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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