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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, 2004 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO
COMMISSION FILE NUMBER 1-2199
ALLIS-CHALMERS ENERGY INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 39-0126090
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5075 WESTHEIMER, SUITE 890, HOUSTON, TEXAS 77056
------------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 369-0550
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Security: Name of Exchange:
Common Stock, par value $0.01 per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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. [X]
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 closing price of the common stock
of $4.70 per share on April 12, 2005, as reported on the American Stock
Exchange, was approximately $15,064,562 (affiliates included for this
computation only: directors, executive officers and holders of more than 5% of
the registrant's common stock).
At April 12, 2005 there were 13,852,798 shares of common stock outstanding.
DOCUMENTS INCORPORATED
BY REFERENCE:
Portions of the Allis-Chalmers Energy Inc. Proxy Statement prepared for the 2005
annual meeting of shareholders, pursuant to Regulation 14A, are incorporated by
reference into Part III of this Report.
2004 FORM 10-K CONTENTS
-----------------------
PART I
ITEM PAGE
---- ----
1. Business............................................................... 4
2. Properties............................................................. 10
3. Legal Proceedings...................................................... 11
4. Submission of Matters to a Vote of Security Holders.................... 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters.. 13
6. Selected Financial Data................................................ 16
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 17
7A. Quantitative and Qualitative Disclosures about Market Risk............. 31
8. Financial Statements................................................... 32
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 61
9A. Controls and Procedures................................................ 62
PART III
10. Directors and Executive Officers of the Registrant..................... 63
11. Executive Compensation................................................. 63
12. Security Ownership of Certain Beneficial Owners and Management......... 63
13. Certain Relationships and Related Transactions......................... 63
14. Principal Accounting Fees and Services................................. 63
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 63
Signatures and Certifications.............................................. 64
DEFINITIONS
"booster" A machine that increases the volume of air when used in conjunction with a
compressor or a group of compressors.
"under balanced drilling" A technique in which oil, gas, or geothermal wells are drilled by creating
a pressure within the well that is lower than the reservoir pressure. The
result is increased rate of penetration, reduced formation damage, and reduced
drilling costs.
"casing" The pipe placed in a drilled well to secure the well bore and formation.
"casing tongs" Hydraulic wrenches used to screw casing pipes together.
"directional drilling" The technique of drilling a well with varying the angle of direction of a
well and changing the direction of a well to hit a specific target.
"drill pipe" A pipe that attaches to the drill bit to drill a well.
"horizontal drilling" The technique of drilling wells at a 90-degree angle.
"lay down machines" A truck mounted machine used to move pipe and casing and tubing onto a pipe
rack (from which a derrick crane lifts the drill pipe, casing and tubing and
inserts it into the well).
"links" Adaptors that fit on the blocks to attach handling tools.
"LWD" or "log while drilling" The technique of measuring, in real time, the formation pressure and the
position of equipment inside of a well.
"mist and foam drilling" The technique of using chemicals to lubricate a well and to facilitate lifting
cuttings to the surface as the well is being drilled.
"MWD" or "measure while drilling" The technique of measuring formation properties within a well.
"protectors" A device placed on a drill pipe and casing pipe to protect the threads.
"reciprocating compressor" A piston type compressor that constantly pushes air with reciprocating pistons.
"screw compressor" A compressor that utilizes a positive displacement mechanism.
"slips" Tools used to hold casing in place while installing casing in wells.
"torque turn service" Monitoring device to insure proper makeup of the casing.
"tubing" A pipe placed inside the casing to produce the well.
"blow out preventors" Large safety device placed on the surface of a well to maintain high pressure well bores.
"test plugs" A device used to test the connections of well heads and the blow out preventors.
"spacer spools" High pressure connections or links which are stacked to elevate the blow out preventors
to the drilling rig floor.
"hevi-wate spiral drill pipe" Heavy drill pipe used for special applications primarily in directional drilling.
The "spiral" design increases flexibility and penetration of the pipe.
3
PART I.
ITEM 1. BUSINESS
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."
We are engaged in the business of providing oilfield services and equipment to
meet the drilling and related needs of oil and gas exploration and development
companies, principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and the Rocky Mountain regions of New Mexico and
Colorado, Oklahoma and in Mexico. We currently operate in four sectors of the
oilfield service industry: the casing and tubing sector; the directional
drilling sector; the compressed air drilling sector, and other services, which
includes oilfield rental tools and production services.
We believe that consolidation among large oilfield service providers has created
an opportunity for us to compete effectively in certain niche markets that are
under-served by the larger service and equipment companies. At the same time,
producers generally favor suppliers that provide a comprehensive package of
products and services, which allows us to compete effectively with smaller
competitors currently providing a significant portion of the services in this
industry.
Our strategy is based on broadening the product mix and the geographic scope of
our products and services primarily within four areas of the oilfield services
and equipment industry: casing and tubing handling services and equipment,
drilling services, oilfield rental tools and production services. We intend to
implement this growth strategy through internal expansion and the acquisition of
companies operating within these segments. We intend to identify and acquire
companies with significant management and field expertise, strong client
relationships and high quality products and services. As discussed under "Risk
Factors" included elsewhere herein, there can be no assurance that we will be
able to complete any further acquisitions and adequately integrate these
acquisitions into our operations.
Our casing and tubing, directional drilling, compressed air drilling and other
services had revenues of approximately $10.4 million, $24.8 million and $11.6
million, and $1.0 million, respectively, during the year ended December 31,
2004. See Note 18 to our consolidated financial statements included elsewhere
herein for information regarding the revenues, income from operations and assets
of each or our segments.
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. and its wholly-owned subsidiary,
Mountain Compressed Air, Inc. In December 2001, we sold Houston Dynamic
Services, Inc., our last pre-bankruptcy business. 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 July 2003, we entered into a limited liability company
operating agreement with a division of M-I L.L.C., a joint venture between Smith
International and Schlumberger N.V., to form a Texas limited liability company
named AirComp LLC. We own 55% and M-I owns 45% of AirComp. In September 2004, we
increased our ownership of Jens' Oilfield Service, Inc. to 100%. In September
2004, we acquired 100% of the outstanding stock of Safco Oil Field Products,
Inc. ("Safco"). In November 2004, AirComp acquired substantially all of the
assets of Diamond Air Drilling Services, Inc. and Marquis Bit Co., LLC,
collectively ("Diamond Air"). In December 2004, we acquired Downhole Injection
Services, LLC ("Downhole"). As a result of these transactions, our prior results
for each of the casing and tubing sector, the directional drilling sector and
the air drilling sector may not be indicative of current or future operations of
those sectors. In January 2005, we changed our name from Allis-Chalmers
Corporation to Allis-Chalmers Energy Inc.
INDUSTRY OVERVIEW
Oil and natural gas producers tend to focus on their core competencies on
identifying reserves has resulted in the extensive outsourcing of drilling and
service functions. The use of service companies allows oil and 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. We believe
that:
o Oil and gas exploration and production companies are currently
consolidating their supplier base to streamline their purchasing
operations and generate economies of scale by purchasing from just a
few suppliers.
o Producers are favoring larger suppliers that provide a comprehensive
list of products and services.
o Companies that can meet customers' demands will continue to earn new
and repeat business.
o 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 less sophisticated service and
control capabilities.
o We can offer customers crucial advantages over our smaller
competitors.
o Opportunities exist to acquire these competing businesses and
successfully integrate and enhance their operations within our
operating structure.
o Consolidation among larger oilfield service providers has created an
opportunity for us to compete effectively in certain niche markets
which are under-served by the large oilfield service and equipment
companies and in which we can provide better products and services
than the smaller competitors currently providing a significant portion
of the services in this industry.
4
DESCRIPTION OF BUSINESSES
CASING AND TUBING SERVICES
We supply specialized equipment and trained operators to install casing and
tubing, change out drill pipe and retrieve production tubing for both onshore
and offshore drilling and workover operations, which we refer to as casing and
tubing services. 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.
We have an 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
protectors. We also maintain a fleet of other revenue generating equipment such
as forklifts and delivery trucks that transport our various rental equipment and
transfer the customers' casing from truck to pipe rack. We charge customers for
tong trucks, laydown trucks and personnel on an hourly basis portal to portal
and rental equipment on a daily basis portal to portal. The customer is liable
for damaged or lost equipment.
We currently provide casing and tubing services primarily to areas in South
Texas and 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 and tubing crew market, that market
remains highly competitive and fragmented with at least 30 casing and tubing
crew companies working in the U.S. We believe that we have several competitive
advantages including:
o A well-established, loyal customer base in South Texas and Mexico;
o A management team with over 15 years of service experience;
o An inventory of specialized equipment;
o A reputation for customer responsiveness;
o Substantial experience in South Texas, primarily a natural gas market;
and
o An excellent relationship with our Mexican partner, which enables us
to access the Mexican market.
We believe that through geographic expansion, we can optimize the utilization of
both our equipment and personnel by accessing additional niche markets
under-served by the larger oilfield service companies in the U.S. and Mexico.
We provide casing and tubing services in Mexico through a significant Mexican
customer, Materiales y Equipo Petroleo, S.A. de C.V. ("Matyep"), in
Villahermosa, Reynosa, Veracruz and Ciudad del Carmen, Mexico. Matyep, in turn
provides equipment and services to Petroleos Mexicanos, known as Pemex. These
services are provided primarily to offshore drilling operations. We provide
substantially all of the necessary equipment and Matyep provides all personnel,
repairs, maintenance, insurance and supervision for provision of the casing and
tubing crew and torque turn service. In addition, Matyep is responsible for the
preparation of billing invoices, collection of receivables and the import and
export of equipment. We have approximately $8.0 million of equipment in Mexico,
and have operated profitably in Mexico since 1997. Services to offshore drilling
operations in Mexico are seasonal, and operations are generally reduced during
the first quarter of each calendar year due to weather conditions. Matyep is
responsible for payment to us, even if it is unable to collect payment on a
timely basis, though in the past our receipt of payments has been delayed for
significant periods of time by failure of Pemex to pay amounts due Matyep on a
timely basis. Our primary competitors in Mexico are South American Enterprises
and Weatherford, both of which provide similar products and services.
For the years ended December 31, 2004 and 2003, our Mexico operations accounted
for approximately $5.1 million and $3.3 million, respectively, of our revenues,
and the loss of Matyep as a customer would have a material adverse effect on our
business. We provide extended payment terms to Matyep and maintain a high
accounts receivable balance due to these terms. The accounts receivable balance
was approximately $968,000 at December 31, 2004 and was $1.4 million as of
December 31, 2003. Jens' has been providing services to Pemex in association
with Matyep since 1997 and has never experienced a default in payment; however a
default on these receivables could have a material adverse effect.
The following table details revenues of our casing and tubing services segment
by class for the year ended December 31, 2004 and December 31, 2003 (in
thousands).
Year Ended Year Ended
Revenues by class: December 31, 2004 Percentage December 31, 2003 Percentage
- ------------------ ----------------- ---------- ----------------- ----------
Laydown machines $ 1,850 17.8% $ 2,426 24.2%
Casing installation 3,396 32.7% 3,829 38.1%
Mexico operations 5,141 49.5% 3,729 37.2%
Other 4 -- 53 .5%
------- ------ ------- ------
Total revenues $10,391 100.0% $10,037 100.0%
======= =======
5
Historically, we have sought to purchase equipment for our casing and tubing 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. We
believe there is a six to eight month backlog on orders to these suppliers.
However, we currently own sufficient equipment for projected operations over the
next 12 months, and believe the shortage of equipment will result in increased
demand for our services.
Our casing and tubing sector is not materially dependent upon the ownership of
any patents, trademarks, franchises or other concessions.
DIRECTIONAL DRILLING SERVICES
We provide directional, horizontal and measure while drilling services to oil
and gas companies operating both onshore and offshore in Texas and Louisiana. We
refer to these as directional drilling services. Management believes there are
several advantages to horizontal and directional drilling services including:
o Improvement of total cumulative recoverable reserves
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
We provide specialized directional drilling services in niche markets, including
the Austin Chalk region, where specialized, technically focused applications are
necessary. Our teams of experienced personnel utilizing state of the art tools
provide services including 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 supervision and
guidance, new well and reentry drilling, steerable drilling and log while
drilling services.
There are three major directional drilling companies, Schlumberger, Halliburton
and Baker Hughes, that market both worldwide and in the U.S. as well as numerous
small regional players, including us. 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.
The following table details our horizontal and directional drilling segment's
revenues by class for the years ended December 31, 2004 and December 31, 2003
(in thousands).
Year Ended Year Ended
Revenues by class: December 31, 2004 Percentage December 31, 2003 Percentage
- ------------------ ----------------- ---------- ----------------- ----------
Drilling operations $ 20,942 83.2% $ 13,188 82.4%
Other 3,845 16.8% 2,820 17.6%
-------- ------ -------- ------
Total revenues $ 24,787 100.0% $ 16,008 100.0%
======== ====== ======== ======
We have only a single supplier for most or all of each type of equipment we use
(downhole motors, tubing, and measure while drilling and log while drilling
equipment). However, we believe that other suppliers of such equipment are
available. We have entered into preferred leasing agreements with our current
suppliers, which are intended to assure the availability of equipment through
2006 for tubing, MWD and LWD equipment. We have an indefinite contract with our
supplier of downhole motors. Our directional drilling sector is not materially
dependent upon the ownership of any patents, trademarks, franchises or other
concessions.
COMPRESSED AIR DRILLING SERVICES
AirComp LLC, our limited liability company owned jointly with M-I, is the
world's second largest provider of compressed air and related products and
services for the compressed air drilling, workover, completion and transmission
segments of the oil, gas and geothermal industries which we refer to as
compressed air drilling services. We believe compressed air products and
services represent more than 10% of an overall $750-$900 million under balanced
drilling operations market.
Compressed air drilling services include the following products and services:
o Engineering Services
o Compressed Air
o Nitrogen (Membrane Separators, Cyrogenic, etc.)
o Chemicals (Foamers, Defoamers, Polymers, Shale Stabilizers, Corrosion
Inhibitors, etc.)
o Specialized Bits
o Hammers and other Downhole Tools
o Surface Blow-Out Prevention Equipment
o Multi-Phase Separation Equipment
6
We provide engineering services, compressed air and chemicals. These products
and services can be used exclusive of the other under balanced components in
traditional compressed air, mist and foam drilling applications or as part of a
more sophisticated under balanced drilling operations package employing most or
all of the elements listed above.
We provide compressed air drilling services primarily in Eastern Oklahoma, North
Texas, West Texas, and throughout the Rocky Mountains. Our operations offices
are in Fort Stockton, Texas; Farmington, New Mexico; and Grand Junction,
Colorado. Our compressed air drilling services operations are headquartered in
Houston, Texas, with a sales and technical support office in Denver, Colorado.
We believe that our operational facilities are well located for quick logistical
response to customer needs.
We are recognized in the compressed air drilling markets for providing superior
compressed air equipment, chemicals and personnel for under balanced drilling.
These operations include compressed air, mist, foam and aerated mud drilling,
completion and workover as well as pipeline testing and commissioning. We have a
combined fleet of over 80 compressors and boosters including:
o Gardner-Denver two-stage reciprocating compressors (35)
o Clark four stage reciprocating compressors (15)
o GHH-Rand three stage screw compressors (12)
o IR four stage screw compressors (3)
o MDY two stage booster (15)
o Ariel two stage booster (4)
This broad and diversified product line enables us to compete in the under
balanced drilling market with an equipment package engineered and customized to
specifically meet customer requirements. All the revenues from our compressed
air drilling services are derived from the rental of equipment and personnel.
Effective November 1, 2004, AirComp acquired substantially all the assets of
Diamond Air for $4.6 million in cash. We contributed $2.5 million and M-I L.L.C.
contributed $2.1 million to AirComp LLC in order to fund the purchase. Diamond
Air and Marquis Bit provide air drilling technology and products to the oil and
gas industry in West Texas, New Mexico and Oklahoma. Diamond Air is a leading
provider of air hammers and hammer bit products. The acquired assets include air
hammers, hammer bits and products, accounts receivable, equipment and rolling
stock utilized in the air drilling business. Diamond Air manufactures its own
hammer bits. Diamond Air's and Marquis Bit's air hammers and hammer bits will
complement and add to AirComp's offering of products and services and enhance
its ability to offer packaged pricing. Diamond Air and Marquis Bit together had
revenues of approximately $4.0 million and $5.5 million for the seven months
ended July 31, 2004 and the year ended December 31, 2003, respectively.
In addition to the oil and gas industry, we are a world leader in providing
specialized compressed air equipment and experienced personnel in geothermal
applications.
Our largest competitor for compressed air drilling services is Weatherford.
Weatherford focuses on large projects, but also competes in the more common
compressed air, mist, foam and aerated mud drilling applications. Other
competition comes from smaller independently owned companies that compete in
only one region, e.g., Rocky Mountains only, West Texas only. We compete
successfully with Weatherford and others through:
o Diversified fleet allowing customized packages
o Multi-region presence
o Highly experienced and effective personnel
o Customer relationships
o Assistance of Sales Personnel from M-I and from other companies.
o Reputation of predecessor companies: M-I Air Drilling Services and
Mountain Compressed Air, each of which had over a 30 year history of
superior service
There is a continuing trend in the industry to drill, complete, and work over
wells with under balanced drilling operations. Multi-component (complete
package) under balanced drilling operations are found in the Middle East, Latin
America, Western Canada and other areas. Under balanced drilling shortens the
time required to drill a well, and enhances production by minimizing formation
damage. The older, depleted, low permeability reservoirs in many areas of the
Western United States are particularly good applications. We expect the market
to continue to grow. Where possible, we purchase equipment from a number of
suppliers and at auctions on an opportunistic basis for our compressed air
drilling sector. The equipment provided by these suppliers is customized and
often times overhauled in order to improve performance. In other instances,
equipment must be made to order. As a result of purchasing the majority of its
air compression equipment at auction, we are not significantly dependent upon
any one supplier for compressed air drilling equipment. Our compressed air
drilling sector is not materially dependent upon the ownership of any patents,
trademarks, franchises or other concessions.
OTHER SERVICES
Effective September 1, 2004, we acquired 100% of the outstanding stock of Safco
for $1.0 million. Safco leases "hevi-wate" spiral drill pipe and provides
related oilfield services to oil and gas exploration and development companies.
7
Effective December 1, 2004, we acquired Downhole for approximately $1.1 million
in cash, 568,466 shares of common stock and assumption of approximately $950,000
of debt. Downhole is headquartered in Midland, Texas, and provides economical
and effective chemical treatments to wells by inserting small diameter,
stainless steel coiled tubing into producing oil and gas wells.
Downhole uses a fleet of 10 service units to install tubing into the existing
tubing or casing of a well up to depths of approximately 20,000 feet. Chemicals
are injected through the tubing to targeted zones. The result is improved
production from treatment of downhole corrosion, scale, paraffin and salt
build-up in flowing wells. Natural gas wells with low bottom pressures can
experience fluid accumulation in the tubing and well bore. This injection system
can inject a foaming agent which lightens the fluids allowing them to flow out
of the well. Additionally, corrosion inhibitors can be introduced to reduce
corrosion in the well.
We do not provide the chemicals injected into the well. We sell or rent the
tubing and charge a fee for its installation, servicing and removal, which
includes the crew and associated equipment. We have 8 units operating in Texas,
one in Mexico and one in the Middle East under a services agreement with a
multinational oil company. There are three other significant competitors in the
market. These include Weatherford, which we believe has five units, and two
private companies, Capcoil Tubing Services, Inc. and Dyna-Coil, which we believe
have approximately 25 units in total.
We believe the use of chemical injection services such as those provided by
Downhole has significant growth potential. For the 11 months ended November 30,
2004, immediately prior to the acquisition, Downhole had revenues of
approximately $4.8 million, and had revenues of $3.8 million for the 12 months
ended December 31, 2003. We plan to further expand the presence of Downhole in
the international markets and in the domestic oil and gas industry through joint
marketing efforts with our other business segments. In addition, we believe the
acquisition of Downhole will provide us a platform to facilitate offering other
services to the production services segment of the energy industry. These
services may be developed internally or obtained through acquisition of other
production services companies.
The operations of Safco and Downhole have been aggregated into our Other
Services segment. This segment had revenues of $987,000 and a loss from
operations of $67,000 for the period ended December 31, 2004.
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 the worldwide
supply and demand for oil and the domestic supply and demand for natural gas.
The peaks and valleys of demand 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. The
increased capital expenditures also ultimately result in greater production,
which, historically, has resulted in reduced prices.
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 we believe was
largely a function of the U.S. recession, a warm winter in that period 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 natural gas inventory levels. Demand
for our services was strong throughout 2003 and 2004. Management believes demand
will remain strong throughout 2005 due to high oil prices and increased demand
and declining production costs for natural gas as compared to other energy
sources. Because of these market fundamentals for natural gas, management
believes the long-term trend of activity in the oilfield services market is
favorable; however, these factors could be more than offset by other
developments affecting the worldwide supply and demand for oil and natural gas
products.
CUSTOMERS
Our customers have primarily been the major and independent oil and gas
companies operating in the U.S. and Mexico. In 2004, Matyep in Mexico
represented 11.0.% of our consolidated revenues and Burlington Resources Inc.
represented 10.1%. In 2003, Matyep, Burlington Resources Inc. and El Paso Energy
Corporation represented 10.1%, 11.1% and 13.8%, respectively, of our revenues.
Our inability to replace our larger existing customers if not offset by sales to
new or other existing customers could have a material adverse effect on our
operations.
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.
BACKLOG
We do not have a significant backlog of orders because our customers utilize our
services on an as-needed basis without significant on-going commitments.
8
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 whom 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, 2004, we had 261 employees.
EXECUTIVE OFFICERS
The names of our current executive officers, and certain information about them,
are set forth below. Subject to the terms of certain written employment
agreement, our officers serve at the will of our board of directors.
NAME AGE POSITION
Munawar H. Hidayatallah 60 Munawar H. Hidayatallah has served as our Chairman of the board of
directors and Chief Executive Officer since May 2001, and was President
from May 2001 through February 2003. Mr. Hidayatallah was Chief Executive
Officer of OilQuip Rentals, Inc., which merged with us in May 2001, from
its formation in February 2000 until the date of the merger. From
December 1994 until August 1999, Mr. Hidayatallah was the Chief Financial
Officer and a director of IRI International, Inc., which was acquired by
National Oilwell, Inc. in early 2000. IRI International, Inc.
manufactured, sold and rented oilfield equipment to the oilfield and
natural gas exploration and production sectors. From August 1999 until
February 2000, Mr. Hidayatallah worked as a consultant to IRI
International, Inc. and Riddell Sports Inc.
David Wilde 50 Mr. Wilde became our President and Chief Operating Officer in February
2005. David Wilde was President and Chief Executive Officer of Strata
from October 2003 through February 2005 and served as Strata's President
and Chief Operating Officer from July 2003 until October 2003. From
February of 2002 until July 2003 Mr. Wilde was our Executive Vice
President of Sales and Marketing. From May 1999 until February 2002, Mr.
Wilde served as Sales and Operations Manager of Strata's Gulf Coast
Division. From March 1998 until May 1999 Mr. Wilde was Sales Manager at
Strata. Mr. Wilde has more than 25 years experience in the drilling
sector of the oil service industry and 21 years experience in the
directional and horizontal drilling and rental tool business.
Victor M. Perez 52 Mr. Perez became our Chief Financial Officer in August 2004. From July
2003 to July 2004 Mr. Perez was a private consultant engaged in corporate
and international finance advisory. From February 1995 to June 2003 Mr.
Perez was Vice President and Chief Financial Officer of Trico Marine
Services, Inc. a marine transportation company serving the offshore
energy industry. Mr. Perez was Vice President of Corporate Finance with
Offshore Pipelines, Inc., an oilfield marine construction company, from
October 1990 to January 1995 when that company merged with a subsidiary
of McDermott International. Mr. Perez also has 15 years experience in
international and energy banking. Mr. Perez is a director of Safeguard
Security Holdings.
Todd C. Seward 42 Mr. Seward has served as our Chief Accounting Officer since September
2002 and from October 2001 through September 2002 served as our Corporate
Controller. Mr. Seward was Secretary from May 2004 through January 2005.
From February 2000 to October 2001, Mr. Seward was an Executive
Accounting Consultant where he served as a Regional Controller for Cemex,
the world's third largest cement company. From February 1997 until
February 2000, Mr. Seward served as Director of Finance for APS Holdings,
Inc., a $750 million consumer branded auto parts distributor and
reseller. Mr. Seward has 16 years of experience in all aspects of
accounting, financial and treasury management.
9
Terrence P. Keane 52 Terrence P. Keane has served as President and Chief Executive Officer of
AirComp, LLC since its formation on July 1, 2003, and served as a
consultant to M-I, LLC in the area of compressed air drilling from July
2002 until June 2003. From March 1999 until June 2002, Mr. Keane served
as Vice President and General Manager - Exploration, Production and
Processing Services for Gas Technology Institute where Mr. Keane was
responsible for all sales, marketing, operations and research and
development of the exploration, production and processing business unit.
For more than ten years prior to joining the Gas Technology Institute,
Mr. Keane had various positions with Smith International, Inc., Houston
Texas, most recently in the position of Vice President Worldwide
Operations and Sales for Smith Tool.
David K. Bryan 47 Mr. Bryan has served as President and Chief Operating Officer of Strata
since February 2005. Mr. Bryan served as Vice President of Strata from
June 2002 until February 2005. From February 2002 to June 2002 he served
as General Manager, and from May 1999 through February 2002, Mr. Bryan
served as Operations Manager of Strata. Mr. Bryan has been involved in
the directional drilling sector since 1979.
Theodore F. Pound III 50 Theodore F. Pound III became our general counsel in October 2004 and was
elected Secretary in January 2005. For ten years prior to joining us, he
was in private practice at the law firm of Wilson, Cribbs & Goren, P.C.
in Houston Texas. Mr. Pound has practiced law for more than twenty-four
years. Mr. Pound has served as lead counsel to the Company in each of its
acquisitions beginning in 2001.
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.
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 possible that an environmental claim could arise
that could cause our business to suffer. We do not anticipate any material
expenditures to comply with environmental regulations affecting our operations.
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, "Legal Proceedings").
INTELLECTUAL PROPERTY RIGHTS
Except for our relationships with our customers and suppliers described above,
we do not own any patents, trademarks, licenses, franchises or concessions which
we believe are material to the success of our business. As part of our overall
corporate strategy to focus on our core business of providing services to the
oil and gas industry and to increase stockholder value, we are investigating the
sale or license of our worldwide rights to trade names and logos for products
and services outside the energy sector.
ITEM 2. PROPERTIES
To support our compressed air drilling operations, we lease an approximately
6,000 square foot facility in Grand Junction, Colorado, which includes offices,
shop and a warehouse; an approximately 10,000 square foot facility in
Farmington, New Mexico, which includes offices, shop and a warehouse, a yard in
Fort Stockton, Texas and a 4,000 square foot shop in Carlsbad, New Mexico.
To support our casing and tubing operations, we own facilities located in
Edinburg, Texas on approximately 8 acres. One building has approximately 5,000
square feet 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, we lease yards located in Victoria and Pearsall, Texas. The yard in
Pearsall is owned by Jens Mortensen, who is one of our directors.
10
To support our directional drilling operations, we lease office space and a shop
in Houston, Texas. To support our production services operations we lease office
space and shops located in Midland and Corpus Christi, Texas.
We maintain our principal executive offices in Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS
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.
A number of claimants have asserted claims for environmental cleanup costs that
had pre-petition triggers, and in each event, the A-C Reorganization Trust,
under its mandate to provide Plan of Reorganization implementation services to
us, has responded to such claims, generally, by informing claimants that our
liabilities were discharged in the bankruptcy. We have been informed by the
Reorganization Trust that in the past each of such claims has been
disposed of without material cost. 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 to 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.
We have been advised that the A-C Reorganization Trust will be terminated and
its assets distributed during 2005, and as a result we will assume the
responsibility of responding to claimants and to the EPA and state agencies
previously undertaken by the A-C Reorganization Trust. However, we have been
advised by the A-C Reorganization Trust that its cost of providing these
services has not been material in the past, and therefore we do not expect to
incur material expenses as a result of responding to such requests. 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.
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 all
such claims. However, there can be no assurance that we will not be subject to
material product liability claims in the future.
Mountain Compressed Air, Inc. was a defendant in an action brought in April 2004
in the District Court of Mesa County, Colorado, by the former owner of Mountain
Air Drilling Service Company, Inc. from whom Mountain Compressed Air, Inc.
acquired assets in 2001. The plaintiff sought to accelerate payment of the note
issued in connection with the acquisition and sought $1.9 million in damages
(representing principal and interest due under the Note), on the basis that
Mountain Compressed Air has failed to provide financial statements required by
the note. We agreed to settle the action by paying to the plaintiff $1.0 million
in cash, and agreeing to pay to the plaintiff an additional $350,000 on June 1,
2006, and an additional $150,000 on June 1, 2007, in settlement of all claims.
The Company is involved in various other legal proceedings in the ordinary
course of businesses. The legal proceedings are at different stages; however,
the Company believes that the likelihood of material loss relating to any such
legal proceeding is remote.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 29, 2004 at the 2004 Annual Meeting of Stockholders (the "Annual
Meeting") the stockholders approved an amendment to the 2003 Incentive Stock
Plan to increase the number of shares with respect to which options and other
awards may be granted under the plan from 1.2 million to 2.4 million. Over 75%
of the stock present, in person or by proxy, approved the amendment to the plan.
At the Annual Meeting, stockholders approved the change of the company's name to
"Allis-Chalmers Energy Inc." The name change was approved by more than a
majority of the outstanding shares of common stock. In addition, we disclosed
such proposal in our proxy statement filed with the Commission. The name change
became effective in January 2005.
At the Annual Meeting, stockholders approved the election of all members of the
board of directors to serve for a term of one year and until their successors
are elected and take office.
At the Annual Meeting, stockholders ratified the appointment of UHY Mann
Frankfort Stein & Lipp CPAs, LLP as our independent public accountants to audit
our financial statements for fiscal year ending December 31, 2004. The following
table sets forth the votes for, against and abstaining, and broker non-votes
with respect to each director and each other proposal considered at the annual
meeting.
ELECTION OF DIRECTORS Votes: 6,145,016
BROKER
NAME DIRECTOR SINCE FOR AGAINST ABSTAIN NON-VOTES
- -------------------------- -------------- --------- ------- ------- ---------
David A. Groshoff October 1999 6,144,996 0 20 0
Munawar H. Hidayatallah May 2001 6,144,577 0 439 0
John E. McConnaughy, Jr. May 2004 6,144,992 0 24 0
Jens H. Mortensen February 2003 6,144,582 0 434 0
Robert E. Nederlander May 1989 6,144,572 0 444 0
James W. Spann (1) February 2002 6,144,581 0 435 0
Leonard Toboroff May 1989 6,144,577 0 439 0
Thomas O. Whitener, Jr. February 2002 6,144,582 0 434 0
Christina E. Woods (1) March 2004 6,144,581 0 435 0
Proposal to Amend 2003 Incentive Stock Plan 5,266,861 2,398 875,757 0
Proposal to Amend Certificate of Incorporation to Change Names 6,144,991 11 14 0
Proposal to Ratify Selection of Independent Public Accountants 6,144,909 11 96 0
(1) Christina E. Woods and James W. Spann resigned as directors effective
January 14, 2005. Ms. Woods was a member of the Audit Committee of the Board of
Directors.
On January 14, 2005, our Board of Directors elected Jeffrey R. Freedman, Victor
F. Germack and Thomas E. Kelly as directors to fill vacancies on the Board of
Directors. Mr. Kelly has been appointed to the Compensation Committee of the
Board of Directors, replacing Saeed M. Sheikh, who resigned as a director in
December 2004, and Mr. Germack has been appointed to the Audit Committee of the
Board of Directors, replacing Ms. Woods.
We have a Stockholders Agreement dated April 2, 2004, whereby Energy Spectrum
Partners, LP has the right to designate three nominees to the Board of Directors
as long as Energy Spectrum holds certain amounts of Common Stock of Company. Two
of Energy Spectrum's nominees resigned effective January 14, 2005 (See Item
5.02(b)of Form 8-K dated January 21, 2005). Energy Spectrum has notified us that
it will designate only one of director unless and until it notifies us of its
determination to reassert its right to designate two additional directors.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE INFORMATION
Since September 13, 2004, our common stock has been traded on the American Stock
Exchange under the symbol "ALY." Prior to September 13, 2004, our common stock
was quoted on the OTC Bulletin Board and traded only sporadically. The following
table sets forth, for periods prior to September 13, 2004, volume and high and
low bid information for the common stock, as determined from sporadic quotations
on the Over-the-Counter Bulletin Board, during the periods indicated, and for
periods since September 13, 2004, volume and high and low sale prices of our
common stock on the American Stock Exchange. The quotations set forth below for
periods prior to September 13, 2004 reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Effective June 10, 2004, we effected a one-to-five reverse stock split. Share
prices for periods prior to June 10, 2004, set forth below have been adjusted to
give retroactive effect to the reverse stock split.
CALENDAR QUARTER HIGH LOW VOLUME
- -------------------------------------------------------------------------------
2002 (# OF SHARES)
First Quarter......................... 6.25 2.00 47,960
Second Quarter........................ 10.00 3.75 6,220
Third Quarter......................... 7.00 3.75 3,080
Fourth Quarter........................ 5.05 .60 48,620
2003
First Quarter......................... 4.50 .55 7,660
Second Quarter........................ 5.00 2.25 6,260
Third Quarter......................... 4.50 2.60 4,300
Fourth Quarter........................ 6.00 2.60 12,804
2004
First Quarter......................... 10.05 2.55 13,262
Second Quarter........................ 10.25 4.25 36,223
Third Quarter......................... 9.75 4.75 130,000
Fourth Quarter........................ 5.40 3.25 1,315,100
2005
First Quarter ........................ 7.25 3.64 1,362,400
Second Quarter (through April 12, 2005) 5.14 4.45 70,300
HOLDERS. As of April 12, 2005, there were approximately 2,100 holders of record
of our common stock. On April 12, 2005, the last sale price for our common stock
reported on the American Stock Exchange was $4.70 per share.
RECENT SALES OF UNREGISTERED SECURITIES. In 2004, the Company effected offerings
of its common stock that were exempt from the Securities Act of 1933 as set
forth below. All references to numbers of shares below have been adjusted to
give retroactive effect to a one-to-five reverse stock split effected on June
10, 2004.
On December 10, 2004, we issued 568,466 shares of our common stock in connection
with the acquisition of Downhole Injection Services, LLC. The transaction was
exempt from registration under the Securities Act of 1933 pursuant to Rule 506
of Regulation D of the Securities and Exchange Commission promulgated pursuant
to Section 4(2) of the Act.
On May 24, 2004, we issued 3,000 shares of our common stock to Jeffrey R.
Freedman upon the exercise of a warrant, for an exercise price of $2,250 or
$0.75 per share. The transaction was exempt from the registration under the
Securities Act of 1933 pursuant to Section 4(2) of the Act.
On September 30, 2004, we issued 1,300,000 shares of our common stock to Jens H.
Mortensen, a director, pursuant to a merger between Jens' Oilfield Service, Inc.
and a newly formed subsidiary of the Company. As a result of the merger, we
acquired Mr. Mortensen's 19% interest and now own 100% of Jens' Oilfield
Service, Inc. The transaction was exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) of the Act.
In September 2004, we completed a private placement of 1,956,634 shares of our
common stock to the following investors: Basic Energy Limited; Milton H. Dresner
Revocable Living Trust; Joseph S. Dresner; J. Steven Emerson Roth IRA; Waverly
Limited Partnership; Rosebury, L.P.; Meteoric, L.P.; Barbara C. Crane; Bristol
Investment Fund, Ltd.; L.H. Schmieding; Meadowbrook Opportunity Fund LLC; and
Kenneth Malkes. Pursuant to the terms of a stock purchase agreement dated August
10, 2004, we sold to the selling stockholders an aggregate of 1,956,634 shares
of common stock at a price per share of $3.00. The transaction was exempt from
registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation
D of the Securities and Exchange Commission promulgated pursuant to Section 4(2)
of the Act.
13
In August 2004 we completed a private placement of 3,504,667 shares of our
common stock to the following investors: J. Steven Emerson Roth IRA, Bear
Stearns Securities Corp., Custodian; J. Steven Emerson IRA RO II, Bear Stearns
Securities Corp., Custodian; Emerson Partners, Bear Stearns Securities Corp,
Custodian; GSSF Master Fund, LP; Gerald Lisac IRA C/O Union Bank of California,
Custodian; May Management, Inc.; Micro Cap Partners, L.P.; MK Employee Early
Stage Fund, L.P.; Morgan Keegan Early Stage Fund, L.P.; Palo Alto Global Energy
Fund, L.P.; RRCM Onshore I, L.P.; Earl Schatz, IRA C/O Union Bank of California,
Custodian; Strauss Partners, L.P., Strauss-GEPT Partners, LP;; UBTI Free, L.P.;
U.S. Bank NA as Custodian of the Holzman Foundation; U.S. Bank NA as Trustee of
the Reliable Credit Association Inc. Pension & Trust; and U.S. Bank NA as
Trustee of the Reliable Credit Association Inc. Profit Sharing Plan & Trust.
Pursuant to the terms of a stock purchase agreement dated September 29, 2004, we
sold to the selling stockholders an aggregate of 3,504,667 shares of common
stock at a price per share of $3.00. The transaction was exempt from
registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation
D of the Securities and Exchange Commission promulgated pursuant to Section 4(2)
of the Act.
In May 2004, we issued a warrant to purchase 20,000 shares of our common stock
at an exercise price of $4.65 per share to Jeffrey Freedman in consideration of
financial advisory services to be provided by Mr. Freedman pursuant to a
consulting agreement. The warrants expire in May 2009. The transaction was
exempt from registration under the Securities Act of 1933 pursuant to Section
4(2) of the Act.
In April 2004, we completed a private placement of 620,000 shares of common
stock and warrants to purchase 800,000 shares of common stock to the following
investors: Christopher Engel; Donald Engel; the Engel Investors Defined Benefit
Plan; RER Corp., a corporation wholly-owned by director Robert Nederlander; and
Leonard Toboroff, a director. Each investor is a selling stockholder. The
investors invested $1,550,000 in exchange for 620,000 shares of common stock for
a purchase price equal to $2.50 per share, and invested $450,000 in exchange for
warrants to purchase 800,000 shares of common stock at an exercise price of
$2.50 per share, expiring on April 1, 2006. Concurrently with this transaction,
Energy Spectrum Partners LP, the holder of all outstanding shares of our Series
A Preferred Stock, converted all such shares, including accrued dividend rights,
into 1,718,090 shares of common stock. The transaction was exempt from
registration under the Securities Act of 1933 pursuant to Rule 506 of Regulation
D of the Securities and Exchange Commission promulgated pursuant to Section 4(2)
of the Act.
In April 2004 we issued warrants to purchase 20,000 shares of common stock to
Wells Fargo Credit, Inc., in connection with the extension of credit by Wells
Fargo Credit, Inc. The Warrants are exercisable at $0.75 per share and expire in
April 2014. The transaction was exempt from registration under the Securities
Act of 1933 pursuant to Section 4(2) of the Act.
In March 2004, we issued a warrant to purchase 340,000 shares of our common
stock at an exercise price of $2.50 per share to Morgan Joseph & Co., Inc. in
consideration of financial advisory services to be provided by Morgan Joseph
pursuant to a consulting agreement. The warrants expire in February 2009. The
transaction was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) of the Act.
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.
Our credit facilities restrict our ability to pay dividends on our common stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2004 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans.
Number of securities
securities to be Weighted
issued upon average Number of securities
exercise of price of remaining available
outstanding outstanding for future issuance
options, warrants options, warrants under equity
PLAN CATEGORY and rights and rights compensation plans
- -------------------------------- --------------------- ----------------- ------------------
Equity compensation plans
approved by security holders 1,215,000 $2.94 1,185,000
Equity compensation plans not
approved by security holders 404,800 $2.05 --
--------- ----- ---------
Total 1,619,800 $2.72 1,185,000
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS:
These plans comprise the following:
In 1999 and 2000, the Board compensated former and continuing Board members who
had served from 1989 to March 31, 1999 without compensation by issuing
promissory notes totaling $325,000 and by granting stock options to these same
individuals. Options to purchase 4,800 shares of common stock were granted with
an exercise price of $13.75. These options vested immediately and expire in
March 2010. None of these options have been exercised.
14
On May 31, 2001, our Board granted to one of our directors, Leonard Toboroff, an
option to purchase 100,000 shares of common stock at $2.50 per share, expiring
in October 2011. The option was granted for services provided by Mr. Toboroff to
OilQuip prior to the merger of OilQuip Rentals, Inc. and the Company, including
providing financial advisory services, assisting in OilQuip's capital structure
and assisting OilQuip in finding strategic acquisition opportunities. None of
these options have been exercised.
In February 2001, we issued warrants to purchase 233,000 shares of our common
stock at an exercise price of $0.75 per share and warrants to purchase 67,000
shares of our common stock at an exercise price of $5.00 per share in connection
with a subordinated debt financing. The warrants to purchase 233,000 shares were
redeemed during December 2004 for $1.5 million. The remaining warrants are
currently outstanding and expire in February 2011.
15
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information for each of the five
years ended December 31, 2004, has been derived from our audited consolidated
financial statements and related notes. This information is only a summary and
should be read in conjunction with material contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
includes a discussion of factors materially affecting the comparability of the
information presented, and in conjunction with our financial statements included
elsewhere. As discussed in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operation," we have during the past four
years effected a number of business combinations and other transactions that
materially affect the comparability of the information set forth below.
Year Ended December 31,
(in thousands, except per share data)
2004 2003 2002 2001 2000
-------- ---------- --------- --------- -------
(Restated)
STATEMENT OF OPERATIONS DATA
Revenues $ 47,726 $ 32,724 $ 17,990 $ 4,796 $ --
Income (loss) from operations $ 4,227 $ 2,625 $ (1,072) $ (1,433) $ (627)
Net income (loss) from continuing
operations $ 888 $ 2,927 $ (3,969) $ (2,273) $ (627)
Net income (loss) attributed to
common stockholders $ 764 $ 2,271 $ (4,290) $ (4,577) $ (627)
Per Share Data:
Net Income (loss) from continuing
operations per common share:
Basic $ 0.10 $ 0.58 $ (1.14) $ (2.88) $(7.84)
Diluted $ 0.07 $ 0.39 $ (1.14) $ (2.88) $(7.84)
Weighted average number of common
shares outstanding:
Basic 7,930 3,927 3,766 790 80
Diluted 11,959 5,761 3,766 790 80
CONSOLIDATED BALANCE SHEET DATA
December 31,
(in thousands, except per share data)
2004 2003 2002 2001 2000
-------- ---------- -------- -------- ------
(Restated)
Total Assets $ 80,192 $ 53,662 $ 34,778 $ 12,465 $2,360
Long-term debt classified as:
Current $ 5,541 $ 3,992 $ 13,890 $ 1,023 $ --
Long-Term $ 24,932 $ 28,241 $ 7,331 $ 6,833 $ --
Redeemable convertible
Preferred stock -- $ 4,171 $ 3,821 $ -- $ --
Stockholders' Equity $ 35,109 $ 4,541 $ 1,009 $ 1,250 $2,348
Book value per share $ 4.43 $ 1.16 $ 0.27 $ 1.58 $29.35
16
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
SELECTED HISTORICAL FINANCIAL DATA AND OUR ACCOMPANYING FINANCIAL STATEMENTS AND
THE NOTES TO THOSE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS DOCUMENT. THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THAT REFLECT OUR PLANS,
ESTIMATES AND BELIEFS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED ABOVE UNDER "RISK
FACTORS."
OVERVIEW OF OUR BUSINESS
We provide services and equipment to the oil and gas drilling industry. Our
customers are principally small independent and major oil and gas producers
engaged in the exploration and development of oil and gas wells. Our operations
are conducted principally in the Texas Gulf Coast, offshore in the United States
Gulf of Mexico, West Texas, and the Rocky Mountain regions of New Mexico,
Colorado, and Oklahoma. We also operate in Mexico through a Mexican partner.
We provide casing and tubing handling services and drilling services, which
includes our directional drilling services segment and compressed air drilling
services segment. Our casing and tubing services segment supplies specialized
equipment and trained operators to install casing and tubing, change out drill
pipe and retrieve production tubing for both onshore and offshore drilling and
workover operations. Our directional drilling operations provide directional,
horizontal and "measure while drilling" services to oil and gas companies
operating both onshore and offshore in Texas and Louisiana. Our compressed air
drilling segment provides compressed air and related products and services for
the air drilling, workover, completion, and transmission segments of the oil,
gas and geothermal industries. As a result of two acquisitions completed in
September and December of 2004, we are also engaged in providing oilfield rental
tools, principally renting spiral drill pipe to oil and gas operators and
providing downhole production services. Our production services business
provides techniques, chemical processes and related services to increase
production from existing wells. The operations from the rental tools and
production services have been aggregated into the Other Services segment as of
December 31, 2004. We plan to broaden the geographic regions in which we operate
and to expand the types of services and equipment we provide to the oil and gas
drilling industry.
We derive operating revenues from rates per day and rates per job that we charge
for the labor and equipment required to provide a service. The rates vary widely
from project to project depending upon the scope of services we are asked to
provide. The price we charge for our services depends upon several factors,
including the level of oil and gas drilling activity in the particular
geographic regions in which we operate and the competitive environment.
Contracts are awarded based on price, quality of service and equipment, and
general reputation and depth of operations and management personnel. The demand
for drilling services has historically been volatile and is affected by the
capital expenditures of oil and gas exploration and development companies, which
in turn are impacted by the prices of oil and natural gas, or the expectation
for the prices of oil and natural gas.
The number of working drilling rigs is an important indicator of activity levels
in the oil and gas industry, typically referred to as the "rig count." The rig
count in the U.S. increased from 862 as of December 31, 2002 to 1,126 on
December 31, 2003, according to the Baker Hughes rig count. According to the
Baker Hughes rig count, the directional and horizontal rig counts increased from
283 as of December 31, 2002 to 381 on December 31, 2003, which accounted for
32.8% and 33.8% of the total U.S. rig count, respectively. As of December 31,
2004, this trend has continued, with directional and horizontal rigs climbing to
440, which was 35.4% of the 1,243 total U.S. rig count on such date.
Our operating expenses represent all direct and indirect costs associated with
the operation and maintenance of our equipment. The principal elements of these
costs are direct and indirect labor and benefits, repairs and maintenance of our
equipment, insurance, equipment rentals and fuel. Operating expenses do not
necessarily fluctuate in proportion to changes in revenues because we have a
fixed base of inventory of equipment and facilities to support our operations,
and we may also seek to preserve labor continuity to market our services and
maintain our equipment.
Prior to May 2001, we operated primarily through Houston Dynamic Services, Inc.,
which conducted a machine repair business. 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 in which we acquired 100% of the capital stock of OilQuip
Rentals, Inc., which owned Mountain Compressed Air, Inc., which provided
compressed air drilling services. In December 2001, we disposed of Houston
Dynamic Service, Inc., and in February 2002, we acquired substantially all of
the capital stock of Strata Directional Technology, Inc. and approximately 81%
of the capital stock of Jens' Oilfield Service, Inc. In July 2003, through
Mountain Compressed Air, we entered into a limited liability company operating
agreement with M-I L.L.C., a joint venture between Smith International and
Schlumberger N.V. to form a Texas limited liability company named AirComp LLC.
We own 55% and M-I owns 45% of AirComp. We have consolidated AirComp into our
financial statements beginning with the quarter ending September 30, 2003. In
September 2004, we acquired the remaining 19% of Jens' Oilfield Service, Inc. In
September 2004 we acquired Safco Oil Field Products, Inc. In November 2004
AirComp acquired substantially all of the assets of Diamond Air Drilling
Services, Inc. and Marquis Bit Co., L.L.C. In December 2004, we acquired
Downhole Injection Services, LLC.
We effected a reverse stock split on June 10, 2004. As a result of the reverse
stock split, every five shares of our common stock were combined into one share
of common stock. The reverse stock split reduced the number of shares of
outstanding common stock from 31,393,789 to approximately 6,276,015 and reduced
the number of stockholders from 6,070 to 2,140. Prior to September 13, 2004, our
common stock traded on the OTC Bulletin Board. On September 13, 2004, our common
stock began trading on the American Stock Exchange.
17
RESTATEMENT
In connection with the formation of AirComp in 2003, the Company and M-I
contributed assets to AirComp in exchange for a 55% interest and 45% interest,
respectively, in AirComp. We originally accounted for the formation of AirComp
as a joint venture, but in February 2005 determined that the transaction should
have been accounted for using purchase accounting pursuant to Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SEC
Staff Accounting Bulletin ("SAB") No. 51 "Accounting for Sales of Stock by a
Subsidiary". Consequently, we have restated our financial statements for the
year ended December 31, 2003, as described in Note 2 to the Consolidated
Financial Statements for the year ended December 31, 2004. All financial
statements for 2003 and for the first three quarters of 2004 presented in this
Form 10K have been restated.
RESULTS OF OPERATIONS
On February 6, 2002, Allis-Chalmers acquired 81% of the outstanding stock for
Jens' Oilfield Service, Inc., which supplies specialized equipment and
operations to install casing and production tubing required to drill and
complete oil and gas wells. On February 6, 2002, we also purchased substantially
all the outstanding common stock and preferred stock of Strata Directional
Technology, Inc., which provides directional and horizontal drilling services
for specific targeted reservoirs that cannot be reached vertically. The results
from our casing and tubing services and directional drilling services are
included in our operating results from February 1, 2002.
In July 2003, through our subsidiary Mountain Air, we entered into a limited
liability company operating agreement with a division of M-I L.L.C., a joint
venture between Smith International and Schlumberger N.V. to form AirComp. We
own 55% and M-I owns 45% of AirComp. We have consolidated AirComp into our
financial statements beginning with the quarter ending September 30, 2003.
In September 2004, we acquired the remaining 19% of Jens' Oilfield Service, Inc.
and we acquired Safco Oil Field Products, Inc. In November 2004, AirComp
acquired substantially all of the assets of Diamond Air Drilling Services, Inc.
and Marquis Bit Co., LLC, and in December 2004, we acquired Downhole Injection
Services, LLC. We consolidated the results of these acquisitions from the day
they were acquired.
COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
Our revenues for the year ended December 31, 2004 were $47.7 million, an
increase of 45.9% compared to $32.7 million for the year ended December 31,
2003. Revenues increased due to increased demand for our services due to the
general increase in oil and gas drilling activity. Revenues increased most
significantly at our directional drilling services segment due to the addition
of operations and sales personnel, which increased our capacity and market
presence. Additionally, our compressed air drilling services revenues in 2004
increased compared to the 2003 year due to the inclusion, for a full year in
2004, of the business contributed by M-I in connection with the formation of
AirComp in July 2003 and the acquisition of Diamond Air and Marquis Bit
(collectively "Diamond Air") on November 1, 2004. We have consolidated AirComp
into our financial statements beginning with the quarter ended September 30,
2003. Also contributing to the increase in revenues was an increase in Mexico
revenues at our casing and tubing services segment, which was offset in part by
a decrease in domestic revenues for this segment due to increased competition
for casing and tubing services in South Texas. Finally in the second half of
2004, we acquired Safco, our rental tools subsidiary, as of September 1, and as
of December 1, 2004, we acquired Downhole, our production services subsidiary.
Our gross profit for the year ended December 31, 2004 increased 42.5% to $12.4
million, or 26.0% of revenues, compared to $8.7 million, or 26.6 % of revenues
for the year ended December 31, 2003, due to the increase in revenues in the
directional drilling services segment, the compressed air drilling services
segment and from Mexico, which more than offset lower revenues and higher costs
in our domestic casing and tubing segment. Our cost of revenues consists
principally of our labor costs and benefits, equipment rentals, maintenance and
repairs of our equipment, depreciation, insurance and fuel. Because many of our
costs are fixed, our gross profit as a percentage of revenues is generally
affected by our level of revenues.
General and administrative expense was $8.0 million in the 2004 period compared
to $6.2 million for 2003. General and administrative expense increased in 2004
due to additional expenses associated with the inclusion of AirComp for a full
year, the acquisitions completed in the second half of 2004, and the hiring of
additional sales and administrative personnel at each of our subsidiaries.
General and administrative expense also increased because of increased
professional fees and other expenses related to our financing and acquisition
activities, including the listing of our common stock on the American Stock
Exchange, and increased corporate accounting and administrative staff. As a
percentage of revenues, general and administrative expenses were 16.7% in 2004
and 18.8% in 2003.
Depreciation and amortization was $3.6 million for the year ended December 31,
2004 compared to $2.9 million for the year ended December 31, 2003 due to the
inclusion of AirComp for a full year and the increase in our assets resulting
from our capital expenditures and the acquisitions completed in 2004.
Income from operations for the year ended December 31, 2004 totaled $4.2
million, a 61.5% increase over the $2.6 million in income from operations for
the prior year, reflecting the increase in our revenues and gross profit, offset
in part by an increase in general and administrative expense and amortization.
Income from operations in the year ended December 31, 2004 includes $188,000 in
additional accrued expense for post-retirement medical benefits pursuant to the
Plan of Reorganization. The increase in this accrued expense was based on the
present value of the expected retiree benefit obligations as determined by a
third party actuary. Income from operations for the 2003 year includes income of
$99,000 which resulted from a reduction in projected post-retirement benefits
based on the third party actuary at the end of 2003. (Please refer to Note 3 -
"Pension and Post Retirement Benefit Obligations").
18
Our interest expense increased to $2.8 million in 2004, compared to $2.5 million
for the prior year, in spite of the decrease in out total debt. Interest expense
in 2004 includes $359,000 in warrant put amortization including the retirement
of warrants in connection with the prepayment, in December 2004, of our $2.4
million 12.0% subordinated note. Interest expense in 2003 includes $216,000 in
connection with the acceleration, in 2003, of the amortization of a put
obligation related to subordinated debt at Mountain Compressed Air. The
subordinated debt including accrued interest was paid off in connection with the
formation of AirComp in 2003.
Minority interest in income of subsidiaries for the 2004 year was $321,000
compared to $343,000 for the 2003 year. The increase in net income at AirComp
was offset in part by the elimination of minority interest in Jens', which was
19%-owned by director Jens Mortensen until September 30, 2004.
We had net income attributed to common stockholders of $764,000 for the year
ended December 31, 2004 compared to net income attributed to common stockholders
of $2.3 million for the year ended December 31, 2003. In 2003, we recognized a
non-operating gain on sale of an interest in a subsidiary in the amount of $2.4
million in connection with the formation of AirComp, and recognized a one-time
gain of $1.0 million in the third quarter of 2003 as a result of settling a
lawsuit against the former owners of Mountain Air Drilling.
The following table compares revenues and income from operations for each of our
business segments for the years ended December 31, 2004 and December 31, 2003.
Income from operations consists of our revenues less cost of revenues, general
and administrative expenses, and depreciation and amortization:
Revenues Income (Loss) from Operations
------------------------------------- ----------------------------------
2004 2003 Change 2004 2003 Change
----------- ---------- ---------- ----------- ----------- ---------
(in thousands)
Casing and tubing services $ 10,391 $ 10,037 $ 354 $ 3,217 $ 3,628 $ (411)
Directional drilling services 24,787 16,008 8,779 3,061 1,103 1,958
Compressed air drilling services 11,561 6,679 4882 1,169 17 1,152
Other services 987 -- 987 (67) -- (67)
General corporate -- -- -- (3,153) (2,222) (931)
----------- ---------- ---------- ----------- ----------- ---------
Total $ 47,726 $ 32,724 $ 15,002 $ 4,227 $ 2,526 $ 1,701
=========== ========== ========== =========== =========== =========
CASING AND TUBING SERVICES SEGMENT
Revenues for the year ended December 31, 2004 for the casing and tubing services
segment were $10.4 million, an increase of 4.0% from the $10.0 million in
revenues for the year ended December 31, 2003. Revenues from domestic operations
decreased from $6.7 million in 2003 to $5.2 million in the 2004 year as a result
of increased competition in South Texas, resulting in fewer contracts awarded to
us and lower pricing for our services. Revenues from Mexican operations,
however, increased from $3.7 million in 2003 to $5.1 million in the 2004 period
as a result of increased drilling activity in Mexico and the addition of
equipment that increased our capacity. Income from operations decreased by 11.1%
to $3.2 million in 2004 from $3.6 million in 2003. The decrease in this
segment's revenues and operating income is due to the decrease in revenues from
domestic operations and increases in wages and benefits domestically, which was
partially offset by increased revenues from Mexico.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for the year ended December 31, 2004 for our directional drilling
services segment were $24.8 million, an increase of 55.0% from the $16.0 million
in revenues for the year ended December 31, 2003. Income from operations
increased by 181.8% to $3.1 million for the year ended December 31, 2004 from
$1.1 million for 2003. The improved results for this segment are due to the
increase in drilling activity in the Texas and Gulf Coast areas and the addition
of operations and sales personnel which increased our capacity and market
presence. Increased operating expenses as a result of the addition of personnel
were more than offset by the growth in revenues and cost savings as a result of
purchases, in late 2003 and in 2004, of most of the down-hole motors used in
directional drilling. Previously we had leased these motors.
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $11.6 million for the year ended
December 31, 2004, an increase of 73.1% compared to $6.7 million in revenues for
the year ended December 31, 2003. Income from operations increased to $1.2
million in 2004 compared to income from operations of $17,000 in 2003. Our
compressed air drilling revenues and operating income for the 2004 year
increased compared to the prior year due to the inclusion, for a full year in
2004, of the business contributed by M-I, in connection with the formation of
AirComp in July 2003, and the acquisition of Diamond Air as of November 1, 2004.
19
OTHER SERVICES SEGMENT
Revenues for this segment consist of Safco's rental tool business, beginning
September 1, 2004, and Downhole's production services beginning December 1,
2004, the effective date of their respective acquisitions. Revenues for this
segment were $987,000 with a loss from operations of $67,000. It is our plan to
grow in these businesses thereby improving profitability as we increase our
market presence and our critical mass.
COMPARISON OF YEARS ENDED DECEMBER 31, 2003 AND 2002
Revenues for the year ended December 31, 2003 totaled $32.7 million, an increase
of 81.7% from the $18.0 million in revenues for the year ended December 31,
2002. The increase in revenues is due to the general increase in oil and gas
drilling activity and the inclusion of AirComp, our compressed air drilling
venture, beginning in July 2003. The increase in revenues is also due to 2003
being the first full year of revenue contribution from the casing and tubing
services segment and the directional drilling segment, both of which were
acquired in February 2002.
Our gross profit for the year ended December 31, 2003 was $8.7 million, or 26.6%
of revenues, compared to $3.4 million, or 18.9 % of revenues for the year ended
December 31, 2002, due to increased utilization of our equipment and personnel
and increased pricing in each of our business segments due to the increase in
industry activity. Our cost of revenues consists principally of our labor costs
and benefits, equipment rentals, maintenance and repairs of our equipment,
insurance and fuel. Because many of our costs are fixed, our gross profit as a
percentage of revenues is generally affected by our level of revenues. Gross
profit as a percentage of revenues has increased as a result of higher revenues
and better pricing for our services.
General and administrative expenses were $6.2 million, or 18.9% of revenues, in
2003 compared to $3.8 million, or 21.1% of revenues, in 2002. The increase in
general and administrative expenses in absolute terms was due to the inclusion
of general and administrative expenses for AirComp, which created a larger
operation compared to our previous Mountain Air subsidiary, the hiring of
additional sales force and operations personnel due to the improvement in the
oil and gas drilling market, and the inclusion of the operations of our casing
and tubing services and directional drilling services segments for a full year
in 2003.
Depreciation and amortization expenses increased to $2.9 million in 2003
compared to $2.6 million in 2002, due to the formation of AirComp in July 2003,
and the acquisition of our casing and tubing services and directional drilling
services segments in February 2002.
Income from operations for the year 2003 totaled $2.6 million reflecting the
general increase in oil and gas drilling activity and the inclusion of revenues
and operating income contributed by M-I through the formation of AirComp in July
2003. In the comparable period of 2002, we incurred an operating loss of $1.0
million. During the third quarter of 2002, we reorganized 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. We also recorded one-time charges for
costs related to abandoned acquisitions and an abandoned private placement in
the amount of $233,000.
Interest expense increased to $2.5 million in 2003, compared to $2.3 million in
the prior year due to increased debt associated with acquisitions completed in
2002, and debt associated with the formation of AirComp in July 2003.
Minority interest in income of subsidiaries for 2003 was $343,000 compared to
$189,000 in 2002 due to the increase in the net income of our casing and tubing
services subsidiary which until September 30, 2004, was owned 19% by Jens
Mortensen; and the formation, in July 2003, of AirComp, which is owned 45% by
M-I.
In the year ended December 31, 2003 we recorded a one-time gain on the reduction
of a note payable of $1.0 million in the third quarter as a result of settling a
lawsuit against the former owners of Mountain Air Drilling Service Co. Inc. The
gain was calculated in part by discounting the note payable to $1.5 million
using a present value calculation and accreting the note payable to $1.9
million, the amount due in September 2007. We will record interest expense
totaling $394,043 over the life of the note payable beginning July 2003. In
addition, we also recorded a one-time non-operating gain on the sale of an
interest in a subsidiary of $2.4 million in connection with the formation of
AirComp. The Company has adopted a policy that any gain or loss in the future
incurred on the sale in the stock of a subsidiary would be recognized as such in
the income statement.
The net loss for 2002 included a discount given to the holder of the Houston
Dynamic Services note in the amount of $191,000 as an incentive to pay-off the
note in September 2002.
We had a net income attributed to common stockholders of $2.3 million, or $0.58
per common share, for the year ended December 31, 2003 compared with a net loss
of ($4.3 million), or ($1.14) per common share, for the year ended December 31,
2002.
The following table compares revenues and income from operations for each of our
business segments for the years ended December 31, 2003 and 2002. Income from
operations consists of our revenues less cost of revenues, general and
administrative expenses, and depreciation and amortization:
Revenues Income (Loss) from Operations
------------------------------------- -----------------------------------
2003 2002 Change 2003 2002 Change
----------- ---------- ---------- ----------- ----------- ---------
(in thousands)
Casing and tubing services $ 10,037 $ 7,796 $ 2,241 $ 3,628 $ 2,495 $ 1,133
Directional drilling services 16,008 6,529 9,479 1,103 (576) 1,679
Compressed air drilling services 6,679 3,665 3,014 17 (945) 962
General corporate -- -- (2,222) (2,144) (78)
----------- ---------- ---------- ----------- ----------- ---------
Total $ 32,724 $ 17,990 $ 14,734 $ 2,526 $ (1,170) $ 3,696
=========== ========== ========== =========== =========== =========
20
CASING AND TUBING SERVICES SEGMENT
Revenues for the year ended December 31, 2003 for the casing and tubing services
segment were $10.0 million, an increase of 28.2% from the $7.8 million in
revenues for the year ended December 31, 2002. Revenues from domestic operations
increased to $6.3 million in 2003 from $5.1 million in 2002 as a result of a
general improvement in oil and gas drilling activity in South Texas and the
inclusion of this segment, which was acquired in February 2002, for a full year
in 2003. Revenues from Mexican operations increased to $3.7 million in 2003 from
$2.7 million in 2002 as a result of increased drilling activity in Mexico.
Income from operations increased 45.4% to $3.6 million in 2003 from $2.5 million
in 2002 due to the increase in revenues.
DIRECTIONAL DRILLING SERVICES SEGMENT
Revenues for 2003 for directional drilling services were $16.0 million, an
increase of 146.2% from $6.5 million in revenues for 2002 due to increased
drilling activity in the Texas and Gulf Coast areas in 2003. Operating income
increased to $1.1 million for 2003 compared to a loss from operations of
($576,000) for the same period in 2002 due to the increase in revenues, which
more than offset an increase in operating expenses due to the addition of
operations and sales personnel.
COMPRESSED AIR DRILLING SERVICES SEGMENT
Our compressed air drilling revenues were $6.7 million in 2003, an increase of
81.1% compared to $3.7 million in revenues in 2002. Revenues increased in 2003
due to the inclusion of revenues contributed by M-I through the formation of
AirComp in July 2003. Operating income increased to $17,000 in 2003 from a
($945,000) loss from operations in 2002 due to the inclusion, for six months in
the 2003 period, of the business contributed by M-I in connection with the
formation of AirComp in July 2003. Through this venture, we have been able to
expand the geographical areas in which we operate to include gas drilling in
West Texas along with the drilling and workover operations of Mountain Air in
the San Juan basin in New Mexico.
LIQUIDITY AND CAPITAL RESOURCES
Our on-going capital requirements arise primarily from our need to service our
debt and retire redeemable securities, to acquire and maintain equipment, for
working capital and for acquisitions. Our primary sources of liquidity are
borrowings under our revolving lines of credit, proceeds from the issuance of
equity securities and cash flows from operations. We had cash and cash
equivalents of $7.3 million at December 31, 2004 compared to $1.3 million at
December 31, 2003 and compared to $146,000 at December 31, 2002.
OPERATING ACTIVITIES
In the year ended December 31, 2004, we generated $3.3 million in cash from
operating activities compared to $1.9 million in cash from operating activities
for the same period in 2003. Net income before preferred stock dividend for the
year ended December 31, 2004 decreased to $888,000, compared to $2.9 million in
the 2003 period. Revenues and income from operations increased in 2004 due to
increased demand for our services due to the general increase in oil and gas
drilling activity. Net income in 2003 includes a $1.0 million gain from the
settlement of a lawsuit and a $2.4 million non-operating gain on sale of
interest in AirComp. Non-cash additions to net income totaled $4.3 million in
the 2004 period consisting of $3.6 million of depreciation and amortization,
$334,000 of minority interest in the income of a subsidiary and $350,000 in
amortization of discount on debt. Non-cash additions to net income in 2003
totaled $305,000, consisting of depreciation and amortization expense of $2.9
million, minority interest in the income of a subsidiary of $343,000 and
amortization of discount on debt of $516,000, offset by the $3.4 million of
non-cash gains.
During the year ended December 31, 2004, changes in working capital used $1.9
million in cash compared to a use of $1.3 million in cash in the 2003 period,
principally due, in the 2004 period, to an increase of $2.3 million in accounts
receivable, an increase of $638,000 in other current assets, and a decrease of
$398,000 in accrued expenses and other liabilities, offset in part by an
increase of $1.1 million in accounts payable, an increase of $299,000 in accrued
interest and a decrease of $229,000 in lease receivable. Our accounts receivable
increased by $2.3 million at December 31, 2004 due to the increase in our
revenues in 2004. Current assets increased $638,000 due primarily to an increase
in prepaid insurance premiums. Accounts payable increased by $1.3 million at
December 31, 2004 due to the increase in our cost of sales associated with the
increase in our revenues and the acquisitions completed in the fourth quarter of
2004.
For the year ended December 31, 2003, we generated $1.9 million in cash from
operating activities compared to $2.2 million in cash from operating activities
for the same period in 2002. Net income before preferred stock dividend for the
2003 period improved to $2.9 million, compared to a net loss of ($4.0 million)
in the comparable 2002 period, due to the increase in revenues and income from
operations in 2003 due to the general increase in oil and gas drilling activity
and the inclusion of AirComp, our compressed air drilling subsidiary in July
2003. Net income for 2003 includes a $1.0 million gain from the settlement of a
lawsuit and a $2.4 million non-operating gain on sale of interest in AirComp.
Non-cash additions to net income totaled $305,000 in 2003, which is net of the
$1.0 million non-cash gain from the settlement of a lawsuit and the $2.4 million
non-operating gain on the sale of an interest in a subsidiary, compared to $3.4
million in non-cash additions in 2002, consisting principally of depreciation
and amortization expense, including amortization of discount on debt, and
minority interest in the income of a subsidiary.
21
During the year ended December 31, 2003, changes in working capital used $1.3
million in cash compared to changes in working capital which provided $2.8
million in cash in the 2002 period, principally due, in 2003, to an increase in
accrued expenses of $1.7 million, an increase in accounts receivable and other
current assets of $5.6 million, and an increase in accounts payable of $2.2
million. The increase in accrued expenses is due to a decrease in accrued
interest of $126,000 due to the retirement of the subordinated debt carrying an
interest rate of 12% and lower interest rates on other debt with variable
interest rates, an increase in accrued expenses of $397,000 due to accrued motor
costs and related expenses, and an increase in accrued employee benefits and
payroll taxes of $1.3 million due to the payroll cycle ending at December 31,
2003. Accounts receivable increased $4.4 million due to an increase in revenues
in our directional drilling services segment, our compressed air drilling
services segment due to the inclusion of the business contributed by M-I to
AirComp in July 2003, and our casing and tubing services segment. Other current
assets decreased primarily because of the recovery of a lease deposit related to
an equipment lease which was paid off in June 2003. Accounts payable increased
by $2.3 million in the 2003 period due to increased costs related to increased
revenues, and the inclusion of the accounts payable of AirComp in July 2003.
INVESTING ACTIVITIES
During the year ended December 31, 2004, we used $9.1 million in investing
activities, consisting principally of capital expenditures of approximately $4.6
million, including $1.6 million to purchase equipment for our directional
drilling services segment, approximately $1.2 million to purchase casing
equipment and approximately $1.4 million to make capital repairs to existing
equipment in our compressed air drilling services segment. During the 12 month
period ended December 31, 2003, we used $4.5 million in investing activities,
consisting of the purchases of equipment of $5.4 million, which was partially
offset by the proceeds from the sale of equipment of $843,000. As of September
1, 2004 we completed, for $1.0 million, the acquisition of 100% of the
outstanding stock of Safco. As of November 1, 2004, AirComp acquired
substantially all the assets of Diamond Air for $4.6 million in cash and the
assumption of approximately $450,000 of debt. We contributed our share of the
purchase price, or $2.5 million, to AirComp in order to fund the purchase.
Finally, effective December 1, 2004, we acquired Downhole for approximately $1.1
million in cash, 568,466 shares of our common stock and payment or assumption of
$950,000 of debt.
Cash used in investing activities in 2002 was $8.5 million, due to the
acquisitions of our Jens' and Strata subsidiaries for a total of $8.3 million,
purchases of other equipment of $518,000, and proceeds from the sales of
equipment of $367,000.
FINANCING ACTIVITIES
During the year ended December 31, 2004, financing activities provided a net of
$11.8 million in cash. We received $16.9 million in net proceeds from the
issuance of common stock, $8.2 million in borrowings under long-term debt
facilities and a $689,000 increase in net borrowings under our revolving lines
of credit. The proceeds were used to repay long-term debt totaling $13.5 million
and to pay $391,000 in debt issuance costs. During the year ended December 31,
2003 financing activities provided a net of $3.8 million in cash. In 2003, we
received $14.1 million from the issuance of long-term debt and $30.5 million
from borrowings under our lines of credit. These proceeds were used to pay
long-term debt in the amount of $10.8 million and make principal payments on
outstanding borrowings under our lines of credit in the amount of $29.4 million.
We also used $408,000 in cash for debt issuance costs in 2003. During the year
ended December 31, 2002 financing activities provided a net of $6.3 million in
cash. In 2002, we received $9.7 million from the issuance of long-term debt and
$7.1 million from borrowings under our lines of credit. These proceeds were used
to pay long-term debt in the amount of $4.1 million and make principal payments
on outstanding borrowings under our lines of credit in the amount of $5.8
million. We also used $588,000 in cash for debt issuance costs in 2002.
In April 2004, Energy Spectrum, the holder of our preferred stock, converted its
3,500,000 shares of Series A 10% Cumulative Convertible Preferred Stock,
including accrued dividend rights, into 1,718,090 shares of common stock.
On August 10, 2004, we completed the private placement of 3,504,667 shares of
our common stock at a price of $3.00 per share. Net proceeds to us, after
selling commissions and expenses, was approximately $9.6 million. On September
30, 2004, we completed the private placement of 1,956,634 shares of our common
stock at a price of $3.00 per share. Net proceeds to us, after selling
commissions and expenses, was approximately $5.4 million. We will use the net
proceeds of the private placement offerings to reduce debt, for acquisitions,
and for general corporate purposes.
On September 30, 2004, we issued 1.3 million shares of our common stock to Jens
Mortensen, a director in exchange for his 19% interest in Jens'. As a result of
this transaction, we now own 100% of Jens'. The total value of the consideration
paid was $6.4 million, which was equal to the number of shares of common stock
issued to Mr. Mortensen (1.3 million) multiplied by the last sale price ($4.95)
of the common stock as reported on the American Stock Exchange on the date of
issuance. This amount was treated as a contribution to stockholders equity. On
our balance sheet, we eliminated the amount recorded as the value of the Jens'
minority interest, $2.0 million. The balance of the contribution ($4.5 million)
was allocated as follows: In June 2004, we obtained an appraisal of the fixed
assets of Jens', which valued the fixed assets at $20.1 million. The book value
of the fixed assets was $15.8 million and the excess of appraised value over
book value was $4.3 million. We increased the value of Jens' fixed assets by 19%
of this amount, or $813,511. The remaining balance of $3.7 million was allocated
to goodwill.
We have several bank credit facilities and other debt instruments at
Allis-Chalmers and at our three principal operating subsidiaries, all of which
are consolidated on our financial statements. At December 31, 2004, we had $30.5
million in outstanding indebtedness, of which $24.9 million was long-term debt
and $5.5 million was the current portion of long-term debt.
22
On December 7, 2004, we entered into an amended and restated credit agreement
which combined and increased various credit facilities previously maintained by
us and our subsidiaries, Jens' and Strata. The credit agreement governing the
facilities was entered into by Allis-Chalmers, Jens', Strata and Safco, and is
guaranteed by our MCA and OilQuip subsidiaries. The amended credit facilities
include:
o A $10.0 million revolving line of credit. Borrowings are subject to a
borrowing base based on 85% of eligible accounts receivables, as
defined. Outstanding borrowings under this line of credit were $2.4
million as of December 31, 2004.
o A term loan in the amount of $6.3 million to be repaid in monthly
payments of principal of $105,583 per month. We are also required to
prepay this term loan by an amount equal to 20% of the accounts
receivables collections from Mexico. Proceeds of the term loan were
used to prepay the term loan owed by our Jens' subsidiary and to
prepay our 12% $2.4 million subordinated note payable and retire its
related warrants. The outstanding balance was $6.3 million as of
December 31, 2004.
o A $6.0 million capital expenditure and acquisition line of credit.
Borrowings under this facility are to be repaid monthly over four
years beginning January 2006. Availability of this capital expenditure
term loan facility is subject to security acceptable to the lender in
the form of equipment or other acquired collateral. There were no
outstanding borrowings as of December 31, 2004
Our credit facilities mature on December 31, 2007 and are secured by liens on
substantially all our assets. The agreement governing these credit facilities
contains customary events of default and financial covenants. It also limits our
ability to incur additional indebtedness, make capital expenditures, pay
dividends or make other distributions, create liens, and sell assets. The
interest rate payable on borrowings floats based on the prime rate. The average
interest rate was 6.25% as of December 31, 2004. We pay a 0.5% per annum fee on
the undrawn portion of the revolving line of credit and the capital expenditure
line.
Our Jens' subsidiary has a subordinated note in the amount of $4.0 million
payable to Jens Mortensen, who sold Jens' to us and is one of our directors. The
note accrues interest at 7.5% per annum and provides for quarterly interest
payments. The principal and interest are due on January 31, 2006. In connection
with the purchase of Jens', we also agreed to pay a total of $1.2 million to Mr.
Mortensen in exchange for a non-compete agreement. We are required to make
monthly payments of $20,576 through January 31, 2007. As of December 31, 2004,
the balance due is approximately $514,000, including $247,000 classified as
short-term.
Jens' also has two bank term loans aggregating $263,000 at December 31, 2004,
which accrue interest at a floating rate (7.25% at December 31, 2004) and which
require monthly payments of $13,000 plus accrued interest. The maturity date of
one of the loans, with a balance of $210,000, is September 17, 2006, while the
second loan, with a balance of $53,000, matures January 12, 2007. Additionally,
in October 2004, Jens' borrowed $326,000 in a five-year equipment financing term
loan. Proceeds were used to purchase five trucks. The loan is to be repaid in 60
installments of principal and interest equal to $6,449 per month beginning
December 2004 until December 2009.
In December 2003, Strata, our directional drilling subsidiary, entered into a
short-term vendor financing agreement with a major supplier for drilling motor
rentals, motor lease costs and motor repair costs. The agreement provides for
repayment of all amounts not later than December 30, 2005. Payment of interest
is due monthly and principal payments of $582,000 are due in each of October
2004, April 2005, and December 2005. The interest rate is fixed at 8.0%. As of
December 31, 2004, the outstanding balance was $1.2 million.
In connection with the purchase of Safco, we also agreed to pay a total of
$150,000 to the sellers in exchange for a non-compete agreement. We are required
to make yearly payments of $50,000 through September 30, 2007. As of December
31, 20