e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2005
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD
FROM
TO
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Commission file number 1-2199
ALLIS-CHALMERS ENERGY
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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39-0126090
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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5075 WESTHEIMER, SUITE 890,
HOUSTON, TEXAS
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77056
(Zip code)
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(Address of principal executive
offices)
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(713)
369-0550
Registrants telephone
number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
ACT:
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Title of Security:
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Name of Exchange:
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Common Stock, par value
$0.01 per share
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American Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
ACT:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or
15(d). Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to ITEM 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
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 $5.65 per share on
June 30, 2005, as reported on the American Stock Exchange,
was approximately $46,064,970 (affiliates included for this
computation only: directors, executive officers and holders of
more than 5% of the registrants common stock).
At March 14, 2006 there were 17,223,142 shares of
common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the Allis-Chalmers Energy Inc. Proxy Statement
prepared for the 2006 annual meeting of shareholders, pursuant
to Regulation 14A, are incorporated by reference into
Part III of this Report.
2005
FORM 10-K
CONTENTS
2
DEFINITIONS
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blow out preventors |
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Large safety device placed on the surface of an oil or natural
gas well to maintain high pressure well bores. |
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booster |
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A machine that increases the volume of air when used in
conjunction with a compressor or a group of compressors. |
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capillary tubing |
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Small diameter tubing installed in producing wells and through
which chemicals are injected to enhance production and reduce
corrosion and other problems. |
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casing |
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A pipe placed in a drilled well to secure the well bore and
formation. |
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choke manifolds |
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An arrangement of pipes, valves and special valves on the rig
floor that controls pressure during drilling by diverting
pressure away from the blow-out preventors and the annulus of
the well. |
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coiled tubing |
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Small diameter tubing used to service producing and problematic
wells and to work in high pressure applications during drilling,
production and workover operations. |
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directional drilling |
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The technique of drilling a well while varying the angle of
direction of a well and changing the direction of a well to hit
a specific target. |
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double studded adapter |
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A flange that adapts a valve or blow-out preventor to another
non-compatible valve. |
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downhole drilling |
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The technique of directional drilling used to deviate a well
away from surface locations to reach a specified target. |
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drill pipe |
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A pipe that attaches to the drill bit to drill a well. |
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heavy weight spiral drill pipe |
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Heavy drill pipe used for special applications primarily in
directional drilling. The spiral design increases
flexibility and penetration of the pipe. |
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horizontal drilling |
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The technique of drilling wells at a
90-degree
angle. |
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laydown machines |
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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). |
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links |
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Adaptors that fit on the blocks to attach handling tools. |
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logging-while-drilling or LWD |
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The technique of measuring, in real time, the formation pressure
and the position of equipment inside of a well. |
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measurement-while-drilling or MWD |
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The technique used to measure direction and angle while drilling
a well. |
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mist pump |
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A drilling pump that uses mist as the circulation medium for
injecting small amounts of foaming agent, corrosion agent and
other chemical solutions into the well. |
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spacer spools or adapter spools |
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High pressure connections or links which are stacked to elevate
the blow out preventors to the drilling rig floor. |
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straight hole drilling |
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The technique of drilling that allows very little or no vertical
deviation. |
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test plugs |
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A device used to test the connections of well heads and the blow
out preventors. |
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torque turn service or torque turn
equipment |
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Monitoring device to insure proper makeup of the casing. |
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tubing |
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A pipe placed inside the casing to allow the well to produce. |
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tubing work strings |
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Tubing used on workover rigs through which high pressure
liquids, gases or mixtures are pumped into a well to perform
production operations. |
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under balanced drilling or air drilling |
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A technique in which oil, natural 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. |
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wear bushings |
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A device placed inside a wellhead to protect the wellhead from
wear. |
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PART I.
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, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
We provide services and equipment to oil and natural gas
exploration and production companies, domestically in Texas,
Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah,
Wyoming, offshore in the Gulf of Mexico, and internationally in
Mexico. We operate in five sectors of the oil and natural gas
service industry: directional drilling services; compressed air
drilling services; casing and tubing services; rental tools; and
production services. Providing high-quality, technologically
advanced services and equipment is central to our operating
strategy. As a result of our commitment to customer service, we
have developed strong relationships with many of the leading oil
and natural gas companies, including both independents and
majors.
Our growth strategy is focused on identifying and pursuing
opportunities in markets we believe are growing faster than the
overall oilfield services industry in which we believe we can
capitalize on our competitive strengths. Over the past several
years, we have significantly expanded the geographic scope of
our operations and the range of services we provide through
internal growth and strategic acquisitions. Our organic growth
has primarily been achieved through expanding our geographic
scope, acquiring complementary equipment, hiring personnel to
service new regions and cross-selling our products and services
from existing operating locations. Since 2001, we have completed
14 acquisitions, including six in 2005 and one in 2006. Our 2006
acquisition of Specialty Rental Tools Inc., or Specialty, not
only balances our revenue mix generated between rental tools and
service operations and between onshore and offshore operations,
but enhances the scope, capacity and customer base in our rental
tools business.
As used herein, Allis-Chalmers, we,
our and us may refer to Allis-Chalmers
Energy Inc. or its subsidiaries. The use of these terms is not
intended to connote any particular corporate status or
relationships.
Our annual reports on
form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13 (a) or 15 (d) of the Securities
Exchange Act of 1934, are made available free of charge on our
website at www.alchenergy.com.
We have adopted a Business Code of Ethics to provide guidance to
our directors, officers and employees on matters of business
conduct and ethics. Our Business Code of Ethics is available on
the investor relations section of our website.
Information contained on or connected to our website is not
incorporated by reference into this annual report on
Form 10-K
and should not be considered part of this report or any other
filing we make with the SEC.
Our
History
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We were incorporated in 1913 under Delaware law.
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We reorganized in bankruptcy in 1988 and sold all of our major
businesses. From 1988 to May 2001 we had only one operating
company in the equipment repair business.
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In May 2001, under new management we consummated a merger in
which we acquired OilQuip Rentals, Inc., or OilQuip, and its
wholly-owned subsidiary, Mountain Compressed Air, Inc.
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In December 2001, we sold Houston Dynamic Services, Inc., our
last pre-bankruptcy business.
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In February 2002, we acquired approximately 81% of the capital
stock of Allis-Chalmers Tubular Services Inc., or Tubular,
formerly known as Jens Oilfield Service, Inc. and
substantially all of the capital stock of Strata Directional
Technology, Inc., which we refer to as Strata.
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In July 2003, we entered into a limited liability company
operating agreement with M-I L.L.C., or M-I, a joint venture
between Smith International and Schlumberger N.V., to form a
Delaware limited liability company named AirComp LLC, or
AirComp. Pursuant to this agreement, we owned 55% and M-I owned
45% of AirComp.
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In September 2004, we acquired the remaining 19% of the capital
stock of Tubular.
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In September 2004, we acquired all of the outstanding stock of
Safco-Oil Field Products, Inc., which we refer to as Safco
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In November 2004, AirComp acquired substantially all of the
assets of Diamond Air Drilling Services, Inc. and Marquis Bit
Co., LLC, which we refer to collectively as Diamond Air.
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In December 2004, we acquired Downhole Injection Services, LLC,
or Downhole.
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In January 2005, we changed our name from Allis-Chalmers
Corporation to Allis-Chalmers Energy Inc.
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In April 2005, we acquired Delta Rental Service, Inc., or Delta,
and, in May 2005, we acquired Capcoil Tubing Services, Inc. or
Capcoil
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In July 2005, we acquired M-Is interest in AirComp, and
acquired the compressed air drilling assets of
W. T. Enterprises, Inc., which we refer to as W.T.
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Effective August 2005, we acquired all of the outstanding stock
of Target Energy Inc., or Target.
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In September of 2005 we acquired the casing and tubing assets of
IHS/Spindletop, a division of Patterson Services, Inc., a
subsidiary of RPC, Inc.
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In January 2006, we acquired all of the outstanding stock of
Specialty.
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As a result of these transactions, our prior results may not be
indicative of current or future operations of those sectors.
Industry
Overview
We provide products and services primarily to domestic onshore
and offshore oil and natural gas exploration and production
companies. The main factor influencing demand for our products
and services is the level of drilling activity by oil and
natural gas companies, which, in turn, depends largely on
current and anticipated future crude oil and natural gas prices
and production depletion rates. According to the Energy
Information Agency of the U.S. Department of Energy, or
EIA, from 1990 to 2005, demand for oil and natural gas in the
United States grew at an average annual rate of 1.5%, while
supply decreased at an average annual rate of just over 2%.
Current industry forecasts suggest an increasing demand for oil
and natural gas coupled with a flat or declining production
curve, which we believe should result in the continuation of
historically high crude oil and natural gas commodity prices.
The EIA forecasts that U.S. oil and natural gas consumption
will increase at an average annual rate of 1.4% and 1.3% through
2025, respectively. Conversely, the EIA estimates that
U.S. oil production will remain flat and natural gas
production will increase at an average annual rate of 0.6%.
We anticipate that oil and natural gas exploration and
production companies will continue to increase capital spending
for their exploration and drilling programs. In recent years,
much of this expansion has focused on natural gas drilling
activities. According to Baker Hughes rig count data, the
average total rig count in the United States increased 67% from
918 in 2000 to 1,533 in February 2006, while the average natural
gas rig count increased 83% from 720 in 2000 to 1,321 in
February 2006. While the number of rigs drilling for natural gas
has increased by approximately 200% since the beginning of 1996,
natural gas production has only increased by approximately 1.5%
over the same period of time. This is largely a function of
increasing decline rates for natural gas wells in the
United States. We believe that a continued increase in
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drilling activity will be required for the natural gas industry
to help meet the expected increased demand for natural gas in
the United States.
We believe oil and natural gas producers are becoming
increasingly focused on their core competencies in identifying
reserves and reducing burdensome capital and maintenance costs.
In addition, we believe our customers are currently
consolidating their supplier base to streamline their purchasing
operations and benefit from economies of scale. We also believe
that certain operational trends in the industry are favoring
smaller, integrated oilfield services and rental tool providers,
like us, that can provide a range of products and services,
while more easily adapting to changing customer demands. We also
believe that:
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producers are more heavily favoring integrated suppliers that
can provide a broad, comprehensive offering of products and
services in many geographic locations; in addition, many
businesses in the highly fragmented oilfield services industry
lack sufficient size, depth or management (many businesses are
family-owned and managed) and sophisticated service and control
capabilities;
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consolidation among larger oilfield services providers has
created an opportunity for us to compete effectively in markets
that are underserved by the large oilfield services and
equipment companies; and
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based on technological advancements in drilling for oil and
natural gas, producers are demanding higher quality service and
equipment from their suppliers.
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Competitive
Strengths
We believe the following competitive strengths will enable us to
capitalize on future opportunities:
Strategic position in high growth markets. We
focus on markets we believe are growing faster than the overall
oilfield services industry and in which we can capitalize on our
competitive strengths. Pursuant to this strategy, we have become
a leading provider of products and services in what we believe
to be two of the fastest growing segments of the oilfield
services industry: directional drilling and air drilling. We
employ approximately 70 full-time directional drillers, and
we believe our ability to attract and retain experienced
drillers has made us a leader in the segment. We also believe we
are one of the largest air drillers based on amount of air
drilling equipment. In addition, we have significant operations
in what we believe will be among the higher growth oil and
natural gas producing regions within the United States and
internationally, including the Barnett Shale in North Texas,
onshore and offshore Louisiana, the Piceance Basin in Southern
Colorado and all five oil and natural gas producing regions in
Mexico.
Strong relationships with diversified customer
base. Our diverse customer base is characterized
by strong relationships with many of the major and independent
oil and natural gas producers and service companies throughout
Texas, Louisiana, New Mexico, Colorado, Oklahoma, Mississippi,
Utah, Wyoming, offshore in the Gulf of Mexico and Mexico. Our
largest customers include Burlington Resources, BP,
ChevronTexaco, Kerr-McGee, Dominion Resources, Remington Oil and
Gas, Petrohawk Energy, Newfield Exploration, El Paso
Corporation, Matyep and Anadarko Petroleum. Since 2002, we have
broadened our customer base as a result of our acquisitions,
technical expertise and reputation for quality customer service
and by providing customers with technologically advanced
equipment and highly skilled operating personnel.
Successful execution of growth strategy. Over
the past five years, we have grown both organically and through
successful acquisitions of competing businesses. Since 2001, we
have completed 14 acquisitions. Our approach is to improve the
operating performance of the businesses we acquire by increasing
their asset utilization and operating efficiency. These
acquisitions have expanded our geographic presence or customer
base and, in turn, have enabled us to cross-sell various
products and services through our existing operating locations.
Experienced and dedicated management team. The
members of our executive management team have extensive
experience in the energy sector, and consequently have developed
strong and longstanding relationships with many of the major and
independent exploration and production companies. We believe
that our management team has demonstrated its ability to grow
our businesses organically, make strategic acquisitions and
successfully integrate these acquired businesses into our
operations.
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Business
Strategy
We intend to continue to pursue the growth strategy that has
allowed us to significantly increase our revenues and
profitability over the last several years. The key elements of
our growth strategy include:
Expand products and services provided in existing operating
locations. Since the beginning of 2003, we have
invested approximately $27.7 million in capital
expenditures to grow our business organically by expanding our
product and service offerings in existing operating locations.
This strategy is consistent with our belief that oil and natural
gas producers more heavily favor integrated suppliers that can
provide a broad product and service offering in many geographic
locations.
Prudently pursue strategic acquisitions. To
complement our organic growth, we seek to opportunistically
complete, at attractive valuations, strategic acquisitions that
will complement our products and services, expand our geographic
footprint and market presence, further diversify our customer
base and be accretive to earnings.
Expand geographically to provide greater access and service
to key customer segments. During the last twelve
months, we have opened new locations in Texas, New Mexico,
Colorado, Oklahoma and Louisiana in order to enhance our
proximity to customers and more efficiently serve their needs.
We intend to continue to establish new locations in active oil
and natural gas producing regions in the United States in order
to increase the utilization of our equipment and personnel. We
also intend to expand into international markets through
strategic acquisitions and alliances similar to our casing and
tubing operations in Mexico.
Increase utilization of assets. We seek to
grow revenues and enhance margins by continuing to increase the
utilization of our rental assets with new and existing
customers. We expect to accomplish this through leveraging
longstanding relationships with our customers and cross-selling
our suite of services and equipment, while taking advantage of
continued improvements in industry fundamentals. We also expect
to implement this strategy at Specialty, thus improving the
utilization and profitability of this newly acquired business
with minimal additional investment.
Target services in which we have a competitive
advantage. Consolidation in the oilfield services
industry has created an opportunity for us to compete
effectively in markets that are underserved by the large
oilfield services and equipment companies. In addition, we
believe we can provide a more comprehensive range of products
and services than many of our smaller competitors.
Description
Of Businesses
Directional Drilling Services. Through Strata
and Target, we utilize
state-of-the-art
equipment to provide well planning and engineering services,
directional drilling packages, downhole motor technology, well
site directional supervision, exploratory and development
re-entry drilling, downhole guidance services and other drilling
services to our customers. We also provide
logging-while-drilling, or LWD, and measurement-while-drilling,
or MWD, services. We have a team of approximately 70 directional
drillers and maintain a selection of approximately 150 drilling
motors. According to Baker Hughes, as of February 2006, 40% of
all wells in the United States are drilled directionally
and/or
horizontally. We expect that figure to grow over the next
several years as companies seek to exploit maturing fields and
sensitive formations. Management believes directional drilling
offers several advantages over conventional drilling including:
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improvement of total cumulative recoverable reserves;
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improved reservoir production performance beyond conventional
vertical wells; and
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reduction of the number of field development wells.
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Since 2002, we have increased our team of directional drillers
from 10 to approximately 70. Our straight-hole motors offer
opportunity to capture additional market share. We have also
recently expanded our directional drilling services segment with
the acquisition of all of the outstanding capital stock of
Target.
Compressed Air Drilling Services. Through
AirComp, we provide compressed air, drilling chemicals and other
specialized drilling products for underbalanced drilling
applications, which we refer to as
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compressed air drilling services. With a combined fleet of over
130 compressors and boosters, we believe we are one of the
worlds largest providers of compressed air, or
underbalanced, drilling services. We also provide premium air
hammers and bits to oil and natural gas companies for use in
underbalanced drilling. Our broad and diversified product line
enables us to compete in the underbalanced drilling market with
an equipment package engineered and customized to specifically
meet customer requirements.
Underbalanced drilling shortens the time required to drill a
well and enhances production by minimizing formation damage.
There is a trend in the industry to drill, complete and workover
wells with underbalanced drilling operations and we expect the
market to continue to grow.
In July 2005, we purchased the compressed air drilling assets of
W. T., operating in West Texas and acquired the remaining 45%
equity interest in AirComp from M-I. The acquired assets include
air compressors, boosters, mist pumps, rolling stock and other
equipment. These assets were integrated into AirComps
assets and complement and add to AirComps product and
service offerings. We currently provide compressed air drilling
services in Texas, Oklahoma, New Mexico, Colorado, Utah and
Wyoming. We are also in the process of expanding our services to
Arkansas.
Casing and Tubing Services. Through Tubular ,
we provide specialized equipment and trained operators to
perform a variety of pipe handling services, including
installing casing and tubing, changing out drill pipe and
retrieving production tubing for both onshore and offshore
drilling and workover operations, which we refer to as casing
and tubing services. All wells drilled for oil and natural gas
require casing to be installed for drilling, and if the well is
producing, tubing will be required in the completion phase. We
currently provide casing and tubing services primarily in Texas,
Louisiana and both onshore and offshore in the Gulf of Mexico
and Mexico. We expanded our casing and tubing services in
September 2005 by acquiring the casing and tubing assets of
IHS/Spindletop, a division of Patterson Services, Inc., a
subsidiary of RPC, Inc. We paid $15.7 million for RPC,
Inc.s casing and tubing assets, which consisted of casing
and tubing installation equipment, including hammers, elevators,
trucks, pickups, power units, laydown machines, casing tools and
torque turn equipment.
The acquisition of RPC, Inc.s casing and tubing assets
increased our capability in casing and tubing services and
expanded our geographic capability. We opened new field offices
in Corpus Christi, Texas, Kilgore, Texas, Lafayette, Louisiana
and Houma, Louisiana. The acquisition allowed us to enter the
East Texas and Louisiana market for casing and tubing services
as well as offshore in the Gulf of Mexico. Additionally, the
acquisition greatly expanded our premium tubing services.
We provide equipment used in casing and tubing services in
Mexico to Materiales y Equipo Petroleo, S.A. de C.V., or Matyep.
Matyep provides equipment and services for offshore and onshore
drilling operations to Petroleos Mexicanos, known as Pemex, in
Villahermosa, Reynosa, Veracruz and Ciudad del Carmen, Mexico.
Matyep provides all personnel, repairs, maintenance, insurance
and supervision for provision of the casing and tubing crew and
torque turn service. The term of the lease agreement pursuant to
which we provide the equipment and Matyep provides the above
listed items continues for as long as Matyep is successful in
maintaining its casing and tubing business with Pemex. Services
to offshore drilling operations in Mexico are traditionally
seasonal, with less activity during the first quarter of each
calendar year due to weather conditions.
For the years ended December 31, 2005, 2004 and 2003, our
Mexico operations accounted for approximately $6.4 million,
$5.1 million and $3.7 million, respectively, of our
revenues. We provide extended payment terms to Matyep and
maintain a high accounts receivable balance due to these terms.
The accounts receivable balance was approximately
$2.2 million at December 31, 2005 and approximately
$968,000 at December 31, 2004. Tubular has been providing
services to Pemex in association with Matyep since 1997.
Rental Tools. We provide specialized rental
equipment for both onshore and offshore well drilling,
completion and workover operations. Most wells drilled for oil
and natural gas require some form of rental tools in the
completion phase of a well. Our rental tools segment was
established with the acquisition of Safco in September 2004 and
of Delta in April 2005.
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We have an inventory of specialized equipment consisting of
heavy weight spiral drill pipe, double studded adapters, test
plugs, wear bushings, adaptor spools, baskets and spacer spools
and other assorted handling tools in various sizes to meet our
customers demands. We charge customers for rental equipment on a
daily basis. The customer is liable for the cost of inspection
and repairs or lost equipment. We currently provide rental tool
equipment in Texas, Oklahoma, Louisiana, Mississippi, Colorado
and offshore in the Gulf of Mexico.
We significantly expanded our rental tools segment in January
2006 with the acquisition of Specialty. Specialty has been in
the rental tools business for over 25 years, providing oil
and natural gas operators and oilfield services companies with
rental equipment. Specialty rents drill pipe, heavy weight
spiral drill pipe, tubing work strings, blow-out preventors,
choke manifold and various valves and handling tools for oil and
natural gas drilling. The acquisition of Specialty gives us a
broader scope of rental tools to offer our existing customer
base, which we believe will allow us to better compete in deep
water drilling operations in the area of premium rental drill
pipe and handling equipment. We also expect that the acquisition
of Specialty will add new customer relationships and enhance our
relationships with key existing customers. In February of 2006,
we merged Specialty and Delta into Safco and named the new
entity, Allis-Chalmers Rental Tools, Inc. or Rental Tools.
Production Services. We supply specialized
equipment and trained operators to install and retrieve
capillary tubing, through which chemicals are injected into
producing wells to increase production and reduce corrosion. In
addition, we perform workover services with coiled tubing units.
Chemicals are injected through the tubing to targeted zones up
to depths of approximately 20,000 feet. The result is
improved production from treatment of downhole corrosion, scale,
paraffin and salt
build-up in
producing 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. Our production services segment was established with
the acquisition of Downhole, in December 2004, and the
acquisition of Capcoil, in May 2005. In February of 2006, we
merged Downhole into Capcoil and named the new entity
Allis-Chalmers Production Services, Inc., or Production Services.
We have an inventory of specialized equipment consisting of
capillary and coil tubing units in various sizes ranging from
1/4²
to
11/4²
along with nitrogen pumping and transportation equipment. We
have placed orders for two additional capillary units and two
additional coil tubing units for delivery in 2006. The new coil
tubing units range in size from
11/4²
to
13/4².
We also maintain a full range of stainless and carbon steel
coiled tubing and related supplies used in the installation of
the tubing. We sell or rent the tubing and charge a fee for its
installation, servicing and removal, which includes the service
personnel and associated equipment on a turn key hourly basis.
We do not provide the chemicals injected into the well.
Cyclical
Nature Of Equipment Rental And Services Industry
The oil and natural 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 increased supplies and reduced prices.
Demand for our services has been strong throughout 2003, 2004
and 2005. Management believes demand will remain strong
throughout 2006 due to high oil and natural gas prices and the
capital expenditure plans of the exploration and production
companies. Because of these market fundamentals for natural gas,
management believes the long-term trend of activity in our
markets 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.
10
Customers
In 2005, none of our customers accounted for more than 10% of
our revenues. Our customers are the major and independent oil
and natural gas companies operating in the United States and
Mexico. In 2004, Matyep in Mexico represented 10.8% and
Burlington Resources Inc. represented 10.1% of our consolidated
revenues. In 2003, Matyep, Burlington Resources Inc. and
El Paso Corporation represented 10.2%, 11.1% and 14.1%,
respectively, of our revenues. The loss without replacement of
our larger existing customers could have a material adverse
effect on our results of operations.
Suppliers
The equipment utilized in our business is generally available
new from manufacturers or at auction. Currently, due to the high
level of activity in the oilfield services industry, there is a
high demand for new and used equipment. Consequently, there is a
limited amount of many types of equipment available at auction
and significant backlogs on new equipment. We own sufficient
equipment for our projected operations over the next twelve
months, and we believe the shortage of equipment will result in
increased demand for our services. However, the cost of
acquiring new equipment to expand our business could increase as
a result of the high demand for equipment in the industry.
Competition
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 experience, 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.
We believe that there are five major directional drilling
companies, Schlumberger, Halliburton, Baker Hughes, W-H Energy
Services (Pathfinder) and Weatherford, that market both
worldwide and in the United States as well as numerous small
regional players.
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 regional companies.
Two large companies, Franks Casing Crew and Rental Tools
and Weatherford, have a substantial portion of the casing and
tubing market in South Texas. The market remains highly
competitive and fragmented with at least 30 casing and tubing
crew companies working in the United States. Our primary
competitors in Mexico are South American Enterprises and
Weatherford, both of which provide similar products and services.
There are two other significant competitors in the chemical
injection services portion of the production services market,
Weatherford and Dyna Coil. We believe we own approximately 30%
of the capillary tubing units in the southwestern United States
that are used for chemical injection services.
The rental tool business is highly fragmented with hundreds of
companies offering various rental tool services. Our largest
competitors include Weatherford, Oil and Gas Rental Tools, Quail
Rental Tools and Knight Rental Tools.
Backlog
We do not view backlog of orders as a significant measure for
our business because our jobs are short-term in nature,
typically one to 30 days, without significant on-going
commitments.
Employees
Our strategy includes acquiring companies with strong management
and entering into long-term employment contracts with key
employees in order to preserve customer relationships and assure
continuity following
11
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 more
technologically complex equipment and given greater
responsibility. All employees are responsible for on-going
quality assurance. At March 14, 2006, we had approximately
700 employees.
Executive
Officers
Our executive officers are:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Munawar H. Hidayatallah
|
|
|
61
|
|
|
Chairman and Chief Executive
Officer
|
David Wilde
|
|
|
50
|
|
|
President and Chief Operating
Officer
|
Victor M. Perez
|
|
|
53
|
|
|
Chief Financial Officer
|
Theodore F. Pound III
|
|
|
51
|
|
|
General Counsel and Secretary
|
Bruce Sauers
|
|
|
42
|
|
|
Vice President and Corporate
Controller
|
Alya H. Hidayatallah
|
|
|
30
|
|
|
Vice
President Planning and Development
|
David K. Bryan
|
|
|
48
|
|
|
President and Chief Executive
Officer of Strata
Directional Technology, Inc.
|
Steve Collins
|
|
|
54
|
|
|
President and Chief Executive
Officer of
Allis-Chalmers
Production Services, Inc.
|
James Davey
|
|
|
52
|
|
|
President and Chief Executive
Officer of
Allis-Chalmers
Rental Tools Inc.
|
Gary Edwards
|
|
|
54
|
|
|
President and Chief Executive
Officer of
Allis-Chalmers
Tubular Services Inc.
|
Terrence P. Keane
|
|
|
53
|
|
|
President and Chief Executive
Officer of AirComp LLC
|
Munawar H. Hidayatallah has served as our Chairman of the
Board 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. from its formation in February 2000 until it
merged with us in May 2001. From December 1994 until August
1999, Mr. Hidayatallah was the Chief Financial Officer and
a director of IRI International, Inc., which was acquired by
National Oilwell, Inc. in early 2000. IRI International, Inc.
manufactured, sold and rented oilfield equipment to the oilfield
and natural gas exploration and production sectors. From August
1999 until February 2001, Mr. Hidayatallah worked as a
consultant to IRI International, Inc. and Riddell Sports Inc.
David Wilde became our President and Chief Operating
Officer in February 2005. Mr. Wilde was President and Chief
Executive Officer of Strata from October 2003 through February
2005 and served as Stratas President and Chief Operating
Officer from July 2003 until October 2003. From February 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 at Strata.
Mr. Wilde has more than 30 years experience in
the directional drilling and rental tool sectors of the oilfield
services industry.
Victor M. 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. Trico Marine Services,
Inc. filed a petition under the federal bankruptcy laws in
December 2004. 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 energy banking. Mr. Perez is a director of
Safeguard Security Holdings.
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 practiced law with the law firm of
Wilson, Cribbs & Goren, P.C.,
12
Houston, Texas. Mr. Pound has practiced law for more than
25 years. Mr. Pound represented us as our lead counsel
in each of our acquisitions beginning in 2001.
Bruce Sauers has served as our Vice President and
Corporate Controller since July 2005. From January 2005 until
July 2005, Mr. Sauers was Controller of Blast Energy Inc.,
an oilfield services company. From June 2004 until January 2005,
Mr. Sauers worked as a financial and accounting consultant.
From July 2003 until June 2004, Mr. Sauers served as
controller for HMT, Inc., an above ground storage tank company.
From February 2003 until July 2003, Mr. Sauers served as
assistant controller at Todco, an offshore drilling contractor.
From August 2002 until January 2003, Mr. Sauers acted as a
consultant on SEC accounting and financial matters. From
December 2001 through June 2002, Mr. Sauers was corporate
controller at OSCA, Inc., an oilfield services company, which
merged with BJ Service Company. From December 1996 until
December 2001, Mr. Sauers was a corporate controller at UTI
Energy Corp., a land drilling contractor, which merged and
became Patterson-UTI Energy, Inc. Mr. Sauers is a certified
public accountant and has served as an accountant for
approximately 20 years.
Alya H. Hidayatallah became our Vice
President Planning and Development in April
2005. From January 2005 to March 2005, Ms. Hidayatallah was
a senior financial analyst for Panda Restaurant Group. From
November 2004 through December 2004, she worked as a financial
analyst for Lexicon Marketing. From February 2000 until April
2004, Ms. Hidayatallah was a Financial Analyst and Senior
Financial Analyst in the Financial Restructuring Group of
Houlihan Lokey Howard & Zukin. Ms. Hidayatallah
has a degree in Business Economics from the University of
California at Los Angeles awarded in 1997. Ms. Hidayatallah
is Mr. Hidayatallahs daughter.
David K. Bryan has served as President and Chief
Executive 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, he served as
Operations Manager of Strata. Mr. Bryan has been involved
in the directional drilling sector since 1979.
Steven Collins has served as President and Chief
Executive Officer of Production Services since December 2005.
Mr. Collins was our corporate Vice President of Sales and
Marketing from June 2005 to December 2005. From 2002 to 2005,
Mr. Collins served as Sales Manager of Well Testing and
Corporate Strategic Accounts Manager for TETRA
Technologies. From 1997 to 2002, Mr. Collins was in sales
for Production Well Testers. Mr. Collins has over
25 years experience in various sales and management
positions in the oilfield services industry.
James Davey has served as President and Chief Executive
Officer of Rental Tools since April 2005. Mr. Davey was
President of Safco Oilfield Products from September 2004 through
2005 and served as our Executive Vice President of Business
Development and Acquisitions in October 2003 until 2004. Prior
to joining us, Mr. Davey had been employed with
CooperCameron for 28 years in various positions.
Gary Edwards has served as President and Chief Executive
Officer of Tubular Services since December 2005 after serving as
Executive Vice President of Tubular Services since September
2005. From April 1997 to September 2005, Mr. Edwards served
as Operations Manager for International Hammer/Spindletop
Tubular Services, a division of Patterson Services, Inc.
Mr. Edwards has been in the casing and tubing industry for
the past 29 years.
Terrence P. Keane has served as President and Chief
Executive Officer of our AirComp, LLC subsidiary 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.
13
Insurance
We carry a variety of insurance coverages for our operations,
and we 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 natural 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 named in environmental claims relating to our
activities prior to our reorganization in 1988 (See
Item 3. 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 natural 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.
14
The following table describes the location and general character
of the principal physical properties used in each of our
companys businesses as of March 14, 2006. All of the
properties are leased by us except for our property in Edinburg,
Texas.
|
|
|
|
|
Business Segment
|
|
Location
|
|
Property
|
|
Directional Drilling Services
|
|
Houston, Texas
|
|
Operating Location
|
|
|
Corpus Christi, Texas
|
|
Operating Location
|
|
|
Oklahoma City, Oklahoma
|
|
Operating Location
|
|
|
Lafayette, Louisiana
|
|
Operating Location
|
Compressed Air Drilling Services
|
|
Houston, Texas
|
|
Operating Location
|
|
|
San Angelo, Texas
|
|
Operating Location
|
|
|
Fort Stockton, Texas
|
|
Operating Location
|
|
|
Farmington, New Mexico
|
|
Operating Location
|
|
|
Grand Junction, Colorado
|
|
Operating Location
|
|
|
Wilburton, Oklahoma
|
|
Operating Location
|
|
|
Sonora, Texas
|
|
Operating Location
|
|
|
Grandbury, Texas
|
|
Operating Location
|
|
|
Denver, Colorado
|
|
Operating Location
|
|
|
Carlsbad, New Mexico
|
|
Operating Location
|
Casing and Tubing Services
|
|
Edinburg, Texas
|
|
Operating Location
|
|
|
Pearsall, Texas
|
|
Operating Location
|
|
|
Corpus Christi, Texas
|
|
Operating Location
|
|
|
Kilgore, Texas
|
|
Operating Location
|
|
|
Lafayette, Louisiana
|
|
Operating Location
|
|
|
Houma, Louisiana
|
|
Operating Location
|
Casing and Tubing Services (cont)
|
|
Buffalo, Texas
|
|
Operating Location
|
Rental Tools
|
|
Houston, Texas
|
|
Operating Location
|
|
|
Broussard, Louisiana
|
|
Operating Location
|
|
|
Lafayette, Louisiana
|
|
Operating Location
|
Production Services
|
|
Midland, Texas
|
|
Operating Location
|
|
|
Corpus Christi, Texas
|
|
Operating Location
|
|
|
Kilgore, Texas
|
|
Operating Location
|
|
|
Carthage, Texas
|
|
Operating Location
|
|
|
Cordell, Oklahoma
|
|
Operating Location
|
General Corporate
|
|
Houston, Texas
|
|
Principal Executive Offices
|
The yard in Buffalo, Texas is co-owned by David Wilde, who is
one of our executive officers.
|
|
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
15
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 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 a few 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 our plan of
reorganization. In each instance, we have taken the position
that the cleanup costs and all 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. 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 were advised in late 2005 that the A-C Reorganization Trust
is in the process of terminating and distributing its assets,
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 continues to defend all
such claims. However, there can be no assurance that we will not
be subject to material product liability claims in the future.
On December 31, 2004, Mountain Air was named as 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 Air 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). We raised several defenses to the
plaintiffs claim. In March 2005, we reached an
16
agreement with the plaintiff to settle an action brought by the
sellers under the note and paid to the sellers $1.0 million
on April 1, 2005 and agreed to pay an additional $350,000
on June 1, 2006, and $150,000 on June 1, 2007, in
settlement of all amounts due under the promissory note and all
other claims.
We are involved in various other legal proceedings in the
ordinary course of businesses. The legal proceedings are at
different stages; however, we believe that the likelihood of
material loss relating to any such legal proceeding is remote.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
|
MARKET
PRICE INFORMATION
Our common stock is 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 sporadically. The following table sets forth, for periods
prior to September 13, 2004, high and low bid information
for the common stock, as reported on the OTC
Bulletin Board, during the periods indicated, and for
periods since September 13, 2004, high and low sale prices
of our common stock reported on the American Stock Exchange. The
quotations reported on the OTC Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. Share
prices for periods prior to June 10, 2004, set forth herein
have been adjusted to give retroactive effect to a
one-to-five
reverse stock split effected June 10, 2004.
|
|
|
|
|
|
|
|
|
Calendar Quarter
|
|
High
|
|
|
Low
|
|
|
2003
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
4.50
|
|
|
|
.55
|
|
Second Quarter
|
|
|
5.00
|
|
|
|
2.25
|
|
Third Quarter
|
|
|
4.50
|
|
|
|
2.60
|
|
Fourth Quarter
|
|
|
6.00
|
|
|
|
2.60
|
|
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
10.05
|
|
|
|
2.55
|
|
Second Quarter
|
|
|
10.25
|
|
|
|
4.25
|
|
Third Quarter
|
|
|
9.75
|
|
|
|
4.75
|
|
Fourth Quarter
|
|
|
5.40
|
|
|
|
3.25
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
7.25
|
|
|
|
3.64
|
|
Second Quarter
|
|
|
6.00
|
|
|
|
4.38
|
|
Third Quarter
|
|
|
14.70
|
|
|
|
5.65
|
|
Fourth Quarter
|
|
|
13.75
|
|
|
|
8.61
|
|
Holders
As of March 14, 2006, there were approximately 2,040
holders of record of our common stock. On March 14, 2006,
the last sale price for our common stock reported on the
American Stock Exchange was $13.55 per share.
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 and the indenture
governing our senior notes restrict our ability to pay dividends
on our common stock.
17
EQUITY
COMPENSATION PLAN INFORMATION
The following table provides information as of December 31,
2005 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities to be
|
|
|
Weighted
|
|
|
|
|
|
|
Issued Upon
|
|
|
Average Exercise
|
|
|
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
|
|
|
2,756,067
|
|
|
$
|
5.18
|
|
|
|
210,100
|
|
Equity compensation plans not
approved by security holders
|
|
|
489,243
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,245,310
|
|
|
$
|
4.85
|
|
|
|
210,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. As of
December 31, 2005, none of these options had been exercised.
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 our merger with OilQuip
Rentals, Inc., including providing financial advisory services,
assisting in OilQuips 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 67,000 warrants are
currently outstanding and expire in February 2011.
In connection with the private placement in April 2004, we
issued warrants for the purchase of 800,000 shares of our
common stock at an exercise price of $2.50 per share. A total of
486,557 of these warrants were exercised in 2005. Warrants for
4,000 shares of our common stock at an exercise price of $4.65
were also issued in May 2004 and remain outstanding as of
December 31, 2005.
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA.
|
SELECTED
HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information for each
of the five years ended December 31, 2005, 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 Managements
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,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, we have during the
past five years effected a number of business combinations and
other transactions that materially affect the comparability of
the information set forth below (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
Statement of Operations
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
105,344
|
|
|
$
|
47,726
|
|
|
$
|
32,724
|
|
|
$
|
17,990
|
|
|
$
|
4,796
|
|
Income (loss) from operations
|
|
$
|
13,218
|
|
|
$
|
4,227
|
|
|
$
|
2,625
|
|
|
$
|
(1,072
|
)
|
|
$
|
(1,433
|
)
|
Net income (loss) from continuing
operations
|
|
$
|
7,175
|
|
|
$
|
888
|
|
|
$
|
2,927
|
|
|
$
|
(3,969
|
)
|
|
$
|
(2,273
|
)
|
Net income (loss) attributed to
common stockholders
|
|
$
|
7,175
|
|
|
$
|
764
|
|
|
$
|
2,271
|
|
|
$
|
(4,290
|
)
|
|
$
|
(4,577
|
)
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) from continuing
operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.48
|
|
|
$
|
0.10
|
|
|
$
|
0.58
|
|
|
$
|
(1.14
|
)
|
|
$
|
(2.88
|
)
|
Diluted
|
|
$
|
0.44
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
$
|
(1.14
|
)
|
|
$
|
(2.88
|
)
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832
|
|
|
|
7,930
|
|
|
|
3,927
|
|
|
|
3,766
|
|
|
|
790
|
|
Diluted
|
|
|
16,238
|
|
|
|
9,510
|
|
|
|
5,850
|
|
|
|
3,766
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
Data
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Restated)
|
|
|
Total Assets
|
|
$
|
137,355
|
|
|
$
|
80,192
|
|
|
$
|
53,662
|
|
|
$
|
34,778
|
|
|
$
|
12,465
|
|
Long-term debt classified as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,632
|
|
|
$
|
5,541
|
|
|
$
|
3,992
|
|
|
$
|
13,890
|
|
|
$
|
1,023
|
|
Long-term
|
|
$
|
54,937
|
|
|
$
|
24,932
|
|
|
$
|
28,241
|
|
|
$
|
7,331
|
|
|
$
|
6,833
|
|
Redeemable convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,171
|
|
|
$
|
3,821
|
|
|
$
|
|
|
Stockholders equity
|
|
$
|
60,875
|
|
|
$
|
35,109
|
|
|
$
|
4,541
|
|
|
$
|
1,009
|
|
|
$
|
1,250
|
|
Book value per share (basic)
|
|
$
|
4.10
|
|
|
$
|
4.43
|
|
|
$
|
1.16
|
|
|
$
|
0.27
|
|
|
$
|
1.58
|
|
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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
below under Risk Factors.
Overview
of Our Business
We are a multi-faceted oilfield services company that provides
services and equipment to oil and natural gas exploration and
production companies, domestically in Texas, Louisiana, New
Mexico, Colorado, Oklahoma, and offshore in the Gulf of Mexico,
and internationally in Mexico. We operate in five sectors of the
oil and natural gas service industry: directional drilling
services; casing and tubing services; compressed air drilling
services; rental tools; and production services.
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 price we charge for our services depends
upon several factors, including the level of oil and natural gas
drilling activity and the competitive environment in the
particular geographic regions in which we operate. Contracts are
awarded based on the price, quality of service and equipment,
and the general reputation and experience of our personnel. The
demand for drilling services has historically been volatile and
is affected by the capital expenditures of oil and natural gas
exploration and development companies, which can fluctuate based
upon the prices of oil and natural gas or the expectation for
the prices of oil and natural gas.
The number of working drilling rigs, typically referred to as
the rig count, is an important indicator of activity
levels in the oil and natural gas industry. The rig count in the
United States increased from 862 as of December 31, 2002 to
1,532 on March 10, 2006, according to the Baker Hughes rig
count. Furthermore, directional and horizontal rig counts
increased from 283 as of December 31, 2002 to 605 on
March 10, 2006, which accounted for 32.8% and 39.5% of the
total U.S. rig count, respectively. Currently, we believe
that the number of available drilling rigs is insufficient to
meet the demand for drilling rigs. Consequently, unless a
significant number of additional drilling rigs are brought
online, the rig count may not increase substantially despite the
strong demand.
Our cost of revenues represents 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, fuel and depreciation. Operating
expenses do not fluctuate in direct proportion to changes in
revenues because, among other factors, we have a fixed base of
inventory of equipment and facilities to support our operations,
and in periods of low drilling activity we may also seek to
preserve labor continuity to market our services and maintain
our equipment.
Cyclical
Nature of Equipment Rental and Services Industry
The oilfield 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 increased supplies
and reduced prices.
Demand for our services has been strong throughout 2003, 2004
and 2005 due to high oil and natural gas prices and increased
demand and declining production costs for natural gas as
compared to other energy
20
sources. Management believes the current market fundamentals are
indicative of a favorable long-term trend of activity in our
markets. However, these factors could be more than offset by
other developments affecting the worldwide supply and demand for
oil and natural gas products.
Restatement
We understated diluted earnings per share due to an incorrect
calculation of our weighted shares outstanding for the third
quarter of 2003, for each of the first three quarters of 2004,
for the years ended December 31, 2003 and 2004 and for the
quarter ended March 31, 2005. In addition, we understated
basic earnings per share due to an incorrect calculation of our
weighted average basic shares outstanding for the quarter ended
September 30, 2004. Consequently, we have restated our
financial statements for each of those periods. The incorrect
calculation resulted from a mathematical error and an improper
application of Statement of Financial Accounting Standards
No. 128, Earnings Per Share, or SFAS,
No. 128. The effect of the restatement is to reduce
weighted average diluted shares outstanding for the relevant
periods and to reduce weighted average basic shares outstanding
for the quarter ended September 30, 2004. Therefore,
diluted earnings per share were increased for the relevant
periods and basic earnings per share were increased for the
quarter ended September 30, 2004. Based on the correction
of a mathematical error, for the three and nine months ended
September 30, 2004, weighted average basic shares
outstanding was 8,298,000 and 6,168,000, respectively, compared
to the previously reported weighted average basic shares
outstanding of 11,599,000 and 7,285,000 for the three and nine
months ended September 30, 2004. The effect is to increase
basic earnings per share to $0.06 and $0.21 for the three and
nine months ended September 30, 2004 compared to the $0.04
and $0.18 previously reported for those periods. Based on the
proper allocation of SFAS No. 128, weighted average
diluted shares outstanding was 9,828,000 and 7,890,000 for the
three and nine months ended September 30, 2004,
respectively, compared to the previously reported weighted
average diluted shares outstanding of 14,407,000 and 9,980,000
for the three and nine months ended September 30, 2004,
respectively. The effect is to increase diluted earnings per
share to $0.05 and $0.18 for the three and nine months ended
September 30, 2004, respectively, compared to the $0.04 and
$0.13 previously restated, respectively. (See Note 2 to our
consolidated financial statements for the three years ended
December 31, 2005).
In connection with the formation of AirComp in 2003, we, along
with 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 SFAS No. 141, Business
Combinations and SEC Staff Accounting
Bulletin No. 51 Accounting for Sales of Stock
by a Subsidiary. Consequently, we have restated our
financial statements for the year ended December 31, 2003
and for the first three quarters of 2004 (See Note 2 to our
consolidated financial statements for the three years ended
December 31, 2005).
Management has concluded that the need to restate our financial
statements resulted, in part, from the lack of sufficient
experienced accounting personnel, which in turn resulted in a
lack of effective control over the financial reporting process.
We have implemented a number of actions that we believe address
the deficiencies in our financial reporting process, including
the following:
|
|
|
|
|
The addition of experienced accounting personnel with
appropriate experience and qualifications to perform quality
review procedures and to satisfy our financial reporting
obligations. During August 2004, we hired a new chief financial
officer and in October of 2004 we hired a full-time in-house
general counsel. In March 2005, we hired a certified public
accountant as our financial reporting manager and in July 2005
we hired as chief accounting officer, a certified public
accountant who has significant prior experience as a chief
accounting officer of a publicly traded company. In 2006, we
have added three additional certified public accountants in
connection with the growth of our business and to implement and
monitor compliance with internal control processes.
|
21
|
|
|
|
|
In the fourth quarter of 2004, we engaged an independent
internal controls consulting firm which is in the process of
documenting, analyzing, identifying and correcting deficiencies
and testing our internal controls and procedures, including our
controls over internal financial reporting.
|
|
|
|
We are in the final stages of completing the implementation of a
new accounting software to facilitate timely and accurate
reporting.
|
Although we have implemented a number of actions as described
above, we have not yet had sufficient time to test the newly
implemented actions.
Results
of Operations
In February 2002, we acquired 81% of the outstanding stock of
Tubular. In February 2002, we also purchased substantially all
the outstanding common stock and preferred stock of Strata. 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 Compressed Air,
Inc., we entered into a limited liability company agreement with
M-I, a company owned by Smith International and Schlumberger
N.V., to form AirComp. We owned 55% and M-I owned 45% of AirComp
until we purchased M-Is interest in July 2005. 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 Tubular and
we acquired Safco. In November 2004, AirComp acquired
substantially all of the assets of Diamond Air and, in December
2004, we acquired Downhole. We consolidated the results of these
acquisitions from the day they were acquired.
In April 2005, we acquired Delta and, in May 2005, we acquired
Capcoil. We report the operations of Downhole and Capcoil as our
production services segment and the operations of Safco and
Delta as our rental tools segment. In July 2005, we acquired the
45% interest of M-I in our compressed air drilling subsidiary,
AirComp, making us the 100% owner of AirComp. In addition, in
July 2005, we acquired the compressed air drilling assets of W.
T. On August 1, 2005, we acquired 100% of the outstanding
capital stock of Target. The results of Target are included in
our directional and horizontal drilling segment as their Measure
While Drilling equipment is utilized in that segment. On
September 1, 2005, we acquired the casing and tubing
service assets of Patterson Services, Inc. We consolidated the
results of these acquisitions from the day they were acquired.
The foregoing acquisitions affect the comparability from period
to period of our historical results, and our historical results
may not be indicative of our future results.
Comparison
of Years Ended December 31, 2005 and December 31,
2004
Our revenue for the year ended December 31, 2005 was
$105.3 million, an increase of 120.8% compared to
$47.7 million for the year ended December 31, 2004.
The increase in revenues was principally due to acquisitions
completed in the fourth quarter of 2004 and the second and third
quarters of 2005, the addition of operations and sales
personnel, the opening of new operations offices, and the
purchase of additional equipment. Acquisitions completed during
this period enabled us to establish our rental tool and
production services segments which resulted in an increased
offering of products and services and an expansion of our
customer base. Directional drilling services segment revenues
increased in the 2005 period compared to the 2004 period due to
the addition of operations and sales personnel, the opening of
new operations offices and the purchase of additional downhole
motors which increased our capacity and market presence.
Revenues increased at our compressed air drilling segment due to
acquisition of the air drilling assets of W. T. on July 11,
2005, the acquisitions of Diamond Air on November 1, 2004
and improved pricing for our services in West Texas.
Revenues increased at our casing and tubing services segment due
to the acquisition of the casing and tubing assets of Patterson
Services Inc. on September 1, 2005, increased revenues from
Mexico, improved
22
market conditions, improved market penetration for our services
in South Texas and the addition of operating personnel and
equipment which broadened our capabilities. Also contributing to
increased revenues were the acquisitions of Safco as of
September 1, 2004, Downhole as of December 1, 2004,
Delta as of April 1, 2005 and Capcoil as of May 1,
2005. Downhole and Capcoil comprise our production services
segment and were merged in February 2006 to
form Allis-Chalmers
Production Services, Inc. Safco and Delta comprise our rental
tool segment and were merged in February 2006 with Specialty to
form Allis-Chalmers
Rental Tools, Inc.
Our gross margin for the year ended December 31, 2005
increased 146.1% to $30.6 million, or 29.0% of revenues,
compared to $12.4 million, or 26.0%, of revenues for the
year ended December 31, 2004. The increase is due to
increased revenues and improved pricing in the directional
drilling services segment, increased revenues at our compressed
air drilling services segment, including revenues resulting from
the acquisition of Diamond Air and the compressed air drilling
assets of W.T., increased revenues from Mexico, improved market
conditions for our domestic casing and tubing segment and the
growth of our rental tools segment through the acquisition of
Delta on April 1, 2005. Depreciation expense increased
80.4% to $4.9 million in 2005 compared to $2.7 million
in 2004. The increase is due to additional depreciable assets
resulting from capital expenditures and acquisitions in 2004 and
2005. 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 $15.9 million for
the year ended December 31, 2005 compared to
$7.1 million for the year ended December 31, 2004.
General and administrative expense increased due to the
additional expenses associated with the acquisitions completed
in the second half of 2004 and in 2005, and the hiring of
additional sales and administrative personnel. General and
administrative expense also increased because of increased legal
and accounting fees and other expenses related to our financing
and acquisition activities, increased consulting fees in
connection with our internal controls and corporate governance
process, and increased corporate accounting and administrative
staff. As a percentage of revenues, general and administrative
expenses were 15.1% for 2005 and 14.9% for 2004.
Amortization expense was $1.8 million for the year ended
December 31, 2005 compared to $0.9 million for the
year ended December 31, 2004. The increase in amortization
expense is due to the amortization of intangible assets in
connection with our acquisitions and the amortization of
deferred financing costs.
Income from operations for the year ended December 31, 2005
totaled $13.2 million, a 212.7% increase over the
$4.2 million in income from operations for the year ended
December 31, 2004, reflecting the increase in our revenues
and gross profit, offset in part by increased general and
administrative expenses.
Our interest expense was $4.4 million for the year ended
December 31, 2005, compared to $2.8 million for the
year ended December 31, 2004. Interest expense increased
during 2005 due to the increased borrowings associated with the
acquisitions completed in the second and third quarters of 2005,
equipment purchases and higher average interest rates, offset in
part by the prepayment, in December 2004, of our 12%
$2.4 million subordinated note. Additionally, in 2005, we
incurred debt retirement expense of $1.1 million related to
the refinancing of our debt. This amount includes prepayment
penalties and the write-off of deferred financing fees from a
previous financing.
Minority interest in income of subsidiaries for the year ended
December 31, 2005 was $488,000 compared to $321,000 for the
corresponding period in 2004 due to the increase in
profitability at AirComp due in part to the acquisition of
Diamond Air as of November 1, 2004. The minority interest
at AirComp was acquired on July 11, 2005 and the minority
interest in Tubular, which was 19%-owned by director Jens
Mortensen, was acquired on September 30, 2004.
We had net income attributed to common stockholders of
$7.2 million for the year ended December 31, 2005, an
increase of 839.1%, compared to net income attributed to common
stockholders of $0.8 million for the year ended
December 31, 2004. The net income attributed to common
stockholders in the 2004 period is after $124,000 in preferred
stock dividends.
23
The following table compares revenues and income from operations
for each of our business segments for the years ended
December 31, 2005 and December 31, 2004. Income from
operations consists of our revenues less cost of revenues,
general and administrative expenses, and depreciation and
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Income (Loss) from
Operations
|
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
Directional drilling services
|
|
$
|
43,901
|
|
|
$
|
24,787
|
|
|
$
|
19,114
|
|
|
$
|
7,389
|
|
|
$
|
3,061
|
|
|
$
|
4,328
|
|
Compressed air drilling services
|
|
|
25,662
|
|
|
|
11,561
|
|
|
|
14,101
|
|
|
|
5,612
|
|
|
|
1,169
|
|
|
|
4,443
|
|
Casing and tubing services
|
|
|
20,932
|
|
|
|
10,391
|
|
|
|
10,541
|
|
|
|
4,994
|
|
|
|
3,217
|
|
|
|
1,777
|
|
Rental tools
|
|
|
5,059
|
|
|
|
611
|
|
|
|
4,448
|
|
|
|
1,300
|
|
|
|
(71
|
)
|
|
|
1,371
|
|
Production services
|
|
|
9,790
|
|
|
|
376
|
|
|
|
9,414
|
|
|
|
(99
|
)
|
|
|
4
|
|
|
|
(103
|
)
|
General corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,978
|
)
|
|
|
(3,153
|
)
|
|
|
(2,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
105,344
|
|
|
$
|
47,726
|
|
|
$
|
57,618
|
|
|
$
|
13,218
|
|
|
$
|
4,227
|
|
|
$
|
8,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional Drilling Services
Segment. Revenues for the year ended
December 31, 2005 for our directional drilling services
segment were $43.9 million, an increase of 77.1% from the
$24.8 million in revenues for the year ended
December 31, 2004. Income from operations increased 141.4%
to $7.4 million for 2005 from $3.1 million for 2004.
The improved results for this segment are due to the increase in
drilling activity in the Texas and Gulf Coast areas, the
establishment of new operations in West Texas and Oklahoma, the
addition of operations and sales personnel, the purchase of
additional downhole motors which increased our capacity and
market presence and the acquisition of Target, a provider of
measurement while drilling equipment, effective August 2005. Our
operating income increased due to higher revenue explained above
and cost savings achieved as a result of the purchases of most
of the downhole motors used in directional drilling, which we
had previously rented.
Compressed Air Drilling Services Segment. Our
compressed air drilling revenues were $25.7 million for the
year ended December 31, 2005, an increase of 122.0%
compared to $11.6 million in revenues for the year ended
December 31, 2004. Income from operations increased 380.1%
to $5.6 million in 2005 compared to income from operations
of $1.2 million in 2004. Our compressed air drilling
revenues and operating income for the 2005 period increased
compared to the 2004 period due in part to the acquisition of
the air drilling assets of W. T., the acquisitions of Diamond
Air as of November 1, 2004 and improved pricing in West
Texas.
Casing and Tubing Services Segment. Revenues
for the year ended December 31, 2005 for the casing and
tubing services segment were $20.9 million, an increase of
101.4% from the $10.4 million in revenues for the year
ended December 31, 2004. Revenues from domestic operations
increased to $14.5 million in 2005 from $5.2 million
in 2004 as a result of the acquisition of the casing and tubing
assets of Patterson Services, Inc. on September 1, 2005,
improved market conditions for our services in South Texas and
the addition of personnel which added to our capabilities and
our offering of services. Revenues from Mexican operations
increased to $6.4 million in 2005 from $5.2 million in
2004 as a result of increased drilling activity in Mexico and
the addition of equipment that increased our capacity. Income
from operations increased 55.2% to $5.0 million in 2005
from $3.2 million in 2004. The increase in this
segments operating income is due to increased revenues
both domestically and in our Mexico operations.
Rental Tools Segment. Our rental tools
revenues were $5.1 million for the year ended
December 31, 2005, an increase of 728.0% compared to
$0.6 million in revenues for the year ended
December 31, 2004. Income from operations increased to
$1.3 million in 2005 compared to a loss from operations of
$71,000 in 2004. Operations for this segment include Safco,
acquired in September 2004, and Delta, acquired in April 2005.
Production Services Segment. Our production
services revenues were $9.8 million for the year ended
December 31, 2005, compared to $376,000 in revenues for the
year ended December 31, 2004. Loss from operations was
$99,000 in 2005 compared to an operating income of $4,000 in
2004. Operations for this segment consist of Downhole, acquired
December 1, 2004, and Capcoil, acquired May 1, 2005.
We plan to grow this segment and improve profitability by
increasing our market presence and our critical mass including
24
adding additional capillary and coil tubing units. Our results
for the year ended December 31, 2005 for this segment were
negatively affected by costs incurred to expand our
international presence for production services and by downtime
experienced by one of our larger coil tubing units.
Comparison
of Years Ended December 31, 2004 and December 31,
2003
Our revenue for the year ended December 31, 2004 was
$47.7 million, an increase of 45.8% 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 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 margin for the year ended December 31, 2004
increased 42.9% 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 $7.1 million in the
2004 period compared to $5.3 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 14.9% in 2004 and 16.2% 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. The increase was 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 61.0% 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.
Income from operations in the year ended December 31, 2004
includes $188,000 in additional accrued expense for
post-retirement medical benefits pursuant to our 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.
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 our 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
25
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 Tubular,
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)
|
|
|
Directional drilling services
|
|
$
|
24,787
|
|
|
$
|
16,008
|
|
|
$
|
8,779
|
|
|
$
|
3,061
|
|
|
$
|
1,103
|
|
|
$
|
1,958
|
|
Compressed air drilling services
|
|
|
11,561
|
|
|
|
6,679
|
|
|
|
4,882
|
|
|
|
1,169
|
|
|
|
17
|
|
|
|
1,152
|
|
Casing and tubing services
|
|
|
10,391
|
|
|
|
10,037
|
|
|
|
354
|
|
|
|
3,217
|
|
|
|
3,628
|
|
|
|
(411
|
)
|
Other services
|
|
|
987
|
|
|
|
|
|
|
|
987
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
(67
|
)
|
General corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,153
|
)
|
|
|
(2,123
|
)
|
|
|
(1,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,726
|
|
|
$
|
32,724
|
|
|
$
|
15,002
|
|
|
$
|
4,227
|
|
|
$
|
2,625
|
|
|
$
|
1,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 54.8% from the
$16.0 million in revenues for the year ended
December 31, 2003. Income from operations increased by
177.5% 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.
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
3.5% from the $10.0 million in revenues for the year ended
December 31, 2003. Revenues from domestic operations
decreased from $6.3 million in 2003 to $5.1 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
$5.3 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
11.3% to $3.2 million in 2004 from $3.6 million in
2003. The decrease in this segments revenues and
26
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.
Other Services Segment. Revenues for this
segment consist of Safcos rental tool business, beginning
September 1, 2004, and Downholes 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.
Liquidity
and Capital Resources
Our on-going capital requirements arise primarily from our need
to service our debt, to acquire and maintain equipment, to fund
our working capital requirements and to complete acquisitions.
Our primary sources of liquidity are borrowings under our
revolving lines of credit, other financings, proceeds from the
issuance of equity securities and cash flows from operations. We
had cash and cash equivalents of $1.9 million at
December 31, 2005 compared to $7.3 million at
December 31, 2004 and compared to $1.3 million at
December 31, 2003.
Operating
Activities
In the year ended December 31, 2005, we generated
$3.6 million in cash from operating activities compared to
$3.3 million in cash from operating activities for the same
period in 2004. Net income before preferred stock dividend for
the year ended December 31, 2005 increased to
$7.2 million, compared to $888,000 in the 2004 period.
Revenues and income from operations increased in 2005 due to
increased demand for our services due to the general increase in
oil and gas drilling activity and the results of acquisitions
that were completed during the period. Non-cash additions to net
income totaled $6.8 million in the 2005 period consisting
of $6.6 million of depreciation and amortization, $488,000
of minority interest in the income of a subsidiary, $653,000 in
write-off of financing fees in conjunction with a refinancing,
offset by decrease of $352,000 in the pension benefit obligation
and the $669,000 of gain from the disposition of equipment.
Non-cash additions to net income totaled $4.3 million in
the 2004 period consisting of $3.6 million of depreciation
and amortization, $321,000 of minority interest in the income of
a subsidiary and $350,000 in amortization of discount on debt.
During the year ended December 31, 2005, changes in working
capital used $10.4 million in cash compared to a use of
$1.9 million in cash in the 2004 period, principally due,
in the 2005 period, to an increase of $10.4 million in
accounts receivable, an increase of $2.1 million in other
current assets, and a decrease of $97,000 in accrued expenses,
offset in part by an increase of $2.4 million in accounts
payable, an increase of $324,000 in accrued interest and a
increase of $443,000 in accrued employee benefits and payroll
taxes. Our accounts receivables increased by $10.4 million
at December 31, 2005 due to the increase in our revenues in
2005. Other current assets increased $2.1 million due
primarily to an increase in inventory. Accounts payable
increased by $2.4 million at December 31, 2005 due to
the increase in our cost of sales associated with the increase
in our revenues and the acquisitions completed in 2005 and 2004.
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, $321,000 of
minority interest in the income of a subsidiary and $350,000 in
amortization of discount on debt. Net 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.
27
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 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 and an increase of $299,000 in accrued
interest. Our accounts receivables 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 $1.1 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.
Investing
Activities
During the year ended December 31, 2005, we used
$53.1 million in investing activities. During the year
ended December 31, 2005, we completed the following
acquisitions for a total net cash outlay of $36.9 million:
|
|
|
|
|
On April 1, 2005 we acquired Delta for $4.6 million in
cash, 223,114 shares of our common stock and two promissory
notes totaling $350,000.
|
|
|
|
On May 1, 2005, we acquired Capcoil for $2.7 million
in cash, 168,161 shares of our common stock and the payment
or assumption of approximately $1.3 million of debt.
|
|
|
|
On July 11, 2005, we acquired the compressed air drilling
assets of W.T. for $6.0 million in cash.
|
|
|
|
On July 11, 2005, we acquired from M-I its 45%
interest in AirComp and subordinated note in the principal
amount of $4.8 million issued by AirComp, for which we paid
M-I $7.1 million in cash and reissued a $4.0 million
subordinated note.
|
|
|
|
Effective August 1, 2005, we acquired Target for
$1.3 million in cash and forgiveness of a lease receivable
of $592,000.
|
|
|
|
On September 1, 2005, we acquired the casing and tubing
service assets of Patterson Services, Inc. for approximately
$15.6 million.
|
In addition we made capital expenditures of approximately
$17.8 million, including $2.9 million to purchase
equipment for our directional drilling services segment,
$7.0 million to purchase and improve equipment in our
compressed air drilling service segment, $5.2 million to
purchase and improve our casing equipment and approximately
$1.5 million to expand our production services segment. We
also received $1.6 million from the sale of assets during
the year ended December 31, 2005, comprised mostly from
equipment lost in the hole from our directional drilling segment
($1.0 million) and our rental tool segment ($408,000).
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,
$1.3 million to purchase casing equipment and
$1.4 million to make capital repairs to existing equipment
in our compressed air drilling services segment. During the year
ended December 31, 2004, we completed the following
acquisitions for a net cash outlay of $4.6 million.
|
|
|
|
|
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.
|
|
|
|
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.
|
28
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.
Financing
Activities
During the year ended December 31, 2005, financing
activities provided a net of $44.1 million in cash. We
received $56.3 million in borrowings under long-term debt
facilities, $15.5 million in net proceeds from the issuance
of 1,761,034 shares of our common stock, $2.5 million
in net borrowings under our revolving lines of credit and
$1.4 million from the proceeds of warrant and option
exercises for 1,076,154 shares of our common stock. The
proceeds were used to repay long-term debt totaling
$28.2 million, repay related party debt of
$1.5 million and to pay $1.8 million in debt issuance
costs.
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
6,081,301 shares of our 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.
On July 11, 2005, we replaced our previous credit agreement
with a new agreement that provided for the following senior
secured credit facilities:
|
|
|
|
|
A $13.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivable plus 50% of
eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be
used to finance working capital requirements and other general
corporate purposes, including the issuance of standby letters of
credit. Outstanding borrowings under this line of credit were
$6.4 million at a margin above prime and LIBOR rates plus
margin averaging approximately 8.1% as of December 31, 2005.
|
|
|
|
Two term loans totaling $42.0 million. Outstanding
borrowings under these term loans were $42.0 million as of
December 31, 2005. These loans were at LIBOR rates plus a
margin which averages approximately 7.8% at December 31,
2005.
|
We borrowed against the July 2005 facilities to refinance our
prior credit facility and the AirComp credit facility, to fund
the acquisition of M-Is interest in AirComp and the air
drilling assets of W.T. and to pay transaction costs related to
the refinancing and the acquisitions. We incurred debt
retirement expense of $1.1 million related to the
refinancing. This amount includes prepayment penalties and the
write-off of deferred financing fees of the previous financing.
Borrowings under the July 2005 facilities were to mature in July
2007. Amounts outstanding under the term loans as of July 2006
were to be repaid in monthly principal payments based on a
48 month repayment schedule with the remaining balance due
at maturity. Additionally, during the second year, we were to be
required to prepay the remaining balance of the term loans by
75% of excess cash flow, if any, after debt service and capital
expenditures. The interest rate payable on borrowings was based
on a margin over the London Interbank Offered Rate, referred to
as LIBOR, or the prime rate, and there was a 0.5% fee on the
undrawn portion of the revolving line of credit. The margin over
LIBOR was to increase by 1.0% in the second year. The July 2005
credit facilities were secured by substantially all of our
assets and contained customary events of default and financial
and other covenants, including limitations on our ability to
incur additional indebtedness, make capital expenditures, pay
dividends or make other distributions, create liens and sell
assets.
29
All amounts outstanding under our July 2005 credit agreement
were paid off with proceeds of our senior notes offering in
January 2006. We executed an amended and restated credit
agreement which provides a $25.0 million revolving line of
credit. For a more detailed description of our new credit
agreement, please see Recent
Developments below.
Prior to July 11, 2005, we had a credit agreement dated
December 7, 2004 that provided for the following credit
facilities:
|
|
|
|
|
A $10.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivables, as defined.
Outstanding borrowings under this line of credit were
$2.4 million as of December 31, 2004.
|
|
|
|
A term loan in the amount of $6.3 million to be repaid in
monthly payments of principal of $105,583 per month. We
were also required to prepay this term loan by an amount equal
to 20% of receipts from our largest customer in Mexico. Proceeds
of the term loan were used to prepay the term loan owed by
Tubular and to prepay the 12% $2.4 million subordinated
note and retire its related warrants. The outstanding balance
was $6.3 million as of December 31, 2004.
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A $6.0 million capital expenditure and acquisition line of
credit. Borrowings under this facility were payable monthly over
four years beginning in January 2006. Availability of this
capital expenditure term loan facility was 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.
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These credit facilities were to mature on December 31, 2007
and were secured by liens on substantially all of our assets.
The agreement governing these credit facilities contained
customary events of default and financial covenants. It also
limited our ability to incur additional indebtedness, make
capital expenditures, pay dividends or make other distributions,
create liens and sell assets. Interest accrued at an adjustable
rate based on the prime rate and was 6.25% as of
December 31, 2004. We paid a 0.5% per annum fee on the
undrawn portion of the revolving line of credit and the capital
expenditure line.
In connection with the acquisition of Tubular and Strata in
2002, we issued a 12% secured subordinated note in the original
amount of $3.0 million. In connection with this
subordinated note, we issued redeemable warrants valued at
$1.5 million, which were recorded as a discount to the
subordinated debt and as a liability. The discount was amortized
over the life of the subordinated note beginning
February 6, 2002 as additional interest expense of which
$350,000 and $300,000 were recognized in the years ended
December 31, 2004 and December 31, 2003, respectively.
The debt was recorded at $2.7 million at December 31,
2003, net of the unamortized portion of the put obligation. On
December 7, 2004, we prepaid the $2.4 million balance
of the 12% subordinated note and retired the
$1.5 million of warrants, with a portion of the proceeds
from our $6.3 million bank term loan.
Prior to July 11, 2005, our AirComp subsidiary had the
credit facilities described below. These credit facilities were
repaid in connection with our acquisition of the minority
interest in AirComp and the refinancing of our bank credit
facilities described above.
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A $3.5 million bank line of credit. Interest accrued at an
adjustable rate based on the prime rate. We paid a 0.5% per
annum fee on the undrawn portion. Borrowings under the line of
credit were subject to a borrowing base consisting of 80% of
eligible accounts receivable. The balance at December 31,
2004 was $1.5 million.
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A $7.1 million term loan that accrued interest at an
adjustable rate based on either LIBOR or the prime rate.
Principal payments of $286,000 plus interest were due quarterly,
with a final maturity date of June 27, 2007. The balance at
December 31, 2004 was $6.8 million.
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A delayed draw term loan facility in the amount of
$1.5 million to be used for capital expenditures. Interest
accrued at an adjustable rate based on either the LIBOR or the
prime rate. Quarterly principal payments were to commence on
March 31, 2006 in an amount equal to 5.0% of the
outstanding balance as of December 31, 2005, with a final
maturity of June 27, 2007. There were no borrowings
outstanding under this facility as of December 31, 2004.
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30
The AirComp credit facilities were secured by liens on
substantially all of AirComps assets. The agreement
governing these credit facilities contained customary events of
default and required that AirComp satisfy various financial
covenants. It also limited AirComps ability to incur
additional indebtedness, make capital expenditures, pay
dividends or make other distributions, create liens and sell
assets. We guaranteed 55% of the obligations of AirComp under
these facilities.
Tubular had two bank term loans with a remaining balance
totaling $90,000 and $263,000 at December 31, 2005 and
2004, with interest accruing at a floating interest rate based
on prime plus 2.0%. The interest rate was 9.25% and 7.25% at
December 31, 2005 and 2004. Monthly principal payments are
$13,000 plus interest. The maturity date of one of the loans,
with a balance of $60,000, was September 17, 2006, while
the second loan, with a balance of $30,000, had a final maturity
of January 12, 2007. The balances of these two loans were
repaid in full in January 2006 with the proceeds from our senior
notes offering.
AirComp had a subordinated note payable to M-I in the amount of
$4.8 million bearing interest at an annual rate of 5.0%. In
2007 each party had the right to cause AirComp to sell its
assets (or the other party may buy out such partys
interest), and in such event, this note (including accrued
interest) was due and payable. The note was also due and payable
if M-I sells its interest in AirComp or upon a termination of
AirComp. At December 31, 2004, $376,000 of interest was
included in accrued interest. On July 11, 2005, we acquired
from M-I its 45% equity interest in AirComp and the subordinated
note in the principal amount of $4.8 million issued by
AirComp, for which we paid M-I $7.1 million in cash and
issued a new $4.0 million subordinated note bearing
interest at 5% per annum. The subordinated note issued to
M-I requires quarterly interest payments and the principal
amount is due October 9, 2007. Contingent upon a future
equity offering, the subordinated note is convertible into up to
700,000 shares of our common stock at a conversion price
equal to the market value of the common stock at the time of
conversion.
Tubular had a subordinated note payable to Jens Mortensen, the
seller of Tubular and one of our directors, in the amount of
$4.0 million with a fixed interest rate of 7.5%. Interest
was payable quarterly and the final maturity of the note is
January 31, 2006. The subordinated note was subordinated to
the rights of our bank lenders. The balance outstanding for this
note at December 31, 2005 and 2004 was $3.0 and
$4.0 million, respectively. The balance of this
subordinated note was repaid in full in January 2006 with
proceeds from our senior notes offering.
As part of the acquisition of Mountain Air in 2001, we issued a
note to the sellers of Mountain Air in the original amount of
$2.2 million accruing interest at a rate of 5.75% per
annum. The note was reduced to $1.5 million as a result of
the settlement of a legal action against the sellers in 2003. In
March 2005, we reached an agreement with the sellers and holders
of the note as a result of an action brought against us by the
sellers. Under the terms of the agreement, we paid the holders
of the note $1.0 million in cash, and agreed to pay an
additional $350,000 on June 1, 2006, and an additional
$150,000 on June 1, 2007, in settlement of all claims. (See
Item 3. Legal Proceedings). At
December 31, 2005 and 2004 the outstanding amounts due were
$500,000 and $1.6 million.
In connection with the purchase of Delta, we issued to the
sellers a note in the amount of $350,000. The note bears
interest at 2% and the principal and accrued interest is due on
April 1, 2006.
In connection with the purchase of Tubular, we agreed to pay a
total of $1.2 million to Mr. Mortensen in exchange for
a non-compete agreement. Monthly payments of $20,576 are due
under this agreement through January 31, 2007. 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 annual payments of $50,000
through September 30, 2007. In connection with the purchase
of Capcoil, we agreed to pay a total of $500,000 to two
management employees in exchange for non-compete agreements. We
are required to make annual payments of $110,000 through May
2008. Total amounts due under non-compete agreements at
December 31, 2005 and 2004 were $698,000 and $664,000,
respectively.
In 2000 we compensated directors, including current directors
Nederlander and Toboroff, who served on the board of directors
from 1989 to March 31, 1999 without compensation, by
issuing promissory notes
31
totaling $325,000. The notes bear interest at the rate of 5.0%.
At December 31, 2005 and 2004, the principal and accrued
interest on these notes totaled approximately $96,000 and
$402,000, respectively.
Our subsidiary, Downhole, had notes payable to two former
shareholders totaling $49,000. We were required to make monthly
payments of $8,878 through June 30, 2005. At
December 31, 2005 and 2004, the amounts outstanding were $0
and $49,000.
We also had a real estate loan which was payable in equal
monthly installments of $4,344 with the remaining outstanding
balance due on January 1, 2010. The loan had a floating
interest rate based on prime plus 2.0%. The outstanding
principal balance was $548,000 at December 31, 2005. The
balance of this loan was prepaid in full in January 2006 with
proceeds from our senior notes offering.
In December 2003, Strata, our directional drilling subsidiary,
entered into a financing agreement with a major supplier of
downhole motors for repayment of motor lease and repair cost
totaling $1.7 million. The agreement provided for repayment
of all amounts not later than December 30, 2005. Payment of
interest was due monthly and principal payments of $582,000 were
due on April 2005 and December 2005. The interest rate was fixed
at 8.0%. As of December 31, 2005 and 2004, the outstanding
balance was $0 and $1.2 million.
We have various equipment financing loans with interest rates
ranging from 5% to 11.5% and terms ranging from 2 to
5 years. As of December 31, 2005 and 2004, the
outstanding balances for equipment financing loans were
$1.9 million and $530,000, respectively. We also have
various capital leases with terms that expire in 2008. As of
December 31, 2005 and 2004, amounts outstanding under
capital leases were $917,000 and $0, respectively. In 2006, we
prepaid $350,000 of the outstanding equipment loans with
proceeds from our senior notes offering.
Until December 2004, our Chief Executive Officer and Chairman,
Munawar H. Hidayatallah and his wife were personal guarantors of
substantially all of our financing. In December 2004, we
refinanced most of our outstanding bank debt and obtained the
release of certain guarantees. After the refinancing, Mr.
Hidayatallah continued to guarantee the Tubular subordinated
seller note until July 2005. We paid Mr. Hidayatallah an
annual guarantee fee equal to one-quarter of one percent of the
total amount of the debt guaranteed by Mr. Hidayatallah. These
fees aggregated to $7,250 during 2005.
The following table summarizes our obligations and commitments
to make future payments under our notes payable, operating
leases, employment contracts and consulting agreements for the
periods specified as of December 31, 2005.
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Payments by Period
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Less Than
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Total
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1 Year
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2-3 Years
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4-5 Years
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After 5 Years
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(In thousands)
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Contractual
Obligations
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Notes Payable
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$
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59,652
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$
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5,158
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$
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53,887
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$
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607
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$
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Capital leases(a)
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917
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474
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443
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Interest Payments on notes payable
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7,076
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4,186
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2,839
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51
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Operating Lease
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2,878
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926
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1,462
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490
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Employment Contracts
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4,016
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2,512
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1,504
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Total Contractual Cash Obligations
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$
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74,539
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$
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13,256
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$
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60,135
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$
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1,148
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$
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(a) |
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These amounts represent our minimum capital lease payments, net
of interest payments totaling $69,000. |
We have no off balance sheet arrangements, other than normal
operating leases and employee contracts shown above, that have
or are likely to have a current or future material effect on our
financial condition, changes in financial condition, revenues,
expenses, results of operations, liquidity, capital expenditures
or capital resources. We do not guarantee obligations of any
unconsolidated entities.
32
We have identified capital expenditure projects that will
require up to approximately $15.0 million in 2006,
exclusive of any acquisitions. We believe that our current cash
generated from operations, cash available under our credit
facilities and cash on hand will provide sufficient funds for
our identified projects.
We intend to implement a growth strategy of increasing the scope
of services through both internal growth and acquisitions. We
are regularly involved in discussions with a number of potential
acquisition candidates. We expect to make capital expenditures
to acquire and to maintain our existing equipment. Our
performance and cash flow from operations will be determined by
the demand for our services which in turn are affected by our
customers expenditures for oil and gas exploration and
development and industry perceptions and expectations of future
oil and gas prices in the areas where we operate. We will need
to refinance our existing debt facilities as they become due and
provide funds for capital expenditures and acquisitions. To
effect our expansion plans, we will require additional equity or
debt financing in excess of our current working capital and
amounts available under credit facilities. There can be no
assurance that we will be successful in raising the additional
debt or equity capital or that we can do so on terms that will
be acceptable to us.
Recent
Developments
In January of 2006, we acquired 100% of the outstanding stock of
Specialty Rental Tools, Inc. for $96.0 million in cash.
Specialty, located in Lafayette, Louisiana, is engaged in the
rental of high quality drill pipe, heavy weight spiral drill
pipe, tubing work strings, blow-out preventors, choke manifolds
and various valves and handling tools for oil and natural gas
drilling. During the nine months ended September 30, 2005,
Specialty generated aggregate revenues of $21.8 million.
In January of 2006, we closed on a private offering, to
qualified institutional buyers pursuant to Rule 144A under
the Securities Act of 1933, of $160.0 million principal
amount of our 9.0% senior notes due 2014, which we refer to
as our senior notes. The proceeds of the offering were used to
fund the acquisition of Specialty, to repay existing debt and
for general corporate purposes.
In January of 2006, we amended and restated our July 2005 credit
agreement to increase our borrowing capacity by exchanging the
existing two year $55.0 million facility for a new four
year $25.0 million facility. We refer to the July 2005
credit agreement, as so amended and restated, as our new credit
agreement. All amounts outstanding under the previous
$55.0 million credit facility were repaid with proceeds
from the issuance of our senior notes. The new credit
agreements interest rate is based on a margin over LIBOR
or the prime rate, and there is a 0.5% fee for the undrawn
portion. The credit facility is secured by a first priority lien
on substantially all of our assets. As of March 15, 2006,
there are no borrowings under this facility.
In January 2006, with proceeds from the sale of our senior notes
we also prepaid the $3.0 million subordinated seller note
due to Jens Mortensen, the $548,000 real estate loan and
$430,000 in various outstanding term and equipment loans.
In February of 2006, David Groshoff resigned from our Board of
Directors and the Audit Committee. Mr. Groshoff served on
our Board since 1999, initially under an agreement on behalf of
the Pension Benefit Guaranty Corporation, which is a client of
Mr. Groshoffs employer. That agreement permitted the
PBGC to appoint a member to our Board so long as the PBGC held a
minimum number of shares of Allis-Chalmers stock. The PBGC sold
all its stock in Allis-Chalmers in August 2005. As an investment
management employee of JPMorgan Asset Management,
Mr. Groshoff is subject to his employers policies
which generally prohibit employees from serving on public
company boards of directors without a meaningful client interest
in such companies. In light of the PBGCs sale of
Allis-Chalmers stock, these policies required
Mr. Groshoffs resignation from our Board. In March
2006, Robert Nederlander was appointed to the Audit Committee to
replace Mr. Groshoff.
Through March 13, 2006, we received proceeds of
approximately $784,000 from the exercise of 313,000 warrants.
33
Critical
Accounting Policies
We have identified the policies below as critical to our
business operations and the understanding of our results of
operations. The impact and any associated risks related to these
policies on our business operations is discussed throughout
Managements Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our
reported and expected financial results. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated
Financial Statements included elsewhere in this document. Our
preparation of this report requires us to make estimates and
assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at
the date of our financial statements, and the reported amounts
of revenue and expenses during the reporting period. There can
be no assurance that actual results will not differ from those
estimates.
Allowance For Doubtful Accounts. The
determination of the collectibility of amounts due from our
customers requires us to use estimates and make judgments
regarding future events and trends, including monitoring our
customer payment history and current credit worthiness to
determine that collectibility is reasonably assured, as well as
consideration of the overall business climate in which our
customers operate. Those uncertainties require us to make
frequent judgments and estimates regarding our customers
ability to pay amounts due us in order to determine the
appropriate amount of valuation allowances required for doubtful
accounts. Provisions for doubtful accounts are recorded when it
becomes evident that the customers will not be able to make the
required payments at either contractual due dates or in the
future.
Revenue Recognition. We provide rental
equipment and drilling services to our customers at per day and
per job contractual rates and recognize the drilling related
revenue as the work progresses and when collectibility is
reasonably assured. The Securities and Exchange
Commissions Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements, provides
guidance on the SEC staffs views on application of
generally accepted accounting principles to selected revenue
recognition issues. Our revenue recognition policy is in
accordance with generally accepted accounting principles and
SAB No. 104.
Impairment Of Long-Lived Assets. Long-lived
assets, which include property, plant and equipment, goodwill
and other intangibles, comprise a significant amount of our
total assets. We make judgments and estimates in conjunction
with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful
lives. Additionally, the carrying values of these assets are
reviewed for impairment or whenever events or changes in
circumstances indicate that the carrying amounts may not be
recoverable. An impairment loss is recorded in the period in
which it is determined that the carrying amount is not
recoverable. This requires us to make long-term forecasts of our
future revenues and costs related to the assets subject to
review. These forecasts require assumptions about demand for our
products and services, future market conditions and
technological developments. Significant and unanticipated
changes to these assumptions could require a provision for
impairment in a future period.
Goodwill And Other Intangibles. As of
December 31, 2005, we have recorded approximately
$12.4 million of goodwill and $6.8 million of other
identifiable intangible assets. We perform purchase price
allocations to intangible assets when we make a business
combination. Business combinations and purchase price
allocations have been consummated for acquisitions in all of our
reportable segments. The excess of the purchase price after
allocation of fair values to tangible assets is allocated to
identifiable intangibles and thereafter to goodwill.
Subsequently, we perform our initial impairment tests and annual
impairment tests in accordance with Financial Accounting
Standards Board No. 141, Business Combinations, and
Financial Accounting Standards Board No. 142, Goodwill
and Other Intangible Assets. These initial valuations used
two approaches to determine the carrying amount of the
individual reporting units. The first approach is the Discounted
Cash Flow Method, which focuses on our expected cash flow. In
applying this approach, the cash flow available for distribution
is projected for a finite period of years. Cash flow available
for distribution is defined as the amount of cash that could be
distributed as a dividend without impairing our future
profitability or operations. The cash flow available for
distribution and the terminal value (our value at the end of the
estimation period) are then discounted to present value to
derive an indication of value of the business enterprise. This
valuation method is dependent upon the assumptions made
regarding future cash flow and cash requirements. The second
approach is the Guideline Company Method which focuses on
comparing us to
34
selected reasonably similar publicly traded companies. Under
this method, valuation multiples are: (i) derived from
operating data of selected similar companies;
(ii) evaluated and adjusted based on our strengths and
weaknesses relative to the selected guideline companies; and
(iii) applied to our operating data to arrive at an
indication of value. This valuation method is dependent upon the
assumption that our value can be evaluated by analysis of our
earnings and our strengths and weaknesses relative to the
selected similar companies. Significant and unanticipated
changes to these assumptions could require a provision for
impairment in a future period.
Recently
Issued Accounting Standards
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 requires retroactive application of a
voluntary change in accounting principle to prior period
financial statements unless it is impracticable.
SFAS No. 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 is effective for fiscal
years beginning after December 15, 2005. We will adopt the
provisions of SFAS No. 154 as of January 1, 2006
and do not expect that its adoption will have a material impact
on our results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. SFAS 123R revises
SFAS No. 123, Accounting for Stock-Based
Compensation, and focuses on accounting for share-based
payments for services by employer to employee. The statement
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values. We have adopted
SFAS 123R as of January 1, 2006 and will use the
modified prospective transition method, utilizing the
Black-Scholes option pricing model for the calculation of the
fair value of our employee stock options. Under the modified
prospective method, stock option awards that are granted,
modified or settled after January 1, 2006 will be measured
and accounted for in accordance with SFAS No. 123(R).
Compensation cost for awards granted prior to, but not vested,
as of January 1, 2006 would be based on the grant date
attributes originally used to value those awards for pro forma
purposes under SFAS No. 123. We believe that the
adoption of this standard will result in an expense of
approximately $3.2 million, or a reduction in diluted
earnings per share of approximately $0.18 per share for the
full calendar year 2006. This estimate assumes no additional
grants of stock options beyond those outstanding as of
December 31, 2005. We have retained the services of a
compensation consulting firm to advise us on alternatives for
long-term incentive programs, including the future use of stock
options, if any, and other forms of incentive compensation. This
estimate is based on many assumptions including the level of
stock option grants expected in 2006, our stock price, and
significant assumptions in the option valuation model including
volatility and the expected life of options. Actual expenses
could differ from the estimate.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an Amendment of ARB
No. 43, Chapter 4, which amends the guidance in ARB
No. 43 to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that these items be
recognized as current period charges. In addition,
SFAS No. 151 requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. We are required to adopt
provisions of SFAS 151, on a prospective basis, as of
January 1, 2006. We do not believe the adoption of
SFAS 151 will have a material impact on our future results
of operations.
Risk
Factors
This Annual Report on
Form 10-K
(including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of
1934) regarding our business, financial condition, results
of operations and prospects. Words such as expects, anticipates,
intends, plans, believes, seeks, estimates and similar
expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of
identifying forward-looking statements in this Annual Report on
Form 10-K.
35
Although forward-looking statements in this Annual Report on
Form 10-K
reflect the good faith judgment of our management, such
statements can only be based on facts and factors we currently
know about. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual
results and outcomes may differ materially from the results and
outcomes discussed in the forward-looking statements. Factors
that could cause or contribute to such differences in results
and outcomes include, but are not limited to, those discussed
below and elsewhere in this Annual Report on
Form 10-K
and in our other SEC filings and publicly available documents.
Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this Annual Report on
Form 10-K.
We undertake no obligation to revise or update any
forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Annual Report
on
Form 10-K.
Risks
Associated With an Investment in Our Common Stock
Our
stock price may decrease in response to various factors, which
could adversely affect our business and cause our stockholders
to suffer significant losses. These factors
include:
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decreases in prices for oil and natural gas resulting in
decreased demand for our services;
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variations in our operating results and failure to meet
expectations of investors and analysts;
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increases in interest rates;
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the loss of customers;
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failure of customers to pay for our services;
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competition;
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illiquidity of the market for our common stock;
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sales of common stock by existing stockholders; and
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other developments affecting us or the financial markets.
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A reduced stock price will result in a loss to investors and
will adversely affect our ability to issue stock to fund our
activities.
Existing
stockholders interest in us may be diluted by additional
issuances of equity securities.
We expect to issue additional equity securities to fund the
acquisition of additional businesses and pursuant to employee
benefit plans. We may also issue additional equity for other
purposes. These securities may be on parity with our common
stock or may have dividend, liquidation, or other preferences to
our common stock. The issuance of additional equity securities
will dilute the holdings of existing stockholders and may reduce
the share price of our common stock.
We do
not expect to pay dividends on our common stock and investors
will be able to receive cash in respect of the shares of common
stock only upon the sale of the shares.
We have not within the last ten years paid any cash dividends on
our common stock. We have no intention in the foreseeable future
to pay any cash dividends on our common stock and our new credit
agreement and the indenture governing our senior notes restrict
our ability to pay dividends on our common stock. Therefore an
investor in our common stock, in all likelihood, will obtain an
economic benefit from the common stock only by selling the
common stock.
36
Risks
Associated With Our Indebtedness
We
have a substantial amount of debt which could adversely affect
our financial health and prevent us from making principal and
interest payments on our senior notes and our other
debt.
As of December 31, 2005, after giving effect to the sale of
the senior notes in January of 2006, the application of the
proceeds therefrom, and the closing of our new credit agreement,
as if each such transaction had occurred on that date, we had
approximately $168.2 million of consolidated total
indebtedness outstanding and approximately $24.4 million of
additional secured borrowing capacity available under our new
credit agreement.
Our substantial debt could:
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make it more difficult for us to satisfy our obligations with
respect to our senior notes and our other debt;
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increase our vulnerability to general adverse economic and
industry conditions, including declines in oil and natural gas
prices and declines in drilling activities;
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limit our ability to obtain additional financing for future
working capital, capital expenditures, mergers and other general
corporate purposes;
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require us to dedicate a substantial portion of our cash flow
from operations to payments on our debt, thereby reducing the
availability of our cash flow for operations and other purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate;
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make us more vulnerable to increases in interest rates;
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place us at a competitive disadvantage compared to our
competitors that have less debt; and
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have a material adverse effect on us if we fail to comply with
the covenants in the indenture relating to our senior notes or
in the instruments governing our other debt.
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In addition, we may incur substantial additional debt in the
future. The indenture governing our senior notes permits us to
incur additional debt, and our new credit agreement permits
additional borrowings. If new debt is added to our current debt
levels, these related risks could increase.
We may not maintain sufficient revenues to sustain profitability
or to meet our capital expenditure requirements and our
financial obligations. Also, we may not be able to generate a
sufficient amount of cash flow to meet our debt service
obligations.
Our ability to make scheduled payments or to refinance our
obligations with respect to our debt will depend on our
financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to certain financial,
business, and other factors beyond our control. If our cash flow
and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay scheduled
expansion and capital expenditures, sell material assets or
operations, obtain additional capital or restructure our debt.
We cannot assure you that our operating performance, cash flow
and capital resources will be sufficient for payment of our debt
in the future. In the event that we are required to dispose of
material assets or operations or restructure our debt to meet
our debt service and other obligations, we cannot assure you
that the terms of any such transaction would be satisfactory to
us or if or how soon any such transaction could be completed.
If we
fail to obtain additional financing, we may be unable to
refinance our existing debt, expand our current operations or
acquire new businesses, which could result in a failure to grow
or result in defaults in our obligations under our new credit
agreement or our senior notes.
In order to refinance indebtedness, expand existing operations
and acquire additional businesses, we will require substantial
amounts of capital. There can be no assurance that financing,
whether from equity or debt
37
financings or other sources, will be available or, if available,
will be on terms satisfactory to us. If we are unable to obtain
such financing, we will be unable to acquire additional
businesses and may be unable to meet our obligations under our
new credit agreement or our senior notes.
The
indenture governing our senior notes and our new credit
agreement impose restrictions on us that may limit the
discretion of management in operating our business and that, in
turn, could impair our ability to meet our obligations under the
senior notes.
The indenture governing our senior notes and our new credit
agreement contain various restrictive covenants that limit
managements discretion in operating our business. In
particular, these covenants limit our ability to, among other
things:
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incur additional debt;
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make certain investments or pay dividends or distributions on
our capital stock or purchase or redeem or retire capital stock;
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sell assets, including capital stock of our restricted
subsidiaries;
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restrict dividends or other payments by restricted subsidiaries;
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create liens;
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enter into transactions with affiliates; and
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merge or consolidate with another company.
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The new credit agreement also requires us to maintain specified
financial ratios and satisfy certain financial tests. Our
ability to maintain or meet such financial ratios and tests may
be affected by events beyond our control, including changes in
general economic and business conditions, and we cannot assure
you that we will maintain or meet such ratios and tests or that
the lenders under the new credit agreement will waive any
failure to meet such ratios or tests.
These covenants could materially and adversely affect our
ability to finance our future operations or capital needs.
Furthermore, they may restrict our ability to expand, to pursue
our business strategies and otherwise to conduct our business.
Our ability to comply with these covenants may be affected by
circumstances and events beyond our control, such as prevailing
economic conditions and changes in regulations, and we cannot
assure you that we will be able to comply. A breach of these
covenants could result in a default under the indenture
governing our senior notes
and/or the
new credit agreement. If there were an event of default under
the indenture governing our senior notes
and/or the
new credit agreement, the affected creditors could cause all
amounts borrowed under these instruments to be due and payable
immediately. Additionally, if we fail to repay indebtedness
under our new credit agreement when it becomes due, the lenders
under the new credit agreement could proceed against the assets
which we have pledged to them as security. Our assets and cash
flow might not be sufficient to repay our outstanding debt in
the event of a default.
Risks
Associated With Our Company
We may
fail to acquire additional businesses, which will restrict our
growth and may result in a decrease in our stock
price.
Our business strategy is to acquire companies operating in the
oil and natural gas equipment rental and services industry.
However, there can be no assurance that we will be successful in
acquiring any additional companies. Successful acquisition of
new companies will depend on various factors, including but not
limited to:
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our ability to obtain financing;
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the competitive environment for acquisitions; and
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the integration and synergy issues described in the next risk
factor.
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There can be no assurance that we will be able to acquire and
successfully operate any particular business or that we will be
able to expand into areas that we have targeted. The price of
the common stock may fall if we fail to acquire additional
businesses.
Difficulties
in integrating acquired businesses may result in reduced
revenues and income.
We may not be able to successfully integrate the businesses of
our operating subsidiaries or any business we may acquire in the
future. The integration of the businesses will be complex and
time consuming, will place a significant strain on management,
and may disrupt our businesses. We may be adversely impacted by
unknown liabilities of acquired businesses. We may encounter
substantial difficulties, costs and delays involved in
integrating common accounting, information and communication
systems, operating procedures, internal controls and human
resources practices, including incompatibility of business
cultures and the loss of key employees and customers. These
difficulties may reduce our ability to gain customers or retain
existing customers, and may increase operating expenses,
resulting in reduced revenues and income and a failure to
realize the anticipated benefits of acquisitions.
In particular, our recent acquisition of Specialty has been our
largest acquisition to date and may pose greater integration
risks than our previous acquisitions. Furthermore, by acquiring
Specialty with cash from the proceeds of our recent senior notes
offering, we will depend on Specialtys continued
performance as a source of cash flow to service our debt
obligations.
We have made numerous acquisitions during the past five years.
As a result of these transactions, our past performance is not
indicative of future performance, and investors should not base
their expectations as to our future performance on our
historical results.
Failure
to maintain effective disclosure controls and procedures
and/or
internal controls over financial reporting could have a material
adverse effect on our operations.
As disclosed in the notes to our consolidated financial
statements included elsewhere in this report and under the
caption Managements Discussion and Analysis of
Financial Condition and Results of
Operations Restatement, we understated
diluted earnings per share due to an incorrect calculation of
our weighted shares outstanding for the third quarter of 2003,
for each of the first three quarters of 2004, for the years
ended December 31, 2003 and 2004 and for the quarter ended
March 31, 2005. In addition, we understated basic earnings
per share due to an incorrect calculation of our weighted
average basic shares outstanding for the quarter ended
September 30, 2004. Consequently, we have restated our
financial statements for each of those periods. The incorrect
calculation resulted from a mathematical error and an improper
application of Statement of Financial Accounting Standards, or
SFAS, No. 128, Earnings Per Share. Management has
concluded that the need to restate our financial statements
resulted, in part, from the lack of sufficient experienced
accounting personnel, which in turn resulted in a lack of
effective control over the financial reporting process.
In addition, as part of our growth strategy, we have recently
completed several acquisitions of privately-held businesses,
including closely-held entities, and in the future, we may make
additional strategic acquisitions of privately-held businesses.
Prior to becoming part of our consolidated company, these
acquired businesses have not been required to implement or
maintain the disclosure controls and procedures or internal
controls over financial reporting that federal law requires of
publicly-held companies such as ours. Similarly, it is likely
that our future acquired businesses will not have been required
to maintain such disclosure controls and procedures or internal
controls prior to their acquisition. We are in the process of
creating and implementing appropriate disclosure controls and
procedures and internal controls over financial reporting at
each of our recently acquired businesses. However, we have not
yet completed this process and cannot assure you as to when the
process will be complete. Likewise, upon the completion of any
future acquisition, we will be required to integrate the
acquired business into our consolidated companys system of
disclosure controls and procedures and internal controls over
financial reporting, but we cannot assure you as to how long the
integration process may take for any business that we may
acquire. Furthermore, during the integration
39
process, we may not be able to fully implement our consolidated
disclosure controls and internal controls over financial
reporting.
Also, during the fourth quarter of 2005, we failed to timely
file a Current Report on
Form 8-K
relating to the issuance of shares of our common stock in
connection with recent stock option and warrant exercises. The
current report, which was due to be filed in November 2005, was
filed in February 2006.
As a result of the issues described above, our management has
concluded that, as of the end of periods covered by the
restatements and as of December 31, 2005, our disclosure
controls and procedures were not effective to enable us to
record, process, summarize and report information required to be
included in our SEC filings within the required time periods,
and to ensure that such information is accumulated and reported
to our management, including our chief executive officer and
chief financial accounting officer, to allow timely decisions
regarding required disclosure.
As more fully described below under the caption
Managements Discussion and Analysis of Financial
Condition and Results of
Operations Restatement, we have
implemented a number of actions that we believe address the
deficiencies in our financial reporting process and will improve
our disclosure controls and procedures and our internal controls
over financial reporting. However, we cannot yet assert that the
remediation is or will be effective as we have not yet had
sufficient time to test the newly implemented actions. We are in
the process of documenting and testing our internal control
procedures in order to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act, which requires
annual management assessments of the effectiveness of our
internal controls over financial reporting and a report by our
independent auditors addressing these assessments. We have also
retained the services of an independent consultant to assist us
with the documenting and testing process. During the course of
our testing we may identify deficiencies
and/or one
or more material weaknesses in our internal controls over
financial reporting, which we may not be able to remediate in
time to meet the deadline imposed by SEC rules under the
Sarbanes-Oxley Act for compliance with the requirements of
Section 404. In addition, if we fail to achieve and
maintain the adequacy of our disclosure controls and procedures
and/or our
internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to conclude
that we have effective disclosure controls and procedures
and/or
effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. If
we are not successful in improving our financial reporting
process, our disclosure controls and procedures
and/or our
internal controls over financial reporting or if we identify
deficiencies
and/or one
or more material weaknesses in our internal controls over
financial reporting, our independent registered public
accounting firm may be unable to attest that our
managements assessment of our internal controls over
financial reporting is fairly stated, or they may be unable to
express an opinion on our managements evaluation of, or on
the effectiveness of, our internal controls. If it is determined
that our disclosure controls and procedures
and/or our
internal controls over financial reporting are not effective, we
may not be able to provide reliable financial and other reports
or prevent fraud, which, in turn, could harm our business and
operating results, cause investors to lose confidence in the
accuracy and completeness of our financial reports
and/or
adversely affect our ability to timely file our periodic reports
with the SEC. Any failure to timely file our periodic reports
with the SEC may give rise to a default under the indenture
governing our senior notes and, ultimately, an acceleration of
amounts due under the senior notes. In addition, a default under
the indenture generally will also give rise to a default under
our new credit agreement and could cause the acceleration of
amounts due under the new credit agreement. If an acceleration
of our senior notes or our other debt were to occur, we cannot
assure you that we would have sufficient funds to repay such
obligations.
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The
loss of key executives would adversely affect our ability to
effectively finance and manage our business, acquire new
businesses, and obtain and retain customers.
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We are dependent upon the efforts and skills of our executives
to finance and manage our business, identify and consummate
additional acquisitions and obtain and retain customers. These
executives include:
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Chief Executive Officer and Chairman Munawar H.
Hidayatallah; and
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President and Chief Operating Officer David Wilde.
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In addition, our development and expansion will require
additional experienced management and operations personnel. No
assurance can be given that we will be able to identify and
retain these employees. The loss of the services of one or more
of our key executives could increase our exposure to the other
risks described in this Risk Factors section. We do
not maintain key man insurance on any of our personnel.
Historically,
we have been dependent on a few customers operating in a single
industry, the loss of one or more could adversely affect our
financial condition and results of operations.
Our customers are engaged in the oil and natural gas drilling
business in the United States, Mexico and elsewhere.
Historically, we have been dependent upon a few customers for a
significant portion of our revenue. In 2004, Matyep and
Burlington Resources represented 10.8% and 10.1% respectively,
of our revenues. In 2003, Matyep, Burlington Resources and
El Paso Corporation represented 10.2%, 11.1% and 14.1%,
respectively, of our revenues. This concentration of customers
may increase our overall exposure to credit risk, and customers
will likely be similarly affected by changes in economic and
industry conditions. Our financial condition and results of
operations will be materially adversely affected if one or more
of our significant customers fails to pay us or ceases to
contract with us for our services on terms that are favorable to
us or at all.
Our
international operations may expose us to political and other
uncertainties, including risks of:
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terrorist acts, war and civil disturbances;
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changes in laws or policies regarding the award of
contracts; and
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the inability to collect or repatriate income or capital.
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Part of our strategy is to prudently and opportunistically
acquire businesses and assets that complement our existing
products and services, and to expand our geographic footprint.
If we make acquisitions in other countries, we may increase our
exposure to the risks discussed above.
Environmental
liabilities could result in substantial losses.
Since our reorganization under the U.S. federal bankruptcy
laws in 1988, a number of parties, including the Environmental
Protection Agency, have asserted that we are responsible for the
cleanup of hazardous waste sites with respect to our
pre-bankruptcy activities. We believe that such claims are
barred by applicable bankruptcy law, and we have not experienced
any material expense in relation to any such claims. However, if
we do not prevail with respect to these claims in the future, or
if additional environmental claims are asserted against us
relating to our current or future activities in the oil and
natural gas industry, we could become subject to material
environmental liabilities which could have a material adverse
effect on our financial condition and results of operation.
Products
liability claims relating to discontinued operations could
result in substantial losses.
Since our reorganization under the U.S. federal bankruptcy
laws in 1988, we have been regularly named in products liability
lawsuits primarily resulting from the manufacture of products
containing asbestos. In connection with our bankruptcy, a
special products liability trust was established to address
products liability claims. We believe that claims against us are
barred by applicable bankruptcy law, and that the products
liability trust will continue to be responsible for products
liability claims. Since 1988, no court has ruled that we are
responsible for products liability claims. However, if we are
held responsible for product liability claims, we could suffer
substantial losses which could have a material adverse effect on
our financial condition and results of operation. We have not
manufactured products containing asbestos since our
reorganization in 1988.
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We may
be subject to claims for personal injury and property damage,
which could materially adversely affect our financial condition
and results of operations.
Our products and services are used for the exploration and
production of oil and natural gas. These operations are subject
to inherent hazards that can cause personal injury or loss of
life, damage to or destruction of property, equipment, the
environment and marine life, and suspension of operations.
Litigation arising from an accident at a location where our
products or services are used or provided may cause us to be
named as a defendant in lawsuits asserting potentially large
claims. We maintain customary insurance to protect our business
against these potential losses. Our insurance has deductibles or
self-insured retentions and contains certain coverage
exclusions. However, we could become subject to material
uninsured liabilities which could have a material adverse effect
on our financial condition and results of operation.
Risks
Associated with Our Industry
Cyclical
declines in oil and natural gas prices may result in reduced use
of our services, affecting our business, financial condition and
results of operation and our ability to meet our capital
expenditure obligations and financial commitments.
The oil and natural gas exploration and drilling business is
highly cyclical. Generally, as oil and natural gas prices
decrease, exploration and drilling activity declines as
marginally profitable projects become uneconomic and are either
delayed or eliminated. Declines in the number of operating
drilling rigs result in reduced use of and prices for our
services. Accordingly, when oil and natural gas prices are
relatively low, our revenues and income will suffer. Oil and
natural gas prices depend on many factors beyond our control,
including the following:
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economic conditions in the United States and elsewhere;
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changes in global supply and demand for oil and natural gas;
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the level of production of the Organization of Petroleum
Exporting Countries, commonly called OPEC;
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the level of production of non-OPEC countries;
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the price and quantity of imports of foreign oil and natural gas;
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political conditions, including embargoes, in or affecting other
oil and natural gas producing activities;
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the level of global oil and natural gas inventories; and
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advances in exploration, development and production technologies.
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Depending on the market prices of oil and natural gas, companies
exploring for oil and natural gas may cancel or curtail their
drilling programs, thereby reducing demand for drilling
services. Our contracts are generally short-term, and oil and
natural gas companies tend to respond quickly to upward or
downward changes in prices. Any reduction in the demand for
drilling services may materially erode both pricing and
utilization rates for our services and adversely affect our
financial results. As a result, we may suffer losses, be unable
to make necessary capital expenditures and be unable to meet our
financial obligations.
Our
industry is highly competitive, with intense price
competition.
The markets in which we operate are highly competitive.
Contracts are traditionally awarded on a competitive bid basis.
Pricing is often the primary factor in determining which
qualified contractor is awarded a job. The competitive
environment has intensified as recent mergers among oil and
natural gas companies have reduced the number of available
customers. Many other oilfield services companies are larger
than us and have greater resources than we have. These
competitors are better able to withstand industry downturns,
compete on the basis of price and acquire new equipment and
technologies, all of which could affect our revenues and
profitability. These competitors compete with us both for
customers and for acquisitions of other businesses. This
competition may cause our business to suffer. We believe that
competition for contracts will continue to be intense in the
foreseeable future.
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We may
experience increased labor costs or the unavailability of
skilled workers and the failure to retain key personnel could
hurt our operations.
Companies in our industry, including us, are dependent upon the
available labor pool of skilled employees. We compete with other
oilfield services businesses and other employers to attract and
retain qualified personnel with the technical skills and
experience required to provide our customers with the highest
quality service. We are also subject to the Fair Labor Standards
Act, which governs such matters as minimum wage, overtime and
other working conditions. A shortage in the labor pool of
skilled workers or other general inflationary pressures or
changes in applicable laws and regulations could make it more
difficult for us to attract and retain personnel and could
require us to enhance our wage and benefits packages. There can
be no assurance that labor costs will not increase. Any increase
in our operating costs could cause our business to suffer.
Severe
weather could have a material adverse impact on our
business.
Our business could be materially and adversely affected by
severe weather. Repercussions of severe weather conditions may
include:
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curtailment of services;
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weather-related damage to facilities and equipment resulting in
suspension of operations;
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inability to deliver materials to job sites in accordance with
contract schedules; and
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loss of productivity.
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In addition, oil and natural gas operations of our customers
located offshore and onshore in the Gulf of Mexico and in Mexico
may be adversely affected by hurricanes and tropical storms,
resulting in reduced demand for our services. Further, our
customers operations in the Mid-Continent and Rocky
Mountain regions of the United States are also adversely
affected by seasonal weather conditions. This limits our access
to these job sites and our ability to service wells in these
areas. These constraints decrease drilling activity and the
resulting shortages or high costs could delay our operations and
materially increase our operating and capital costs.
Our
business may be affected by terrorist activity and by security
measures taken in response to terrorism.
We may experience loss of business or delays or defaults in
payments from payers that have been affected by actual or
potential terrorist activities. Some oil and natural gas
drilling companies have implemented security measures in
response to potential terrorist activities, including access
restrictions, that could adversely affect our ability to market
our services to new and existing customers and could increase
our costs. Terrorist activities and potential terrorist
activities and any resulting economic downturn could adversely
impact our results of operations, impair our ability to raise
capital or otherwise adversely affect our ability to grow our
business.
We are
subject to government regulations.
We are subject to various federal, state and local laws and
regulations relating to the energy industry in general and the
environment in particular. Environmental laws have in recent
years become more stringent and have generally sought to impose
greater liability on a larger number of potentially responsible
parties. Although we are not aware of any proposed material
changes in any federal, state and local statutes, rules or
regulations, any changes could materially affect our financial
condition and results of operations.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
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We are exposed to market risk primarily from changes in interest
rates and foreign currency exchange risks.
Interest
Rate Risk
Fluctuations in the general level of interest rates on our
current and future fixed and variable rate debt obligations
expose us to market risk. We are vulnerable to significant
fluctuations in interest rates on our variable rate debt and on
any future repricing or refinancing of our fixed rate debt and
on future debt.
At December 31, 2005, we were exposed to interest rate
fluctuations on approximately $49.0 million of notes
payable and bank credit facility borrowings carrying variable
interest rates. A hypothetical one hundred basis point increase
in interest rates for these notes payable would increase our
annual interest expense by approximately $490,000. Due to the
uncertainty of fluctuations in interest rates and the specific
actions that might be taken by us to mitigate the impact of such
fluctuations and their possible effects, the foregoing
sensitivity analysis assumes no changes in our financial
structure.
We have also been subject to interest rate market risk for
short-term invested cash and cash equivalents. The principal of
such invested funds would not be subject to fluctuating value
because of their highly liquid short-term nature. As of
December 31, 2005, we had $1.1 million invested in
short-term maturing investments.
Foreign
Currency Exchange Rate Risk
We conduct business in Mexico through our Mexican partner,
Matyep. This business exposes us to foreign exchange risk. To
control this risk, we provide for payment in U.S. dollars.
However, we have historically provided our partner a discount
upon payment equal to 50% of any loss suffered by our partner as
a result of devaluation of the Mexican peso between the date of
invoicing and the date of payment. During 2005 and 2004 the
discounts have not exceeded $10,000 per year.
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ITEM 8.
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FINANCIAL
STATEMENTS.
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Allis-Chalmers Energy Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of
Allis-Chalmers Energy Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and cash
flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Allis-Chalmers Energy Inc.
and subsidiaries as of December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows
for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ UHY Mann Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
March 21, 2006
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REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Allis-Chalmers Energy Inc.
Houston, Texas
We have audited the accompanying consolidated statements of
operations, stockholders equity and cash flows for the
year ended December 31, 2003 of Allis-Chalmers Energy Inc.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit in accordance with the Standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of its consolidated operations and cash flows for the year ended
December 31, 2003 of Allis-Chalmers Energy Inc., in
conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note-2 to the consolidated financial statements,
the Company restated the consolidated financial statements as of
and for the year ended December 31, 2003.
/s/ GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
March 3, 2004, except as to Note 11 which date is
June 10, 2004 and Notes 2 and 17 which date is
February 10, 2005 and
Note 2 which date is August 5, 2005.
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ALLIS-CHALMERS
ENERGY INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except for share
amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,920
|
|
|
$
|
7,344
|
|
Trade receivables, net of
allowance for doubtful accounts of $383 and $265 at
December 31, 2005 and 2004, respectively
|
|
|
26,964
|
|
|
|
12,986
|
|
Inventory
|
|
|
5,945
|
|
|
|
2,373
|
|
Lease receivable, current
|
|
|
|
|
|
|
180
|
|
Prepaid expenses and other
|
|
|
823
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
35,652
|
|
|
|
24,378
|
|
Property and equipment, at costs
net of accumulated depreciation of $9,996 and $5,251 at
December 31, 2005 and 2004, respectively
|
|
|
80,574
|
|
|
|
37,679
|
|
Goodwill
|
|
|
12,417
|
|
|
|
11,776
|
|
Other intangible assets, net of
accumulated amortization of $3,163 and $2,036 at
December 31, 2005 and 2004, respectively
|
|
|
6,783
|
|
|
|
5,057
|
|
Debt issuance costs, net of
accumulated amortization of $299 and $828 at December 31,
2005 and 2004, respectively
|
|
|
1,298
|
|
|
|
685
|
|
Lease receivable, less current
portion
|
|
|
|
|
|
|
558
|
|
Other assets
|
|
|
631
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
137,355
|
|
|
$
|
80,192
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current maturities of long-term
debt
|
|
$
|
5,632
|
|
|
$
|
5,541
|
|
Trade accounts payable
|
|
|
9,018
|
|
|
|
5,694
|
|
Accrued salaries, benefits and
payroll taxes
|
|
|
1,271
|
|
|
|
615
|
|
Accrued interest
|
|
|
289
|
|
|
|
470
|
|
Accrued expenses
|
|
|
4,350
|
|
|
|
1,852
|
|
Accounts payable, related parties
|
|
|
60
|
|
|
|
740
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,620
|
|
|
|
14,912
|
|
Accrued postretirement benefit
obligations
|
|
|
335
|
|
|
|
687
|
|
Long-term debt, net of current
maturities
|
|
|
54,937
|
|
|
|
24,932
|
|
Other long-term liabilities
|
|
|
588
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
76,480
|
|
|
|
40,660
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
|
|
|
|
4,423
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value (25,000,000 shares authorized, none issued)
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value
(100,000,000 shares authorized;16,859,988 issued and
outstanding at December 31, 2005 and 20,000,000 shares
authorized and 13,611,525 issued and outstanding at
December 31, 2004)
|
|
|
169
|
|
|
|
136
|
|
Capital in excess of par value
|
|
|
58,889
|
|
|
|
40,331
|
|
Retained earnings (deficit)
|
|
|
1,817
|
|
|
|
(5,358
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
60,875
|
|
|
|
35,109
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
137,355
|
|
|
$
|
80,192
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
47
ALLIS-CHALMERS
ENERGY INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
|
Revenues
|
|
$
|
105,344
|
|
|
$
|
47,726
|
|
|
$
|
32,724
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
69,889
|
|
|
|
32,598
|
|
|
|
21,977
|
|
Depreciation
|
|
|
4,874
|
|
|
|
2,702
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
30,581
|
|
|
|
12,426
|
|
|
|
8,695
|
|
General and administrative expense
|
|
|
15,928
|
|
|
|
7,135
|
|
|
|
5,285
|
|
Amortization
|
|
|
1,787
|
|
|
|
876
|
|
|
|
884
|
|
Post-retirement medical costs
|
|
|
(352
|
)
|
|
|
188
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
13,218
|
|
|
|
4,227
|
|
|
|
2,625
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,397
|
)
|
|
|
(2,808
|
)
|
|
|
(2,467
|
)
|
Settlement on lawsuit
|
|
|
|
|
|
|
|
|
|
|
1,034
|
|
Gain on sale of interest in AirComp
|
|
|
|
|
|
|
|
|
|
|
2,433
|
|
Other
|
|
|
186
|
|
|
|
304
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(4,211
|
)
|
|
|
(2,504
|
)
|
|
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
and income taxes
|
|
|
9,007
|
|
|
|
1,723
|
|
|
|
3,640
|
|
Minority interest in income of
subsidiaries
|
|
|
(488
|
)
|
|
|
(321
|
)
|
|
|
(343
|
)
|
Provision for income taxes
|
|
|
(1,344
|
)
|
|
|
(514
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,175
|
|
|
|
888
|
|
|
|
2,927
|
|
Preferred stock dividend
|
|
|
|
|
|
|
(124
|
)
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed to common
stockholders
|
|
$
|
7,175
|
|
|
$
|
764
|
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common
share basic
|
|
$
|
0.48
|
|
|
$
|
0.10
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common
share diluted
|
|
$
|
0.44
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832
|
|
|
|
7,930
|
|
|
|
3,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,238
|
|
|
|
9,510
|
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
48
ALLIS-CHALMERS
ENERGY INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Retained
|
|
|
|
|
|
|
Common Stock
|
|
|
Excess of
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Par Value
|
|
|
(Deficit)
|
|
|
Total
|
|
|
|
(In thousands, except share
amounts)
|
|
|
Balances, December 31, 2002
|
|
|
3,926,668
|
|
|
$
|
39
|
|
|
$
|
10,143
|
|
|
$
|
(9,173
|
)
|
|
$
|
1,009
|
|
Net income (restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,927
|
|
|
|
2,927
|
|
Effect of consolidation of AirComp
|
|
|
|
|
|
|
|
|
|
|
955
|
|
|
|
|
|
|
|
955
|
|
Accrual of preferred dividends
|
|
|
|
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
(350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003,
as restated
|
|
|
3,926,668
|
|
|
|
39
|
|
|
|
10,748
|
|
|
|
(6,246
|
)
|
|
|
4,541
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888
|
|
|
|
888
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
1,868,466
|
|
|
|
19
|
|
|
|
8,592
|
|
|
|
|
|
|
|
8,611
|
|
Private placement
|
|
|
6,081,301
|
|
|
|
61
|
|
|
|
15,600
|
|
|
|
|
|
|
|
15,661
|
|
Services
|
|
|
17,000
|
|
|
|
|
|
|
|
99
|
|
|
|
|
|
|
|
99
|
|
Conversion of preferred stock
|
|
|
1,718,090
|
|
|
|
17
|
|
|
|
4,278
|
|
|
|
|
|
|
|
4,295
|
|
Issuance of stock purchase warrants
|
|
|
|
|
|
|
|
|
|
|
1,138
|
|
|
|
|
|
|
|
1,138
|
|
Accrual of preferred dividends
|
|
|
|
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
13,611,525
|
|
|
|
136
|
|
|
|
40,331
|
|
|
|
(5,358
|
)
|
|
|
35,109
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,175
|
|
|
|
7,175
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
411,275
|
|
|
|
4
|
|
|
|
1,746
|
|
|
|
|
|
|
|
1,750
|
|
Secondary public offering
|
|
|
1,761,034
|
|
|
|
18
|
|
|
|
15,441
|
|
|
|
|
|
|
|
15,459
|
|
Stock options and warrants
exercised
|
|
|
1,076,154
|
|
|
|
11
|
|
|
|
1,371
|
|
|
|
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
16,859,988
|
|
|
$
|
169
|
|
|
$
|
58,889
|
|
|
$
|
1,817
|
|
|
$
|
60,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
49
ALLIS-CHALMERS
ENERGY INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,175
|
|
|
$
|
888
|
|
|
$
|
2,927
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,874
|
|
|
|
2,702
|
|
|
|
2,052
|
|
Amortization
|
|
|
1,787
|
|
|
|
876
|
|
|
|
884
|
|
Write-off of deferred financing
fees due to refinancing
|
|
|
653
|
|
|
|
|
|
|
|
|
|
Issuance of stock options for
services
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Amortization of discount on debt
|
|
|
9
|
|
|
|
350
|
|
|
|
516
|
|
(Gain) on change in PBO liability
|
|
|
(352
|
)
|
|
|
|
|
|
|
(125
|
)
|
(Gain) on settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
(1,034
|
)
|
(Gain) on sale of interest in
AirComp
|
|
|
|
|
|
|
|
|
|
|
(2,433
|
)
|
Minority interest in income of
subsidiaries
|
|
|
488
|
|
|
|
321
|
|
|
|
343
|
|
(Gain) loss on sale of property
|
|
|
(669
|
)
|
|
|
|
|
|
|
82
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(10,437
|
)
|
|
|
(2,292
|
)
|
|
|
(4,414
|
)
|
(Increase) in due from related
party
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
(Increase) in other current assets
|
|
|
(2,143
|
)
|
|
|
(612
|
)
|
|
|
(1,260
|
)
|
Decrease (increase) in other assets
|
|
|
(936
|
)
|
|
|
(19
|
)
|
|
|
1
|
|
Decrease in lease deposit
|
|
|
|
|
|
|
|
|
|
|
525
|
|
Increase in accounts payable
|
|
|
2,373
|
|
|
|
1,140
|
|
|
|
2,251
|
|
(Decrease) increase in accrued
interest
|
|
|
324
|
|
|
|
299
|
|
|
|
(126
|
)
|
(Decrease) increase in accrued
expenses
|
|
|
(97
|
)
|
|
|
(276
|
)
|
|
|
397
|
|
(Decrease) increase in other
long-term liabilities
|
|
|
86
|
|
|
|
(141
|
)
|
|
|
|
|
Increase in accrued
salaries,benefits and payroll taxes
|
|
|
443
|
|
|
|
19
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
3,578
|
|
|
|
3,262
|
|
|
|
1,879
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(36,888
|
)
|
|
|
(4,459
|
)
|
|
|
|
|
Purchase of property and equipment
|
|
|
(17,767
|
)
|
|
|
(4,603
|
)
|
|
|
(5,354
|
)
|
Proceeds from sale of property and
equipment
|
|
|
1,579
|
|
|
|
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(53,076
|
)
|
|
|
(9,062
|
)
|
|
|
(4,511
|
)
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
56,251
|
|
|
|
8,169
|
|
|
|
14,127
|
|
Payments on long-term debt
|
|
|
(28,202
|
)
|
|
|
(13,259
|
)
|
|
|
(10,826
|
)
|
Payments on related party debt
|
|
|
(1,522
|
)
|
|
|
(246
|
)
|
|
|
(246
|
)
|
Net borrowings on lines of credit
|
|
|
2,527
|
|
|
|
689
|
|
|
|
1,138
|
|
Proceeds from issuance of common
stock
|
|
|
15,459
|
|
|
|
16,883
|
|
|
|
|
|
Proceeds from exercise of options
and warrants
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(1,821
|
)
|
|
|
(391
|
)
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
44,074
|
|
|
|
11,845
|
|
|
|
3,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
(5,424
|
)
|
|
|
6,045
|
|
|
|
1,153
|
|
Cash and cash equivalents at
beginning of year
|
|
|
7,344
|
|
|
|
1,299
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
1,920
|
|
|
$
|
7,344
|
|
|
$
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Financial Statements.
50
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial Statements
|
|
NOTE 1
|
NATURE OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
of Business
Allis-Chalmers Energy Inc. (Allis-Chalmers or
We) was incorporated in Delaware in 1913. OilQuip
Rentals, Inc. (OilQuip), an oil and gas rental
company, was incorporated on February 4, 2000 to find and
acquire acquisition targets to operate as subsidiaries.
On February 6, 2001, OilQuip, through its subsidiary,
Mountain Compressed Air Inc. (Mountain Air), a Texas
corporation, acquired certain assets of Mountain Air Drilling
Service Co., Inc, whose business consisted of providing
equipment and trained personnel in the Four Corners area of the
southwestern United States. Mountain Air primarily provided
compressed air equipment and related products and services and
trained operators to companies in the business of drilling for
natural gas. On May 9, 2001, OilQuip merged into a
subsidiary of Allis-Chalmers Energy Inc. In the merger, all of
OilQuips outstanding common stock was converted into
2.0 million shares of Allis-Chalmers common stock.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent
company of Mountain Air. However, for accounting purposes,
OilQuip was treated as the acquiring company in a reverse
acquisition of Allis-Chalmers.
On February 6, 2002, we acquired 81% of the outstanding
stock of Allis-Chalmers Tubular Services Inc.
(Tubular), formerly known as Jens Oilfield
Service, Inc., which supplies highly specialized equipment and
operations to install casing and production tubing required to
drill and complete oil and gas wells. On February 2, 2002,
we also purchased substantially all of the outstanding common
stock and preferred stock of Strata Directional Technology, Inc.
(Strata), which provides high-end directional and
horizontal drilling services for specific targeted reservoirs
that cannot be reached vertically.
In July 2003, through its subsidiary Mountain Air, we entered
into a limited liability company operating agreement with a
division of M-I L.L.C. (M-I), a joint venture
between Smith International and Schlumberger N.V. (Schlumberger
Limited), to form a Texas limited liability company named
AirComp LLC (AirComp). The assets contributed by
Mountain Air were recorded at Mountain Airs historical
cost of $6.3 million, and the assets contributed by M-I
were recorded at fair market value of $10.3 million. We
originally owned 55% and M-I originally owned 45% of AirComp. As
a result of our controlling interest and operating control, we
consolidated AirComp in our financial statements. AirComp is in
the compressed air drilling services segment.
On September 23, 2004, we acquired 100% of the outstanding
stock of Safco-Oil Field Products, Inc. (Safco) for
$1.0 million. Safco leases spiral drill pipe and provides
related oilfield services to the oil drilling industry.
On September 30, 2004, we acquired the remaining 19% of
Tubular in exchange for 1.3 million shares of our
common stock. The total value of the consideration paid to the
seller, Jens Mortensen, was $6.4 million which was equal to
the number of shares of common stock issued to
Mr. Mortensen multiplied by the last sale price ($4.95) of
the common stock as reported on the American Stock Exchange on
the date of issuance.
On November 10, 2004, AirComp acquired substantially all
the assets of Diamond Air Drilling Services, Inc. and Marquis
Bit Co., L.L.C. collectively (Diamond Air) for
$4.6 million in cash and the assumption of approximately
$450,000 of accrued liabilities. 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
provides 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.
On December 10, 2004, we acquired Downhole Injection
Services, LLC (Downhole) for approximately
$1.1 million in cash, 568,466 shares of common stock
and payment or assumption of $950,000 of debt. Downhole is
headquartered in Midland, Texas, and provides chemical
treatments to wells by inserting small diameter, stainless steel
coiled tubing into producing oil and gas wells.
51
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
On April 1, 2005, we acquired 100% of the outstanding stock
of Delta Rental Service, Inc. (Delta) for
$4.6 million in cash, 223,114 shares of our common
stock and two promissory notes totaling $350,000. Delta, located
in Lafayette, Louisiana, is a rental tool company providing
specialty rental items to the oil and gas industry such as
spiral heavy weight drill pipe, test plugs used to test blow-out
preventors, well head retrieval tools, spacer spools and
assorted handling tools.
On May 1, 2005, we acquired 100% of the outstanding capital
stock of Capcoil Tubing Services, Inc. (Capcoil) for
$2.7 million in cash, 168,161 shares of our common
stock and the payment or assumption of approximately
$1.3 million of debt. Capcoil, located in Kilgore, Texas,
is engaged in downhole well servicing by providing coil tubing
services to enhance production from existing wells.
On July 11, 2005, we acquired the compressed air drilling
assets of W.T. Enterprises, Inc. (W.T.), based in
South Texas, for $6.0 million in cash. The equipment
includes compressors, boosters, mist pumps and vehicles.
On July 11, 2005, we acquired from M-I its 45% interest in
AirComp and subordinated note in the principal amount of
$4.8 million issued by AirComp, for which we paid M-I
$7.1 million in cash and issued to M-I a $4.0 million
subordinated note bearing interest at 5% per annum. As a
result, we now own 100% of AirComp.
Effective August 1, 2005, we acquired 100% of the
outstanding capital stock of Target Energy Inc.
(Target) for $1.3 million in cash and
forgiveness of a lease receivable of approximately
$0.6 million. The results of Target are included in our
directional and horizontal drilling segment as their Measure
While Drilling equipment is utilized in that segment.
On September 1, 2005, we acquired the casing and tubing
service assets of Patterson Services, Inc. for approximately
$15.6 million. These assets are located in Corpus Christi,
Texas; Kilgore, Texas; Lafayette, Louisiana and Houma, Louisiana.
Vulnerabilities
and Concentrations
We provide oilfield services in several regions, including the
states of Texas, Utah, Louisiana, Colorado, Oklahoma, and New
Mexico, the Gulf of Mexico and southern portions of Mexico. The
nature of our operations and the many regions in which we
operate subject us to changing economic, regulatory and
political conditions. We are vulnerable to near-term and
long-term changes in the demand for and prices of oil and
natural gas and the related demand for oilfield service
operations.
Use
of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Future events and
their effects cannot be perceived with certainty. Accordingly,
our accounting estimates require the exercise of judgment. While
management believes that the estimates and assumptions used in
the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates.
Estimates are used for, but are not limited to, determining the
following: allowance for doubtful accounts, recoverability of
long-lived assets and intangibles, useful lives used in
depreciation and amortization, income taxes and valuation
allowances. The accounting estimates used in the preparation of
the consolidated financial statements
52
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
may change as new events occur, as more experience is acquired,
as additional information is obtained and as our operating
environment changes.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Allis-Chalmers and its subsidiaries. Our subsidiaries at
December 31, 2005 are Oil Quip, Mountain Air, Tubular,
Strata, AirComp, Safco, Downhole, Delta, Capcoil and Target. All
significant inter-company transactions have been eliminated.
Revenue
Recognition
We provide rental equipment and drilling services to our
customers at per day and per job contractual rates and recognize
the drilling related revenue as the work progresses and when
collectibility is reasonably assured. The Securities and
Exchange Commissions (SEC) Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition In Financial Statements
(SAB No. 104), provides guidance on
the SEC staffs views on the application of generally
accepted accounting principles to selected revenue recognition
issues. Our revenue recognition policy is in accordance with
generally accepted accounting principles and
SAB No. 104.
Allowance
for Doubtful Accounts
Accounts receivable are customer obligations due under normal
trade terms. We sell our services to oil and natural gas
exploration and production companies. We perform continuing
credit evaluations of its customers financial condition
and although we generally does not require collateral, letters
of credit may be required from customers in certain
circumstances.
We record an allowance for doubtful accounts based on
specifically identified amounts that are determined
uncollectible. We have a limited number of customers with
individually large amounts due at any given date. Any
unanticipated change in any one of these customers credit
worthiness or other matters affecting the collectibility of
amounts due from such customers could have a material effect on
the results of operations in the period in which such changes or
events occur. After all attempts to collect a receivable have
failed, the receivable is written off against the allowance. As
of December 31, 2005 and 2004, we had recorded an allowance
for doubtful accounts of $383,000 and $265,000 respectively. Bad
debt expense was $219,000, $104,000 and $136,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
Cash
Equivalents
We consider all highly liquid investments with an original
maturity of three months or less at the time of purchase to be
cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first in,
first out (FIFO) method or the
average cost method, which approximates FIFO, and includes the
cost of materials, labor and manufacturing overhead.
Property
and Equipment
Property and equipment is recorded at cost less accumulated
depreciation. Certain equipment held under capital leases are
classified as equipment and the related obligations are recorded
as liabilities.
Maintenance and repairs, which do not improve or extend the life
of the related assets, are charged to operations when incurred.
Refurbishments and renewals are capitalized when the value of
the equipment is enhanced for an extended period. When property
and equipment are sold or otherwise disposed of, the asset
53
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations.
The cost of property and equipment currently in service is
depreciated over the estimated useful lives of the related
assets, which range from three to twenty years. Depreciation is
computed on the straight-line method for financial reporting
purposes. Capital leases are amortized using the straight-line
method over the estimated useful lives of the assets and lease
amortization is included in depreciation expense. Depreciation
expense charged to operations was $4.9 million,
$2.7 million and $2.1 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
Goodwill,
Intangible Assets and Amortization
Goodwill, including goodwill associated with equity method
investments, and other intangible assets with infinite lives are
not amortized, but tested for impairment annually or more
frequently if circumstances indicate that impairment may exist.
Intangible assets with finite useful lives are amortized either
on a straight-line basis over the assets estimated useful
life or on a basis that reflects the pattern in which the
economic benefits of the intangible assets are realized.
We perform impairment tests on the carrying value of our
goodwill on an annual basis as of December 31st for each of
our reportable segments. As of December 31, 2005 and 2004,
no evidence of impairment exists.
|
|
|
Impairment
of Long-Lived Assets
|
Long-lived assets, which include property, plant and equipment
and other intangible assets, and certain other assets are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recorded in the period in
which it is determined that the carrying amount is not
recoverable. The determination of recoverability is made based
upon the estimated undiscounted future net cash flows, excluding
interest expense. The impairment loss is determined by comparing
the fair value, as determined by a discounted cash flow
analysis, with the carrying value of the related assets.
Financial
Instruments
Financial instruments consist of cash and cash equivalents,
accounts receivable and payable, and debt. The carrying value of
cash and cash equivalents and accounts receivable and payable
approximate fair value due to their short-term nature. We
believe the fair values and the carrying value of our debt would
not be materially different due to the instruments
interest rates approximating market rates for similar borrowings
at December 31, 2005 and 2004.
Concentration
of Credit and Customer Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and trade accounts receivable. We transact our
business with several financial institutions. However, the
amount on deposit in two financial institutions exceeded the
$100,000 federally insured limit at December 31, 2005 by a
total of $2.0 million. Management believes that the
financial institutions are financially sound and the risk of
loss is minimal.
We sell our services to major and independent domestic and
international oil and gas companies. We perform ongoing credit
valuations of our customers and provide allowances for probable
credit losses where appropriate. In 2005, none of our customers
accounted for more than 10% of our consolidated revenues. In the
year ended December 31, 2004, Matyep in Mexico represented
10.8%, and Burlington Resources represented 10.1% of our
consolidated revenues, respectively. In the year ended
December 31, 2003, Matyep, Burlington
54
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Resources, Inc., and El Paso Energy Corporation represented
10.2%, 11.1% and 14.1%, respectively, of our consolidated
revenues. Revenues from Matyep represented 94.5%, 98.0% and 100%
of our international revenues in 2005, 2004 and 2003,
respectively.
Debt
Issuance Costs
The costs related to the issuance of debt are capitalized and
amortized to interest expense using the straight-line method,
which approximates the interest method, over the maturity
periods of the related debt.
Income
Taxes
We use the liability method for determining our income taxes,
under which current and deferred tax liabilities and assets are
recorded in accordance with enacted tax laws and rates. Under
this method, the amounts of deferred tax liabilities and assets
at the end of each period are determined using the tax rate
expected to be in effect when taxes are actually paid or
recovered. Future tax benefits are recognized to the extent that
realization of such benefits is more likely than not.
Deferred income taxes are provided for the estimated income tax
effect of temporary differences between financial and tax bases
in assets and liabilities. Deferred tax assets are also provided
for certain tax credit carryforwards. A valuation allowance to
reduce deferred tax assets is established when it is more likely
than not that some portion or all of the deferred tax assets
will not be realized.
Stock-Based
Compensation
We account for our stock-based compensation using Accounting
Principle Board Opinion No. 25 (APB
No. 25). Under APB No. 25, compensation expense
is recognized for stock options with an exercise price that is
less than the market price on the grant date of the option. For
stock options with exercise prices at or above the market value
of the stock on the grant date, we adopted the disclosure-only
provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting For Stock-Based
Compensation (SFAS 123). We also adopted
the disclosure-only provisions of SFAS No. 123 for the
stock options granted to our employees and directors.
Accordingly, no compensation cost has been recognized under APB
No. 25. Had compensation expense for the options granted
been recorded based on the fair value at the grant date for the
options, consistent with the provisions of SFAS 123, our
net income/(loss) and net income/(loss) per share for the years
ended December 31, 2005, 2004, and 2003 would have been
decreased to the pro forma amounts indicated below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Net income attributed to common
stockholders as reported:
|
|
|
|
$
|
7,175
|
|
|
$
|
764
|
|
|
$
|
2,271
|
|
Less total stock based employee
compensation expense determined under fair value based method
for all awards net of tax related effects
|
|
|
|
|
(4,284
|
)
|
|
|
(1,072
|
)
|
|
|
(2,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net income (loss)
attributed to common stockholders
|
|
|
|
$
|
2,891
|
|
|
$
|
(308
|
)
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
As reported
|
|
$
|
0.48
|
|
|
$
|
0.10
|
|
|
$
|
0.58
|
|
|
|
Pro forma
|
|
$
|
0.19
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
As reported
|
|
$
|
0.44
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
|
Pro forma
|
|
$
|
0.18
|
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
55
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Options were granted in 2005, 2004 and 2003. See Note 12
for further disclosures regarding stock options. The following
assumptions were applied in determining the pro forma
compensation costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected price volatility
|
|
|
84.28%
|
|
|
|
89.76%
|
|
|
|
265.08%
|
|
Risk-free interest rate
|
|
|
5.6%
|
|
|
|
7.00%
|
|
|
|
6.25%
|
|
Expected life of options
|
|
|
7 years
|
|
|
|
7 years
|
|
|
|
7 years
|
|
Weighted average fair value of
options
|
|
|
|
|
|
|
|
|
|
|
|
|
granted at market value
|
|
$
|
5.02
|
|
|
$
|
3.19
|
|
|
$
|
2.78
|
|
Segments
of an Enterprise and Related Information
We disclose the results of our segments in accordance with
SFAS No. 131, Disclosures About Segments Of An
Enterprise And Related Information
(SFAS No. 131). We designate the
internal organization that is used by management for allocating
resources and assessing performance as the source of our
reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and
major customers Please see Note 18 for further disclosure
of segment information in accordance with SFAS No. 131.
Pension
and Other Post Retirement Benefits
SFAS No. 132, Employers Disclosures About
Pension And Other Post Retirement Benefits
(SFAS No. 132), requires certain
disclosures about employers pension and other post
retirement benefit plans and specifies the accounting and
measurement or recognition of those plans.
SFAS No. 132 requires disclosure of information on
changes in the benefit obligations and fair values of the plan
assets that facilitates financial analysis. Please see
Note 3 for further disclosure in accordance with
SFAS No. 132.
Income
Per Common Share
We compute income per common share in accordance with the
provisions of SFAS No. 128, Earnings Per Share
(SFAS No. 128). SFAS No. 128
requires companies with complex capital structures to present
basic and diluted earnings per share. Basic earnings per share
are computed on the basis of the weighted average number of
shares of common stock outstanding during the period. For
periods through April 12, 2004, preferred dividends are
deducted from net income and have been considered in the
calculation of income available to common stockholders in
computing basic earnings per share. Diluted earnings per share
is similar to basic earnings per share, but presents the
dilutive effect on a per share basis of potential common shares
(e.g., convertible preferred stock, stock options, etc.) as if
they had been converted. Potential dilutive common shares that
have an anti-dilutive effect (e.g., those that increase income
per share) are excluded from diluted earnings per share.
56
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
The components of basic and diluted earnings per share are as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(Restated)
|
|
|
(Restated)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available for common
stockholders
|
|
$
|
7,175
|
|
|
$
|
764
|
|
|
$
|
2,271
|
|
Plus income impact of assumed
conversions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends/interest
|
|
|
|
|
|
|
124
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
stockholders plus assumed conversions
|
|
$
|
7,175
|
|
|
$
|
888
|
|
|
$
|
2,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares outstanding
|
|
|
14,832
|
|
|
|
7,930
|
|
|
|
3,927
|
|
Effect of potentially dilutive
common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock and
employee and director stock options
|
|
|
1,406
|
|
|
|
1,580
|
|
|
|
1,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding and assumed conversions
|
|
|
16,238
|
|
|
|
9,510
|
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.48
|
|
|
$
|
0.10
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.09
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
Certain prior period balances have been reclassified to conform
to current year presentation.
New
Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 requires retroactive application of a
voluntary change in accounting principle to prior period
financial statements unless it is impracticable.
SFAS No. 154 also requires that a change in the method
of depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 is effective for fiscal
years beginning after December 15, 2005. We will adopt the
provisions of SFAS No. 154 as of January 1, 2006
and do not expect that its adoption will have a material impact
on our results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. SFAS No. 123R revises
SFAS No. 123, Accounting for Stock-Based
Compensation, and focuses on accounting for share-based
payments for services by employer to employee. The statement
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial
statements based on their fair values. We will adopt
SFAS No. 123R as of January 1, 2006 and will use
the modified prospective transition method, utilizing the
Black-Scholes option pricing model for the calculation of the
fair value of our employee stock options. Under the modified
prospective method, stock option awards that are granted,
modified or settled after January 1, 2006 will be measured
and accounted for in accordance with SFAS No. 123R.
Compensation cost for awards granted prior to, but not vested,
as of January 1, 2006 would be based on the grant date
attributes originally used to value those awards for pro forma
purposes under
57
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
SFAS No. 123. We believe that the adoption of this
standard will result in an expense of approximately
$3.2 million, or a reduction in diluted earnings per share
of approximately $0.18 per share. This estimate assumes no
additional grants of stock options beyond those outstanding as
of December 31, 2005. This estimate is based on many
assumptions including the level of stock option grants expected
in 2006, our stock price, and significant assumptions in the
option valuation model including volatility and the expected
life of options. Actual expenses could differ from the estimate.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an Amendment of ARB
No. 43, Chapter 4, which amends the guidance in ARB
No. 43 to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted
material. SFAS No. 151 requires that these items be
recognized as current period charges. In addition,
SFAS No. 151 requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. We are required to adopt
provisions of SFAS 151, on a prospective basis, as of
January 1, 2006. We do not believe the adoption of
SFAS 151 will have a material impact on our future results
of operations.
Earnings
Per Share
We understated diluted earnings per share due to an incorrect
calculation of our weighted shares outstanding for the third
quarter of 2003, for each of the first three quarters of 2004,
for the years ended December 31, 2003 and 2004 and for the
quarter ended March 31, 2005. In addition, we understated
basic earnings per share due to an incorrect calculation of our
weighted average basic shares outstanding for the quarter ended
September 30, 2004. Consequently, we have restated our
financial statements for each of those periods. The incorrect
calculation resulted from a mathematical error and an improper
application of SFAS No. 128. The effect of the
restatement is to reduce weighted average basic and diluted
shares outstanding for the three and nine months ended
September 30, 2004. Consequently, weighted average basic
and diluted earnings per share for the three and nine months
ended September 30, 2004 were increased.
A restated earnings per share calculation for all affected
periods reflecting the above adjustments to our results as
previously restated (see following section), is presented below
(amounts in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2005
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.09
|
|
|
$
|
0.02
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
17,789
|
|
|
|
(3,094
|
)
|
|
|
14,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
11,959
|
|
|
|
(2,449
|
)
|
|
|
9,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2004
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common
share basic
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share- diluted
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,599
|
|
|
|
(3,301
|
)
|
|
|
8,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,407
|
|
|
|
(4,579
|
)
|
|
|
9,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
2004
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,237
|
|
|
|
(2,618
|
)
|
|
|
7,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2004
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,762
|
|
|
|
478
|
|
|
|
6,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.39
|
|
|
$
|
0.11
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,761
|
|
|
|
89
|
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Income per common share- diluted
|
|
$
|
0.60
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,761
|
|
|
|
208
|
|
|
|
5,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AirComp
Acquisition
In connection with the formation of AirComp LLC in 2003, we,
along with M-I L.L.C. contributed assets to AirComp in exchange
for a 55% interest and 45% interest, respectively, in AirComp.
We originally
59
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
accounted for the formation of AirComp as a joint venture.
However in February 2005, we determined that the transaction
should have been accounted for using purchase accounting
pursuant to SFAS No. 141, Business Combinations
and recorded the sale of an interest in a subsidiary, in
accordance with SEC Staff Accounting Bulletin No. 51,
Accounting for Sales of Stock by a Subsidiary.
Consequently, we restated our financial statements for the
quarter ended September 30, 2003, for the year ended
December 31, 2003 and for the three quarters ended
September 30, 2004, to reflect the following adjustments:
Increase
in Book Value of Fixed Assets.
Under joint venture accounting, we originally recorded the value
of the assets contributed by M-I to AirComp at M-Is
historical cost of $6.9 million. Under purchase accounting,
we increased the recorded value of the assets contributed by M-I
by approximately $3.3 million to $10.3 million to
reflect their fair market value as determined by a third party
appraisal. In addition, under joint venture accounting, we
established negative goodwill which reduced fixed assets in the
amount of $1.6 million. The negative goodwill was amortized
by us over the lives of the related fixed assets. Under purchase
accounting, we increased fixed assets by $1.6 million to
reverse the negative goodwill previously recorded and reversed
amortization expenses recorded in 2004. Therefore, the cost of
fixed assets was increased by a total of $4.9 million at
the time of acquisition. As a result of the increase in fixed
assets and the reversal of amortization of negative goodwill,
depreciation expense increased by $98,000 for the year ended
December 31, 2003.
Increase
in Minority Interest and Capital in Excess of Par
Value.
Under purchase accounting, minority interest was increased by
$1.5 million, which was partially offset by minority
interest expense of $44,000 for the year ended December 31,
2003. Under purchase accounting, the capital in excess of par
was increased by $955,000.
60
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
A restated consolidated balance sheet, reflecting the above
adjustments follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,299
|
|
|
$
|
|
|
|
$
|
1,299
|
|
Trade receivables, net
|
|
|
8,823
|
|
|
|
|
|
|
|
8,823
|
|
Lease receivable, current
|
|
|
180
|
|
|
|
|
|
|
|
180
|
|
Prepaid expenses and other
|
|
|
887
|
|
|
|
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,189
|
|
|
|
|
|
|
|
11,189
|
|
Property and equipment, net
|
|
|
26,339
|
|
|
|
4,789
|
|
|
|
31,128
|
|
Goodwill
|
|
|
7,661
|
|
|
|
|
|
|
|
7,661
|
|
Other intangible assets, net
|
|
|
2,290
|
|
|
|
|
|
|
|
2,290
|
|
Debt issuance costs, net
|
|
|
567
|
|
|
|
|
|
|
|
567
|
|
Lease receivable, less current
portion
|
|
|
787
|
|
|
|
|
|
|
|
787
|
|
Other
|
|
|
40
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
48,873
|
|
|
$
|
4,789
|
|
|
$
|
53,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
Current maturities of long-term
debt
|
|
$
|
3,992
|
|
|
$
|
|
|
|
$
|
3,992
|
|
Trade accounts payable
|
|
|
3,133
|
|
|
|
|
|
|
|
3,133
|
|
Accrued salaries, benefits and
payroll taxes
|
|
|
591
|
|
|
|
|
|
|
|
591
|
|
Accrued interest
|
|
|
152
|
|
|
|
|
|
|
|
152
|
|
Accrued expenses
|
|
|
1,761
|
|
|
|
|
|
|
|
1,761
|
|
Accounts payable, related parties
|
|
|
787
|
|
|
|
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,416
|
|
|
|
|
|
|
|
10,416
|
|
Accrued postretirement benefit
obligations
|
|
|
545
|
|
|
|
|
|
|
|
545
|
|
Long-term debt, net of current
maturities
|
|
|
28,241
|
|
|
|
|
|
|
|
28,241
|
|
Other long-term liabilities
|
|
|
270
|
|
|
|
|
|
|
|
270
|
|
Redeemable warrants
|
|
|
1,500
|
|
|
|
|
|
|
|
1,500
|
|
Redeemable convertible preferred
stock and dividends
|
|
|
4,171
|
|
|
|
|
|
|
|
4,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
45,143
|
|
|
|
|
|
|
|
45,143
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests
|
|
|
2,523
|
|
|
|
1,455
|
|
|
|
3,978
|
|
Stockholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
39
|
|
|
|
|
|
|
|
39
|
|
Capital in excess of par value
|
|
|
9,793
|
|
|
|
955
|
|
|
|
10,748
|
|
Accumulated (deficit)
|
|
|
(8,625
|
)
|
|
|
2,379
|
|
|
|
(6,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,207
|
|
|
|
3,334
|
|
|
|
4,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
48,873
|
|
|
$
|
4,789
|
|
|
$
|
53,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Increase
in Net Income.
Under joint venture accounting, no gain or loss was recognized
in connection with the formation of AirComp. Under purchase
accounting, we recorded a $2.4 million non-operating gain
in the third quarter of 2003.
As a result of the increase in fixed assets, depreciation
expense was increased for the year ended December 31, 2003
by $98,000 and minority interest expense decreased by $44,000,
resulting in a reduction in net income attributable to common
stockholders of $54,000. However, as a result of recording the
non-operating gain, net income attributed to common stockholders
increased by $2.4 million for the year ended
December 31, 2003.
A restated consolidated income statement reflecting the above
adjustments follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Revenue
|
|
$
|
32,724
|
|
|
$
|
|
|
|
$
|
32,724
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
21,977
|
|
|
|
|
|
|
|
21,977
|
|
Depreciation
|
|
|
1,954
|
|
|
|
98
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
8,793
|
|
|
|
(98
|
)
|
|
|
8,695
|
|
General and administrative expense
|
|
|
5,285
|
|
|
|
|
|
|
|
5,285
|
|
Amortization
|
|
|
884
|
|
|
|
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,624
|
|
|
|
(98
|
)
|
|
|
2,526
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(2,464
|
)
|
|
|
|
|
|
|
(2,464
|
)
|
Settlement on lawsuit
|
|
|
1,034
|
|
|
|
|
|
|
|
1,034
|
|
Gain on sale of stock in a
subsidiary
|
|
|
|
|
|
|
2,433
|
|
|
|
2,433
|
|
Other
|
|
|
111
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(1,319
|
)
|
|
|
2,433
|
|
|
|
1,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before minority
interest and income taxes
|
|
|
1,305
|
|
|
|
2,335
|
|
|
|
3,640
|
|
Minority interest in income of
subsidiaries
|
|
|
(387
|
)
|
|
|
44
|
|
|
|
(343
|
)
|
Provision for foreign income tax
|
|
|
(370
|
)
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
548
|
|
|
|
2,379
|
|
|
|
2,927
|
|
Preferred stock dividend
|
|
|
(656
|
)
|
|
|
|
|
|
|
(656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to
common stockholders
|
|
$
|
(108
|
)
|
|
$
|
2,379
|
|
|
$
|
2,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share basic
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share diluted
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,927
|
|
|
|
|
|
|
|
3,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,761
|
|
|
|
|
|
|
|
5,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
A restated consolidated statement of cash flows reflecting the
adjustments follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
Cash Flows From Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
548
|
|
|
$
|
2,379
|
|
|
$
|
2,927
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
2,838
|
|
|
|
98
|
|
|
|
2,936
|
|
Amortization of discount on debt
|
|
|
516
|
|
|
|
|
|
|
|
516
|
|
(Gain) on change PBO liability
|
|
|
(125
|
)
|
|
|
|
|
|
|
(125
|
)
|
(Gain) on settlement of lawsuit
|
|
|
(1,034
|
)
|
|
|
|
|
|
|
(1,034
|
)
|
(Gain) on sale of interest in
AirComp
|
|
|
|
|
|
|
(2,433
|
)
|
|
|
(2,433
|
)
|
Minority interest in income of
subsidiaries
|
|
|
387
|
|
|
|
(44
|
)
|
|
|
343
|
|
Loss on sale of property
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in accounts receivable
|
|
|
(4,414
|
)
|
|
|
|
|
|
|
(4,414
|
)
|
(Increase) in other current assets
|
|
|
(1,260
|
)
|
|
|
|
|
|
|
(1,260
|
)
|
Decrease in other assets
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Decrease in lease deposit
|
|
|
525
|
|
|
|
|
|
|
|
525
|
|
Increase in accounts payable
|
|
|
2,251
|
|
|
|
|
|
|
|
2,251
|
|
(Decrease) in accrued interest
|
|
|
(126
|
)
|
|
|
|
|
|
|
(126
|
)
|
Increase in accrued expenses
|
|
|
397
|
|
|
|
|
|
|
|
397
|
|
Increase in accrued employee
benefits and payroll taxes
|
|
|
1,293
|
|
|
|
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
1,879
|
|
|
|
|
|
|
|
1,879
|
|
Cash Flows From Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(5,354
|
)
|
|
|
|
|
|
|
(5,354
|
)
|
Proceeds from sale of equipment
|
|
|
843
|
|
|
|
|
|
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing
activities
|
|
|
(4,511
|
)
|
|
|
|
|
|
|
(4,511
|
)
|
Cash Flows From Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
long-term debt
|
|
|
14,127
|
|
|
|
|
|
|
|
14,127
|
|
Repayments of long-term debt
|
|
|
(10,826
|
)
|
|
|
|
|
|
|
(10,826
|
)
|
Repayments on related party debt
|
|
|
(246
|
)
|
|
|
|
|
|
|
(246
|
)
|
Borrowing on lines of credit
|
|
|
30,537
|
|
|
|
|
|
|
|
30,537
|
|
Repayments on lines of credit
|
|
|
(29,399
|
)
|
|
|
|
|
|
|
(29,399
|
)
|
Debt issuance costs
|
|
|
(408
|
)
|
|
|
|
|
|
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
3,785
|
|
|
|
|
|
|
|
3,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
1,153
|
|
|
|
|
|
|
|
1,153
|
|
Cash and cash equivalents at
beginning of the year
|
|
|
146
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of the period
|
|
$
|
1,299
|
|
|
$
|
|
|
|
$
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,341
|
|
|
$
|
|
|
|
$
|
2,341
|
|
63
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
In addition, the 2004 financial statements have been restated
from the previously filed interim financial statements included
in
Form 10-Q
for the first, second and third quarters of 2004. The effect of
the restatement on the individual quarterly financial statements
is as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
Net income (loss) attributed to
common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
501
|
|
|
$
|
434
|
|
|
$
|
576
|
|
Adjustment depreciation
expense
|
|
|
(139
|
)
|
|
|
(79
|
)
|
|
|
(79
|
)
|
Adjustment minority
interest expense
|
|
|
22
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
$
|
384
|
|
|
$
|
377
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
$
|
0.05
|
|
Total adjustments
|
|
|
(0.03
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the accompanying 2003 financial statements have
been restated from the previously filed interim financial
statements included in
Form 10-Q
for the first, second and third quarters of 2003. An adjustment
was recorded in the fourth quarter of 2003 to reflect a change
in estimate of the recoverability of foreign taxes paid in 2002
and 2003. The effect of the significant fourth quarter
adjustment on the individual quarterly financial statements is
as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2003
|
|
|
2003
|
|
|
2003
|
|
|
Net income (loss) attributed to
common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
(183
|
)
|
|
$
|
(330
|
)
|
|
$
|
1,136
|
|
Adjustment gain
on sale of stock in a subsidiary
|
|
|
|
|
|
|
|
|
|
|
2,433
|
|
Adjustment depreciation
expense
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Adjustment minority
interest expense
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Adjustment foreign
tax expense
|
|
|
(158
|
)
|
|
|
(92
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
$
|
(341
|
)
|
|
$
|
(422
|
)
|
|
$
|
3,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously reported
|
|
$
|
(0.05
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.29
|
|
Total adjustments
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
$
|
(0.09
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3
|
POST
RETIREMENT BENEFIT OBLIGATIONS
|
Medical
And Life
Pursuant to the Plan of Reorganization that was confirmed by the
Bankruptcy Court after acceptances by our creditors and
stockholders and was consummated on December 2, 1988, we
assumed the contractual obligation to Simplicity Manufacturing,
Inc. (SMI) to reimburse SMI for 50% of the actual cost of
medical and life insurance claims for a select group of retirees
(SMI Retirees) of the prior Simplicity Manufacturing
64
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Division of Allis-Chalmers. The actuarial present value of the
expected retiree benefit obligation is determined by an actuary
and is the amount that results from applying actuarial
assumptions to (1) historical claims-cost data,
(2) estimates for the time value of money (through
discounts for interest) and (3) the probability of payment
(including decrements for death, disability, withdrawal, or
retirement) between today and expected date of benefit payments.
As of December 31, 2005, 2004 and 2003, we have
post-retirement benefit obligations of $335,000, $687,000 and
$545,000, respectively.
401(k)
Savings Plan
On June 30, 2003, we adopted the 401(k) Profit Sharing Plan
(the Plan). The Plan is a defined contribution
savings plan designed to provide retirement income to our
eligible employees. The Plan is intended to be qualified under
Section 401(k) of the Internal Revenue Code of 1986, as
amended. It is funded by voluntary pre-tax contributions from
eligible employees who may contribute a percentage of their
eligible compensation, limited and subject to statutory limits.
The Plan is also funded by discretionary matching employer
contributions from us. Eligible employees cannot participate in
the Plan until they have attained the age of 21 and completed
six-months of service with us. Each participant is 100% vested
with respect to the participants contributions while our
matching contributions are vested over a three-year period in
accordance with the Plan document. Contributions are invested,
as directed by the participant, in investment funds available
under the Plan. Matching contributions of approximately
$114,000, $35,000 and $10,000 were paid in 2005, 2004 and 2003,
respectively.
In July 2003, through our subsidiary Mountain Air, we entered
into a limited liability company operating agreement with a
division of M-I, a joint venture between Smith International and
Schlumberger N.V. (Schlumberger Limited), to form AirComp,
a Texas limited liability company. The assets contributed by
Mountain Air were recorded at Mountain Airs historical
cost of $6.3 million, and the assets contributed by M-I
were recorded at a fair market value of $10.3 million. We
originally owned 55% and M-I originally owned 45% of AirComp. As
a result of our controlling interest and operating control, we
consolidated AirComp in our financial statements. AirComp
comprises the compressed air drilling services segment.
In September 2004, we acquired 100% of the outstanding stock of
Safco for $1.0 million. Safco leases spiral drill pipe and
provides related oilfield services to the oil drilling industry.
In September 2004, we acquired the remaining 19% of Tubular in
exchange for 1.3 million shares of our common stock. The
total value of the consideration paid to the seller, Jens
Mortensen, 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 the balance sheet, the
$1.9 million minority interest in Tubular was eliminated.
The balance of the contribution of $4.4 million was
allocated as follows: In June 2004, we obtained an appraisal of
the fixed assets of Tubular which valued the fixed assets at
$20.1 million. The book value of the fixed assets was
$15.8 million and the fixed assets appraised value was
$4.3 million over the book value. We increased the value of
our fixed assets by 19% of the amount of the excess of the
appraised value over the book value, or $.8 million. The
remaining balance of $3.6 million was allocated to goodwill.
In November 2004, AirComp acquired substantially all the assets
of Diamond Air for $4.6 million in cash and the assumption
of approximately $450,000 of accrued liabilities. We contributed
$2.5 million and
M-I L.L.C.
contributed $2.1 million to AirComp LLC in order to fund
the purchase. Goodwill of $375,000 and other intangible assets
of $2.3 million were recorded in connection with the
acquisition. Diamond Air provides 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.
65
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
In December 2004, we acquired Downhole for approximately
$1.1 million in cash, 568,466 shares of our common
stock and the assumption of approximately $950,000 of debt.
Goodwill of $442,000 and other intangible assets of $795,000
were recorded in connection with the acquisition. Downhole
provides economical chemical treatments to wells by inserting
small diameter, stainless steel coiled tubing into producing oil
and gas wells.
On April 1, 2005, we acquired 100% of the outstanding stock
of Delta for $4.6 million in cash, 223,114 shares of
our common stock and two promissory notes totaling $350,000. The
purchase price was allocated to fixed assets and inventory.
Delta, located in Lafayette, Louisiana, is a rental tool company
providing specialty rental items to the oil and gas industry
such as spiral heavy weight drill pipe, test plugs used to test
blow-out preventors, well head retrieval tools, spacer spools
and assorted handling tools.
On May 1, 2005, we acquired 100% of the outstanding capital
stock of Capcoil for $2.7 million in cash,
168,161 shares of our common stock and the payment or
assumption of approximately $1.3 million of debt. Capcoil,
located in Kilgore, Texas, is engaged in downhole well servicing
by providing coil tubing services to enhance production from
existing wells. Goodwill of $184,000 and other identifiable
intangible assets of $1.4 million were recorded in
connection with the acquisition.
On July 11, 2005, we acquired the compressed air drilling
assets of W.T., based in South Texas, for $6.0 million in
cash. The equipment includes compressors, boosters, mist pumps
and vehicles. Goodwill of $82,000 and other identifiable
intangible assets of $1.5 million were recorded in
connection with the acquisition.
On July 11, 2005, we acquired from M-I its 45% interest in
AirComp and subordinated note in the principal amount of
$4.8 million issued by AirComp, for which we paid M-I
$7.1 million in cash and issued to M-I a $4.0 million
subordinated note bearing interest at 5% per annum. As a
result, we now own 100% of AirComp
Effective August 1, 2005, we acquired 100% of the
outstanding capital stock of Target for $1.3 million in
cash and forgiveness of a lease receivable of approximately
$0.6 million. The purchase price was allocated to the fixed
assets of Target and resulted in the recording of a
$0.8 million deferred tax liability. The results of Target
are included in our directional and horizontal drilling segment
as their Measure While Drilling equipment is utilized in that
segment.
On September 1, 2005, we acquired the casing and tubing
service assets of Patterson Services, Inc. for approximately
$15.6 million. These assets are located in Corpus Christi,
Texas; Kilgore, Texas; Lafayette, Louisiana and Houma, Louisiana.
The acquisitions were accounted for using the purchase method of
accounting. The results of operations of the acquired entities
since the date of acquisition are included in our consolidated
income statement.
The following unaudited pro forma consolidated summary financial
information for the year ended December 31, 2005
illustrates the effects of the acquisitions of Delta, Capcoil,
W.T. and the minority interest in AirComp as if the acquisitions
had occurred as of January 1, 2005, based on the historical
results of the acquisitions. The following unaudited pro forma
consolidated summary financial information for the years ended
December 31, 2004 and 2003 illustrates the effects of the
acquisitions of Diamond Air, Downhole, Delta, Capcoil, W.T. and
the minority interest in AirComp as if the acquisitions had
occurred as of beginning
66
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
of the period, based on the historical results of the
acquisitions (unaudited) (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
$
|
110,383
|
|
|
$
|
70,988
|
|
|
$
|
52,588
|
|
Operating income
|
|
$
|
14,143
|
|
|
$
|
8,233
|
|
|
$
|
4,276
|
|
Net income
|
|
$
|
8,180
|
|
|
$
|
4,000
|
|
|
$
|
2,459
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
|
$
|
0.46
|
|
|
$
|
0.53
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
0.48
|
|
|
$
|
0.48
|
|
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Hammer bits
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
1,402
|
|
|
$
|
857
|
|
Work in process
|
|
|
787
|
|
|
|
385
|
|
Raw materials
|
|
|
233
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Total hammer bits
|
|
|
2,422
|
|
|
|
1,393
|
|
Hammers
|
|
|
584
|
|
|
|
417
|
|
Drive pipe
|
|
|
666
|
|
|
|
|
|
Rental supplies
|
|
|
64
|
|
|
|
|
|
Chemicals
|
|
|
201
|
|
|
|
254
|
|
Coiled tubing and related inventory
|
|
|
1,145
|
|
|
|
309
|
|
Shop supplies and related inventory
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
5,945
|
|
|
$
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6
|
PROPERTY
AND OTHER INTANGIBLE ASSETS
|
Property and equipment is comprised of the following at
December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
Period
|
|
2005
|
|
|
2004
|
|
|
Land
|
|
|
|
$
|
27
|
|
|
$
|
27
|
|
Building and improvements
|
|
15-20 years
|
|
|
637
|
|
|
|
633
|
|
Transportation equipment
|
|
3-7 years
|
|
|
7,772
|
|
|
|
4,854
|
|
Machinery and equipment
|
|
3-20 years
|
|
|
77,002
|
|
|
|
36,411
|
|
Furniture, computers, software and
leasehold improvements
|
|
3-7 years
|
|
|
2,073
|
|
|
|
1,005
|
|
Construction in
progress equipment
|
|
N/A
|
|
|
3,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
90,570
|
|
|
|
42,930
|
|
Less: accumulated depreciation
|
|
|
|
|
(9,996
|
)
|
|
|
(5,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
80,574
|
|
|
$
|
37,679
|
|
|
|
|
|
|
|
|
|
|
|
|
67
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
The net book value of equipment recorded under capital leases
was $908 and $0 at December 31, 2005 and 2004, respectively.
Intangible assets are as follows at December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Period
|
|
2005
|
|
|
2004
|
|
|
Intellectual property
|
|
20 years
|
|
$
|
1,009
|
|
|
$
|
1,009
|
|
Non-compete agreements
|
|
3-5 years
|
|
|
4,630
|
|
|
|
2,856
|
|
Patent
|
|
15 years
|
|
|
496
|
|
|
|
496
|
|
Other intangible assets
|
|
3-10
years
|
|
|
3,811
|
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
9,946
|
|
|
$
|
7,093
|
|
Less: accumulated amortization
|
|
|
|
|
(3,163
|
)
|
|
|
(2,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles assets, net
|
|
|
|
$
|
6,783
|
|
|
$
|
5,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Current Year
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Current Year
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Value
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Intellectual property
|
|
$
|
1,009
|
|
|
$
|
293
|
|
|
$
|
54
|
|
|
$
|
1,009
|
|
|
$
|
239
|
|
|
$
|
56
|
|
Non-compete agreements
|
|
|
4,630
|
|
|
|
1,916
|
|
|
|
884
|
|
|
|
2,856
|
|
|
|
1,032
|
|
|
|
300
|
|
Patent
|
|
|
496
|
|
|
|
39
|
|
|
|
33
|
|
|
|
496
|
|
|
|
6
|
|
|
|
6
|
|
Other intangible assets
|
|
|
3,811
|
|
|
|
915
|
|
|
|
277
|
|
|
|
2,732
|
|
|
|
759
|
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,946
|
|
|
$
|
3,163
|
|
|
$
|
1,248
|
|
|
$
|
7,093
|
|
|
$
|
2,036
|
|
|
$
|
782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future amortization of intangible assets at December 31,
2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Amortization by
Period
|
|
|
|
Years Ended
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 and
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Thereafter
|
|
|
Intellectual property
|
|
$
|
55
|
|
|
$
|
55
|
|
|
$
|
55
|
|
|
$
|
55
|
|
|
$
|
496
|
|
Non-compete agreements
|
|
|
1,043
|
|
|
|
804
|
|
|
|
480
|
|
|
|
327
|
|
|
|
60
|
|
Patent
|
|
|
33
|
|
|
|
33
|
|
|
|
33
|
|
|
|
33
|
|
|
|
325
|
|
Other intangible assets
|
|
|
395
|
|
|
|
370
|
|
|
|
359
|
|
|
|
359
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Intangible Amortization
|
|
$
|
1,526
|
|
|
$
|
1,262
|
|
|
$
|
927
|
|
|
$
|
774
|
|
|
$
|
2,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
The income tax provision consists of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
595
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
626
|
|
|
|
514
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,344
|
|
|
$
|
514
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are required to file a consolidated U.S. federal income
tax return. We pay foreign income taxes in Mexico related to
Allis-Chalmers Tubular Services Mexico revenues. There are
approximately $1.6 million of U.S. foreign tax credits
available to us and of that amount, the available
U.S. foreign tax credits may or may not be recoverable by
us depending upon the availability of taxable income in future
years and therefore, have not been recorded as an asset as of
December 31, 2005. Our foreign tax credits begin to expire
in the year 2007.
The following table reconciles the U.S. statutory tax rate
to our actual tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Income tax expense based on the
U.S. statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
Foreign income at other than
U.S. rate
|
|
|
7.3
|
|
|
|
36.6
|
|
|
|
11.2
|
|
Valuation allowances
|
|
|
(98.7
|
)
|
|
|
(209.4
|
)
|
|
|
28.6
|
|
Nondeductible items, permanent
differences and other
|
|
|
67.1
|
|
|
|
175.4
|
|
|
|
(62.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
15.8
|
%
|
|
|
36.6
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences are differences between the tax basis of
assets and liabilities and their reported amounts in the
financial statements that will result in differences between
income for tax purposes and income for financial statement
purposes in future years. A valuation allowance is established
for deferred tax assets when management, based upon available
information, considers it more likely than not that a benefit
from such assets will not be realized. We have recorded a
valuation allowance equal to the excess of deferred tax assets
over deferred tax liabilities as we were unable to determine
that it is more likely than not that the deferred tax asset will
be realized.
The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carry forwards
if there has been a change of ownership as described
in Section 382 of the Internal Revenue Code. Such a change
of ownership may limit the our utilization of our net operating
loss and tax credit carry forwards, and could be triggered by a
public offering or by subsequent sales of securities by us or
our stockholders.
69
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Deferred income tax assets and the related allowance as of
December 31, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred non-current income tax
assets:
|
|
|
|
|
|
|
|
|
Net future (taxable) deductible
items
|
|
$
|
384
|
|
|
$
|
533
|
|
Net operating loss carry forwards
|
|
|
5,656
|
|
|
|
4,894
|
|
A-C Reorganization Trust claims
|
|
|
29,098
|
|
|
|
30,112
|
|
|
|
|
|
|
|
|
|
|
Total deferred non-current income
tax assets
|
|
|
35,138
|
|
|
|
35,539
|
|
Valuation allowance
|
|
|
(27,131
|
)
|
|
|
(30,367
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred non-current income
taxes
|
|
$
|
8,007
|
|
|
$
|
5,172
|
|
Deferred non-current income tax
liabilities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
(8,007
|
)
|
|
$
|
(5,172
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards for tax purposes at
December 31, 2005 and 2004 were estimated to be
$16.6 million and $14.5 million, respectively,
expiring through 2024.
Net future tax-deductible items relate primarily to timing
differences. Our 1988 Plan of Reorganization established the A-C
Reorganization Trust to settle claims and to make distributions
to creditors and certain stockholders. We transferred cash and
certain other property to the A-C Reorganization Trust on
December 2, 1988. Payments made by us to the A-C
Reorganization Trust did not generate tax deductions for us upon
the transfer but generate deductions for us as the A-C
Reorganization Trust makes payments to holders of claims.
The Plan of Reorganization also created a trust to process and
liquidate product liability claims. Payments made by the A-C
Reorganization Trust to the product liability trust did not
generate current tax deductions for us upon the payment but
generate deductions for us as the product liability trust makes
payments to liquidate claims or incurs other expenses.
We believe the above-named trusts are grantor trusts and
therefore we include the income or loss of these trusts in our
income or loss for tax purposes, resulting in an adjustment of
the tax basis of net operating and capital loss carry forwards.
The income or loss of these trusts is not included in our
results of operations for financial reporting purposes.
70
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
Our long-term debt consists of the following: (in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Bank term loans
|
|
$
|
42,090
|
|
|
$
|
13,373
|
|
Revolving line of credit
|
|
|
6,400
|
|
|
|
3,873
|
|
Subordinated note payable to M-I
LLC
|
|
|
4,000
|
|
|
|
4,818
|
|
Subordinated seller note
|
|
|
3,031
|
|
|
|
4,000
|
|
Seller note
|
|
|
850
|
|
|
|
1,600
|
|
Notes payable under non-compete
agreements
|
|
|
698
|
|
|
|
664
|
|
Notes payable to former directors
|
|
|
96
|
|
|
|
402
|
|
Notes payable to former
shareholders
|
|
|
|
|
|
|
49
|
|
Real estate loan
|
|
|
548
|
|
|
|
|
|
Vendor financing
|
|
|
|
|
|
|
1,164
|
|
Equipment & vehicle
installment notes
|
|
|
1,939
|
|
|
|
530
|
|
Capital lease obligations
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
60,569
|
|
|
|
30,473
|
|
Less: short-term debt and current
maturities
|
|
|
5,632
|
|
|
|
5,541
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$
|
54,937
|
|
|
$
|
24,932
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 and 2004, our debt was
approximately $60.6 million and $30.5 million,
respectively. Our weighted average interest rate for all of our
outstanding debt was approximately 7.5% at December 31,
2005 and 7.3% at December 31, 2004.
Maturities of debt obligations at December 31, 2005 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
Capital Leases
|
|
|
Total
|
|
|
Year Ending:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
5,158
|
|
|
$
|
474
|
|
|
$
|
5,632
|
|
December 31, 2007
|
|
|
49,620
|
|
|
|
443
|
|
|
|
50,063
|
|
December 31, 2008
|
|
|
4,267
|
|
|
|
|
|
|
|
4,267
|
|
December 31, 2009
|
|
|
69
|
|
|
|
|
|
|
|
69
|
|
December 31, 2010
|
|
|
538
|
|
|
|
|
|
|
|
538
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,652
|
|
|
$
|
917
|
|
|
$
|
60,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
loans and line of credit agreements
On July 11, 2005, we replaced our previous credit agreement
with a new agreement that provided for the following senior
secured credit facilities:
|
|
|
|
|
A $13.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivable plus 50% of
eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was used to
finance working capital requirements and other general corporate
purposes, including the issuance of standby letters of credit.
Outstanding borrowings under
|
71
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
this line of credit were $6.4 million at a margin above
prime and LIBOR rates plus margin averaging approximately 8.1%
as of December 31, 2005.
|
|
|
|
|
Two term loans totaling $42.0 million. Outstanding
borrowings under these term loans were $42.0 million as of
December 31, 2005. These loans were at LIBOR rates plus a
margin which averages approximately 7.8%.
|
We borrowed against the July 2005 facilities to refinance our
prior credit facility and the AirComp credit facility, to fund
the acquisition of M-Is interest in AirComp and the air
drilling assets of W.T. and to pay transaction costs related to
the refinancing and the acquisitions. We incurred debt
retirement expense of $1.1 million related to the
refinancing. This amount includes prepayment penalties and the
write-off of deferred financing fees of the previous financing,
which has been included in interest expense in the consolidated
statement of operations.
Borrowings under the July 2005 credit facilities were to mature
in July 2007. Amounts outstanding under the term loans as of
July 2006 were to be repaid in monthly principal payments based
on a 48 month repayment schedule with the remaining balance
due at maturity. Additionally, during the second year, we were
to be required to prepay the remaining balance of the term loans
by 75% of excess cash flow, if any, after debt service and
capital expenditures. The interest rate payable on borrowings
was based on a margin over the London Interbank Offered Rate,
referred to as LIBOR, or the prime rate, and there was a 0.5%
fee on the undrawn portion of the revolving line of credit. The
margin over LIBOR was to increase by 1.0% in the second year.
The credit facilities were secured by substantially all of our
assets and contain customary events of default and financial and
other covenants, including limitations on our ability to incur
additional indebtedness, make capital expenditures, pay
dividends or make other distributions, create liens and sell
assets.
All amounts outstanding under our July 2005 credit agreement
were paid off with the proceeds of our senior notes offering in
January 2006. We executed an amended and restated credit
agreement which provides a $25.0 million revolving line of
credit (See Note 22).
Prior to July 11, 2005, we had a credit agreement dated
December 7, 2004 that provided for the following credit
facilities:
|
|
|
|
|
A $10.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivables, as defined.
Outstanding borrowings under this line of credit were
$2.4 million as of December 31, 2004.
|
|
|
|
A term loan in the amount of $6.3 million to be repaid in
monthly payments of principal of $105,583 per month. We
were also required to prepay this term loan by an amount equal
to 20% of receipts from our largest customer in Mexico. Proceeds
of the term loan were used to prepay the term loan owed by
Tubular Services and to prepay the 12% $2.4 million
subordinated note and retire its related warrants. The
outstanding balance was $6.3 million as of
December 31, 2004.
|
|
|
|
A $6.0 million capital expenditure and acquisition line of
credit. Borrowings under this facility were payable monthly over
four years beginning in January 2006. Availability of this
capital expenditure term loan facility was 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.
|
These credit facilities were to mature on December 31, 2007
and were secured by liens on substantially all of our assets.
The agreement governing these credit facilities contained
customary events of default and financial covenants. It also
limited our ability to incur additional indebtedness, make
capital expenditures, pay dividends or make other distributions,
create liens and sell assets. Interest accrued at an adjustable
rate based on the prime rate and was 6.25% as of
December 31, 2004. We paid a 0.5% per annum fee on the
undrawn portion of the revolving line of credit and the capital
expenditure line.
72
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
In connection with the acquisition of Tubular and Strata in
2002, we issued a 12% secured subordinated note in the original
amount of $3.0 million. In connection with this
subordinated note, we issued redeemable warrants valued at
$1.5 million, which were recorded as a discount to the
subordinated debt and as a liability. The discount was amortized
over the life of the subordinated note beginning
February 6, 2002 as additional interest expense of which
$350,000 and $300,000 were recognized in the years ended
December 31, 2004 and December 31, 2003, respectively.
The debt was recorded at $2.7 million at December 31,
2003, net of the unamortized portion of the put obligation. On
December 7, 2004, we prepaid the $2.4 million balance
of the 12% subordinated note and retired the
$1.5 million of warrants, with a portion of the proceeds
from our $6.3 million bank term loan.
Prior to July 11, 2005, our AirComp subsidiary had the
credit facilities described below. These credit facilities were
repaid in connection with our acquisition of the minority
interest in AirComp and the refinancing of our bank credit
facilities described above.
|
|
|
|
|
A $3.5 million bank line of credit. Interest accrued at an
adjustable rate based on the prime rate. We paid a 0.5% per
annum fee on the undrawn portion. Borrowings under the line of
credit were subject to a borrowing base consisting of 80% of
eligible accounts receivable. The balance at December 31,
2004 was $1.5 million.
|
|
|
|
A $7.1 million term loan that accrued interest at an
adjustable rate based on either LIBOR or the prime rate.
Principal payments of $286,000 plus interest were due quarterly,
with a final maturity date of June 27, 2007. The balance at
December 31, 2004 was $6.8 million.
|
|
|
|
A delayed draw term loan facility in the amount of
$1.5 million to be used for capital expenditures. Interest
accrued at an adjustable rate based on either the LIBOR or the
prime rate. Quarterly principal payments were to commence on
March 31, 2006 in an amount equal to 5.0% of the
outstanding balance as of December 31, 2005, with a final
maturity of June 27, 2007. There were no borrowings
outstanding under this facility as of December 31, 2004.
|
The AirComp credit facilities were secured by liens on
substantially all of AirComps assets. The agreement
governing these credit facilities contained customary events of
default and required that AirComp satisfy various financial
covenants. It also limited AirComps ability to incur
additional indebtedness, make capital expenditures, pay
dividends or make other distributions, create liens and sell
assets. We guaranteed 55% of the obligations of AirComp under
these facilities.
Tubular had two bank term loans with a remaining balance
totaling $90,000 and $263,000 at December 31, 2005 and
2004, with interest accruing at a floating interest rate based
on prime plus 2.0%. The interest rate was 9.25% and 7.25% at
December 31, 2005 and 2004. Monthly principal payments are
$13,000 plus interest. The maturity date of one of the loans,
with a balance of $60,000, was September 17, 2006, while
the second loan, with a balance of $30,000, had a final maturity
of January 12, 2007. The balances of these two loans were
repaid in full in January 2006 with the proceeds from our senior
notes offering.
Notes
payable and real estate loan
AirComp had a subordinated note payable to M-I in the amount of
$4.8 million bearing interest at an annual rate of 5.0%. In
2007 each party had the right to cause AirComp to sell its
assets (or the other party may buy out such partys
interest), and in such event this note (including accrued
interest) was due and payable. The note was also due and payable
if M-I sells its interest in AirComp or upon a termination of
AirComp. At December 31, 2004, $376,000 of interest was
included in accrued interest. On July 11, 2005, we acquired
from M-I its 45% equity interest in AirComp and the subordinated
note in the principal amount of $4.8 million issued by
AirComp, for which we paid M-I $7.1 million in cash and
issued a new $4.0 million subordinated note bearing
interest at 5% per annum. The subordinated note issued to
M-I requires quarterly interest payments and the principal
amount is due October 9, 2007. Contingent upon a future
equity offering,
73
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
the subordinated note is convertible into up to
700,000 shares of our common stock at a conversion price
equal to the market value of the common stock at the time of
conversion.
Tubular had a subordinated note payable to Jens Mortensen, the
seller of Tubular and one of our directors, in the amount of
$4.0 million with a fixed interest rate of 7.5%. Interest
was payable quarterly and the final maturity of the note is
January 31, 2006. The subordinated note was subordinated to
the rights of our bank lenders. The balance outstanding for this
note at December 31, 2005 and 2004 was $3.0 and
$4.0 million, respectively. The balance of this
subordinated note was repaid in full in January 2006 with
proceeds from our senior notes offering.
As part of the acquisition of Mountain Air in 2001, we issued a
note to the sellers of Mountain Air in the original amount of
$2.2 million accruing interest at a rate of 5.75% per
annum. The note was reduced to $1.5 million as a result of
the settlement of a legal action against the sellers in 2003. In
March 2005, we reached an agreement with the sellers and holders
of the note as a result of an action brought against us by the
sellers. Under the terms of the agreement, we paid the holders
of the note $1.0 million in cash, and agreed to pay an
additional $350,000 on June 1, 2006, and an additional
$150,000 on June 1, 2007, in settlement of all claims. (See
Note 16). At December 31, 2005 and 2004 the
outstanding amounts due were $500,000 and $1.6 million,
including accrued interest.
In connection with the purchase of Delta, we issued to the
sellers a note in the amount of $350,000. The note bears
interest at 2% and the principal and accrued interest is due on
April 1, 2006.
In connection with the purchase of Tubular, we agreed to pay a
total of $1.2 million to Mr. Mortensen in exchange for
a non-compete agreement. Monthly payments of $20,576 are due
under this agreement through January 31, 2007. 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 annual payments of $50,000
through September 30, 2007. In connection with the purchase
of Capcoil, we agreed to pay a total of $500,000 to two
management employees in exchange for non-compete agreements. We
are required to make annual payments of $110,000 through May
2008. Total amounts due under non-compete agreements at
December 31, 2005 and 2004 were $698,000 and $664,000,
respectively.
In 2000 we compensated directors, including current directors
Nederlander and Toboroff, who served on the board of directors
from 1989 to March 31, 1999 without compensation, by
issuing promissory notes totaling $325,000. The notes bear
interest at the rate of 5.0%. At December 31, 2005 and
2004, the principal and accrued interest on these notes totaled
approximately $96,000 and $402,000, respectively.
Our subsidiary, Downhole, had notes payable to two former
shareholders totaling $49,000. We were required to make monthly
payments of $8,878 through June 30, 2005. At
December 31, 2005 and 2004, the amounts outstanding were $0
and $49,000.
We also have a real estate loan which is payable in equal
monthly installments of $4,344 with the remaining outstanding
balance due on January 1, 2010. The loan has a floating
interest rate based on prime plus 2.0%. The outstanding
principal balance was $548,000 at December 31, 2005. The
balance of this loan was prepaid in full in January 2006 with
proceeds from our senior notes offering.
Other
debt
In December 2003, Strata, our directional drilling subsidiary,
entered into a financing agreement with a major supplier of
downhole motors for repayment of motor lease and repair cost
totaling $1.7 million. The agreement provided for repayment
of all amounts not later than December 30, 2005. Payment of
interest was due monthly and principal payments of $582,000 were
due on April 2005 and December 2005. The interest rate was fixed
at 8.0%. As of December 31, 2005 and 2004, the outstanding
balance was $0 and $1.2 million.
74
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
We have various equipment financing loans with interest rates
ranging from 5% to 11.5% and terms ranging from 2 to
5 years. As of December 31, 2005 and 2004, the
outstanding balances for equipment financing loans were
$1.9 million and $530,000, respectively. We also have
various capital leases with terms that expire in 2008. As of
December 31, 2005 and 2004, amounts outstanding under
capital leases were $917,000 and $0, respectively. In January
2006, we prepaid $350,000 of the outstanding equipment loans
with proceeds from our senior notes offering.
|
|
NOTE 9
|
COMMITMENTS
AND CONTINGENCIES
|
We have placed orders for capital equipment totaling
$6.8 million to be received and paid for through 2006. Of
this amount, $3.1 million is for six measurement while
drilling kits and ancillary equipment for our directional
drilling segment and $3.7 million is for two new capillary
tubing units and two new coil tubing units for our production
services segment. Of the $6.8 million in orders, we are
firmly committed to approximately $4.4 million as the
balance may be subject to cancellation with minimal loss of
prior cash deposits, if any.
We rent office space on a five-year lease which expires November
2009. We also rent certain other facilities and shop yards for
equipment storage and maintenance. Facility rent expense for the
years ended December 31, 2005, 2004 and 2003 was $987,000,
$577,000, and $370,000, respectively.
At December 31, 2005, future minimum rental commitments for
all operating leases are as follows (in thousands):
|
|
|
|
|
Years Ending:
|
|
|
|
|
December 31, 2006
|
|
$
|
926
|
|
December 31, 2007
|
|
|
833
|
|
December 31, 2008
|
|
|
629
|
|
December 31, 2009
|
|
|
446
|
|
December 31, 2010
|
|
|
44
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,878
|
|
|
|
|
|
|
|
|
NOTE 10
|
STOCKHOLDERS
EQUITY
|
In connection with the formation of AirComp in July 2003, we
eliminated $955,000 of our negative investment in the assets
contributed to AirComp. Under purchase accounting, we recognized
a $955,000 increase in stockholders equity. For the year ended
December 31, 2003, we accrued $350,000 of dividends payable
to the Preferred Stock holders. No dividends were declared or
paid.
On March 3, 2004, we entered into an agreement with an
investment banking firm whereby they would provide underwriting
and fundraising activities on our behalf. In exchange for their
services, the investment banking firm received a stock purchase
warrant to purchase 340,000 shares of common stock at an
exercise price of $2.50 per share. The warrant was
exercised in August of 2005. The fair value of the total
warrants issued in connection with the fundraising activities
was established in accordance with the Black-Scholes valuation
model and as a result, $641,000 was added to stockholders
equity. The following assumptions were utilized to determine
fair value: no dividend yield; expected volatility of 89.7%;
risk free interest rate of 7.00%; and expected life of five
years.
During 2004, we issued two warrants (Warrants A and
B) for the purchase of 233,000 total shares of our common
stock at an exercise price of $0.75 per share and one
warrant for the purchase of 67,000 shares of our common
stock at an exercise price of $5.00 per share
(Warrant C) in connection with their
75
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
subordinated debt financing. Warrants A and B were redeemed for
a total of $1,500,000 on December 7, 2004. The fair value
of Warrant C was established in accordance with the
Black-Scholes valuation model and as a result, $47,000 was added
to stockholders equity. The following assumptions were
utilized to determine fair value: no dividend yield; expected
volatility of 67.24%; risk free interest rate of 5.00%; and
expected life of four years.
On April 2, 2004, we completed the following transactions:
|
|
|
|
|
In exchange for an investment of $2.0 million, we issued
620,000 shares of our common stock for a purchase price
equal to $2.50 per share, and issued warrants to purchase
800,000 shares of our common stock at an exercise price of
$2.50 per share, expiring on April 1, 2006, to an
investor group (the Investor Group) consisting of
entities affiliated with Donald and Christopher Engel and
directors Robert Nederlander and Leonard Toboroff. The aggregate
purchase price for the common stock was $1.55 million and
the fair value for the warrants was $450,000.
|
|
|
|
Energy Spectrum 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. Energy Spectrum was granted the preferred stock in
connection with the Strata acquisition.
|
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. Our net proceeds, after selling
commissions and expenses, were approximately $9.6 million.
We issued shares pursuant to an exemption from the Securities
Act of 1933, and agreed to subsequently register the common
stock under the Securities Act of 1933 to allow investors to
resell the common stock in public markets.
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. Our net proceeds, after selling commission
and expenses, were approximately $5.3 million. We issued
shares pursuant to an exemption from the Securities Act of 1933,
and agreed to subsequently register the common stock under the
Securities Act of 1933 to allow investors to resell the common
stock in public markets.
On September 30, 2004, we issued 1.3 million shares of
common stock to Jens Mortensen, a director, in exchange for his
19% interest in Tubular. As a result of this transaction, we own
100% of Tubular. The total value of the consideration paid to
Jens was $6.4 million, which was equal to the number of
shares of common stock issued to Mr. Mortensen 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 December 10, 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.
Approximately $2.2 million, the value of the common stock
issued to Downholes sellers based on the closing price of
our common stock issued at the date of the acquisition, was
added to stockholders equity.
As of January 1, 2005, in relation to the acquisition of
Downhole, we executed a business development agreement with CTTV
Investments LLC, an affiliate of ChevronTexaco Inc., whereby we
issued 20,000 shares of our common stock to CTTV and
further agreed to issue up to an additional 60,000 shares
to CTTV contingent upon our subsidiaries receiving certain
levels of revenues in 2005 from ChevronTexaco and its
affiliates. CTTV was a minority owner of Downhole, which we
acquired in 2004. Based on the terms of the agreement, no
additional shares were issued in 2005.
On April 1, 2005, we acquired 100% of the outstanding stock
of Delta, for $4.6 million in cash, 223,114 shares of
our common stock and two promissory notes totaling $350,000.
Approximately $1.0 million, the value of the common stock
issued to Deltas sellers based on the closing price of our
common stock issued at the date of the acquisition, was added to
stockholders equity.
76
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
On May 1, 2005, we acquired 100% of the outstanding capital
stock of Capcoil for $2.7 million in cash,
168,161 shares of our common stock and the payment or
assumption of approximately $1.3 million of debt.
Approximately $750,000, the value of the common stock issued to
Capcoils sellers based on the closing price of our common
stock issued at the date of the acquisition, was added to
stockholders equity.
In August 2005, our stockholders approved an amendment to our
certificate of incorporation to increase the authorized number
of shares of our common stock from 20 million to
100 million and to increase our authorized preferred stock
from 10 million shares to 25 million shares and, we
completed a secondary public offering in which we sold
1,761,034 shares for approximately $15.5 million, net
of expenses.
We also had options and warrants exercised during 2005. Those
exercises resulted in 1,076,154 shares of our common stock
being issued for $1.4 million.
NOTE 11 REVERSE
STOCK SPLIT
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 was 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 6,265,000 and
reduced the number of our stockholders from 6,070 to
approximately 2,140. All share and related amounts presented
have been retroactively adjusted for the stock split.
NOTE 12 STOCK
OPTIONS
In 2000, we issued stock options and promissory notes to certain
current and former directors as compensation for services as
directors (See Note 8), and our Board of Directors granted
stock options to these same individuals. Options to purchase
4,800 shares of our common stock were granted with an
exercise price of $13.75 per share. These options vested
immediately and may be exercised any time prior to
March 28, 2010. As of December 31, 2005, none of the
stock options had been exercised. No compensation expense has
been recorded for these options that were issued with an
exercise price equal to the fair value of the common stock at
the date of grant.
On May 31, 2001, the Board granted to Leonard Toboroff, one
of our directors, an option to purchase 100,000 shares of
our common stock at $2.50 per share, exercisable for
10 years from October 15, 2001. The option was granted
for services provided by Mr. Toboroff to OilQuip prior to
the merger, including providing financial advisory services,
assisting in OilQuips capital structure and assisting
OilQuip in finding strategic acquisition opportunities. We
recorded compensation expense of $500,000 for the issuance of
the option for the year ended December 31, 2001.
The 2003 Incentive Stock Plan, as amended, permits us to grant
to our key employees and outside directors various forms of
stock incentives, including, among others, incentive and
non-qualified stock options and restricted stock. Stock
incentive terms are not to be in excess of ten years. As
disclosed in Note 1, we account for our stock-based
compensation using APB No. 25. We have adopted the
disclosure-only provisions of SFAS No. 123 for the
stock options granted to our employees and directors.
Accordingly, no compensation cost has been recognized for these
options.
77
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
A summary of our stock option activity and related information
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
December 31, 2003
|
|
|
|
Shares
|
|
|
Weighted Ave.
|
|
|
Shares
|
|
|
Weighted Avg.
|
|
|
Shares
|
|
|
Weighted Avg.
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Under
|
|
|
Exercise
|
|
|
Under
|
|
|
Exercise
|
|
|
|
Option
|
|
|
Price
|
|
|
Option
|
|
|
Price
|
|
|
Option
|
|
|
Price
|
|
|
Beginning balance
|
|
|
1,215,000
|
|
|
$
|
3.20
|
|
|
|
973,300
|
|
|
$
|
2.78
|
|
|
|
104,800
|
|
|
$
|
3.00
|
|
Granted
|
|
|
1,695,000
|
|
|
|
6.44
|
|
|
|
248,000
|
|
|
|
4.85
|
|
|
|
868,500
|
|
|
|
2.75
|
|
Canceled
|
|
|
(15,300
|
)
|
|
|
3.33
|
|
|
|
(6,300
|
)
|
|
|
2.78
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(33,833
|
)
|
|
|
2.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
2,860,867
|
|
|
$
|
5.10
|
|
|
|
1,215,000
|
|
|
$
|
3.20
|
|
|
|
973,300
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes additional information about our
stock options outstanding as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Shares Under
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise Price
|
|
|
Option
|
|
|
Contractual Life
|
|
Options Exercisable
|
|
|
Exercise Price
|
|
|
$
|
2.50
|
|
|
|
100,000
|
|
|
5.79 years
|
|
|
100,000
|
|
|
$
|
2.50
|
|
$
|
2.75
|
|
|
|
829,067
|
|
|
7.96 years
|
|
|
829,067
|
|
|
$
|
2.75
|
|
$
|
3.86
|
|
|
|
920,000
|
|
|
9.09 years
|
|
|
306,667
|
|
|
$
|
3.86
|
|
$
|
4.85
|
|
|
|
259,000
|
|
|
8.73 years
|
|
|
172,667
|
|
|
$
|
4.85
|
|
$
|
4.87
|
|
|
|
154,000
|
|
|
9.40 years
|
|
|
51,333
|
|
|
$
|
4.87
|
|
$
|
10.85
|
|
|
|
594,000
|
|
|
9.96 years
|
|
|
198,000
|
|
|
$
|
10.85
|
|
$
|
13.75
|
|
|
|
4,800
|
|
|
4.24 years
|
|
|
4,800
|
|
|
$
|
13.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.11
|
|
|
|
2,860,867
|
|
|
8.82 years
|
|
|
1,662,534
|
|
|
$
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 13 STOCK
PURCHASE WARRANTS
In conjunction with the Mountain Air purchase by OilQuip in
February of 2001, Mountain Air issued a common stock warrant for
620,000 shares to a third-party investment firm that
assisted us in its initial identification and purchase of the
Mountain Air assets. The warrant entitles the holder to acquire
up to 620,000 shares of common stock of Mountain Air at an
exercise price of $.01 per share over a nine-year period
commencing on February 7, 2001.
We issued two warrants (Warrants A and B) for the
purchase of 233,000 total shares of our common stock at an
exercise price of $0.75 per share and one warrant for the
purchase of 67,000 shares of our common stock at an
exercise price of $5.00 per share (Warrant C)
in connection with our subordinated debt financing for Mountain
Air in 2001. Warrants A and B were paid off on
December 7, 2004. Warrant C is still outstanding at
December 31, 2005.
On February 6, 2002, in connection with the acquisition of
substantially all of the outstanding stock of Strata, we issued
a warrant for the purchase of 87,500 shares of our common
stock at an exercise price of $0.75 per share over the term
of four years. The warrants were exercised in August of 2005.
In connection with the Strata Acquisition, on February 19,
2003, we issued Energy Spectrum an additional warrant to
purchase 175,000 shares of our common stock at an exercise
price of $0.75 per share. The warrants were exercised in
August of 2005.
78
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
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., in
consideration of financial advisory services to be provided by
Morgan Joseph pursuant to a consulting agreement. The warrants
were exercised in August 2005.
In April 2004, we issued warrants to purchase 20,000 shares
of common stock at an exercise price of $0.75 per share to
Wells Fargo Credit, Inc., in connection with the extension of
credit by Wells Fargo Credit Inc. The warrants were exercised in
August 2005.
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 Defined Benefit Plan;
RER Corp., a corporation wholly-owned by director Robert
Nederlander; and Leonard Toboroff, a director. 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 of
$2.50 per share, expiring on April 1, 2006. A total of
486,557 of these warrants were exercised in 2005.
In May 2004, we issued a warrant to purchase 3,000 shares
of our common stock at an exercise price of $4.75 per share
to Jeffrey R. Freedman in consideration of financial advisory
services to be provided by Mr. Freedman pursuant to a
consulting agreement. The warrants were exercised in May 2004.
Mr. Freedman was also granted 16,000 warrants in May of
2004 exercisable at $4.65 per share. These warrants were
exercised in November of 2005.
Warrants for 4,000 shares of our common stock at an
exercise price of $4.65 were also issued in May 2004 and remain
outstanding as of December 31, 2005.
NOTE 14 LEASE
RECEIVABLE
In June 2002, our subsidiary, Strata, sold its MWD assets to a
third party for $1.3 million. Under the terms of the sale,
we would receive at least $15,000 per month for thirty-six
months. After thirty-six months, the purchaser had the option to
pay the remaining balance or continue paying a minimum of
$15,000 per month for twenty-four additional months. After the
expiration of the additional twenty-four months, the purchaser
would repay any remaining balance. This transaction had been
accounted for as a direct financing lease with the nominal
residual gain from the asset sale deferred into income over the
life of the lease. In August of 2005, we acquired 100% of the
outstanding stock of the buyer and the balance of the lease
receivable was part of the consideration of the acquisition.
During the years ended December 31, 2005, 2004 and 2003, we
received a total of $146,000, $229,000, and $251,000,
respectively, in payments from the third party related to this
lease.
NOTE 15 RELATED
PARTY TRANSACTIONS
In July 2005, we entered into a lease of a yard in Buffalo,
Texas which is part owned by our Chief Operating Officer, David
Wilde. The monthly rent is $3,500.
Alya H. Hidayatallah, the daughter of our Chairman and Chief
Executive Officer, Munawar H. Hidayatallah, has served as our
Vice President-Planning and Development since April 2005. In
2005, we paid Ms. Hidayatallah a salary at a rate of
$80,000 per annum.
At December 31, 2005 and 2004, we owed our Chief Executive
Officer, $0 and $175,000, respectively, related to deferred
compensation. In March and April of 2005 we paid all amounts due
Mr. Hidayatallah.
Until December 2004, our Chief Executive Officer and Chairman,
Munawar H. Hidayatallah and his wife were personal guarantors of
substantially all of the financing extended to us by commercial
banks. In December 2004, we refinanced most of our outstanding
bank debt and obtained the release of certain guarantees. After
the refinancing, Mr. Hidayatallah continued to guarantee
the Tubular $4.0 million
79
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
subordinated seller note until July 2005. We paid Mr.
Hidayatallah an annual guarantee fee equal to one-quarter of one
percent of the total amount of the debt guaranteed by
Mr. Hidayatallah. These fees aggregated to $7,250 during
2005 and were paid quarterly, in arrears, based upon the average
amount of debt outstanding in the prior quarter.
In April 2004, we entered into an oral consulting agreement with
Leonard Toboroff, one of our directors, pursuant to which we pay
him $10,000 per month to advise us regarding financing and
acquisition opportunities.
Jens Mortensen, one of our directors, is the former owner of
Tubular and held a 19% minority interest in Tubular until
September 30, 2004. He was also the holder of a
$4.0 million subordinated note payable issued by Tubular
and at December 31, 2005 was owed $60,000 in accrued
interest and $267,000 related to a non-compete agreement. (See
Note 8). The subordinated note was repaid in January of
2006 (See Note 22) and the accrued interest was paid
in January 2006. Mr. Mortensen, formerly the sole
proprietor of Tubular, owns a shop yard which he leases to
Jens on a monthly basis. Lease payments made under the
terms of the lease were $16,800, $28,800 and $28,800 for the
years ended December 31, 2005, 2004 and 2003, respectively.
In addition, Mr. Mortensen and members of his family own
100% of Tex-Mex Rental & Supply Co., a Texas
corporation, that sold approximately $0, $167,000 and $173,000
of equipment and other supplies to Tubular for the years ended
December 31, 2005, 2004 and 2003, respectively.
As described in Note 8, several of our former directors
were issued promissory notes in 2000 in lieu of compensation for
services. Our current maturities of long-term debt includes
$96,000 and $402,000 as of December 31, 2005 and 2004,
respectively, relative to these notes.
NOTE 16 SETTLEMENT
OF LAWSUIT
In June 2003, our subsidiary, Mountain Air, filed a lawsuit
against the former owners of Mountain Air Drilling Service
Company for breach of the asset purchase agreement pursuant to
which Mountain Air acquired Mountain Air Drilling Services
Company, alleging that the sellers stored hazardous materials on
the property leased by us without our consent and violated the
non-compete clause in the asset purchase agreement. On
July 15, 2003, we entered into a settlement agreement with
the sellers. As of the date of the agreement, we owed the
sellers a total of $2.6 million including $2.2 million
in principal and approximately $363,000 in accrued interest. As
part of the settlement agreement, the note payable to the
sellers was reduced from $2.2 million to $1.5 million
and the due date of the note payable was extended from
February 6, 2006 to September 30, 2007. The lump-sum
payment due the sellers at that date was $1.9 million. We
recorded a one-time gain on the reduction of the note payable to
the sellers of $1.0 million in the third quarter of 2003.
The gain was calculated 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. In March 2005, we reached an agreement with
the sellers to settle an action brought by the sellers under the
note. Under the terms of the agreement, we paid
$1.0 million in April of 2005 and will pay $350,000 on
June 1, 2006 and the remaining $150,000 on June 1,
2007, in settlement of all claims.
NOTE 17 GAIN
ON SALE OF INTEREST IN A SUBSIDIARY
In July 2003, through the subsidiary Mountain Air, we entered
into a limited liability company operating agreement with a
division of M-I to form a Texas limited liability company named
AirComp. Both companies contributed assets with a combined value
of $16.6 million to AirComp. The contributed assets from
Mountain Air were contributed at a historical book value of
approximately $6.3 million and the assets contributed by
M-I were
contributed at a fair market value of approximately
$10.3 million. Prior to the formation of AirComp, we owned
100% of Mountain Air and after the formation of AirComp,
Mountain Air owned 55% and M-I owned 45% of the business
combination. The business combination was accounted for as a
purchase and we recorded a one-time non-operating gain on the
sale of the 45% interest in the subsidiary of
80
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
approximately $2,433,000. The gain was calculated after
recording the assets contributed by M-I of approximately
$10.3 million less the subordinated note issued to M-I in
the amount of approximately $4.8 million, recording
minority interest of approximately $2,049,000 and an increase in
equity of $955,000 in accordance with Staff Accounting
Bulletin No. 51 (SAB 51). We have not
recorded any deferred income taxes because the increase in
assets and gain is a permanent timing difference. We have
adopted a policy that any gain or loss in the future incurred on
the sale in the stock or an interest of a subsidiary would be
recognized as such in the income statement.
NOTE 18 SEGMENT
INFORMATION
At December 31, 2005, we had five operating segments
including: Directional Drilling Services (Strata and Target),
Compressed Air Drilling Services (AirComp), Casing and Tubing
Services (Tubular), Rental Tools (Safco and Delta) and
Production Services (Downhole and Capcoil). All of the segments
provide services to the energy industry. The revenues, operating
income (loss), depreciation and amortization, capital
expenditures and assets of each of the reporting segments plus
the Corporate function are reported below for (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
43,901
|
|
|
$
|
24,787
|
|
|
$
|
16,008
|
|
Compressed air drilling services
|
|
|
25,662
|
|
|
|
11,561
|
|
|
|
6,679
|
|
Casing and tubing services
|
|
|
20,932
|
|
|
|
10,391
|
|
|
|
10,037
|
|
Rental tools
|
|
|
5,059
|
|
|
|
611
|
|
|
|
|
|
Production services
|
|
|
9,790
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
105,344
|
|
|
$
|
47,726
|
|
|
$
|
32,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
7,389
|
|
|
$
|
3,061
|
|
|
$
|
1,103
|
|
Compressed air drilling services
|
|
|
5,612
|
|
|
|
1,169
|
|
|
|
17
|
|
Casing and tubing services
|
|
|
4,994
|
|
|
|
3,217
|
|
|
|
3,628
|
|
Rental tools
|
|
|
1,300
|
|
|
|
(71
|
)
|
|
|
|
|
Production services
|
|
|
(99
|
)
|
|
|
4
|
|
|
|
|
|
General corporate
|
|
|
(5,978
|
)
|
|
|
(3,153
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from operations
|
|
$
|
13,218
|
|
|
$
|
4,227
|
|
|
$
|
2,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
887
|
|
|
$
|
466
|
|
|
$
|
275
|
|
Compressed air drilling services
|
|
|
1,946
|
|
|
|
1,329
|
|
|
|
1,139
|
|
Casing and tubing services
|
|
|
2,006
|
|
|
|
1,597
|
|
|
|
1,413
|
|
Rental tools
|
|
|
492
|
|
|
|
40
|
|
|
|
|
|
Production services
|
|
|
912
|
|
|
|
26
|
|
|
|
|
|
General corporate
|
|
|
418
|
|
|
|
120
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and
amortization expense
|
|
$
|
6,661
|
|
|
$
|
3,578
|
|
|
$
|
2,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
(Restated)
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
2,922
|
|
|
$
|
1,552
|
|
|
$
|
1,066
|
|
Compressed air drilling services
|
|
|
7,008
|
|
|
|
1,399
|
|
|
|
2,093
|
|
Casing and tubing services
|
|
|
5,207
|
|
|
|
1,285
|
|
|
|
2,176
|
|
Rental tools
|
|
|
435
|
|
|
|
232
|
|
|
|
|
|
Production services
|
|
|
1,514
|
|
|
|
106
|
|
|
|
|
|
General corporate
|
|
|
681
|
|
|
|
29
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
17,767
|
|
|
$
|
4,603
|
|
|
$
|
5,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
4,168
|
|
|
$
|
4,168
|
|
|
$
|
4,168
|
|
Compressed air drilling services
|
|
|
3,950
|
|
|
|
3,510
|
|
|
|
3,493
|
|
Casing and tubing services
|
|
|
3,673
|
|
|
|
3,673
|
|
|
|
|
|
Rental tools
|
|
|
|
|
|
|
|
|
|
|
|
|
Production services
|
|
|
626
|
|
|
|
425
|
|
|
|
|
|
General corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
12,417
|
|
|
$
|
11,776
|
|
|
$
|
7,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$
|
20,960
|
|
|
$
|
14,166
|
|
|
$
|
11,529
|
|
Compressed air drilling services
|
|
|
46,045
|
|
|
|
29,147
|
|
|
|
22,735
|
|
Casing and tubing services
|
|
|
45,351
|
|
|
|
21,197
|
|
|
|
18,191
|
|
Rental tools
|
|
|
8,034
|
|
|
|
1,291
|
|
|
|
|
|
Production services
|
|
|
12,282
|
|
|
|
5,806
|
|
|
|
|
|
General corporate
|
|
|
4,683
|
|
|
|
8,585
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
137,355
|
|
|
$
|
80,192
|
|
|
$
|
53,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
98,583
|
|
|
$
|
42,466
|
|
|
$
|
28,995
|
|
International
|
|
|
6,761
|
|
|
|
5,260
|
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
105,344
|
|
|
$
|
47,726
|
|
|
$
|
32,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
NOTE 19 SUPPLEMENTAL
CASH FLOWS INFORMATION (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Restated)
|
|
|
Interest paid
|
|
$
|
3,924
|
|
|
$
|
2,159
|
|
|
$
|
2,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
676
|
|
|
$
|
514
|
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash investing and
financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of property &
equipment in connection with direct financing lease
(Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) on settlement of debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,034
|
)
|
Amortization of discount on debt
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Purchase of equipment financed
through assumption of debt or accounts payable
|
|
|
592
|
|
|
|
|
|
|
|
906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
592
|
|
|
$
|
|
|
|
$
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AirComp formation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt to joint venture
by M-I
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,818
|
)
|
Contribution of property, plant
and equipment by M-I to joint venture
|
|
|
|
|
|
|
|
|
|
|
10,268
|
|
Increase in minority interest
|
|
|
|
|
|
|
|
|
|
|
(2,063
|
)
|
(Gain) on sale of stock in a
subsidiary
|
|
|
|
|
|
|
|
|
|
|
(2,433
|
)
|
Difference of our investment cost
basis in AirComp and their share of underlying equity of net
assets of AirComp
|
|
|
|
|
|
|
|
|
|
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid in connection with
the joint venture
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing
transactions in connection with acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
|
|
|
$
|
(4,867
|
)
|
|
$
|
|
|
Goodwill and other intangibles
|
|
|
|
|
|
|
(3,839
|
)
|
|
|
|
|
Value of common stock, issued
|
|
|
1,750
|
|
|
|
2,177
|
|
|
|
|
|
Value of minority interest
contribution
|
|
|
|
|
|
|
2,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,750
|
|
|
$
|
(4,459
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of the remaining 19%
of Jens:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
|
|
|
$
|
(813
|
)
|
|
$
|
|
|
Goodwill and other intangibles
|
|
|
|
|
|
|
(3,676
|
)
|
|
|
|
|
Value of common stock issued
|
|
|
|
|
|
|
6,434
|
|
|
|
|
|
Value of minority interest
retirement
|
|
|
|
|
|
|
(1,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
NOTE 20 QUARTERLY
RESULTS (UNAUDITED) (in thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
Year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
19,334
|
|
|
$
|
23,588
|
|
|
$
|
28,908
|
|
|
$
|
33,514
|
|
Operating income
|
|
|
2,247
|
|
|
|
2,914
|
|
|
|
3,524
|
|
|
|
4,533
|
|
Net income
|
|
|
1,567
|
|
|
|
1,769
|
|
|
|
1,293
|
|
|
|
2,546
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed to common
shares
|
|
$
|
1,567
|
|
|
$
|
1,769
|
|
|
$
|
1,293
|
|
|
$
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.12
|
|
|
$
|
0.08
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(Restated)
|
|
|
Year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,661
|
|
|
$
|
11,422
|
|
|
$
|
11,906
|
|
|
$
|
14,737
|
|
Operating income
|
|
|
1,030
|
|
|
|
1,150
|
|
|
|
1,237
|
|
|
|
810
|
|
Net income (loss)
|
|
|
472
|
|
|
|
413
|
|
|
|
515
|
|
|
|
(512
|
)
|
Preferred stock dividend
|
|
|
(88
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to
common shares
|
|
$
|
384
|
|
|
$
|
377
|
|
|
$
|
515
|
|
|
$
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are named from time to time in legal proceedings related to
our activities prior to our bankruptcy in 1988; however, we
believe that we were discharged from liability for all such
claims in the bankruptcy and believe the likelihood of a
material loss relating to any such legal proceeding is remote.
We are involved in various other legal proceedings in the
ordinary course of business. The legal proceedings are at
different stages; however, we believe that the likelihood of
material loss relating to any such legal proceeding is remote.
|
|
NOTE 22
|
SUBSEQUENT
EVENTS
|
In January of 2006, we acquired 100% of the outstanding stock of
Specialty Rental Tools, Inc. (Specialty) for
$96.0 million in cash. Specialty, located in Lafayette,
Louisiana, is engaged in the rental of high quality drill pipe,
heavy weight spiral drill pipe, tubing work strings, blow-out
preventors, choke manifolds and various valves and handling
tools for oil and natural gas drilling. During the nine months
ended September 30, 2005, Specialty generated aggregate
revenues of $21.8 million.
84
ALLIS-CHALMERS
ENERGY INC.
Notes to
Consolidated Financial
Statements (Continued)
In January of 2006, we closed on a private offering, to
qualified institutional buyers pursuant to Rule 144A under
the Securities Act of 1933, of $160.0 million principal
amount of our 9.0% senior notes due 2014, which we refer to
as our senior notes. The proceeds of the offering were used to
fund the acquisition of Specialty, to repay existing debt and
for general corporate purposes.
In January of 2006, we amended and restated our July 2005 credit
agreement to increase our borrowing capacity by exchanging the
existing two year $55.0 million facility for a new four
year $25.0 million facility. We refer to the July 2005
credit agreement, as so amended and restated, as our new credit
agreement. All amounts outstanding under the previous
$55.0 million credit facility were repaid with proceeds
from the issuance of our senior notes. The new credit
agreements interest rate is based on a margin over LIBOR
or the prime rate, and there is a 0.5% fee for the undrawn
portion. The credit facility is secured by a first priority lien
on substantially all of our assets.
In January 2006, with proceeds from the sale of our senior notes
we also prepaid the $3.0 million subordinated seller note
due to Jens Mortensen, the $548,000 real estate loan and
$430,000 in various outstanding term and equipment loans.
In February of 2006, David Groshoff resigned from our Board of
Directors and the Audit Committee. Mr. Groshoff served on
our Board since 1999, initially under an agreement on behalf of
the Pension Benefit Guaranty Corporation, which is a client of
Mr. Groshoffs employer. That agreement permitted the
PBGC to appoint a member to our Board so long as the PBGC held a
minimum number of shares of our stock. The PBGC sold all its
holdings in our stock in August 2005. As an investment
management employee of JPMorgan Asset Management, Mr. Groshoff
is subject to his employers policies which generally
prohibit employees from serving on public company boards of
directors without a meaningful client interest in such
companies. In light of the PBGCs sale of our stock, these
policies required Mr. Groshoffs resignation from our
Board. In March 2006, Robert Nederlander was appointed to the
Audit Committee to replace Mr. Groshoff.
Through March 13, 2006, we received proceeds of
approximately $784,000 from the exercise of 313,000 warrants.
85
|
|
ITEM 9.
|
CHANGES
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On October 5, 2004, our Audit Committee dismissed Gordon,
Hughes & Banks, LLP as our independent public
accountant and engaged UHY Mann Frankfort Stein & Lipp
CPAs, LLP as our independent public accountant to review our
financial statements beginning with the quarter ending
September 30, 2004 and to audit our financial statement for
the year ending December 31, 2004.
Gordon, Hughes & Banks, LLP has not audited our prior
two fiscal years and accordingly have not expressed an adverse
opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle.
During our two prior fiscal years and through October 5,
2004, there were no disagreements with Gordon, Hughes &
Banks, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of
Gordon, Hughes & Banks, LLP, would have caused it to
make reference to the subject matter of the disagreement in
connection with its report.
Prior to October 5, 2004, there were no reportable events
(as defined in
Regulation S-K
Item 304(a)(1)(v) of the Securities and Exchange
Commission) arising out of the services performed by Gordon,
Hughes & Banks, LLP for us.
Gordon, Hughes & Banks, LLP indicated to us that it
concurs with the foregoing statements as they relate to Gordon,
Hughes & Banks, LLP and furnished a letter to the
Securities and Exchange Commission to this effect. A copy of
this letter is an exhibit hereto.
Prior to October 5, 2004, we did not consult UHY Mann
Frankfort Stein & Lipp CPAs, LLP regarding (i) the
application of accounting principles to a specified transaction
(completed or proposed), (ii) the type of audit opinion
that might be rendered on our financial statements, or
(iii) any matter that was either the subject of a
disagreement as that term is defined in Item 304(a)(1)(iv)
of
Regulation S-K
of the Securities and Exchange Commission and the related
instructions to this Item or a reportable event as that term is
defined in Item 304(a)(1)(v) of
Regulation S-K
of the Securities and Exchange Commission.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
(a). Evaluation
Of Disclosure Controls And Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
reports under the Securities Exchange Act of 1934, as amended,
are recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to management,
including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding
required disclosures.
Management, including our chief executive officer and our chief
financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Exchange Act
Rules 13a-15(e)
and
15d-15(e))
as of the end of the period covered by this Report, which we
refer to as the Evaluation Date.
As disclosed in the notes to our consolidated financial
statements included elsewhere in this report and under the
caption Managements Discussion and Analysis of
Financial Condition and Results of
Operations Restatement, we understated
diluted earnings per share due to an incorrect calculation of
our weighted shares outstanding for the third quarter of 2003,
for each of the first three quarters of 2004, for the years
ended December 31, 2003 and 2004 and for the quarter ended
March 31, 2005. In addition, we understated basic earnings
per share due to an incorrect calculation of our weighted
average basic shares outstanding for the quarter ended
September 30, 2004. Consequently, we have restated our
financial statements for each of those periods. The incorrect
calculation resulted from a mathematical error and an improper
application of Statement of Financial Accounting Standards, or
SFAS, No. 128, Earnings Per Share. Management has concluded
that the need to restate our financial statements resulted, in
part, from the lack of sufficient experienced accounting
personnel, which in turn resulted in a lack of effective control
over the financial reporting process.
86
As part of our growth strategy over the past five years, we have
completed acquisitions of several privately-held businesses,
including closely-held entities. Prior to becoming part of our
consolidated company, these businesses were not required to
implement or maintain, and did not implement or maintain, the
disclosure controls and procedures or internal controls over
financial reporting that federal law requires of publicly-held
companies such as ours. We are in the process of creating and
implementing appropriate disclosure controls and procedures and
internal controls over financial reporting at each of our
recently acquired businesses. However, we have not yet completed
this process and cannot assure you as to when the process will
be complete.
In addition, during the fourth quarter of 2005, we failed to
timely file a Current Report on
Form 8-K
relating to the issuance of shares of our common stock in
connection with recent stock option and warrant exercises. The
current report, which was due to be filed in November 2005, was
filed in February 2006.
As a result of the issues described above, our management has
concluded that, as of the Evaluation Date, our disclosure
controls and procedures were not effective in enabling us to
record, process, summarize and report information required to be
included in our SEC filings within the required time period, and
to ensure that such information is accumulated and communicated
to our management, including our chief executive officer and
chief financial accounting officer, to allow timely decisions
regarding required disclosure.
(b). Change
in Internal Control Over Financial Reporting.
There were the following changes in our internal control over
financial reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) that occurred during the period covered
by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting:
|
|
|
|
|
We continued the engagement of an independent internal controls
consulting firm which is in the process of documenting,
analyzing, identifying and testing internal controls.
|
|
|
|
In March 2005, we hired a certified public accountant as our
financial reporting manager.
|
|
|
|
In July 2005, we hired a certified public accountant who has
prior experience as a chief accounting officer of a publicly
traded company to be our chief accounting officer.
|
|
|
|
During the year we started the implementation of new accounting
software and as of December 31, 2005, all but one of our
segments was utilizing the software.
|
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The information required by Item 10 is incorporated by
reference from the section entitled Election of
Directors and Executive Compensation and Other
Matters and other relevant portions of the definitive
Proxy Statement (the Proxy Statement) on
Schedule 14A to be filed by the registrant not later than
120 days following December 31, 2005.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 is incorporated by
reference from the section entitled Executive Compensation
and Other Matters and other relevant portions of the Proxy
Statement.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The information required by Item 12 is incorporated by
reference from the section entitled Security Ownership of
Management and Certain Beneficial Owners and other
relevant portions of the Proxy Statement.
87
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
The information required by Item 13 is incorporated by
reference from the section entitled Certain Relationships
and Related Transactions and other relevant portions of
the Proxy Statement.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by Item 14 is incorporated by
reference from the section entitled Corporate
Governance and other relevant portions of the Proxy
Statement.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a) (1) Financial Statements
All financial statements of the Registrant as set forth under
Item 8 of this Annual Report on
Form 10-K.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying
Accounts
(3) Exhibits
The exhibits listed on the Exhibit index located on page 91
of this Annual report are filed as part of this
10-K.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 22, 2006.
/s/ MUNAWAR H. HIDAYATALLAH
Munawar H. Hidayatallah
Chief Executive Officer and Chairman
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, this report has
been signed on the date indicated by the following persons on
behalf of the registrant and in the capacities indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ MUNAWAR
H. HIDAYATALLAH
Munawar
H. Hidayatallah
|
|
Chairman and Chief Executive
Officer (Principle Executive Officer)
|
|
March 22, 2006
|
|
|
|
|
|
/s/ VICTOR
M. PEREZ
Victor
M. Perez
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
March 22, 2006
|
|
|
|
|
|
/s/ BRUCE
SAUERS
Bruce
Sauers
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
March 22, 2006
|
|
|
|
|
|
/s/ JENS
H. MORTENSEN
Jens
H. Mortensen
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ VICTOR
F. GERMACK
Victor
F. Germack
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ LEONARD
TOBOROFF
Leonard
Toboroff
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ JOHN
E. MCCONNAUGHY, JR.
John
E. McConnaughy, Jr.
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ ROBERT
E. NEDERLANDER
Robert
E. Nederlander
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ JEFFREY
R. FREEDMAN
Jeffrey
R. Freedman
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ THOMAS
E. KELLEY
Thomas
E. Kelley
|
|
Director
|
|
March 22, 2006
|
|
|
|
|
|
/s/ THOMAS
O. WHITENER, JR.
Thomas
O. Whitener, Jr.
|
|
Director
|
|
March 22, 2006
|
89
|
|
(2)
|
Financial
Statement Schedule:
|
Schedule II Valuation
and Qualifying Accounts
Allis-Chalmers
Energy Inc.
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expense
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year Ended December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
265
|
|
|
|
219
|
|
|
|
(101
|
)
|
|
|
383
|
|
Deferred tax assets valuation
allowance
|
|
|
30,367
|
|
|
|
|
|
|
|
(3,236
|
)
|
|
|
27,131
|
|
Year Ended December 31,
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
168
|
|
|
|
104
|
|
|
|
(7
|
)
|
|
|
265
|
|
Deferred tax assets valuation
allowance
|
|
|
38,475
|
|
|
|
|
|
|
|
(8,108
|
)
|
|
|
30,367
|
|
Year Ended December 31,
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
32
|
|
|
|
136
|
|
|
|
|
|
|
|
168
|
|
Deferred tax assets valuation
allowance
|
|
|
37,533
|
|
|
|
942
|
|
|
|
|
|
|
|
38,475
|
|
90
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.1
|
|
First Amended Disclosure Statement
pursuant to Section 1125 of the Bankruptcy Code, dated
September 14, 1988, which includes the First Amended and
Restated Joint Plan of Reorganization dated September 14,
1988 (incorporated by reference to Registrants Current
Report on
Form 8-K
dated December 1, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.2
|
|
Agreement and Plan of Merger dated
as of May 9, 2001 by and among Registrant, Allis-Chalmers
Acquisition Corp. and OilQuip Rentals, Inc. (incorporated by
reference to Registrants Current Report on
Form 8-K
filed May 15, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.3
|
|
Stock Purchase Agreement dated
February 1, 2002 by and between Registrant and Jens H.
Mortensen, Jr. (incorporated by reference to
Registrants Current Report on
Form 8-K
filed February 21, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.4
|
|
Shareholders Agreement dated
February 1, 2002 by and among Jens Oilfield Service,
Inc., a Texas corporation, Jens H. Mortensen, Jr., and
Registrant (incorporated by reference to Registrants
Annual Report on
Form 10-K
for the year ended December 31, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.5
|
|
Stock Purchase Agreement dated
February 1, 2002 by and among Registrant, Energy Spectrum
Partners LP, and Strata Directional Technology, Inc.
(incorporated by reference to Registrants Annual Report on
Form 10-K
for the year ended December 31, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
2
|
.6
|
|
Joint Venture Agreement dated
June 27, 2003 by and between Mountain Compressed Air, Inc.
and M-I L.L.C. (incorporated by reference to Registrants
Current Report on
Form 8-K
filed July 16, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of Registrant (incorporated by reference to
Registrants Annual Report on
Form 10-K
for the year ended December 31, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.2
|
|
Certificate of Designation,
Preferences and Rights of the Series A 10% Cumulative
Convertible Preferred Stock ($.01 Par Value) of
Registrant (incorporated by reference to Registrants
Current Report on
Form 8-K
filed February 21, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.3
|
|
Amended and Restated By-laws of
Registrant (incorporated by reference to Registrants
Annual Report of
Form 10-K
for the year ended December 31, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.4
|
|
Certificate of Amendment of
Certificate of Incorporation filed with the Delaware Secretary
of State on June 9, 2004 (incorporated by reference to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.5
|
|
Certificate of Amendment of
Certificate of Incorporation filed with the Delaware Secretary
of State on January 5, 2005 (incorporated by reference to
the Registrants Current Report on
Form 8-K
filed January 11, 2005).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.1
|
|
Specimen Stock Certificate of
Common Stock of Registrant (incorporated by reference to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.2
|
|
Registration Rights Agreement
dated as of March 31, 1999, by and between Allis-Chalmers
Corporation and the Pension Benefit Guaranty Corporation
(incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 1999).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.3
|
|
Option Agreement dated
October 15, 2001 by and between Registrant and Leonard
Toboroff (incorporated by reference to Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.4
|
|
Warrant Purchase Agreement dated
February 1, 2002 by and between Allis-Chalmers Corporation
and Wells Fargo Energy Capital, Inc., including form of warrant
(incorporated by reference to the Registrants Current
Report on
Form 8-K
filed February 21, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.5*
|
|
2003 Incentive Stock Plan
(incorporated by reference to Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.6*
|
|
Form of Option Certificate issued
pursuant to 2003 Incentive Stock Plan (incorporated by reference
to Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002).
|
|
|
|
|
|
91
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
4
|
.7
|
|
Form of warrant issued to
Investors pursuant to Stock and Warrant Purchase Agreement dated
April 2, 2004 by and among Registrant and Donald Engel,
Christopher Engel The Engel Defined Benefit plan, RER Corp. and
Leonard Toboroff (incorporated by reference to Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.8
|
|
Registration Rights Agreement
dated April 2, 2004 by and between Registrant and the
Stockholder signatories thereto (incorporated by reference to
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.9
|
|
Warrant dated May 19, 2004,
issued to Jeffrey R. Freedman (incorporated by reference to the
Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.10
|
|
Amendment to 2003 Stock Option
Plan (incorporated by reference to Quarterly Report of
Form 10-Q
for the quarter ended September 30, 2005).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.11
|
|
Indenture dated as of
January 18, 2006 by and among Allis-Chalmers Energy Inc.,
the Guarantors named therein and Wells Fargo Bank, N.A., as
trustee (incorporated by reference to the Registrants
Current Report on
Form 8-K
filed on January 13, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.12
|
|
Form of 9.0% Senior Note due
2014 (incorporated by reference to the Registrants Current
Report on
Form 8-K
dated January 13, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
9
|
.1
|
|
Shareholders Agreement dated
February 1, 2002 by and among Registrant and the
stockholder and warrant holder signatories thereto (incorporated
by reference to Registrants Annual Report on
Form 10-K
for the year ended December 31, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.1
|
|
Amended and Restated Retiree
Health Trust Agreement dated September 14, 1988 by and
between Registrant and Wells Fargo Bank (incorporated by
reference to
Exhibit C-1
of the First Amended and Restated Joint Plan of Reorganization
dated September 14, 1988 included in Registrants
Current Report on
Form 8-K
dated December 1, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.2
|
|
Amended and Restated Retiree
Health Trust Agreement dated September 18, 1988 by and
between Registrant and Firstar Trust Company (incorporated by
reference to
Exhibit C-2
of the First Amended and Restated Joint Plan of Reorganization
dated September 14, 1988 included in Registrants
Current Report on
Form 8-K
dated December 1, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.3
|
|
Reorganization
Trust Agreement dated September 14, 1988 by and
between Registrant and John T. Grigsby, Jr., Trustee
(incorporated by reference to Exhibit D of the First
Amended and Restated Joint Plan of Reorganization dated
September 14, 1988 included in Registrants Current
Report on
Form 8-K
dated December 1, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.4
|
|
Product Liability
Trust Agreement dated September 14, 1988 by and
between Registrant and Bruce W. Strausberg, Trustee
(incorporated by reference to Exhibit E of the First
Amended and Restated Joint Plan of Reorganization dated
September 14, 1988 included in Registrants Current
Report on
Form 8-K
dated December 1, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.5*
|
|
Allis-Chalmers Savings Plan
(incorporated by reference to Registrants Annual Report on
Form 10-K
for the year ended December 31, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.6*
|
|
Allis-Chalmers Consolidated
Pension Plan (incorporated by reference to Registrants
Annual Report on
Form 10-K
for the year ended December 31, 1988).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.7
|
|
Agreement dated as of
March 31, 1999 by and between Registrant and the Pension
Benefit Guaranty Corporation (incorporated by reference to
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 1999).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.8
|
|
Letter Agreement dated May 9,
2001 by and between Registrant and the Pension Benefit Guarantee
Corporation (incorporated by reference to Registrants
Quarterly Report on
Form 10-Q
filed on May 15, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.9
|
|
Termination Agreement dated
May 9, 2001 by and between Registrant, the Pension Benefit
Guarantee Corporation and others (incorporated by reference to
Registrants Current Report on
Form 8-K
filed on May 15, 2002).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.10*
|
|
Option Agreement dated
October 15, 2001 by and between Registrant and Leonard
Toboroff (incorporated by reference to Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2001).
|
|
|
|
|
|
92
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.11*
|
|
Employment Agreement dated
July 1, 2003 by and between AirComp LLC and Terry Keane
(incorporated by reference to Registrants Current Report
on
Form 8-K
filed July 16, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.12
|
|
Letter Agreement dated
February 13, 2004 by and between Registrant and Morgan
Joseph & Co., Inc. (incorporated by reference to the
Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.13*
|
|
Employment Agreement dated as of
April 1, 2004 between Registrant and Munawar H.
Hidayatallah (incorporated by reference to Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.14*
|
|
Employment Agreement dated as of
April 1, 2004 between Registrant and David Wilde
(incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.15
|
|
Fifth Amendment to Credit
Agreement dated as of April 6, 2004 by and between Strata
Directional Technology, Inc., and Wells Fargo Credit Inc.
(incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.16
|
|
Third Amendment to Credit
Agreement dated as of April 6, 2004 by and between
Jens Oilfield Service, Inc. and Wells Fargo Credit Inc.
(incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.17
|
|
Letter Agreement dated
June 8, 2004 by and between the Registrant and Morgan
Keegan & Company, Inc. (incorporated by reference to
the Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.18*
|
|
Employment Agreement dated
July 26, 2004 by and between the Registrant and Victor M.
Perez (incorporated by reference to the Registration Statement
on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.19
|
|
Stock Purchase Agreement dated
August 10, 2004 (incorporated by reference to the
Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.20
|
|
Amendment to Stock Purchase
Agreement dated August 10, 2004 (incorporated by reference
to the Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.21
|
|
Letter Agreement relating to Stock
Purchase Agreement dated August 5, 2004 (incorporated by
reference to the Registration Statement on
Form S-1
(Registration No. 118916) filed on September 10,
2004).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.22
|
|
Addendum to Stock Purchase
Agreement dated September 24, 2004 (incorporated by
reference to Registrants Current Report on
Form 8-K
filed on September 30, 2004).
|
|
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10
|
.23*
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|
Employment Agreement dated
October 11, 2004, between the Registrant and Theodore F.
Pound III (incorporated by reference to Registrants
Current Report on
Form 8-K
filed on October 15, 2004).
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10
|
.24
|
|
Asset Purchase Agreement dated
November 10, 2004 by and among AirComp LLC, a Delaware
limited liability company, Diamond Air Drilling Services, Inc.,
a Texas corporation, and Marquis Bit Co., L.L.C., a New Mexico
limited liability company, Greg Hawley and Tammy Hawley,
residents of Texas and Clay Wilson and Linda Wilson, residents
of New Mexico (incorporated by reference to the Current Report
on
Form 8-K
filed on November 15, 2004).
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10
|
.25
|
|
Amended and Restated Credit
Agreement dated as of December 7, 2004, between AirComp LLC
and Wells Fargo Bank, NA (incorporated by reference to
Registrants Current Report on
Form 8-K
filed on December 13, 2004).
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10
|
.26
|
|
Purchase Agreement and related
Agreements by and among Allis-Chalmers Corporation, Chevron USA,
Inc., Dale Redman and others dated December 10, 2004
(incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on December 16, 2004).
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10
|
.27
|
|
Stock Purchase Agreement dated
April 1, 2005, by and among Allis-Chalmers Energy Inc.,
Thomas Whittington, Sr., Werlyn R. Bourgeois and SAM and D,
LLC. (incorporated by reference to the Registrants Current
Report on
Form 8-K
filed on April 5, 2005).
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10
|
.28
|
|
Stock Purchase Agreement effective
May 1, 2005, by and among Allis-Chalmers Energy Inc.,
Wesley J. Mahone, Mike T. Wilhite, Andrew D. Mills and Tim
Williams (incorporated by reference to the Registrants
Current Report on
Form 8-K
filed on May 6, 2005).
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93
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|
|
Exhibit
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|
Description
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10
|
.29
|
|
Purchase Agreement dated
July 11, 2005 among Allis-Chalmers Energy Inc., Mountain
Compressed Air, Inc. and M-I, L.L.C. (incorporated by reference
to the Registrants Current Report on
Form 8-K
filed on July 15, 2005).
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10
|
.30
|
|
Asset Purchase Agreement dated
July 11, 2005 between AirComp LLC, W.T. Enterprises, Inc.
and William M. Watts (incorporated by reference to the
Registrants Current Report on
Form 8-K
filed on July 15, 2005).
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|
|
10
|
.31
|
|
First Amendment to Stockholder
Agreement by and among Allis-Chalmers Energy Inc. and the
Stockholders named therein (incorporated by reference to the
Registrants Current Report on
Form 8-K
filed on August 5, 2005).
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|
|
10
|
.32
|
|
Asset Purchase Agreement by and
between Patterson Services, Inc. and Allis-Chalmers Tubular
Services, Inc. (incorporated by reference to the
Registrants Current Report on
Form 8-K
filed on September 8, 2005).
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10
|
.33
|
|
Stock Purchase Agreement dated as
of December 20, 2005 between Allis-Chalmers Energy Inc. and
Joe Van Matre.
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10
|
.34
|
|
Purchase Agreement dated as of
January 12, 2006 by and among Allis-Chalmers Energy Inc,
the Guarantors named therein and the Initial Purchasers named
therein (incorporated by reference to the Registrants
Current Report on
Form 8-K
filed on January 24, 2006).
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10
|
.35
|
|
Registration Rights Agreement
dated as of January 18, 2006 by and among Allis-Chalmers
Energy Inc., the Guarantors named therein and the Initial
Purchasers named therein (incorporated by reference to the
Registrants Current Report on
Form 8-K
filed on January 24, 2006).
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|
|
10
|
.36
|
|
Amended and Restated Credit
Agreement dated as of January 18, 2006 by and among
Allis-Chalmers Energy Inc., as borrower, Royal bank of Canada,
as administrative agent and Collateral Agent, RBC Capital
Markets, as lead arranger and sole bookrunner, and the lenders
party thereto (incorporated by reference to the
Registrants Current Report on
Form 8-K
filed on January 24, 2006).
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14
|
.1
|
|
Code of Ethics (incorporated by
reference to the
Form 8-K
filed on December 1, 2004).
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|
16
|
.1
|
|
Letter from Gordon
Hughes & Banks LLP dated October 5, 2004, to the
Securities and Exchange Commission (incorporated by reference to
Registrants Current Report on
Form 8-K
filed on October 6, 2004).
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21
|
.1
|
|
Subsidiaries of Registrant.
|
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31
|
.1
|
|
Certification of Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
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|
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31
|
.2
|
|
Certification of Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
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|
|
|
|
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|
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32
|
.1
|
|
Certification of the Chief
Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
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* |
|
Compensation Plan or Agreement |
94