sv1
As filed with the Securities and Exchange Commission on
May 8, 2006
Registration
No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ALLIS-CHALMERS ENERGY INC.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Delaware |
|
1389 |
|
39-0126090 |
(State or other jurisdiction of |
|
(Primary Standard Industrial |
|
(I.R.S. Employer |
incorporation or organization) |
|
Classification Code Number) |
|
Identification No.) |
5075 Westheimer, Suite 890
Houston, Texas 77056
(713) 369-0550
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Victor M. Perez
Chief Financial Officer
5075 Westheimer, Suite 890
Houston, Texas 77056
(713) 369-0550
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
|
|
|
Andrews Kurth LLP |
|
Shearman & Sterling LLP |
600 Travis, Suite 4200 |
|
599 Lexington Avenue |
Houston, Texas 77002 |
|
New York, New York 10022 |
(713) 220-4200 |
|
(212) 848-4000 |
Attn: Robert V. Jewell |
|
Attn: Bruce Czachor |
Approximate date of commencement of proposed sale to the
public: As soon as practicable following the effectiveness
of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If the delivery of the prospectus is expected to be made
pursuant to Rule 434, check the following
box. o
CALCULATION OF REGISTRATION FEE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposed Maximum |
|
|
|
Title of Each Class of |
|
|
Aggregate |
|
|
Amount of |
Securities to be Registered |
|
|
Offering Price(2) |
|
|
Registration Fee(2) |
|
|
|
|
|
|
|
Common stock, par value $0.01 per share(1)
|
|
|
$91,999,978 |
|
|
$9,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes shares of common stock issuable upon the exercise of
the underwriters over-allotment option. |
|
(2) |
Estimated solely for the purpose of calculating the amount of
the registration fee pursuant to Rule 457(o) under the
Securities Act of 1933, as amended. |
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the Securities and Exchange
Commission declares our registration statement effective. This
prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
|
Subject to completion, dated
May 8, 2006
PROSPECTUS
4,716,980 shares
Allis-Chalmers Energy Inc.
Common Stock
We are offering 4,716,980 shares of common stock. We plan
to use the net proceeds to us of this offering to fund a portion
of our pending acquisition of DLS Drilling, Logistics &
Services Corporation.
Our common stock trades on the American Stock Exchange under the
symbol ALY. On May 5, 2006, the last sale price
reported for our common stock on the American Stock Exchange was
$16.96 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 7.
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Total | |
|
|
| |
|
| |
Public offering price
|
|
$ |
|
|
|
$ |
|
|
Underwriting discounts
|
|
$ |
|
|
|
$ |
|
|
Proceeds to us before expenses
|
|
$ |
|
|
|
$ |
|
|
We and several selling stockholders have granted the
underwriters a 30-day
option to purchase up to 707,547 additional shares to cover any
over-allotments. We will not receive any of the proceeds of the
sale of shares by the selling stockholders.
We expect that delivery of the shares of common stock will be
made on or
about ,
2006.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
RBC Capital
Markets
,
2006
[INSIDE FRONT COVER ART TO COME]
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the
shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
i |
|
|
|
|
i |
|
|
|
|
ii |
|
|
|
|
ii |
|
|
|
|
iii |
|
|
|
|
iv |
|
|
|
|
iv |
|
|
|
|
1 |
|
|
|
|
7 |
|
|
|
|
23 |
|
|
|
|
23 |
|
|
|
|
24 |
|
|
|
|
25 |
|
|
|
|
26 |
|
|
|
|
33 |
|
|
|
|
36 |
|
|
|
|
55 |
|
|
|
|
66 |
|
|
|
|
74 |
|
|
|
|
80 |
|
|
|
|
83 |
|
|
|
|
86 |
|
|
|
|
89 |
|
|
|
|
91 |
|
|
|
|
91 |
|
|
|
|
F-1 |
|
Consent of UHY Mann Frankfort Stein & Lipp CPAs, LLP |
Consent of Gordon, Hughes and Banks, LLP |
Consent of Wright, Moore, Dehart, Dupuis & Hutchinson, LLC |
Consent of Curtis Blakely & Co., PC |
Consent of Accounting & Consulting Group, LLP |
Consent of UHY Mann Frankfort Stein & Lipp CPAs, LLP |
Consent of Sibille |
ABOUT THIS PROSPECTUS
The information in this prospectus is not complete and may be
changed. You should rely only on the information contained in or
incorporated by reference in this prospectus or any other
documents to which we have referred you. We have not, and the
underwriters have not, authorized anyone to provide you with
information that is different. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed
since that date.
This prospectus is part of a registration statement that we have
filed with the Securities and Exchange Commission, or SEC. You
should read this prospectus together with the registration
statement, the exhibits thereto and the additional information
described under the headings Where You Can Find More
Information and Incorporation by Reference.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, regarding our business,
financial condition, results of operations and prospects. Words
such as expects, anticipates, intends, plans, believes, seeks,
i
estimates and similar expressions or variations of such words
are intended to identify forward-looking statements. However,
these are not the exclusive means of identifying forward-looking
statements. Although forward-looking statements contained in
this prospectus reflect our good faith judgment, such statements
can only be based on facts and factors currently known to us.
Consequently, forward-looking statements are inherently subject
to risks and uncertainties, and actual outcomes may differ
materially from the results and outcomes discussed in the
forward-looking statements. Further information about the risks
and uncertainties that may impact us are described in Risk
Factors beginning on page 7. You should read that
section carefully. You should not place undue reliance on
forward-looking statements, which speak only as of the date of
this prospectus. We undertake no obligation to update publicly
any forward-looking statements in order to reflect any event or
circumstance occurring after the date of this prospectus or
currently unknown facts or conditions or the occurrence of
unanticipated events.
NON-GAAP FINANCIAL MEASURES
The SEC has adopted rules to regulate the use of non-GAAP
financial measures such as EBITDA, that are derived on the
basis of methodologies other than in accordance with generally
accepted accounting principles, or GAAP. EBITDA is a non-GAAP
financial measure that complies with the Securities Act
regulations when it is defined as net income (the most directly
comparable GAAP financial measure) before interest, taxes,
depreciation and amortization. We define EBITDA in this
prospectus accordingly.
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. For example, EBITDA:
|
|
|
|
|
does not reflect our cash expenditures, or future requirements
for capital expenditures or contractual commitments; |
|
|
|
does not reflect changes in, or cash requirements for, our
working capital needs; |
|
|
|
does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal
payments, on our debts; and |
|
|
|
does not reflect the effect of earnings or charges resulting
from matters we consider not to be indicative of our ongoing
operations. |
In addition, although depreciation and amortization are non-cash
charges, the assets being depreciated and amortized will often
have to be replaced in the future, and EBITDA does not reflect
any cash requirements for such replacements. Other companies in
our industry and in other industries may calculate EBITDA
differently from the way that we do, limiting its usefulness as
a comparative measure. Because of these limitations, EBITDA
should not be considered as a measure of discretionary cash
available to us to invest in the growth of our business. We
compensate for these limitations by relying primarily on our
GAAP results and using EBITDA only supplementally.
INDUSTRY AND MARKET DATA
We have obtained some industry and market share data from
third-party sources that we believe are reliable. In many cases,
however, we have made statements in this prospectus (or in
documents incorporated by reference in this prospectus)
regarding our industry and our position in the industry based on
estimates made based on our experience in the industry and our
own investigation of market conditions. We believe these
estimates to be accurate as of the date of this prospectus.
However, this information may prove to be inaccurate because of
the method by which we obtained some of the data
ii
for our estimates or because this information cannot always be
verified with complete certainty due to the limits on the
availability and reliability of raw data, the voluntary nature
of the data gathering process and other limitations and
uncertainties. As a result, you should be aware that the
industry and market data included or incorporated by reference
in this prospectus, and estimates and beliefs based on that
data, may not be reliable. We cannot, and the underwriters
cannot, guarantee the accuracy or completeness of any such
information.
DEFINITIONS
|
|
|
air drilling |
|
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. |
|
blow out preventors |
|
A large safety device placed on the surface of an oil or natural
gas well to control high pressure well bores. |
|
booster |
|
A machine that increases the pressure and/or volume of air when
used in conjunction with a compressor or a group of compressors. |
|
capillary tubing |
|
A small diameter tubing installed in producing wells and through
which chemicals are injected to enhance production and reduce
corrosion and other problems. |
|
casing |
|
A pipe placed in a drilled well to secure the well bore and
formation. |
|
choke manifolds |
|
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. |
|
coiled tubing |
|
A small diameter tubing used to service producing and
problematic wells and to work in high pressure applications
during drilling, production and workover operations. |
|
directional drilling |
|
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. |
|
double studded adapter |
|
A device that joins two dissimilar connections on certain
equipment, including valves, piping, and blow out preventors. |
|
drill pipe |
|
A pipe that attaches to the drill bit to drill a well. |
|
heavy weight spiral drill pipe |
|
A heavy drill pipe used for special applications primarily in
directional drilling. The spiral design increases
flexibility and penetration of the pipe. |
|
horizontal drilling |
|
The technique of drilling wells at a 90-degree angle. |
|
laydown machines |
|
A truck mounted machine used to move pipe and casing and tubing
onto a pipe rack (from which a derrick crane lifts the drill
pipe, casing and tubing and inserts it into the well). |
|
mist pump |
|
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. |
iii
|
|
|
spacer spools |
|
High pressure connections which are stacked to elevate the blow
out preventors to the drilling rig floor. |
|
straight hole drilling |
|
The technique of drilling that allows very little or no vertical
deviation. |
|
test plugs |
|
A device used to test the connections of well heads and the blow
out preventors. |
|
torque turn service or torque turn
equipment |
|
A monitoring device to insure proper makeup of the casing. |
|
tubing |
|
A pipe placed inside the casing to allow the well to produce. |
|
tubing work strings |
|
The tubing used on workover rigs through which high pressure
liquids, gases or mixtures are pumped into a well to perform
production operations. |
|
wear bushings |
|
A device placed inside a wellhead to protect the wellhead from
wear. |
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC under the
Securities Act that registers the issuance and sale of the
securities offered by this prospectus. The registration
statement, including the attached exhibits, contains additional
relevant information about us. The rules and regulations of the
SEC allow us to omit some information included in the
registration statement from this prospectus.
We file annual, quarterly, and other reports, proxy statements
and other information with the SEC under the Securities Exchange
Act of 1934, as amended. You may read and copy any materials we
file with the SEC at the SECs public reference room at 100
F Street, N.E., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for
further information on the public reference room. Our SEC
filings are also available to the public through the SECs
website at http://www.sec.gov. General information about us,
including our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q and
current reports on
Form 8-K, as well
as any amendments and exhibits to those reports, are available
free of charge through our website at http://www.alchenergy.com
as soon as reasonably practicable after we file them with, or
furnish them to, the SEC. Information on our website is not
incorporated into this prospectus or our other securities
filings and is not a part of this prospectus.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference
information into this document. This means that we can disclose
important information to you by referring you to another
document filed separately with the SEC. The information
incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed
below, other than any portions of the respective filings that
were furnished (pursuant to Item 2.02 or Item 7.01 of
current reports on
Form 8-K or other
applicable SEC rules) rather than filed:
|
|
|
|
|
our annual report on
Form 10-K for the
year ended December 31, 2005, as filed with the SEC on
March 22, 2006, as amended by Amendment No. 1 thereto,
as filed with the SEC on May 1, 2006, which we collectively
refer to as our 2005
Form 10-K; and |
iv
|
|
|
|
|
our current reports on
Form 8-K
and 8-K/ A, as
filed with the SEC on January 24, 2006, February 1,
2006, February 3, 2006, February 24, 2006,
April 3, 2006, April 6, 2006, April 25, 2006 and
April 28, 2006. |
We will provide to each person, including any beneficial owner
to whom a prospectus is delivered, a copy of these filings,
other than an exhibit to these filings unless we have
specifically incorporated that exhibit by reference into the
filing, upon written or oral request and at no cost. Requests
should be made by writing or telephoning us at the following
address:
Allis-Chalmers Energy Inc.
5075 Westheimer, Suite 890
Houston, Texas 77056
(713) 369-0550
Attn: Investor Relations
v
PROSPECTUS SUMMARY
This summary is not complete. It highlights selected
information contained elsewhere in this prospectus. You should
read this entire prospectus carefully, including the information
under the heading Risk Factors, our financial
statements and the notes to those financial statements. Unless
the context requires otherwise, references in this prospectus to
Allis-Chalmers, we, us,
our or ours refer to Allis-Chalmers
Energy Inc., together with its subsidiaries, but not including
DLS. References in this prospectus to DLS refer to
DLS Drilling Logistics & Services Corporation and its
subsidiaries. In this prospectus, we present pro forma as
adjusted financial information giving effect to the DLS
transactions and the Specialty transactions. When we refer to
the DLS transactions, we mean our pending acquisition of DLS and
the related financing of that acquisition by this stock offering
and a concurrent debt financing of approximately
$35 million. When we refer to the Specialty transactions,
we mean our acquisition of Specialty Rental Tool, Inc. and the
related financing of that acquisition and repayment of
obligations outstanding under our credit facility with the
proceeds from our $160 million offering of senior notes,
which closed in January 2006.
Our Company
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, Mississippi, Utah, Wyoming, offshore
in the Gulf of Mexico, and internationally in Mexico.
The principal purpose of this offering is to raise a portion of
the cash consideration for our pending DLS acquisition,
described below. Giving pro forma as adjusted effect to the
recent Specialty transactions, our recent acquisitions of Rogers
Oil Tool Services, Inc., Delta Rental Service, Inc., Capcoil
Tubing Services, Inc., W.T. Enterprises, Inc., the minority
interest of M-I LLC in AirComp LLC and the pending DLS
transactions, we would have generated revenues of
$280.1 million, net income of $15.2 million and EBITDA
of $67.9 million for the fiscal year ended
December 31, 2005.
Acquisition of DLS
We have entered into a stock purchase agreement for the
acquisition of all of the outstanding capital stock of DLS, a
leading provider of drilling, completion, repair and related
services for oil and gas wells in Argentina. For the year ended
December 31, 2005, DLS had aggregate revenues of
$129.8 million and income from operations of
$6.2 million. The stock purchase agreement provides that
the purchase price will consist of cash consideration in the
amount of $102.4 million and 2.5 million shares of our
common stock. The principal purpose of this offering is to raise
a portion of the cash component of the purchase price. We expect
to raise the remainder of the cash necessary to complete the
acquisition through a debt financing of approximately
$35.0 million. The stock purchase agreement also
contemplates that upon closing of the acquisition we will enter
into an investors rights agreement, providing, among other
things, that the sellers of DLS will have the right to designate
two nominees for election to our board of directors.
With approximately 1,500 employees, DLS operates a fleet of 51
rigs, including 20 drilling rigs, 18 workover rigs and 12
pulling rigs in Argentina and one drilling rig in Bolivia. We
believe that the ability to offer drilling rigs is very
important in the international marketplace, and we expect this
acquisition to further diversify our business mix by balancing
our predominately natural gas based operations in the United
States with primarily oil based drilling operations in
Argentina. The integration of DLS operations into
Allis-Chalmers will significantly expand our geographic
footprint, increase our menu of
1
service offerings and we anticipate that it will also increase
our opportunities to cross-sell existing Allis-Chalmers products
and services.
Business Segments
Prior to our acquisition of DLS, our existing five business
segments are:
Directional Drilling Services. We employ approximately 75
full-time directional drillers utilizing
state-of-the-art
equipment for 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, including, logging-while-drilling and
measurement-while-drilling services. For the year ended
December 31, 2005, our directional drilling services
segment had revenues of $43.9 million and income from
operations of $7.4 million.
Rental Tools. We provide specialized rental equipment,
including premium drill pipe, heavy weight spiral drill pipe,
tubing work strings, blow out preventers, choke manifolds and
various valves and handling tools, for both onshore and offshore
well drilling, completion and workover operations. For the year
ended December 31, 2005, our rental tools segment had
revenues of $5.1 million and income from operations of
$1.3 million. After giving pro forma effect to the
Specialty acquisition and our acquisition of Delta Rental
Service, Inc., for the year ended December 31, 2005, our
rental tools segment would have had revenues of
$37.3 million and income from operations of
$12.9 million.
Casing and Tubing Services. We provide specialized
equipment and trained operators for 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. For the year ended
December 31, 2005, our casing and tubing services segment
had revenues of $20.9 million and income from operations of
$5.0 million. After giving pro forma effect to the Rogers
acquisition, for the year ended December 31, 2005, our
casing and tubing services segment would have had revenues of
$29.3 million and income from operations of
$5.9 million.
Compressed Air Drilling Services. We provide compressed
air equipment, drilling bits, hammers, drilling chemicals and
other specialized drilling products for underbalanced drilling
applications. With a combined fleet of over 130 compressors
and boosters, we believe we are one of the largest providers of
compressed air or underbalanced drilling services in the United
States. For the year ended December 31, 2005, our
compressed air drilling services segment had revenues of
$25.7 million and income from operations of
$5.6 million. After giving pro forma effect to our
acquisition of W. T. Enterprises, Inc., for the year
ended December 31, 2005, our compressed air drilling
services segment would have had revenues of $27.8 million
and income from operations of $6.2 million.
Production Services. We provide 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, and workover services
with coiled tubing units. For the year ended December 31,
2005, our production services segment had revenues of
$9.8 million and a loss from operations of $99,000. After
giving pro forma effect to our acquisition of Capcoil Tubing
Services, Inc., for the year ended December 31, 2005, our
production services segment would have had revenues of
$12.0 million and breakeven income for operations.
In addition to the businesses mentioned above, we plan to enter
into the contract drilling and repair services business in
Argentina and Bolivia upon completion of our pending acquisition
of DLS.
2
Competitive Strengths
Our competitive strengths are:
Strategic position in high growth markets. We focus on
markets we believe are growing faster than the overall oilfield
services industry. We are a leading provider of products and
services in directional drilling and air drilling, which we
believe to be two of the fastest growing segments of the
oilfield services industry.
Strong relationships with diversified customer base. We
have strong relationships with many of the major and independent
oil and natural gas producers and service companies in Texas,
Louisiana, New Mexico, Colorado, Oklahoma, Mississippi, Utah,
Wyoming, offshore in the Gulf of Mexico and Mexico. Our largest
customers include Burlington Resources, ConocoPhilips, BP,
ChevronTexaco, Kerr-McGee, Dominion Resources, Remington Oil and
Gas, Petrohawk Energy, Newfield Exploration, El Paso
Corporation, Matyep and Anadarko Petroleum.
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 15 acquisitions. We strive to improve the
operating performance of our acquired businesses by increasing
their asset utilization and operating efficiency.
Experienced and dedicated management team. Our executive
management team has extensive experience in the energy sector,
and consequently has developed strong and longstanding
relationships with many of the major and independent exploration
and production companies.
Business Strategy
Expand geographically to provide greater access and service
to key customer segments. We have recently 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 plan to continue to establish
new locations in the United States and internationally.
Prudently pursue strategic acquisitions. To complement
our organic growth, we seek to opportunistically complete, at
attractive valuations, strategic acquisitions that will be
accretive to earnings and complement our products and services,
expand our geographic footprint and market presence, and further
diversify our customer base.
Expand products and services provided in existing operating
locations. Since the beginning of 2003, we have made
approximately $27.8 million in capital expenditures to grow
our business organically by expanding our product and service
offerings.
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.
Target services in which we have a competitive advantage.
We believe 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.
Our principal executive offices are located at
5075 Westheimer, Suite 890, Houston, Texas 77056, and
our telephone number at that address is
(800) 997-9534.
Our website address is www.alchenergy.com. However,
information contained on our website is not incorporated by
reference into this prospectus, and you should not consider the
information contained on our website to be part of this
prospectus.
3
The Offering
|
|
|
Common stock offered by Allis-Chalmers |
|
4,716,980 shares. |
|
Common stock to be outstanding after this offering |
|
24,565,406 shares. |
|
Use of proceeds |
|
We estimate that the net proceeds to Allis-Chalmers from this
offering will be approximately $76.0 million. We plan to
use the net proceeds to us from this offering to fund a portion
of the purchase price for our pending acquisition of DLS. |
|
American Stock Exchange symbol |
|
ALY. |
|
Risk factors |
|
See Risk Factors beginning on page 7 of this
prospectus for a discussion of factors you should carefully
consider before deciding to invest in our common stock. |
The number of shares of common stock to be outstanding upon
consummation of this offering is based upon
17,223,141 shares of our common stock outstanding as of
March 31, 2006, 4,716,980 shares to be issued in this
offering, 125,285 shares issued as a portion of the
consideration for our recent acquisition of Rogers and
2,500,000 shares of common stock to be issued as a portion
of the consideration for our pending acquisition of DLS. In
addition, the number of shares of common stock excludes:
|
|
|
|
|
2,914,667 shares reserved for issuance under our 2003
Incentive Stock Plan (of which 2,672,567 shares are
currently issuable upon the exercise of outstanding options with
a weighted average exercise price of $5.22 per share), |
|
|
|
104,400 shares issuable upon the exercise of outstanding
stand-alone options issued to certain of our current and former
directors with a weighted average exercise price of $2.97 per
share, and |
|
|
|
4,000 shares issuable upon the exercise of outstanding
warrants with a weighted exercise price of $4.65 per share. |
Allis-Chalmers and several selling stockholders have granted the
underwriters a 30-day option to purchase up to
707,547 additional shares to cover any over-allotments.
Unless otherwise noted, this prospectus assumes no exercise of
the underwriters over-allotment option.
4
Summary Historical and Pro Forma Consolidated Financial
Information
The following summary historical consolidated financial
information for each of the years in the three-year period ended
December 31, 2005 has been derived from our audited
consolidated financial statements. The summary pro forma as
adjusted consolidated statement of operations and other
information for the year ended December 31, 2005 gives
effect on a pro forma as adjusted basis to our acquisitions of
Capcoil Tubing Services, Inc., Delta Rental Service, Inc., the
minority interest of M-I LLC in AirComp LLC, W. T. Enterprises,
Inc., and Rogers Oil Tool Services, Inc., or Rogers, and the
consummation of the Specialty transactions and the DLS
transactions, as if such acquisitions and transactions were
consummated on January 1, 2005. The summary pro forma as
adjusted consolidated balance sheet information gives effect on
a pro forma as adjusted basis to our acquisition of Rogers and
the consummation of the Specialty transactions and the DLS
transactions, as if such acquisition and such transactions were
consummated on December 31, 2005. However, the pro forma
statement of operations information presented below does not
give effect to our immaterial acquisition of Target Energy,
Inc., which was acquired effective August 1, 2005, and our
acquisition of certain casing and tubing assets from Patterson
Services, Inc. on September 1, 2005. This information is
only a summary and you should read it in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which discusses
factors affecting the comparability of the information
presented, and in conjunction with our consolidated financial
statements and related notes included elsewhere in this
prospectus, including the pro forma financial statements. Our
historical consolidated financial statements have been restated
for the period from July 1, 2003 through March 31,
2005, as described in the notes to our consolidated financial
statements included elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma As | |
|
|
| |
|
Adjusted | |
|
|
|
|
| |
|
|
Year Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
32,724 |
|
|
$ |
47,726 |
|
|
$ |
105,344 |
|
|
$ |
280,061 |
|
Cost of revenues
|
|
|
24,029 |
|
|
|
35,300 |
|
|
|
74,763 |
|
|
|
207,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,695 |
|
|
|
12,426 |
|
|
|
30,581 |
|
|
|
72,421 |
|
Income from operations
|
|
|
2,625 |
|
|
|
4,227 |
|
|
|
13,218 |
|
|
|
40,013 |
|
Interest expense, net
|
|
|
(2,464 |
) |
|
|
(2,776 |
) |
|
|
(4,397 |
) |
|
|
21,066 |
|
Net income
|
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
|
|
15,206 |
|
Preferred stock dividend
|
|
|
(656 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common stockholders
|
|
$ |
2,271 |
|
|
$ |
764 |
|
|
$ |
7,175 |
|
|
$ |
15,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share basic
|
|
$ |
0.58 |
|
|
$ |
0.10 |
|
|
$ |
0.48 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share diluted
|
|
$ |
0.50 |
|
|
$ |
0.09 |
|
|
$ |
0.44 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,927 |
|
|
|
7,930 |
|
|
|
14,832 |
|
|
|
34,113 |
|
|
Diluted
|
|
|
5,850 |
|
|
|
9,510 |
|
|
|
16,238 |
|
|
|
35,519 |
|
Other Financial Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1)(2)
|
|
$ |
8,697 |
|
|
$ |
7,756 |
|
|
$ |
19,577 |
|
|
$ |
67,930 |
|
Capital expenditures
|
|
|
5,354 |
|
|
|
4,603 |
|
|
|
17,767 |
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,920 |
|
|
$ |
5,934 |
|
Total assets
|
|
|
137,355 |
|
|
|
437,429 |
|
Long-term debt (including current portion)
|
|
|
60,569 |
|
|
|
208,890 |
|
Stockholders equity
|
|
|
60,875 |
|
|
|
169,700 |
|
|
|
(1) |
EBITDA is a non-GAAP financial measure that we
define as net income before interest, taxes, depreciation and
amortization. |
|
(2) |
EBITDA, as used and defined by us, may not be
comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in
accordance with GAAP. EBITDA should not be considered in
isolation or as a substitute for operating income, net income or
loss, cash flows provided by operating, investing and financing
activities, or other income or cash flow statement data prepared
in accordance with GAAP. However, our management believes EBITDA
is useful to an investor in evaluating our operating performance
because this measure: |
|
|
|
|
|
is widely used by investors in the energy industry to measure a
companys operating performance without regard to items
excluded from the calculation of such term, which can vary
substantially from company to company depending upon accounting
methods and book value of assets, capital structure and the
method by which assets were acquired, among other factors; |
|
|
|
helps investors to more meaningfully evaluate and compare the
results of our operations from period to period by removing the
effect of our capital structure and asset base from our
operating structure; and |
|
|
|
is used by our management for various purposes, including as a
measure of operating performance, in presentations to our board
of directors, as a basis for strategic planning and forecasting,
and as a component for setting incentive compensation. |
|
|
|
There are significant limitations to using EBITDA as a measure
of performance, including the inability to analyze the effect of
certain recurring and non-recurring items that materially affect
our net income or loss, and the lack of comparability of results
of operations of different companies. The following table
reconciles our net income, the most directly comparable GAAP
financial measure, to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma As | |
|
|
| |
|
Adjusted | |
|
|
|
|
| |
|
|
Year Ended December 31, | |
|
Year Ended | |
|
|
| |
|
December 31, | |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Net income
|
|
$ |
2,927 |
|
|
$ |
888 |
|
|
$ |
7,175 |
|
|
$ |
15,206 |
|
Interest expense, net
|
|
|
2,464 |
|
|
|
2,776 |
|
|
|
4,397 |
|
|
|
21,066 |
|
Income taxes
|
|
|
370 |
|
|
|
514 |
|
|
|
1,344 |
|
|
|
5,157 |
|
Depreciation and amortization
|
|
|
2,936 |
|
|
|
3,578 |
|
|
|
6,661 |
|
|
|
26,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
8,697 |
|
|
|
7,756 |
|
|
|
19,577 |
|
|
|
67,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
RISK FACTORS
You should carefully consider the following risks before you
decide to buy our common stock. If any of the following risks
actually occur, our business, financial condition or results of
operations would likely suffer. If this occurs, the trading
price of our common stock could decline, and you could lose all
or part of the money you paid to buy our common stock. Although
the risks described below are the risks that we believe are
material, they are not the only risks relating to our business
and our common stock. Additional risks and uncertainties,
including those that are not yet identified or that we currently
believe are immaterial, may also adversely affect our business,
financial condition or results of operations.
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
oilfield 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:
|
|
|
|
|
our ability to obtain financing; |
|
|
|
the competitive environment for acquisitions; and |
|
|
|
the integration and synergy issues described in the next risk
factor. |
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 our information systems, and this strain could disrupt our
businesses. Furthermore, if our combined businesses continue to
grow rapidly, we may be required to replace our current
information and accounting systems with systems designed for
companies that are larger than ours. 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 planned acquisition of DLS and our recent
acquisition of Specialty will be our two largest acquisitions to
date and may pose greater integration risks than our previous
acquisitions. We will be conducting parts of the integration of
these two companies simultaneously, and as a result we could
strain our current resources. Furthermore, by financing part or
all of these acquisitions with proceeds from the offering of our
senior notes, we will depend on these entities continued
performance as a source of cash flow to service our debt
obligations.
7
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.
|
|
|
We anticipate that our
pending acquisition of DLS will substantially change the nature
of our operations and business. |
We anticipate that our pending acquisition of DLS will
substantially change the nature and geographic location of our
operations and business as a result of the character and
location of DLS businesses, which have substantially
different operating characteristics and are in different
geographic locations from our existing businesses. Prior to our
pending acquisition of DLS, we have operated as an oilfield
services company domestically in Texas, Louisiana, New Mexico,
Colorado, Oklahoma, Mississippi, Utah, Wyoming, offshore in the
Gulf of Mexico, and internationally in Mexico. DLS
business is located primarily in Argentina, and we have no
significant operations in South America. Accordingly, this
acquisition will subject us to risks inherent in operating in a
foreign country where we do not have significant prior
experience. DLS business consists of employing drilling
and workover rigs for drilling, completion and repair services
for oil and gas wells, and we do not currently own any drilling
rigs or workover rigs, and have not historically provided such
services. Consequently, we may not be able to realize the
economic benefits of this acquisition as efficiently as in our
prior acquisitions, if at all.
|
|
|
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 prospectus 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
8
process may take for any business that we may acquire.
Furthermore, during the integration 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 the 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 credit agreement and could
cause the acceleration of amounts due under the 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.
9
|
|
|
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. |
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:
|
|
|
|
|
Chairman of the Board and Chief Executive Officer Munawar H.
Hidayatallah; and |
|
|
|
President and Chief Operating Officer David Wilde. |
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 customers 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 2005, no single customer
generated over 10% of our revenues. In 2004, Matyep represented
10.8% of our revenues, and Burlington Resources represented
10.1% of our revenues. In 2003, Matyep represented 10.2% of our
revenues, Burlington represented 11.1% of our revenue and
El Paso Corporation represented 14.1% of our revenues.
Additionally, DLS currently relies on two customers for a
majority of its revenue. In 2005, Pan American Energy LLC
Sucursal Argentina, or Pan American Energy, represented 55% of
DLS revenues and Repsol-YPF represented 15% of DLS
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: |
|
|
|
|
|
terrorist acts, war and civil disturbances; |
|
|
|
changes in laws or policies regarding the award of
contracts; and |
|
|
|
the inability to collect or repatriate currency, income, capital
or assets. |
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
10
natural gas industry, we could become subject to material
environmental liabilities that 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 that 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.
|
|
|
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 that 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:
|
|
|
|
|
economic conditions in the United States and elsewhere; |
|
|
|
changes in global supply and demand for oil and natural gas; |
|
|
|
the level of production of the Organization of Petroleum
Exporting Countries, commonly called OPEC; |
|
|
|
the level of production of non-OPEC countries; |
|
|
|
the price and quantity of imports of foreign oil and natural gas; |
|
|
|
political conditions, including embargoes, in or affecting other
oil and natural gas producing activities; |
11
|
|
|
|
|
the level of global oil and natural gas inventories; and |
|
|
|
advances in exploration, development and production technologies. |
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 we are and have resources that are significantly greater
than our resources. 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.
|
|
|
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:
|
|
|
|
|
curtailment of services; |
|
|
|
weather-related damage to facilities and equipment resulting in
suspension of operations; |
|
|
|
inability to deliver materials to job sites in accordance with
contract schedules; and |
|
|
|
loss of productivity. |
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
12
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.
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: |
|
|
|
|
|
decreases in prices for oil and natural gas resulting in
decreased demand for our services; |
|
|
|
variations in our operating results and failure to meet
expectations of investors and analysts; |
|
|
|
increases in interest rates; |
|
|
|
the loss of customers; |
|
|
|
failure of customers to pay for our services; |
|
|
|
competition; |
|
|
|
illiquidity of the market for our common stock; |
|
|
|
developments specifically affecting the Argentine economy; |
|
|
|
sales of common stock by existing stockholders; and |
|
|
|
other developments affecting us or the financial markets. |
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
13
securities may have the same rights as our common stock or,
alternatively, 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 paid any cash dividends on our common stock within
the last ten years. We have no intention in the foreseeable
future to pay any cash dividends on our common stock and our
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 will obtain an
economic benefit from the common stock only after an increase in
its trading price and only by selling the common stock.
|
|
|
Substantial sales of our
common stock could adversely affect our stock price. |
Sales of a substantial number of shares of common stock after
this offering, or the perception that such sales could occur,
could adversely affect the market price of our common stock by
introducing a large number of sellers to the market. Such sales
could cause the market price of our common stock to decline.
Based on our shares outstanding as of March 31, 2006, we
will have 24,565,406 shares of common stock outstanding
immediately after this offering. We have reserved an additional
2,914,667 shares of common stock for issuance under our
equity compensation plans, of which 2,672,567 shares are
subject to outstanding options. In addition, we have reserved
4,000 shares of common stock for issuance upon the exercise
of outstanding warrants. Following this offering, all of the
shares of common stock to be sold in this offering and
approximately 9.4 million shares of common stock that may
be sold pursuant to another registration statement that we have
filed with the SEC will be freely tradable without restriction
or further registration under the federal securities laws unless
purchased by our affiliates, as that term is defined in
Rule 144 under the Securities Act.
In connection with our pending acquisition of DLS, we plan to
enter into an investors rights agreement with the seller parties
to the DLS stock purchase agreement, who will collectively hold
2.5 million shares of our common stock after giving effect
to the acquisition. Under the investors rights agreement, the
DLS sellers will be entitled to certain rights with respect to
the registration of the sale of such shares under the Securities
Act. By exercising their registration rights and causing a large
number of shares to be sold in the public market, these holders
could cause the market price of our common stock to decline. See
DLS Business.
We cannot predict whether future sales of our common stock, or
the availability of our common stock for sale, will adversely
affect the market price for our common stock or our ability to
raise capital by offering equity securities.
|
|
|
Upon closing of our
acquisition of DLS, the DLS sellers will have the right to
designate two nominees for election to our board of directors,
and their interests may be different from yours. |
After giving effect to this offering and upon closing of the DLS
acquisition, we anticipate that the DLS sellers will
collectively hold 2.5 million shares of our common stock,
representing approximately 10.2% of our issued and outstanding
shares. Under the investors rights agreement that we plan to
enter into in connection with the acquisition, the DLS sellers
will have the right to designate two nominees for election to
our board of directors. As a result, the DLS sellers will have a
greater ability to determine the composition of our board of
directors and to control our future operations and strategy as
14
compared to the voting power and control that could be exercised
by a stockholder owning the same number of shares and not
benefiting from board designation rights.
Conflicts of interest between the DLS sellers and our other
stockholders may arise with respect to sales of shares of
capital stock owned by the DLS sellers or other matters. In
addition, the interests of the DLS sellers regarding any
proposed merger or sale may differ from the interests of our
other stockholders, especially if the consideration to be paid
for the common stock is less than the price paid by other
stockholders.
The board designation rights described above could also have the
effect of delaying or preventing a change in our control or
otherwise discouraging a potential acquirer from attempting to
obtain control of us, which in turn could have a material and
adverse effect on the market price of our common stock or
prevent our stockholders from realizing a premium over the
market prices for their shares.
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. |
After giving pro forma as adjusted effect to the Specialty
transactions, the acquisition of Rogers and the DLS
transactions, as if each such transaction had occurred on
December 31, 2005, we would have had approximately
$208.9 million of consolidated total indebtedness
outstanding and approximately $19.4 million of additional
secured borrowing capacity available under our credit agreement
as of December 31, 2005.
Our substantial debt could:
|
|
|
|
|
make it more difficult for us to satisfy our obligations with
respect to our senior notes and our other debt; |
|
|
|
increase our vulnerability to general adverse economic and
industry conditions, including declines in oil and natural gas
prices and declines in drilling activities; |
|
|
|
limit our ability to obtain additional financing for future
working capital, capital expenditures, mergers and other general
corporate purposes; |
|
|
|
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; |
|
|
|
limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; |
|
|
|
make us more vulnerable to increases in interest rates; |
|
|
|
place us at a competitive disadvantage compared to our
competitors that have less debt; and |
|
|
|
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. |
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 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.
15
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 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 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 credit agreement or our senior notes.
|
|
|
The indenture governing our
senior notes and our 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 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:
|
|
|
|
|
incur additional debt; |
|
|
|
make certain investments or pay dividends or distributions on
our capital stock or purchase or redeem or retire capital stock; |
|
|
|
sell assets, including capital stock of our restricted
subsidiaries; |
|
|
|
restrict dividends or other payments by restricted subsidiaries; |
|
|
|
create liens; |
|
|
|
enter into transactions with affiliates; and |
|
|
|
merge or consolidate with another company. |
The 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 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 to otherwise 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
16
regulations, and we cannot assure you that we will be able to
comply with them. A breach of these covenants could result in a
default under the indenture governing our senior notes and/or
the credit agreement. If there were an event of default under
the indenture governing our senior notes and/or the 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 credit agreement when it becomes due, the lenders
under the 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 DLS Business and Industry
|
|
|
A material or extended
decline in expenditures by oil and gas companies due to a
decline or volatility in oil and gas prices, a decrease in
demand for oil and gas or other factors may reduce demand for
DLS services and substantially reduce DLS revenues,
profitability, cash flows and/or liquidity. |
The profitability of DLS operations depends upon
conditions in the oil and gas industry and, specifically, the
level of exploration and production expenditures of oil and gas
company customers. The oil and gas industry is cyclical and
subject to governmental price controls. The demand for contract
drilling and related services is directly influenced by many
factors beyond DLS control, including:
|
|
|
|
|
oil and gas prices and expectations about future prices; |
|
|
|
the demand for oil and gas, both in Latin America and globally; |
|
|
|
the cost of producing and delivering oil and gas; |
|
|
|
advances in exploration, development and production technology; |
|
|
|
government regulations, including governmental imposed commodity
price controls, export controls and renationalization of a
countrys oil and gas industry; |
|
|
|
local and international political and economic conditions; |
|
|
|
the ability of OPEC to set and maintain production levels and
prices; |
|
|
|
the level of production by non-OPEC countries; and |
|
|
|
the policies of various governments regarding exploration and
development of their oil and gas reserves. |
Depending on the factors outlined above, companies exploring for
oil and gas may cancel or curtail their drilling programs,
thereby reducing demand for drilling services. Such a reduction
in demand may erode daily rates and utilization of DLS
rigs. Any significant decrease in daily rates or utilization of
DLS rigs could materially reduce DLS revenues,
profitability, cash flows and/or liquidity.
|
|
|
A majority of DLS
revenues are derived from two customers. The termination of the
contracts with these two customers could have a significant
negative effect on the revenues, results of operations and
financial condition of DLS. |
A majority of DLS revenues are currently received pursuant
to a strategic agreement with Pan American Energy. Pan American
Energy is a joint venture that is owned 60% by British Petroleum
and 40% by Bridas Corporation, an affiliate of the current
stockholders of DLS. This agreement terminates on June 30,
2008. However, Pan American Energy may terminate the agreement
(i) without cause at any time with 60 days
notice, or (ii) in the event of a breach of the agreement
by DLS if such breach is not cured within 20 days of notice
of the breach. DLS is currently in negotiations to extend this
agreement to December 2010.
17
In addition, DLS derives over 10% of its revenues from
Repsol-YPF pursuant to a drilling equipment contract and a
drilling fluids contract, both of which are scheduled to expire
in September 2006. We cannot assure you that these contracts
will be renewed or replaced, and consequently there is a risk
that DLS could fail to continue receiving the significant
revenues generated under these contracts.
Because a majority of DLS revenues are currently generated
under these agreements, DLS revenues and earnings will be
materially adversely affected if these agreements are terminated
unless DLS is able to enter into satisfactory substitute
arrangements. We cannot assure you that in the event of such a
termination DLS would be able to enter into substitute
arrangements on terms similar to those contained in the current
agreements with Pan American Energy and Repsol-YPF.
|
|
|
DLS operations and
financial condition could be affected by union activity and
general labor unrest. Additionally, our labor expenses could
increase as a result of governmental regulation of payments to
employees. |
In Argentina, labor organizations have substantial support and
have considerable political influence. The demands of labor
organizations have increased in recent years as a result of the
general labor unrest and dissatisfaction resulting from the
disparity between the cost of living and salaries in Argentina
as a result of the devaluation of the Argentine peso. There can
be no assurance that DLS will not face labor disruptions in the
future or that any such disruptions will not have a material
adverse effect on DLS financial condition or results of
operations.
The Argentine government has in the past and may in the future
promulgate laws, regulations and decrees requiring companies in
the private sector to maintain minimum wage levels and provide
specified benefits to employees, including significant mandatory
severance payments. In the aftermath of the Argentine economic
crisis of 2001 and 2002, both the government and private sector
companies have experienced significant pressure from employees
and labor organizations relating to wage levels and employee
benefits. In early 2005 the Argentine government promised not to
order salary increases by decree. However, there has been no
abatement of pressure to mandate salary increases, and it is
possible the government will adopt measures that will increase
salaries or require DLS to provide additional benefits, which
would increase DLS costs and potentially reduce DLS
profitability, cash flow and/or liquidity.
|
|
|
Rig upgrade, refurbishment
and construction projects are subject to risks, including delays
and cost overruns, which could have an adverse effect on
DLS results of operations and cash flows. |
DLS often has to make upgrade and refurbishment expenditures for
its rig fleet to comply with DLS quality management and
preventive maintenance system or contractual requirements or
when repairs are required in response to an inspection by a
governmental authority. DLS may also make significant
expenditures when it moves rigs from one location to another.
Additionally, DLS may make substantial expenditures for the
construction of new rigs. Rig upgrade, refurbishment and
construction projects are subject to the risks of delay or cost
overruns inherent in any large construction project, including
the following:
|
|
|
|
|
shortages of material or skilled labor; |
|
|
|
unforeseen engineering problems; |
|
|
|
unanticipated change orders; |
|
|
|
work stoppages; |
|
|
|
adverse weather conditions; |
|
|
|
long lead times for manufactured rig components; |
18
|
|
|
|
|
unanticipated cost increases; and |
|
|
|
inability to obtain the required permits or approvals. |
Significant cost overruns or delays could adversely affect
DLS financial condition and results of operations.
Additionally, capital expenditures for rig upgrade,
refurbishment or construction projects could exceed DLS
planned capital expenditures, impairing DLS ability to
service its debt obligations.
|
|
|
An oversupply of comparable
rigs in the geographic markets in which DLS competes could
depress the utilization rates and dayrates for DLS rigs
and materially reduce DLS revenues and
profitability. |
Utilization rates, which are the number of days a rig actually
works divided by the number of days the rig is available for
work, and dayrates, which are the contract prices customers pay
for rigs per day, are also affected by the total supply of
comparable rigs available for service in the geographic markets
in which DLS competes. Improvements in demand in a geographic
market may cause DLS competitors to respond by moving
competing rigs into the market, thus intensifying price
competition. Significant new rig construction could also
intensify price competition. In the past, there have been
prolonged periods of rig oversupply with correspondingly
depressed utilization rates and dayrates largely due to earlier,
speculative construction of new rigs. Improvements in dayrates
and expectations of longer-term, sustained improvements in
utilization rates and dayrates for drilling rigs may lead to
construction of new rigs. These increases in the supply of rigs
could depress the utilization rates and dayrates for DLS
rigs and materially reduce DLS revenues and profitability.
|
|
|
Worldwide political and
economic developments may hurt DLS operations
materially. |
Currently, DLS derives substantially all of its revenues from
operations in Argentina and a small portion from operations in
Bolivia. DLS operations are subject to the following
risks, among others:
|
|
|
|
|
expropriation of assets; |
|
|
|
nationalization of components of the energy industry in the
geographic areas where DLS operates; |
|
|
|
foreign currency fluctuations and devaluation; |
|
|
|
new economic and tax policies; |
|
|
|
restrictions on currency, income, capital or asset repatriation; |
|
|
|
political instability, war and civil disturbances; |
|
|
|
uncertainty or instability resulting from armed hostilities or
other crises in the Middle East or the geographic areas in which
DLS operates; and |
|
|
|
acts of terrorism. |
Continued hostilities in the Middle East and the occurrence or
threat of future terrorist attacks against the United States or
other developed countries could cause a downturn in the
economies of the United States and those other countries. A
lower level of economic activity could result in a decline in
energy consumption, which could cause DLS revenues and
margins to decline and limit its future growth prospects. More
specifically, these risks could lead to increased volatility in
prices for crude oil and natural gas and could affect the
markets for DLS drilling services. In addition, these
risks could increase instability in the financial and insurance
markets and make it more difficult for DLS to access capital and
to obtain insurance coverages that DLS considers adequate or are
otherwise required by DLS contracts.
19
DLS attempts to limit the risks of currency fluctuation and
restrictions on currency repatriation where possible by
obtaining contracts providing for payment of a percentage of the
contract in U.S. dollars or freely convertible foreign
currency. To the extent possible, DLS seeks to limit its
exposure to local currencies by matching the acceptance of local
currencies to DLS expense requirements in those
currencies. Although DLS has done this in the past, DLS may not
be able to take these actions in the future, thereby exposing
DLS to foreign currency fluctuations that could cause its
results of operations, financial condition and cash flows to
deteriorate materially.
Over the past several years, Argentina and Bolivia have
experienced political and economic instability that resulted in
significant changes in their general economic policies and
regulations.
DLS derives a small portion of its revenues from operating one
drilling rig in Bolivia. Recently, Bolivian President Evo
Morales announced the nationalization of Bolivias natural
gas industry and ordered the Bolivian military to occupy
Bolivias natural gas fields. This measure will likely
adversely affect the Bolivian operations of foreign oil and gas
companies operating in Bolivia, including DLS customers
and potential future customers, and accordingly, DLS
prospects for future business in Bolivia may be harmed. In
addition, in light of these recent political developments in
Bolivia, DLS assets in Bolivia may be subject to an
increased risk of expropriation or government imposed
restrictions on movement to a new location.
In light of the early stage and uncertainty of political
developments affecting the energy industry in Bolivia, we are
unable to predict the effect that recent events may have on
DLS operations, financial results or business plans. There
is a risk that the changes resulting from the recent events in
Bolivia will adversely affect DLS financial position or
results of operations, and DLS operations may be further
adversely affected by continuing economic and political
instability in Bolivia. Furthermore, if nationalistic measures
similar to those developing in Bolivia were to be adopted in
other countries where DLS may in the future seek drilling
contracts, DLS prospects in such countries may be
adversely affected.
DLS operations are also subject to other risks, including
foreign monetary and tax policies, expropriation,
nationalization and nullification or modification of contracts.
Additionally, DLS ability to compete may be limited by
foreign governmental regulations that favor or require the
awarding of contracts to local contractors or by regulations
requiring foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction. Furthermore, DLS may
face governmentally imposed restrictions from time to time on
its ability to transfer funds.
|
|
|
Devaluation of the Argentine
peso will adversely affect DLS results of
operations. |
The Argentine peso has been subject to significant devaluation
in the past and may be subject to significant fluctuations in
the future. Given the economic and political uncertainties in
Argentina, it is impossible to predict whether, and to what
extent, the value of the Argentine peso may depreciate or
appreciate against the U.S. dollar. We cannot predict how
these uncertainties will affect DLS financial results, but
there is a risk that DLS financial performance could be
adversely affected. Moreover, we cannot predict whether the
Argentine government will further modify its monetary policy
and, if so, what effect any of these changes could have on the
value of the Argentine peso. Such changes could have an adverse
effect on DLS financial condition and results of
operations.
|
|
|
Argentina continues to face
considerable political and economic uncertainty. |
Although general economic conditions have shown improvement and
political protests and social disturbances have diminished
considerably since the economic crisis of 2001 and 2002, the
rapid and radical nature of the changes in the Argentine social,
political, economic and legal environmental over
20
the past several years and the absence of a clear political
consensus in favor of any particular set of economic policies
have given rise to significant uncertainties about the
countrys economic and political future. It is currently
unclear whether the economic and political instability
experienced over the past several years will continue and it is
possible that, despite recent economic growth, Argentina may
return to a deeper recession, higher inflation and unemployment
and greater social unrest. If instability persists, there could
be a material adverse effect on DLS results of operations
and financial condition.
In the event of further social or political crisis, companies in
Argentina may also face the risk of further civil and social
unrest, strikes, expropriation, nationalization, forced
renegotiation or modification of existing contracts and changes
in taxation policies, including royalty and tax increases and
retroactive tax claims.
In addition, investments in Argentine companies may be further
affected by changes in laws and policies of the United States
affecting foreign trade, taxation and investment.
|
|
|
An increase in inflation
could have a material adverse effect on DLS results of
operations. |
The devaluation of the Argentine peso created pressures on the
domestic price system that generated high rates of inflation in
2002 before substantially stabilizing in 2003 and remaining
stable in 2004. In 2005, however, inflation rates began to
increase. In addition, in response to the economic crisis in
2002, the federal government granted the Central Bank greater
control over monetary policy than was available to it under the
previous monetary regime, known as the
Convertibility regime, including the ability to
print currency, to make advances to the federal government to
cover its anticipated budget deficit and to provide financial
assistance to financial institutions with liquidity problems. We
cannot assure you that inflation rates will remain stable in the
future. Significant inflation could have a material adverse
effect on DLS results of operations and financial
condition.
|
|
|
DLS customers may seek
to cancel or renegotiate some of DLS drilling contracts
during periods of depressed market conditions or if DLS
experiences operational difficulties. |
Substantially all of DLS contracts with major customers
are dayrate contracts, where DLS charges a fixed charge per day
regardless of the number of days needed to drill the well.
During depressed market conditions, a customer may no longer
need a rig that is currently under contract or may be able to
obtain a comparable rig at a lower daily rate. As a result,
customers may seek to renegotiate the terms of their existing
drilling contracts or avoid their obligations under those
contracts. In addition, DLS customers may have the right
to terminate existing contracts if DLS experiences operational
problems. The likelihood that a customer may seek to terminate a
contract for operational difficulties is increased during
periods of market weakness. The cancellation of a number of
DLS drilling contracts could materially reduce DLS
revenues and profitability.
|
|
|
DLS is subject to numerous
governmental laws and regulations, including those that may
impose significant liability on DLS for environmental and
natural resource damages. |
Many aspects of DLS operations are subject to laws and
regulations that may relate directly or indirectly to the
contract drilling and well servicing industries, including those
requiring DLS to control the discharge of oil and other
contaminants into the environment or otherwise relating to
environmental protection. The countries where DLS operates have
environmental laws and regulations covering the discharge of oil
and other contaminants and protection of the environment in
connection with operations. Failure to comply with these laws
and regulations may result in the assessment of administrative,
civil and even criminal penalties, the imposition of remedial
obligations, and the issuance of injunctions that may limit or
prohibit DLS operations. Laws and regulations protecting
the environment have become
21
more stringent in recent years and may in certain circumstances
impose strict liability, rendering DLS liable for environmental
and natural resource damages without regard to negligence or
fault on DLS part. These laws and regulations may expose
DLS to liability for the conduct of, or conditions caused by,
others or for acts that were in compliance with all applicable
laws at the time the acts were performed. The application of
these requirements, the modification of existing laws or
regulations or the adoption of new laws or regulations
curtailing exploratory or development drilling for oil and gas
could materially limit future contract drilling opportunities or
materially increase DLS costs or both.
|
|
|
DLS is subject to hazards
customary for drilling operations, which could adversely affect
its financial performance if DLS is not adequately indemnified
or insured. |
Substantially all of DLS operations are subject to hazards
that are customary for oil and gas drilling operations,
including blowouts, reservoir damage, loss of well control,
cratering, oil and gas well fires and explosions, natural
disasters, pollution and mechanical failure. Any of these risks
could result in damage to or destruction of drilling equipment,
personal injury and property damage, suspension of operations or
environmental damage. Generally, drilling contracts provide for
the division of responsibilities between a drilling company and
its customer, and DLS generally obtains indemnification from its
customers by contract for some of these risks. However, there
may be limitations on the enforceability of indemnification
provisions that allow a contractor to be indemnified for damages
resulting from the contractors fault. To the extent that
DLS is unable to transfer such risks to customers by contract or
indemnification agreements, DLS generally seeks protection
through insurance. However, DLS has a significant amount of
self-insured retention or deductible for certain losses relating
to workers compensation, employers liability,
general liability and property damage. There is no assurance
that such insurance or indemnification agreements will
adequately protect DLS against liability from all of the
consequences of the hazards and risks described above. The
occurrence of an event not fully insured or for which DLS is not
indemnified against, or the failure of a customer or insurer to
meet its indemnification or insurance obligations, could result
in substantial losses. In addition, there can be no assurance
that insurance will continue to be available to cover any or all
of these risks, or, even if available, that insurance premiums
or other costs will not rise significantly in the future, so as
to make the cost of such insurance prohibitive.
22
USE OF PROCEEDS
We expect that our net proceeds from the sale of common stock in
the offering will be approximately $76.0 million, or
$ million
if the underwriters over-allotment option is exercised in
full, at an assumed offering price of $16.96 per share and
after deducting underwriters discounts and commissions and
estimated transaction fees and expenses payable by us. In the
event the over-allotment option is exercised, we will receive no
proceeds from the sale of shares by selling stockholders in
connection with that option. We plan to use the net proceeds to
us from this offering along with approximately
$34.2 million in net proceeds from our concurrent offering
of approximately $35.0 million aggregate principal amount
of senior notes to fund the cash component of the purchase price
for our pending acquisition of DLS as set forth below.
|
|
|
|
|
|
|
(In millions) | |
cash component of DLS purchase price
|
|
$ |
102.4 |
|
acquisition fees and expenses
|
|
|
5.3 |
|
general corporate purposes
|
|
|
2.5 |
|
|
|
|
|
|
|
$ |
110.2 |
|
DIVIDEND POLICY
We currently intend to continue our policy of retaining earnings
to finance the growth of our business. As a result, we do not
anticipate paying cash dividends on our common stock in the
foreseeable future. In addition, the terms of our credit
agreement and the indenture governing our senior notes restrict
our ability to pay dividends on our common stock.
23
PRICE RANGE OF COMMON STOCK
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 |
|
|
$ |
0.55 |
|
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 |
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
18.50 |
|
|
$ |
12.40 |
|
Second Quarter (through May 5)
|
|
$ |
17.62 |
|
|
$ |
13.50 |
|
As of April 26, 2006, there were approximately
2,041 holders of record of our common stock. On May 5,
2006, the last sale price for our common stock reported on the
American Stock Exchange was $16.96 per share.
24
CAPITALIZATION
The following table sets forth our audited cash and cash
equivalents and capitalization as of December 31, 2005:
|
|
|
|
|
on an actual basis; and |
|
|
|
on a pro forma basis giving effect to: |
|
|
|
|
|
the Specialty transactions; |
|
|
|
the acquisition of Rogers; and |
|
|
|
the DLS transactions. |
You should read this table in conjunction with our financial
statements and the notes to our financial statements included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
Actual | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Cash and cash equivalents
|
|
$ |
1,920 |
|
|
$ |
5,934 |
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
$ |
48,490 |
|
|
$ |
5,000 |
|
|
Other debt(1)
|
|
|
11,381 |
|
|
|
8,192 |
|
|
Senior notes
|
|
|
|
|
|
|
195,000 |
|
Payment obligations under non-compete agreements(2)
|
|
|
698 |
|
|
|
698 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
60,569 |
|
|
|
208,890 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares
authorized, 16,859,988 shares issued and outstanding on an
actual basis; 24,565,406 shares(3) issued and outstanding
on a pro forma basis
|
|
$ |
169 |
|
|
$ |
246 |
|
|
|
Additional paid-in capital
|
|
|
58,889 |
|
|
|
178,837 |
|
|
|
Retained earnings
|
|
|
1,817 |
|
|
|
1,817 |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$ |
60,875 |
|
|
$ |
180,900 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
121,444 |
|
|
$ |
389,790 |
|
|
|
|
|
|
|
|
|
|
(1) |
Actual other debt consists of a $4.0 million
5.0% subordinated note payable by Allis-Chalmers Energy
Inc., a $3.0 million 7.5% subordinated note payable by
our subsidiary Allis-Chalmers Tubular Services, Inc., or
Tubular, and $4.4 million of miscellaneous other debt. All
of such other indebtedness, except the $4.0 million
5.0% subordinated note and $3.4 million of
miscellaneous debt, were repaid with the proceeds of our January
2006 senior notes offering. In connection with our acquisition
of Rogers, we issued a note for $750,000. |
|
(2) |
Consists of amounts payable to former owners of acquired
businesses. |
|
(3) |
Based upon 17,223,141 shares of our common stock issued and
outstanding as of March 31, 2006, which is
363,153 shares greater than the 16,859,988 shares
issued and outstanding as of December 31, 2005. |
25
UNAUDITED PRO FORMA AS ADJUSTED
CONSOLIDATED FINANCIAL INFORMATION
Introduction
The following are our unaudited pro forma as adjusted financial
statements as of and for the year ended December 31, 2005,
as adjusted for this offering.
Our unaudited pro forma as adjusted balance sheet reflects:
|
|
|
|
|
our acquisition of Specialty, which closed on January 18,
2006, for $83.6 million in cash, as if such transaction
occurred on December 31, 2005, as adjusted for our
$160.0 million offering of senior notes in January 2006; |
|
|
|
our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash, the issuance of a $750,000 three
year promissory note and the issuance of 125,285 shares of
our common stock, as if such transaction occurred on
December 31, 2005; and |
|
|
|
our pending acquisition of DLS for the consideration described
below under DLS Business as if such
transaction occurred on December 31, 2005, as adjusted for
this offering and the proposed sale of an additional
$35.0 million aggregate principal amount of our senior
notes in connection with the DLS acquisition. |
Our unaudited pro forma as adjusted condensed consolidated
statement of operations for the year ended December 31,
2005 reflects the following transactions as if such transactions
occurred on January 1, 2005, as adjusted for this offering:
|
|
|
|
|
our acquisition of Delta Rental Service, Inc., which closed on
April 1, 2005, for $4.6 million in cash,
$1.0 million in shares of our common stock and two
promissory notes totaling $350,000; |
|
|
|
our acquisition of Capcoil Tubing Services, Inc., which closed
on May 2, 2005, for $2.7 million in cash,
$0.8 million in shares of our common stock and the
assumption of $1.3 million in debt offset by working
capital of $0.9 million; |
|
|
|
our acquisition of the assets of W.T. Enterprises, Inc., which
closed on July 11, 2005, for $6.0 million in cash; |
|
|
|
our acquisition of the minority interest in AirComp LLC from
M-I LLC and a
subordinated note in the principal amount of $4.8 million
on July 11, 2005 for $7.1 million in cash and a new
$4.0 million subordinated note; |
|
|
|
our acquisition of Specialty, which closed on January 18,
2006, for $83.6 million in cash; |
|
|
|
our $160 million offering of senior notes in January 2006; |
|
|
|
our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash, the issuance of a $750,000 three
year promissory note and the issuance of 125,285 shares of
our common stock; |
|
|
|
our pending acquisition of DLS for the consideration described
below under DLS Business; and |
|
|
|
the proposed sale of an additional $35 million aggregate
principal amount of our senior notes in connection with the
pending DLS acquisition. |
26
However, the pro forma as adjusted statement of operations
information presented below does not give effect to our
immaterial acquisition of Target Energy, Inc., which was
acquired effective August 1, 2005, and our acquisition of
certain casing and tubing assets from Patterson Services, Inc.
on September 1, 2005.
Adjustments for the above-listed transactions on an individual
basis are presented in the notes to the unaudited pro forma as
adjusted financial statements.
Certain information normally included in the financial
statements prepared in accordance with GAAP has been condensed
or omitted in accordance with the rules and regulations of the
SEC. The unaudited pro forma as adjusted financial statements
and accompanying notes should be read in conjunction with the
historical financial statements and related notes thereto
appearing elsewhere herein. The unaudited pro forma as adjusted
consolidated condensed financial statements do not purport to be
indicative of the results of operations or financial position
that we actually would have achieved if the transactions had
been consummated on the dates indicated, nor do they project our
results of operations or financial position for any future
period or date.
27
Unaudited Pro Forma As Adjusted Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
Allis-Chalmers |
|
Specialty |
|
Rogers |
|
DLS |
|
|
Historical |
|
Historical |
|
Historical |
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,920 |
|
|
$ |
17,476 |
|
|
$ |
561 |
|
|
$ |
731 |
|
Trade receivables, net
|
|
|
26,964 |
|
|
|
7,254 |
|
|
|
1,851 |
|
|
|
26,826 |
|
Inventories
|
|
|
5,945 |
|
|
|
348 |
|
|
|
1,254 |
|
|
|
16,640 |
|
Prepaids and other
|
|
|
823 |
|
|
|
63 |
|
|
|
303 |
|
|
|
4,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
35,652 |
|
|
|
25,141 |
|
|
|
3,969 |
|
|
|
48,266 |
|
Property and equipment, net
|
|
|
80,574 |
|
|
|
19,046 |
|
|
|
1,542 |
|
|
|
117,786 |
|
Goodwill
|
|
|
12,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles, net
|
|
|
6,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt issuance costs, net
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
631 |
|
|
|
|
|
|
|
183 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
137,355 |
|
|
$ |
44,187 |
|
|
$ |
5,694 |
|
|
$ |
166,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
5,632 |
|
|
$ |
3,084 |
|
|
$ |
360 |
|
|
$ |
8,690 |
|
Trade accounts payable
|
|
|
9,018 |
|
|
|
1,380 |
|
|
|
691 |
|
|
|
13,522 |
|
Accrued employee benefits
|
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
|
5,205 |
|
Accrued interest
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
4,350 |
|
|
|
13,008 |
|
|
|
19 |
|
|
|
11,959 |
|
Accounts payable, related parties
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
20,620 |
|
|
|
17,472 |
|
|
|
1,070 |
|
|
|
39,376 |
|
Accrued postretirement benefit obligations
|
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
54,937 |
|
|
|
429 |
|
|
|
617 |
|
|
|
29,640 |
|
Other long-term liabilities
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
76,480 |
|
|
|
17,901 |
|
|
|
1,687 |
|
|
|
70,494 |
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
169 |
|
|
|
156 |
|
|
|
24 |
|
|
|
42,963 |
|
Capital in excess of par value
|
|
|
58,889 |
|
|
|
|
|
|
|
|
|
|
|
31,606 |
|
Treasury stock, at cost
|
|
|
|
|
|
|
(736 |
) |
|
|
(4 |
) |
|
|
|
|
Accumulated earnings (deficit)
|
|
|
1,817 |
|
|
|
26,866 |
|
|
|
3,987 |
|
|
|
20,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
60,875 |
|
|
|
26,286 |
|
|
|
4,007 |
|
|
|
95,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
137,355 |
|
|
$ |
44,187 |
|
|
$ |
5,694 |
|
|
$ |
166,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
Financing/ |
|
|
|
|
Pro Forma |
|
Pro Forma |
|
Offering |
|
Pro Forma |
|
|
Adjustments(1) |
|
Combined |
|
Adjustments(2) |
|
As Adjusted |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
(131,172 |
)AA |
|
$ |
(110,484 |
) |
|
$ |
116,418 |
AB |
|
$ |
5,934 |
|
Trade receivables, net
|
|
|
|
|
|
|
62,895 |
|
|
|
|
|
|
|
62,895 |
|
Inventories
|
|
|
|
|
|
|
24,187 |
|
|
|
|
|
|
|
24,187 |
|
Prepaids and other
|
|
|
|
|
|
|
5,258 |
|
|
|
|
|
|
|
5,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
(131,172 |
) |
|
|
(18,144 |
) |
|
|
116,418 |
|
|
|
98,274 |
|
Property and equipment, net
|
|
|
92,218 |
AC |
|
|
311,166 |
|
|
|
|
|
|
|
311,166 |
|
Goodwill
|
|
|
|
|
|
|
12,417 |
|
|
|
|
|
|
|
12,417 |
|
Other intangibles, net
|
|
|
522 |
AD |
|
|
7,305 |
|
|
|
|
|
|
|
7,305 |
|
Debt issuance costs, net
|
|
|
|
|
|
|
1,298 |
|
|
|
6,153 |
AE |
|
|
7,451 |
|
Other assets
|
|
|
|
|
|
|
816 |
|
|
|
|
|
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
(38,432 |
) |
|
$ |
314,858 |
|
|
$ |
122,571 |
|
|
$ |
437,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
(12,134 |
)AF |
|
$ |
5,632 |
|
|
$ |
(3,234 |
)AG |
|
$ |
2,398 |
|
Trade accounts payable
|
|
|
|
|
|
|
24,611 |
|
|
|
|
|
|
|
24,611 |
|
Accrued employee benefits
|
|
|
|
|
|
|
6,476 |
|
|
|
|
|
|
|
6,476 |
|
Accrued interest
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
289 |
|
Accrued expenses
|
|
|
(21,377 |
)AH |
|
|
7,959 |
|
|
|
|
|
|
|
7,959 |
|
Accounts payable, related parties
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
(33,511 |
) |
|
|
45,027 |
|
|
|
(3,234 |
) |
|
|
41,793 |
|
Accrued postretirement benefit obligations
|
|
|
|
|
|
|
335 |
|
|
|
|
|
|
|
335 |
|
Long-term debt, net of current maturities
|
|
|
71,064 |
AI |
|
|
156,687 |
|
|
|
49,805 |
AJ |
|
|
206,492 |
|
Other long-term liabilities
|
|
|
17,043 |
AK |
|
|
19,109 |
|
|
|
|
|
|
|
19,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
54,596 |
|
|
|
221,158 |
|
|
|
46,571 |
|
|
|
267,729 |
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
(43,117 |
)AL |
|
|
195 |
|
|
|
64 |
AM |
|
|
259 |
|
Capital in excess of par value
|
|
|
1,193 |
AL |
|
|
91,688 |
|
|
|
75,936 |
AM |
|
|
167,624 |
|
Treasury stock, at cost
|
|
|
740 |
AL |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated earnings (deficit)
|
|
|
(51,844 |
)AL |
|
|
1,817 |
|
|
|
|
|
|
|
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
(93,028 |
) |
|
|
93,700 |
|
|
|
76,000 |
|
|
|
169,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
(38,432 |
) |
|
$ |
314,858 |
|
|
$ |
122,571 |
|
|
$ |
437,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects adjustments for the acquisitions of Specialty and
Rogers and the pending acquisition of DLS. |
|
(2) |
Reflects adjustments for our $160 million senior notes
offering in January 2006, this offering and the proposed sale of
an additional $35 million aggregate principal amount of our
senior notes in connection with the pending acquisition of DLS. |
28
Unaudited Pro Forma As Adjusted Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
|
|
Other | |
|
|
|
|
Allis-Chalmers | |
|
Specialty | |
|
DLS | |
|
Acquisitions(1) | |
|
Pro Forma | |
|
Pro Forma | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Historical | |
|
Historical | |
|
Historical | |
|
Adjustments(2) | |
|
Combined | |
|
Adjustments(3) | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenues
|
|
$ |
105,344 |
|
|
$ |
31,439 |
|
|
$ |
129,849 |
|
|
$ |
13,429 |
|
|
$ |
|
|
|
$ |
280,061 |
|
|
$ |
|
|
|
$ |
280,061 |
|
Cost of revenues
|
|
|
74,763 |
|
|
|
7,280 |
|
|
|
119,717 |
|
|
|
7,372 |
|
|
|
(1,492 |
)A |
|
|
207,640 |
|
|
|
|
|
|
|
207,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,581 |
|
|
|
24,159 |
|
|
|
10,132 |
|
|
|
6,057 |
|
|
|
1,492 |
|
|
|
72,421 |
|
|
|
|
|
|
|
72,421 |
|
General and administrative expense
|
|
|
17,363 |
|
|
|
19,632 |
|
|
|
3,933 |
|
|
|
4,318 |
|
|
|
(13,636 |
)B |
|
|
31,610 |
|
|
|
798 |
C |
|
|
32,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
13,218 |
|
|
|
4,527 |
|
|
|
6,199 |
|
|
|
1,739 |
|
|
|
15,128 |
|
|
|
40,811 |
|
|
|
(798 |
) |
|
|
40,013 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
56 |
|
|
|
(189 |
)D |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
Interest expense
|
|
|
(4,397 |
) |
|
|
(185 |
) |
|
|
(5,394 |
) |
|
|
(54 |
) |
|
|
(6,653 |
)E |
|
|
(16,683 |
) |
|
|
(4,386 |
)F |
|
|
(21,069 |
) |
|
Other
|
|
|
186 |
|
|
|
72 |
|
|
|
7,127 |
|
|
|
397 |
|
|
|
(6,366 |
)G |
|
|
1,416 |
|
|
|
|
|
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
9,007 |
|
|
|
4,550 |
|
|
|
7,932 |
|
|
|
2,138 |
|
|
|
1,920 |
|
|
|
25,547 |
|
|
|
(5,184 |
) |
|
|
20,363 |
|
Minority interest
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488 |
H |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
(1,344 |
) |
|
|
|
|
|
|
(1,319 |
) |
|
|
(340 |
) |
|
|
(2,544 |
)I |
|
|
(5,547 |
) |
|
|
390 |
I |
|
|
(5,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
7,175 |
|
|
$ |
4,550 |
|
|
$ |
6,613 |
|
|
$ |
1,798 |
|
|
$ |
(136 |
) |
|
$ |
20,000 |
|
|
$ |
(4,794 |
) |
|
$ |
15,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.12 |
|
|
|
|
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.04 |
|
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954 |
J |
|
|
17,786 |
|
|
|
16,327 |
K |
|
|
34,113 |
|
|
Diluted
|
|
|
16,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954 |
J |
|
|
19,192 |
|
|
|
16,327 |
K |
|
|
35,519 |
|
|
Other financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
6,661 |
|
|
$ |
3,447 |
|
|
$ |
9,420 |
|
|
$ |
650 |
|
|
$ |
5,525 |
|
|
$ |
25,703 |
|
|
$ |
798 |
|
|
$ |
26,501 |
|
EBITDA(4)(5)
|
|
|
19,577 |
|
|
|
8,046 |
|
|
|
22,746 |
|
|
|
2,786 |
|
|
|
14,775 |
|
|
|
67,930 |
|
|
|
|
|
|
|
67,930 |
|
|
|
(1) |
Acquisitions of Capcoil Tubing Services, Inc., Delta Rental
Service, Inc., the minority interest of M-I LLC in AirComp LLC,
W.T. Enterprises, Inc. and Rogers. |
|
(2) |
Reflects adjustments for the acquisitions described in footnote
(1) and the acquisition of Specialty and the pending
acquisition of DLS. |
|
(3) |
Reflects adjustments for our $160 million senior notes
offering in January 2006, this offering and the proposed sale of
an additional $35.0 million aggregate principal amount of
our senior notes in connection with the pending acquisition of
DLS. |
29
|
|
(4) |
EBITDA is a non-GAAP financial measure that we
define as net income before interest, taxes, depreciation and
amortization. |
|
(5) |
EBITDA, as used and defined by us, may not be
comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in
accordance with GAAP. EBITDA should not be considered in
isolation or as a substitute for operating income, net income or
loss, cash flows provided by operating, investing and financing
activities, or other income or cash flow statement data prepared
in accordance with GAAP. However, our management believes EBITDA
is useful to an investor in evaluating our operating performance
because this measure: |
|
|
|
|
|
is widely used by investors in the energy industry to measure a
companys operating performance without regard to items
excluded from the calculation of such term, which can vary
substantially from company to company depending upon accounting
methods and book value of assets, capital structure and the
method by which assets were acquired, among other factors; |
|
|
|
helps investors to more meaningfully evaluate and compare the
results of our operations from period to period by removing the
effect of our capital structure and asset base from our
operating structure; and |
|
|
|
is used by our management for various purposes, including as a
measure of operating performance, in presentations to our board
of directors, as a basis for strategic planning and forecasting,
and as a component for setting incentive compensation. |
|
|
|
There are significant limitations to using EBITDA as a measure
of performance, including the inability to analyze the effect of
certain recurring and non-recurring items that materially affect
our net income or loss, and the lack of comparability of results
of operations of different companies. The following table
reconciles our net income, the most directly comparable GAAP
financial measure, to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other | |
|
|
|
|
|
|
|
|
|
|
Allis-Chalmers | |
|
Specialty | |
|
DLS | |
|
Acquisitions | |
|
Pro Forma | |
|
Pro Forma | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Historical | |
|
Historical | |
|
Historical | |
|
Adjustments | |
|
Combined | |
|
Adjustments | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Net income
|
|
$ |
7,175 |
|
|
$ |
4,550 |
|
|
$ |
6,613 |
|
|
$ |
1,798 |
|
|
$ |
(136 |
) |
|
$ |
20,000 |
|
|
$ |
(4,794 |
) |
|
$ |
15,206 |
|
Interest expense, net
|
|
|
4,397 |
|
|
|
49 |
|
|
|
5,394 |
|
|
|
(2 |
) |
|
|
6,842 |
|
|
|
16,680 |
|
|
|
4,386 |
|
|
|
21,066 |
|
Income taxes
|
|
|
1,344 |
|
|
|
|
|
|
|
1,319 |
|
|
|
340 |
|
|
|
2,544 |
|
|
|
5,547 |
|
|
|
(390 |
) |
|
|
5,157 |
|
Depreciation and amortization
|
|
|
6,661 |
|
|
|
3,447 |
|
|
|
9,420 |
|
|
|
650 |
|
|
|
5,525 |
|
|
|
25,703 |
|
|
|
798 |
|
|
|
26,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
19,577 |
|
|
$ |
8,046 |
|
|
$ |
22,746 |
|
|
$ |
2,786 |
|
|
$ |
14,775 |
|
|
$ |
67,930 |
|
|
$ |
|
|
|
$ |
67,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Notes to Unaudited Pro Forma As Adjusted Consolidated
Condensed Financial Statements
The following pro forma adjustments have been made to the
historical financial statements:
|
|
|
AA) Reflects the use of excess cash of Specialty to either
pay existing debt or to reduce the amount of borrowing needed to
complete the acquisition, the cash payment of $11.3 million
to purchase Rogers, net of $5.0 million of borrowings under
existing credit facilities and the cash purchase price and fees
to acquire DLS, which includes approximately $5.2 million
in transaction costs. |
|
|
AB) Reflects the excess proceeds from our $160 million
senior notes offering in January 2006, the proceeds from this
offering and the proceeds from the proposed sale of an
additional $35 million of senior notes. |
|
|
AC) Reflects the
step-up in the basis of
the fixed assets as a result of the acquisitions of Specialty
and Rogers and the pending acquisition of DLS to the lower of
fair market value or actual cost. |
|
|
AD) Intangibles associated with the acquisition of Rogers. |
|
|
AE) Fees and expenses related to our $160 million
senior notes offering in January 2006 and the proposed sale of
an additional $35 million of senior notes. |
|
|
AF) Reflects the repayment of debt of the acquisitions of
Specialty and Rogers and the pending acquisition of DLS prior to
such acquisitions. |
|
|
AG) Reflects the repayment of current maturities of debt
outstanding at December 31, 2005 from the proceeds from our
$160 million senior notes offering in January 2006. |
|
|
AH) Reflects the payment of $12.4 million of accrued
expenses of Specialty at the time of acquisition, the repayment
of $7.2 million of drilling block expenses,
$1.9 million of rig acquisition expenses of DLS by the
seller prior to acquisition and the current portion of the
non-compete payment to be paid to the seller of Rogers. |
|
|
AI) Reflects the net borrowing to effect the acquisitions
of Specialty and Rogers and the pending acquisition of DLS.
$96.0 million was borrowed for the Specialty acquisition,
$5.0 million was borrowed for the Rogers acquisition in
addition to the $750,000 note issued to the seller, offset by
debt repayments on all three acquisitions by the seller prior to
closing. |
|
|
AJ) Reflects the proceeds from our $160 million senior
notes offering in January 2006 not used in the Specialty
acquisition and the proposed sale of an additional
$35 million of senior notes. |
|
|
AK) Reflects deferred taxes on the pending DLS acquisition
and the long-term portion of non-compete payments to the sellers
of DLS. |
|
|
AL) Reflects the elimination of the acquired companies
stockholders equity and the issuance of 125,285 shares of
our common stock in the Rogers acquisition and 2.5 million
shares in the pending DLS acquisition. |
|
|
AM) Reflects the additional stock issued in connection with
this offering, net of expenses. |
|
|
A) Reflects the increase in depreciation expense as a
result of the step-up in basis of fixed assets. |
|
|
Also reflects the elimination of lease expense not assumed as
part of the W. T. Enterprises acquisition, net of
additional depreciation expense of $187,000 due to the increased
value of the |
31
|
|
|
assets acquired, a $216,000 increase in rent expense for Rogers
offset by a $215,000 decrease in insurance costs and a $405,000
decrease in lease expense, a 1.4 million decrease in dry
hole expense and a decrease of a $4.9 million in impairment
charge on DLS. |
|
|
B) Reflects the increase in amortization due to the
increase in other intangible assets in connection with the
acquisitions of Capcoil, W. T. Enterprises and Rogers. |
|
|
Reflects the elimination of year-end bonus paid to the employees
of Delta. |
|
|
Reflects the following changes in general and administrative
cost that will result from the acquisition of Specialty: |
|
|
the elimination of year-end bonus paid to employees
of $12.4 million, |
|
|
the elimination of director fees of $96,000, |
|
|
the elimination of professional fees of $78,000, |
|
|
decreased rent expense of $347,000 and |
|
|
the elimination of officer salary of $228,000. |
|
|
C) Reflects the amortization on the financing fees related
to our $160 million senior notes offering in January 2006
and the proposed sale of an additional $35 million of
senior notes. |
|
|
D) Reflects the elimination of interest income as the pro
forma assumes excess cash was utilized to offset borrowings. |
|
|
E) Reflects the net increase in interest expense after
taking into account debt of acquired companies that was repaid
and additional borrowings needed to complete the acquisitions. |
|
|
F) Reflects the increased interest expense related to
additional borrowings as a result of the January 2006 senior
notes, the Rogers acquisition and the pending DLS acquisition. |
|
|
G) Removes other income on DLS for exploration work that we
will not conduct. |
|
|
H) Reflects the elimination of the 45% minority interest
position of M-I in AirComp. |
|
|
I) Reflects a 35% tax rate applied to DLS and a 12% tax
rate applied to all other operations. |
|
|
J) Reflects the issuance of shares of our common stock as
part of the acquisition price for Delta, Capcoil, Rogers and
DLS. The pro forma statement of operations treats the shares as
having been issued at the stock price of $4.90 on
January 1, 2005. The Delta acquisition included
consideration of $1.0 million in stock, the Capcoil
acquisition include consideration of $765,000 in stock and the
Rogers acquisition included consideration of $1,650,000 in
stock. The stock component of the consideration for the pending
DLS acquisition is comprised of 2.5 million shares of stock
valued at $4.90 per share for purposes of this pro forma
presentation. |
|
|
K) Reflects the issuance of shares of our common stock as a
result of this offering. The pro forma statement of operations
treats the shares as having been issued at the stock price of
$4.90 on January 1, 2005. |
32
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial
information for each of the years in the five-year period ended
December 31, 2005 has been derived from our audited
consolidated financial statements. This information is only a
summary and you should read it in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which discusses
factors affecting the comparability of the information
presented, and in conjunction with our consolidated financial
statements and related notes included elsewhere in this
prospectus. Our historical consolidated financial statements
have been restated for the period from July 1, 2003 through
March 31, 2005, as described in the notes to our
consolidated financial statements included elsewhere herein.
Results for interim periods may not be indicative of results for
full fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2001(1) | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
4,796 |
|
|
$ |
17,990 |
|
|
$ |
32,724 |
|
|
$ |
47,726 |
|
|
$ |
105,344 |
|
Cost of revenues
|
|
|
3,331 |
|
|
|
14,640 |
|
|
|
24,029 |
|
|
|
35,300 |
|
|
|
74,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,465 |
|
|
|
3,350 |
|
|
|
8,695 |
|
|
|
12,426 |
|
|
|
30,581 |
|
General and administrative expense
|
|
|
2,898 |
|
|
|
3,792 |
|
|
|
6,169 |
|
|
|
8,011 |
|
|
|
17,715 |
|
Personnel restructuring costs
|
|
|
|
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Abandoned acquisition/private placement costs
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-retirement medical costs
|
|
|
|
|
|
|
(98 |
) |
|
|
(99 |
) |
|
|
188 |
|
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,898 |
|
|
|
4,422 |
|
|
|
6,070 |
|
|
|
8,199 |
|
|
|
17,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,433 |
) |
|
|
(1,072 |
) |
|
|
2,625 |
|
|
|
4,227 |
|
|
|
13,218 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(828 |
) |
|
|
(2,207 |
) |
|
|
(2,464 |
) |
|
|
(2,776 |
) |
|
|
(4,397 |
) |
|
Factoring costs on note receivable
|
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement on lawsuit
|
|
|
|
|
|
|
|
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
Gain on sale of interest in AirComp L.L.C
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(12 |
) |
|
|
(40 |
) |
|
|
12 |
|
|
|
272 |
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(840 |
) |
|
|
(2,438 |
) |
|
|
1,015 |
|
|
|
(2,504 |
) |
|
|
(4,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes and minority interest
|
|
|
(2,273 |
) |
|
|
(3,510 |
) |
|
|
3,640 |
|
|
|
1,723 |
|
|
|
9,007 |
|
Minority interests in income of subsidiaries
|
|
|
|
|
|
|
(189 |
) |
|
|
(343 |
) |
|
|
(321 |
) |
|
|
(488 |
) |
Income tax
|
|
|
|
|
|
|
(270 |
) |
|
|
(370 |
) |
|
|
(514 |
) |
|
|
(1,344 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(2,273 |
) |
|
|
(3,969 |
) |
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
(Loss) from discontinued operations
|
|
|
(291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from sales of discontinued operations
|
|
|
(2,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from discontinued operations
|
|
|
(2,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,577 |
) |
|
|
(3,969 |
) |
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
Preferred stock dividend
|
|
|
|
|
|
|
(321 |
) |
|
|
(656 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common stockholders
|
|
$ |
(4,577 |
) |
|
$ |
(4,290 |
) |
|
$ |
2,271 |
|
|
$ |
764 |
|
|
$ |
7,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2001(1) | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Income (loss) per common share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(2.88 |
) |
|
|
(1.14 |
) |
|
|
0.58 |
|
|
|
0.10 |
|
|
|
0.48 |
|
|
Discontinued operations
|
|
|
(2.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.79 |
) |
|
|
(1.14 |
) |
|
|
0.58 |
|
|
|
0.10 |
|
|
|
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(2.88 |
) |
|
|
(1.14 |
) |
|
|
0.50 |
|
|
|
0.09 |
|
|
|
0.44 |
|
|
Discontinued operations
|
|
|
(2.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.79 |
) |
|
|
(1.14 |
) |
|
|
0.50 |
|
|
|
0.09 |
|
|
|
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
790 |
|
|
|
3,766 |
|
|
|
3,927 |
|
|
|
7,930 |
|
|
|
14,832 |
|
|
Diluted
|
|
|
790 |
|
|
|
3,766 |
|
|
|
5,850 |
|
|
|
9,510 |
|
|
|
16,238 |
|
Other Financial Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(2)(3)
|
|
$ |
(342 |
) |
|
$ |
1,089 |
|
|
$ |
8,697 |
|
|
$ |
7,756 |
|
|
$ |
19,577 |
|
Capital expenditures
|
|
|
402 |
|
|
|
518 |
|
|
|
5,354 |
|
|
|
4,603 |
|
|
|
17,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
152 |
|
|
$ |
146 |
|
|
$ |
1,299 |
|
|
$ |
7,344 |
|
|
$ |
1,920 |
|
Total assets
|
|
|
12,465 |
|
|
|
34,778 |
|
|
|
53,662 |
|
|
|
80,192 |
|
|
|
137,355 |
|
Long-term debt (including current portion)
|
|
|
7,856 |
|
|
|
21,221 |
|
|
|
32,233 |
|
|
|
30,473 |
|
|
|
60,569 |
|
Stockholders equity
|
|
|
1,250 |
|
|
|
1,009 |
|
|
|
4,541 |
|
|
|
35,109 |
|
|
|
60,875 |
|
|
|
(1) |
We entered the oilfield services business in 2001. We sold our
last non-oilfield services business in December 2001, which is
reflected in our financial statements for 2001 as a discontinued
operation. |
|
(2) |
EBITDA is a non-GAAP financial measure that we
define as net income before interest, taxes, depreciation and
amortization. |
|
(3) |
EBITDA, as used and defined by us, may not be
comparable to similarly titled measures employed by other
companies and is not a measure of performance calculated in
accordance with GAAP. EBITDA should not be considered in
isolation or as a substitute for operating income, net income or
loss, cash flows provided by operating, investing and financing
activities, or other income or cash flow statement data prepared
in accordance with GAAP. However, our management believes EBITDA
is useful to an investor in evaluating our operating performance
because this measure: |
|
|
|
|
|
is widely used by investors in the energy industry to measure a
companys operating performance without regard to items
excluded from the calculation of such term, which can vary
substantially from company to company depending upon accounting
methods and book value of assets, capital structure and the
method by which assets were acquired among other factors; |
|
|
|
helps investors to more meaningfully evaluate and compare the
results of our operations from period to period by removing the
effect of our capital structure and asset base from our
operating structure; and |
34
|
|
|
|
|
is used by our management for various purposes, including as a
measure of operating performance, in presentations to our board
of directors, as a basis for strategic planning and forecasting,
and as a component for setting incentive compensation. |
There are significant limitations to using EBITDA as a measure
of performance, including the inability to analyze the effect of
certain recurring and non-recurring items that materially affect
our net income or loss, and the lack of comparability of results
of operations of different companies. The following table
reconciles our net income, the most directly comparable GAAP
financial measure, to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Net income (loss) from continuing operations
|
|
$ |
(2,273 |
) |
|
$ |
(3,969 |
) |
|
$ |
2,927 |
|
|
$ |
888 |
|
|
$ |
7,175 |
|
Interest expense, net
|
|
|
828 |
|
|
|
2,207 |
|
|
|
2,464 |
|
|
|
2,776 |
|
|
|
4,397 |
|
Income taxes
|
|
|
|
|
|
|
270 |
|
|
|
370 |
|
|
|
514 |
|
|
|
1,344 |
|
Depreciation and amortization
|
|
|
1,103 |
|
|
|
2,581 |
|
|
|
2,936 |
|
|
|
3,578 |
|
|
|
6,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
(342 |
) |
|
|
1,089 |
|
|
|
8,697 |
|
|
|
7,756 |
|
|
|
19,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
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 prospectus. The
following discussion contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995 that reflect our plans, estimates and beliefs. Our actual
results could differ materially from those anticipated in these
forward-looking statements as a result of risks and
uncertainties, including, but not limited to, those discussed
above under Risk Factors.
Overview of Our Business
We 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, 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.
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 Oilfield 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
36
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 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.
37
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 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. |
|
|
|
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.
38
|
|
|
Comparison of Years Ended
December 31, 2005 and December 31, 2004 |
Our revenues for the year ended December 31, 2005 were
$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 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
39
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 the 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 were distributed.
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 Texas and the Gulf Coast area, 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
40
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 acquisition 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 and 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 revenues for the year ended December 31, 2004 were
$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 year 2003 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
41
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 year 2003 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 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 year 2004
was $321,000 compared to $343,000 for the year 2003. 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.
42
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) | |
|
|
Revenues | |
|
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
Texas and the Gulf Coast area 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 year 2004 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 year 2004 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 operating
income is due to the decrease in revenues
43
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.
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
a write-off of financing fees in conjunction with a refinancing,
offset by a decrease of $352,000 in the pension benefit
obligation and $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
44
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.
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.
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 a 45% interest in
AirComp and subordinated notes 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
services 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
45
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. |
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.
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 provides 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.
46
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.
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 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. |
|
|
|
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.
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
47
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, respectively, 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,
respectively. 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 sold 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
M-I 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
48
and the final maturity of the note was 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, respectively.
In connection with the purchase of Delta, we issued to the
sellers notes in the aggregate amount of $350,000. These notes
bore interest at 2% and the principal and accrued interest were
repaid at maturity 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 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. Payments
of interest were 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, respectively.
We have various equipment financing loans with interest rates
ranging from 5% to 11.5% and terms ranging from two to five
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
49
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period |
|
|
|
|
|
|
|
Less Than | |
|
|
|
|
Total | |
|
1 Year | |
|
2-3 Years | |
|
4-5 Years | |
|
After 5 Years |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) |
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable
|
|
$ |
59,652 |
|
|
$ |
5,158 |
|
|
$ |
53,887 |
|
|
$ |
607 |
|
|
$ |
|
|
Capital Leases(a)
|
|
|
917 |
|
|
|
474 |
|
|
|
443 |
|
|
|
|
|
|
|
|
|
Interest Payments on Notes Payable
|
|
|
7,076 |
|
|
|
4,186 |
|
|
|
2,839 |
|
|
|
51 |
|
|
|
|
|
Operating Lease
|
|
|
2,878 |
|
|
|
926 |
|
|
|
1,462 |
|
|
|
490 |
|
|
|
|
|
Employment Contracts
|
|
|
4,016 |
|
|
|
2,512 |
|
|
|
1,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash Obligations
|
|
$ |
74,539 |
|
|
$ |
13,256 |
|
|
$ |
60,135 |
|
|
$ |
1,148 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
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.
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.
50
Recent Developments
Rogers acquisition. In April of 2006, we acquired 100% of
the outstanding stock of Rogers for approximately
$13.7 million. Rogers, based in Lafayette, Louisiana, was
engaged in providing services for tubing tongs and casing tongs
and renting and selling specialized automated power tongs to the
snubbing and well control markets. Rogers also rented and sold
drill pipe tongs, accessories, hydraulic power units and
hydraulic tong positioners. Based on Rogers unaudited 2005
financial statements, for the year ended December 31, 2005,
Rogers had revenues of $8.4 million and income from
operations of $1.4 million.
Prepayment of certain indebtedness. 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.
Resignation of director. 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.
Warrant exercises. Through March 13, 2006, we
received proceeds of approximately $784,000 from the exercise of
313,000 warrants.
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 prospectus. Our
preparation of this prospectus 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.
51
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 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
52
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.
Quantitative and Qualitative Disclosure About Market Risk
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
53
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.
54
BUSINESS
Our Company
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
15 acquisitions, including six in 2005 and two in 2006. In
January 2006, we acquired 100% of the outstanding stock of
Specialty for $83.6 million. Our acquisition of Specialty
not only balances our revenue mix generated between rental tools
and service operations and between onshore and offshore
operations, but also enhances the scope, capacity and customer
base in our rental tools business. In April 2006, we acquired
100% of the outstanding stock of Rogers for approximately
$13.7 million. Our acquisition of Rogers not only enhanced
our casing and tubing operations with its tubing, tongs and
casings services, but also increased our rental tools operations
with its inventory of rental equipment, including drill pipe
tongs, accessories, hydraulic power units and hydraulic tong
positioners. Giving pro forma as adjusted effect to the
Specialty transactions, our recent acquisition of Rogers and the
DLS transactions, we would have generated revenues of
$280.1 million, net income of $15.2 million and EBITDA
of $67.9 million for the fiscal year ended
December 31, 2005.
Our History
|
|
|
|
|
We were incorporated in 1913 under Delaware law. |
|
|
|
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. |
|
|
|
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. |
|
|
|
In December 2001, we sold Houston Dynamic Services, Inc., our
last pre-bankruptcy business. |
|
|
|
In February 2002, we acquired approximately 81% of the capital
stock of 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. |
|
|
|
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. |
55
|
|
|
|
|
In September 2004, we acquired the remaining 19% of the capital
stock of Tubular. |
|
|
|
In September 2004, we acquired all of the outstanding stock of
Safco-Oil Field Products, Inc., which we refer to as Safco. |
|
|
|
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. |
|
|
|
In December 2004, we acquired Downhole Injection Services, LLC,
or Downhole. |
|
|
|
In January 2005, we changed our name from Allis-Chalmers
Corporation to Allis-Chalmers Energy Inc. |
|
|
|
In April 2005, we acquired Delta Rental Service, Inc., or Delta,
and, in May 2005, we acquired Capcoil Tubing Services, Inc. or
Capcoil. |
|
|
|
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. |
|
|
|
Effective August 2005, we acquired all of the outstanding stock
of Target Energy Inc., or Target. |
|
|
|
In September 2005, we acquired the casing and tubing assets of
IHS/Spindletop, a division of Patterson Services, Inc., a
subsidiary of RPC, Inc. |
|
|
|
In January 2006, we acquired all of the outstanding stock of
Specialty. |
|
|
|
In April 2006, we acquired all of the outstanding capital stock
of Rogers. |
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 69% from
918 in 2000 to 1,551 in March 2006, while the average
natural gas rig count increased 81% from 720 in 2000 to 1,305 in
March 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
56
believe that a continued increase in 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 bases to streamline their
purchasing operations and benefit from economies of scale.
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 75 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, ConocoPhilips, 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 15 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 and 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.
Business Strategy
The key elements of our growth strategy include:
Expand geographically to provide greater access and service
to key customer segments. We have recently opened new
locations in Texas, New Mexico, Colorado, Oklahoma and Louisiana
in order to
57
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 and internationally in order to increase the utilization
of our equipment and personnel. Our pending acquisition of DLS
will also allow us to provide a platform for further
international growth and increase our opportunities to
cross-sell existing Allis-Chalmers products and services in the
international markets.
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 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.
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 continue to implement
this strategy in our recently expanded rental tools segment,
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.
Business Segments
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 and measurement-while-drilling services.
We have a team of approximately 75 full-time 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:
|
|
|
|
|
improvement of total cumulative recoverable reserves; |
|
|
|
improved reservoir production performance beyond conventional
vertical wells; and |
|
|
|
reduction of the number of field development wells. |
Since 2002, we have increased our team of directional drillers
from ten to approximately 75. Our straight hole drilling 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.
58
Rental Tools. We provide specialized rental equipment,
including premium drill pipe, heavy weight spiral drill pipe,
tubing work strings, blow out preventers, choke manifolds and
various valves and handling tools, 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.
We have an inventory of specialized equipment consisting of
heavy weight spiral drill pipe, double studded adaptors, 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 manifolds 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.
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.
59
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.
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 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.
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
1/4
to
11/4
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
11/4
to
13/4
. 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.
60
Cyclical Nature of Oilfield 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. 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.
Customers
In 2005, none of our customers accounted for more than 10% of
our revenues. Our customers are the major 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 represented 10.2%, Burlington Resources Inc.
represented 11.1% and El Paso Corporation represented
14.1%, 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.
61
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 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 31, 2006, we had
approximately 758 employees.
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
62
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
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.
Description of Properties
The following table describes the location and general character
of the principal physical properties used in each of our
companys businesses as of March 31, 2006. All of the
properties are leased by us except for our property in Edinburg,
Texas.
|
|
|
Business Segment |
|
Location |
|
|
|
Directional Drilling Services
|
|
Houston, Texas |
|
|
Corpus Christi, Texas |
|
|
Oklahoma City, Oklahoma |
|
|
Lafayette, Louisiana |
Compressed Air Drilling Services
|
|
Houston, Texas |
|
|
San Angelo, Texas |
|
|
Fort Stockton, Texas |
|
|
Farmington, New Mexico |
|
|
Grand Junction, Colorado |
|
|
Wilburton, Oklahoma |
|
|
Sonora, Texas |
|
|
Grandbury, Texas |
|
|
Denver, Colorado |
|
|
Carlsbad, New Mexico |
Casing and Tubing Services
|
|
Edinburg, Texas |
|
|
Pearsall, Texas |
|
|
Corpus Christi, Texas |
|
|
Kilgore, Texas |
|
|
Lafayette, Louisiana |
|
|
Houma, Louisiana |
|
|
Buffalo, Texas |
Rental Tools
|
|
Houston, Texas |
|
|
Broussard, Louisiana |
|
|
Lafayette, Louisiana |
Production Services
|
|
Midland, Texas |
|
|
Corpus Christi, Texas |
|
|
Kilgore, Texas |
|
|
Carthage, Texas |
|
|
Cordell, Oklahoma |
General Corporate
|
|
Houston, Texas |
63
The yard in Buffalo, Texas is co-owned by David Wilde, who is
one of our executive officers.
Legal Proceedings
On June 29, 1987, we filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. Our plan
of reorganization was confirmed by the Bankruptcy Court after
acceptance by our creditors and stockholders, and was
consummated on December 2, 1988.
At confirmation of our plan of reorganization, the United States
Bankruptcy Court approved the establishment of the A-C
Reorganization Trust as the primary vehicle for distributions
and the administration of claims under our plan of
reorganization, two trust funds to service health care and life
insurance programs for retired employees and a trust fund to
process and liquidate future product liability claims. The
trusts assumed responsibility for substantially all remaining
cash distributions to be made to holders of claims and interests
pursuant to our plan of reorganization. We were thereby
discharged of all debts that arose before confirmation of our
plan of reorganization.
We do not administer any of the aforementioned trusts and retain
no responsibility for the assets transferred to or distributions
to be made by such trusts pursuant to our plan of reorganization.
As part of our plan of reorganization, we settled
U.S. Environmental Protection Agency 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
that 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
64
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 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.
65
DLS BUSINESS
General
We have entered into a stock purchase agreement for the
acquisition of all of the outstanding capital stock of DLS. We
expect the purchase price for the DLS stock will consist of:
|
|
|
|
|
cash consideration payable at closing in the amount of
$102.4 million (out of the net proceeds of this offering
and the offering and sale of $35.0 million additional
principal amount of our senior notes); and |
|
|
|
2.5 million shares of our common stock, which shares will
be held in an escrow arrangement for a period of 18 months
pursuant to the terms and conditions of an escrow agreement. |
The stock purchase agreement contains customary representations,
warranties, covenants and conditions to closing. Among other
things, our obligations under the agreement are subject to our
obtaining, on terms acceptable to us, all of the financing we
need in order to consummate the acquisition. The stock purchase
agreement provides that if we are unable to obtain the necessary
financing by August 15, 2006, we must pay to the sellers a
cash break-up fee equal
to $1.0 million. DLS has also agreed to bear up to
$2.0 million of the legal, accounting and financial
advisory expenses incurred by either DLS or the sellers in
connection with the negotiation, execution and delivery of the
stock purchase agreement or otherwise related to the acquisition
of DLS.
In addition, the stock purchase agreement provides that, as a
condition to the sellers obligation to close, we must
enter into an investors rights agreement with the sellers. We
anticipate that, pursuant and subject to the terms, conditions
and limitations set forth in the investors rights agreement:
|
|
|
|
|
upon closing of our acquisition of DLS, the sellers will have
the right to designate two nominees for election to our board of
directors; and |
|
|
|
within 30 days after such closing, we will be required to
file with the SEC a shelf registration statement registering the
offer and resale by the sellers of all the shares of our common
stock issued to the sellers pursuant to the stock purchase
agreement. |
DLS is a leading provider of drilling, completion, repair and
related services for oil and gas wells in Argentina, with,
through its predecessors, over 40 years experience in the
contract drilling and oilfield services industry. DLS previously
operated under different names and was established under its
existing name in the British Virgin Islands in 1993.
Headquartered in Buenos Aires, DLS operates out of the
San Jorge, Cuyan, Neuquén, Austral and Noroeste basins
of Argentina and the Subandina basin in Bolivia.
With approximately 1,500 employees, DLS currently services
several of the major and independent oil and natural gas
producing companies, including Pan American Energy, Repsol-YPF,
Apache Corporation (formerly Pioneer Natural Resources),
Occidental Petroleum Corporation (formerly Vintage Petroleum)
and Total Austral SA. Major competitors of DLS include Pride
International, Inc., Servicios WellTech, S.A., Ensign Energy
Services Inc. (formerly ODE), Nabors Industries Ltd. and
Helmerich & Payne, Inc.
DLS specializes in contract drilling, oil well completion and
repair services. DLS also offers a wide variety of other
oilfield services such as drilling fluids and completion fluids,
engineering, field maintenance and logistics to complement its
customers field organization. For the year ended
December 31, 2005, DLS generated revenues of
$71.6 million in its drilling rigs segment,
$39.4 million in its completion and repair segment (which
includes workover and pulling functions) and $18.8 million
in its drilling fluids/other services segment.
66
DLS operates a fleet of 51 rigs, including 20 drilling rigs, 18
workover rigs and 12 pulling rigs in Argentina and one drilling
rig in Bolivia. Argentine rig operations are generally conducted
in remote regions of the country and require substantial
infrastructure and support. DLS believes that its established
infrastructure and scale of operations provide it with a
competitive advantage in this market. In Bolivia, DLS operates
one drilling rig. As of March 31, 2006, all of DLS
rig fleet was actively marketed, except for one drilling rig
that is presently inactive and requires approximately
$6.0 million in capital expenditures for upgrades.
Markets Served
Argentina is one of Latin Americas largest economies and a
significant energy producer and consumer. It is a net energy
exporter primarily to neighboring Brazil and Chile.
Argentina suffered a severe financial crisis in 2001-2002.
However, the countrys economy has recovered since that
time. In 2005, Argentinas real gross domestic product
(GDP) grew at an estimated rate of 8.7%. Economic forecasts
are for 5.0% real growth in 2006.
Argentina has Latin Americas third-largest proven natural
gas reserves, at around 21 trillion cubic feet (Tcf). Natural
gas production in Argentina has increased steadily over the last
decade, with the country surpassing Mexico in 2000 to become
Latin Americas largest natural gas producer. Natural gas
is now the countrys dominant energy source, accounting for
45% of primary energy consumption in 2002.
According to Oil and Gas Journal, Argentina has 2.3 billion
barrels of proven oil reserves as of January 2006. The country
produced an estimated 763,000 barrels per day (bbl/d) of
oil in 2005; of this amount, 660,000 bbl/d was crude oil, the
rest consisted of lease condensates, natural gas liquids, and
refinery gain. Argentina consumed an estimated 440,000 bbl/d of
oil in 2005, leaving net oil exports of 323,000 bbl/d.
In Argentina, 19 sedimentary basins have been identified of
which five, with an area of about 1.3 million square
kilometers, are producing. Two onshore basins produced 87% of
Argentinas oil during the first ten months of 2005:
Neuquén, in western-central Argentina and San Jorge in
the southeast, surrounding Comodoro. Outside these established
zones, there has been interest in exploring offshore oil
resources.
The Neuquén, Austral, and Noroeste basins contain
Argentinas largest proven natural gas reserves. As of
2003, the Neuquén basin held 47% of the countrys
proven natural gas reserves and accounted for about 65% of
natural gas production. Argentinas proven reserves could
increase substantially in the future, as gas companies have
explored only five of the 19 basins in the country.
The Neuquén, Salta, Tierra del Fuego, and Santa Cruz
regions contain most of Argentinas natural gas production.
During the first eleven months of 2005, the Neuquén region
accounted for 51 percent of the countrys natural gas
production, along with 14 percent for Salta, ten percent
for Tierra del Fuego, and nine percent for Santa Cruz.
In 1999, the Spanish oil company Repsol merged with the formerly
state-owned oil company, Yacimientos Petroliferos Fiscales or
YPF. Repsol-YPF dominates oil exploration and production
activities in Argentina. Other significant oil-producing
companies in Argentina include Pan American Energy,
Chevron Texaco Total Austral S.A., Occidental
Petroleum Corporation (formerly Vintage Petroleum) and Petrobras
Energía.
67
Bolivias economy endured a period of sub-par economic
growth from 1999 to 2002, but has performed better in recent
years, posting real GDP growth of 2.4 percent in 2003 and
3.7 percent in 2004. Global Insight forecasts that
Bolivias economy will have grown by 3.0 percent in
2005 and will grow 3.3 percent in 2006.
Bolivia has the second-largest proven natural gas reserves in
South America, behind Venezuela, and has the potential to become
a natural gas hub in the Southern Cone. Bolivia had proven
natural gas reserves of 24.0 trillion cubic feet (Tcf) and
proven crude oil reserves of 440 Million barrels in 2005.
Bolivias oil and natural gas production satisfies current
consumption levels and allows Bolivia to be a net exporter of
oil and natural gas. Recently, Bolivian President Evo Morales
announced the nationalization of Bolivias natural gas
industry and ordered the Bolivian military to occupy
Bolivias natural gas fields. Furthermore, President
Morales threatened to expel foreign firms that do not recognize
state control by signing new contracts by November 2006.
DLS only customer in Bolivia is Repsol-YPF, a foreign
based energy company, and its Bolivian operations will likely be
affected by this political development.
In 2005, the Bolivian Congress also imposed a 32 percent
tax on energy producers in addition to an 18 percent
royalty that was already in place. It is generally expected that
the Bolivian government will strictly control oil and gas
production in Bolivia, and in turn will pay foreign operators
fees for the energy production services they provide. However,
there is significant continuing uncertainty regarding future
regulation of the Bolivian energy industry.
Equipment and Services
A land drilling rig basically consists of a drawworks or hoist,
a derrick, a power plant, rotating equipment, pumps to circulate
the drilling fluid and the drill string. Power requirements for
drilling jobs may vary considerably, but most land drilling rigs
employ several engines to generate between 500 and 3,000
horsepower, depending on well depth and rig design. There are
numerous factors that differentiate land drilling rigs,
including their power generation systems and their drilling
depth capabilities.
The size and type of rig utilized depends, among other factors,
upon well depth and site conditions. An active maintenance and
replacement program during the life of a drilling rig permits
upgrading of components on an individual basis. Over the life of
a typical rig, due to the normal wear and tear of operating up
to 24 hours a day, several of the major components, such as
engines, air compressors, boosters and drill pipe, are replaced
or rebuilt on a periodic basis as required. Other components,
such as the substructure, mast and drawworks, can be utilized
for extended periods of time with proper maintenance.
As of March 31, 2006, DLS owned 21 drilling rigs, all of
which were actively marketed, except for one drilling rig that
is currently inactive and requires approximately
$6.0 million in capital expenditures for upgrades. The
following table sets forth certain information with respect to
each of these rigs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
9,500 |
|
|
MID CONTINENT |
|
|
600 |
|
|
Comodoro Rivadavia |
|
102 |
|
|
|
9,500 |
|
|
MID CONTINENT |
|
|
600 |
|
|
Comodoro Rivadavia |
|
103 |
|
|
|
9,500 |
|
|
MID CONTINENT |
|
|
600 |
|
|
Comodoro Rivadavia |
|
104 |
|
|
|
9,500 |
|
|
IDECO |
|
|
650 |
|
|
Comodoro Rivadavia |
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
111 |
|
|
|
11,500 |
|
|
GARDNER-DENVER |
|
|
800 |
|
|
Comodoro Rivadavia |
|
113 |
|
|
|
12,500 |
|
|
GARDNER-DENVER |
|
|
1000 |
|
|
Comodoro Rivadavia |
|
132 |
|
|
|
7,500 |
|
|
IDECO |
|
|
500 |
|
|
Comodoro Rivadavia |
|
136 |
|
|
|
7,500 |
|
|
IDECO-PIGNONE |
|
|
500 |
|
|
Comodoro Rivadavia |
|
148 |
|
|
|
11,500 |
|
|
INGERSOLL-RAND |
|
|
1100 |
|
|
Comodoro Rivadavia |
|
150 |
|
|
|
9,800 |
|
|
NATIONAL |
|
|
750 |
|
|
Comodoro Rivadavia |
|
151 |
|
|
|
9,800 |
|
|
NATIONAL |
|
|
750 |
|
|
Comodoro Rivadavia |
|
154 |
|
|
|
9,500 |
|
|
CARDWELL |
|
|
650 |
|
|
Comodoro Rivadavia |
|
126 |
|
|
|
21,000 |
|
|
NATIONAL |
|
|
2000 |
|
|
Neuquén |
|
129 |
|
|
|
12,500 |
|
|
NATIONAL |
|
|
1000 |
|
|
Mendoza |
|
146 |
|
|
|
12,500 |
|
|
GARDNER-DENVER |
|
|
1000 |
|
|
Neuquén |
|
147 |
|
|
|
14,800 |
|
|
INGERSOLL-RAND |
|
|
1500 |
|
|
Neuquén |
|
149 |
|
|
|
11,500 |
|
|
INGERSOLL-RAND |
|
|
1100 |
|
|
Neuquén |
|
152 |
|
|
|
16,400 |
|
|
INGERSOLL-RAND |
|
|
1500 |
|
|
Neuquén |
|
127 |
|
|
|
21,000 |
|
|
GARDNER-DENVER |
|
|
2000 |
|
|
Tartagal |
|
134 |
* |
|
|
24,600 |
|
|
NATIONAL |
|
|
3000 |
|
|
Tartagal |
|
153 |
|
|
|
24,900 |
|
|
NATIONAL |
|
|
3000 |
|
|
Bolivia |
* inactive
The workover rigs are quite similar to the drilling rigs,
however, they are smaller than the drilling rig for the same
depth of well. These rigs are used to complete the drilled wells
or to repair them whenever necessary.
The well completion process, to prepare a newly drilled oil or
natural gas well for production, involves selectively
perforating the well casing to access producing zones,
eventually stimulating and testing these zones and installing
the downhole equipment. The well completion process typically
requires a few days to several weeks, depending on the nature
and type of the completion. The demand for well completion
services is directly related to drilling activity levels, which
are highly sensitive to expectations relating to, and changes
in, oil and natural gas prices.
Workover services are performed to enhance the production of
existing wells or to repair the wells.
The workover rigs, identical to the rigs used for completion,
are used to seal off depleted zones in existing wellbores, open
new producing zones to enhance production or activate producing
zones using fracturing or acidifying processes. Workover rigs
are also used to convert former producing wells into water
injection wells through which water or carbon dioxide is pumped
into the formation to enhance the production of an oil field.
Other workover services include major subsurface repairs such as
casing repairs or replacement of deteriorated downhole equipment.
DLS workover rig fleet consisted of 18 rigs as of
March 31, 2006. The following table sets forth certain
information with respect to each of these rigs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
16,000 |
|
|
IDECO |
|
|
400 |
|
|
Comodoro Rivadavia |
|
301 |
|
|
|
12,000 |
|
|
CARDWELL |
|
|
500 |
|
|
Comodoro Rivadavia |
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
302 |
|
|
|
9,800 |
|
|
WAGNER-MOREHOUSE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
304 |
|
|
|
9,800 |
|
|
WAGNER-MOREHOUSE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
307 |
|
|
|
9,800 |
|
|
IDECO |
|
|
250 |
|
|
Comodoro Rivadavia |
|
309 |
|
|
|
14,500 |
|
|
CARDWELL |
|
|
400 |
|
|
Comodoro Rivadavia |
|
310 |
|
|
|
12,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
316 |
|
|
|
12,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
317 |
|
|
|
12,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
318 |
|
|
|
10,500 |
|
|
IDECO-PIGNONE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
319 |
|
|
|
10,500 |
|
|
IDECO-PIGNONE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
320 |
|
|
|
10,500 |
|
|
IDECO-PIGNONE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
323 |
|
|
|
10,500 |
|
|
IDECO-PIGNONE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
324 |
|
|
|
16,000 |
|
|
WILSON |
|
|
400 |
|
|
Comodoro Rivadavia |
|
328 |
|
|
|
16,000 |
|
|
NATIONAL OILWELL |
|
|
500 |
|
|
Comodoro Rivadavia |
|
329 |
|
|
|
16,000 |
|
|
NATIONAL OILWELL |
|
|
500 |
|
|
Comodoro Rivadavia |
|
4100 |
|
|
|
12,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
110 |
|
|
|
16,000 |
|
|
NATIONAL |
|
|
500 |
|
|
Neuquén |
A pulling rig is a type of well-servicing rig used to pull
downhole equipment, such as tubing, rods or the pumps from a
well, and replace them when necessary. A pulling rig is also
used to set downhole tools and perform lighter jobs.
As of March 31, 2006, DLS operated a fleet of 12 pulling
rigs. The following table sets forth certain information with
respect to each of these rigs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
4020 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
200 |
|
|
Comodoro Rivadavia |
|
4022 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
200 |
|
|
Comodoro Rivadavia |
|
4042 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
250 |
|
|
Comodoro Rivadavia |
|
4043 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
4044 |
|
|
|
10,000 |
|
|
FRANKS |
|
|
300 |
|
|
Comodoro Rivadavia |
|
4045 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
300 |
|
|
Comodoro Rivadavia |
|
4061 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
200 |
|
|
Comodoro Rivadavia |
|
4063 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
200 |
|
|
Comodoro Rivadavia |
|
4066 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
200 |
|
|
Comodoro Rivadavia |
|
4067 |
|
|
|
12,500 |
|
|
NATIONAL OILWELL |
|
|
400 |
|
|
Comodoro Rivadavia |
|
4068 |
|
|
|
12,500 |
|
|
NATIONAL OILWELL |
|
|
400 |
|
|
Comodoro Rivadavia |
|
4064 |
|
|
|
10,000 |
|
|
CARDWELL |
|
|
250 |
|
|
Tierra del Fuego |
This segment consists of drilling fluids and completion fluids
supply and field maintenance.
Drilling fluid services. The required drilling fluid
characteristics depend on the type of formation drilled, the
encountered formation pressures and on the type of well. The
service provided by DLS is to determine the best mud for the
projected well and the consequent supply and engineering of the
drilling fluid.
70
Completion fluid services. Completion fluids are used
when completing an oil or gas well. This fluid is placed in the
well to control the wellbore pressures driving the completion
and prior to initiation of production, such as setting packers,
downhole valves and shooting perforations into the producing
zone. DLS engineers and supplies completion fluids for oil and
gas wells.
Field maintenance. DLS renders services for the operation
and maintenance of oilfields surface equipment and facilities.
These services may include constructing, repairing and
maintaining roads, laying-down production lines, maintaining
surface equipment and facilities, transporting solid and liquid
cargos and personnel, monitoring oil and gas delivery and
overall field management.
DLS drilling contracts are obtained either through
competitive bidding or through direct negotiations with its
customers. The majority of these contracts provide for
compensation on a dayrate basis. Under dayrate
contracts, DLS provides a drilling rig with the required
personnel to perform the drilling of the well. DLS is typically
paid based on a negotiated rate per day, comprised of both
U.S. dollars and Argentine pesos, while the rig is
utilized. The Argentine pesos portion is subject to inflation
adjustment. Additionally, most of these contracts are terminable
by either party on short notice. As a result, the contracts tend
to be subject to renegotiation.
The rates for DLS services depend on market and
competitive conditions, the nature of the operations to be
performed, the duration of the work, the equipment and services
to be provided, the geographic area involved and other
variables. Lower rates may be paid when the rig is in transit,
or when drilling operations are interrupted or restricted by
conditions beyond control. In addition, dayrate contracts
typically provide for a separate amount to cover the cost of
mobilization and demobilization of the drilling rig. Dayrate
drilling contracts specify the type of equipment to be used, the
general characteristic of the hole and the depth of the well.
Under a dayrate drilling contract, the customer bears a large
portion of
out-of-pocket costs of
drilling and DLS does not bear any part of the usual capital
risks associated with oil and natural gas exploration.
Pan American Energy contract. DLS and Pan American
Energy, a company that is 40% owned by an affiliate of the
current owners of DLS and 60% owned by British Petroleum,
entered into a five-year strategic agreement for the purpose of
solidifying a long-term alliance for the drilling of oil and gas
wells in the San Jorge basin. The completion and repair of
all wells in the area is also part of the agreement. The
strategic agreement expires on June 30, 2008 and DLS is
currently in negotiations to extend this agreement to December
2010. Pan American Energy represented approximately 55% of
DLS revenue in 2005. Pan American Energy may terminate the
agreement without cause on 60 days notice or in the
case of a spin-off or merger of DLS that is not consented to by
Pan American Energy. There is no provision allowing early
termination by DLS and there are no change of control
provisions. In accordance with the strategic agreement, DLS
shall ensure the availability of at least three drilling rigs,
eight workover rigs and five pulling rigs in order to meet Pan
American Energys drilling plans but, in turn, Pan American
Energy will provide DLS a sufficient number of drilling
locations to keep all such rigs and associated equipment working
during the term of the strategic agreement, provided that there
are no material changes in the price of oil or adverse results
of the production forecasts. The drilling rigs rates under the
agreement are subject to an efficiency factor for drilling
depths up to 2,700 meters. The agreement incorporates a standard
drilling time in hours for a typical drilling prospect up to
2,700 meters. Drilling beyond 2,700 meters or drilling prospects
with non-standard procedures are at agreed upon hourly rates
plus reimbursable materials and expenses.
71
DLS completion, workover or pulling contracts are obtained
in the same way and provide for compensation on a dayrate basis
comprised of both U.S. dollars and Argentine pesos and are
subject to inflation adjustment.
The most important drilling fluid service contract of DLS is
with Repsol-YPF, in the Neuquén basin. The term of the
contract expires in September 2006, and this contract covers 50%
of all drilling and fluid services required in the area where
Repsol-YPF is drilling with approximately 20 rigs.
Other Business Data
DLS purchases a wide variety of raw materials as well as
components made by other manufacturers and suppliers for use in
its operations. Many of the products used by DLS are
manufactured by other parties. DLS is not dependent on any
single source of supply for any of its raw materials; however,
DLS has a long-term agreement with Tanus, who is a supplier of
chemical specialties used in drilling and completion fluid
service.
DLS principal customers consist of major and independent
oil and natural gas producing companies. Key customers include
Pan American Energy, Repsol-YPF, Apache Corporation (formerly
Pioneer Natural Resources), Occidental Petroleum Corporation
(formerly Vintage Petroleum) and Total Austral SA.
|
|
|
Government and Environmental
Regulations |
DLS drilling operations are subject to many hazards,
including blowouts and well fires, which could cause personal
injury, suspend drilling operations, seriously damage or destroy
the equipment involved and cause substantial damage to producing
formations or to the surrounding areas.
Many aspects of DLS operations are subject to government
regulation, as in the areas of equipping and operating vessels,
drilling practices and disposal of waste. In addition, various
countries have regulations relating to environmental protection
and pollution control. Recent events in the oil industry have
also increased the sensitivity of the oil and gas industry to
environmental matters.
DLS believes that its safety and environmental protection
standards are better than industry averages and that it complies
in all material respects with legislation and regulations
affecting the drilling of oil and gas wells and the discharge of
wastes. Regulatory compliance has not materially affected the
capital expenditures, earnings or competitive position of DLS to
date, although such measures do increase drilling costs. Further
regulations may reasonably be anticipated, but any effects
thereof on DLS drilling operations cannot be accurately
predicted.
Although DLS is subject to various ongoing items of litigation,
almost all of which relate to labor contracts, and DLS does not
believe any of the items of litigation to which it is currently
subject will result in any material uninsured losses to it. It
is possible, however, an unexpected judgment could be rendered
against DLS in the cases in which it is involved that could be
uninsured and beyond the amounts it currently has reserved.
DLS currently carries a variety of insurance for its operations
involving third-party liability insurance. DLS is partially
self-insured for certain claims in amounts it believes to be
customary and
72
reasonable. DLS believes that it is adequately insured for
physical damage to its rigs, workers compensation,
automobile liability and for various other types of exposures
customarily encountered in its operations. Certain of DLS
liability insurance policies specifically exclude coverage for
fines, penalties and punitive or exemplary damages.
DLS anticipates that its present insurance coverage will be
maintained, but no assurance can be given that insurance
coverage will continue to be available at rates considered
reasonable, that self-insured amounts or deductibles will not
increase or that certain types of coverage will be available at
any cost.
As of March 31, 2006, DLS employed approximately 1,500
employees, including approximately 1,450 employees in Argentina
and approximately 50 employees in Bolivia. Almost all of
its operations are subject to collective bargaining agreements.
DLS believes that its relationship with its employees is very
good. Approximately 50% of its personnel have been with DLS for
more than five years and approximately 30% of its personnel have
been with DLS for more than ten years. In addition, DLS
maintains a satisfactory relationship with the unions.
73
OUR MANAGEMENT
Board of Directors and Executive Officers
Our executive officers and directors are:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Munawar H. Hidayatallah..
|
|
|
61 |
|
|
Chairman and Chief Executive Officer |
David Wilde
|
|
|
51 |
|
|
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 Operating Officer of Strata Directional
Technology, Inc. |
Steven Collins
|
|
|
54 |
|
|
President of Allis-Chalmers Production Services, Inc. |
James Davey
|
|
|
52 |
|
|
President of Allis-Chalmers Rental Tools Inc. |
Gary Edwards
|
|
|
54 |
|
|
President of Allis-Chalmers Tubular Services Inc. |
Terrence P. Keane
|
|
|
53 |
|
|
President and Chief Executive Officer of AirComp L.L.C |
Jens H. Mortensen, Jr.
|
|
|
52 |
|
|
Vice Chairman |
John E. McConnaughy, Jr.
|
|
|
76 |
|
|
Director(1) |
Victor F. Germack
|
|
|
66 |
|
|
Director(1) |
Thomas E. Kelly
|
|
|
50 |
|
|
Director(2) |
Thomas O. Whitener, Jr.
|
|
|
58 |
|
|
Director(2)(3) |
Robert E. Nederlander
|
|
|
72 |
|
|
Director(1)(3) |
Jeffrey R. Freedman
|
|
|
58 |
|
|
Director |
Leonard Toboroff
|
|
|
73 |
|
|
Vice Chairman |
|
|
(1) |
Member of Audit Committee. |
|
(2) |
Member of Compensation Committee. |
|
(3) |
Member of Nominating Committee. |
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
74
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 of
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., 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
Operating Officer of Strata since February 2005. Mr. Bryan
served as Vice President of Strata from June 2002 until February
2005. From February 2002 to June 2002, he served as General
Manager, and from May 1999 through February 2002, 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 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.
75
James Davey has served as President 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 of Tubular since
December 2005 after serving as Executive Vice President of
Tubular 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 L.L.C. 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.
Jens H. Mortensen, Jr. has served as our director
since November 2002 and as Vice-Chairman since February 2005 and
served as our President and Chief Operating Officer from
February 2003 through February 2005. Mr. Mortensen founded
Allis-Chalmers Tubular Services, Inc., formerly known as
Jens Oilfield Service, Inc., one of our subsidiaries, in
1982 after having spent eight years in operations and sales
positions with a South Texas casing crew operator.
Mr. Mortensens experience includes extensive
knowledge of specialized equipment utilized to install the
various strings of casing required to drill and complete oil and
natural gas wells.
John E. McConnaughy, Jr. was appointed to our board
of directors in May 2004. Mr. McConnaughy has served as
Chairman and Chief Executive Officer of JEMC Corporation, a
personal holding company, since he founded it in 1985. His
career includes positions of management with Westinghouse
Electric and the Singer Company, as well as service as a
director of numerous public and private companies. In addition,
he previously served as Chairman and Chief Executive Officer of
Peabody International Corp. and Chairman and Chief Executive
Officer of GEO International Corp. He retired from Peabody in
February 1986 and GEO in October 1992. Mr. McConnaughy
currently serves on the boards of Wave Systems Corp., Consumer
Portfolio Services, Inc., Overhill Farms, Inc., Levcor
International, Inc. and Positron Corporation. He also serves as
Chairman of the Board of Trustees of the Strang Cancer
Prevention Center and as Chairman Emeritus for the Harlem School
of the Arts.
Victor F. Germack was appointed to our board of directors
in January 2005. Mr. Germack has served since 1980 as
President of Heritage Capital Corp., a company engaged in
investment banking services. In addition, Mr. Germack
formed, and since 2002 has been President of, RateFinancials
Inc., a company that rates and ranks the financial reporting of
U.S. public companies.
Thomas E. Kelly was appointed to our board of directors
in January 2005. Mr. Kelly was an owner and founder of
Downhole Injection Systems, LLC (formerly known as Downhole
Injection Services, Inc.), which we purchased in December 2004.
Since 1997, Mr. Kelly has been the Chairman and CEO of
United Fuel & Energy Corp., a provider of fuel,
lubricants and services in the Permian Basin of West Texas.
Mr. Kelly is also a director of BPZ Energy, a Houston based
exploration and production company with properties in Peru and
Ecuador, and was Chief Executive Officer of BPZ Energy from
September 2004 until May 2005. Mr. Kelly has been involved
in oil and natural gas exploration projects since
76
1981, including Baytech, Inc., which he co-founded in 1981 and
was involved in until it was sold in 2002. Mr. Kelly
currently serves on the board of directors of BPZ Energy.
Thomas O. Whitener, Jr. has served as our director
since February 1, 2002. Mr. Whitener is a founding
partner of Energy Spectrum Capital and has been a partner since
May 1996. Mr. Whitener has also served as a managing
director of Energy Spectrum Securities Corp., a financial
advisory firm for energy companies, since October 1997.
Mr. Whitener has been financing companies in the energy
industry since 1974. From 1987 to 1996, Mr. Whitener was an
investment banker with R. Reid Investments Inc. and Dean Witter
Reynolds.
Robert E. Nederlander has served as our director since
May 1989. Mr. Nederlander served as our Chairman of the
board of directors from May 1989 to 1993, and as our Vice
Chairman of the board of directors from 1993 to 1996.
Mr. Nederlander has been a Director of Cendant Corp. since
December 1997 and Chairman of the Corporate Governance Committee
of Cendant Corp. since 2002. Mr. Nederlander was a director
of HFS, Inc. from July 1995 to December 1997. Since November
1981, Mr. Nederlander has been President and/or Director of
the Nederlander Organization, Inc., owner and operator of
legitimate theaters in New York City. Since December 1998,
Mr. Nederlander has been a managing partner of the
Nederlander Company, LLC, operator of legitimate theaters
outside New York City. Mr. Nederlander was Chairman of the
board of directors of Varsity Brands, Inc. (formerly Riddell
Sports Inc.) from April 1988 to September 2003 and was the Chief
Executive Officer of such corporation from 1988 through
April 1, 1993. Mr. Nederlander has been a limited
partner and a director of the New York Yankees since 1973.
Mr. Nederlander has been President of Nederlander
Television and Film Productions, Inc. since October 1985. In
addition, from January 1988 to January 2002,
Mr. Nederlander was Chairman of the Board and Chief
Executive Officer of Mego Financial Corp., doing business as
Leisure Industries Corporation of America, which filed a
voluntary petition under Chapter 11 of the
U.S. federal bankruptcy code in July 2003.
Jeffrey R. Freedman was appointed to our board of
directors in January 2005. Mr. Freedman served as our
Executive Vice President Corporate Development from
January 2002 to November 2002. Since January 2003,
Mr. Freedman has been involved in real estate development
in South Florida. From 1994 through March 2002,
Mr. Freedman was Managing Director Oil Services
and Equipment for Prudential Securities with responsibilities
for institutional equity research of oilfield services and
contract drilling companies in the U.S. public markets.
Mr. Freedman has been involved and held various positions
with major institutional brokerage firms in equity research
relating to the oil service sector over the last 20 years.
Leonard Toboroff has served as our director and Vice
Chairman of the board of directors since May 1989 and served as
our Executive Vice President from May 1989 until February 2002.
Mr. Toboroff served as a director and Vice President of
Varsity Brands, Inc. (formerly Riddell Sports Inc.) from April
1988 through October 2003, and he is also a director of Engex
Corp. Mr. Toboroff is currently a managing
(executive) director of Corinthian Capital, a private
equity firm. Mr. Toboroff has been a practicing attorney
continuously since 1961.
Board of Directors; Committees
Our board currently has nine members who serve for a term of one
year or until their successors are elected and take office. Our
board of directors currently has three standing committees: the
Audit Committee, the Nominating Committee and the Compensation
Committee.
77
Our Audit Committee consists of three directors,
Mr. McConnaughy and Mr. Germack, who serve as
Co-Chairmen, and Mr. Nederlander. All of our Audit
Committee members are independent under the
applicable American Stock Exchange and SEC rules regarding audit
committee membership. Our board of directors has determined that
Mr. Germack qualifies as an audit committee financial
expert under applicable SEC rules and regulations
governing the composition of the Audit Committee. We pay
Mr. Germack an additional $30,000 per year for serving as
our audit committee financial expert.
The Audit Committee assists our board of directors in fulfilling
its oversight responsibility by overseeing and evaluating
(i) the conduct of our accounting and financial reporting
process and the integrity of the financial statements that will
be provided to stockholders and others; (ii) the
functioning of our systems of internal accounting and financial
controls; and (iii) the engagement, compensation,
performance, qualifications and independence of our independent
auditors. Our board of directors adopted a written Audit
Committee charter in March 2002, which was amended in May 2004.
The charter is reviewed annually and revised as appropriate. A
copy of the Audit Committee charter is available on our website
(www.alchenergy.com).
The independent auditors have unrestricted access and report
directly to the Audit Committee. The Audit Committee meets
privately with, and has unrestricted access to, the independent
auditors and all of our personnel. The Audit Committee has
selected UHY Mann Frankfort Stein & Lipp CPAs, LLP as
our independent auditors for the fiscal years ended
December 31, 2005 and 2006.
The Compensation Committee consists of two independent,
non-employee directors, Thomas E. Kelly and Thomas O.
Whitener, Jr. The Compensation Committee formulates and
oversees the execution of our compensation strategies, including
by making recommendations to our board of directors with respect
to compensation arrangements for senior management, directors
and other key employees. The Compensation Committee also
administers our 2003 Incentive Stock Plan. Our board of
directors has adopted a charter for the Compensation Committee,
a copy of which is available on our website
(www.alchenergy.com).
The Nominating Committee of our board of directors was
established in January 2005 to select nominees for the board of
directors. The Nominating Committee consists of
Mr. Nederlander, as Chairman, and Mr. Whitener, both
of whom are independent as defined for such purpose by the
American Stock Exchange. We have no formal procedure pursuant to
which stockholders may recommend nominees to our board of
directors or Nominating Committee, and the board of directors
believes that the lack of a formal procedure will not hinder the
consideration of qualified nominees. The Nominating Committee
utilizes a variety of methods for identifying and evaluating
nominees for directors. Candidates may come to the attention of
the Nominating Committee through current board members,
stockholders and other persons. Our board of directors has
adopted a charter for the Nominating Committee, a copy of which
is available on our website (www.alchenergy.com).
78
Compensation Committee Interlocks And Insider
Participation
The Compensation Committee of our board currently consists of
Messrs. Kelly and Whitener. Neither of these individuals
has been our officer or employee at any time. No current
executive officer has ever served as a member of the board of
directors or compensation committee of any other entity (other
than our subsidiaries) that has or has had one or more executive
officers serving as a member of our board or our Compensation
Committee.
Mr. Whitener is a principal of Energy Spectrum, from whom
we acquired Strata in February 2002. On April 2, 2004,
Energy Spectrum converted all of its Series A Preferred
Stock, including accrued dividend rights, into
1,718,090 shares of common stock and has subsequently sold
such common stock. Mr. Kelly was an owner and founder of
Downhole Injection Systems, LLC, which we purchased in December
2004. Mr. Kelly received 117,138 shares of our common
stock and $306,800 for his interest in Downhole Injection
Systems, LLC and has subsequently sold all but
14,201 shares of such common stock.
79
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our
outstanding common stock and the shares beneficially owned by
all selling stockholders as of April 28, 2006 (both before and
immediately following this offering) for:
|
|
|
|
|
our chief executive officer and each of our four most highly
compensated executive officers as of December 31, 2005; |
|
|
|
each of our directors; |
|
|
|
all of our directors and executive officers as a group; |
|
|
|
each other person known by us to be a beneficial owner of more
than 5.0% of our outstanding common stock; and |
|
|
|
all selling stockholders. |
Beneficial ownership is determined in accordance with the rules
of the SEC. Under the rules of the SEC, a person is deemed to be
a beneficial owner of a security if that person has
or shares voting power, which includes the power to
vote or to direct the voting of such security, or
investment power, which includes the power to
dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities
of which that person has a right to acquire beneficial ownership
within 60 days. Under these rules, more than one person may
be deemed a beneficial owner of the same securities and a person
may be deemed a beneficial owner of securities as to which he
has no economic interest. Except as indicated by footnote, the
persons named in the table below have sole voting and investment
power with respect to all shares shown as beneficially owned by
them, subject to community property laws where applicable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially | |
|
|
|
Shares Beneficially | |
|
|
Owned Prior to this | |
|
|
|
Owned After this | |
|
|
Offering(1) | |
|
|
|
Offering(2)(3) | |
|
|
| |
|
Number of Shares | |
|
| |
Name and Address |
|
Number | |
|
Percent | |
|
Offered(2) | |
|
Number | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munawar H. Hidayatallah(4)
|
|
|
1,686,666 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Wilde(5)
|
|
|
341,666 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor M. Perez(6)
|
|
|
51,667 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terence P. Keane(7)
|
|
|
25,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bryan(8)
|
|
|
68,666 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jens H. Mortensen, Jr.(9)
|
|
|
1,600,591 |
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John E. McConnaughy, Jr.(10)
|
|
|
100,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Victor F. Germack(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Kelly(12)
|
|
|
14,201 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas O. Whitener, Jr.(13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Nederlander(14)
|
|
|
717,594 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey R. Freedman(15)
|
|
|
119,000 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leonard Toboroff(16)
|
|
|
695,594 |
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group
(19 persons)
|
|
|
5,543,976 |
|
|
|
28.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially | |
|
|
|
Shares Beneficially | |
|
|
Owned Prior to this | |
|
|
|
Owned After this | |
|
|
Offering(1) | |
|
|
|
Offering(2)(3) | |
|
|
| |
|
Number of Shares | |
|
| |
Name and Address |
|
Number | |
|
Percent | |
|
Offered(2) | |
|
Number | |
|
Percent | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Other 5% Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palo Alto Investors(17)
|
|
|
2,208,767 |
|
|
|
12.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve Emerson(18)
|
|
|
1,065,900 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Based upon an aggregate
of shares
outstanding as of April 28, 2006. |
|
(2) |
Assumes exercise of the underwriters over-allotment option
in full. If the over-allotment option is not exercised, these
stockholders will not sell any shares in this offering. |
|
(3) |
Based upon an aggregate
of shares
to be outstanding following this offering. |
|
(4) |
Mr. Hidayatallah is the trustee of the Hidayatallah Family
Trust, which is the record owner of 845,000 shares of our
common stock, and Mr. Hidayatallah holds options to
purchase 1,125,000 shares of common stock, of which options
to purchase 841,666 shares are exercisable within
60 days. Mr. Hidayatallahs address is
5075 Westheimer, Suite 890, Houston, TX 77056. |
|
(5) |
Includes (a) 5,000 shares of common stock owned of
record by Mr. Wilde and (b) options to
purchase 500,000 shares of common stock, of which
336,666 are exercisable within 60 days.
Mr. Wildes address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
(6) |
Includes options to purchase 100,000 shares of common
stock, of which 51,667 are exercisable within 60 days.
Mr. Perezs address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
(7) |
Includes options to purchase 50,000 shares of common
stock, of which 25,000 are exercisable within 60 days.
Mr. Keanes address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
(8) |
Includes (a) 12,000 shares of common stock owned of
record by Mr. Bryan and (b) options to
purchase 70,000 shares of common stock, of which
56,666 are exercisable within 60 days.
Mr. Bryans address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
(9) |
Includes (a) 1,500,591 shares of common stock owned of
record by Mr. Mortensen and (b) options to
purchase 100,000 shares of common stock, all of which
are exercisable within 60 days. Mr. Mortensens
address is 5075 Westheimer, Suite 890, Houston, TX
77056. |
|
|
(10) |
Mr. McConnaughys address is 2 Parklands Drive,
Darien, CT 06820. |
|
(11) |
Mr. Germacks address is 845 3rd Avenue,
Suite 1410, New York, NY 10022. |
|
(12) |
Mr. Kellys address is 450 North Marienfield,
Suite 200, Midland, TX 79701. |
|
(13) |
Mr. Whiteners address is 5956 Sherry Lane,
Suite 900, Dallas, TX 75225. |
|
(14) |
Includes (a) 715,594 shares of common stock owned
directly by Mr. Nederlander or by RER Corp. or QEN Corp.,
corporations controlled by Mr. Nederlander, and
(b) currently exercisable options to
purchase 2,000 shares of common stock owned directly
by Mr. Nederlander or RER Corp. Mr. Nederlanders
address is 1450 Broadway, Suite 2001, New York, NY
10018. |
|
(15) |
Mr. Freedmans address is 123 Via Verde Way, Palm
Beach, FL 33418. |
|
(16) |
Includes (a) 595,194 shares of common stock owned
directly by Mr. Toboroff or Lenny Corp., a corporation
wholly-owned by Mr. Toboroff, and (b) currently
exercisable options to purchase 100,400 shares of common
stock owned directly by Mr. Toboroff.
Mr. Toboroffs address is 1450 Broadway,
Suite 2001, New York, NY 10018. |
81
|
|
(17) |
Owned collectively by Micro Cap Partners, L.P., UBTI Free, L.P.
and Palo Alto Global Energy Fund, L.P. Palo Alto Investors, LLC
acts as the general partner of Micro Cap Partners, L.P., UBTI
Free, L.P. and Palo Alto Global Energy Fund, L.P. Palo Alto
Investors, Inc. is the manager of Palo Alto Investors, LLC, and
William L. Edwards is the President of Palo Alto Investors, Inc.
Palo Alto Investors, LLC, Palo Alto Investors, Inc. and William
L. Edwards each have investment and voting authority with
respect to the shares owned by this stockholder. The business
address for each of these persons is 470 University Avenue,
Palo Alto, CA 94301. |
|
(18) |
Consists of certain shares owned by J. Steven Emerson IRA
RO II, Bear Stearns Securities Corporation, Custodian, J.
Steven Emerson Roth IRA, Bear Stearns Securities Corporation,
Custodian, and Emerson Partners, respectively. J. Steven Emerson
has investment and voting authority with respect to the shares
owned by J. Steven Emerson IRA RO II, Bear Stearns
Securities Corporation, Custodian, J. Steven Emerson Roth IRA,
Bear Stearns Securities Corporation, Custodian and Emerson
Partners, Bear Stearns Securities Corporation, Custodian.
Mr. Emersons business address is 1522 Ensley
Avenue, Los Angeles, CA 90024. |
82
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Notes
On January 18, 2006, we completed the issuance and sale of
$160.0 million aggregate principal amount of our
9.0% senior notes due 2014, which we refer to as our senior
notes. In addition, concurrently with the consummation of the
common stock offering described in this prospectus, we intend to
consummate the issuance and sale of an additional
$35.0 million principal amount of our senior notes. We
refer to the offering of these additional senior notes as our
follow-on senior notes offering. The senior notes are jointly
and severally, fully and unconditionally guaranteed by each of
our material domestic restricted subsidiaries. The senior notes
and the related guarantees were offered and sold in private
transactions in conformance with Rule 144A and
Regulation S under the Securities Act.
We issued the senior notes pursuant to an indenture, dated as of
January 18, 2006, by and among Allis-Chalmers, the
subsidiary guarantor parties thereto and Wells Fargo Bank, N.A.,
as trustee.
We used net proceeds from the January 2006 sale of the senior
notes to fund our acquisition of Specialty, to repay existing
debt and for general corporate purposes. We expect to use the
net proceeds from our follow-on senior notes offering to fund
the remaining portion of our acquisition of DLS after giving
effect to the issuance and sale of our common stock in this
offering and the intended use of proceeds thereof.
Interest on the senior notes began to accrue on January 18,
2006 at a rate of 9.0% per year. Interest on the senior
notes is payable semi-annually in arrears on January 15 and July
15 of each year, commencing on July 15, 2006. The senior
notes will mature on January 15, 2014. The senior notes are
our senior unsecured obligations of and rank, in right of
payment, equally with all of our existing and future senior
unsecured indebtedness and senior to our existing and future
subordinated indebtedness. The senior notes are effectively
subordinated to any of our existing or future secured
indebtedness, including under our credit agreement, to the
extent of the assets securing such indebtedness. The guarantees
are senior unsecured obligations of the guarantors and rank, in
right of payment, equally with all of the guarantors
existing and future senior unsecured indebtedness and senior to
any existing and future subordinated indebtedness of the
guarantors. The guarantees are effectively subordinated to any
of the guarantors existing or future secured indebtedness
to the extent of the assets securing such indebtedness.
The indenture governing our senior notes contains covenants that
limit the ability of Allis-Chalmers and our restricted
subsidiaries to:
|
|
|
|
|
incur additional debt; |
|
|
|
make certain investments or pay dividends or distributions on
such entitys capital stock or purchase or redeem or retire
capital stock; |
|
|
|
sell assets, including capital stock of our restricted
subsidiaries; |
|
|
|
restrict dividends or other payments by restricted subsidiaries; |
|
|
|
create liens; |
|
|
|
enter into transactions with affiliates; and |
|
|
|
merge or consolidate with another company. |
These limitations are subject to a number of important
qualifications and exceptions.
83
Upon an event of default (as defined in the indenture), the
trustee or the holders of at least 25% in aggregate principal
amount of the senior notes then outstanding may declare the
entire principal of all the senior notes to be due and payable
immediately.
We may, at our option, redeem all or part of the senior notes,
at any time prior to January 15, 2010 at the make-whole
price set forth in the indenture, and on or after
January 15, 2010 at fixed redemption prices, plus accrued
and unpaid interest, if any, to the date of redemption.
At any time, which may be more than once, before
January 15, 2009, we may redeem up to 35% of the
outstanding senior notes with money that we raise in one or more
equity offerings at a redemption price of 109.0% of the par
value of the senior notes redeemed, plus accrued and unpaid
interest, as long as:
|
|
|
|
|
we redeem the senior notes within 180 days of completing
the equity offering; and |
|
|
|
at least 65% of the aggregate principal amount of senior notes
issued in the January 2006 offering remains outstanding after
the redemption. |
If we experience certain kinds of changes of control, we must
give holders of the senior notes the opportunity to sell to us
their senior notes at 101% of their principal amount, plus
accrued and unpaid interest.
|
|
|
Registration Rights
Agreement |
On January 18, 2006, we entered into a Registration Rights
Agreement with the initial purchasers of the senior notes,
pursuant to which we agreed to use our commercially reasonable
efforts to (i) file with the SEC a registration statement
on an appropriate form under the Securities Act, which we refer
to as the exchange offer registration statement, relating to a
registered exchange offer for the senior notes under the
Securities Act and (ii) cause the exchange offer
registration statement to be declared effective under the
Securities Act within 270 days following January 18,
2006. If we fail to comply with certain obligations under the
Registration Rights Agreement, we will be required to pay
liquidated damages to the holders of the senior notes in
accordance with the provisions of the Registration Rights
Agreement.
New Senior Secured Credit Facility
On January 18, 2006, we amended and restated our previous
credit agreement (which we signed in July 2005), resulting in a
new four-year, $25.0 million senior secured revolving
credit facility with a syndicate of lenders led by Royal Bank of
Canada, as administrative agent and collateral agent. Our
borrowing capacity under this new facility is available to
finance working capital requirements and other general corporate
purposes, including permitted acquisitions (as defined in the
credit agreement) and the issuance of standby letters of credit.
The terms of this facility are as described below.
Borrowings under the credit agreement will mature on
January 18, 2010. The credit agreement requires us to repay
the facility prior to maturity by an amount equal to
(i) 100% of the net cash proceeds of certain asset sales
(other than inventory and obsolete equipment in the ordinary
course of business) by us or our subsidiaries (including sales
of stock of our subsidiaries) and 100% of insurance proceeds, to
the extent such proceeds exceed a cumulative basket equal to 5%
of our consolidated assets (as determined in accordance with the
credit agreement), subject to a
180-day reinvestment
period, (ii) 100% of the net cash proceeds from the
issuance of any unsecured debt after January 18, 2006
(subject to permitted exceptions, including the issuance of our
senior notes and (iii) 100% of the net cash proceeds from
the issuance of our equity securities after such date (subject
to permitted exceptions). Amounts under the facility may be
repaid and reborrowed prior to the final
84
maturity date. As of December 31, 2005, after giving effect
to the sale of our senior notes in January 2006, the application
of the proceeds therefrom, and the closing of our credit
agreement, as if each such transaction had occurred on that
date, we would have had approximately $24.4 million of
unused availability under our new credit facility.
All borrowings under our new facility are subject to the
satisfaction of usual and customary conditions, including the
accuracy of representations and warranties and the absence of
defaults.
All of our existing and future direct and indirect subsidiaries
are required to guarantee our obligations under the credit
agreement. Borrowings under the credit facility and any related
guarantees are secured by a first priority lien on (i) all
of our and our subsidiaries fixed assets and (ii) all
of our and our subsidiaries accounts receivable,
inventory, equipment, general intangibles, deposit accounts and
other material assets and properties, including stock and other
equity interests.
The interest under the credit agreement is payable at rates per
annum based on the London Interbank Offered Rate, or LIBOR, or
an alternate base rate, or ABR. Under the credit agreement, ABR
loans may be prepaid at any time without penalty. LIBOR loans
may be prepaid without penalty, subject to our reimbursement of
certain breakage and redeployment costs.
|
|
|
Covenants and Events of
Default |
The credit agreement contains covenants customary for agreements
of this type, including, but not limited to, limitations on our
ability to: (i) incur additional indebtedness and
guarantees, (ii) create liens and other encumbrances on our
assets, (iii) consolidate, merge or sell assets,
(iv) pay dividends and other distributions or repurchase
stock, (v) make certain investments, loans and advances,
(vi) make capital expenditures, (vii) enter into
operating leases and sale/leaseback transactions,
(viii) enter into transactions with our affiliates,
(ix) change the character of our business, (x) engage
in hedging activities unless certain requirements are satisfied
and (xi) prepay other debt. Also, we are required to comply
with certain financial tests and maintain certain financial
ratios. These financial tests and ratios include requirements to
maintain: (i) a maximum ratio of total funded debt to
EBITDA, (ii) a maximum ratio of senior secured debt to
EBITDA, (iii) a minimum ratio of EBITDA to interest
expense, (iv) a minimum tangible net worth, (v) a
minimum current ratio and (vi) a minimum fixed asset
coverage ratio.
The credit agreement also includes customary representations,
warranties and events of default, including events of default
relating to non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and
warranties, the termination of or default under any material
agreement, the result of which could reasonably be expected to
have a material adverse effect, material and uncured judgments,
bankruptcy and insolvency events, cross-defaults and a default
in the event of a change of control. An event of default under
the credit agreement will permit the lenders to accelerate the
maturity of the indebtedness under the facility, and may result
in one or more cross-defaults under other indebtedness,
including our senior notes. Similarly, a default generally under
the indenture governing our senior notes will constitute an
event of default under the credit agreement.
Of the aggregate $25.0 million of capacity under the credit
agreement, $5.0 million is available for the issuance of
standby letters of credit.
85
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares
of common stock, $0.01 par value per share and
25,000,000 shares of preferred stock, $0.01 par value
per share.
The following summary of the rights, preferences and privileges
of our capital stock and certificate of incorporation and
by-laws does not purport to be complete and is qualified in its
entirety by reference to the provisions of applicable law and to
our certificate of incorporation and by-laws.
Common Stock
Holders of our common stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. Accordingly, holders
of a majority of the shares of our common stock entitled to vote
in any election of directors may elect all of the directors
standing for election. Holders of our common stock are entitled
to receive proportionately any dividends if and when such
dividends are declared by our board of directors, subject to any
preferential dividend rights of outstanding preferred stock.
Upon the liquidation, dissolution or winding up of our company,
the holders of our common stock are entitled to receive ratably
our net assets available after the payment of all debts and
other liabilities and subject to the prior rights of any
outstanding preferred stock. Holders of our common stock have no
preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of our common
stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock
that we may designate and issue in the future.
Preferred Stock
Under the terms of our certificate of incorporation, our board
of directors is authorized to designate and issue shares of
preferred stock in one or more series without stockholder
approval. Our board of directors has discretion to determine the
rights, preferences, privileges and restrictions, including
voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, of each series of
preferred stock. It is not possible to state the actual effect
of the issuance of any shares of preferred stock upon the rights
of holders of our common stock until the board of directors
determines the specific rights of the holders of the preferred
stock. However, these effects might include:
|
|
|
|
|
restricting dividends on the common stock; |
|
|
|
diluting the voting power of the common stock; |
|
|
|
impairing the liquidation rights of the common stock; and |
|
|
|
delaying or preventing a change in control of our company. |
We have no present plans to issue any shares of preferred stock.
Shares Eligible for Future Sale
Sales of substantial amounts of shares of common stock in the
public market could have an adverse effect on the market value
of our common stock. With the exception of certain shares issued
in connection with acquisitions consummated during the past
year, substantially all outstanding shares of our common stock
are either freely tradable or tradable pursuant to Rule 144
or pursuant to the registration statement described below.
We have an effective registration statement with the SEC
registering the resale of approximately 9.4 million shares
of our currently outstanding common stock. Also, pursuant to
Rule 144, shares of our
86
common stock that have been held for at least one year may
generally be sold in brokers transactions, provided that the
amount of shares sold by any stockholder (and the
stockholders transferees under certain circumstances) in
any three-month period does not exceed the greater of 1% of the
outstanding stock (currently approximately 180,000 shares)
or the four-week average weekly trading volume of the common
stock. Such sales may be effected provided the requirements of
Rule 144 are met, including the requirement that at the
time of the sale we have filed all reports required to be filed
under the Securities and Exchange Act of 1934. Pursuant to
Rule 144, shares of our common stock that have been held by
persons who are not our affiliates for at least two years may
generally be sold without restriction under Rule 144.
Delaware Anti-Takeover Law and Charter and By-Law
Provisions
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in
a business combination with an interested
stockholder for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination or the transaction
by which the person became an interested stockholder is approved
by the corporations board of directors and/or stockholders
in a prescribed manner or the person owns at least 85% of the
corporations outstanding voting stock after giving effect
to the transaction in which the person became an interested
stockholder. The term business combination includes
mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to
certain exceptions, an interested stockholder is a
person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the
corporations voting stock. A Delaware corporation may
opt out from the application of Section 203
through a provision in its certificate of incorporation or
by-laws. We have not opted out from the application
of Section 203.
Under our certificate of incorporation and by-laws, our board of
directors is not divided into classes, and each director serves
for a term of one year. Any vacancies on the board of directors
shall be filled by vote of the board of directors until the next
meeting of stockholders when the election of directors is in the
regular course of business, and until a successor has been duly
elected and qualified. Our certificate of incorporation and
by-laws also provide that any director may be removed from
office, with or without cause, by the affirmative vote of the
holders of a majority of the voting power of our then
outstanding capital stock entitled to vote generally in the
election of directors.
Our by-laws provide that meetings of stockholders may be called
only by a majority of our board of directors.
The foregoing provisions of our certificate of incorporation and
by-laws and the provisions of Section 203 of the Delaware
General Corporation Law could have the effect of delaying,
deferring or preventing a change of control of our company.
Liability and Indemnification of Officers and Directors
Our certificate of incorporation provides that our directors
will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of a
directors duty of loyalty to us or our stockholders,
(2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law,
(3) under Section 174 of the Delaware General
Corporation Law, or (4) for any transaction from which the
director derives an improper personal benefit. If the Delaware
General Corporation Law is amended to authorize the further
elimination or limitation of directors liability, then the
liability of our directors will automatically be limited to the
fullest extent provided by law. Our certificate of incorporation
and by-laws also contain
87
provisions to indemnify our directors and officers to the
fullest extent permitted by the Delaware General Corporation
Law. We also maintain indemnification insurance on behalf of our
directors. In addition, our board of directors has approved and
we are in the process of entering into indemnification
agreements with all of our directors and executive officers.
These provisions and agreements may have the practical effect in
certain cases of eliminating the ability of stockholders to
collect monetary damages from our directors and officers. We
believe that these contractual agreements and the provisions in
our certificate of incorporation and by-laws are necessary to
attract and retain qualified persons as directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is
Continental Stock Transfer and Trust Company, 17 Battery
Place, New York, New York
10004-1123,
(212) 509-4000.
88
UNDERWRITING
We are offering the shares of common stock described in this
prospectus through several underwriters. RBC Capital Markets
Corporation is the representative of the several underwriters.
We and the selling stockholders (who will sell shares only if
the over-allotment option described below is exercised) have
entered into a firm commitment underwriting agreement with
RBC Capital Markets Corporation, as representative of the
several underwriters. Subject to the terms and conditions of the
underwriting agreement, we have agreed to sell to the
underwriters, and each underwriter has agreed to purchase, the
number of shares of common stock listed next to its name in the
following table:
|
|
|
|
|
|
|
|
Number |
Underwriter |
|
of Shares |
|
|
|
RBC Capital Markets Corporation
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,716,980 |
|
The underwriting agreement provides that the obligation of the
underwriters to purchase the shares included in this offering is
subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all of
the shares (other than those covered by the over-allotment
option described below) if they purchase any of the shares.
The underwriting agreement provides that the underwriters will
purchase the shares of common stock from us at the public
offering price shown on the cover page of this prospectus less
the underwriting discount shown on the cover page of this
prospectus. The underwriters may allow a concession of not more
than
$ per
share to selected dealers. The underwriters may also allow, and
those dealers may re-allow, a concession of not more than
$ per
share to some other dealers. If all of the shares are not sold
at the public offering price, the underwriters may change the
public offering price and the other selling terms. The common
stock is offered subject to a number of conditions.
The following table summarizes the underwriting discounts the
underwriters are to receive on a per share basis and in total
from us. The information is presented assuming either no
exercise or full exercise of the underwriters option to
purchase additional shares of stock to cover over-allotments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Per Share |
|
Without Option |
|
With Option |
|
|
|
|
|
|
|
Underwriting discount paid by us
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Underwriting discount paid by selling stockholders
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
We estimate that the total expenses of this offering will be
approximately
$ ,
excluding underwriters discounts. We will pay all expenses
associated with this offering.
The underwriters propose to offer the shares of our common stock
to the public at the offering price set forth on the cover page
of this prospectus. After the offering, the underwriters may
change the offering price and other selling terms. The
underwriters reserve the right to reject an order for the
purchase of shares, in whole or in part.
We and several selling stockholders have granted to the
underwriters the option, exercisable for thirty (30) days
from the date of this prospectus, to purchase up
to additional
shares of common
89
stock at the price set forth on the cover of this prospectus. We
will not receive any of the proceeds of the sale of the shares
by the selling stockholders. The underwriters may exercise the
option solely for the purpose of covering over-allotments, if
any, in connection with the offering. If any additional shares
are purchased, the underwriters will offer the additional shares
on the same terms as those on which the shares are being offered.
We and each of our executive officers and directors have agreed
that none of us will issue, sell, transfer or dispose of any
shares of our common stock or securities convertible into or
exercisable for any shares of our common stock, without the
prior written consent of RBC Capital Markets Corporation which
shall not be unreasonably withheld for a period of ninety
(90) days after the date of the underwriting agreement,
other than in this offering in accordance with the terms of the
underwriting agreement.
Our shares of common stock are listed on the American Stock
Exchange under the symbol ALY.
In connection with this offering, the underwriters may purchase
and sell shares of our common stock in the open market. These
transactions may include short sales, syndicate covering
transactions and stabilizing transactions in accordance with
Regulation M. Short sales involve syndicate sales of shares
in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short
position. Covered short sales are sales made in an
amount up to the number of shares represented by the
underwriters over-allotment option. In determining the
source of shares to close out the covered syndicate short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which the underwriters may purchase
shares through the over-allotment option. Transactions to close
out the covered syndicate short position involve either
purchases in the open market after the distribution has been
completed or the exercise of the over-allotment option. The
underwriters may also make naked short sales of
shares in excess of the over-allotment option. The underwriters
must close out any naked short position by purchasing shares of
common stock in the open market. A naked short position is more
likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors
who purchase in the offering. Stabilizing transactions consist
of bids for, or purchases of, shares in the open market while
the offering is in progress, subject to a specified maximum
price.
Any of these activities may have the effect of preventing or
retarding a decline in the market price of our common stock.
They may also cause the price of the shares of our common stock
to be higher than the price that would otherwise exist on the
open market in the absence of these transactions. The
underwriters may conduct these transactions on the American
Stock Exchange or otherwise. If the underwriters commence any of
these transactions, it may discontinue them at any time.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make because of any of those liabilities.
Some of the underwriters, including RBC Capital Markets
Corporation, have from time to time performed, and may in the
future perform, various investment banking, financial advisory,
commercial banking and other services for us for which they has
been paid, or will be paid, customary fees. Also,
RBC Capital Markets Corporation and certain of its
affiliates beneficially own approximately 8,600 shares of
our common stock.
90
LEGAL MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Andrews Kurth LLP, Houston, Texas, our
counsel. Certain legal matters in connection with the offering
will be passed upon for the underwriters by Shearman &
Sterling LLP, New York, New York.
EXPERTS
The consolidated financial statements of Allis-Chalmers Energy
Inc. and schedules and notes thereto included in this prospectus
have been audited by UHY Mann Frankfort Stein & Lipp
CPAs, LLP and by Gordon, Hughes and Banks, LLP, independent
registered public accounting firms, in each case to the extent
and for the periods set forth in their report thereon appearing
elsewhere herein, and are included herein in reliance upon such
report given upon the authority of said firm as experts in
auditing and accounting.
The financial statements of Delta Rental Service, Inc. and
schedules and notes thereto included in this prospectus have
been audited by Wright, Moore, Dehart, Dupuis &
Hutchinson, LLC, independent certified public accountants, to
the extent and for the periods set forth in their report thereon
appearing elsewhere herein, and are included herein in reliance
upon such report given upon the authority of said firm as
experts in auditing and accounting.
The financial statements of Capcoil Tubing Services, Inc. and
schedules and notes thereto included in this prospectus have
been audited by Curtis Blakely & Co., PC, independent
certified public accountants, to the extent and for the periods
set forth in their report thereon appearing elsewhere herein,
and are included herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The financial statements of W.T. Enterprises, Inc. and schedules
and notes thereto included in this prospectus have been audited
by Accounting & Consulting Group, LLP, independent
certified public accountants, to the extent and for the periods
set forth in their report thereon appearing elsewhere herein,
and are included herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The financial statements of Specialty Rental Tools Inc. and
schedules and notes thereto included in this prospectus have
been audited by UHY Mann Frankfort Stein & Lipp CPAs,
LLP, an independent registered public accounting firm, to the
extent and for the periods set forth in their report thereon
appearing elsewhere herein, and are included herein in reliance
upon such report given upon the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of DLS Drilling, Logistics
and Services Corporation as of December 31, 2005 and 2004
and for each of the years in the three-year period ended
December 31, 2005, have been included herein in reliance
upon the report of Sibille (formerly Finsterbusch Pickenhayn
Sibille), independent accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing.
91
INDEX TO FINANCIAL STATEMENTS
|
|
|
ALLIS-CHALMERS ENERGY INC.
|
|
|
|
|
F-3 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
F-9 |
DELTA RENTAL SERVICE, INC.
|
|
|
|
|
F-48 |
|
|
F-49 |
|
|
F-51 |
|
|
F-52 |
|
|
F-53 |
|
|
F-54 |
|
|
F-58 |
|
|
F-59 |
|
|
F-60 |
|
|
F-61 |
CAPCOIL TUBING SERVICES, INC.
|
|
|
|
|
F-62 |
|
|
F-63 |
|
|
F-65 |
|
|
F-66 |
|
|
F-67 |
|
|
F-74 |
|
|
F-75 |
|
|
F-77 |
|
|
F-78 |
|
|
F-79 |
F-1
|
|
|
W. T. ENTERPRISES, INC.
|
|
|
|
|
F-80 |
|
|
F-81 |
|
|
F-82 |
|
|
F-83 |
|
|
F-84 |
|
|
F-85 |
|
|
F-90 |
|
|
F-91 |
|
|
F-92 |
|
|
F-93 |
SPECIALTY RENTAL TOOLS, INC.
|
|
|
|
|
F-94 |
|
|
F-95 |
|
|
F-96 |
|
|
F-97 |
|
|
F-98 |
|
|
F-99 |
Supplemental Information
|
|
|
|
|
F-103 |
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
|
|
|
Independent Auditors Report
|
|
F-104 |
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
F-105 |
Consolidated Statements of Income for the Years Ended
December 31, 2005, 2004 and 2003
|
|
F-106 |
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2005, 2004 and 2003
|
|
F-107 |
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003
|
|
F-108 |
Notes to Financial Statements
|
|
F-109 |
PRO FORMA FINANCIAL INFORMATION
|
|
|
|
|
F-123 |
|
|
F-124 |
|
|
F-126 |
F-2
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
F-3
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.
F-4
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.
F-5
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.
F-6
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
Capital in | |
|
Retained | |
|
|
|
|
| |
|
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.
F-7
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.
F-8
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 |
Nature of Business and Summary of Significant Accounting
Policies |
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
F-9
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
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
F-10
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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.
We consider all highly liquid investments with an original
maturity of three months or less at the time of purchase to be
cash equivalents.
F-11
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
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 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
F-12
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
|
|
|
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. |
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.
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
F-13
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For0the Years2Ended December031, | |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
|
|
(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 |
) |
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
F-14
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
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 |
|
|
|
|
|
|
|
|
|
|
|
F-15
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
Note 2 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
F-16
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
F-17
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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 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
F-18
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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.
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 |
|
F-19
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003 | |
|
|
| |
|
|
As | |
|
|
|
|
Previously | |
|
Restatement | |
|
As | |
|
|
Reported | |
|
Adjustments | |
|
Restated | |
|
|
| |
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
|
|
|
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.
F-20
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 |
|
|
|
|
|
|
|
|
|
|
|
F-21
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 |
) |
F-22
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003 | |
|
|
| |
|
|
As | |
|
|
|
|
Previously | |
|
Restatement |
|
As | |
|
|
Reported | |
|
Adjustments |
|
Restated | |
|
|
| |
|
|
|
| |
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 |
|
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
F-23
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
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
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.
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
F-24
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Note 4 Acquisitions
In July 2003, through our subsidiary Mountain Air, we entered
into a limited liability company operating agreement with a
division of M-I, a joint venture between Smith International and
Schlumberger N.V. (Schlumberger Limited), to form 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.
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
F-25
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 of the period, based on the historical
results of the acquisitions (unaudited) (in thousands, except
per share amounts):
F-26
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Note 5 Inventories
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 |
|
|
|
|
|
|
|
|
|
|
|
F-27
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 7 Income Taxes
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.
F-29
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.
F-30
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 8 Debt
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 |
F-31
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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%.
|
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. |
F-32
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
|
|
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
F-33
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 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.
F-34
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 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.
F-35
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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. |
F-36
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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.
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
F-37
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
F-38
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 | |
|
Shares | |
|
|
|
Shares | |
|
|
|
|
Under | |
|
Avg. Exercise | |
|
Under | |
|
Weighted Avg. | |
|
Under | |
|
Weighted Avg. | |
|
|
Option | |
|
Price | |
|
Option | |
|
Exercise Price | |
|
Option | |
|
Exercise 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 | |
|
Options | |
|
|
Exercise Price |
|
Option | |
|
Contractual Life | |
|
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.
F-39
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
measurement-while-drilling 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.
F-40
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
F-41
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 |
|
|
|
|
|
|
|
|
|
|
|
F-42
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Restated) | |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
F-43
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
ALLIS-CHALMERS ENERGY INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
F-44
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21 Legal Matters
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.
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 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 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.
F-46
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
F-47
INDEPENDENT AUDITORS REPORT
To the Stockholders
Delta Rental Service, Inc.
Scott, Louisiana
We have audited the accompanying Balance Sheets of Delta Rental
Service, Inc. (a Louisiana corporation) as of December 31,
2004 and 2003 and the related Statements of Income, Retained
Earnings and Cash Flows for the twelve months then ended. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Delta Rental Service, Inc. as of December 31, 2004 and
2003 and the results of their operations and cash flows for the
twelve months then ended in conformity with accounting
principles generally accepted in the United States of America.
|
|
|
|
/s/ |
WRIGHT, MOORE, DEHART, |
|
|
|
DUPUIS & HUTCHINSON, L.L.C. |
|
|
|
Certified Public Accountants |
March 23, 2005
F-48
DELTA RENTAL SERVICE, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
891,338 |
|
|
$ |
705,553 |
|
|
Accounts Receivable
|
|
|
1,095,587 |
|
|
|
713,929 |
|
|
Prepaid Insurance
|
|
|
13,838 |
|
|
|
14,067 |
|
|
Prepaid Income Taxes
|
|
|
|
|
|
|
51,411 |
|
|
Current Deferred Tax Asset
|
|
|
|
|
|
|
77,595 |
|
|
|
|
|
|
|
|
|
Employee Advances
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,000,763 |
|
|
|
1,562,555 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
|
33,624 |
|
|
|
32,407 |
|
|
Rental Equipment
|
|
|
3,699,987 |
|
|
|
3,341,816 |
|
|
Transportation Equipment
|
|
|
144,260 |
|
|
|
144,260 |
|
|
Yard Equipment
|
|
|
77,211 |
|
|
|
77,211 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,955,082 |
|
|
|
3,595,694 |
|
|
Less: Accumulated Depreciation
|
|
|
(2,610,143 |
) |
|
|
(2,307,864 |
) |
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
1,344,939 |
|
|
|
1,287,830 |
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
|
Cash Surrender Value of Life Insurance
|
|
|
38,261 |
|
|
|
35,446 |
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
38,261 |
|
|
|
35,446 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
3,383,963 |
|
|
$ |
2,885,831 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-49
DELTA RENTAL SERVICE, INC.
BALANCE SHEETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$ |
53,949 |
|
|
$ |
40,829 |
|
|
Payroll Liabilities Payable
|
|
|
17,157 |
|
|
|
16,063 |
|
|
Sales Tax Payable
|
|
|
12,308 |
|
|
|
3,487 |
|
|
Accrued Interest Expense
|
|
|
3,734 |
|
|
|
4,244 |
|
|
Income Taxes Payable
|
|
|
92,448 |
|
|
|
|
|
|
Current Portion of Stockholder Loan
|
|
|
93,994 |
|
|
|
87,674 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
273,590 |
|
|
|
152,297 |
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
|
Stockholder Loan (Less Current Portion)
|
|
|
547,784 |
|
|
|
641,775 |
|
|
Long-Term Deferred Tax Liability
|
|
|
353,147 |
|
|
|
311,762 |
|
|
|
|
|
|
|
|
|
Stockholder Loan
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
900,931 |
|
|
|
953,537 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,174,521 |
|
|
|
1,105,834 |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Common Stock (No Par Value, 300,000 Shares Authorized,
27,083 Shares Issued and 8,333 Outstanding)
|
|
|
27,083 |
|
|
|
27,083 |
|
|
Additional Paid-In Capital
|
|
|
64,574 |
|
|
|
64,574 |
|
|
Retained Earnings
|
|
|
3,117,785 |
|
|
|
2,688,340 |
|
|
Less: Treasury Stock (18,750 Shares at Cost)
|
|
|
(1,000,000 |
) |
|
|
(1,000,000 |
) |
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
2,209,442 |
|
|
|
1,779,997 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$ |
3,383,963 |
|
|
$ |
2,885,831 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-50
DELTA RENTAL SERVICE, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
REVENUES
|
|
$ |
3,249,338 |
|
|
$ |
2,662,091 |
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
796,194 |
|
|
|
766,196 |
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,453,144 |
|
|
|
1,895,895 |
|
ADMINISTRATIVE EXPENSES
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
1,798,414 |
|
|
|
1,926,173 |
|
|
Depreciation
|
|
|
30,061 |
|
|
|
31,678 |
|
|
|
|
|
|
|
|
|
|
Total Administrative Expenses
|
|
|
1,828,475 |
|
|
|
1,957,851 |
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
624,669 |
|
|
|
(61,956 |
) |
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(48,503 |
) |
|
|
(61,177 |
) |
|
Interest Income
|
|
|
4,064 |
|
|
|
2,234 |
|
|
Life Insurance Dividends
|
|
|
930 |
|
|
|
930 |
|
|
Gain on Sale of Assets
|
|
|
113,435 |
|
|
|
354,382 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses)
|
|
|
69,926 |
|
|
|
296,369 |
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
694,595 |
|
|
|
234,413 |
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
146,170 |
|
|
|
|
|
|
Deferred
|
|
|
118,980 |
|
|
|
134,274 |
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision
|
|
|
265,150 |
|
|
|
134,274 |
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
429,445 |
|
|
$ |
100,139 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-51
DELTA RENTAL SERVICE, INC.
STATEMENTS OF RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
BEGINNING BALANCE
|
|
$ |
2,688,340 |
|
|
$ |
2,588,201 |
|
NET INCOME
|
|
|
429,445 |
|
|
|
100,139 |
|
|
|
|
|
|
|
|
ENDING BALANCE
|
|
$ |
3,117,785 |
|
|
$ |
2,688,340 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-52
DELTA RENTAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
429,445 |
|
|
$ |
100,139 |
|
|
Adjustments to Reconcile Net Income to Net Cash Provided By
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
346,615 |
|
|
|
308,587 |
|
|
|
|
Gain on Sale of Assets
|
|
|
(113,435 |
) |
|
|
(354,382 |
) |
Change in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
(381,658 |
) |
|
|
(7,963 |
) |
|
|
Prepaid Expenses
|
|
|
51,640 |
|
|
|
62,610 |
|
|
|
Accounts Payable and Accrued Expenses
|
|
|
114,973 |
|
|
|
(29,129 |
) |
|
|
Deferred Taxes
|
|
|
118,980 |
|
|
|
134,274 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
137,115 |
|
|
|
113,997 |
|
|
|
|
|
|
|
|
Net Cash Provided By Operating Activities
|
|
|
566,560 |
|
|
|
214,136 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of Equipment
|
|
|
(480,371 |
) |
|
|
(781,152 |
) |
|
Proceeds from Sale of Assets
|
|
|
190,082 |
|
|
|
522,911 |
|
|
Cash Surrender Value Life Insurance
|
|
|
(2,815 |
) |
|
|
(2,816 |
) |
|
|
|
|
|
|
|
Net Cash Used In Investing Activities
|
|
|
(293,104 |
) |
|
|
(261,057 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Principal Payments on Treasury Stock Note
|
|
|
|
|
|
|
(506,036 |
) |
|
Proceeds From Long-Term Debt
|
|
|
|
|
|
|
|
|
|
Proceeds From Stockholder Note Payable
|
|
|
|
|
|
|
450,000 |
|
|
Principal Payments Stockholder Note Payable
|
|
|
(87,671 |
) |
|
|
(20,550 |
) |
|
|
|
|
|
|
|
Net Cash Used in Financing Activities
|
|
|
(87,671 |
) |
|
|
(76,586 |
) |
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
185,785 |
|
|
|
(123,507 |
) |
CASH AT BEGINNING OF YEAR
|
|
|
705,553 |
|
|
|
829,060 |
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$ |
891,338 |
|
|
$ |
705,553 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$ |
49,013 |
|
|
$ |
84,650 |
|
|
|
|
|
|
|
|
|
Income Taxes Paid
|
|
$ |
2,311 |
|
|
$ |
37,460 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this statement.
F-53
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(A) Summary of Significant
Accounting Policies
NATURE OF BUSINESS Delta Rental Service, Inc. (the
Company) is incorporated in the State of Louisiana. The Company
leases pipe, tubulars and other equipment to the service
companies of the petroleum exploration and production industry.
The Companys facility is located in Scott, Louisiana, and
leases equipment to companies primarily in the Louisiana Gulf
Coast Region.
REPORTING PERIOD The Company typically reports its
financial position and results of operations based on its
federal income tax fiscal year end of March 31. The
accompanying financial statements present the Companys
financial position as of December 31, and the results of
operations and cash flows for the twelve months ended
December 31.
INCOME TAXES Income taxes are provided for the tax
effects of transactions reported in the financial statements and
consist of accrued taxes plus deferred taxes related primarily
to the differences between the bases of certain assets and
liabilities for financial and tax reporting. The deferred taxes
represent the future tax return consequences of those
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
PROPERTY AND EQUIPMENT Property and equipment of the
Company are stated at cost. Expenditures for property and
equipment which substantially increase the useful lives of
existing assets are capitalized at cost and depreciated. Routine
expenditures for repairs and maintenance are expensed as
incurred.
Depreciation is provided principally on the straight-line method
over the estimated useful lives of the assets for financial
reporting purposes. For income tax purposes, depreciation is
computed by use of the Modified Accelerated Cost Recovery System
(MACRS).
CASH AND CASH EQUIVALENTS The Company considers all
highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. The
Company had no cash equivalents at December 31, 2004 and
2003.
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. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE The Company generally does not
require collateral, and the majority of its trade receivables
are unsecured. The carrying amount for accounts receivable
approximates fair value.
ADVERTISING Advertising costs are charged to
operations when incurred. Advertising expense for the twelve
month periods ended December 31, 2004 and 2003 was $3,272
and $1,884, respectively.
(B) Concentration of Credit
Risk
The Company maintains cash balances at two separate financial
institutions. Accounts are insured by the Federal Deposit
Insurance Corporation up to $100,000 per institution.
Balances in excess of insured limits at December 31, 2004
and 2003 were $692,208 and $507,438 respectively.
F-54
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(C) Accounts Receivable
The balance in Accounts Receivable is comprised of billed
invoices as well as unbilled rentals which crossed accounting
periods. The breakdown of accounts receivable at
December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Billed Accounts Receivable
|
|
$ |
699,442 |
|
|
$ |
407,556 |
|
Accrued Unbilled Revenue
|
|
|
396,145 |
|
|
|
306,373 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,095,587 |
|
|
$ |
713,929 |
|
|
|
|
|
|
|
|
(D) Income Taxes
Income tax expense consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
128,548 |
|
|
$ |
|
|
|
States
|
|
|
17,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Income Tax Expense
|
|
|
146,170 |
|
|
|
|
|
Deferred
|
|
|
118,980 |
|
|
|
134,274 |
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
$ |
265,150 |
|
|
$ |
134,274 |
|
|
|
|
|
|
|
|
The effective tax on pre-taxable income is approximately
34 percent federal and 6 percent for the various
states. The primary reason for the difference between the
effective tax rates and the statutory marginal rates is due to
various book to tax timing differences, and non-deductible
expenses for income tax purposes.
Deferred income taxes are a result of timing differences between
book and taxable incomes as well as net operating loss
carryforwards. The major timing differences for deferred income
taxes at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Depreciation Timing Difference
|
|
$ |
882,867 |
|
|
$ |
779,405 |
|
Net Operating Loss Carry-Forward
|
|
|
|
|
|
|
(163,311 |
) |
Charitable Contribution Carryover
|
|
|
|
|
|
|
(30,678 |
) |
|
|
|
|
|
|
|
|
|
|
882,867 |
|
|
|
585,416 |
|
Blended Federal and State Rates
|
|
|
40 |
% |
|
|
40 |
% |
|
|
|
|
|
|
|
|
Deferred Income Tax Liability (Net)
|
|
$ |
353,147 |
|
|
$ |
234,167 |
|
|
|
|
|
|
|
|
These amounts have been presented in the Companys
financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Current Deferred Tax Asset
|
|
$ |
|
|
|
$ |
(77,595 |
) |
Long-Term Deferred Tax Liability
|
|
|
353,147 |
|
|
|
311,762 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
353,147 |
|
|
$ |
234,167 |
|
|
|
|
|
|
|
|
F-55
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(E) Employee Benefit Plans
The Company adopted a profit sharing retirement plan for its
employees effective April 1, 1979. The plan was restated to
update its terms, provisions and conditions effective
April 1, 2003. The restated plan continues to be for the
exclusive benefit of the employees of the Company. An employee
is eligible to participate upon the completion of one year of
eligible service and the attainment of age 21. The Company
determines annually the amount of current or accumulated profits
to be contributed to the plan. The plan vests one hundred
percent (100%) after six or more years of continuing service.
Contributions to the plan for the twelve months ended
December 31, 2004 and 2003 were $147,744 and $133,382
respectively.
(F) Note Payable Stockholder
The Company has a note payable to the stockholder dated
August 29, 2003, payable in monthly installments of $3,955,
bearing interest at 6.982% per annum, due August 1,
2010. The balance at December 31, 2004 and 2003 is $641,778
and $729,449, respectively.
Future maturities on this note are as follows:
|
|
|
|
|
|
|
Twelve Months Ending December 31,
|
|
|
|
|
|
2005
|
|
$ |
93,994 |
|
|
2006
|
|
|
100,772 |
|
|
2007
|
|
|
108,038 |
|
|
2008
|
|
|
115,827 |
|
|
2009
|
|
|
124,178 |
|
|
Later
|
|
|
98,969 |
|
|
|
|
|
|
|
Total
|
|
$ |
641,778 |
|
|
|
|
|
(G) Compensated Absences
Employees of the Company are entitled to paid vacation and paid
sick days, depending on length of service. No unused vacation or
sick leave is payable to an employee upon separation. The
Companys policy is to recognize the costs of compensated
absences when actually paid to employees. Accordingly, no
accruals have been made.
(H) Related Party
Transactions
The Companys operations are conducted in a facility owned
by its stockholders. The Company entered into a formal lease
agreement for the facilities on June 6, 2000. The lease
agreement requires rental payments of $6,000 per month and
expires on June 30, 2005. For the twelve month periods
ended December 31, 2004 and 2003, $72,000 per period
was paid to the stockholders for rent.
Minimum future lease payments under the lease are as follows:
|
|
|
|
|
Twelve Months Ending December 31,
|
|
|
|
2005
|
|
$36,000 |
|
|
|
|
|
Total
|
|
$36,000 |
|
|
|
F-56
DELTA RENTAL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
(I) Major Customers
Customers comprising ten percent (10%) or more of the
Companys revenues or accounts receivable balances for the
periods ended December 31 are as follows:
For the twelve months ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
Sales | |
|
Percentage of | |
|
Total Accounts | |
|
|
Amount | |
|
Total Revenue | |
|
Receivable | |
|
|
| |
|
| |
|
| |
Customer A
|
|
$ |
488,589 |
|
|
|
18.35 |
% |
|
|
14.39 |
% |
Customer B
|
|
$ |
401,265 |
|
|
|
15.07 |
% |
|
|
9.85 |
% |
Customer C
|
|
$ |
296,570 |
|
|
|
11.14 |
% |
|
|
11.71 |
% |
Customer D
|
|
$ |
269,963 |
|
|
|
10.14 |
% |
|
|
9.61 |
% |
For the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
Sales | |
|
Percentage of | |
|
Total Accounts | |
|
|
Amount | |
|
Total Revenue | |
|
Receivable | |
|
|
| |
|
| |
|
| |
Customer A
|
|
$ |
549,678 |
|
|
|
16.92 |
% |
|
|
14.31 |
% |
Customer B
|
|
$ |
528,474 |
|
|
|
16.26 |
% |
|
|
22.51 |
% |
Customer C
|
|
$ |
329,160 |
|
|
|
10.13 |
% |
|
|
6.40 |
% |
Customer D
|
|
$ |
308,133 |
|
|
|
9.48 |
% |
|
|
13.15 |
% |
(J) Subsequent Events
Subsequent to the balance sheet date, but prior to the date of
this report, the Companys stockholders entered into a
purchase agreement whereby they have agreed to sale all of their
interest in the Company to a third-party. The sale is scheduled
to close in April, 2005.
F-57
DELTA RENTAL SERVICE, INC.
BALANCE SHEET
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
|
2005 | |
|
|
| |
ASSETS |
CURRENT ASSETS
|
|
|
|
|
|
Cash
|
|
$ |
169,154 |
|
|
Accounts Receivable
|
|
|
936,156 |
|
|
Prepaid Insurance
|
|
|
|
|
|
Prepaid Income Taxes
|
|
|
|
|
|
Current Deferred Tax Asset
|
|
|
160,349 |
|
|
|
|
|
|
Employee Advances
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,265,659 |
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
Office Equipment
|
|
|
33,624 |
|
|
Rental Equipment
|
|
|
3,739,342 |
|
|
Transportation Equipment
|
|
|
144,180 |
|
|
Yard Equipment
|
|
|
77,211 |
|
|
|
|
|
|
|
Total
|
|
|
3,994,357 |
|
|
Less: Accumulated Depreciation
|
|
|
(2,652,825 |
) |
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
1,341,532 |
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
Cash Surrender Value of Life Insurance
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
2,607,191 |
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES
|
|
|
|
|
|
Accounts Payable
|
|
$ |
31,630 |
|
|
Payroll Liabilities Payable
|
|
|
398 |
|
|
Sales Tax Payable
|
|
|
7,433 |
|
|
Accrued Insurance Payable
|
|
|
19,447 |
|
|
Accrued Interest Expense
|
|
|
|
|
|
Accrued Profit Sharing Payable
|
|
|
|
|
|
Income Taxes Payable
|
|
|
374,492 |
|
|
Note Payable Insurance
|
|
|
|
|
|
Current Portion of Stockholder Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
433,400 |
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
Stockholder Loan (Less Current Portion)
|
|
|
|
|
|
Long-Term Deferred Tax Liability
|
|
|
373,153 |
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
373,153 |
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
806,553 |
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Common Stock (No Par Value, 300,000 Shares Authorized,
27,083 Shares Issued and 8,333 Outstanding)
|
|
|
27,083 |
|
|
Additional Paid-In Capital
|
|
|
64,574 |
|
|
Retained Earnings
|
|
|
2,708,981 |
|
|
Less: Treasury Stock (18,750 Shares at Cost)
|
|
|
(1,000,000 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,800,638 |
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$ |
2,607,191 |
|
|
|
|
|
F-58
DELTA RENTAL SERVICE, INC.
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
REVENUES
|
|
$ |
820,769 |
|
|
$ |
744,811 |
|
COST OF REVENUES
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
203,271 |
|
|
|
265,230 |
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
617,498 |
|
|
|
479,581 |
|
ADMINISTRATIVE EXPENSES
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
984,505 |
|
|
|
1,106,656 |
|
|
Depreciation
|
|
|
7,578 |
|
|
|
7,465 |
|
|
|
|
|
|
|
|
|
|
Total Administrative Expenses
|
|
|
992,083 |
|
|
|
1,114,121 |
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(374,585 |
) |
|
|
(634,540 |
) |
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(10,937 |
) |
|
|
(13,166 |
) |
|
Interest Income
|
|
|
2,896 |
|
|
|
364 |
|
|
Gain on Sale of Assets
|
|
|
115,519 |
|
|
|
36,850 |
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expenses)
|
|
|
107,478 |
|
|
|
24,048 |
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME TAXES
|
|
|
(267,107 |
) |
|
|
(610,492 |
) |
|
|
|
|
|
|
|
PROVISION (BENEFIT) FOR INCOME TAXES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
141,697 |
|
|
|
(221,825 |
) |
|
|
|
|
|
|
|
|
|
Total Income Tax Provision (Benefit)
|
|
|
141,697 |
|
|
|
(221,825 |
) |
|
|
|
|
|
|
|
NET LOSS
|
|
$ |
(408,804 |
) |
|
$ |
(388,667 |
) |
|
|
|
|
|
|
|
F-59
DELTA RENTAL SERVICE, INC.
STATEMENT OF RETAINED EARNINGS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
BEGINNING BALANCE
|
|
$ |
3,117,785 |
|
|
$ |
2,688,340 |
|
NET LOSS
|
|
|
(408,804 |
) |
|
|
(388,667 |
) |
|
|
|
|
|
|
|
ENDING BALANCE
|
|
$ |
2,708,981 |
|
|
$ |
2,299,673 |
|
|
|
|
|
|
|
|
F-60
DELTA RENTAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$ |
(408,804 |
) |
|
$ |
(388,667 |
) |
|
Adjustments to Reconcile Net Income to Net Cash Provided By
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
94,220 |
|
|
|
83,854 |
|
|
|
|
Gain on Sale of Assets
|
|
|
(115,519 |
) |
|
|
(36,850 |
) |
Change in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
159,431 |
|
|
|
(97,326 |
) |
|
|
Prepaid Expenses
|
|
|
13,838 |
|
|
|
(10,933 |
) |
|
|
Accounts Payable and Accrued Expenses
|
|
|
253,804 |
|
|
|
256,078 |
|
|
|
Deferred Taxes
|
|
|
(140,343 |
) |
|
|
(221,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
265,431 |
|
|
|
(27,002 |
) |
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
|
|
|
(143,373 |
) |
|
|
(415,669 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchase of Equipment
|
|
|
(151,956 |
) |
|
|
(40,557 |
) |
|
Proceeds from Sale of Assets
|
|
|
176,662 |
|
|
|
44,440 |
|
|
Cash Surrender Value Life Insurance
|
|
|
38,261 |
|
|
|
(473 |
) |
|
|
|
|
|
|
|
Net Cash Used In Investing Activities
|
|
|
62,967 |
|
|
|
3,410 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Principal Payments Stockholder Note Payable
|
|
|
(641,778 |
) |
|
|
(21,349 |
) |
Net Cash Used in Financing Activities
|
|
|
(641,778 |
) |
|
|
(21,349 |
) |
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(722,184 |
) |
|
|
(433,608 |
) |
CASH AT BEGINNING OF PERIOD
|
|
|
891,338 |
|
|
|
705,553 |
|
|
|
|
|
|
|
|
CASH AT END OF PERIOD
|
|
$ |
169,154 |
|
|
$ |
271,945 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
Interest Paid
|
|
$ |
7,203 |
|
|
$ |
13,166 |
|
|
|
|
|
|
|
|
|
Income Taxes Paid
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing of Insurance Premiums
|
|
$ |
|
|
|
$ |
30,351 |
|
|
|
|
|
|
|
|
F-61
INDEPENDENT AUDITORS REPORT
To the Board of Directors
Capcoil Tubing Services, Inc.
P.O. Box 2280 Kilgore, Texas
We have audited the balance sheets of Capcoil Tubing Services,
Inc. (a Texas corporation), as of December 31, 2004 and
2003, and the related statements of operations and retained
earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the
Corporations management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Corporations internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Capcoil Tubing Services, Inc. as of December 31, 2004
and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
|
|
|
/s/ CURTIS BLAKELY & CO., PC |
|
|
Kilgore, Texas
March 16, 2005
F-62
CAPCOIL TUBING SERVICES, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$ |
348,674 |
|
|
$ |
45,857 |
|
|
Accounts Receivable
|
|
|
538,658 |
|
|
|
818,736 |
|
|
Inventory
|
|
|
386,685 |
|
|
|
384,431 |
|
|
Prepaid Expenses
|
|
|
107,703 |
|
|
|
92,306 |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
1,381,720 |
|
|
|
1,341,330 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
|
Furniture, Fixtures and Equipment
|
|
|
11,343 |
|
|
|
5,870 |
|
|
Software
|
|
|
3,127 |
|
|
|
3,127 |
|
|
Production Equipment
|
|
|
2,078,897 |
|
|
|
1,709,196 |
|
|
Vehicles
|
|
|
172,720 |
|
|
|
107,442 |
|
|
Production Equipment Under Construction
|
|
|
94,332 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
TOTAL PROPERTY AND EQUIPMENT
|
|
|
2,360,419 |
|
|
|
1,825,635 |
|
|
Less: Accumulated Depreciation
|
|
|
(433,800 |
) |
|
|
(221,451 |
) |
|
|
|
|
|
|
|
|
|
NET PROPERTY AND EQUIPMENT
|
|
|
1,926,619 |
|
|
|
1,604,184 |
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
Organizational Costs
|
|
|
12,057 |
|
|
|
18,085 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
3,320,396 |
|
|
$ |
2,963,599 |
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these financial
statements.)
F-63
CAPCOIL TUBING SERVICES, INC.
BALANCE SHEETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Current Portion of Long-term Debt
|
|
$ |
445,924 |
|
|
$ |
431,452 |
|
|
Current Portion of Obligation Under Capital Lease
|
|
|
447 |
|
|
|
-0- |
|
|
Current Portion of Long-term Debt Related Party
|
|
|
22,824 |
|
|
|
-0- |
|
|
Accounts Payable Trade
|
|
|
383,762 |
|
|
|
891,508 |
|
|
Accrued Interest Payable
|
|
|
4,018 |
|
|
|
-0- |
|
|
Accrued Wages
|
|
|
6,400 |
|
|
|
-0- |
|
|
Short-term Borrowings
|
|
|
430,314 |
|
|
|
422,321 |
|
|
Short-term Borrowings Related Party
|
|
|
130,000 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
1,423,689 |
|
|
|
1,745,281 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT, LESS CURRENT MATURITIES:
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
|
471,451 |
|
|
|
451,262 |
|
|
Long-term Debt Related Party
|
|
|
31,213 |
|
|
|
-0- |
|
|
Obligation Under Capital Lease
|
|
|
2,880 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
TOTAL LONG-TERM DEBT
|
|
|
505,544 |
|
|
|
451,262 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
1,929,233 |
|
|
|
2,196,543 |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Common Stock $1 Par Value
|
|
|
|
|
|
|
|
|
|
|
100,000 Shares Authorized
|
|
|
|
|
|
|
|
|
|
|
1,000 Shares Issued and Outstanding
|
|
|
600,000 |
|
|
|
600,000 |
|
|
Additional Paid-in Capital
|
|
|
50,000 |
|
|
|
50,000 |
|
|
Retained Earnings
|
|
|
741,163 |
|
|
|
117,056 |
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
1,391,163 |
|
|
|
767,056 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$ |
3,320,396 |
|
|
$ |
2,963,599 |
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these financial
statements.)
F-64
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
REVENUE
|
|
$ |
5,774,442 |
|
|
$ |
5,478,666 |
|
Cost of Sales and Services
|
|
|
4,371,316 |
|
|
|
4,523,702 |
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
1,403,126 |
|
|
|
954,964 |
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
159,677 |
|
|
|
131,254 |
|
|
Depreciation
|
|
|
35,456 |
|
|
|
24,648 |
|
|
Insurance
|
|
|
228,112 |
|
|
|
186,125 |
|
|
Lease Expense
|
|
|
29,250 |
|
|
|
27,000 |
|
|
Salaries Administration
|
|
|
126,520 |
|
|
|
89,287 |
|
|
Taxes
|
|
|
126,222 |
|
|
|
68,838 |
|
|
Interest
|
|
|
73,782 |
|
|
|
51,380 |
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
779,019 |
|
|
|
578,532 |
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
624,107 |
|
|
|
376,432 |
|
|
|
RETAINED EARNINGS (DEFICIT) BEGINNING OF PERIOD
|
|
|
117,056 |
|
|
|
(259,376 |
) |
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS END OF PERIOD
|
|
$ |
741,163 |
|
|
$ |
117,056 |
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these financial
statements.)
F-65
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
624,107 |
|
|
$ |
376,432 |
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
218,375 |
|
|
|
170,317 |
|
|
Change in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable
|
|
|
280,078 |
|
|
|
(595,486 |
) |
|
|
Inventory
|
|
|
(428,090 |
) |
|
|
298,810 |
|
|
|
Prepaids
|
|
|
(15,395 |
) |
|
|
(32,465 |
) |
|
|
Accounts Payable and Accruals
|
|
|
(42,242 |
) |
|
|
95,417 |
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ADJUSTMENTS
|
|
|
12,726 |
|
|
|
(63,407 |
) |
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
636,833 |
|
|
|
313,025 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Additions to Plant and Equipment
|
|
|
(462,998 |
) |
|
|
(541,551 |
) |
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(462,998 |
) |
|
|
(541,551 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Payments of Short-term Borrowings
|
|
|
(101,736 |
) |
|
|
(124,513 |
) |
|
Payments of Long-term Debt
|
|
|
(519,383 |
) |
|
|
(377,668 |
) |
|
Payments of Capital Lease Obligation
|
|
|
(89 |
) |
|
|
-0- |
|
|
Proceeds From Short-term Debt Borrowing
|
|
|
239,729 |
|
|
|
223,578 |
|
|
Proceeds From Long-term Debt Borrowing
|
|
|
510,461 |
|
|
|
441,265 |
|
|
Proceeds From Additional Paid-in Capital
|
|
|
-0- |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
128,982 |
|
|
|
212,662 |
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
302,817 |
|
|
|
(15,864 |
) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
|
|
45,857 |
|
|
|
61,721 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$ |
348,674 |
|
|
$ |
45,857 |
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these financial
statements.)
F-66
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
|
|
Note 1 |
Summary of Significant Accounting Policies: |
Basis of Presentation
The Corporation began business in 2001, and is engaged in the
business of oil and gas well servicing. The Corporation
currently provides coil tubing services with capabilities from
1/4
capillary tubing to 1 coil tubing. Services
include the ability to deliver and inject nitrogen into wells.
Most of the work is service work related to existing wells in
the field, but some work is performed in relation to drilling
activity.
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 in the financial statements and
accompanying notes. Actual results could differ from these
estimates. Among other things, estimates are used in accounting
for depreciation.
Revenue Recognition
Revenues and expenses are recorded when services are rendered
and expenses are incurred and collectibility is reasonably
assured. Customers are billed as services are rendered.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Corporation
considers cash and cash equivalents to include cash on hand and
demand deposits.
Accounts Receivable
Trade receivables are reported in the balance sheets at
outstanding principal less any allowances for doubtful accounts.
Trade receivables are short-term and interest is not accrued.
Trade receivables are written off at the time they are deemed
uncollectible. An allowance for uncollectible trade receivables
is recorded when deemed appropriate based on a review of aged
receivables and expected recoveries. The allowance for doubtful
accounts was $-0- at December 31, 2004 and 2003.
Inventory
Inventories, which consist principally of (i) products
which are consumed in the Corporations services provided
to customers, (ii) spare parts for equipment used in
providing these services and (iii) manufactured components
and attachments for equipment used in providing services, are
stated primarily at the lower of weighted-average cost or
market. Cost primarily represents invoice costs. The Corporation
regularly reviews inventory quantities on hand.
Property and Equipment
Property and equipment is stated substantially at original cost.
Additions, replacements, and renewals of property determined to
be units of property are charged to the property and equipment
accounts. The replacement of property and equipment determined
not to be a unit of property and the cost of maintenance and
repairs are charged to operating expense. Property and equipment
is stated at cost and when sold or retired, a gain or loss is
recognized. Depreciation expense is computed using the
straight-line composite method based on estimated service lives
of the various classes of depreciable property.
F-67
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Property and equipment are reviewed for impairment whenever
events or circumstances indicate their carrying value may not be
recoverable. When such events or circumstances arise, an
estimate of the future undiscounted cash flows produced by the
asset, or the appropriate grouping of assets, is compared to the
assets carrying value to determine if any impairment
exists pursuant to the requirements of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144). If the asset is
determined to be impaired, the impairment loss is measured based
on the excess of its carrying value over its fair value.
Internal Use Software
In accordance with Statement of Position (SOP) 98-1, the
Corporation capitalizes software developed or obtained for
internal use. These capitalized costs are included in property
and equipment. Initial operating system software is amortized
over the life of the associated hardware. Application software
is amortized over a useful life of three years.
Asset Retirement Obligations
Effective January 1, 2003, the Corporation adopted
SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement provides the accounting for
the cost of legal obligations associated with the retirement of
long-lived assets. SFAS No. 143 requires that
companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations
are incurred and capitalize that amount as part of the book
value of the long-lived asset. The Corporation has no legal
obligation to remove assets. Therefore, the adoption of
SFAS No. 143 did not have a material effect on the
Corporations financial statements.
Income Taxes
The Corporation is a Subchapter S Corporation under the
Internal Revenue Code. The taxable income or losses of the
Corporation are includable in the tax return of the stockholder
for federal income tax purposes. The Corporation is subject to
state income tax.
Deferred state income taxes should be recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. However, management
considers their amount to be immaterial and thus deferred state
income taxes are not recorded on the Corporations
financial statements.
|
|
Note 2 |
Organizational Costs: |
Organizational costs represent the unamortized balance of
organizational costs. The organizational costs were incurred in
2001 and are being amortized over 5 years. Amortization for
both 2004 and 2003 totaled $6,028.
F-68
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Note 3 |
Property and Equipment: |
Net property and equipment at December 31, 2004 and 2003
was composed of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation | |
|
|
|
|
|
|
Rate (%) | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Furniture, fixtures, and equipment
|
|
|
20% |
|
|
$ |
11,343 |
|
|
$ |
5,870 |
|
Software
|
|
|
33% |
|
|
|
3,127 |
|
|
|
3,127 |
|
Production equipment
|
|
|
10% 20% |
|
|
|
2,078,897 |
|
|
|
1,709,196 |
|
Vehicles
|
|
|
20% |
|
|
|
172,720 |
|
|
|
107,442 |
|
Production equipment under construction
|
|
|
N/A |
|
|
|
94,332 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
|
|
|
|
2,360,419 |
|
|
|
1,825,635 |
|
|
Less: Accumulated Depreciation
|
|
|
|
|
|
|
(433,800 |
) |
|
|
(221,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
|
|
|
$ |
1,926,619 |
|
|
$ |
1,604,184 |
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the plant is pledged as security for
long-term debt to various lenders.
Depreciation expense was $212,347 and $164,289 for the years
ended December 31, 2004 and 2003, respectively, of which
$182,919 and $145,669 was included in cost of sales in 2004 and
2003.
|
|
Note 4 |
Capital Lease Obligations: |
The Corporation leases office equipment with a lease term
through October 2007. This obligation has been recorded in the
accompanying financial statements at the present value of future
minimum lease payments, discounted at an interest rate of
20 percent. Capitalized costs of $3,416, less accumulated
depreciation of $-0-at December 31, 2004, are included in
property and equipment in the accompanying financial statements.
Depreciation expense for this equipment for 2004 was $-0-.
Obligation under capital leases consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
|
|
|
| |
Total |
|
$ |
3,327 |
|
Less:
|
|
Current portion |
|
|
(447 |
) |
|
|
|
|
|
|
|
|
Long-Term Portion |
|
$ |
2,880 |
|
|
|
|
|
|
|
The future minimum lease payments under the capital leases and
the net present value of the future minimum lease payments are
as follows for the year ended December 31, 2004:
|
|
|
|
|
|
|
2004 | |
|
|
| |
2005
|
|
$ |
1,072 |
|
2006
|
|
|
1,072 |
|
2007
|
|
|
1,072 |
|
2008
|
|
|
1,072 |
|
2009
|
|
|
894 |
|
|
|
|
|
|
|
|
5,182 |
|
Less: Amount representing interest
|
|
|
(1,855 |
) |
|
|
|
|
Present Value of Future Minimum Lease payments
|
|
$ |
3,327 |
|
|
|
|
|
F-69
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 5 Short-Term Borrowings:
Short-term borrowings at December 31, 2004 and 2003 are
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Creditor |
|
Terms |
|
Collateral | |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
Texas Bank & Trust
|
|
$350,000 line-of-credit expiring December 2005 bearing interest
at prime (5.25 percent at December 31, 2004). |
|
|
Equipment |
|
|
$349,923 |
|
$350,000 |
Texas Bank & Trust
|
|
$375,000 line of credit expiring December 2004 bearing interest
at prime. |
|
|
Equipment |
|
|
-0- |
|
3,029 |
AICCO, Inc.
|
|
Due $11,760 per month through July 2005 including interest
at 7.15 percent. |
|
|
None |
|
|
80,391 |
|
-0- |
AICCO, Inc.
|
|
Due $10,114 per month through July 2004 including interest
at 6.50 percent. |
|
|
None |
|
|
-0- |
|
69,292 |
|
|
|
|
|
|
|
|
|
|
Total Short-Term Borrowings
|
|
|
|
|
|
|
|
$430,314 |
|
$422,321 |
|
|
|
|
|
|
|
|
|
|
Note 6 Short-Term Borrowings
Related Party:
Short-term borrowings from related parties at December 31,
2004 and 2003 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Creditor |
|
Terms |
|
Collateral | |
|
2004 |
|
2003 |
|
|
|
|
| |
|
|
|
|
M Bar Ranch, L.P.
|
|
$130,000 promissory note, interest of 8 percent and
principal due at maturity date August 2005. |
|
|
None |
|
|
$130,000 |
|
$-0- |
A stockholder of the corporation holds an interest in M Bar
Ranch, L.P.
Interest expense of $4,018 has been accrued on this short-term
borrowing at December 31, 2004.
F-70
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7 Long-Term Notes Payable:
Long-term notes payable to unrelated parties are comprised of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor |
|
Terms |
|
Collateral |
|
2004 | |
|
2003 | |
|
|
|
|
|
|
| |
|
| |
Texas Bank & Trust
|
|
Due $6,048 per month through August 2006, including
interest at prime (5.25% at December 2004). |
|
Equipment - Accounts |
|
$ |
117,138 |
|
|
$ |
183,232 |
|
Texas Bank & Trust
|
|
Due $7,037 per month through March 2007, including interest
at prime (5.25% at December 2004). |
|
Equipment - Accounts |
|
|
176,501 |
|
|
|
251,566 |
|
Texas Bank & Trust
|
|
Due $7,000 per month through March 2006, including interest
at prime (5.25% at December 2004). |
|
Equipment - Accounts |
|
|
101,957 |
|
|
|
179,620 |
|
Texas Bank & Trust
|
|
Due $30,000 per month through June 2004, including interest
at prime (Pd in full at December 2004). |
|
Equipment - Accounts |
|
|
-0- |
|
|
|
171,541 |
|
Texas Bank & Trust
|
|
Due $7,407 per month through March 2007, including interest
at prime (5.25% at December 2004). |
|
Equipment - Accounts |
|
|
191,125 |
|
|
|
-0- |
|
Texas Bank & Trust
|
|
Due $6,100 per month through October 2007, including
interest at prime (5.25% at December 2004). |
|
Equipment - Accounts |
|
|
195,082 |
|
|
|
-0- |
|
Navistar
|
|
Due $1,055 per month through November 2005, including
interest at 9.95 percent. |
|
Equipment |
|
|
11,046 |
|
|
|
22,004 |
|
Navistar
|
|
Due $1,055 per month through November 2005, including
interest at 9.95 percent. |
|
Equipment |
|
|
11,046 |
|
|
|
21,075 |
|
Navistar
|
|
Due $998 per month through June 2007, including interest at
11.50 percent. |
|
Equipment |
|
|
24,405 |
|
|
|
-0- |
|
Ford Motor Credit
|
|
Due $738 per month through May 2006, including interest at
2.90 percent. |
|
Vehicle |
|
|
12,275 |
|
|
|
20,641 |
|
Ford Motor Credit
|
|
Due $1,112 per month through August 2006, including
interest at 5.50 percent. |
|
Vehicle |
|
|
21,211 |
|
|
|
33,035 |
|
Ford Motor Credit
|
|
Due $1,173 per month through July 2007, including interest
at 2.90 percent. |
|
Vehicle |
|
|
35,007 |
|
|
|
-0- |
|
Ford Motor Credit
|
|
Due $730 per month through August 2007, including interest
at 7.25 percent. |
|
Vehicle |
|
|
20,582 |
|
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Notes Payable
|
|
|
|
|
|
|
917,375 |
|
|
|
882,714 |
|
|
Current Maturities
|
|
|
|
|
|
|
(445,924 |
) |
|
|
(431,452 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Notes Payable,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Current Maturities
|
|
|
|
|
|
$ |
471,451 |
|
|
$ |
451,262 |
|
|
|
|
|
|
|
|
|
|
|
|
F-71
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Payments on the notes are due monthly in the approximate amount
of $40,453. The maturities of long-term debt for each of the
three years succeeding the balance sheet date are as follows:
|
|
|
|
|
|
2005
|
|
$ |
445,924 |
|
2006
|
|
|
349,064 |
|
2007
|
|
|
122,387 |
|
|
|
|
|
|
Total
|
|
$ |
917,375 |
|
|
|
|
|
Note 8 Long-Term
Note Payable Related Party:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creditor |
|
Terms |
|
Collateral | |
|
2004 | |
|
2003 |
|
|
|
|
| |
|
| |
|
|
M Bar Ranch, L.P.
|
|
Due $2,194 per month through March 2007, including interest
at 8.00 percent. |
|
|
Vehicle |
|
|
$ |
54,037 |
|
|
$-0- |
|
Current Maturities
|
|
|
|
|
|
|
|
|
(22,824 |
) |
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Note Payables Related Party, Net of
Current Maturities
|
|
|
|
|
|
|
|
$ |
31,213 |
|
|
$-0- |
|
|
|
|
|
|
|
|
|
|
|
The maturities of long-term debt for each of the three years
succeeding the balance sheet date are as follows:
|
|
|
|
|
|
2005
|
|
$ |
22,824 |
|
2006
|
|
|
24,719 |
|
2007
|
|
|
6,494 |
|
|
|
|
|
|
Total
|
|
$ |
54,037 |
|
|
|
|
|
Interest of $3,779 and principal of $8,986 was paid to the
related party on the note in 2004.
Note 9 Operating Leases:
The Corporation has various cancelable and noncancelable
operating leases for building space, storage facilities and
equipment. The noncancelable lease expired March 2005, but was
renewed through March 2007.
Future minimum rental payments for the next five years are as
follows:
|
|
|
|
|
2005
|
|
$ |
27,000 |
|
2006
|
|
|
27,000 |
|
2007
|
|
|
5,625 |
|
Rental expense under operating leases was $29,250 in 2004 and
$27,000 in 2003.
Note 10 Related Party Transactions:
The Corporation has received loans from affiliates and owners.
These transactions are described in previous footnotes to these
financial statements.
F-72
CAPCOIL TUBING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 11 Concentration of Credit Risk:
Financial instruments that potentially subject the Corporation
to significant concentrations of credit risk consists primarily
of cash equivalents and trade accounts receivable. The estimated
fair value of such financial instruments at December 31,
2004 and 2003 approximate their carrying value as reflected in
the balance sheet. At December 31, 2004, the Corporation
had deposits in checking accounts which exceed federally insured
limits by $248,674. The Corporation has not experienced any
material credit losses on its financial instruments.
Revenues from one customer represent 32 percent and
47 percent of total revenues in 2004 and 2003,
respectively. A second customer represented 14 percent of
total revenues in 2004. No other customers or entity accounted
for more than 10 percent of 2004 or 2003 revenues.
A majority of the Corporations trade receivables are
derived from large oil and gas production companies.
Concentration of credit risk with respect to receivables is
considered to be limited due to its customer base. However,
30 percent of trade receivables is due from one customer at
December 31, 2004. The Corporation performs ongoing credit
evaluations of its customers financial condition and
generally requires no collateral to secure accounts receivable.
The Corporation is exposed to credit loss in the event of
nonperformance by customers on trade receivables. The
Corporation does not anticipate significant nonperformance by
customers on trade receivables.
The Corporations sales are concentrated primarily in east
Texas and northern Louisiana.
Note 12 Additional Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Cash paid during the year:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
69,764 |
|
|
$ |
51,380 |
|
Note 13 Significant Noncash Transactions:
The Corporation purchased equipment and vehicles in 2004 and
2003 and incurred $97,620 and $92,463, respectively, in debt
relative to these purchases.
Note 14 Subsequent Event:
Effective April 1, 2005, the stockholders of the
Corporation signed a letter of intent to sell their interests in
the Corporation to Allis-Chalmers Energy, Inc.
Effective January 1, 2005, the Corporation revoked its
S Corporation election for federal tax purposes and will be
taxed as a C Corporation.
F-73
INDEPENDENT AUDITORS REPORT ON ADDITIONAL
INFORMATION
To the Stockholders
of Capcoil Tubing Services, Inc.
Our report on our audits of the basic financial statements of
Capcoil Tubing Services, Inc. for December 31, 2004 and
2003, appears on page F-116. These audits were made for the
purpose of forming an opinion on the basic financial statements
taken as a whole. The additional information on pages F-129
and F-130 is presented for purposes of additional analysis and
is not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in
our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
|
|
|
/s/ CURTIS BLAKELY & CO.,
PC |
|
|
Longview, Texas
March 16, 2005
F-74
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS WITH ADDITIONAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
REVENUE
|
|
$ |
5,774,442 |
|
|
$ |
5,478,666 |
|
COST OF SALES AND SERVICES:
|
|
|
|
|
|
|
|
|
|
Inventory Purchases
|
|
|
2,684,319 |
|
|
|
3,400,025 |
|
|
Wages
|
|
|
854,041 |
|
|
|
546,858 |
|
|
Contract Services
|
|
|
153,192 |
|
|
|
152,432 |
|
|
Location Expenses
|
|
|
84,709 |
|
|
|
58,027 |
|
|
Repairs and Maintenance
|
|
|
132,846 |
|
|
|
70,024 |
|
|
Depreciation
|
|
|
182,919 |
|
|
|
145,669 |
|
|
Fuel and Oil
|
|
|
114,112 |
|
|
|
74,836 |
|
|
Freight
|
|
|
14,432 |
|
|
|
11,646 |
|
|
Sales Commissions
|
|
|
15,352 |
|
|
|
323 |
|
|
Sales Expense
|
|
|
13,307 |
|
|
|
10,827 |
|
|
Supplies
|
|
|
61,494 |
|
|
|
28,165 |
|
|
Other Expenses
|
|
|
12,082 |
|
|
|
6,676 |
|
|
Equipment Leases and Rentals
|
|
|
48,511 |
|
|
|
18,194 |
|
|
|
|
|
|
|
|
|
|
TOTAL COST OF GOODS SOLD
|
|
|
4,371,316 |
|
|
|
4,523,702 |
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
1,403,126 |
|
|
|
954,964 |
|
|
|
|
|
|
|
|
GENERAL AND ADMINISTRATIVE:
|
|
|
|
|
|
|
|
|
|
Accounting
|
|
|
41,794 |
|
|
|
22,456 |
|
|
Telephone
|
|
|
26,939 |
|
|
|
19,842 |
|
|
Auto
|
|
|
17,955 |
|
|
|
15,203 |
|
|
Consulting
|
|
|
15,100 |
|
|
|
15,012 |
|
|
Advertising and Promotional
|
|
|
12,715 |
|
|
|
6,847 |
|
|
License and Fees
|
|
|
10,719 |
|
|
|
7,110 |
|
|
Office Supplies
|
|
|
7,818 |
|
|
|
7,644 |
|
|
Utilities
|
|
|
7,582 |
|
|
|
6,397 |
|
|
Janitorial
|
|
|
5,542 |
|
|
|
2,953 |
|
|
Office Expense
|
|
|
4,248 |
|
|
|
3,332 |
|
|
Postage
|
|
|
4,084 |
|
|
|
4,556 |
|
|
Other General and Administrative
|
|
|
1,643 |
|
|
|
829 |
|
|
Meals
|
|
|
1,393 |
|
|
|
1,899 |
|
|
Contract Service Office
|
|
|
1,145 |
|
|
|
16,779 |
|
|
Contributions
|
|
|
1,000 |
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
TOTAL GENERAL AND ADMINISTRATIVE
|
|
|
159,677 |
|
|
|
131,254 |
|
|
|
|
|
|
|
|
F-75
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF OPERATIONS WITH ADDITIONAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
DEPRECIATION AND AMORTIZATION:
|
|
|
|
|
|
|
|
|
|
Depreciation Expense
|
|
|
29,428 |
|
|
|
18,620 |
|
|
Amortization Expense
|
|
|
6,028 |
|
|
|
6,028 |
|
|
|
|
|
|
|
|
|
|
TOTAL DEPRECIATION AND AMORTIZATION
|
|
|
35,456 |
|
|
|
24,648 |
|
|
|
|
|
|
|
|
INSURANCE EXPENSE:
|
|
|
|
|
|
|
|
|
|
Insurance General
|
|
|
119,039 |
|
|
|
118,023 |
|
|
Insurance Health
|
|
|
65,583 |
|
|
|
40,792 |
|
|
Insurance Workmens Compensation
|
|
|
41,445 |
|
|
|
25,265 |
|
|
Insurance Keyman Life
|
|
|
2,045 |
|
|
|
2,045 |
|
|
|
|
|
|
|
|
|
|
TOTAL INSURANCE
|
|
|
228,112 |
|
|
|
186,125 |
|
|
|
|
|
|
|
|
LEASE OF BUILDINGS AND STORAGE FACILITIES
|
|
|
29,250 |
|
|
|
27,000 |
|
|
|
|
|
|
|
|
SALARIES ADMINISTRATIVE
|
|
|
|
|
|
|
|
|
|
Salaries Officers
|
|
|
89,115 |
|
|
|
77,769 |
|
|
Salaries Office Employees
|
|
|
37,405 |
|
|
|
11,518 |
|
|
|
|
|
|
|
|
|
|
TOTAL SALARIES ADMINISTRATIVE
|
|
|
126,520 |
|
|
|
89,287 |
|
|
|
|
|
|
|
|
TAX EXPENSE:
|
|
|
|
|
|
|
|
|
|
Taxes Payroll
|
|
|
78,536 |
|
|
|
52,205 |
|
|
Taxes Property
|
|
|
43,495 |
|
|
|
13,926 |
|
|
Taxes Other
|
|
|
2,501 |
|
|
|
1,832 |
|
|
Taxes State Franchise
|
|
|
1,690 |
|
|
|
875 |
|
|
|
|
|
|
|
|
|
|
TOTAL TAX EXPENSE
|
|
|
126,222 |
|
|
|
68,838 |
|
|
|
|
|
|
|
|
INTEREST
|
|
|
73,782 |
|
|
|
51,380 |
|
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
|
779,019 |
|
|
|
578,532 |
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
624,107 |
|
|
$ |
376,432 |
|
|
|
|
|
|
|
|
F-76
CAPCOIL TUBING SERVICES, INC.
BALANCE SHEET
As of March 31, 2005
(unaudited)
|
|
|
|
|
|
|
|
ASSETS |
Current Assets
|
|
|
|
|
|
Cash in Bank TB&T
|
|
|
183,614.45 |
|
|
Accounts Receivable
|
|
|
1,021,133.53 |
|
|
Inventory
|
|
|
334,309.46 |
|
|
Prepaid Expenses
|
|
|
79,136.57 |
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,618,194.01 |
|
Property and Equipment Equipment
|
|
|
2,474,765.35 |
|
|
Accumulated Depreciation
|
|
|
(492,780.50 |
) |
|
|
|
|
|
Net Property and Equipment
|
|
|
1,981,984.85 |
|
|
Other Assets Organization Costs
|
|
|
2,242.25 |
|
|
Startup Costs
|
|
|
27,898.75 |
|
|
Accumulated Amortization
|
|
|
(19,590.00 |
) |
|
Deposits
|
|
|
10,875.00 |
|
|
|
|
|
|
|
Total Other Assets
|
|
|
21,426.00 |
|
|
|
|
|
|
|
|
Total Assets
|
|
|
3,621,604.86 |
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities
|
|
|
|
|
|
Accounts Payable
|
|
|
449,217.60 |
|
|
Payroll Taxes Payable
|
|
|
3,448.71 |
|
|
Sales Tax Payable
|
|
|
44,997.92 |
|
|
Accrued Interest Payable
|
|
|
4,017.53 |
|
|
Salaries Payable
|
|
|
16,143.77 |
|
|
Current Income Taxes Payable
|
|
|
94,000.00 |
|
|
N/ P Insurance
|
|
|
46,139.99 |
|
|
N/ P M-BAR Ranch
|
|
|
130,000.00 |
|
|
N/ P TB&T LOC
|
|
|
349,923.29 |
|
|
Current Maturities of L-T
|
|
|
467,915.64 |
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
1,605,804.45 |
|
Long-Term Liabilities N/ P FMC
|
|
|
135,292.77 |
|
N/ P Navistar
|
|
|
39,147.38 |
|
N/ P TB&T
|
|
|
686,059.55 |
|
N/ P M-BAR
|
|
|
48,500.43 |
|
N/ P IKON RICOH
|
|
|
3,258.52 |
|
Current Maturities of L-T
|
|
|
(467,915.64 |
) |
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
444,343.01 |
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,050,147.46 |
|
Deferred Income Taxes
|
|
|
6,898.00 |
|
Stockholders Equity Capital Stock
|
|
|
600,000.00 |
|
|
Contribution to Capital
|
|
|
50,000.00 |
|
|
Retained Earnings
|
|
|
914,559.40 |
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,564,559.40 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
|
3,621,604.86 |
|
|
|
|
|
F-77
CAPCOIL TUBING SERVICES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenue
|
|
|
|
|
|
|
|
|
|
Sales Service
|
|
|
622,283.61 |
|
|
|
355,661.68 |
|
|
Sales Materials
|
|
|
911,615.67 |
|
|
|
1,190,200.66 |
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,533,899.28 |
|
|
|
1,545,862.34 |
|
Cost of Goods Sold
|
|
|
950,535.70 |
|
|
|
1,131,968.64 |
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
583,363.58 |
|
|
|
413,893.70 |
|
Operating Expenses Contract Services
|
|
|
3,007.50 |
|
|
|
8,548.13 |
|
|
Insurance
|
|
|
61,206.10 |
|
|
|
57,193.97 |
|
|
Lease
|
|
|
59,372.36 |
|
|
|
24,618.30 |
|
|
Supplies
|
|
|
28,500.98 |
|
|
|
14,705.44 |
|
|
Taxes
|
|
|
26,077.65 |
|
|
|
16,749.81 |
|
|
Accounting & Legal
|
|
|
28,478.91 |
|
|
|
13,481.21 |
|
|
Advertising & Promotional
|
|
|
844.43 |
|
|
|
882.50 |
|
|
Amortization
|
|
|
1,506.00 |
|
|
|
1,506.00 |
|
|
Bank Charges
|
|
|
128.60 |
|
|
|
129.20 |
|
|
Commission Salesman
|
|
|
4,000.00 |
|
|
|
0.00 |
|
|
Consulting
|
|
|
4,200.00 |
|
|
|
3,300.00 |
|
|
Depreciation
|
|
|
9,240.66 |
|
|
|
5,926.17 |
|
|
Dues & Subscriptions
|
|
|
1,189.39 |
|
|
|
0.00 |
|
|
Employee Medical
|
|
|
978.22 |
|
|
|
436.06 |
|
|
Freight
|
|
|
8,259.61 |
|
|
|
340.00 |
|
|
Interest
|
|
|
20,360.28 |
|
|
|
18,007.80 |
|
|
License & Fees
|
|
|
150.46 |
|
|
|
1,364.98 |
|
|
Maint & Repairs General
|
|
|
98.51 |
|
|
|
815.40 |
|
|
Meals & Entertainment
|
|
|
0.00 |
|
|
|
101.85 |
|
|
Office Expense
|
|
|
3,326.71 |
|
|
|
964.16 |
|
|
Postage
|
|
|
1,117.54 |
|
|
|
999.49 |
|
|
Janitorial
|
|
|
1,300.00 |
|
|
|
1,340.75 |
|
|
Salaries Officers
|
|
|
21,000.00 |
|
|
|
21,000.00 |
|
|
Salaries Office
|
|
|
8,830.06 |
|
|
|
5,805.94 |
|
|
Sales Expense
|
|
|
3,679.23 |
|
|
|
2,649.54 |
|
|
Telephone
|
|
|
8,483.66 |
|
|
|
4,296.17 |
|
|
Uniforms
|
|
|
824.89 |
|
|
|
0.00 |
|
|
Utilities
|
|
|
1,610.44 |
|
|
|
1,828.06 |
|
|
Waste Water
|
|
|
714.00 |
|
|
|
475.00 |
|
|
Travel
|
|
|
0.00 |
|
|
|
246.75 |
|
|
Truck Expense
|
|
|
583.27 |
|
|
|
218.00 |
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
309,069.46 |
|
|
|
207,930.68 |
|
|
|
|
|
|
|
|
|
|
Income/(Loss) Before Income Taxes
|
|
|
274,294.12 |
|
|
|
205,963.02 |
|
Income Taxes
|
|
|
(100,898.00 |
) |
|
|
0.00 |
|
Other Income
|
|
|
0.00 |
|
|
|
1,000.00 |
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
173,396.12 |
|
|
|
206,963.02 |
|
|
|
|
|
|
|
|
Retained Earnings at Beginning of Period
|
|
|
741,163.28 |
|
|
|
117,056.14 |
|
|
|
|
|
|
|
|
|
|
Retained Earnings at End of Period
|
|
|
914,559.40 |
|
|
|
324,019.16 |
|
|
|
|
|
|
|
|
F-78
CAPCOIL TUBING SERVICES, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
173,396 |
|
|
$ |
206,963 |
|
Adjustments to reconcile net (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
51,247 |
|
|
|
44,236 |
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
(482,476 |
) |
|
|
69,545 |
|
|
Decrease (increase) in other current assets
|
|
|
80,942 |
|
|
|
163,895 |
|
|
Decrease (increase) in other assets
|
|
|
(10,875 |
) |
|
|
(375 |
) |
|
(Decrease) increase in accounts payable
|
|
|
65,456 |
|
|
|
(306,063 |
) |
|
(Decrease) increase in accrued expenses
|
|
|
138,998 |
|
|
|
21,643 |
|
|
(Decrease) increase in other long-term liabilities
|
|
|
6,898 |
|
|
|
|
|
|
(Decrease) increase in accrued employee benefits and payroll
taxes
|
|
|
13,193 |
|
|
|
67 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
36,779 |
|
|
|
199,911 |
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(105,107 |
) |
|
|
(35,739 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by investing activities
|
|
|
(105,107 |
) |
|
|
(35,739 |
) |
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(96,732 |
) |
|
|
(161,241 |
) |
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
307,399 |
|
Net cash provided (used) by financing activities
|
|
|
(96,732 |
) |
|
|
146,158 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(165,060 |
) |
|
|
310,330 |
|
Cash and cash equivalents at beginning of year
|
|
|
348,674 |
|
|
|
45,857 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
183,614 |
|
|
$ |
356,187 |
|
|
|
|
|
|
|
|
F-79
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Stockholders
of W.T. Enterprises, Inc.
We have audited the accompanying balance sheets of W.T.
Enterprises, Inc. (a Texas Corporation) (the Company) as of
March 31, 2005, and December 31, 2004 and 2003 and the
related statements of income, stockholders equity, and
cash flows for the three months ended March 31, 2005 and
the years ended December 31, 2004 and 2003. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit 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 financial statements referred to in the first
paragraph present fairly, in all material respects, the
financial position of W.T. Enterprises, Inc. as of
March 31, 2005 and December 31, 2004 and 2003, and the
results of its operations and its cash flows for the three
months ended March 31, 2005 and the years ended
December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
|
|
|
Accounting & Consulting Group, LLP |
Carlsbad, New Mexico
June 10, 2005
F-80
W.T. ENTERPRISES, INC.
BALANCE SHEETS
March 31, 2005, December 31, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
ASSETS |
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
123,093 |
|
|
$ |
49,695 |
|
|
$ |
39,821 |
|
|
Accounts receivable
|
|
|
359,875 |
|
|
|
418,290 |
|
|
|
446,646 |
|
|
Unbilled receivables
|
|
|
129,325 |
|
|
|
101,400 |
|
|
|
47,000 |
|
|
Related party receivable (Note 2)
|
|
|
7,967 |
|
|
|
9,673 |
|
|
|
15,991 |
|
|
Prepaid income taxes
|
|
|
|
|
|
|
|
|
|
|
3,507 |
|
|
Prepaid expenses
|
|
|
10,497 |
|
|
|
11,593 |
|
|
|
11,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
630,757 |
|
|
|
590,651 |
|
|
|
564,662 |
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation equipment
|
|
|
137,555 |
|
|
|
137,555 |
|
|
|
137,555 |
|
|
Machinery and equipment
|
|
|
1,905,235 |
|
|
|
1,867,336 |
|
|
|
1,248,414 |
|
|
Office furniture and equipment
|
|
|
7,131 |
|
|
|
7,131 |
|
|
|
7,131 |
|
|
Accumulated depreciation
|
|
|
(748,646 |
) |
|
|
(677,475 |
) |
|
|
(428,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
1,301,275 |
|
|
|
1,334,547 |
|
|
|
965,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
1,932,032 |
|
|
$ |
1,925,198 |
|
|
$ |
1,529,731 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 4)
|
|
$ |
283,194 |
|
|
$ |
312,414 |
|
|
$ |
235,137 |
|
|
Short-term notes payable (Note 3)
|
|
|
54,601 |
|
|
|
86,765 |
|
|
|
149,995 |
|
|
Accounts payable
|
|
|
82,369 |
|
|
|
117,928 |
|
|
|
129,895 |
|
|
Accrued expenses
|
|
|
131,188 |
|
|
|
62,726 |
|
|
|
63,514 |
|
|
Deferred income taxes (Note 9)
|
|
|
68,644 |
|
|
|
72,204 |
|
|
|
33,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
619,996 |
|
|
|
652,037 |
|
|
|
611,966 |
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (Note 4)
|
|
|
89,959 |
|
|
|
153,675 |
|
|
|
279,349 |
|
Deferred income taxes (Note 9)
|
|
|
136,593 |
|
|
|
132,577 |
|
|
|
78,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
846,548 |
|
|
|
938,289 |
|
|
|
969,880 |
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $10 100 shares issued and
outstanding
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
1,084,484 |
|
|
|
985,909 |
|
|
|
558,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,085,484 |
|
|
|
986,909 |
|
|
|
559,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
1,932,032 |
|
|
$ |
1,925,198 |
|
|
$ |
1,529,731 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-81
W.T. ENTERPRISES, INC.
STATEMENTS OF INCOME
For the Three Months Ended March 31, 2005
and Years Ended December 31, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue
|
|
$ |
926,906 |
|
|
$ |
3,862,005 |
|
|
$ |
2,415,266 |
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
2,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
926,906 |
|
|
|
3,862,005 |
|
|
|
2,418,066 |
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-related expenses
|
|
|
552,472 |
|
|
|
2,514,373 |
|
|
|
1,582,313 |
|
|
Selling, general, and administrative expenses
|
|
|
150,499 |
|
|
|
514,211 |
|
|
|
459,186 |
|
|
Depreciation and amortization
|
|
|
71,171 |
|
|
|
249,444 |
|
|
|
174,386 |
|
|
Interest expense
|
|
|
8,656 |
|
|
|
44,344 |
|
|
|
27,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
782,798 |
|
|
|
3,322,372 |
|
|
|
2,243,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
144,108 |
|
|
|
539,633 |
|
|
|
174,577 |
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of assets
|
|
|
|
|
|
|
|
|
|
|
6,723 |
|
|
Interest income
|
|
|
93 |
|
|
|
585 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
144,201 |
|
|
|
540,218 |
|
|
|
182,205 |
|
Federal and state income taxes (Note 9)
|
|
|
45,626 |
|
|
|
113,160 |
|
|
|
37,121 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
98,575 |
|
|
$ |
427,058 |
|
|
$ |
145,084 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-82
W.T. ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2005 and
The Years Ended December 31, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common | |
|
Paid-in |
|
Retained | |
|
|
|
|
Stock | |
|
Capital |
|
Earnings | |
|
Total | |
|
|
| |
|
|
|
| |
|
| |
Balance, January 1, 2003
|
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
413,767 |
|
|
$ |
414,767 |
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
145,084 |
|
|
|
145,084 |
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
1,000 |
|
|
|
|
|
|
|
558,851 |
|
|
|
559,851 |
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
427,058 |
|
|
|
427,058 |
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
1,000 |
|
|
|
|
|
|
|
985,909 |
|
|
|
986,909 |
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
98,575 |
|
|
|
98,575 |
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2005
|
|
$ |
1,000 |
|
|
$ |
|
|
|
$ |
1,084,484 |
|
|
$ |
1,085,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-83
W.T. ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and
The Years Ended December 31, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
98,575 |
|
|
$ |
427,058 |
|
|
$ |
145,084 |
|
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
71,171 |
|
|
|
249,444 |
|
|
|
174,386 |
|
|
Gain (loss) on sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
|
(6,723 |
) |
|
Deferred income taxes
|
|
|
457 |
|
|
|
92,791 |
|
|
|
37,121 |
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
30,490 |
|
|
|
(26,044 |
) |
|
|
(309,046 |
) |
|
Shareholder loans
|
|
|
1,707 |
|
|
|
6,318 |
|
|
|
5,695 |
|
|
Prepaid expenses
|
|
|
1,096 |
|
|
|
104 |
|
|
|
(858 |
) |
|
Prepaid income tax
|
|
|
|
|
|
|
3,507 |
|
|
|
(3,507 |
) |
|
Accounts payable
|
|
|
(35,559 |
) |
|
|
(11,967 |
) |
|
|
81,718 |
|
|
Accrued payroll and employee benefits
|
|
|
29,696 |
|
|
|
(14,467 |
) |
|
|
31,379 |
|
|
Income tax payable
|
|
|
38,764 |
|
|
|
13,679 |
|
|
|
(2,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Operating Activities
|
|
|
236,397 |
|
|
|
740,423 |
|
|
|
153,173 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Capital expenditures on property, plant, and equipment
|
|
|
(37,899 |
) |
|
|
(406,618 |
) |
|
|
(220,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Investing Activities
|
|
|
(37,899 |
) |
|
|
(406,618 |
) |
|
|
(195,385 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(92,936 |
) |
|
|
(322,686 |
) |
|
|
(190,748 |
) |
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
160,000 |
|
|
|
155,105 |
|
Repayment of short-term debt
|
|
|
(32,164 |
) |
|
|
(1,550,165 |
) |
|
|
(479,550 |
) |
Proceeds from issuance of short-term debt
|
|
|
|
|
|
|
1,388,920 |
|
|
|
561,260 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Financing Activities
|
|
|
(125,100 |
) |
|
|
(323,931 |
) |
|
|
46,067 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
73,398 |
|
|
|
9,874 |
|
|
|
3,855 |
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
49,695 |
|
|
|
39,821 |
|
|
|
35,966 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$ |
123,093 |
|
|
$ |
49,695 |
|
|
$ |
39,821 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment financed with debt proceeds
|
|
$ |
|
|
|
$ |
212,303 |
|
|
$ |
378,396 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
8,954 |
|
|
$ |
44,045 |
|
|
$ |
27,022 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-84
W.T. ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 2005, December 31, 2004 and 2003
|
|
Note 1: |
Summary of Significant Accounting Policies |
Nature of Operations. W.T. Enterprises, Inc. (the
Company), is primarily engaged in the business of providing
compressed air for the drilling of oil and gas wells in the
state of Texas. The work is generally performed under fixed
price per day contracts.
Cash and Cash Equivalents. Cash and cash equivalents
include all cash balances and highly liquid investments with an
initial maturity of three months or less. The Company places its
temporary cash investments with a high credit quality financial
institution. At times such deposits may be in excess of the
Federal Deposit Insurance Corporation (FDIC) insurance limit.
Trade Accounts Receivable. Trade receivables are carried
at their estimated collectible amounts. Trade credit is
generally extended on a short-term basis; thus trade receivables
do not bear interest. Trade accounts receivable are periodically
evaluated for collectibility based on past credit history with
customers and their current financial condition. Trade
receivables are considered fully collectible and therefore no
allowance for doubtful accounts has been provided.
Unbilled Receivables. Unbilled receivables represent
revenue earned in the current period but not billed to the
customer until future dates, usually within one month.
Property, plant and equipment. Property, plant and
equipment are recorded at cost less depreciation and
amortization. Depreciation is provided over the estimated useful
life of each class of depreciable asset and is computed using
the straight line method. Estimated useful lives for equipment
and transportation equipment range from three to seven years.
Betterments and large renewals which extend the life of the
asset are capitalized whereas maintenance and repairs and small
renewals are expensed as incurred.
Revenue Recognition. Revenue is recognized in the
financial statements in the period the services were provided.
Advertising Costs. Advertising costs are expensed as
incurred.
Income Taxes. Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit
carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. The Company files its income
tax returns on the cash basis of accounting. The Companys
temporary differences relate primarily to accounts receivable,
accounts payable and accrued expenses and property and
equipment. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Use of Estimates. The preparation of financial statements
in conformity with generally accepted accounting principles
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. Actual results could
differ from those estimates.
F-85
W.T. ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Note 2: |
Related-Party Transactions |
A summary of amounts due from shareholders follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Note receivables from shareholders, due upon demand, bearing
interest of 0%, unsecured
|
|
$ |
7,967 |
|
|
$ |
9,673 |
|
|
$ |
15,991 |
|
|
|
|
|
|
|
|
|
|
|
The Company leases equipment and a storage facility from
shareholders under informal
month-to-month
operating leases. Rental expense for these leases totaled
$8,700, $34,800 and $6,000 for the three months ended
March 31, 2005 and the years ended December 31, 2004
and 2003, respectively.
|
|
Note 3: |
Pledged Assets and Short-Term Notes Payable |
Short-term notes payable are collateralized by equipment and
receivables and as of March 31, 2005 and December 31,
2004 and 2003 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Note payable, FNB, $150,000 line of credit, 6.0 to 6.25%
interest rate
|
|
$ |
|
|
|
$ |
|
|
|
$ |
103,850 |
|
Note payable, FNB, $53,485, 6.0 to 7.75% interest rate
|
|
|
|
|
|
|
|
|
|
|
24,299 |
|
Note payable, FNB, $53,485, 6.25 to 8.75% interest rate
|
|
|
|
|
|
|
|
|
|
|
21,846 |
|
Note payable, FNB, $46,145, 6.0 to 7.25% interest rate
|
|
|
13,380 |
|
|
|
21,106 |
|
|
|
|
|
Note payable, CAT Financial, $98,013, 6.7% interest rate
|
|
|
41,221 |
|
|
|
65,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,601 |
|
|
$ |
86,765 |
|
|
$ |
149,995 |
|
|
|
|
|
|
|
|
|
|
|
F-86
W.T. ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Note 4: |
Pledged Assets and Long-Term Debt |
Long-term debt and the related assets pledged thereon as of
March 31, 2005, and December 31, 2004 and 2003,
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Various notes payable to banks and financing companies for
vehicles and equipment, due in installments through March, 2008
at fixed interest rates ranging from 0.0% to 8.75%,
collateralized by vehicles, equipment and accounts receivable
|
|
$ |
138,594 |
|
|
$ |
160,674 |
|
|
$ |
250,893 |
|
Various notes payable to banks and financing companies for
vehicles and equipment, due in installments through March, 2007
at variable interest rates ranging from 4.15% to 7.25%,
collateralized by vehicles, equipment and accounts receivable
|
|
|
234,559 |
|
|
|
305,415 |
|
|
|
263,593 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
373,153 |
|
|
|
466,089 |
|
|
|
514,486 |
|
|
Less current maturities
|
|
|
283,194 |
|
|
|
312,414 |
|
|
|
235,137 |
|
|
|
|
|
|
|
|
|
|
|
Total Long-term debt
|
|
$ |
89,959 |
|
|
$ |
153,675 |
|
|
$ |
279,349 |
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2005, principal payments required to
amortize the debt are summarized below:
|
|
|
|
|
Year Ending March 31, |
|
|
|
|
|
2006
|
|
$ |
283,194 |
|
2007
|
|
|
79,845 |
|
2008
|
|
|
10,114 |
|
|
|
|
|
|
|
$ |
373,153 |
|
|
|
|
|
The Company has two non-cancelable operating leases for
compressor equipment, which expire on November 30, 2005.
The company also leases compressor equipment on various
cancelable leases. Future minimum lease payments payable under
non-cancelable operating lease are due as follows:
|
|
|
|
|
Year Ending March 31, |
|
|
|
|
|
2006
|
|
$ |
144,000 |
|
|
|
|
|
Rental expense for all operating leases totaled $186,936,
$912,594, and $472,272 for the three months ended March 31,
2005 and the years ended December 31, 2004 and 2003,
respectively.
F-87
W.T. ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Note 6: |
Stockholders Equity |
At March 31, 2005, December 31, 2004 and 2003, the
number of authorized and issued common stock and related par
value and dividends paid are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Common stock authorized
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Common stock issued
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Common stock outstanding
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
Common stock, per share par value
|
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
10 |
|
Cash dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7: |
Dependence on Key Customers |
For the three months ended March 31, 2005 and for the years
ended December 31, 2004 and December 31, 2003 the
Companys revenues were almost entirely attributable to one
customer. As of March 31, 2005 approximately 85% of the
Companys accounts receivable were attributable to this one
customer.
|
|
Note 8: |
Subsequent Events |
The Companys management is currently negotiating the sale
of substantially all the Companys assets. The anticipated
sales date is June 30, 2005. The estimated sales price of
the assets is substantially in excess of their book value. Upon
consummation of the sale, the Company will exercise options to
purchase equipment, currently under operating leases, for
$550,000 and then include this equipment in the assets the
Company sells.
Subsequent to March 31, 2005 the Company purchased
approximately $240,000 of equipment, which was 100% financed
through short-term bank loans.
F-88
W.T. ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
Note 9: |
Income Tax Matters |
Net deferred tax liabilities as of March 31, 2005,
December 31, 2004 and 2003 consist of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$ |
136,593 |
|
|
$ |
132,577 |
|
|
$ |
78,565 |
|
|
Cash basis receivables
|
|
|
95,394 |
|
|
|
101,340 |
|
|
|
96,261 |
|
|
Prepaid expenses
|
|
|
2,047 |
|
|
|
2,261 |
|
|
|
2,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234,034 |
|
|
|
236,178 |
|
|
|
177,107 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
|
|
|
|
|
|
|
|
|
31,099 |
|
|
Cash basis accounts payable and accrued expenses
|
|
|
28,797 |
|
|
|
31,397 |
|
|
|
34,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,797 |
|
|
|
31,397 |
|
|
|
65,117 |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$ |
205,237 |
|
|
$ |
204,781 |
|
|
$ |
111,990 |
|
|
|
|
|
|
|
|
|
|
|
Realization of deferred tax assets is dependent upon sufficient
future taxable income during the period that deductible
temporary differences and carryforwards are expected to be
available to reduce taxable income.
As of March 31, 2005 and December 31, 2004 and 2003,
the deferred tax amounts mentioned above have been classified on
the accompanying balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current liabilities
|
|
$ |
68,644 |
|
|
$ |
72,204 |
|
|
$ |
33,425 |
|
Noncurrent liabilities
|
|
|
136,593 |
|
|
|
132,577 |
|
|
|
78,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
205,237 |
|
|
$ |
204,781 |
|
|
$ |
111,991 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes charged to operation for the
three months ended March 31, 2005 and the years ended
December 31, 2004 and 2003 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
March 31, | |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current tax expense
|
|
$ |
45,169 |
|
|
$ |
51,469 |
|
|
$ |
|
|
Deferred tax expense
|
|
|
457 |
|
|
|
92,790 |
|
|
|
37,121 |
|
Benefit of operating loss carryforward
|
|
|
|
|
|
|
(31,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,626 |
|
|
$ |
113,160 |
|
|
$ |
37,121 |
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2005 and the years
ended December 31, 2004 and 2003 the difference between the
expected tax expense that would result from applying domestic
federal statutory rates to pretax income and the provision for
income tax expense is due mainly to the lower average graduated
tax rate expected to apply to the estimated taxable income in
the years the temporary differences reverse as well as the
accrual of state income taxes.
F-89
W.T. ENTERPRISES, INC.
BALANCE SHEET
June 30, 2005
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
153,254.16 |
|
|
|
|
|
|
Trade Receivables
|
|
|
422,900.00 |
|
|
|
|
|
|
Trade Receivables-WIP
|
|
|
111,225.00 |
|
|
|
|
|
|
Loans to Shareholder
|
|
|
6,242.36 |
|
|
|
|
|
|
Prepaid Expense
|
|
|
19,120.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
|
|
|
$ |
712,742.02 |
|
Property and Equipment
|
|
|
|
|
|
|
|
|
|
Transportation Equipment
|
|
|
178,238.71 |
|
|
|
|
|
|
Machinery & Equipment
|
|
|
2,140,792.13 |
|
|
|
|
|
|
Office Furniture & Equipment
|
|
|
7,131.34 |
|
|
|
|
|
|
Accumulated Depreciation
|
|
|
(829,395.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Property and Equipment
|
|
|
|
|
|
|
1,496,767.18 |
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
$ |
2,209,509.20 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$ |
85,265.16 |
|
|
|
|
|
|
Accrued Expenses
|
|
|
114,569.38 |
|
|
|
|
|
|
Income Tax Payable
|
|
|
80,329.09 |
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
71,781.00 |
|
|
|
|
|
|
Notes Payable
|
|
|
246,301.98 |
|
|
|
|
|
|
Current Portion of L.T. Debt
|
|
|
206,298.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
|
|
|
$ |
804,544.87 |
|
Deferred Income Tax
|
|
|
|
|
|
|
158,816.00 |
|
Long-Term Debt, Net of Current Portion
|
|
|
|
|
|
|
16,014.91 |
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common Stock, $10 Par Value
|
|
|
1,000.00 |
|
|
|
|
|
|
Retained Earnings
|
|
|
1,229,133.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
|
|
|
|
1,230,133.42 |
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Stockholders Equity
|
|
|
|
|
|
$ |
2,209,509.20 |
|
|
|
|
|
|
|
|
F-90
W.T. ENTERPRISES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
Six Months Ended | |
|
|
|
|
Jun. 30, 2005 | |
|
Pct | |
|
Jun. 30, 2004 | |
|
Pct | |
|
|
| |
|
| |
|
| |
|
| |
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Revenue
|
|
$ |
1,949,131.25 |
|
|
|
100.00 |
|
|
$ |
1,839,365.00 |
|
|
|
100.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,949,131.25 |
|
|
|
100.00 |
|
|
|
1,839,365.00 |
|
|
|
100.00 |
|
Cost of Revenue
|
|
|
1,257,348.70 |
|
|
|
64.51 |
|
|
|
1,421,254.04 |
|
|
|
77.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
691,782.55 |
|
|
|
35.49 |
|
|
|
418,110.96 |
|
|
|
22.73 |
|
Operating Expenses
|
|
|
328,061.99 |
|
|
|
16.83 |
|
|
|
269,719.48 |
|
|
|
14.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Operations
|
|
|
363,720.56 |
|
|
|
18.66 |
|
|
|
148,391.48 |
|
|
|
8.07 |
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
168.77 |
|
|
|
0.01 |
|
|
|
343.36 |
|
|
|
0.02 |
|
|
Interest Expense
|
|
|
(16,139.41 |
) |
|
|
(0.83 |
) |
|
|
(24,819.02 |
) |
|
|
(1.35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(15,970.64 |
) |
|
|
(0.82 |
) |
|
|
(24,475.66 |
) |
|
|
(1.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Taxes
|
|
|
347,749.92 |
|
|
|
17.84 |
|
|
|
123,915.82 |
|
|
|
6.74 |
|
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Income Tax
|
|
|
78,710.75 |
|
|
|
4.04 |
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
|
25,816.00 |
|
|
|
1.32 |
|
|
|
23,830.00 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,526.75 |
|
|
|
5.36 |
|
|
|
23,830.00 |
|
|
|
1.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
243,223.17 |
|
|
|
12.48 |
|
|
|
100,085.82 |
|
|
|
5.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Retained Earnings
|
|
|
985,910.25 |
|
|
|
|
|
|
|
558,852.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Retained Earnings
|
|
$ |
1,229,133.42 |
|
|
|
|
|
|
$ |
658,938.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-91
W.T. ENTERPRISES, INC.
SCHEDULE OF COST OF REVENUE & OPERATING EXPENSES
For the Period Ended June 30, 2005 and 2004
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
|
Six Months Ended | |
|
|
|
|
Jun. 30, 2005 | |
|
Pct | |
|
Jun. 30, 2004 | |
|
Pct | |
|
|
| |
|
| |
|
| |
|
| |
Cost of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Air
|
|
|
191,500.00 |
|
|
|
9.83 |
|
|
|
352,300.00 |
|
|
|
19.15 |
|
|
Freight & Trucking
|
|
|
11,529.98 |
|
|
|
0.59 |
|
|
|
13,788.47 |
|
|
|
0.75 |
|
|
Auto Expense
|
|
|
57,800.36 |
|
|
|
2.97 |
|
|
|
57,554.74 |
|
|
|
3.13 |
|
|
Depreciation
|
|
|
148,285.00 |
|
|
|
7.61 |
|
|
|
110,875.00 |
|
|
|
6.03 |
|
|
Fuel
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
12,906.32 |
|
|
|
0.70 |
|
|
Insurance
|
|
|
27,634.49 |
|
|
|
1.42 |
|
|
|
21,697.12 |
|
|
|
1.18 |
|
|
Laundry/ Uniforms
|
|
|
1,365.96 |
|
|
|
0.07 |
|
|
|
5,223.46 |
|
|
|
0.28 |
|
|
Maintenance & Repairs
|
|
|
95,822.66 |
|
|
|
4.92 |
|
|
|
73,610.05 |
|
|
|
4.00 |
|
|
Equipment Rental
|
|
|
141,320.17 |
|
|
|
7.25 |
|
|
|
175,289.72 |
|
|
|
9.53 |
|
|
Subcontracting Other
|
|
|
2,942.50 |
|
|
|
0.15 |
|
|
|
1,800.00 |
|
|
|
0.10 |
|
|
Supplies
|
|
|
104,745.30 |
|
|
|
5.37 |
|
|
|
139,860.66 |
|
|
|
7.60 |
|
|
Taxes
|
|
|
34,631.08 |
|
|
|
1.78 |
|
|
|
33,779.21 |
|
|
|
1.84 |
|
|
Travel
|
|
|
2,666.50 |
|
|
|
0.14 |
|
|
|
0.00 |
|
|
|
22.97 |
|
|
Wages
|
|
|
437,054.70 |
|
|
|
22.42 |
|
|
|
422,569.29 |
|
|
|
22.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Revenue
|
|
$ |
1,257,348.70 |
|
|
|
64.51 |
|
|
$ |
1,421,254.04 |
|
|
|
77.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising & Promotional
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
454.56 |
|
|
|
0.02 |
|
|
Bank Charges
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
632.62 |
|
|
|
0.03 |
|
|
Contract Labor
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
924.00 |
|
|
|
0.05 |
|
|
Car & Truck Expense
|
|
|
3,400.29 |
|
|
|
0.17 |
|
|
|
0.00 |
|
|
|
0.05 |
|
|
Contributions
|
|
|
2,250.00 |
|
|
|
0.12 |
|
|
|
1,000.00 |
|
|
|
0.05 |
|
|
Depreciation
|
|
|
3,635.00 |
|
|
|
0.19 |
|
|
|
3,341.00 |
|
|
|
0.18 |
|
|
Dues & Subscriptions
|
|
|
71.70 |
|
|
|
0.00 |
|
|
|
170.40 |
|
|
|
0.01 |
|
|
Insurance
|
|
|
21,057.11 |
|
|
|
1.08 |
|
|
|
20,040.54 |
|
|
|
1.09 |
|
|
Laundry & Uniforms
|
|
|
1,748.23 |
|
|
|
0.09 |
|
|
|
0.00 |
|
|
|
1.09 |
|
|
Life Insurance
|
|
|
288.00 |
|
|
|
0.01 |
|
|
|
269.00 |
|
|
|
0.01 |
|
|
Medical Reimbursement
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
3,621.06 |
|
|
|
0.20 |
|
|
Meals & Entertainment
|
|
|
7,604.96 |
|
|
|
0.39 |
|
|
|
1,441.28 |
|
|
|
0.08 |
|
|
Office Expense
|
|
|
936.47 |
|
|
|
0.05 |
|
|
|
1,510.61 |
|
|
|
0.08 |
|
|
Professional fees
|
|
|
5,171.03 |
|
|
|
0.27 |
|
|
|
1,054.00 |
|
|
|
0.06 |
|
|
Rent
|
|
|
6,026.48 |
|
|
|
0.31 |
|
|
|
6,938.15 |
|
|
|
0.38 |
|
|
Repairs & Maintenance
|
|
|
154.20 |
|
|
|
0.01 |
|
|
|
0.00 |
|
|
|
0.38 |
|
|
Supplies
|
|
|
497.90 |
|
|
|
0.03 |
|
|
|
40.00 |
|
|
|
0.00 |
|
|
Taxes
|
|
|
19,904.64 |
|
|
|
1.02 |
|
|
|
11,195.41 |
|
|
|
0.61 |
|
|
Travel
|
|
|
6,104.48 |
|
|
|
0.31 |
|
|
|
1,564.70 |
|
|
|
0.09 |
|
|
Utilities & Telephone
|
|
|
13,329.50 |
|
|
|
0.68 |
|
|
|
8,322.15 |
|
|
|
0.45 |
|
|
Wages
|
|
|
43,482.00 |
|
|
|
2.23 |
|
|
|
8,322.15 |
|
|
|
0.45 |
|
|
Salaries-Officers
|
|
|
192,400.00 |
|
|
|
9.87 |
|
|
|
207,200.00 |
|
|
|
11.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$ |
328,061.99 |
|
|
|
16.83 |
|
|
$ |
269,719.48 |
|
|
|
14.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-92
W.T. ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
For the Period Ended June 30, 2005 and 2004
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Months Ended | |
|
6 Months Ended | |
|
|
Jun. 30, 2005 | |
|
Jun. 30, 2004 | |
|
|
| |
|
| |
Cash Flow from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
242,223.17 |
|
|
$ |
100,085.82 |
|
|
Adjustments to Reconcile Cash Flow
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
151,920.00 |
|
|
|
114,216.00 |
|
|
|
Deferred Income Tax
|
|
|
25,816.00 |
|
|
|
23,830.00 |
|
|
Decrease (Increase) in Current Assets
|
|
|
|
|
|
|
|
|
|
|
Trade Receivables
|
|
|
(4,610.00 |
) |
|
|
56,721.00 |
|
|
|
Trade Receivable WIP
|
|
|
(9,825.00 |
) |
|
|
(30,025.00 |
) |
|
|
Loans to Shareholder
|
|
|
3,432.23 |
|
|
|
2,959.58 |
|
|
|
Prepaid Expense
|
|
|
(7,527.57 |
) |
|
|
(321.51 |
) |
|
|
Prepaid Income Taxes
|
|
|
0.00 |
|
|
|
894.00 |
|
|
Increase (Decrease) in Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
|
(32,662.73 |
) |
|
|
(19,411.84 |
) |
|
|
Accrued Expenses
|
|
|
65,522.20 |
|
|
|
2,781.13 |
|
|
|
Credit Cards Payable
|
|
|
66,650.50 |
|
|
|
10,690.02 |
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments
|
|
|
258,714.63 |
|
|
|
162,333.38 |
|
|
|
|
|
|
|
|
|
|
|
Cash Provided (Used) by Operations
|
|
|
501,937.80 |
|
|
|
262,419.20 |
|
Cash Flow From Investing Activities
|
|
|
|
|
|
|
|
|
|
Sales (Purchases) of Assets
|
|
|
|
|
|
|
|
|
|
|
Machinery & Equipment
|
|
|
(314,139.87 |
) |
|
|
(397,016.47 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Provided (Used) by Investing
|
|
|
(314,139.87 |
) |
|
|
(397,016.47 |
) |
Cash Flow From Financing Activities
|
|
|
|
|
|
|
|
|
|
Cash (Used) or provided by:
|
|
|
|
|
|
|
|
|
|
|
Short-Term Debt
|
|
|
159,537.27 |
|
|
|
42,475.87 |
|
|
|
Long-Term Debt
|
|
|
(243,775.81 |
) |
|
|
137,312.81 |
|
|
|
|
|
|
|
|
|
|
|
Cash Provided (Used) by Financing
|
|
|
(84,238.54 |
) |
|
|
179,788.68 |
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
103,559.39 |
|
|
|
45,191.41 |
|
|
|
|
Cash at Beginning of Period
|
|
|
49,694.77 |
|
|
|
39,821.42 |
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$ |
153,254.16 |
|
|
$ |
85,012.83 |
|
|
|
|
|
|
|
|
See accompanying accountants compilation report
F-93
INDEPENDENT AUDITORS REPORT
To the Shareholder
Specialty Rental Tools, Inc.
Broussard, Louisiana
We have audited the accompanying balance sheets of Specialty
Rental Tools, Inc. (the Company) as of
December 31, 2005 and 2004, and the related statements of
income, shareholders equity and cash flows for the years
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Specialty Rental Tools, Inc. as of December 31, 2005 and
2004, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion
on the basic financial statements taken as a whole.
Schedule I is presented for purposes of additional analysis
and is not a required part of the basic financial statements.
Such information has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in
our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ UHY Mann Frankfort Stein & Lipp CPAs, LLP
Houston, Texas
March 10, 2006
F-94
SPECIALTY RENTAL TOOLS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
17,476,515 |
|
|
$ |
11,038,970 |
|
Trade receivables, net
|
|
|
7,253,603 |
|
|
|
5,437,713 |
|
Inventory
|
|
|
347,978 |
|
|
|
256,888 |
|
Prepaid expenses and other
|
|
|
63,266 |
|
|
|
82,256 |
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
25,141,362 |
|
|
|
16,815,827 |
|
Property and Equipment, net
|
|
|
19,045,776 |
|
|
|
12,285,735 |
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
44,187,138 |
|
|
$ |
29,101,562 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,379,752 |
|
|
$ |
1,217,857 |
|
Accrued liabilities
|
|
|
13,008,797 |
|
|
|
291,195 |
|
Current portion of notes payable
|
|
|
3,084,046 |
|
|
|
1,488,466 |
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
17,472,595 |
|
|
|
2,997,518 |
|
Notes Payable, less current portion
|
|
|
429,184 |
|
|
|
1,566,536 |
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
17,901,779 |
|
|
|
4,564,054 |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
155,655 |
|
|
|
155,655 |
|
Treasury stock, at cost
|
|
|
(736,000 |
) |
|
|
(736,000 |
) |
Retained earnings
|
|
|
26,865,704 |
|
|
|
25,117,853 |
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
26,285,359 |
|
|
|
24,537,508 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$ |
44,187,138 |
|
|
$ |
29,101,562 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-95
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Revenues, Net
|
|
$ |
29,572,730 |
|
|
$ |
18,010,940 |
|
Expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,833,246 |
|
|
|
2,718,080 |
|
General and administrative
|
|
|
19,632,127 |
|
|
|
5,218,634 |
|
Depreciation
|
|
|
3,447,210 |
|
|
|
2,434,682 |
|
Gain on sale of assets
|
|
|
(1,865,949 |
) |
|
|
(1,098,488 |
) |
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
25,046,634 |
|
|
|
9,272,908 |
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
4,526,096 |
|
|
|
8,738,032 |
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
136,597 |
|
|
|
46,173 |
|
Interest expense
|
|
|
(184,856 |
) |
|
|
(11,987 |
) |
Other, net
|
|
|
72,515 |
|
|
|
(76,917 |
) |
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
24,256 |
|
|
|
(42,731 |
) |
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
4,550,352 |
|
|
$ |
8,695,301 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-96
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
| |
|
Treasury | |
|
Retained | |
|
|
|
|
Shares | |
|
Amount | |
|
Stock | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2004
|
|
|
225 |
|
|
$ |
155,655 |
|
|
$ |
(736,000 |
) |
|
$ |
19,674,162 |
|
|
$ |
19,093,817 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,695,301 |
|
|
|
8,695,301 |
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,251,610 |
) |
|
|
(3,251,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
225 |
|
|
|
155,655 |
|
|
|
(736,000 |
) |
|
|
25,117,853 |
|
|
|
24,537,508 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,550,352 |
|
|
|
4,550,352 |
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,802,501 |
) |
|
|
(2,802,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
225 |
|
|
$ |
155,655 |
|
|
$ |
(736,000 |
) |
|
$ |
26,865,704 |
|
|
$ |
26,285,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-97
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,550,352 |
|
|
$ |
8,695,301 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,447,210 |
|
|
|
2,434,682 |
|
|
Gain on sale of assets
|
|
|
(1,865,949 |
) |
|
|
(1,098,488 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,815,890 |
) |
|
|
(2,230,771 |
) |
|
Inventory
|
|
|
(91,090 |
) |
|
|
(75,520 |
) |
|
Prepaid expenses and other
|
|
|
18,990 |
|
|
|
(15,346 |
) |
|
Accounts payable
|
|
|
161,895 |
|
|
|
(62,784 |
) |
|
Accrued liabilities
|
|
|
12,717,602 |
|
|
|
30,545 |
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
17,123,120 |
|
|
|
7,677,619 |
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(11,429,761 |
) |
|
|
(5,796,433 |
) |
|
Proceeds from sale of property and equipment
|
|
|
3,135,857 |
|
|
|
1,334,493 |
|
|
|
|
|
|
|
|
|
|
Net Cash used in Investing Activities
|
|
|
(8,293,904 |
) |
|
|
(4,461,940 |
) |
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Distributions to shareholder
|
|
|
(2,802,501 |
) |
|
|
(3,251,610 |
) |
|
Proceeds from notes payable
|
|
|
3,000,000 |
|
|
|
3,000,000 |
|
|
Repayment of notes payable
|
|
|
(2,589,170 |
) |
|
|
(1,022,861 |
) |
|
|
|
|
|
|
|
|
|
Net Cash used in Financing Activities
|
|
|
(2,391,671 |
) |
|
|
(1,274,471 |
) |
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
|
6,437,545 |
|
|
|
1,941,208 |
|
Cash and Cash Equivalents Beginning of Year
|
|
|
11,038,970 |
|
|
|
9,097,762 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents End of Year
|
|
$ |
17,476,515 |
|
|
$ |
11,038,970 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
184,856 |
|
|
$ |
11,987 |
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-98
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Note A Nature of Operations
Specialty Rental Tools, Inc. (the Company) leases
drill pipe, tubing, handling equipment, pressure control
equipment, drill collars and other oilfield equipment to both
major and independent petroleum exploration and production
companies for use in drilling, completion and work-over
operations. The Company is located in Broussard, Louisiana, and
leases equipment to companies throughout the Gulf Coast Region.
The Company was incorporated in the State of Louisiana in
December 1978.
Note B Summary of Significant Accounting
Policies
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 amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Revenue Recognition: Rental equipment is leased to
customers at per day and per job contractual rates. Net revenues
are determined by deducting sales discounts from gross sales.
Cash and Cash Equivalents: The Company considers all
highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.
Accounts Receivable: The Company uses the allowance
method to account for uncollectible accounts receivable. The
Company establishes an allowance for doubtful accounts based on
factors surrounding credit risk of debtors, historical factors
and other related information. The allowance for doubtful
accounts was $55,994 and $35,087 at December 31, 2005 and
2004, respectively.
Concentrations of Credit and Other Risks: Financial
instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts receivables. The Company maintains its cash in bank
deposits with a financial institution. These accounts exceed
federally insured limits. Deposits in the United States are
guaranteed by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The Company monitors the
financial condition of the financial institution and has not
experienced any losses on such accounts.
The Company is not party to any financial instruments which
would have off-balance sheet credit or interest rate risk.
Inventory: Inventory consists primarily of supplies and
materials used to repair and maintain rental equipment.
Inventory is valued using the first-in, first-out method and
stated at the lower of cost or market.
Property and Equipment: Property and equipment are stated
at cost. Depreciation of property and equipment is computed
using the straight-line method over the estimated useful lives
of the assets, ranging from 5 to 39 years. Expenditures for
major renewals and betterments, which extend the original
estimated economic useful lives of applicable assets, are
capitalized. Expenditures for normal repairs and maintenance are
charged to expense as incurred and are often billed back to
customers as allowed by rental contracts. The costs and related
accumulated depreciation of assets sold or retired are removed
from the accounts, and any gain or loss thereon is reflected in
operations.
F-99
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company periodically evaluates the recoverability of the
carrying value of its property and equipment whenever events or
changes in circumstances indicate that the carrying amount of
the asset may not be recoverable.
Income Taxes: The Companys shareholder has elected
to be taxed as a small business corporation under the provisions
of Subchapter S of the Internal Revenue Code. Accordingly,
federal income tax is the responsibility of the individual
shareholder, and no provision for federal income tax is included
in the accompanying financial statements.
Advertising: The Companys policy is to expense
advertising costs as incurred and amounted to approximately
$254,000 and $196,000 for years ended December 31, 2005 and
2004, respectively.
Major Customers: For the year ended December 31,
2005, 51% of the Companys revenues were generated from two
unrelated customers, and trade receivables from those customers
totaled $2,869,316 at December 31, 2005. For the year ended
December 31, 2004, 43% of the Companys revenues were
generated from one unrelated customer, and trade receivables
from this customer were $2,665,365 at December 31, 2004.
Note C Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
December 31, | |
|
|
Useful | |
|
| |
|
|
Lives | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Rental equipment
|
|
|
7 - 10 years |
|
|
$ |
37,346,425 |
|
|
$ |
27,390,801 |
|
Automobiles
|
|
|
5 years |
|
|
|
508,535 |
|
|
|
410,094 |
|
Furniture and fixtures
|
|
|
5 - 7 years |
|
|
|
12,369 |
|
|
|
12,369 |
|
Leasehold improvements
|
|
|
15 - 39 years |
|
|
|
161,091 |
|
|
|
161,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,028,420 |
|
|
|
27,974,355 |
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(18,982,644 |
) |
|
|
(15,688,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,045,776 |
|
|
$ |
12,285,735 |
|
|
|
|
|
|
|
|
|
|
|
Note D Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Note payable to bank (1)
|
|
$ |
1,531,520 |
|
|
$ |
3,000,000 |
|
Note payable to bank (2)
|
|
|
1,907,252 |
|
|
|
|
|
Note payable to GMAC (3)
|
|
|
34,869 |
|
|
|
55,002 |
|
Note payable to Ford Credit (4)
|
|
|
39,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,513,230 |
|
|
|
3,055,002 |
|
Less: current portion
|
|
|
3,084,046 |
|
|
|
1,488,466 |
|
|
|
|
|
|
|
|
Total notes payable long-term
|
|
$ |
429,184 |
|
|
$ |
1,566,536 |
|
|
|
|
|
|
|
|
F-100
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Future maturities of long-term debt as of December 31, 2005
are as follows:
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
|
2006
|
|
$ |
3,084,046 |
|
2007
|
|
|
421,199 |
|
2008
|
|
|
7,985 |
|
|
|
|
|
|
|
$ |
3,513,230 |
|
|
|
|
|
In December 2004, the Company raised $3,000,000 under a note
payable agreement from Iberia Bank, a financial institution in
Louisiana. The note bears interest at a rate of 4.2% per annum
and is being repaid through monthly principal and interest
payments totaling $130,617. Under the terms of the note payable
agreement, the note was due in December 2006. The Company repaid
the note in January 2006.
In February 2005, the Company raised $3,000,000 under a note
payable agreement from Iberia Bank, a financial institution in
Louisiana. The note bears interest at a rate of 4.2% per annum
and is being repaid through monthly principal and interest
payments totaling $130,818. Under the terms of the note payable
agreement, the note was due in March 2007. The Company repaid
the note in January 2006.
In October 2004, the Company financed the purchase of a vehicle
through a $56,333 note payable agreement with GMAC. The note is
non-interest bearing and is being repaid through monthly
principal payments of $1,565. The note is due in November 2007.
|
|
|
(4) Note Payable to
Ford Credit |
In June 2005, the Company financed the purchase of a vehicle
through a $47,398 note payable agreement with Ford Credit. The
note bears interest at a rate of 0.9% per annum and is being
repaid through monthly principal and interest payments totaling
$1,335. The note is due in June 2008.
Note E Shareholders Equity
Common Stock: The Company is authorized to issue 10,000
shares of common stock that has no par value. As of
December 31, 2005 and 2004, the Company had 2500 shares
issued and 225 common shares outstanding.
Treasury Stock: The Company has repurchased common stock
as treasury stock. As of December 31, 2005 and 2004, the
Company owned 2,275 shares of treasury stock.
F-101
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note F Profit Sharing Plan
The Company sponsors a profit sharing plan (the
Plan) which covers all eligible employees. Company
contributions to the Plan are discretionary. The Plan vests one
hundred percent (100%) after six or more years of continuing
service. During the years ended December 31, 2005 and 2004,
the Company made contributions of approximately $175,000 and
$163,000, respectively, to the Plan.
Note G Related Party Transactions
The Company paid the shareholder $648,000 and $288,000 for the
years ended December 31, 2005 and 2004, respectively, for
rent expense on the Companys operating facilities in
Broussard, Louisiana.
Note H Non-Cash Investing and Financing
Activities
The following non-cash transaction took place during the year
ended December 31, 2005:
|
|
|
|
|
The Company acquired an automobile for $47,398, which was funded
through a note payable instrument. |
The following non-cash transaction took place during the year
ended December 31, 2004:
|
|
|
|
|
The Company acquired an automobile for $56,333, which was funded
through a note payable instrument. |
Note I Subsequent Events
On January 18, 2006 the Company was acquired by
Allis-Chalmers Energy, Inc. through a 100% stock purchase
agreement for $96.0 million in cash. The Companys
financial statements have not been modified as a result of this
transaction.
On January 16, 2006 the Company repaid the outstanding
balance of Note 1 and Note 2 as stated in Note D
of the financial statements.
F-102
SPECIALTY RENTAL TOOLS, INC.
SCHEDULE I SCHEDULE OF GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Salaries and wages
|
|
$ |
15,208,822 |
|
|
$ |
2,449,073 |
|
Retirement plan expenses
|
|
|
174,863 |
|
|
|
163,261 |
|
Selling expenses
|
|
|
486,323 |
|
|
|
325,595 |
|
Shop supplies
|
|
|
774,694 |
|
|
|
500,783 |
|
Shop maintenance
|
|
|
321,111 |
|
|
|
43,691 |
|
Rent
|
|
|
648,000 |
|
|
|
288,257 |
|
Insurance
|
|
|
461,198 |
|
|
|
404,886 |
|
Automobile expenses
|
|
|
242,276 |
|
|
|
161,549 |
|
Advertising
|
|
|
253,624 |
|
|
|
196,037 |
|
Taxes, licenses and other
|
|
|
565,751 |
|
|
|
377,022 |
|
Bad debt expense, net of recoveries
|
|
|
103,609 |
|
|
|
81,389 |
|
Office expense
|
|
|
57,424 |
|
|
|
49,648 |
|
Uniforms
|
|
|
25,555 |
|
|
|
17,971 |
|
Utilities
|
|
|
88,091 |
|
|
|
115,565 |
|
Dues and subscriptions
|
|
|
8,083 |
|
|
|
7,375 |
|
Professional fees
|
|
|
211,563 |
|
|
|
34,739 |
|
Other
|
|
|
1,140 |
|
|
|
1,793 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
19,632,127 |
|
|
$ |
5,218,634 |
|
|
|
|
|
|
|
|
F-103
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders of
DLS Drilling, Logistics & Services Corporation
We have audited the accompanying consolidated balance sheets of
DLS Drilling, Logistics & Services Corporation as of
December 31, 2005 and 2004, and the related consolidated
statements of income, stockholders equity and cash flows
for each of the years in the three-year period ended
December 31, 2005. 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 auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 DLS Drilling,
Logistics & Services Corporation as of
December 31, 2005 and 2004, and the consolidated results of
their operations, changes in stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2005, in conformity with generally accepted
accounting principles in the United States of America.
March 2, 2006, except in respect of Note 22 for which the
date is May 5, 2006.
Sibille
/s/ Ariel S. Eisenstein
Partner
F-104
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
CONSOLIDATED BALANCE SHEETS
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 4)
|
|
|
731 |
|
|
|
1,496 |
|
|
Accounts receivable (Note 5)
|
|
|
26,826 |
|
|
|
19,970 |
|
|
Parts and supplies (Note 6)
|
|
|
16,640 |
|
|
|
16,110 |
|
|
Prepaid expenses and other current assets (Note 7)
|
|
|
4,069 |
|
|
|
4,713 |
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
48,266 |
|
|
|
42,289 |
|
|
|
|
|
|
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net (Note 8)
|
|
|
117,786 |
|
|
|
110,458 |
|
|
Investments
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total Non-Current Assets
|
|
|
117,788 |
|
|
|
110,460 |
|
|
|
|
|
|
|
|
TOTAL
|
|
|
166,054 |
|
|
|
152,749 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts payable and accrued expenses (Note 9)
|
|
|
13,522 |
|
|
|
12,209 |
|
|
Short-term debt (Note 10)
|
|
|
8,690 |
|
|
|
19,430 |
|
|
Payroll and accrued taxes (Note 11)
|
|
|
7,976 |
|
|
|
6,948 |
|
|
Other liabilities (Note 12)
|
|
|
9,188 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
39,376 |
|
|
|
40,403 |
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
Other liabilities (Note 12)
|
|
|
782 |
|
|
|
14,167 |
|
|
Long-term debt (Note 13)
|
|
|
29,640 |
|
|
|
12,846 |
|
|
Deferred income taxes liability (Note 14)
|
|
|
696 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total Non-Current Liabilities
|
|
|
31,118 |
|
|
|
27,539 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
70,494 |
|
|
|
67,942 |
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common stock (Note 3)
|
|
|
42,963 |
|
|
|
42,963 |
|
|
Additional paid-in capital (Note 3)
|
|
|
31,606 |
|
|
|
27,466 |
|
|
Retained earnings
|
|
|
20,991 |
|
|
|
14,378 |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
95,560 |
|
|
|
84,807 |
|
|
|
|
|
|
|
|
TOTAL
|
|
|
166,054 |
|
|
|
152,749 |
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-105
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Sales and Other Operating Revenues (Note 15)
|
|
|
129,849 |
|
|
|
112,272 |
|
|
|
96,084 |
|
Operating Costs and Expenses (Note 16)
|
|
|
(113,351 |
) |
|
|
(98,366 |
) |
|
|
(83,727 |
) |
Dry hole expenses
|
|
|
(1,420 |
) |
|
|
(382 |
) |
|
|
|
|
Impairment charge on unproved properties
|
|
|
(4,946 |
) |
|
|
(1,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
10,132 |
|
|
|
11,892 |
|
|
|
12,357 |
|
General and Administrative Expenses
|
|
|
(3,933 |
) |
|
|
(3,430 |
) |
|
|
(3,140 |
) |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
6,199 |
|
|
|
8,462 |
|
|
|
9,217 |
|
Net Financial Expenses (Note 16)
|
|
|
(5,394 |
) |
|
|
(4,585 |
) |
|
|
(4,030 |
) |
Other Income (Expenses) (Note 16)
|
|
|
7,127 |
|
|
|
1,000 |
|
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax
|
|
|
7,932 |
|
|
|
4,877 |
|
|
|
5,021 |
|
Income Tax (Note 14)
|
|
|
(1,319 |
) |
|
|
(2,325 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
6,613 |
|
|
|
2,552 |
|
|
|
1,114 |
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-106
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
Common Stock | |
|
|
|
other | |
|
|
|
|
|
|
| |
|
Paid-in | |
|
comprehensive | |
|
Retained | |
|
|
Description |
|
Shares | |
|
Amount | |
|
Capital | |
|
income | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening Balance
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
27,466 |
|
|
|
|
|
|
|
10,712 |
|
|
|
81,141 |
|
Net income for fiscal year 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,114 |
|
|
|
1,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
27,466 |
|
|
|
|
|
|
|
11,826 |
|
|
|
82,255 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for fiscal year 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,552 |
|
|
|
2,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
27,466 |
|
|
|
|
|
|
|
14,378 |
|
|
|
84,807 |
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of additional paid-in-capital
|
|
|
|
|
|
|
|
|
|
|
4,140 |
|
|
|
|
|
|
|
|
|
|
|
4,140 |
|
Net income for fiscal year 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,613 |
|
|
|
6,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
31,606 |
|
|
|
|
|
|
|
20,991 |
|
|
|
95,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-107
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net Income
|
|
|
6,613 |
|
|
|
2,552 |
|
|
|
1,114 |
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
|
|
|
524 |
|
|
|
320 |
|
|
|
3,907 |
|
|
Depreciation, depletion and amortization
|
|
|
9,420 |
|
|
|
9,475 |
|
|
|
7,173 |
|
|
Dry hole expense
|
|
|
1,420 |
|
|
|
382 |
|
|
|
|
|
|
Impairment charges on unproved properties
|
|
|
4,946 |
|
|
|
1,632 |
|
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in parts and supplies
|
|
|
(530 |
) |
|
|
91 |
|
|
|
(400 |
) |
|
Increase in accounts receivable trade
|
|
|
(6,856 |
) |
|
|
(2,041 |
) |
|
|
(6,697 |
) |
|
Decrease (increase) prepaid expenses and other current assets,
net of deferred income tax
|
|
|
290 |
|
|
|
719 |
|
|
|
(2,120 |
) |
|
Increase in trade accounts payable and accrued expenses, payroll
and accrued taxes and current other liabilities
|
|
|
2,401 |
|
|
|
5,642 |
|
|
|
4,783 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
18,228 |
|
|
|
18,772 |
|
|
|
7,760 |
|
|
|
|
|
|
|
|
|
|
|
Investment activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal (purchase) of investments
|
|
|
|
|
|
|
13 |
|
|
|
(10 |
) |
|
Proceeds from the sale of property, plant and equipment
|
|
|
64 |
|
|
|
160 |
|
|
|
|
|
|
Additions to oil and gas construction work in progress
|
|
|
(983 |
) |
|
|
(979 |
) |
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(22,195 |
) |
|
|
(25,878 |
) |
|
|
(12,640 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investment activities
|
|
|
(23,114 |
) |
|
|
(26,684 |
) |
|
|
(12,650 |
) |
|
|
|
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of additional paid-in capital
|
|
|
4,140 |
|
|
|
|
|
|
|
|
|
|
New long term debt
|
|
|
14,500 |
|
|
|
5,065 |
|
|
|
5,290 |
|
|
Net new short term debt
|
|
|
|
|
|
|
2,912 |
|
|
|
|
|
|
Financing from customers and other liabilities
|
|
|
(6,073 |
) |
|
|
14,166 |
|
|
|
|
|
|
Net decrease in short term debt and long-term debt
|
|
|
(8,446 |
) |
|
|
(12,894 |
) |
|
|
(733 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,121 |
|
|
|
9,249 |
|
|
|
4,557 |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(765 |
) |
|
|
1,337 |
|
|
|
(333 |
) |
Cash and cash equivalents at the beginning of the year
|
|
|
1,496 |
|
|
|
159 |
|
|
|
492 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
731 |
|
|
|
1,496 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
920 |
|
|
|
1,873 |
|
|
|
467 |
|
See the accompanying notes to the consolidated financial
statements
F-108
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts expressed in thousands of US Dollars
Note 1. The Company
DLS Drilling, Logistics & Services Corporation
(DLS or, including its subsidiaries and branch, the
Company), incorporated under the laws of the British
Virgin Islands in September 1993, is involved in drilling and
oil field services.
In addition, the Company has made certain investments in oil and
natural gas exploration activities.
DLSs shareholders are Bridas International Holdings Ltd.,
Bridas Central Company Ltd. and Associated Petroleum Investors
Limited, which hold 40%, 40% and 20%, respectively of DLSs
capital stock.
The Company has conducted and continues to conduct significant
transactions with related parties as explained in Note 17.
Note 2. Significant accounting
policies and presentation
The consolidated financial statements of DLS are prepared in
accordance with accounting principles generally accepted in the
United States of America (US GAAP). The financial
statements presented herein were prepared on a consistent basis
applying the significant accounting policies described in this
note. Certain reclassifications have been made to prior
presentations to be consistent with the current period
classification.
The management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities,
revenues and expenses to prepare these financial statements in
conformity with US GAAP. Actual results may differ in some cases
from those estimates. These estimates include, but are not
limited to, the allowance for uncollectible accounts,
recoverability of the investment in long-term assets and the
fair value of the Companys investment in unproved oil and
gas properties.
|
|
|
2.2. Basis of
presentation |
The consolidated financial statements include the financial
statements of DLS Drilling, Logistics & Services Corporation
and its subsidiary and branch. All intercompany balances and
transactions have been eliminated in these consolidated
financial statements.
DLS had the following subsidiary and branch:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock | |
|
|
Company |
|
Main Activity | |
|
Ownership | |
|
Voting rights | |
|
|
| |
|
| |
|
| |
DLS Argentina Ltd. (1)
|
|
|
Oil Field Services |
|
|
|
99.99 |
% |
|
|
99.99 |
% |
DLS Bolivia Branch
|
|
|
Oil Field Services |
|
|
|
100.00 |
% |
|
|
|
|
|
|
(1) |
DLS Argentina Ltd. has a branch in Argentina (DLS Argentina
Limited Sucursal Argentina). |
|
|
|
2.3. Cash and cash
equivalents |
Cash and cash equivalents include checking account deposits,
time deposits with original maturities of three months or less
and cash on hand. For the purposes of the consolidated
statements of cash flows the company considers all highly liquid
instruments with original maturities of three months or less to
be cash equivalents.
F-109
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
Inventories of materials, supplies, spare parts, drilling fluids
and others are stated at purchase cost. Goods in transit on
which ownership has passed to the Company are valued at purchase
cost. These values do not exceed those prevailing in the market.
|
|
|
2.5. Property, plant and
equipment |
Property, plant and equipment are carried at cost. Major
renewals and improvements are capitalized and depreciated over
the respective assets remaining useful life. Maintenance
and repair costs are charged to expense as incurred. When assets
are sold or retired, the remaining costs and related accumulated
depreciation are removed from the accounts and any resulting
gain or loss is included in results of operations. Interest is
capitalized on construction-in-progress, if any, at the interest
rate on debt incurred for construction or at the weighted
average cost of debt outstanding during the period of
construction.
Depreciation is provided using the working days method for
drilling rigs and the straight-line method based upon expected
useful lives of the rest of the items determined for each class
of asset. Estimated useful lives of the assets are as follows:
|
|
|
|
|
Drilling rigs
|
|
|
5840 working days |
|
Rig equipment
|
|
|
5 years |
|
Workover rigs
|
|
|
16 years |
|
Pulling rigs
|
|
|
10 years |
|
Trucks and transportation equipment
|
|
|
4 years |
|
Buildings
|
|
|
10 years |
|
Trailers and facilities
|
|
|
4 years |
|
Other
|
|
|
3 to 5 years |
|
Costs incurred in oil and gas exploration activities: The
Company follows the successful efforts method of accounting.
Costs of property acquisitions, successful exploratory wells and
support equipment and facilities are capitalized. Costs of
capitalized oil and gas properties would be amortized using the
units of production method. As of December 31, 2005, the
Company has not generated any sales of oil or gas and all
activities to date have been exploratory in nature. Unsuccessful
exploratory wells are expensed when determined to be
non-productive. Overhead and all exploration cost other than
exploratory drilling are charged against income as incurred.
Net property, plant and equipment does not exceed recoverable
values based on estimates of future operations. The Company
adopted Statement of Financial Accounting Standard Nr.144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, issued by the Financial Accounting Standards Board
(FASB) in August 2001. This standard addresses the
accounting for the recognition and measurement of impairment
losses for long-lived assets (including oil and gas properties
accounted for under the
F-110
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
successful efforts method of accounting and certain
amortizable intangibles to be held and used or disposed of).
The Company performs a review for impairment when circumstances
suggest there is a need for such a review. The Company groups
and evaluates other property, plant and equipment for impairment
based on the ability to identify separate cash flows generated
therefrom.
|
|
|
2.6. Foreign currency
remeasurement |
The Company has designated the U.S. dollar as the functional
currency for its operations because it contracts with customers,
purchases equipment and finances capital using the U.S. dollar.
Certain monetary assets and liabilities denominated in
currencies other than the U.S. dollar are remeasured at period
end historical exchange rates and all foreign currency monetary,
gains or losses are reflected in each years results of
operations and are included in Financial Expenses, net on the
Statement of Income. (See Note 16).
The Company recognizes revenue as services are performed based
upon contracted dayrates and the number of operating days during
the year. Revenue from turnkey contracts is based on percentage
of completion of the services at each balance sheet date.
Mobilization fees received and costs incurred in connection with
a customer contract to mobilize a rig from one geographic area
to another are deferred and recognized on a straight-line basis
over the term of such contract. Costs incurred to mobilize a rig
without a contract are expensed as incurred.
|
|
|
2.8. Compensated absences
and additional salaries |
The Company accrues the liability for future compensation to
employees for vacations and annual additional salaries (13th
month payment) vested during the year.
|
|
|
2.9. Concentration of
credit risk |
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents and trade receivables. The Company places its
cash and cash equivalents in other high quality financial
instruments. The Company limits the amount of credit exposure to
any one financial institution. The Companys customer base
consists primarily of major integrated international oil
companies, as well as smaller independent oil and gas producers.
Management believes the credit quality of its customers is
generally high. The Company provides allowances for potential
credit losses when necessary.
|
|
|
2.10. Conditions affecting
ongoing operations |
The Companys current business and operations are
substantially dependent upon conditions in the oil and gas
industry and, specifically, the exploration and production
expenditures of oil and gas companies. The demand for contract
drilling and related services is influenced by oil and gas
prices, expectations about future prices, the cost of producing
and delivering oil and gas, government
F-111
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
regulations and local and international political and
economic conditions. There can be no assurance that current
levels of exploration and production expenditures of oil and gas
companies will be maintained or that demand for the
Companys services will reflect the level of such
activities.
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards Nr. 109 (SFAS
109), Accounting for Income Tax. Under the
asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income for the period that includes the enactment date.
The consolidated entity domiciled in Argentina is subject to
Argentine income tax at a nominal rate of 35% except for the
activities carried out in the province of Tierra del Fuego,
which are exempt. The entity domiciled in Bolivia is subject to
Bolivian income tax at a nominal rate of 25%. Income earned by
DLS is not subject to taxation.
Note 3. Stockholders
equity
At December 31, 2005, 2004 and 2003, the authorized share
capital of DLS was USD 70,000, of which USD 42,963 had been
issued and was outstanding, represented by 42,963,374 shares.
Each share has a par value of one U.S. Dollar and is entitled to
one vote. The shares are identical in all respects. During 2005,
the Company received contribution of additional paid in capital
in the aggregate amount of USD 4,140. This contribution of
additional paid in capital was made by the shareholders in the
same proportion to their ownership interest. No additional
common shares were issued.
Note 4. Cash and cash
equivalents
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cash on hand and in banks
|
|
|
331 |
|
|
|
1,496 |
|
Time deposits
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731 |
|
|
|
1,496 |
|
|
|
|
|
|
|
|
F-112
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 5. Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
2005 |
|
2004 |
|
|
|
|
|
Trade
|
|
|
26,826 |
|
|
|
19,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
26,826 |
|
|
|
19,970 |
|
|
|
|
|
|
|
|
|
|
No allowance for potential credit loss was deemed necessary as
of December 31, 2005 and 2004 based on an evaluation of
outstanding customer balances at each date.
Note 6. Parts and supplies
|
|
|
|
|
|
|
|
|
Drilling fluids
|
|
|
1,741 |
|
|
|
1,541 |
|
Materials, supplies, spare parts and others
|
|
|
13,916 |
|
|
|
13,165 |
|
Goods in transit
|
|
|
983 |
|
|
|
1,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
16,640 |
|
|
|
16,110 |
|
|
|
|
|
|
|
|
|
|
Note 7. Prepaid expenses and
other current assets
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
|
2,073 |
|
|
|
1,857 |
|
Minimum presumed income tax
|
|
|
|
|
|
|
791 |
|
Deferred tax asset
|
|
|
309 |
|
|
|
663 |
|
Prepaid expenses
|
|
|
1,036 |
|
|
|
1,402 |
|
Deferred mobilization costs
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,069 |
|
|
|
4,713 |
|
|
|
|
|
|
|
|
|
|
Note 8. Property, plant and
equipment
|
|
|
|
|
|
|
|
|
|
Drilling activities:
|
|
|
|
|
|
|
|
|
|
Drilling rigs
|
|
|
91,585 |
|
|
|
81,227 |
|
|
Rig equipment
|
|
|
17,372 |
|
|
|
15,594 |
|
|
Workover rigs
|
|
|
15,549 |
|
|
|
11,622 |
|
|
Rig held for future use(1)
|
|
|
10,752 |
|
|
|
10,752 |
|
|
Pulling rigs
|
|
|
7,324 |
|
|
|
6,459 |
|
|
Trucks and transportation equipment
|
|
|
3,559 |
|
|
|
3,456 |
|
|
Buildings
|
|
|
2,826 |
|
|
|
2,073 |
|
|
Trailers and facilities
|
|
|
1,359 |
|
|
|
1,258 |
|
|
Other
|
|
|
8,599 |
|
|
|
7,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
158,925 |
|
|
|
139,682 |
|
Accumulated depreciation
|
|
|
(48,415 |
) |
|
|
(41,883 |
) |
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
110,510 |
|
|
|
97,799 |
|
Oil and gas unproved properties(2)
|
|
|
6,701 |
|
|
|
11,647 |
|
Oil and gas construction work in progress(2)
|
|
|
575 |
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
117,786 |
|
|
|
110,458 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Carried at cost, which is lower than estimated fair market value. |
|
(2) |
On June 30, 2004, the Company purchased a 90% interest in
exploratory blocks General Lamadrid and Juarez for oil and gas
exploration. The purchase price was USD 13,694. The Company
allocated USD 13,279 to unproved properties and
USD 415 to construction work in progress. Subsequent
exploration expenditures were capitalized in 2005 and 2004 in
the amount of USD 983 and USD 979 respectively, net of
dry hole expense of USD 1,420 and USD 382,
respectively. The Company has recorded an impairment charge of
the unproved properties in the amount of USD 4,946 and
USD 1,632 in the years ended December 31, 2005 and
2004, respectively. |
F-113
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 9. Trade accounts payable
and accrued expenses
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Trade creditors
|
|
|
11,724 |
|
|
|
10,999 |
|
Accrued expenses
|
|
|
1,798 |
|
|
|
1,210 |
|
|
|
|
|
|
|
|
|
|
|
13,522 |
|
|
|
12,209 |
|
|
|
|
|
|
|
|
Note 10. Short-term debt
|
|
|
|
|
|
|
|
|
Short term debt
|
|
|
|
|
|
|
1,006 |
|
Portion of long term debt maturing within one year
|
|
|
8,690 |
|
|
|
18,424 |
|
|
|
|
|
|
|
|
|
|
|
8,690 |
|
|
|
19,430 |
|
|
|
|
|
|
|
|
Short term debt for USD 1,006 at December 31, 2004 accrued
interest at an average 4.35% annual rate .
Note 11. Payroll and accrued
taxes
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Payroll
|
|
|
5,203 |
|
|
|
4,149 |
|
Taxes
|
|
|
2,773 |
|
|
|
2,799 |
|
|
|
|
|
|
|
|
|
|
|
7,976 |
|
|
|
6,948 |
|
|
|
|
|
|
|
|
Note 12. Other liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Customer financing of rig purchases
|
|
|
1,850 |
|
|
|
1,715 |
|
Note payable
|
|
|
7,177 |
|
|
|
|
|
Other
|
|
|
161 |
|
|
|
101 |
|
|
|
|
|
|
|
|
Total
|
|
|
9,188 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
Non-Current
|
|
|
|
|
|
|
|
|
Customer financing of rig purchases
|
|
|
782 |
|
|
|
2,591 |
|
Note payable
|
|
|
|
|
|
|
11,576 |
|
|
|
|
|
|
|
|
Total
|
|
|
782 |
|
|
|
14,167 |
|
|
|
|
|
|
|
|
These liabilities are denominated in U.S. dollars, except for
USD 161 and USD 101 which were denominated in
Argentine pesos as of December 31, 2005 and 2004,
respectively. The amounts of USD 2,632 and USD 4,306
accrued interest at a 8% p.a. rate in the years ended
December 31, 2005 and 2004, respectively. The amounts of
USD 7,177 and USD 11,576 accrued interest at a
6% p.a. rate in the years ended December 31, 2005 and
2004, respectively. The remaining other
liabilities current (USD 161 and USD 101 at
each year end) did not bear interest.
Other liabilities non current as of
December 31, 2005 become due in 2007.
F-114
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 13. Long-term debt
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
3,49 % loan agreement due 2005(1)
|
|
|
|
|
|
|
2,028 |
|
4,51% loan agreement due 2005(1)
|
|
|
|
|
|
|
4,032 |
|
10,78% loan agreement due 2005(2)
|
|
|
|
|
|
|
1,128 |
|
10,78% loan agreement due 2006(2)
|
|
|
1,110 |
|
|
|
1,106 |
|
6,31% loan agreement due 2006(1)
|
|
|
2,142 |
|
|
|
1,676 |
|
6,31% loan agreement due 2008(1)
|
|
|
2,376 |
|
|
|
1,676 |
|
5,51% loan agreement due 2009(1)
|
|
|
1,500 |
|
|
|
800 |
|
6,156% loan agreement due 2010(1)
|
|
|
700 |
|
|
|
|
|
5,67% loan agreement due 2011(1)
|
|
|
350 |
|
|
|
|
|
10,78% loan agreement due 2007(2)
|
|
|
733 |
|
|
|
746 |
|
3,49% loan agreement due 2007(1)
|
|
|
2,376 |
|
|
|
1,676 |
|
6% loan agreement due 2005(1)
|
|
|
|
|
|
|
11,236 |
|
6% loan agreement due 2006(1)
|
|
|
5,438 |
|
|
|
5,166 |
|
6% loan agreement due 2007(1)
|
|
|
7,163 |
|
|
|
|
|
6% loan agreement due 2008(1)
|
|
|
7,514 |
|
|
|
|
|
6% loan agreement due 2009(1)
|
|
|
6,928 |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
38,330 |
|
|
|
31,270 |
|
Less: Long-term debt maturing within one year
|
|
|
8,690 |
|
|
|
18,424 |
|
|
|
|
|
|
|
|
|
|
|
29,640 |
|
|
|
12,846 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Denominated in US dollars |
|
|
(2) |
Denominated in Argentine pesos |
Future maturities of long-term debt as of December 31, 2005
were as follows:
|
|
|
|
|
2006
|
|
|
8,690 |
|
2007
|
|
|
10,272 |
|
2008
|
|
|
9,890 |
|
2009
|
|
|
8,428 |
|
2010
|
|
|
700 |
|
Thereafter
|
|
|
350 |
|
|
|
|
|
Total long term debt
|
|
|
38,330 |
|
|
|
|
|
F-115
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 14. Income tax
The components of the income tax expense for each year were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
(795 |
) |
|
|
(2,005 |
) |
|
|
|
|
Deferred
|
|
|
(524 |
) |
|
|
(320 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1,319 |
) |
|
|
(2,325 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
A reconciliation between the income tax expense and income tax
computed by applying the statutory rate to income before income
taxes is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
|
|
|
Percent of | |
|
|
|
Percent of | |
|
|
|
|
Pre-tax | |
|
|
|
Pre-tax | |
|
|
|
Pre-tax | |
|
|
2005 | |
|
income | |
|
2004 | |
|
income | |
|
2003 | |
|
income | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Income before income tax
|
|
|
7,932 |
|
|
|
|
|
|
|
4,877 |
|
|
|
|
|
|
|
5,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax (*)
|
|
|
2,713 |
|
|
|
34.2% |
|
|
|
1,653 |
|
|
|
33.9% |
|
|
|
1,722 |
|
|
|
34.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non taxable income(1)
|
|
|
(2,333 |
) |
|
|
-29.4% |
|
|
|
(573 |
) |
|
|
-11.7% |
|
|
|
|
|
|
|
|
|
Non taxable-exempt operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
8.4% |
|
Foreign exchange remeasurement
|
|
|
939 |
|
|
|
11.8% |
|
|
|
1,245 |
|
|
|
25.5% |
|
|
|
1,761 |
|
|
|
35.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
1,319 |
|
|
|
16.6% |
|
|
|
2,325 |
|
|
|
47.7% |
|
|
|
3,907 |
|
|
|
77.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
The theoretical income tax rate applied represents the weighted
average of 35% of Argentine income tax and 25% of Bolivian
income tax. |
|
(1) |
Taxable income generated by the Companys operations in the
Province of Tierra de Fuego are exempt from Argentine income tax. |
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at each year end are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
Exchange losses deferred for tax purposes
|
|
|
309 |
|
|
|
663 |
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
309 |
|
|
|
663 |
|
|
|
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
696 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
696 |
|
|
|
526 |
|
|
|
|
|
|
|
|
F-116
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 15. Sales and other
operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
By type of service provided
|
|
|
|
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
71,617 |
|
|
|
68,805 |
|
|
|
54,779 |
|
Workover
|
|
|
25,848 |
|
|
|
19,592 |
|
|
|
19,059 |
|
Pulling
|
|
|
13,545 |
|
|
|
9,752 |
|
|
|
16,078 |
|
Mud Services
|
|
|
18,506 |
|
|
|
13,426 |
|
|
|
5,862 |
|
Other Revenues
|
|
|
333 |
|
|
|
697 |
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,849 |
|
|
|
112,272 |
|
|
|
96,084 |
|
|
|
|
|
|
|
|
|
|
|
By location
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
|
126,716 |
|
|
|
102,339 |
|
|
|
89,443 |
|
Bolivia
|
|
|
3,133 |
|
|
|
9,933 |
|
|
|
6,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,849 |
|
|
|
112,272 |
|
|
|
96,084 |
|
|
|
|
|
|
|
|
|
|
|
Sales to significant customers were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pan American Energy LLC (see Notes 17 and 18)
|
|
|
71,928 |
|
|
|
57,326 |
|
|
|
47,565 |
|
Repsol YPF S.A.
|
|
|
19,741 |
|
|
|
17,454 |
|
|
|
26,631 |
|
Sales to other customers
|
|
|
38,180 |
|
|
|
37,492 |
|
|
|
21,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,849 |
|
|
|
112,272 |
|
|
|
96,084 |
|
|
|
|
|
|
|
|
|
|
|
Note 16. Detail of Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and related taxes
|
|
|
39,290 |
|
|
|
29,599 |
|
|
|
23,155 |
|
Fuel, lubricants & materials
|
|
|
29,708 |
|
|
|
29,256 |
|
|
|
25,234 |
|
Third party services
|
|
|
20,898 |
|
|
|
17,264 |
|
|
|
18,961 |
|
Depreciation
|
|
|
9,420 |
|
|
|
9,475 |
|
|
|
7,173 |
|
Repairs and maintenance
|
|
|
4,506 |
|
|
|
4,064 |
|
|
|
2,857 |
|
Fleet expenses
|
|
|
3,415 |
|
|
|
2,794 |
|
|
|
1,837 |
|
Insurance
|
|
|
1,102 |
|
|
|
1,280 |
|
|
|
1,081 |
|
Other expenses
|
|
|
5,012 |
|
|
|
4,634 |
|
|
|
3,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,351 |
|
|
|
98,366 |
|
|
|
83,727 |
|
|
|
|
|
|
|
|
|
|
|
F-117
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 16. Detail of Expenses
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net Financial expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
2,713 |
|
|
|
1,836 |
|
|
|
1,462 |
|
Interest income
|
|
|
(78 |
) |
|
|
(2 |
) |
|
|
(10 |
) |
Other financing charges
|
|
|
2,287 |
|
|
|
2,478 |
|
|
|
2,085 |
|
Foreign currency losses
|
|
|
472 |
|
|
|
273 |
|
|
|
493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,394 |
|
|
|
4,585 |
|
|
|
4,030 |
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions earned
|
|
|
7,217 |
|
|
|
2,104 |
|
|
|
0 |
|
Other
|
|
|
(90 |
) |
|
|
(1,104 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,127 |
|
|
|
1,000 |
|
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
Note 17. Certain agreement and
transactions with related parties
DLS and Pan American Energy LLC, or PAE, a company that is
approximately 40% owned by an affiliate of the current owners of
DLS, entered into a five-year strategic agreement for the
purpose of solidifying a long-term alliance for the drilling of
oil and gas wells in the San Jorge basin (see Note 18.1).
In 2005, 2004 and 2003 Company billed PAE a net aggregate of
approximately USD 71,298 USD 57,326 and
USD 47,565 respectively in respect of drilling and related
services provided by DLS; services rendered to PAE represented
approximately 55%, 51% and 50% of DLSs revenue in those
years. Also under the strategic agreement, DLS borrowed from PAE
the amount of USD 5,545 during 2004 to purchase rigs to be
used in drilling services to this customer. This loan bears
interest at a 8% p.a. rate.
In 2005, 2004 and 2003 the Company paid an aggregate amount of
approximately USD 6,741 USD 5,771 and USD 4,439
respectively, to Tanus Argentina S.A., a related party, for
the purchase of drilling fluids (see Note 18.3).
In 2005 the Company acquired drilling rigs from
Compañía de Perforaciones Río Colorado S.A.,
a related party, for USD 15,140.
The Company received certain financing loans from a related
party, Hudson Global Strategies Limited, in the normal course of
business. The outstanding balance as of December 31, 2005,
2004 and 2003 was USD 27,043 USD 16,402 and
USD 20,773 respectively. These loans bear interest at a 6%
p.a. rate.
In 2004 the Company purchased from Barrancas Sur S.A., a related
party, a 90% interest in exploratory blocks General Lamadrid and
Juarez for oil and gas exploration.
Executive and other services such as data processing, rent and
miscellaneous administrative and technical services were entered
into by the Company with related parties. In 2005, 2004 and 2003
the
F-118
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 17. Certain agreement and
transactions with related parties (continued)
Company paid to such related parties an aggregate amount of
approximately USD 1,171 USD 1,186 and USD 1,714
respectively, in respect of said items.
In 2005 and 2004, the Company earned commissions from Interoil
Services Enterprise Limited, a related party, in the amount of
USD 7,217 and USD 2,104, respectively.
The following table summarizes the outstanding balances at each
year end, arising from the transactions described above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Accounts receivable trade
|
|
|
5,076 |
|
|
|
9,681 |
|
|
|
8,283 |
|
Trade accounts payable and accrued expenses
|
|
|
1,073 |
|
|
|
2,095 |
|
|
|
888 |
|
Short term debt
|
|
|
5,437 |
|
|
|
11,237 |
|
|
|
5,207 |
|
Long term debt
|
|
|
21,605 |
|
|
|
5,166 |
|
|
|
15,566 |
|
Other liabilities current
|
|
|
9,027 |
|
|
|
1,715 |
|
|
|
|
|
Other liabilities non current
|
|
|
782 |
|
|
|
14,167 |
|
|
|
|
|
Note 18. Commitments and
contingencies
18.1. PAE
contract
DLS and PAE, a related party, entered into a five-year strategic
agreement for the purpose of solidifying a long-term alliance
for the drilling of oil and gas wells in the San Jorge basin.
The completion and repair of all wells in the area is also part
of the agreement. The strategic agreement expires in June 2008.
PAE represented approximately 55% of DLS revenue in 2005.
PAE may terminate the agreement without cause on
60 days notice or in the case of a spin-off or merger
of DLS that is not consented to by PAE. There is no provision
allowing early termination by DLS and there are no change of
control provisions. In accordance with the strategic agreement,
DLS shall ensure the availability of at least three drilling
rigs, eight workover rigs and five pulling rigs in order to meet
PAEs drilling plans but, in turn, PAE will provide DLS a
sufficient number of drilling locations to keep all such rigs
and associated equipment working during the term of the
strategic agreement, provided that there are no material changes
in the price of oil or adverse results of the production
forecasts. The drilling rigs rates under the agreement are
subject to an efficiency factor for drilling depths up to 2,700
meters. The agreement incorporates a standard drilling time in
hours for a typical drilling prospect up to 2,700 meters.
Drilling beyond 2,700 meters or drilling prospects with
non-standard procedures are at agreed upon hourly rates plus
reimbursable materials and expenses.
|
|
|
18.2. Drilling
fluid contract |
DLS entered into a drilling service contract with Repsol-YPF.
The term of the contract is three years and comprises 50% of all
drilling and fluid services required by the customer in the
Neuquen basin where Repsol-YPF is drilling with approximately 20
rigs. DLS derives 15% of its revenues from this contract.
F-119
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 18. Commitments and
contingencies (continued)
|
|
|
18.3. Source
of drilling fluids |
DLS purchases a wide variety of drilling fluids as well as
components made by other manufacturers and suppliers for use in
its operations. The products used by DLS are manufactured by
other parties. DLS is not dependent on any single source of
supply for any of its raw materials; however, DLS has a
long-term agreement with Tanus, a supplier of chemical
specialties used in mud service, from which DLS agreed to
purchase through 2009 the chemicals it uses to provide mud
services. DLS may terminate these agreement without cause on six
months notice.
The Company is routinely involved in other litigation, claims
and disputes incidental to its business, related to its labor
agreements, which at times involves claims, some of which would
not be covered by insurance. In the opinion of management, none
of the existing litigation will have a material adverse effect
on the Companys financial position, results of operations
or cash flows.
Note 19. Leases
The Company leases space used for the executive offices of the
branch in Argentina of DLS Argentina Limited. This lease is for
an initial three-year term expiring in 2007. It has been
classified as an operating lease. The approximate minimum annual
rental commitment estimated at December 31, 2005 is
USD 70 for each of the next three years. The total rental
expense associated with this lease for the years ended
December 31, 2005, 2004 and 2003 was USD 63
USD 72 and USD 59 respectively.
Note 20. Fair value of financial
instruments
The following table presents the carrying amounts and estimated
fair values of the Companys financial instruments at
December 31, 2005. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a
current transaction between willing parties.
|
|
|
|
|
|
|
|
|
|
|
Carrying | |
|
Fair | |
|
|
amount | |
|
value | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
|
731 |
|
|
|
731 |
|
Accounts receivable
|
|
|
26,826 |
|
|
|
26,826 |
|
Accounts payable
|
|
|
13,522 |
|
|
|
13,522 |
|
Short-term debt
|
|
|
8,690 |
|
|
|
8,690 |
|
Long-term debt
|
|
|
29,640 |
|
|
|
29,640 |
|
Other liabilities
|
|
|
9,970 |
|
|
|
9,970 |
|
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
|
|
|
|
|
Cash and cash equivalents, trade accounts receivable, other
assets, short term debt, trade accounts payable, accrued
expenses: The carrying amounts approximate fair value because of
the short maturity of these instruments. |
F-120
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 20. Fair value of financial
instruments (continued)
|
|
|
|
|
Long-term debt: The fair value of the Companys long-term
debt is estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar
debt instruments of comparable maturities by the Companys
bankers. |
Note 21. New accounting
pronouncements
SFAS No. 151, Inventory Costs, was issued by the Financial
Accounting Standards Board (FASB) in November 2004. This
statement amends Accounting Research Bulletin No. 43, to
clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials should be recognized as
current-period charges, and it also requires that allocation of
fixed production overheads be based on the normal capacity of
the related production facilities. The provisions of this
statement will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The provisions
of this statement are applied prospectively. The Company expects
that the adoption of this statement will not have a material
impact on its financial position or results of operations in the
future.
FASB issued in December 2004 SFAS No. 153, Exchanges of
Non-monetary Assets, An Amendment of APB Opinion No. 29.
This statement addresses the measurement of exchanges of
non-monetary assets and eliminates the exception from fair value
measurement for non-monetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do
not have commercial substance. SFAS No. 153 is effective
for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005. The provisions of this
statement are applied prospectively. The Company expects that
the adoption of this statement will not have a material impact
on its financial position or results of operations in the future.
In May 2005, FASB issued the SFAS No. 154, Accounting
Changes and Error Corrections. This statement replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Change in Interim Financial
Statements, and changes the requirements for the accounting and
reporting of a change in an accounting principle. The adoption
of this statement did not have any effect on the Companys
consolidated financial statements.
On April 4, 2005, FASB adopted Staff Position FSP FAS 19-1
that amends SFAS No. 19 Financial Accounting and Reporting
by Oil and Gas Producing Companies, to permit the continued
capitalization of exploratory well costs beyond one year if
(a) the well found a sufficient quantity of reserves to
justify its completion as a producing well and (b) the
entity is making sufficient progress assessing the reserves and
the economic and operating viability of the project. The
guidance in the FSP is required to be applied prospectively as
from the third quarter of 2005. The adoption of this FSP did not
have any impact on the Companys 2005 results of operations.
In September 2005, the Emerging Issue Task Force
(EITF) concluded in
Issue 04-13,
Accounting for Purchases and Sales of Inventory with the Same
Counterparty, that two or more exchange transactions involving
inventory with the same counterparty that are entered into in
contemplation of one another should be combined for purposes of
evaluating the effect of APB Opinion 29, Accounting for
Non-monetary Transactions. Additionally, the EITF reached a
consensus that a non-monetary exchange where an entity transfers
finished goods inventory in exchange for the receipt of raw
materials or work-in-progress inventory within the same line of
business should generally
F-121
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 21. New accounting
pronouncements (continued)
be recognized by the entity at fair value. The consensus in this
issue should be applied to transactions completed in reporting
periods beginning after March 15, 2006, whether pursuant to
arrangements that were in place at the date of initial
application of the consensus or arrangements executed subsequent
to that date. The Company expects that the adoption of this EITF
will not have a material impact on its financial position or
results of operations in the future.
Note 22. Subsequent events
In March 2006, the Company entered into an agreement to sell its
interest in the exploratory block referred to in Note 8 to its
co-owner Barrancas Sur S.A. The transfer was made at the
December 31, 2005 book value.
F-122
ALLIS-CHALMERS ENERGY INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLIS- | |
|
|
|
Specialty | |
|
Debt | |
|
|
|
Rogers | |
|
|
|
DLS | |
|
Financing | |
|
ALLIS- | |
|
|
Chalmers | |
|
Specialty | |
|
Purchase | |
|
Financing | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Pro Forma | |
|
Pro Forma | |
|
Chalmers | |
|
|
Consolidated | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
1,920 |
|
|
$ |
17,476 |
|
|
$ |
(17,260 |
)AA |
|
$ |
6,206 |
AB |
|
$ |
561 |
|
|
$ |
(6,300 |
)AC |
|
$ |
731 |
|
|
$ |
(107,612 |
)AD |
|
$ |
110,212 |
AE |
|
$ |
5,934 |
|
Trade receivables, net
|
|
|
26,964 |
|
|
|
7,254 |
|
|
|
|
|
|
|
|
|
|
|
1,851 |
|
|
|
|
|
|
|
26,826 |
|
|
|
|
|
|
|
|
|
|
|
62,895 |
|
Inventories
|
|
|
5,945 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
1,254 |
|
|
|
|
|
|
|
16,640 |
|
|
|
|
|
|
|
|
|
|
|
24,187 |
|
Prepaids and other
|
|
|
823 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
4,069 |
|
|
|
|
|
|
|
|
|
|
|
5,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
35,652 |
|
|
|
25,141 |
|
|
|
(17,260 |
) |
|
|
6,206 |
|
|
|
3,969 |
|
|
|
(6,300 |
) |
|
|
48,266 |
|
|
|
(107,612 |
) |
|
|
110,212 |
|
|
|
98,274 |
|
Property and equipment, net
|
|
|
80,574 |
|
|
|
19,046 |
|
|
|
71,061 |
AF |
|
|
|
|
|
|
1,542 |
|
|
|
8,344 |
AF |
|
|
117,786 |
|
|
|
12,813 |
AF |
|
|
|
|
|
|
311,166 |
|
Goodwill
|
|
|
12,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,417 |
|
Other intangibles, net
|
|
|
6,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
522 |
AG |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,305 |
|
Debt issuance costs, net
|
|
|
1,298 |
|
|
|
|
|
|
|
|
|
|
|
5,365 |
AH |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
788 |
AH |
|
|
7,451 |
|
Other assets
|
|
|
631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
137,355 |
|
|
$ |
44,187 |
|
|
$ |
53,801 |
|
|
$ |
11,571 |
|
|
$ |
5,694 |
|
|
$ |
2,566 |
|
|
$ |
166,054 |
|
|
$ |
(94,799 |
) |
|
$ |
111,000 |
|
|
$ |
437,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
5,632 |
|
|
$ |
3,084 |
|
|
$ |
(3,084 |
)AI |
|
$ |
(3,234 |
)AJ |
|
$ |
360 |
|
|
$ |
(360 |
)AI |
|
$ |
8,690 |
|
|
$ |
(8,690 |
)AI |
|
$ |
|
|
|
$ |
2,398 |
|
Trade accounts payable
|
|
|
9,018 |
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
691 |
|
|
|
|
|
|
|
13,522 |
|
|
|
|
|
|
|
|
|
|
|
24,611 |
|
Accrued employee benefits
|
|
|
1,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,205 |
|
|
|
|
|
|
|
|
|
|
|
6,476 |
|
Accrued interest
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289 |
|
Accrued expenses
|
|
|
4,350 |
|
|
|
13,008 |
|
|
|
(12,400 |
)AK |
|
|
|
|
|
|
19 |
|
|
|
50 |
AL |
|
|
11,959 |
|
|
|
(9,027 |
)AM |
|
|
|
|
|
|
7,959 |
|
Accounts payable, related parties
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
20,620 |
|
|
|
17,472 |
|
|
|
(15,484 |
) |
|
|
(3,234 |
) |
|
|
1,070 |
|
|
|
(310 |
) |
|
|
39,376 |
|
|
|
(17,717 |
) |
|
|
|
|
|
|
41,793 |
|
Accrued postretirement benefit obligations
|
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335 |
|
Long-term debt, net of current maturities
|
|
|
54,937 |
|
|
|
429 |
|
|
|
95,571 |
AN |
|
|
14,805 |
AO |
|
|
617 |
|
|
|
5,133 |
AN |
|
|
29,640 |
|
|
|
(29,640 |
)AN |
|
|
35,000 |
AO |
|
|
206,492 |
|
Other long-term liabilities
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
AP |
|
|
1,478 |
|
|
|
16,943 |
AQ |
|
|
|
|
|
|
19,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,480 |
|
|
|
17,901 |
|
|
|
80,087 |
|
|
|
11,571 |
|
|
|
1,687 |
|
|
|
4,923 |
|
|
|
70,494 |
|
|
|
(30,414 |
) |
|
|
35,000 |
|
|
|
267,729 |
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
169 |
|
|
|
156 |
|
|
|
(156 |
)AR |
|
|
|
|
|
|
24 |
|
|
|
(23 |
)AR |
|
|
42,963 |
|
|
|
(42,938 |
)AR |
|
|
64 |
AS |
|
|
259 |
|
Capital in excess of par value
|
|
|
58,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,649 |
AR |
|
|
31,606 |
|
|
|
(456 |
)AR |
|
|
75,936 |
AS |
|
|
167,624 |
|
Treasury stock, at cost
|
|
|
|
|
|
|
(736 |
) |
|
|
736 |
AR |
|
|
|
|
|
|
(4 |
) |
|
|
4 |
AR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
1,817 |
|
|
|
26,866 |
|
|
|
(26,866 |
)AR |
|
|
|
|
|
|
3,987 |
|
|
|
(3,987 |
)AR |
|
|
20,991 |
|
|
|
(20,991 |
)AR |
|
|
|
|
|
|
1,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
60,875 |
|
|
|
26,286 |
|
|
|
(26,286 |
) |
|
|
0 |
|
|
|
4,007 |
|
|
|
(2,357 |
) |
|
|
95,560 |
|
|
|
(64,385 |
) |
|
|
76,000 |
|
|
|
169,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
137,355 |
|
|
$ |
44,187 |
|
|
$ |
53,801 |
|
|
$ |
11,571 |
|
|
$ |
5,694 |
|
|
$ |
2,566 |
|
|
$ |
166,054 |
|
|
$ |
(94,799 |
) |
|
$ |
111,000 |
|
|
$ |
437,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma consolidated financial
statements.
F-123
ALLIS-CHALMERS ENERGY INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2005
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allis- | |
|
|
|
Delta | |
|
|
|
Capcoil | |
|
W.T. | |
|
W.T. ENT | |
|
MI | |
|
|
Chalmers | |
|
Delta | |
|
Purchase | |
|
Capcoil | |
|
Purchase | |
|
ENT | |
|
Purchase | |
|
Purchase | |
|
|
Consolidated | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
105,344 |
|
|
$ |
821 |
|
|
$ |
|
|
|
$ |
2,161 |
|
|
|
|
|
|
$ |
2,057 |
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
74,763 |
|
|
|
211 |
|
|
|
82 |
A |
|
|
1,458 |
|
|
|
132 |
A |
|
|
1,331 |
|
|
|
(286 |
)B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
30,581 |
|
|
|
610 |
|
|
|
(82 |
) |
|
|
703 |
|
|
|
(132 |
) |
|
|
726 |
|
|
|
286 |
|
|
|
|
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative Expense
|
|
|
17,363 |
|
|
|
985 |
|
|
|
(665 |
)F |
|
|
421 |
|
|
|
28 |
F |
|
|
342 |
|
|
|
75 |
F |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
13,218 |
|
|
|
(375 |
) |
|
|
583 |
|
|
|
282 |
|
|
|
(160 |
) |
|
|
384 |
|
|
|
211 |
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(4,397 |
) |
|
|
(11 |
) |
|
|
11 |
J |
|
|
(26 |
) |
|
|
(16 |
)J |
|
|
(17 |
) |
|
|
(102 |
)K |
|
|
(366 |
) |
|
Other
|
|
|
186 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
9,007 |
|
|
|
(267 |
) |
|
|
594 |
|
|
|
256 |
|
|
|
(176 |
) |
|
|
367 |
|
|
|
109 |
|
|
|
(366 |
) |
Minority Interest
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488 |
N |
Taxes
|
|
|
(1,344 |
) |
|
|
(142 |
) |
|
|
142 |
O |
|
|
(87 |
) |
|
|
87 |
O |
|
|
(111 |
) |
|
|
111 |
O |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
|
7,175 |
|
|
|
(409 |
) |
|
|
736 |
|
|
|
169 |
|
|
|
(89 |
) |
|
|
256 |
|
|
|
220 |
|
|
|
122 |
|
|
|
Preferred Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributed to common shares
|
|
$ |
7,175 |
|
|
$ |
(409 |
) |
|
$ |
736 |
|
|
$ |
169 |
|
|
$ |
(89 |
) |
|
$ |
256 |
|
|
$ |
220 |
|
|
$ |
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832 |
|
|
|
|
|
|
|
55 |
R |
|
|
|
|
|
|
62 |
R |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,238 |
|
|
|
|
|
|
|
55 |
R |
|
|
|
|
|
|
62 |
R |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty | |
|
|
|
|
|
Rogers | |
|
|
|
DLS | |
|
|
|
ALLIS- | |
|
|
Specialty | |
|
Purchase | |
|
Debt | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Purchase | |
|
Offering | |
|
Chalmers | |
|
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Sales
|
|
$ |
31,439 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,390 |
|
|
$ |
|
|
|
$ |
129,849 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
280,061 |
|
Cost of Sales
|
|
|
7,280 |
|
|
|
5,564 |
A |
|
|
|
|
|
|
4,372 |
|
|
|
500 |
G |
|
|
119,717 |
|
|
|
(7,484 |
)D |
|
|
|
|
|
|
207,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
24,159 |
|
|
|
(5,564 |
) |
|
|
|
|
|
|
4,018 |
|
|
|
(500 |
) |
|
|
10,132 |
|
|
|
7,484 |
|
|
|
|
|
|
|
72,421 |
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative Expense
|
|
|
19,632 |
|
|
|
(13,149 |
)G |
|
|
700 |
H |
|
|
2,570 |
|
|
|
75 |
F |
|
|
3,933 |
|
|
|
|
|
|
|
98 |
H |
|
|
32,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
4,527 |
|
|
|
7,585 |
|
|
|
(700 |
) |
|
|
1,448 |
|
|
|
(575 |
) |
|
|
6,199 |
|
|
|
7,484 |
|
|
|
(98 |
) |
|
|
40,013 |
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
136 |
|
|
|
(136 |
) I |
|
|
|
|
|
|
53 |
|
|
|
(53 |
)I |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
Interest Expense
|
|
|
(185 |
) |
|
|
(8,455 |
)L |
|
|
(1,236 |
)L |
|
|
|
|
|
|
(438 |
)L |
|
|
(5,394 |
) |
|
|
2,713 |
L |
|
|
(3,150 |
) L |
|
|
(21,069 |
) |
|
Other
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
7,127 |
|
|
|
(6,366 |
)M |
|
|
|
|
|
|
1,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes
|
|
|
4,550 |
|
|
|
(1,006 |
) |
|
|
(1,936 |
) |
|
|
1,782 |
|
|
|
(1,066 |
) |
|
|
7,932 |
|
|
|
3,831 |
|
|
|
(3,248 |
) |
|
|
20,363 |
|
Minority Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86 |
)P |
|
|
(1,319 |
) |
|
|
(2,798 |
)Q |
|
|
390 |
P |
|
|
(5,157 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
|
4,550 |
|
|
|
(1,006 |
) |
|
|
(1,936 |
) |
|
|
1,782 |
|
|
|
(1,152 |
) |
|
|
6,613 |
|
|
|
1,033 |
|
|
|
(2,858 |
) |
|
|
15,206 |
|
|
|
Preferred Dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) attributed to common shares
|
|
$ |
4,550 |
|
|
$ |
(1,006 |
) |
|
$ |
(1,936 |
) |
|
$ |
1,782 |
|
|
$ |
(1,152 |
) |
|
$ |
6,613 |
|
|
$ |
1,033 |
|
|
$ |
(2,858 |
) |
|
$ |
15,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
R |
|
|
|
|
|
|
2,500 |
R |
|
|
16,327 |
S |
|
|
34,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337 |
R |
|
|
|
|
|
|
2,500 |
R |
|
|
16,327 |
S |
|
|
35,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-125
ALLIS-CHALMERS ENERGY INC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the
historical financial statements:
|
|
|
AA)
|
|
Reflects the use of excess cash of Specialty to either pay
existing debt or to reduce the amount of borrowing needed to
complete the acquisition. |
|
AB)
|
|
Reflects the excess proceeds from our $160 million senior
notes offering in January 2006. |
|
AC)
|
|
Reflects the cash needed to complete the acquisition, the cash
payment of $11.3 million to purchase Rogers, net of
$5.0 million of borrowings under existing credit facilities. |
|
AD)
|
|
Reflects the cash needed to complete the acquisition. |
|
AE)
|
|
Reflects the cash raised from this offering and the proposed
offering, issuance and sale of additional senior notes. |
|
AF)
|
|
Reflects the step-up in the basis of the fixed assets as a
result of the acquisition to the lower of fair market value or
actual cost. |
|
AG)
|
|
Intangibles associated with the acquisition of Rogers. |
|
AH)
|
|
Fees and expenses related to the $160 million senior notes
offering in January 2006 and the proposed sale of an additional
$35 million of senior notes. |
|
AI)
|
|
Reflects the repayment of debt of the acquisitions prior to the
acquisition. |
|
AJ)
|
|
Reflects the repayment of current maturities of debt outstanding
at December 31, 2005 from the proceeds of the
$160 million senior notes offering in January 2006. |
|
AK)
|
|
Reflects the payment of accrued expenses at the time of
acquisition. |
|
AL)
|
|
Reflects the current portion of the non-compete payment to be
paid to the seller. |
|
AM)
|
|
Reflects the repayment of drilling block expenses of
$7.2 million and rig related expenses of $1.8 million
by the seller prior to the acquisition. |
|
AN)
|
|
Reflects the net borrowing to effect the acquisitions of
Specialty and Rogers and the pending acquisition of DLS.
$96.0 million was borrowed for the Specialty acquisition,
$5.0 million for the Rogers acquisition in addition to the
$750,000 note issued to the seller, offset by debt repayments on
all three acquisitions by the seller prior to closing. |
|
AO)
|
|
Reflects the proceeds of the $160 million senior notes
offering in January 2006 not used in the Specialty acquisition
and the proposed sale of an additional $35 million of
senior notes. |
|
AP)
|
|
Reflects the long-term portion of non-compete payments to the
sellers. |
|
AQ)
|
|
Reflects deferred taxes on the acquisition due to differences
between the book and tax basis of acquired assets. |
|
AR)
|
|
Reflects the elimination of the acquired companies
stockholders equity and the issuance of
125,285 shares of our common stock in the Rogers
acquisition and 2.5 million shares in the pending DLS
acquisition. |
|
AS)
|
|
Reflects the additional stock issued in connection with this
offering, net of expenses. |
F-126
ALLIS-CHALMERS ENERGY INC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
The following pro forma adjustments have been made to the
historical financial statements:
|
|
|
A) |
|
Reflects the increase in depreciation expense as a result of the
step-up in basis of fixed assets. |
|
B) |
|
Reflects the elimination of lease expense not assumed as part of
the acquisition, net of additional depreciation expense of
$187,000 due to the increase value of the assets acquired. |
|
C) |
|
Reflects the increase in depreciation expense as a result of the
step-up in the basis of fixed assets and additional rent expense
of $216,000, offset by insurance savings of $215,000. |
|
D) |
|
Reflects the increase in depreciation expense as a result of the
step-up in the basis of fixed assets offset by $405,000
reduction in lease expense as the lease asset is now owned, a
reduction of $1.4 million of dry hole expense and
$4.9 million of impairment charges. |
|
E) |
|
Reflects the elimination of year-end bonus paid to the employees
of Delta. |
|
F) |
|
Reflects the increase in amortization due to the increase in
other intangible assets in connection with the acquisitions of
Capcoil, W. T. Enterprises and Rogers. |
|
G) |
|
Reflects the following changes in general and administrative
cost that will result from the acquisition of Specialty: |
|
|
|
The
elimination of year-end bonus paid to employees of
$12.4 million, |
|
|
|
The
elimination of director fees of $96,000, |
|
|
|
The
elimination of professional fees of $78,000, |
|
|
|
decreased
rent expense of $347,000 and |
|
|
|
the
elimination of officer salary of $228,000. |
|
H) |
|
Reflects the amortization on the financing fees related to the
$160 million senior notes offering in January 2006 and the
proposed sale of an additional $35 million of senior notes. |
|
I) |
|
Reflects the elimination of interest income as the pro forma
assumes excess cash was utilized to offset borrowings. |
|
J) |
|
Reflects the elimination of interest expense due to historical
debt not being assumed or replaced. |
|
L) |
|
Reflects the interest expense related to cash borrowed to affect
the acquisitions. |
|
M) |
|
Reflects the elimination of other income related to exploration
activities that we will not be conducting. |
|
N) |
|
Reflects the elimination of the 45% minority interest position
of M-I. |
|
O) |
|
Reflects the elimination of tax provisions of the Delta, Capcoil
and W.T. Enterprises acquisitions as Allis-Chalmers has tax net
operating losses to offset net income of the acquired entities. |
|
P) |
|
Reflects the application of Allis-Chalmers effective tax rate of
12% to the adjustments. |
F-127
ALLIS-CHALMERS ENERGY INC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
|
|
|
Q) |
|
Reflects the application of a 35% tax rate for Argentina income. |
|
R) |
|
Reflects the issuance of shares of our common stock as part of
the acquisition price for Delta, Capcoil, Rogers and DLS. The
pro forma treats the shares as having been issued at the stock
price of $4.90 on January 1, 2005. The Delta acquisition
included consideration of $1.0 million in stock, the
Capcoil acquisition included consideration of $765,000 in stock
and the Rogers acquisition included consideration of $1,650,000
in stock. The pending DLS acquisition is comprised of
2.5 million shares of stock valued at $4.90 per share
for purposes of this pro forma presentation. |
|
S) |
|
Reflects the issuance of shares of our common stock as a result
of this offering. The pro forma treats the shares as having been
issued at the stock price of $4.90 on January 1, 2005. |
F-128
4,716,980 shares
Allis-Chalmers Energy Inc.
Common Stock
PROSPECTUS
RBC Capital
Markets
,
2006
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and
Distribution.
The following table sets forth the various expenses, other than
the underwriting discounts and commissions, payable by us in
connection with the sale and distribution of the securities
being registered. All amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the
National Association of Securities Dealers, Inc. filing fee and
the American Stock Exchange supplemental listing application fee.
|
|
|
|
|
|
SEC registration fee
|
|
$ |
9,847 |
|
NASD filing fee
|
|
$ |
9,703 |
|
American Stock Exchange supplemental listing application fee
|
|
|
* |
|
Accounting fees and expenses
|
|
|
* |
|
Legal fees and expenses
|
|
|
* |
|
Printing and engraving expenses
|
|
|
* |
|
Transfer agent fees and expenses
|
|
|
* |
|
Miscellaneous fees and expenses
|
|
|
* |
|
|
|
|
|
|
Total
|
|
$ |
1,000,000 |
|
|
|
* |
To be completed by amendment. |
Item 14. Indemnification of Directors and
Officers.
The registrants Amended and Restated Certificate of
Incorporation (the Certificate of Incorporation) and
its by-laws provide for the indemnification by the registrant of
each director, officer and employee of the registrant to the
fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended.
Section 145 of the Delaware General Corporation Law
provides in relevant part that a corporation may indemnify any
person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such
persons conduct was unlawful.
In addition, Section 145 provides that a corporation may
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys fees)
actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such
person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to
II-1
the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the
Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court
of Chancery or such other court shall deem proper. Delaware law
further provides that nothing in the above described provisions
shall be deemed exclusive of any other rights to indemnification
or advancement of expenses to which any person may be entitled
under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
The registrants Certificate of Incorporation provides that
a director of the registrant shall not be liable to the
registrant or its stockholders for monetary damages for breach
of fiduciary duty as a director. Section 102(o)(7) of the
Delaware General Corporation Law provides that a provision so
limiting the personal liability of a director shall not
eliminate or limit the liability of a director for, among other
things: breach of the duty of loyalty; acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of the law; unlawful payment of dividends; and
transactions from which the director derived an improper
personal benefit.
The registrant has entered into separate but identical indemnity
agreements (the Indemnity Agreements) with each
director of the registrant and certain officers of the
registrant (the Indemnitees). Pursuant to the terms
and conditions of the Indemnity Agreements, the registrant
indemnified each Indemnitee against any amounts which he or she
becomes legally obligated to pay in connection with any claim
against him or her based upon any action or inaction which he or
she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the registrant or its
subsidiaries, provided, however, that Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in or
not opposed to the best interests of the registrant and, with
respect to any criminal action, had no reasonable cause to
believe Indemnitees conduct was unlawful.
Item 15. Recent Sales of Unregistered
Securities.
We effected a one to five reverse stock split on June 10,
2003. Disclosure set forth below gives retroactive effect to the
reverse stock split.
On January 18, 2006, we completed the issuance and sale of
$160,000,000 aggregate principal amount of our 9.0% Senior
Notes due 2014 (the Senior Notes), pursuant to the
Purchase Agreement, dated as of January 12, 2006 (the
Purchase Agreement), by and among Allis-Chalmers,
the Guarantors named therein, RBC Capital Markets Corporation
(RBC) and Morgan Keegan & Company Inc.
(Morgan Keegan and together with RBC, the
Initial Purchasers). The Senior Notes are jointly
and severally, fully and unconditionally guaranteed by each of
our material domestic restricted subsidiaries (the
Guarantees). The Senior Notes and the Guarantees
were offered and sold in private transactions that were exempt
from the registration requirements of the Securities Act in
conformance with Rule 144A and Regulation S
promulgated by the SEC under the Securities Act. We issued the
Senior Notes pursuant to an indenture, dated as of
January 18, 2006, by and among Allis-Chalmers, the
guarantor parties thereto (the Guarantors) and Wells
Fargo Bank, N.A., as trustee (the Indenture). We
used the net proceeds from the sale of the Senior Notes to fund
our acquisition of Specialty, to repay existing debt and for
general corporate purposes. On January 18, 2006, we also
entered into a Registration Rights Agreement with the Initial
Purchasers (the Registration Rights Agreement),
pursuant to which we agreed to use our commercially reasonable
efforts to (i) file with the SEC a registration statement
on an appropriate form under the Securities Act (the
Exchange Offer Registration Statement) relating to a
registered exchange offer for the Senior Notes under the
Securities Act and (ii) cause the Exchange Offer
Registration Statement to be declared effective under the
II-2
Securities Act within 270 days following January 18,
2006. If we fail to comply with certain obligations under the
Registration Rights Agreement, we will be required to pay
liquidated damages to the holders of the Senior Notes in
accordance with the provisions of the Registration Rights
Agreement.
On May 1, 2005 and April 1, 2005, we issued 223,114
and 168,161 shares, respectively, of our common stock in
connection with our acquisitions of Delta Rental Service, Inc.
and Capcoil Tubing Services, Inc. The transactions were exempt
from the registration requirements of the Securities Act
pursuant to Regulation D promulgated by the SEC under the
Securities Act.
In January 2005, we issued to CTTV Investments, an affiliate of
ChevronTexaco Inc., 20,000 shares of our common stock, in
connection with the execution and delivery of a business
development agreement pursuant to which ChevronTexaco Inc. and
its affiliates may contract for services from our subsidiaries.
In addition, we agreed to issue to CTTV Investments up to an
additional 60,000 shares of common stock based upon the
payments for services made by Chevron Texaco Inc. and its
affiliates to our subsidiaries in calendar year 2005, as
follows: $500,000 to $749,000 20,000 shares;
$750,000 to $1,249,000 40,000 shares; more than
$1,250,000 60,000 shares. The transaction was
exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
On December 10, 2004, we acquired Downhole Injection
Services, LLC and in connection therewith issued to the sellers
568,466 shares of our common stock. The transaction was
exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
In September 2004, we issued 1,300,000 shares of our common
stock to Jens H. Mortensen, our President, Chief Operating
Officer and a director, pursuant to a merger between Jens
Oilfield Service, Inc. and a newly formed subsidiary of
Allis-Chalmers. As a result of the merger, we acquired
Mr. Mortensens 19% interest and now own 100% of
Jens Oilfield Service, Inc. The transaction was exempt
from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
In September 2004, we completed a private placement of
1,956,634 shares of our common stock to the following
investors: Transcontinental Capital Corp.; Milton H. Dresner
Revocable Living Trust; Joseph S. Dresner; J. Steven Emerson
Roth IRA; Waverly Limited Partnership; Rosebury, L.P.; Meteoric,
L.P.; Barbara C. Crane; Bristol Investment Fund, Ltd.; L.H.
Schmieding; Meadowbrook Opportunity Fund LLC; and Kenneth
Malkes. Pursuant to the terms of a stock purchase agreement, we
sold to such investors an aggregate of 3,504,667 shares of
common stock at a price per share of $3.00. The transaction was
exempt from the registration requirements of the Securities Act
pursuant to Regulation D promulgated by the SEC under the
Securities Act. We paid a fee of $410,893 to Morgan
Keegan & Company, Inc. for its services as a placement
agent in connection with the offering.
In August 2004, we completed a private placement of
3,504,667 shares of our common stock to the following
investors: Bear Stearns Securities Corp., Custodian, J. Steven
Emersen Roth IRA; Bear Stearns Securities Corp., Custodian, J.
Steven Emersen IRA RO II; Bear Stearns Securities Corp.,
Custodian, Emerson Partners; GSSF Master Fund, LP; Gerald Lisac,
IRA C/ O Union Bank of California, Custodian; May Management,
Inc.; Micro Cap Partners, L.P.; MK Employee Early Stage Fund,
L.P.; Morgan Keegan Early Stage Fund, L.P.; Palo Alto Global
Energy Fund, L.P.; RRCM Onshore I, L.P.; Earl Schatz, IRA
C/ O Union Bank of California, Custodian; Straus Partners, L.P.,
Straus-GEPT Partners, LP; UBTI Free, L.P.; U.S. Bank NA as
Custodian of the Holzman Foundation; U.S. Bank NA as
Trustee of the Reliable Credit Association Inc.
Pension & Trust; and U.S. Bank NA as Trustee of
the Reliable Credit Association Inc. Profit Sharing
Plan & Trust. Pursuant to the terms of a stock purchase
agreement, we sold to the investors an aggregate of
3,504,667 shares of common stock at a price per share of
$3.00 for an aggregate purchase price of $10,514,000. The
transaction was exempt from the registration requirements of the
Securities Act pursuant to Regulation D promulgated by the
II-3
SEC under the Securities Act. We paid a fee of $735,984 to
Morgan Keegan & Company, Inc. for its services as a
placement agent in connection with the offering.
In May 2004, we issued a warrant to
purchase 20,000 shares of our common stock at an
exercise price of $4.75 per share to director Jeffrey
Freedman in consideration of financial advisory services to be
provided by Mr. Freedman pursuant to a consulting
agreement. The warrants were exercised in November 2005. The
transaction was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities
Act.
In April 2004, we completed a private placement of
620,000 shares of common stock and warrants to
purchase 800,000 shares of common stock to the
following investors: Christopher Engel; Donald Engel; Engel
Investors 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 price of $2.50 per share, expiring on
April 1, 2006. Warrants for 99,950, 119,940, 266,666 and
266,667 shares, respectively, were exercised between
November 2005 and January 31, 2006 by Christopher Engel,
Donald Engel, Engel Investors Defined Benefit Plan, RER Corp and
Leonard Toboroff. Concurrently with this transaction, Energy
Spectrum Partners LP, the holder of all outstanding shares of
our Series A Preferred Stock, converted all such shares,
including accrued dividend rights, into 1,718,090 shares of
common stock. These transactions were exempt from the
registration requirements of the Securities Act pursuant to
Regulation D promulgated by the SEC under the Securities
Act.
In April 2004, we issued warrants to
purchase 20,000 shares of common stock to Wells Fargo
Credit, Inc., in connection with the extension of credit by
Wells Fargo Credit, Inc. The warrants are exercisable at
$0.75 per share and expire in April 2014. The transaction
was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act.
In March 2004, we issued a warrant to
purchase 340,000 shares of our common stock at an
exercise price of $2.50 per share to Morgan Joseph in
consideration of financial advisory services to be provided by
Morgan Joseph pursuant to a consulting agreement. The warrants
expire in February 2009. The transaction was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act.
In February 2002, we purchased from our current President and
Chief Operating Officer, Jens H. Mortensen, Jr., 81% of the
outstanding Jens stock for (i) $10,250,000 in cash,
(ii) a $4,000,000 note payable with interest at an annual
rate of 7.5% with the principal due in four years,
(iii) $1,234,560 for a non-competition agreement payable in
sixty monthly installments over five years, (iv) an
additional payment of $841,000 based upon Jens working
capital as of February 1, 2002 and
(v) 279,570 shares of our common stock. The
transaction was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of the Securities
Act. We entered into a three-year employment agreement with
Mr. Mortensen under which we 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 entered into an
agreement pursuant to which Mr. Mortensen had the option to
exchange his shares of stock of Jens for shares of our
common stock based on a formula set forth in the agreement. On
September 30, 2004, we issued Mr. Mortensen
1,300,000 shares of common stock in exchange for his
minority interest in Jens. The number of shares was not
based on the formula set forth in the parties agreement, but was
negotiated by the parties. The transaction was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act.
II-4
In February 2002, we acquired substantially all of the capital
stock of Strata Directional Technology, Inc. from Energy
Spectrum. In connection therewith, we issued to Energy Spectrum
3,500,000 shares of Series A 10% Cumulative
Convertible Preferred Stock and warrants to
purchase 87,500 shares of common stock at an exercise
price of $0.75 per share, expiring in February 2012. The
transaction was exempt from the registration requirements of the
Securities Act pursuant to Regulation D promulgated by the
SEC under the Securities Act. In addition, in February 2003, as
additional consideration for the shares of Strata, we issued to
Energy Spectrum additional warrants to purchase 175,000
additional shares of common stock at an exercise price of
$0.75 per share, expiring in February 2012. The transaction
was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) of the Securities Act.
In February 2002 we issued warrants to
purchase 300,000 shares of common stock to Wells Fargo
Energy Capital, Inc., in connection with the extension of credit
by Wells Fargo Energy Capital, Inc. Warrants to
purchase 233,000 shares were exercisable at
$0.75 per share and were repurchased by Allis-Chalmers in
December 2004. Warrants to purchase 67,000 shares
exercisable at $5.00 per share are currently outstanding
and expire February 1, 2011. The transaction was exempt
from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act.
|
|
Item 16. |
Exhibits and Financial Statement Schedules. |
(a) Exhibits. The exhibits listed in the
accompanying Exhibit Index are filed (except where
otherwise indicated) as part of this registration statement.
(b) Financial Statement Schedules. No financial
statement schedules are included in Part II of this
registration statement because the information required to be
set forth herein is not applicable or is shown in our
consolidated financial statements or the notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
|
|
|
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective. |
|
|
(2) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. |
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Houston, State of Texas, on this
3rd day of May, 2006.
|
|
|
ALLIS-CHALMERS ENERGY INC. |
|
|
|
|
By: |
/s/ Munawar H. Hidayatallah |
|
|
|
|
|
Munawar H. Hidayatallah |
|
Chief Executive Officer and Chairman of the Board |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Munawar
H. Hidayatallah and Victor M. Perez, and each of them, as such
signatorys true and lawful
attorneys-in-fact and
agents with full power of substitution and resubstitution, to
sign on his or her behalf, individually and in the capacities
stated below, any and all amendments (including post-effective
amendments) to this registration statement (and to any
registration statement filed pursuant to Rule 462 under the
Securities Act), and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the foregoing, as fully as to all intents
and purposes as such signatory might or could do in person,
hereby ratifying and confirming all that said
attorneys-in-fact and
agents, or either of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to requirements of the Securities Act, this
registration statement has been signed on May 3, 2006 by
the following persons in the capacities indicated.
|
|
|
/s/ Munawar H.
Hidayatallah
Munawar
H. Hidayatallah
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer) |
|
/s/ David Wilde
David
Wilde
President and Chief Operating Officer |
|
/s/ Victor M. Perez
Victor
M. Perez
Chief Financial Officer
(Principal Financial Officer) |
|
/s/ Bruce Sauers
Bruce
Sauers
Chief Accounting Officer
(Principal Accounting Officer) |
|
/s/ Jeffrey R. Freedman
Jeffrey
R. Freedman
Director |
|
/s/ Victor F. Germack
Victor
F. Germack
Director |
|
/s/ Thomas E. Kelly
Thomas
E. Kelly
Director |
|
John
E. McConnaughy, Jr.
Director |
II-6
|
|
|
/s/ Jens H.
Mortensen, Jr.
Jens
H. Mortensen, Jr.
Director |
|
/s/ Robert E.
Nederlander
Robert
E. Nederlander
Director |
|
/s/ Leonard Toboroff
Leonard
Toboroff
Director |
|
/s/ Thomas O.
Whitener, Jr.
Thomas
O. Whitener, Jr.
Director |
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
1 |
.1** |
|
Form of Underwriting Agreement. |
|
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). |
|
2 |
.7 |
|
Stock Purchase Agreement dated as of December 20, 2005
between the Registrant and Joe Van Matre (incorporated by
reference to the Registrants Annual Report on
Form 10-K for the year ended December 31, 2005). |
|
2 |
.8*** |
|
Stock Purchase Agreement, dated as of April 27, 2006, by
and among Bridas International Holdings Ltd., Bridas Central
Company Ltd., Associated Petroleum Investors Limited, and the
Registrant. |
|
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 on 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). |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
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). |
|
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, 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 the
Registrant, 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 24, 2006). |
|
4 |
.12 |
|
Form of 9.0% Senior Note due 2014 (incorporated by
reference to the Registrants Current Report on
Form 8-K filed on January 24, 2006). |
|
5 |
.1** |
|
Opinion of Andrews Kurth LLP regarding the legality of the
securities being registered hereby. |
|
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 among
Registrant, the Pension Benefit Guarantee Corporation and others
(incorporated by reference to Registrants Current Report
on Form 8-K filed on May 15, 2002). |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
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). |
|
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 by and
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 by and
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). |
|
10 |
.23 |
|
Employment Agreement dated October 11, 2004, by and between
the Registrant and Theodore F. Pound III (incorporated by
reference to Registrants Current Report on Form 8-K
filed on October 15, 2004). |
|
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, 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). |
|
10 |
.25 |
|
Amended and Restated Credit Agreement dated as of
December 7, 2004, by and between AirComp LLC and Wells
Fargo Bank, NA (incorporated by reference to Registrants
Current Report on Form 8-K filed on December 13, 2004). |
|
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). |
|
10 |
.27 |
|
Stock Purchase Agreement dated April 1, 2005 by and among
the Registrant, 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). |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
10 |
.28 |
|
Stock Purchase Agreement effective May 1, 2005, by and
among the Registrant, 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). |
|
10 |
.29 |
|
Purchase Agreement dated July 11, 2005 by and among the
Registrant, 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). |
|
10 |
.30 |
|
Asset Purchase Agreement dated July 11, 2005 by and among
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). |
|
10 |
.31 |
|
First Amendment to Stockholder Agreement by and among the
Registrant and the Stockholders named therein (incorporated by
reference to the Registrants Current Report on
Form 8-K filed on August 5, 2005). |
|
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). |
|
10 |
.33 |
|
Purchase Agreement dated as of January 12, 2006 by and
among the Registrant, 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). |
|
10 |
.34 |
|
Registration Rights Agreement dated as of January 18, 2006
by and among the Registrant, 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). |
|
10 |
.35 |
|
Amended and Restated Credit Agreement dated as of
January 18, 2006 by and among the Registrant, 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). |
|
16 |
.1 |
|
Letter from Gordon Hughes & Banks LLP dated
October 5, 2004 to the Securities and Exchange Commission
(incorporated by reference to the Registrants Current
Report on Form 8-K filed on October 6, 2004). |
|
21 |
.1 |
|
Subsidiaries of Registrant (incorporated by reference to the
Registrants Annual Report on Form 10-K for the year
ended December 31, 2005). |
|
23 |
.1* |
|
Consent of UHY Mann Frankfort Stein & Lipp CPAs, LLP. |
|
23 |
.2* |
|
Consent of Gordon, Hughes and Banks, LLP. |
|
23 |
.3* |
|
Consent of Wright, Moore, Dehart, Dupuis & Hutchinson,
LLC. |
|
23 |
.4* |
|
Consent of Curtis Blakely & Co., PC. |
|
23 |
.5* |
|
Consent of Accounting & Consulting Group, LLP. |
|
23 |
.6* |
|
Consent of UHY Mann Frankfort Stein & Lipp CPAs, LLP. |
|
23 |
.7* |
|
Consent of Sibille (formerly Finsterbusch Pickenhayn Sibille). |
|
23 |
.8** |
|
Consent of Andrews Kurth LLP (to be included in
Exhibit 5.1). |
|
24 |
.1* |
|
Power of Attorney (included in the signature page of this
registration statement). |
|
|
* |
Filed herewith. |
|
** |
To be filed by an amendment to this registration statement. |
|
*** |
To be incorporated by reference to the Registrants
Quarterly Report on Form 10-Q for the period ended
March 31, 2006. |
|
|
|
Compensation plan or arrangement. |