SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______________ TO _______________
Commission file number 1-2199
ALLIS-CHALMERS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 39-0126090
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7660 Woodway, Suite 200, Houston, Texas 77063
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(Address of principal executive offices) (Zip code)
(713) 369-0550
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __X__ No ____
At November 13, 2002 were 19,633,340 shares of Common Stock outstanding.
ALLIS-CHALMERS CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 2002
TABLE OF CONTENTS
Page
No.
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Part I. Financial Information
Item1: Financial Statements
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2002 and 2001 1
Consolidated Balance Sheets for the nine months ended
September 30, 2002 and December 31,2001 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 3
Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 4: Controls and Procedures 24
Part II. Other Information
Item 1: Legal Proceedings 24
Item 3: Default on Senior Securities 25
Item 6: Exhibits and Reports on Form 8-K 25
Signatures 26
Certifications 27
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(thousands, except per share)
Sales $ 4,775 $ 1,521 $ 12,265 $ 3,468
Cost of sales 3,769 957 9,871 2,331
--------- --------- --------- ---------
Gross margin 1,006 564 2,394 1,137
Marketing and administrative expense 886 528 2,696 1,801
Corporate reorganization costs 495 - 495 -
Abandoned acquisition/private placement costs 233 - 233 -
--------- --------- --------- ---------
Income/(loss) from operations (608) 36 (1,030) (664)
Other income (expense)
Interest income - - -
Interest expense (558) (171) (1,581) (521)
Minority interest (105) - (145) -
Factoring costs on note receivable (191) - (191) -
Other 29 55 107 59
--------- --------- --------- ---------
Net (loss) before income taxes (1,433) (80) (2,840) (1,126)
Provision for income taxes (72) - (175) -
--------- --------- --------- ---------
Net (loss) from continuing operations $ (1,505) $ (80) $ (3,015) $ (1,126)
Income/(loss) from discontinued operations - (108) - (103)
--------- --------- --------- ---------
Net (loss) $ (1,505) $ (188) $ (3,015) $ (1,229)
Preferred stock dividend (87) - (232) -
--------- --------- --------- ---------
Net (loss) attributed to common shares $ (1,592) $ (188) $ (3,247) $ (1,229)
========= ========= ========= =========
Net (loss) per common share (Basic and diluted):
Continuing $ (.08) $ (.01) $ (.18) $ (.18)
Discontinued $ - $ (.01) $ - $ (.01)
--------- --------- --------- ---------
Net (Loss) per common share $ (.08) $ (.02) $ (.18) $ (.19)
========= ========= ========= =========
Weighted average shares outstanding 19,633 11,588 18,506 6,342
========= ========= ========= =========
This interim statement is unaudited
The accompanying Notes are an integral part of the Financial Statements.
1
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
September 30, December 31,
2002 2001
--------- ---------
Assets
------
Cash and cash equivalents $ 110 $ 152
Trade receivables, net 3,279 973
Due from related party 10 61
Other current assets 576 153
--------- ---------
Total current assets 3,975 1,339
Property, plant and equipment, net 17,952 4,246
--------- ---------
Goodwill and other intangibles, net 11,020 5,067
Debt issuance costs, net 813 180
Lease deposit 701 701
Long-term receivables 1,081 791
Other assets 2 141
--------- ---------
Total Assets $ 35,544 $ 12,465
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current maturities of long-term debt $ 17,093 $ 1,023
Trade accounts payable 2,145 298
Income tax payable 138 -
Accrued employee benefits and payroll taxes 265 851
Accrued interest 501 176
Accrued expenses 1,774 610
--------- ---------
Total current liabilities 21,916 2,958
Accrued postretirement benefit obligations 794 824
Long-term debt, less current portion 2,566 6,833
Deferred income tax 64 -
Other long-term liabilities 1,093 -
Minority interest 1,809 -
Redeemable warrant 1,500 600
Redeemable convertible preferred stock 3,732 -
Common shareholders' equity:
Common stock, $.15 par value (110,000,000
shares authorized; 19,633,340 issued
and outstanding at September 30, 2002 and
11,588,128 issued and outstanding at
December 31, 2001) 2,945 1,738
Capital in excess of par value 7,575 4,716
Accumulated deficit (8,451) (5,204)
--------- ---------
Total shareholders' equity 2,069 1,250
--------- ---------
Total liabilities and shareholders' equity $ 35,544 $ 12,465
========= =========
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
2
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
---------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net (loss) $(3,015) $(1,229)
Adjustments to reconcile net (loss) to net
cash provided (used) by operating activities:
Depreciation expense 1,339 343
Amortization expense 415 161
Issuance of stock options - 500
Minority interest 146 -
Amortization of discount on debt 200 -
Depreciation expense on discontinued
operations - 75
Changes in operating assets and liabilities:
Accounts receivables, net 304 (707)
Due from related party 51 -
Other current assets 910 (4)
Lease deposit - (701)
Other assets 925 -
Accrued interest payable 125 -
Accounts payable 863 552
Accrued expenses (914) 668
Accrued employee benefits and payroll taxes (784) -
Other long-term liabilities (124) (64)
-------- --------
Net cash provided (used) by operating
activities 441 (406)
Cash flows from investing activities:
Acquisition of MCA, net of cash acquired - (9,730)
Acquisition of Jens, net of cash acquired (7,762) -
Acquisition of Strata, net of cash acquired (373) -
Capital expenditures (258) (303)
Proceeds from sale of equipment - 3,549
-------- --------
Net cash (used) by investing activities (8,385) (6,484)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net
of repayments 8,657 5,527
Proceeds from issuance of common stock - 1,838
Debt issuance costs (755) (190)
-------- --------
Net cash provided by financing activities 7,902 7,175
-------- --------
Net increase in cash and cash equivalents (42) 285
Cash and cash equivalents at beginning of period 152 4
-------- --------
Cash and cash equivalents at end of period $ 110 $ 289
======== ========
Supplemental information - interest paid $ 1,177 $ 429
======== ========
3
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS (CONTINUED)
------------------------------------
Non-cash investing and financing transactions in connection
with the acquisition of Mountain Air assets:
Fair value of net assets acquired $ (9,970)
Goodwill and other intangibles (2,656)
Note payable to prior owner 2,200
Other adjustments 696
---------
Net cash paid to acquire subsidiary $ (9,730)
---------
Non-cash investing and financing transactions in connection
with the acquisition of Jens' Oilfield Service, Inc.:
Fair value of net assets acquired $(11,204)
Goodwill and other intangibles (1,235)
Note payable to prior owner 4,000
Value of common stock issued 677
---------
Net cash paid to acquire subsidiary $ (7,762)
---------
Non-cash investing and financing transactions in connection
with the acquisition of Strata Directional Technology, Inc.
Fair value of net assets acquired $ (2,073)
Goodwill and other intangibles (5,019)
Issuance of preferred stock 3,500
Value of common stock issued 3,219
---------
Net cash paid to acquire subsidiary $ (373)
---------
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
4
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in Allis-Chalmers Corporation's ("Allis-Chalmers" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 2001,
and the Current Reports on Forms 8-K and 8-K/A filed on February 21, 2002 and
April 22, 2002, respectively.
All normal and recurring adjustments considered necessary for a fair
presentation of the results of operations have been included in the unaudited
financial statements. In addition, all non-recurring adjustments necessary to
prevent the financial statements from being misleading have been included in the
unaudited financial statements. The results of operations for any interim period
are not necessarily indicative of the Company's operating results for a full
year.
ORGANIZATION OF BUSINESS
On May 9, 2001, OilQuip Rentals, Inc., an oil and gas rental company
("OilQuip"), merged into a subsidiary of Allis-Chalmers Corporation
("Allis-Chalmers" or the "Company"). In the merger, all of OilQuip's outstanding
common stock was converted into 400,000 shares of Allis-Chalmers' common stock
and the right to receive an additional 9,600,000 shares of Allis-Chalmers'
common stock upon the filing of an amendment to the Amended and Restated
Certificate of Incorporation ("Certificate") to authorize the issuance of such
shares. That authorization and issuance occurred on October 15, 2001.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Compressed Air, Inc. ("MCA"). However, for accounting purposes OilQuip
was treated as the acquiring company in a reverse acquisition of Allis-Chalmers.
The financial statements prior to the merger on May 9, 2001 are the financial
statements of OilQuip. OilQuip was incorporated on February 4, 2000 to find and
acquire targets to operate as subsidiaries in the oil and natural gas services
industries.
During the period February 4, 2000 (Inception) to February 6, 2001, OilQuip had
been in the development stage. OilQuip's activities through February 6, 2001
consisted of developing its business plan, raising capital and negotiating with
potential acquisition targets.
On February 6, 2001, OilQuip, through its subsidiary, MCA, acquired certain
assets of Mountain Air Drilling Service Co., Inc. ("Mountain Air"), whose
business consists of providing equipment and trained personnel to companies in
the business of drilling for natural gas in the four corner areas of the
southwestern United States. With the acquisition of Mountain Air assets, OilQuip
ceased to be in the development stage.
5
On December 12, 2001, the Company sold its wholly owned subsidiary, Houston
Dynamic Service, Inc. ("HDS"), to Clayton Lau, the general manager of HDS, in a
management buy-out. In conjunction with the sale of HDS, the Company formally
discontinued the operations related to precision machining of rotating
equipment, which was the principal HDS business.
On February 6, 2002, The Company purchased 81% of the outstanding stock of Jens
Oil Field Service, Inc. ("Jens"). Jens supplies highly specialized equipment and
operators to install casing and production tubing required to drill and complete
oil and gas wells. The Company also purchased substantially all the outstanding
common stock and preferred stock of Strata Directional Technology, Inc.
("Strata"). Strata provides high-end directional and horizontal drilling
services for specific targeted reservoirs that cannot be reached vertically.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be perceived
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts reserves, recoverability of long-lived assets, useful lives
used in depreciation and amortization, income taxes and related valuation
allowances, and insurance and legal accruals. The accounting estimates used in
the preparation of the consolidated financial statements may change as new
events occur, as more experience is acquired, as additional information is
obtained and as the Company's operating environment changes.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS 143 on its consolidated financial statements. The Company will
adopt SFAS 143 for its fiscal year beginning January 1, 2003.
6
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 replaces SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. SFAS 144 is not expected to materially change the
methods used by the Company to measure impairment losses on long-lived assets,
but may result in future dispositions being reported as discontinued operations
to a greater extent than is currently permitted. The Company adopted SFAS 144
for its fiscal year beginning January 1, 2002.
NOTE 2 - ACQUISITIONS
On January 25, 2001, OilQuip formed a subsidiary, MCA, a Texas corporation. On
February 6, 2001, MCA acquired the business and certain assets of Mountain Air,
a private company, for $10,000,000 (including a $200,000 deposit paid in 2000)
in cash and a $2,200,000 promissory note to the sellers (with an interest rate
of 5.75% and principal and interest due February 6, 2006). The acquisition was
accounted for using the purchase method of accounting. Goodwill of $3,660,000
and other identifiable intangible assets of $800,000 were recorded with the
acquisition.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
Merger, all of OilQuip's outstanding common stock was converted into 10,000,000
million shares of Allis-Chalmers' common stock. The acquisition was accounted
for using the purchase method of accounting as a reverse acquisition. Goodwill
of $194,000 and other identifiable intangible assets of $725,000 were recorded
in connection with the merger. Effective on the date of the merger, OilQuip
retroactively became the reporting company. As a result, financial statements
prior to the merger are those of OilQuip.
The Company completed two acquisitions and related financing on February 6,
2002.
The Company purchased 81% of the outstanding stock of Jens Oil Field Service,
Inc. ("Jens"). Jens supplies highly specialized equipment and operations to
install casing and production tubing required to drill and complete oil and gas
wells. The Company also purchased substantially all the outstanding common stock
and preferred stock of Strata Directional Technology, Inc. ("Strata"). Strata
provides high-end directional and horizontal drilling services for specific
targeted reservoirs that cannot be reached vertically.
The purchase price for Jens and Strata was (i) $10,250,000 in cash, (ii) a
$4,000,000 note payable due in four years, (iii) $1,000,000 for a non-compete
agreement payable for five years, (iv) 7,957,712 shares of common stock of the
Company, (v) 3,500,000 shares of a newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock") and (vi)
an additional payment of $841,000 based upon Jens' working capital on February
1, 2002. In May 2002, the Company purchased the remaining minority interest in
Strata in exchange for 87,500 shares of the Company common stock.
7
In connection with the acquisition of Strata and Jens, the Company's bank
provided financing of $12,728,396 consisting of revolving credit facilities in
the amount of $3,500,000, term facilities in the amount of $5,696,396 and a
subordinated loan in the amount of $3,000,000.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. 3,500,000 shares of Series A Preferred stock were
issued to the seller, Energy Spectrum. The Series A Preferred stock has
cumulative dividends at ten percent (10%) per annum payable in cash or
additional Series A Preferred Stock. Additionally, the Series A Preferred Stock
is convertible into common stock of the Company. The Series A Preferred Stock is
also subject to mandatory redemption on or before February 4, 2004 or earlier
from the net proceeds of new equity sales and optional redemption by the Company
at any time. The redemption price of the Series A Preferred Stock is $1.00 per
share. In addition, in connection with the Strata acquisition, Energy Spectrum
was issued warrants for 437,500 shares of Company common stock at an exercise
price of $0.15 per share.
The acquisitions were accounted for using the purchase method of accounting.
Goodwill of $5,019,000 was recorded with the acquisition of Strata and other
identifiable intangible assets of $1,235,000 were recorded with the acquisition
of Jens.
The Company issued to the banks warrants for 1,165,000 shares of common stock at
an exercise price of $0.15 per share and 335,000 warrants to purchase common
stock at a $1.00 per share in connection with their subordinated debt financing.
All of these warrants are subject to redemption by the Company at the option of
the warrant holders for $1,500,000 after three years.
The Company has approximately 19.6 million shares of common stock outstanding at
September 30, 2002, as well as options and warrants to purchase up to 9.6
million additional shares. Substantially all of the Company's tangible assets
have been pledged as collateral on the loans from the banks.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens and Strata on the Company's
results of operations, based on the historical statements of operations, as if
the transactions had occurred as of the beginning of the periods presented. The
discontinued HDS operations are not included in the pro forma information
Three months ended Nine Months ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands) (in thousands)
Revenues $ 4,775 $ 8,197 $ 13,418 $ 23,063
Operating income/ (loss) $ (296) $ 1,757 $ (64) $ 4,386
Net Income/ (loss) $ (239) $ 916 $ (2,017) $ 1,663
Income (loss) per share $ (0.01) $ 0.08 $ (0.10) $ 0.14
8
NOTE 3 - LONG TERM RECEIVABLES
The long-term receivables include a $1,065,000 receivable from the sale of the
Company's measurement while drilling (MWD) assets, which were acquired in the
Strata acquisition. Under the terms of the MWD sale, completed in June 2002, the
Company will receive at least $15,000 per month, which will be applied to the
Company's outstanding bank debt. After thirty-six months, the purchaser has the
option to pay the remaining balance or continue paying a minimum of $15,000 per
month for an additional twenty-four months. After the expiration of the
additional twenty-four months, the purchaser must repay any remaining balance.
The transaction has been accounted for as a direct financing lease.
NOTE 4 - LONG-TERM DEBT
Long-term debt is primarily a result of the costs of the acquisitions of certain
assets of Mountain Air, Jens' Oilfield Service, Inc. and Strata Directional
Technology, Inc.
Mountain Compressed Air:
o A term loan in the amount of $3,550,000 at variable interest
rates related to the Prime or LIBOR rates (5.25% at September
30, 2002), with interest payable quarterly and quarterly
principal payments of $147,917 due on the last day of April,
July, October and January. The maturity date of the loan is
February 7, 2004.
o A seller's note in the amount of $2,200,000 at 5.75% simple
interest. The principal and interest are due on February 6,
2004.
o Subordinated debt in the amount of $2,000,000 at 12% interest
payable quarterly commencing on April 1, 2001. The principal
will be due on January 31, 2004. In connection with incurring
the debt, the Company issued redeemable warrants valued at
$600,000, which have been recorded as discount to the
subordinated debt and a liability. The discount is amortizable
over three years as additional interest expense.
o A delayed draw term loan in the amount of $282,291 at LIBOR
plus 0.5% interest payable quarterly commencing on November
30, 2001 (Interest rate of 5.25% at September 30, 2002). The
principal will be due on February 7, 2004.
o At September 30, 2002, the Company has a $500,000 line of
credit at Wells Fargo bank, of which $12,000 was outstanding.
The committed line of credit is due on February 1, 2005.
Interest accrues at a rate equal to the Prime rate plus 1.5%
for the committed portion. Additionally, the Company pays a
0.5% fee for the uncommitted portion.
Jens' Oilfield Service:
o A term loan in the amount of $4,042,369 at variable interest
rates related to the Prime rate plus 4.5% (9.25% at September
30, 2002), with interest and principal payments of $67,373 due
monthly. The maturity date of the loan is February 1, 2007.
9
o A Real Estate loan secured by real property in the amount of
$532,000 at variable interest rates related to the Prime rate
plus 4.5% (9.25% at September 30, 2002), with interest and
principal payments of $14,778 due monthly. The maturity date
of the loan is February 1, 2005.
o A subordinated seller's note in the amount of $4,000,000 at
7.5% simple interest. Interest payments are due quarterly
beginning on April 1, 2002 and continuing each January, April,
July and October. The principal will be due on January 31,
2006.
o At September 30, 2002, the Company has a $1,000,000 line of
credit at Wells Fargo bank, of which $477,000 was outstanding.
The committed line of credit is due on February 1, 2005.
Interest accrues at a rate equal to the Prime rate plus 1.5%
for the committed portion. Additionally, the Company pays a
0.5% fee for the uncommitted portion.
Strata Directional Technology, Inc.:
o A term loan in the amount of $1,654,000 at variable interest
rates related to the Prime rate plus 5.0% (9.75% at September
30, 2002), interest and principal payments of $27,567 due
monthly. The maturity date of the loan is February 1, 2007.
o At September 30, 2002, the Company has a $2,500,000 line of
credit at Wells Fargo bank, of which $329,000 was outstanding.
The committed line of credit is due on February 1, 2005.
Interest accrues at a rate equal to the Prime rate plus 2.0%
for the committed portion. Additionally, the Company pays a
0.5% fee for the uncommitted portion.
Allis-Chalmers Corporation, Inc.:
o Subordinated debt in the amount of $2,000,000 at 12% interest
payable monthly commencing on March 1, 2002. The principal
will be due on January 31, 2005. In connection with incurring
the debt, the Company issued redeemable warrants valued at
$900,000, which have been recorded as discount to the
subordinated debt and a liability. The discount is amortizable
over three years as additional interest expense.
In addition to the above acquisition debt, Allis-Chalmers issued promissory
notes totaling $325,000 in 1999 to current and former directors and officers as
compensation for services rendered to the company. The notes bear interest at
the rate of 5% and are due March 28, 2005. At September 30, 2002, the notes are
recorded at $366,000, including accrued interest.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.
10
On July 16, 2002, the Company received a letter declaring that the Company was
in default of certain covenants set forth in its credit agreements with Wells
Fargo Bank and its affiliates (the Bank Lenders). ). The defaults resulted
primarily from our failure to meet financial covenants as a result of decreased
revenues at our subsidiaries. As a result of these defaults the Company's bank
lenders have imposed default interest rates, resulting in an increase of
approximately $15,000 in the monthly interest payable by the Company.
Additionally the Bank Lenders have suspended interest payments (aggregating
$200,000 through the date of the filing of this Report) on a $4.0 million
subordinated seller note issued in connection with the Jens acquisition, which
puts the Company in default under the terms of the subordinated seller note and
have suspended interest payments (aggregating $60,000 through the date of the
filing of this Report) on a $2.0 million subordinated bank note issued in
connection with the Jens acquisition, which puts the Company in default under
the terms of the subordinated bank note. The holders of the subordinated seller
note and the bank note are precluded from taking action to enforce the
subordinated seller note without the consent of the Bank Lenders.
The Company has made all outstanding principal and interest payments on it's
senior term debt to the Bank Lenders and believes it will be able to continue to
make such payments for the foreseeable future based upon its current revenue and
cash flow forecasts. While there can be no assurances of maintaining sufficient
liquidity into the future, the Company believes it does have sufficient current
liquidity and will make every effort to remedy the aforementioned defaults in
order to comply with provisions in the credit agreement and subordinated seller
and bank notes. The Company has the ability to draw on an available line of
credit of $1,576,000 extended by the bank lenders, of which $359,000 was unused
as of September 30, 2002.
The Company is currently seeking refinancing and in connection with any
financing will seek to obtain a waiver and amendment of the bank credit
agreements which will waive past defaults, eliminate the default interest rate
and remedy other issues, in order to be in compliance. However, there can be no
assurance that the Company will be able to obtain such refinancing, that an
amendment and waiver will be obtained, or that the lenders will not exercise
their rights under the credit agreements, including the acceleration of
approximately $18,000,000 in debt. Accordingly, the bank debt and the
subordinated seller note are recorded as current liabilities on the Company's
financial statements. The acceleration of outstanding debt or any action to
enforce the Company's obligations with respect to such debt would have a
material adverse effect on the Company.
The Company has issued redeemable warrants that are exercisable for a maximum of
1,350,000 shares of the Company's common stock at an exercise price of $0.15 per
share. The warrants are exercisable beginning January 31, 2004. The warrants are
subject to a cash redemption provision ("put") at the discretion of the warrant
holder beginning January 31, 2004 and extending through January 31, 2006 if the
warrant holder decides not to exercise the warrants. The Company has recorded a
liability of $1,500,000 issued in connection with the issuance of the warrants
and is amortizing the effects of the put to interest expense over the life of
the related debt instrument.
11
NOTE 5 - SHAREHOLDERS' EQUITY
The changes in common shareholders' equity for the nine months ended September
30, 2002 were as follows:
Allis-Chalmers balance at December 31, 2001 $1,250,000
Jens' Oilfield acquisition 677,000
Strata Directional acquisition 3,389,000
Net (loss) - Nine Months ended September 30, 2002 (3,247,000)
-----------
Balance at September 30, 2002 $2,069,000
===========
Allis-Chalmers acquired 81% of Jens' Oilfield Service. The business combination
was accounted for as a purchase. As a result, $677,000, the value of the
Allis-Chalmers common stock issued at the date of the acquisition, was added to
shareholders' equity.
Allis-Chalmers acquired 95% of Strata Directional Technology in the first
quarter of 2002 and the remaining 5% of Strata in the second quarter. The
business combination was accounted for as a purchase. As a result, $3,388,000,
the value of Allis-Chalmers common stock issued was added to shareholders'
equity.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. 3,500,000 shares of Series A Preferred stock were
issued to the seller, Energy Spectrum. The Series A Preferred stock has
cumulative dividends at ten percent (10%) per annum payable in cash or
additional Series A Preferred Stock. Additionally, the Series A Preferred Stock
is convertible into common stock of the Company. The Series A Preferred Stock is
also subject to mandatory redemption on or before February 4, 2004 or earlier
from the net proceeds of new equity sales and optional redemption by the Company
at any time. The redemption price of the Series A Preferred Stock is $1.00 per
share. In addition, in connection with the Strata acquisition, Energy Spectrum
was issued warrants for 437,500 shares of Company common stock at an exercise
price of $0.15 per share.
NOTE 6 - GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
(Goodwill and Other Intangible Assets). The Company adopted SFAS No. 142 as of
January 1, 2002. SFAS No. 142 defines the accounting treatment of goodwill and
other intangible assets derived from business combinations and supersedes APB
Opinion No. 17. This statement requires us to discontinue amortization of
goodwill and requires that the Company test goodwill and other intangible assets
for impairment in a specific manner on an annual basis or when certain events
trigger such a test. The Company has evaluated the provisions of SFAS No. 142
and determined that no cumulative effect results from adopting this change in
accounting principle. The following is the pro forma effect of implementing SFAS
No. 142. The Company has recorded $5,019,000 of goodwill at September 30, 2002
related to Strata, which was acquired in February 2002. The Company has not
performed the transitional goodwill impairment test on Strata as of the date of
this filing but will complete it prior to December 31, 2002. The Company cannot
predict the amount, if any, of an adjustment to goodwill as a result of this
test.
12
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(in thousands, except per share)
Reported net income (loss) $ (1,592) $ (188) $ (3,247) $ (1,229)
Goodwill amortization - 70 - 161
---------- ---------- ---------- ----------
Adjusted net income (loss) $ (1,592) $ (118) $ (3,247) $ (1,068)
========== ========== ========== ==========
Earnings per share:
Reported net income (loss) per share $ (.08) $ (.02) $ (.18) $ (.19)
Goodwill amortization per share - .01 - .01
---------- ---------- ---------- ----------
Adjusted net income (loss) per share $ (.08) $ (.01) $ (.18) $ (.18)
========== ========== ========== ==========
NOTE 7 - CORPORATE REORGANIZATION COSTS
During the third quarter of 2002, in response to the default of its debt
covenants, the Company reorganized itself in order to contain costs and recorded
charges related to the reorganization in the amount of $495,000. Such
organizational changes included the severance of members of management, the
deployment of turn-around consultants and a terminated rent obligation. These
charges consisted of related payroll costs for terminated employees of $307,000,
consulting fees of $113,000, and costs associated with a terminated rent
obligation of $75,000.
NOTE 8 - ABANDONED ACQUISITION/PRIVATE PLACEMENT COSTS
The Company recorded abandoned acquisition/private placement costs in the amount
of $233,000 in the third quarter of 2002. These costs consist of legal fees for
acquisitions in the amount of $83,000 and expenses related to the abandoned
private placement of $150,000.
NOTE 9 - SEGMENT INFORMATION
The Company has three segments, Casing Services (Jens), Directional Drilling
Services (Strata) and Compressed Air Drilling Services (Mountain Air). All of
the segments provide services to the petroleum industry. The revenues and
operating income by segment are presented below:
Three months ended Nine Months ended
--------------------- ---------------------
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands)
Revenues:
Casing Services $ 2,197 $ - $ 5,445 $ -
Directional Drilling Services 1,785 - 4,058 -
Compressed Air Drilling Services 793 1,521 2,762 3,468
--------- --------- --------- ---------
$ 4,775 $ 1,521 $ 12,265 $ 3,468
========= ========= ========= =========
13
Operating income/ (loss):
Casing Services $ 822 $ - $ 1,882 $ -
Directional Drilling Services (45) - (187) -
Compressed Air Drilling Services (116) 309 (562) 500
--------- --------- --------- ---------
$ 661 $ 309 $ 1,133 $ 500
General Corporate $ (1,269) $ (273) $ (2,163) $ (1,164)
--------- --------- --------- ---------
$ (608) $ 36 $ (1,030) $ (664)
========= ========= ========= =========
Depreciation and Amortization Expense
Casing Services $ 332 $ - $ 863 $ -
Directional Drilling Services 47 - 165 -
Compressed Air Services 231 185 690 441
--------- --------- --------- ---------
$ 610 $ 185 $ 1,718 $ 441
General Corporate $ 12 $ 32 $ 36 $ 63
--------- --------- --------- ---------
$ 622 $ 217 $ 1,754 $ 504
========= ========= ========= =========
Interest Expense
Casing Services $ 152 $ - $ 420 $ -
Directional Drilling Services 51 - 139 -
Compressed Air Services 185 166 554 513
--------- --------- --------- ---------
$ 388 $ 166 $ 1,113 $ 513
General Corporate $ 170 $ 5 $ 468 $ 7
--------- --------- --------- ---------
$ 558 $ 171 $ 1,581 $ 520
========= ========= ========= =========
Capital Expenditures
Casing Services $ 60 $ - $ 75 $ -
Directional Drilling Services - - - -
Compressed Air Services 121 $ 71 $ 178 $ 290
--------- --------- --------- ---------
$ 181 $ 71 $ 253 $ 290
General Corporate $ - $ - $ 5 $ 13
--------- --------- --------- ---------
$ 181 $ 71 $ 258 $ 303
========= ========= ========= =========
At September 30, 2002 the total assets for the Casing Services, Directional
Drilling Services, Compressed Air Drilling Services and General Corporate
segments are $16,491,000, $8,418,000, $9,408,000 and $1,227,000, respectively.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
--------------------------------------------------------------------------------
BACKGROUND
----------
Prior to 2001, we operated primarily through HDS. In May 2001, as part of a
strategy to acquire and develop businesses in the natural gas and oil services
industry, we consummated a merger (the "OilQuip Merger") in which we acquired
100% of the capital stock of OilQuip Rentals, Inc. ("OilQuip"), which owned 100%
of the capital stock of MCA. In December 2001, we disposed of HDS, and in
February 2002, we acquired substantially all of the capital stock of Strata and
approximately 81% of the capital stock of Jens. (see "--Recent Developments
--Acquisition of Jens Oilfield Service, Inc, and Strata Directional Drilling,
Inc.; Disposition of HDS," below). Our business conducted in 2001 did not
include the operations of Jens and Strata, which will be material to our
continuing business operations.
For accounting purposes, the OilQuip Merger was treated as a reverse acquisition
of Allis-Chalmers and financial statements presented herein for periods prior to
May 2001 present the results of operations and financial condition of OilQuip.
As a result of the OilQuip Merger, the fixed assets, and goodwill and other
intangibles of Allis-Chalmers in existence immediately prior to the Merger (the
"Prior A-C Assets") were increased by $2,691,000. The fixed assets included in
the Prior A-C Assets are being depreciated over 10 years.
CRITICAL ACCOUNTING POLICIES
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in the Annual Report on Form 10-K filed on April 1, 2002. Note that
our preparation of this Quarterly Report on Form 10-Q requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, 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. Actual results may differ materially from those estimates.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
other intangibles, and other assets comprise a significant amount of the
Company's total assets. The Company makes judgments and estimates in conjunction
with the carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically reviewed for impairment or
15
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period. The
Company has $5,019,000 of goodwill at June 30, 2002 related to Strata, which was
acquired in February 2002. The Company has not performed the transitional
goodwill impairment test on Strata in accordance with SFAS No. 142 as of the
date of this filing but will complete it prior to December 31, 2002. The Company
cannot predict the amount, if any, of an adjustment to goodwill as a result of
this test.
RESULTS OF OPERATIONS
---------------------
Results of operations for 2001 reflect the business operations of OilQuip. From
its inception on February 4, 2000 to February 6, 2001, OilQuip was in the
developmental stage. OilQuip's activities for the period prior to February 6,
2001 consisted of developing its business plan, raising capital and negotiating
with potential acquisition targets. Therefore, the results for operations prior
to February 6, 2001 had no sales, cost of sales, or marketing and administrative
expenses that would be reflective of the ongoing company. On February 6, 2001,
OilQuip acquired the assets of Mountain Air, which conducted natural gas
exploration equipment rental and services operations. On May 9, 2001, OilQuip
acquired the Prior A-C Assets, including the operations of HDS. The results of
operation of HDS, which was sold in December 2001, are included in discontinued
operations from May 9, 2001. On February 6, 2002, Allis-Chalmers acquired 81% of
the outstanding stock for Jens Oilfield Service, Inc. which supplies highly
specialized equipment and operations to install casing and production tubing
required to drill and complete oil and gas wells. The Company also purchased
substantially all the outstanding common stock and preferred stock of Strata
Directional Technology, Inc., which provides high-end directional and horizontal
drilling services for specific targeted reservoirs that cannot be reached
vertically. The results from these operations impact the nine months ended
September 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001:
---------------------------------------------------------------------
HISTORICAL COMPARISON
Sales for the three months ended September 30, 2002 totaled $4,775,000,
reflecting the revenue for Jens and Strata, which were acquired in February,
2002. In the comparable period of 2001, revenues were $1,521,000. Revenues for
the three months ended September 30, 2002 for the Casing Services, Directional
16
Drilling Services, and Compressed Air Drilling Services segments were
$2,197,000, $1,785,000 and $793,000, respectively. Revenues for the Compressed
Air Drilling Services segment decreased from $1,521,000 for the three months
ended September 30, 2001 primarily due to the overall downturn in the petroleum
industry.
Gross margin ratio, as a percentage of sales, was 21.1% in the third quarter of
2002 compared with 34.2 % in the third quarter of 2001. The gross margin ratio
declined as a result of the Jens and Strata acquisitions in 2002 and lower gross
margin ratios at Mountain Air.
General and administrative expense was $886,000 in the third quarter of 2002
compared with $528,000 in the third quarter of 2001. The general administrative
expenses increased in 2002 compared to 2001 due to the acquisition of Jens and
Strata.
Operating income (loss) for the three months ended September 30, 2002 for the
Casing Services, Directional Drilling Services, Compressed Air Drilling Services
and General Corporate segments were $822,000, ($45,000), ($116,000) and
($542,000), respectively. Operating income for the Compressed Air Drilling
Services segment decreased from income of $310,000 for the three months ended
September 30, 2001 primarily due to the overall downturn in the petroleum
industry. Operating (loss) for the General Corporate segment increased from
($277,000) for the three months ended September 30, 2001 due to the acquisition
of Jens and Strata.
We had EBITDA (earnings before interest, income taxes, depreciation and
amortization) of $15,000 for the three months ended September 30, 2002 compared
with an EBITDA of $168,000 for the three months ended September 30, 2001. The
decrease in EBITDA for the three months ended September 20, 2002 resulting from
the response to the default of its debt covenants, the Company reorganized
itself in order to contain costs and recorded charges related to the
reorganization in the amount of $495,000. Such organizational changes included
the severance of members of management, the deployment of turn-around
consultants and a terminated rent obligation. These charges consisted of related
payroll costs for terminated employees of $307,000, consulting fees of $113,000,
and costs associated with a terminated rent obligation of $75,000. The Company
also recorded costs related to abandoned acquisitions and equity raise in the
amount of $233,000 consisting of legal fees associated with abandoned
acquisition of $82,000 and costs related to a abandoned private placement in the
amount of $150,000.
We incurred a net loss of $(1,592,000), or ($0.08) per common share, for the
third quarter of 2002 compared with a loss of ($188,000), or ($0.02) per common
share, for the third quarter of 2001. The net loss for 2002 included a factoring
discount given to the holder of the HDS note in the amount of $191,000 as an
incentive to pay-off the note by September 30, 2002. During the third quarter of
2002, in response to the default of its debt covenants, the Company reorganized
itself in order to contain costs and recorded charges related to the
reorganization in the amount of $495,000. Such organizational changes included
the severance of members of management, the deployment of turn-around
consultants and a terminated rent obligation. These charges consisted of related
payroll costs for terminated employees of $307,000, consulting fees of $113,000,
and costs associated with a terminated rent obligation of $75,000. The Company
also recorded one-time charges for costs related to abandoned acquisitions and
abandoned private placement in the amount of $233,000.
17
PRO FORMA COMPARISON
The pro forma results of operations set forth below includes results of
operations of the Oilquip, MCA, Jens and Strata subsidiaries for all of the
third quarter of 2002 and 2001 as if the transactions had occurred as of the
beginning of the periods presented. These pro forma financial statements should
be read in conjunction with the historical financial statements included herein.
Sales in the third quarter of 2002 totaled $4,775,000 compared with pro forma
sales of $8,197,000 for the third quarter of 2001. The decline in pro forma
revenues reflects the overall decline in the oilfield services industry. The
total rigs operating in the United States per Baker Hughes, Inc. declined from
1,168 at September 30, 2001 to 857 at September 30, 2002, a decrease of 27 %.
Gross profit totaled $753,000 for a gross profit margin of 21.1% of sales in the
three months ended September 30, 2002. Pro forma gross profit for the comparable
quarter in the prior year totaled $2,802,000 for a gross profit margin of 34.2%
of sales. The decline in profit margin results reflects the decrease in revenues
offset partially by cost reductions.
The Company had EBITDA and an operating loss of $15,000 and ($1,201,000),
respectively, for the three months ended September 30, 2002. The pro forma
EBITDA and operating income for the comparable quarter in the prior year were
$2,327,000 and $1,757,000, respectively. The decrease in EBITDA and operating
loss is related to the recording of the above mentioned corporate reorganization
costs and the abandoned acquisition/private placement costs.
The Company incurred a net loss of ($1,592,000), or ($0.08) per common share,
for the third quarter of 2002 compared to a pro forma net income of $916,000, or
$0.08 per common share, for the third quarter of 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001:
--------------------------------------------------------------------
HISTORICAL COMPARISON
Sales for the nine months ended September 30, 2002 totaled $12,265,000,
reflecting eight months of revenue for Jens and Strata following the
acquisitions in February, 2002. In the comparable period of 2001, revenues were
$3,468,000. Revenues for the nine months ended September 30, 2002 for the Casing
Services, Directional Drilling Services, and Compressed Air Drilling Services
segments were $5,445,000, $4,058,000 and $2,763,000, respectively. Revenues for
the Compressed Air Drilling Services segment were $3,468,000 for the nine months
ended September 30, 2001.
Gross margin, as a percentage of sales, was 19.5% for the nine months ended
September 30, 2002 compared with 29.1 % for the nine months ended September 30,
2001. The gross margin ratio declined as a result of the Jens and Strata
acquisitions in 2002 and lower gross margin ratios at Mountain Air.
18
General and administrative expense was $2,696,000 for the nine months ended
September 30, 2002 compared with $1,301,000 for the nine months ended September
30, 2001, increasing as a result of the Jens and Strata acquisitions.
Operating income (loss) for the nine months ended September 30, 2002 for the
Casing Services, Directional Drilling Services, Compressed Air Drilling Services
and General Corporate segments were $2,114,000, ($358,000), ($562,000) and
($1,435,000), respectively. Operating income for the Compressed Air Drilling
Services segment decreased from income of $500,000 for the nine months ended
September 30, 2001 primarily due to the overall downturn in the petroleum
industry. Operating (loss) for the General Corporate segment increased slightly
from ($1,164,000) for the nine months ended September 30, 2001.
We had EBITDA (earnings before interest, income taxes, depreciation and
amortization) of $723,000 for the nine months ended September 30, 2002 compared
with an EBITDA of $340,000 for the nine months ended September 30, 2001. The
decrease in EBITDA for the nine months ended September 20, 2002 due from the
response to the default of its debt covenants, the Company reorganized itself in
order to contain costs and recorded charges related to the reorganization in the
amount of $495,000. Such organizational changes included the severance of
members of management, the deployment of turn-around consultants and a
terminated rent obligation. These charges consisted of related payroll costs for
terminated employees of $307,000, consulting fees of $113,000, and costs
associated with a terminated rent obligation of $75,000. The Company also
recorded costs related to abandoned acquisitions and equity raise in the amount
of $233,000 consisting of legal fees associated with abandoned acquisition of
$82,000 and costs related to a abandoned private placement in the amount of
$150,000.
We incurred a net loss of $(3,247,000), or ($0.18) per common share, for the
nine months ended September 30, 2002 compared with a loss of ($1,229,000), or
($0.19) per common share, for the nine months ended September 30, 2001.
PRO FORMA COMPARISON
The pro forma results of operations set forth below includes results of
operation of the Oilquip, MCA, Jens and Strata subsidiaries for the nine months
of 2002 and 2001 as if the transactions had occurred as of the beginning of the
periods presented. These pro forma financial statements should be read in
conjunction with the historical financial statements included herein. These pro
forma financial statements should be read in conjunction with the historical
financial statements included herein.
Pro forma sales for the nine months ended September 30, 2002 totaled $13,417,000
compared with $23,063,000 for the nine months ended September 30, 2001. The
decline in pro forma revenues reflects the overall decline in the oilfield
services industry. The total rigs operating in the United States per Baker
Hughes, Inc. declined from 1,168 at September 30, 2001 to 857 at September 30,
2002, a decrease of 27 %.
Pro forma gross profit totaled $2,569,000 for a gross profit margin of 19.2% of
sales in the nine months ended September 30, 2002. Pro forma gross profit for
the comparable period in the prior year totaled $ 7,636,000 for a gross profit
margin of 33.1% of sales. The decline in profit margin results reflects the
decrease in revenues offset partially by cost reductions.
19
The Company had pro forma EBITDA and an operating loss of $914,000 and
($969,000), respectively, for the nine months ended September 30, 2002 and 2001.
The decrease in EBITDA for the nine months ended September 20, 2002 includes the
corporate reorganization and abandoned acquisitions/private placement charges
mentioned above. The pro forma EBITDA and operating income for the comparable
period in the prior year were $6,013,000 and $4,386,000, respectively. The 2001
period included the above-mentioned expense of $500,000 related to the grant of
a stock option.
The Company incurred a pro forma net loss of ($2,017,000), or ($0.10) per common
share, for the nine months ended September 30, 2002 compared to a pro forma net
income of $1,663,000, or $0.14 per common share, for the nine months ended
September 30, 2001. The increase in 2002 over the same period in 2001 is
primarily the result of the Jens and Strata acquisition and the recorded
corporate reorganization charges of $495,000.
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
Cash and cash equivalents totaled $110,000 at September 30, 2002, a decrease
from $152,000 at December 31, 2001 mainly due to the acquisitions of Jens and
Strata and the related financings.
Net trade receivables at September 30, 2002 were $3,279,000. This increased
significantly from the December 31, 2001 balance of $973,000 due to the
acquisitions of Jens and Strata.
Net property, plant and equipment were $17,952,000 at September 30, 2002, a
significant increase over the total at December 31, 2001, primarily as a result
of the acquisitions of Jens and Strata. Capital expenditures for the nine months
ended September 30, 2002 were $258,000. Capital expenditures for the year 2002
are projected to be approximately $350,000.
Trade accounts payable at September 30, 2002 were $2,145,000. This increased
significantly from the December 31, 2001 balance due to the acquisition of Jens
and Strata operations.
Other current liabilities, excluding the current portion of long-term debt, were
$2,678,000 including interest in the amount of $501,000, accrued salary and
benefits in the amount of $265,000 and accrued federal income taxes of $139,000.
All of these balance sheet accounts increased significantly from the December
31, 2001 balances due to the acquisition of Jens and Strata operations.
Long-term debt was $19,412,000 at September 30, 2002 including current
maturities.
As described below in, "-- Recent Developments --Acquisition of Jens Oilfield
Service, Inc. and Strata Directional Drilling, Inc." the Company incurred an
additional $13.2 million in long-term debt in connection with the acquisition of
Jens and Strata in February 2002.
20
In addition to the debt discussed above, the Company had available lines of
credit totaling $1,576,000 at September 30, 2002, of which $359,000 was
available and unused.
Our long term capital needs are to provide funds for existing operations, retire
existing debt, the redeem of the Series A Preferred Stock and to secure funds
for the acquisitions in the oil and gas equipment rental and services industry.
To continue our growth through additional acquisitions we will require
additional financing, which may include the issuance of new equity or debt
securities, as well as secured and unsecured loans (substantially all of our
assets are pledged to secure our existing financing). We have had discussions
regarding the issuance of additional equity securities; however, there can be no
assurance that we will be able to consummate any such transaction.
On July 16, 2002, the Company received a letter declaring that the Company was
in default of certain covenants set forth in its credit agreements with Wells
Fargo Bank and its affiliates (the Bank Lenders). The defaults resulted
primarily from our failure to meet financial covenants as a result of decreased
revenues at our subsidiaries. As a result of these defaults the Company's bank
lenders have imposed default interest rates, resulting in an increase of
approximately $15,000 in the monthly interest payable by the Company.
Additionally the Bank Lenders have suspended interest payments (aggregating
$200,000 through the date of the filing of this Report) on a $4.0 million
subordinated seller note issued in connection with the Jens acquisition, which
puts the Company in default under the terms of the subordinated seller note and
have suspended interest payments (aggregating $60,000 through the date of the
filing of this Report) on a $2.0 million subordinated bank note issued in
connection with the Jens acquisition, which puts the Company in default under
the terms of the subordinated bank note. The holders of the subordinated seller
note and subordinated bank are precluded from taking action to enforce the
subordinated seller note without the consent of the Bank Lenders.
The Company has made all outstanding principal and interest payments on it's
senior term debt to the Bank Lenders and believes it will be able to continue to
make such payments for the foreseeable future based upon its current revenue and
cash flow forecasts. While there can be no assurances of maintaining sufficient
liquidity into the future, the Company believes it does have sufficient current
liquidity and will make every effort to remedy the aforementioned defaults in
order to comply with provisions in the credit agreement and subordinated seller
and bank notes.
The Company is currently seeking refinancing and in connection with any
refinancing will seek to obtain a waiver and amendment of the bank credit
agreements which will waive past defaults, eliminate the default interest rate
and remedy other issues, in order to be in compliance. However, there can be no
assurance that the Company will be able to obtain refinance any of its debt,
that an amendment and waiver will be obtained, or that the lenders will not
exercise their rights under the credit agreements, including the acceleration of
approximately $18,000,000 million in debt. Accordingly, the bank debt and the
subordinated seller note are recorded as current liabilities on the Company's
financial statements. The acceleration of outstanding debt or any action to
enforce the Company's obligations with respect to such debt would have a
material adverse effect on the Company.
21
RECENT DEVELOPMENTS --ACQUISITION OF JENS' OILFIELD SERVICE, INC. AND STRATA
DIRECTIONAL TECHNOLOGY, INC.
--------------------------------------------------------------------------------
JENS OIL FIELD TRANSACTION
We purchased 81% of the outstanding stock of Jens for (i) $10,250,000 in cash,
(ii) a $4,000,000 note payable with a 7.5% interest rate and the principal due
in four years, (iii) $1,000,000 for a non-compete agreement payable monthly for
five years, (iv) an additional payment of $841,000 based upon Jens' working
capital as of February 1, 2002 and (v) 1,397,849 shares of our common stock. We
entered into a three-year employment agreement with Mr. Mortensen under which we
will pay Mr. Mortensen a base salary of $150,000 per year. We also entered into
a Shareholders Agreement with Jens and Mr. Mortensen providing for restrictions
against transfer of the stock of Jens by us and Mr. Mortensen, and providing Mr.
Mortensen the option after February 1, 2003, to exchange his shares of stock of
Jens for shares of our common stock with a value equal to 4.6 times the trailing
EBITDA of Jens determined in accordance with GAAP, less any intercompany loans
or third party investments in Jens, times nineteen percent (19%). Our common
stock will be valued based on the average closing bid price for the stock for
the preceding 30 days. Mr. Mortensen has a demand registration right pursuant to
the Shareholder Agreement that requires the Company to register his shares of
the Company under the Securities Act of 1933, as amended, which can not be
effected until after August 1, 2002, and within 3 years thereafter at Mr.
Mortensen's cost, along with piggyback registration rights.
STRATA ACQUISITION
We acquired 100% of the preferred stock and 95% of the common stock of Strata in
consideration for the issuance to Energy Spectrum Partners, LP ("Energy
Spectrum") of 6,559,863 shares of our common stock, warrants to purchase an
additional 437,500 shares of Company common stock at an exercise price of $0.15
per share and 3,500,000 shares of a newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock"). In
addition, in the event the Series A Preferred Stock is not converted or redeemed
prior to February 4, 2004, an additional warrant will be issued to Energy
Spectrum, which will entitle it to acquire 875,000 shares at an exercise price
of $0.15 per share. Energy Spectrum, which is now our largest shareholder, is a
private equity fund headquartered in Dallas. In May 2002, we purchased the
remaining minority interest in Strata in exchange for 87,500 shares of the
Allis-Chalmers common stock.
The Series A Preferred Stock issued to Energy Spectrum in connection with the
Strata transaction has cumulative dividends at $ .10 per share payable in cash
or additional Series A Preferred Stock. Additionally, the Series A Preferred
Stock is convertible at $0.75 per share of Company common stock until February
1, 2003, when the conversion price will be lowered to the lesser of (i) $0.60
per share or (ii) 75% of the market price calculated in accordance with the
certificate of designations of the Series A Preferred Stock. The Series A
Preferred Stock is also subject to anti-dilution in the event of issuances below
the conversion price of the Series A Preferred Stock and is subject to mandatory
redemption on the second anniversary date of issuance or earlier from the net
proceeds of new equity sales and is subject to optional redemption by us at any
22
time. The redemption price of the Series A Preferred Stock is $1.00 per share
plus an amount equal to all accrued and unpaid dividends to such date. In
addition, the holder of the Series A Preferred Stock is entitled to appoint
three directors to our Board of Directors and three persons designated by Energy
Spectrum, Thomas O. Whitener, Jr., James W. Spann, and Michael D. Tapp, were
appointed as directors upon consummation of the acquisition of Strata. We also
granted Energy Spectrum registration rights, which includes two demand
registrations at our expense, and piggyback registration rights.
BANK FINANCING
In connection with the acquisition of Jens, Wells Fargo Bank and its affiliates
(the "Banks") provided $5,574,396 in financing consisting of a revolving credit
facility in the amount of $1,000,000, a term equipment facility in the amount of
$4,042,396 and a real estate term facility in the amount of $532,000. The
facilities have a floating interest rate and a maturity date of February 1,
2005.
In connection with the acquisition of Strata, the Banks provided financing of
$4,154,000 consisting of a revolving credit facility in the amount of $2,500,000
and a term facility in the amount of $1,654,000. The facilities have a floating
interest rate and a maturity date of February 1, 2005.
In connection with the Jens and Strata acquisitions, the banks also made a
subordinated loan to us in the amount of $3,000,000. This loan has a 12.0%
interest rate and a maturity date of February 1, 2005. Energy Capital has been
issued warrants for 1,165,000 shares of common stock at a $0.15 exercise price
and 335,000 warrants to purchase common stock at $1.00 per share exercise price
in connection with their subordinated debt financing. We have the right to
redeem 465,000 of these warrants for $600,000 after two years and 700,000 of
these warrants for $900,000 after three years. In addition, previously issued
warrants to purchase common stock of MCA were cancelled.
Substantially all of the Company's tangible assets have been pledged as
collateral on the loans from the Banks.
Currently, we have outstanding approximately 19.6 million shares of common
stock, as well as preferred stock, options and warrants convertible into or
exercisable for an additional 9.6 million shares.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements (within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934) regarding our business, financial
condition, results of operations and prospects. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates and similar expressions
or variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Report on Form 10-Q.
23
Although forward-looking statements in this Report on Form 10-Q 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 elsewhere in this Report on Form 10-Q, in our Annual Report on Form
10K (including without limitation in the "Risk Factors" Section), 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 Report on Form 10-Q. 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 Report on Form 10-Q.
ITEM 4. Controls and Procedures
(a). Evaluation of disclosure controls and procedures. Our chief
executive officer and our chief accounting officer, after
evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) as of a date (the "Evaluation Date")
within 90 days prior to the filing date of this quarterly
report, have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were adequate to ensure
that material information relating to the registrant and its
consolidated subsidiaries would be made known to them by
others within those entities.
(b). Changes in internal controls. To our knowledge, there are no
significant changes in the Company's internal controls or in
other factors that could significantly affect internal
controls subsequent to the Evaluation Date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
On July 16, 2002, the Company received a letter declaring that the Company was
in default of certain covenants set forth in its credit agreements with Wells
Fargo Bank and its affiliates (the Bank Lenders). ). The defaults resulted
primarily from our failure to meet financial covenants as a result of decreased
revenues at our subsidiaries. As a result of these defaults the Company's bank
lenders have imposed default interest rates, resulting in an increase of
approximately $15,000 in the monthly interest payable by the Company.
Additionally the Bank Lenders have suspended interest payments (aggregating
$200,000 through the date of the filing of this Report) on a $4.0 million
subordinated seller note issued in connection with the Jens acquisition, which
24
puts the Company in default under the terms of the subordinated seller note and
have suspended interest payments (aggregating $60,000 through the date of the
filing of this Report) on a $2.0 million sub-debt bank note issued in connection
with the Jens acquisition, which puts the Company in default under the terms of
the subordinated bank note. The holders of the subordinated seller note and the
subordinated bank note are precluded from taking action to enforce the
subordinated seller note without the consent of the Bank Lenders.
The Company has made all outstanding principal and interest payments on it's
senior term debt to the Bank Lenders on it's senior term debt and believes it
will be able to continue to make such payments for the foreseeable future based
upon its current revenue and cash flow forecasts. While there can be no
assurances of maintaining sufficient liquidity into the future, the Company
believes it does have sufficient current liquidity and will make every effort to
remedy the aforementioned defaults in order to comply with provisions in the
credit agreement and subordinated seller and bank notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K: None
25
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allis-Chalmers Corporation
--------------------------
(Registrant)
/s/ Munawar H. Hidayatallah
---------------------------
Munawar H. Hidayatallah
Chief Executive Officer
And Chairman
November 13, 2002
26
CERTIFICATIONS
I, Munawar H. Hidayatallah, Chief Executive Officer of the Company, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Munawar H. Hidayatallah
---------------------------
Munawar H. Hidayatallah
Chief Executive Officer
27
CERTIFICATIONS
I, Todd C. Seward, Chief Accounting Officer of the Company, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Todd C. Seward
---------------------------
Todd C. Seward
Chief Accounting Officer
28