recognized for these options. Many
equity instrument transactions are valued based on pricing models such as
Black-Scholes, which require judgments by management. Values for such
transactions can vary widely and are often material to the financial statements.
RESULTS OF OPERATIONS
- ---------------------
Results of operations for 2004 and 2003 reflect the business operations of
Allis-Chalmers and its subsidiaries Jens' Oilfield Service, Inc., which supplies
highly specialized equipment and operations to install casing and production
tubing required to drill and complete oil and gas wells ("Casing Services"), and
Strata Directional Technology, Inc., which provides high-end directional and
horizontal drilling services for specific targeted reservoirs that cannot be
reached vertically ("Directional Drilling Services"). In July 2003, through our
subsidiary Mountain Air, we entered into a limited liability company operating
agreement with a division of M-I L.L.C., a joint venture between Smith
International and Schlumberger N.V. (Schlumberger Limited) to form a Texas
limited liability company named AirComp LLC. Mountain Air contributed assets
with a net book value of approximately $6.3 million and M-I contributed assets
with a net book value of approximately $6.8 million to AirComp L.L.C. The
Company owns 55% and M-I owns 45% of AirComp. We have consolidated AirComp into
our financial statements beginning with the quarter ending September 30, 2003.
The business of Mountain Air and AirComp is referred to below as "Compressed Air
Drilling Services."
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO MARCH 31, 2003:
- -------------------------------------------------------------
Sales for the three months ended March 31, 2004 totaled $9,661,000, which
included the revenue of AirComp, a joint venture between the Company and M-I
consummated in July, 2003. In the comparable period of 2003, revenues were
$6,999,000 reflecting the revenue of Jens', Strata, and Mountain Air. Revenues
for the quarter ended March 31, 2004 for the Casing Services, Directional
Drilling Services, and Compressed Air Drilling Services segments were
$1,939,000, $5,253,000 and $2,469,000, respectively. Revenues for the quarter
ended March 31, 2003 for the Casing Services, Directional Drilling Services, and
Compressed Air Drilling Services segments were $2,509,000, $3,480,000 and
$1,010,000, respectively. Revenues for the Casing Services segment decreased
$570,000 due to increased competition in the South Texas market and slower than
projected drilling in Mexico by PEMEX due to bad weather. Revenues for the
Compressed Air Drilling Services segment increased $1,459,000 for the quarter
ended March 31, 2004 primarily due to joint venture between the Company and M-I.
The Company through AirComp was able to expand the geographical areas in which
it operates to include geothermal drilling in California and natural gas
drilling in West Texas. Directional Drilling Services revenues increased
$753,000 due to increased market share in the Gulf Coast.
Gross margin ratio, as a percentage of sales, was 24.0% for the quarter ended
March 31, 2004 compared with 28.6% for the quarter ended March 31, 2003. The
gross margin ratio decreased as a result of relatively fixed direct costs and
decreased service pricing in the Casing Services and Compressed Air Drilling
Services segments. Because we have made significant investments in equipment and
have a constant number of operations personnel, many of our costs of revenues
are relatively fixed, and as a result, our gross profit margins are
significantly impacted by either increases or decreases in pricing structures or
revenues.
General and administrative expense was $1,103,000 in 2004 compared with $981,000
in 2003. General and administrative expense increased in 2004 compared to 2003
due to the overhead costs associated with AirComp and the hiring of additional
sales force and administrative personnel at each of the Company's subsidiaries
to meet increased demand in the market.
Operating income for the first quarter ended March 31, 2004 totaled $1,169,000,
a 14% increase over the comparable period in 2003, reflecting the inclusion of
operating income of AirComp, the limited liability company formed in July 2003.
In the comparable period of 2003, operating income was $1,023,000. Operating
income (loss) for the quarter ended March 31, 2004 for the Casing Services,
Directional Drilling Services, Compressed Air Drilling Services and General
Corporate segments were $442,000, $662,000, $394,000 and ($329,000),
respectively. Operating income (loss) for the quarter ended March 31, 2003 for
the Casing Services, Directional Drilling Services, Compressed Air Drilling
Services and General Corporate segments were $1,239,000, $256,000, ($107,000)
and ($365,000), respectively. Operating income for the Casing Services decreased
approximately $797,000 due to increased competition in the South Texas market
and slower than projected drilling in Mexico by PEMEX due to bad weather.
Directional Drilling Services increased approximately $406,000 due to increased
market share in the Gulf Coast. Compressed Air Drilling Services increased
approximately $501,000 due the expanded geographical areas in which AirComp
operates. General Corporate segments decreased approximately $36,000 due to
lower corporate expenses.
We had a net income attributed to common shareholders of $501,000, or $0.03 per
common share, for the quarter ended March 31, 2004 compared with a net loss of
($341,000), or ($0.02) per common share, for the quarter end March 31, 2003.
12
PRO FORMA RESULTS
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the formation of AirComp on the Company's results of
operations, based on the historical statements of operations, as if the
transaction had occurred as of the beginning of the periods presented. Pro forma
results of operations set forth below includes results of operations for the
quarter ended March 31, 2004 and 2003.
Pro forma sales for the first quarter of 2004 totaled $9,661,000, compared to
pro forma sales in the first quarter of 2003 of $7,880,000, an increase of
approximately 22%. The increase in 2004 compared to 2003 was primarily due to
higher revenues resulting from the overall upturn in the petroleum industry. Pro
forma sales for the first quarter of 2004 for AirComp totaled $2,469,000,
compared to pro forma sales in the first quarter of 2003 of $1,891,000. The pro
forma sales in 2004 for AirComp increased $578,000 due to increased drilling
activity in West Texas and a slight increase in activity in the San Juan basin
over the same period in 2003.
Pro forma gross margin, as a percentage of sales, was 24.0% for the quarter
ended March 31, 2004 compared with a pro forma gross margin of 26.4 % for the
quarter ended March 31, 2003. The gross margin ratio decreased as a result of
relatively fixed direct costs and decreased service pricing in the Casing
Services and Compressed Air Drilling Services segments. Because we have made
significant investments in equipment and have a constant number of operations
personnel, many of our costs of revenues are relatively fixed, and as a result,
our gross profit margins are significantly impacted by either increases or
decreases in revenues.
Pro forma general and administrative expense was $1,103,000 in 2004 compared
with $981,000 in 2003. The pro forma general and administrative expense
increased in 2004 due to the overhead costs associated with AirComp and the
hiring of additional sales force and administrative personnel at each of the
Company's subsidiaries to meet increased demand in the market.
The Company had pro forma operating income for the first quarter of 2004 of
$1,169,000, an increase of 6% as compared to pro forma operating income of
$1,096,000 in the first quarter of 2003. The increase in pro forma operating
income for 2004 was primarily due to higher revenues resulting from the overall
upturn in the petroleum industry.
The Company incurred a pro forma net income of $501,000, or $0.03 per common
share, for the quarter ended March 31, 2004 compared with a pro forma net loss
of ($260,000), or ($0.01) per common share, for the quarter ended March 31 2003.
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 March 31, 2004.
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- ----------------------- ------------ ------------ ------------ ------------ ------------
Notes payable $31,364,000 $ 6,806,000 $14,071,000 $10,487,000 $ --
Interest Payments on notes payable 1,978,000 431,000 973,000 574,000 --
Operating Lease 730,000 318,000 323,000 89,000 --
Employment Contracts 750,000 750,000 -- -- --
------------ ------------ ------------ ------------ ------------
Total Contractual Cash Obligations $34,822,000 $ 8,305,000 $15,367,000 $11,150,000 $ --
============ ============ ============ ============ ============
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Cash and cash equivalents totaled $491,000 at March 31, 2004 as compared to
$1,299,000 at December 31, 2003. The decrease in cash and cash equivalents was
due to the decrease in long-term debt resulting from scheduled principal
repayments as well as an accelerated payment on Strata's vendor financed note of
approximately $637,000 and the decrease in other current liabilities.
Net trade receivables at March 31, 2004 were $8,347,000 as compared to
$8,823,000 at December 31, 2003, due to increased collection efforts in
collecting past due accounts.
Net property, plant and equipment were $27,270,000 at March 31, 2004 as compared
to $26,339,000 at December 31, 2003. The increase in net property, plant and
equipment was due to the addition of approximately $750,000 of downhole motors
and other assets used in the operations at Strata, the addition of casing
equipment of approximately $334,000 at Jens', and capital repairs to the
existing equipment of approximately $327,000 at AirComp. Capital expenditures
for the quarter 2004 were $1,411,000. Capital expenditures for the quarter 2003
were $196,000. Capital expenditures for 2004 are projected to be approximately
$4,100,000. These expenditures are expected to be funded from operating cash
flows and lines of credit already in place available for capital projects.
Trade accounts payable at March 31, 2004 were $3,483,000 as compared to
$3,133,000 at December 31, 2003. The increase was primarily due to increased
operational expenses.
13
At March 31, 2004, other current liabilities, excluding the current portion of
long-term debt and trade accounts payable, were $2,795,000 consisting of
interest in the amount of $241,000, accrued salary and benefits in the amount of
$885,000, income taxes payable of $45,000, accrued restructuring costs of
$129,000, related party payables of $467,000, accrued operating expenses of
$967,000, and legal and professional expenses in the amount of $25,000. Included
in accrued restructuring costs was compensation in the amount of $129,000 due to
former employees of the Company. At December 31, 2003, other current
liabilities, excluding the current portion of long-term debt and trade accounts
payable, were $3,291,000 consisting of interest in the amount of $152,000,
accrued salary and benefits in the amount of $591,000, income taxes payable of
$45,000, accrued restructuring costs of $296,000, related party payables of
$787,000, accrued operating expenses of $1,358,000, and legal and professional
expenses in the amount of $62,000. Included in accrued restructuring costs was
compensation in the amount of $166,000 due to former employees of the Company.
All of these balance sheet accounts decreased significantly from December 31,
2003 balances due to increased cash flow from operations.
Long-term debt including current maturities was $31,364,000 at March 31, 2004 as
compared to $32,233,000 at December 31, 2003. The decrease in long-term debt
resulted from scheduled principal repayments as well as an accelerated payment
on Strata's vendor financed note of approximately $637,000.
CAPITAL REQUIREMENTS
Our long-term capital needs are to repay and/or refinance our existing debt,
provide funds for existing operations, 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, which may include the
issuance of equity or debt securities, as well as secured and unsecured loans.
See "Recent Developments" below for a discussion of capital transactions
completed subsequent to March 31, 2004. In March 2004 the Company entered into
an agreement with Morgan Joseph & Co. Inc. to assist the Company in
restructuring its outstanding debt and to consummate an offering of its common
stock. However, there can be no assurance that the Company will be successful in
such efforts. Any new issuance of equity securities may further dilute existing
shareholders.
RECENT DEVELOPMENTS
On March 15, 2004, the Company filed an application to list the common stock on
the American Stock Exchange. However, approval of listing of the common stock is
subject to numerous conditions, including that the Company effect a reverse
stock split resulting in an increase in the per share price to at least $3.00
per share, and meet certain other quantitative and qualitative standards. While
the stockholders and board of directors have approved a future reverse stock
split, there can be no assurance that the Company will meet the listing
requirements of the American Stock Exchange or any other exchange.
On April 2, 2004, the Company entered into the following transactions:
o In exchange for a cash investment of $2 million, the Company issued
3,100,000 shares of common stock for a purchase price equal to $0.50
per share, and warrants to purchase 4,000,000 shares of common stock
at an exercise price of $0.50 per share, expiring on April 1, 2006, to
an investor group (the "Investor Group") consisting of entities
affiliated with Donald and Christopher Engel and directors Robert
Nederlander and Leonard Toboroff. The aggregate purchase price for the
common stock was $1,550,000, and the aggregate purchase price for the
warrants was $450,000.
o Energy Spectrum converted its 3,500,000 shares of Series A 10%
Cumulative Convertible Preferred Stock, including accrued dividend
rights, into 8,590,449 shares of common stock.
o The Company, the Investor Group, Energy Spectrum, and director Saeed
Sheikh, and officers and directors Munawar H. Hidayatallah and Jens H.
Mortensen entered into a stockholders agreement pursuant to which the
parties have agreed to vote for the election to the board of directors
of the Company three persons nominated by Energy Spectrum, two persons
nominated by the Investor Group and one person nominated by Messrs.
Hidayatallah, Mortensen and Sheikh. In addition, the parties and the
Company agreed that in the event the Company has not effected a public
offering of its shares prior to September 30, 2005, then, at the
request of Energy Spectrum, the Company will retain an investment
banking firm to identify candidates for a transaction involving the
sale of the Company or its assets.
o Wells Fargo Credit, Inc. and Wells Fargo Energy Capital, Inc. extended
the maturity dates for certain obligations (which at March 31, 2004,
aggregated approximately $9,452,000) from January and February of 2005
to January and February of 2006. As a condition of the extension, the
Company made a $400,000 initial payment and agreed to make 24 monthly
principal payments in the amount of $25,000 each to Wells Fargo Energy
Capital, Inc. As part of the extension, the lenders waived certain
defaults including defaults relating to the failure of Jens' and
Strata to comply with certain covenants relating to the amount of
their capital expenditures, and amended certain covenants set forth in
the loan agreements. In addition, Wells Fargo Credit, Inc. increased
Strata's line of credit from $2.5 million to $4.0 million.
As a result of the foregoing transactions, the parties to the above stockholders
agreement own 86.4% of the outstanding common stock of the Company, calculated
in accordance with Rule 13d-3 of the Securities and Exchange Commission. The
proceeds of the sale of the common stock and warrants will be used by the
Company to reduce debt, to fund potential acquisitions and for general corporate
purposes.
14
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer
and our chief accounting officer have evaluated the effectiveness of the
Company's "disclosure controls and procedures" (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this Report (the
"Evaluation Date"), and have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in enabling us to record,
process, summarize, and report information required to be included in our SEC
filings within the required time period. Since the Evaluation Date, there have
not been any significant changes in our internal controls, or in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of future
events.
15
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is a defendant in an action (the "Action") brought in April 2004
(No. 04CV308) in the District Court of Mesa County Colorado by the former owner
of Mountain Air Drilling Service Company, Inc. nka Pattongill & Murphy, Inc.,
from whom the Company's Mountain Compressed Air, Inc. ("MCA") acquired assets in
2001. The plaintiff seeks to accelerate payment of a note (the "Note") issued in
connection with the acquisition and are seeking $1,863,000 in damages
(representing principal and interest due under the Note), on the basis that MCA
has failed to provide financial statements required by the Note. The Company
believes the claim is without merit because MCA no longer maintains separate
financial statements and the Company provides plaintiff with the Company's
publicly available financial statements. The financial statements disclose as a
separate segment the operations of AirComp, which conducts business using the
assets acquired from plaintiff. In addition, the rights of the holder of the
Note are subordinated to certain senior lease obligations, and therefore even if
the plaintiff had the right to accelerate the debt under the terms of the Note,
the plaintiff is prevented from doing so pursuant to the terms of the
subordination agreement until September, 2007, at which time the Note will
mature by its terms. Finally, the Company has claims in the amount of $12,000
for legal fees and other expenses that the plaintiff agreed to pay the Company
in connection with the settlement of an earlier lawsuit involving the
acquisition of assets from plaintiff.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed
-----------------------
The Index to Financial Statements is included on page 2 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. The exhibits listed on the Exhibit Index
located at Page 18 of this Quarterly Report are filed as part of this Form 10-Q.
(b) Reports on Form 8-K
-------------------
None.
16
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 May 17, 2004.
ALLIS-CHALMERS CORPORATION
------------------------------------
(REGISTRANT)
/S/ MUNAWAR H. HIDAYATALLAH
------------------------------------
MUNAWAR H. HIDAYATALLAH
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
17
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Accounting Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer, President and Chief
Accounting Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.