sv1za
As filed with the Securities and Exchange Commission on
August 8, 2006
Registration
No. 333-133874
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 6
to
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)
|
|
|
$41,860,000 |
|
|
$4,480(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(3) |
The registrant has previously paid fees of $9,844. |
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
August 8, 2006
PROSPECTUS
2,500,000 shares
Allis-Chalmers Energy Inc.
Common Stock
We are offering 2,500,000 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 August 7, 2006, the last sale
price reported for our common stock on the American Stock
Exchange was $14.56 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 10.
|
|
|
|
|
|
|
|
|
|
|
Per Share | |
|
Total | |
|
|
| |
|
| |
Public offering price
|
|
$ |
|
|
|
$ |
|
|
Underwriting discounts
|
|
$ |
|
|
|
$ |
|
|
Proceeds to us before expenses
|
|
$ |
|
|
|
$ |
|
|
We have granted the underwriters a
30-day option to
purchase up to 375,000 additional shares to cover any
over-allotments.
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
|
|
A.G. Edwards |
Johnson Rice & Company L.L.C. |
,
2006
DIRECTIONAL DRILLING SERVICES PROVIDES WELL PLANNING AND ENGINEERING SERVICES, DIRECTIONAL
DRILLING PACKAGES, DOWNHOLE MOTOR TECHNOLOGY, WELL SITE DIRECTIONAL SUPERVISION, Our Businesses
EXPLORATORY AND DEVELOPMENT RE-ENTRY DRILLING, DOWNHOLE GUIDANCE AND OTHER DRILLING SERVICES.
RENTAL TOOLS SUPPLIES SPECIALIZED RENTAL EQUIPMENT FOR BOTH ONSHORE AND OFFSHORE WELL DRILLING,
COMPLETION AND WORKOVER OPERATIONS. CASING AND TUBING SERVICES SUPPLIES SPECIALIZED EQUIPMENT AND
OPERATORS TO PERFORM A VARIETY OF PIPE HANDLING SERVICES, INCLUDING CASING AND TUBING, CHANGING OUT
DRILL PIPE AND RETRIEVING PRODUCTION TUBING FOR ONSHORE AND OFFSHORE DRILLING AND WORKOVER
OPERATIONS. This is a promising time for the energy industry as worldwide demand and strong
commodity prices drive exploration and production activity to new levels. COMPRESSED AIR DRILLING
SERVICES PROVIDES COMPRESSION, BOOSTERS, MIST PUMPS, HAMMERS AND BITS, CHEMICALS AND OTHER
SPECIALIZED PRODUCTS FOR UNDERBALANCED DRILLING AND WORKOVER APPLICATIONS. PRODUCTION SERVICES
SUPPLIES SPECIALIZED EQUIPMENT AND OPERATORS TO INSTALL AND RETRIEVE CAPILLARY TUBING AND TO
PERFORM WORKOVER SERVICES WITH COILED TUBING UNITS TO ENHANCE AND INCREASE PRODUCTION IN EXISTING
WELLS AND TREAT WELL CORROSION. Allis-Chalmers goal is to achieve a strong position
in markets that are underserved by global oilfield service companies by expanding services from
its existing locations, broadening its customer base,increasing market share with existing
customers and diversifying its operations geographically.
|
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 |
|
|
|
|
ii |
|
|
|
|
ii |
|
|
|
|
iii |
|
|
|
|
iii |
|
|
|
|
iv |
|
|
|
|
iv |
|
|
|
|
1 |
|
|
|
|
10 |
|
|
|
|
27 |
|
|
|
|
27 |
|
|
|
|
28 |
|
|
|
|
29 |
|
|
|
|
30 |
|
|
|
|
41 |
|
|
|
|
43 |
|
|
|
|
62 |
|
|
|
|
73 |
|
|
|
|
81 |
|
|
|
|
87 |
|
|
|
|
89 |
|
|
|
|
92 |
|
|
|
|
95 |
|
|
|
|
98 |
|
|
|
|
98 |
|
|
|
|
F-1 |
|
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.
i
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,
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 9. 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.
ii
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 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. |
iii
|
|
|
laydown machines |
|
A truck mounted machine used to move drill pipe, 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. |
|
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 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
iv
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 to such
report, as filed with the SEC on May 1, 2006, and Amendment
No. 2 to such report, as filed with the SEC on
July 24, 2006, which we collectively refer to as our 2005
Form 10-K; |
|
|
|
our quarterly report on
Form 10-Q for the
quarter ended March 31, 2006, as filed with the SEC on
May 10, 2006, as amended by Amendment No. 1 to such
report, as filed with the SEC on July 24, 2006, which we
collectively refer to as our First Quarter 2006
Form 10-Q;
and |
|
|
|
|
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,
April 28, 2006, May 9, 2006, June 16, 2006,
July 17, 2006 and July 27, 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 and repayment of
obligations outstanding under a subordinated note payable to
M-I LLC with the
proceeds of this stock offering and a concurrent debt financing
of approximately $80.0 million. When we refer to the
Specialty transactions, we mean our acquisition of Specialty
Rental Tools, Inc., or Specialty, and the related financing of
that acquisition and repayment of obligations outstanding under
our credit facility with the proceeds from our
$160.0 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
$281.3 million, net income of $8.2 million and EBITDA
of $68.7 million for the fiscal year ended
December 31, 2005. Giving pro forma as adjusted effect to
the recent Rogers and the pending DLS transactions, we would
have generated revenues of $87.9 million, net income of
$7.5 million and EBITDA of $22.9 million for the three
months ended March 31, 2006.
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
$12.6 million. For the three months ended March 31,
2006, DLS had aggregate revenues of $38.8 million and
income from operations of $5.1 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 newly issued shares of our common stock.
However, under the stock purchase agreement, we plan to reduce
the cash consideration to $93.2 million, in consideration
for DLS retaining $9.1 million of its currently existing
indebtedness. 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
$80.0 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.
1
With approximately 1,566 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 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. For the three months ended
March 31, 2006, our directional drilling services segment
had revenues of $15.1 million and income from operations of
$2.6 million.
Rental Tools. We provide specialized rental equipment,
including premium drill pipe, heavy weight spiral drill pipe,
tubing work strings, blow out preventors, 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
$38.6 million and income from operations of
$11.9 million. For the three months ended March 31,
2006, our rental tools segment had revenues of
$10.4 million and income from operations of
$5.0 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. For the three months ended March 31,
2006, our casing and tubing services segment had revenues of
$9.5 million and income from operations of
$1.9 million. After giving pro forma effect to the Rogers
acquisition, for the three months ended March 31, 2006, our
casing and tubing services segment would have had revenues of
$11.5 million and income from operations of
$1.9 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
2
revenues of $27.8 million and income from operations of
$5.7 million. For the three months ended March 31,
2006, our compressed air drilling services segment had revenues
of $9.1 million and income from operations of
$2.2 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. For the
three months ended March 31, 2006, our production services
segment had revenues of $3.0 million and income from
operations of $277,000.
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 acquisition of DLS.
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, Materiales y Equipo Petroleo S.A. de C.V. 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.
3
Expand products and services provided in existing operating
locations. Since the beginning of 2003, we have made
approximately $35.3 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.
Recent Developments
Amendments to Credit
Agreement
In conjunction with this offering and the pending acquisition of
DLS, we expect to amend the credit agreement governing our
$25.0 million credit facility to, among other things,
provide for the acquisition of DLS, permit the net proceeds from
this offering and the concurrent issuance of an additional
$80.0 million of our senior notes to be used for the
acquisition of DLS, increase the sub-limit for the issuance of
stand-by letters of credit, increase permitted capital
expenditures and increase permitted indebtedness at DLS.
|
|
|
Second Quarter 2006 Results Allis-Chalmers |
On July 20, 2006, we announced our results for the quarter
ended June 30, 2006.
Revenues for the second quarter 2006 rose 156.4% to
$60.5 million compared to $23.6 million for the second
quarter of 2005. The solid growth in revenues was due to
continued success with integrating recent acquisitions while
expanding operating locations, personnel and equipment and
growing our customer base in response to strong demand for our
products and services.
Income from operations grew 444.6%, which was substantially
higher than the percentage growth in revenues, to
$15.9 million for second quarter 2006, from
$2.9 million in last years second quarter.
Net income for the second quarter of 2006 attributed to common
shares increased 442.3% to $9.6 million, or $0.50 per
diluted share, compared to net income of $1.8 million, or
$0.12 per diluted share, in the second quarter of 2005. Weighted
average shares of common stock outstanding on a diluted basis
increased to 19.1 million shares for the second quarter of
2006 from 15.1 million shares for the second quarter of
2005.
EBITDA increased 396.8% to $20.4 million for the second
quarter of 2006, from $4.1 million in the second quarter of
2005.
EBITDA is a non-GAAP financial measure that we define as net
income before interest, taxes, depreciation and amortization.
The following table reconciles our net income, the most directly
comparable GAAP financial measure, to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Net income
|
|
$ |
1,769 |
|
|
$ |
9,594 |
|
Interest expense, net
|
|
|
645 |
|
|
|
3,797 |
|
Income taxes
|
|
|
166 |
|
|
|
2,474 |
|
Depreciation and amortization
|
|
|
1,518 |
|
|
|
4,494 |
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
4,098 |
|
|
$ |
20,359 |
|
4
Revenue for the first six months of 2006 rose 150.4% to
$107.5 million compared to $42.9 million for the first
six months of 2005. Income from operations grew to
$24.5 million in 2006 from $5.2 million during the
comparable six months in 2005, representing a 374.8% increase.
Net income for the first six months of 2006 rose 320.2% to
$14.0 million, or $0.74 per diluted shares, from net income
of $3.3 million or $0.22 per diluted share in the first six
months of 2005. Weighted average shares of common stock
outstanding on a diluted basis increased to 19.0 million
shares for the six month period of 2006 from 14.9 million
shares for the same period of 2005.
|
|
|
Second Quarter 2006 Results DLS |
DLS has informed us that its preliminary, estimated, unaudited
results for the quarter ended June 30, 2006 included
revenues of $43.2 million, income from operations of
$6.3 million, net income of $2.7 million and EBITDA of
$8.4 million. These results are preliminary and DLS
actual results for the second quarter of 2006 may differ from
these expectations. Moreover, DLS results from the second
quarter of 2006 and these estimates have not been examined by
DLS independent registered public accounting firm, which
does not express an opinion or any other form of assurance with
respect thereto.
EBITDA is a non-GAAP financial measure that DLS defines as net
income before interest, taxes, depreciation and amortization.
The following table reconciles DLS preliminary second
quarter 2006 net income presented above, which is the most
directly comparable GAAP financial measure, to its preliminary,
estimated EBITDA for that quarter:
|
|
|
|
|
|
|
Three Months | |
|
|
Ended | |
|
|
June 30, 2006 | |
|
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Net income
|
|
$ |
2,681 |
|
Interest expense, net
|
|
|
1,067 |
|
Income taxes
|
|
|
2,059 |
|
Depreciation and amortization
|
|
|
2,557 |
|
|
|
|
|
EBITDA
|
|
$ |
8,364 |
|
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.
5
The Offering
|
|
|
Common stock offered by Allis-Chalmers |
|
2,500,000 shares. |
|
Common stock to be outstanding after this offering |
|
23,514,260 shares. |
|
|
Use of proceeds |
|
We estimate that the net proceeds to Allis-Chalmers from this
offering will be approximately $34.1 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 10 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
18,514,260 shares of our common stock outstanding as of
July 1, 2006, 2,500,000 shares to be issued in this
offering, 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:
|
|
|
|
|
1,843,633 shares reserved for issuance under our 2003
Incentive Stock Plan (of which 1,600,534 shares are
currently issuable upon the exercise of outstanding options with
a weighted average exercise price of $6.40 per share), |
|
|
|
71,000 shares issuable upon the exercise of outstanding
warrants with a weighted average exercise price of $4.98 per
share, and |
|
|
|
4,000 shares reserved (of which 4,000 shares are currently
issuable upon the exercise of outstanding options at an exercise
price of $13.75 per share) for options granted to former and
continuing board members in 1999 and 2000. |
Allis-Chalmers has granted the underwriters a 30-day option to
purchase up to 375,000 additional shares to cover any
over-allotments. Unless otherwise noted, this prospectus assumes
no exercise of the underwriters over-allotment option.
6
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 following summary
historical consolidated financial information for the three
months ended March 31, 2006 and 2005 has been derived from
our unaudited consolidated financial statements and, in the
opinion of our management, includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation. The summary pro forma as adjusted consolidated
statement of operations and other information for the year ended
December 31, 2005 and the three months ended March 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. However, the pro forma
statement of operations information presented below for the year
ended December 31, 2005 and the three months ended
March 31, 2005 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. The summary pro forma as adjusted consolidated statement
of operations and other information for the three months ended
March 31, 2006 gives effect on a pro forma as adjusted
basis to our acquisition of Rogers and the DLS transactions, as
if such acquisition and such transactions were consummated on
January 1, 2005. The summary pro forma as adjusted
consolidated balance sheet information gives effect on a pro
forma basis to the consummation of the DLS transactions and our
acquisition of Rogers, as if such transactions were consummated
on March 31, 2006. 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.
Results for interim periods may not be indicative of results for
full fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma As Adjusted | |
|
|
| |
|
| |
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Year Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
December 31, | |
|
March 31, | |
|
Year Ended | |
|
March 31, | |
|
|
| |
|
| |
|
December 31, | |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
32,724 |
|
|
$ |
47,726 |
|
|
$ |
105,344 |
|
|
$ |
19,334 |
|
|
$ |
47,028 |
|
|
$ |
281,331 |
|
|
$ |
59,446 |
|
|
$ |
87,913 |
|
Cost of revenues
|
|
|
24,029 |
|
|
|
35,300 |
|
|
|
74,763 |
|
|
|
13,699 |
|
|
|
30,445 |
|
|
|
211,174 |
|
|
|
45,746 |
|
|
|
63,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,695 |
|
|
|
12,426 |
|
|
|
30,581 |
|
|
|
5,635 |
|
|
|
16,583 |
|
|
|
70,157 |
|
|
|
13,700 |
|
|
|
23,988 |
|
Income from operations
|
|
|
2,625 |
|
|
|
4,227 |
|
|
|
13,218 |
|
|
|
2,247 |
|
|
|
8,633 |
|
|
|
36,576 |
|
|
|
5,314 |
|
|
|
14,056 |
|
Interest expense, net
|
|
|
(2,464 |
) |
|
|
(2,776 |
) |
|
|
(4,397 |
) |
|
|
(521 |
) |
|
|
(3,628 |
) |
|
|
(25,113 |
) |
|
|
(6,022 |
) |
|
|
(6,620 |
) |
Income from continuing operations
|
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
|
|
1,567 |
|
|
|
4,423 |
|
|
|
12,382 |
|
|
|
304 |
|
|
|
5,107 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
2,375 |
|
Net income
|
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
|
|
1,567 |
|
|
|
4,423 |
|
|
|
8,244 |
|
|
|
304 |
|
|
|
7,482 |
|
Preferred stock dividend
|
|
|
(656 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common stockholders
|
|
$ |
2,271 |
|
|
$ |
764 |
|
|
$ |
7,175 |
|
|
$ |
1,567 |
|
|
$ |
4,423 |
|
|
$ |
8,244 |
|
|
$ |
304 |
|
|
$ |
7,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical | |
|
Pro Forma As Adjusted | |
|
|
| |
|
| |
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
Year Ended | |
|
Ended | |
|
|
|
Ended | |
|
|
December 31, | |
|
March 31, | |
|
Year Ended | |
|
March 31, | |
|
|
| |
|
| |
|
December 31, | |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Income (loss) per common share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.58 |
|
|
$ |
0.10 |
|
|
$ |
0.48 |
|
|
$ |
0.12 |
|
|
$ |
0.26 |
|
|
$ |
0.62 |
|
|
$ |
0.02 |
|
|
$ |
0.23 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|
|
|
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.58 |
|
|
$ |
0.10 |
|
|
$ |
0.48 |
|
|
$ |
0.12 |
|
|
$ |
0.26 |
|
|
$ |
0.41 |
|
|
$ |
0.02 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.50 |
|
|
$ |
0.09 |
|
|
$ |
0.44 |
|
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
$ |
0.57 |
|
|
$ |
0.02 |
|
|
$ |
0.21 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.19 |
) |
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.50 |
|
|
$ |
0.09 |
|
|
$ |
0.44 |
|
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
$ |
0.38 |
|
|
$ |
0.02 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,927 |
|
|
|
7,930 |
|
|
|
14,832 |
|
|
|
13,632 |
|
|
|
17,105 |
|
|
|
20,074 |
|
|
|
18,874 |
|
|
|
22,230 |
|
|
Diluted
|
|
|
5,850 |
|
|
|
9,510 |
|
|
|
16,238 |
|
|
|
14,695 |
|
|
|
19,113 |
|
|
|
21,480 |
|
|
|
19,937 |
|
|
|
24,238 |
|
Other Financial Information (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(1)(2)
|
|
$ |
8,697 |
|
|
$ |
7,756 |
|
|
$ |
19,577 |
|
|
$ |
3,559 |
|
|
$ |
12,595 |
|
|
$ |
68,657 |
|
|
$ |
14,218 |
|
|
$ |
22,874 |
|
Capital expenditures
|
|
|
5,354 |
|
|
|
4,603 |
|
|
|
17,767 |
|
|
|
2,728 |
|
|
|
7,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
10,661 |
|
|
$ |
15,496 |
|
Total assets
|
|
|
257,830 |
|
|
|
475,936 |
|
Long-term debt (including current portion)
|
|
|
169,143 |
|
|
|
260,077 |
|
Stockholders equity
|
|
|
67,212 |
|
|
|
139,342 |
|
|
|
(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; |
8
|
|
|
|
|
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 | |
|
|
| |
|
| |
|
|
|
|
Three Months | |
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
|
|
Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
Year Ended | |
|
March 31, | |
|
|
| |
|
| |
|
December 31, | |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
|
(Unaudited) | |
|
|
(In thousands) | |
Net income
|
|
$ |
2,927 |
|
|
$ |
888 |
|
|
$ |
7,175 |
|
|
$ |
1,567 |
|
|
$ |
4,423 |
|
|
$ |
8,244 |
|
|
$ |
304 |
|
|
$ |
7,482 |
|
Interest expense, net
|
|
|
2,464 |
|
|
|
2,776 |
|
|
|
4,397 |
|
|
|
521 |
|
|
|
3,628 |
|
|
|
25,113 |
|
|
|
6,022 |
|
|
|
6,620 |
|
Income taxes
|
|
|
370 |
|
|
|
514 |
|
|
|
1,344 |
|
|
|
163 |
|
|
|
607 |
|
|
|
6,863 |
|
|
|
1,345 |
|
|
|
2,009 |
|
Depreciation and amortization
|
|
|
2,936 |
|
|
|
3,578 |
|
|
|
6,661 |
|
|
|
1,308 |
|
|
|
3,937 |
|
|
|
28,437 |
|
|
|
6,547 |
|
|
|
6,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
8,697 |
|
|
$ |
7,756 |
|
|
$ |
19,577 |
|
|
$ |
3,559 |
|
|
$ |
12,595 |
|
|
$ |
68,657 |
|
|
$ |
14,218 |
|
|
$ |
22,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
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 pending 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.
10
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 (including our pending acquisition of DLS),
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
11
you as to how long the integration 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. With respect to our pending acquisition of
DLS, this risk is exacerbated by DLS relative size, when
compared to the rest of our consolidated company.
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 existing 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.
Likewise, during the course of our integration of any acquired
business (including DLS), we may identify needed improvements to
our or such acquired business internal controls and may be
required to design enhanced processes and controls in order to
make such improvements. This could result in significant delays
and costs to us and could require us to divert substantial
resources, including management time, from other activities.
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; |
|
|
|
we identify deficiencies and/or one or more material weaknesses
in our internal controls over financial reporting; or |
|
|
|
we are not successful in integrating acquired businesses (such
as DLS) into our consolidated companys system of
disclosure controls and procedures and internal controls over
financial reporting, |
12
then 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 and/or we fail to satisfy the requirements of
Section 404 of the Sarbanes-Oxley Act on a timely basis, 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, have a
material adverse effect on the trading price of our common stock
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.
|
|
|
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.
13
|
|
|
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
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.
14
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; |
|
|
|
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.
15
|
|
|
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
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.
16
Risks Associated With an Investment in Our Common Stock
|
|
|
We may have a contingent
liability arising out of a possible violation of Section 5
of the Securities Act in connection with electronic
communications sent to potential investors in our common
stock. |
On or about July 20, 2006, one of the proposed underwriters
of this offering sent e-mails and/or instant messages to
approximately 20 potential investors in our common stock.
Although we did not authorize these communications, and we
believe they were not made or intended to be made on our behalf,
these communications may have constituted violations of
Section 5 of the Securities Act. Accordingly, if the
recipients of these emails were to purchase shares in this
offering, they might have the right, under certain
circumstances, to require us to repurchase those shares.
Consequently, we could have a contingent liability arising out
of these possible violations of the Securities Act. The
magnitude of this liability is presently impossible to quantify,
and would depend upon the number of shares purchased by the
recipients of such communications and the trading price of our
common stock. However, the proposed underwriter who sent these
electronic communications is not acting as an underwriter in
this offering, and we and the underwriters that are
participating in this offering have taken measures designed to
ensure that the recipients of the communications will not have
the opportunity to purchase shares in this offering.
Furthermore, if any investors in our common stock do assert any
such liability, we intend to contest the matter vigorously, and
in light of the remedial measures and our belief that the
communications were not made or intended to be made on our
behalf, we do not believe that any such liability would be
material to our financial condition.
|
|
|
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 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.
17
|
|
|
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 July 1, 2006, we will
have 23,514,260 shares of common stock outstanding
immediately after this offering. We have reserved an additional
1,843,633 shares of common stock for issuance under our
equity compensation plans, of which 1,600,534 shares are
currently issuable upon the exercise of outstanding options with
a weighted average exercise price of $6.40 per share. In
addition, we have reserved 71,000 shares of common stock
for issuance upon the exercise of outstanding warrants (with a
weighted average exercise price of $4.98 per share) and
4,000 shares for issuance upon the exercise of outstanding
options (with an exercise price of $13.75 per share) granted to
former and continuing board members in 1999 and 2000. 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 10.6% 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
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.
18
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 acquisition of
Rogers and the DLS transactions, as if each such transaction had
occurred on March 31, 2006, we would have had approximately
$260.1 million of consolidated total indebtedness
outstanding and approximately $8.0 million of additional
secured borrowing capacity available under our credit agreement
as of March 31, 2006.
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.
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
19
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 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
20
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.
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.
21
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; |
|
|
|
unanticipated cost increases; and |
|
|
|
inability to obtain the required permits or approvals. |
22
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.
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
23
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 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
24
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
25
the environment have become 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.
26
USE OF PROCEEDS
We expect that our net proceeds from the sale of common stock in
the offering will be approximately $34.1 million, or
$39.3 million if the underwriters over-allotment
option is exercised in full, at an assumed offering price of
$14.56 per share and after deducting underwriter discounts
and commissions and estimated transaction fees and expenses
payable by us. We plan to use the net proceeds to us from this
offering to fund a portion of the purchase price for our
acquisition of DLS. The net proceeds from this offering,
together with approximately $78.0 million in net proceeds
from our concurrent offering of approximately $80.0 million
aggregate principal amount of senior notes, will be used to fund
the cash component of the purchase price for our pending
acquisition of DLS, to repay existing debt and for general
corporate purposes, as set forth below.
|
|
|
|
|
|
|
(In millions) | |
Cash component of DLS purchase price(1)
|
|
$ |
93.2 |
|
Acquisition fees and expenses
|
|
|
4.6 |
|
Repayment of subordinated note payable to M-I LLC(2)
|
|
|
4.0 |
|
General corporate purposes
|
|
|
10.3 |
|
|
|
|
|
|
|
$ |
112.1 |
|
|
|
(1) |
Under the stock purchase agreement, we plan to reduce the cash
consideration from $102.4 million to $93.2 million, in
consideration for DLS retaining $9.1 million of its
currently existing indebtedness. |
|
(2) |
This subordinated note accrues interest at a rate of 5.0% per
annum and requires quarterly interest payments. The principal
amount is due on October 9, 2007. |
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.
27
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 |
|
|
$ |
1.75 |
|
Third Quarter
|
|
$ |
4.50 |
|
|
$ |
2.60 |
|
Fourth Quarter
|
|
$ |
6.00 |
|
|
$ |
2.60 |
|
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
10.05 |
|
|
$ |
2.55 |
|
Second Quarter
|
|
$ |
10.25 |
|
|
$ |
1.75 |
|
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 |
|
|
$ |
12.46 |
|
Second Quarter
|
|
$ |
16.99 |
|
|
$ |
10.85 |
|
Third Quarter (through August 7)
|
|
$ |
15.99 |
|
|
$ |
9.80 |
|
As of June 1, 2006, there were approximately
2,036 holders of record of our common stock. On
August 7, 2006, the last sale price for our common stock
reported on the American Stock Exchange was $14.56 per
share.
28
CAPITALIZATION
The following table sets forth our unaudited cash and cash
equivalents and capitalization as of March 31, 2006:
|
|
|
|
|
on an actual basis; and |
|
|
|
on a pro forma basis giving effect to: |
|
|
|
|
|
this offering and the proposed issuance of an additional
$80.0 million of senior notes, with the net proceeds of
this offering and the notes issuance being used together to fund
the cash component of the purchase price for our pending
acquisition of DLS; |
|
|
|
the repayment of our $4.0 million subordinated note payable
to M-I LLC; |
|
|
|
our acquisition of Rogers; and |
|
|
|
our acquisition of DLS (including the issuance of an
additional 2.5 million shares of our common stock to the
sellers as the stock component of the purchase price for DLS). |
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 March 31, 2006 | |
|
|
| |
|
|
Actual | |
|
Pro Forma | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Cash and cash equivalents
|
|
$ |
10,661 |
|
|
$ |
15,496 |
|
|
|
|
|
|
|
|
Long-term debt, including current maturities
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
$ |
|
|
|
$ |
5,000 |
|
|
Other debt(1)
|
|
|
8,528 |
|
|
|
14,462 |
|
|
Senior notes
|
|
|
160,000 |
|
|
|
240,000 |
|
Payment obligations under non-compete agreements(2)
|
|
|
615 |
|
|
|
615 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
169,143 |
|
|
|
260,077 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares
authorized, 17,225,330 shares issued and outstanding on an
actual basis; 22,350,615 shares issued and outstanding on a
pro forma basis
|
|
|
172 |
|
|
|
223 |
|
|
|
Additional paid-in capital
|
|
|
60,800 |
|
|
|
132,879 |
|
|
|
Retained earnings
|
|
|
6,240 |
|
|
|
6,240 |
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
67,212 |
|
|
|
139,342 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
236,355 |
|
|
$ |
399,419 |
|
|
|
|
|
|
|
|
|
|
(1) |
Actual other debt consists of a $4.0 million
5.0% subordinated note payable by Allis-Chalmers Energy
Inc. and $4.5 million of miscellaneous other debt. In
connection with our acquisition of Rogers, we issued a note for
$750,000 and assumed debt of $44,000. In connection with our
acquisition of DLS, we expect to assume debt of
$9.1 million. We intend to repay the $4.0 million
subordinated note with a portion of the proceeds of this
offering and our concurrent senior notes offering. |
|
(2) |
Consists of amounts payable to former owners of acquired
businesses. |
29
UNAUDITED PRO FORMA AS ADJUSTED
CONSOLIDATED FINANCIAL INFORMATION
Introduction
Our unaudited pro forma as adjusted balance sheet as of
March 31, 2006 reflects the following transactions as if
they occurred on March 31, 2006:
|
|
|
|
|
Our acquisition of Rogers, which closed on April 3, 2006.
The following table summarizes the preliminary allocation of the
purchase price to the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in
thousands): |
|
|
|
|
|
|
Current assets
|
|
$ |
4,520 |
|
Property and equipment
|
|
|
9,886 |
|
Intangible assets
|
|
|
1,050 |
|
|
|
|
|
|
Total assets acquired
|
|
|
15,456 |
|
|
|
|
|
Current liabilities
|
|
|
1,612 |
|
Long-term debt
|
|
|
44 |
|
Other long term liabilities
|
|
|
100 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,756 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
13,700 |
|
|
|
|
|
|
|
|
We paid the purchase price with $11.3 million in cash (of
which we borrowed $5.0 million under our line of credit), a
$750,000 seller financed note and 125,285 newly issued shares of
our common stock, which had a value of $1.7 million. We
incurred approximately $341,000 of acquisition costs in
connection with the Rogers acquisition. Rogers historical
property and equipment book values were increased by
approximately $8.4 million based on third-party valuations.
Intangible assets include $900,000 assigned to patents and
$150,000 assigned to a non-compete agreement, based on
third-party valuations and employment contracts. The intangibles
have a weighted-average useful life of nine years. We do not
expect any material differences from the preliminary allocation
of the purchase price and actual purchase price allocation. |
|
|
|
|
|
Our pending acquisition of DLS, for the consideration described
below under DLS Business, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers, as adjusted for this offering and
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes to fund a portion of the
cash component of the purchase price for this acquisition. The
following table summarizes the preliminary allocation of the
purchase price to the estimated fair value of the assets
expected to be acquired and liabilities expected to be assumed
at the date of acquisition (in thousands): |
|
|
|
|
|
|
Current assets
|
|
$ |
45,230 |
|
Property and equipment
|
|
|
151,410 |
|
Other long-term assets
|
|
|
2 |
|
|
|
|
|
|
Total assets acquired
|
|
|
196,642 |
|
|
|
|
|
Current liabilities
|
|
|
25,578 |
|
Long-term debt
|
|
|
9,140 |
|
Other long term liabilities
|
|
|
27,752 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
62,470 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
134,172 |
|
|
|
|
|
30
|
|
|
We expect to incur approximately $4.6 million of
acquisition costs in connection with this acquisition. DLS
historical property and equipment values are expected to be
increased by approximately $44.7 million based on
third-party valuations. We do not expect any material
differences from the preliminary allocation of the purchase
price and actual purchase price allocation. |
Our unaudited pro forma as adjusted condensed consolidated
statement of operations for the year ended December 31,
2005 and for the three months ended March 31, 2005 reflects
the following transactions as if such transactions occurred on
January 1, 2005:
|
|
|
|
|
Our acquisition of Delta Rental Service, Inc., or Delta, which
closed on April 1, 2005. The following table summarizes the
allocation of the purchase price to the estimated fair value of
the assets acquired and liabilities assumed at the date of
acquisition (in thousands): |
|
|
|
|
|
|
Current assets
|
|
$ |
1,327 |
|
Property and equipment
|
|
|
5,529 |
|
Intangible assets
|
|
|
150 |
|
|
|
|
|
|
Total assets acquired
|
|
|
7,006 |
|
|
|
|
|
Current liabilities
|
|
|
633 |
|
Long-term debt
|
|
|
523 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,156 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
5,850 |
|
|
|
|
|
|
|
|
We paid the purchase price with approximately $4.5 million
in cash, newly issued shares of our common stock valued at
approximately $1.0 million and two promissory notes
totaling $350,000 in principal amount. We incurred approximately
$28,000 of acquisition costs in connection with the Delta
acquisition. Deltas historical property and equipment book
values were increased by approximately $4.2 million based
on third-party valuations. The fair value of the $150,000
non-compete intangible asset was based on a non-compete
agreement and the related employment contract and has a useful
life of 3 years. |
|
|
|
|
|
Our acquisition of Capcoil Tubing Services, Inc., or Capcoil,
which closed on May 2, 2005. The following table summarizes
the allocation of the purchase price to the estimated fair value
of the assets acquired and liabilities assumed at the date of
acquisition (in thousands): |
|
|
|
|
|
|
Current assets
|
|
$ |
1,706 |
|
Property and equipment
|
|
|
2,908 |
|
Other long-term assets
|
|
|
11 |
|
Intangible assets
|
|
|
1,389 |
|
Goodwill
|
|
|
184 |
|
|
|
|
|
|
Total assets acquired
|
|
|
6,198 |
|
|
|
|
|
Current liabilities
|
|
|
847 |
|
Long-term debt
|
|
|
1,851 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,698 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
3,500 |
|
|
|
|
|
|
|
|
We paid the purchase price with approximately $2.7 million
in cash and newly issued shares of our common stock valued at
approximately $750,000. We incurred approximately $26,000 of
acquisition costs in connection with the Capcoil acquisition.
Capcoils historical property and equipment book values
were increased by approximately $1.0 million based on
third-party valuations. Intangible assets include
$1.0 million assigned to non-compete agreements included in |
31
|
|
|
employment contracts and $364,000 assigned to customer lists
based on third-party valuations. The intangibles have a
weighted-average useful life of 5 years. |
|
|
|
|
|
Our acquisition of the assets of W.T. Enterprises, Inc., or
W.T., which closed on July 11, 2005. The following table
summarizes the allocation of the purchase price to the estimated
fair value of the assets acquired at the date of acquisition (in
thousands): |
|
|
|
|
|
|
Property and equipment
|
|
$ |
4,500 |
|
Intangible assets
|
|
|
1,481 |
|
Goodwill
|
|
|
82 |
|
|
|
|
|
|
Total assets acquired
|
|
$ |
6,063 |
|
|
|
|
|
|
|
|
We paid the purchase price with borrowings under our line of
credit. We incurred approximately $63,000 of acquisition costs
in connection with the W.T. Enterprises, Inc. acquisition. W.T.
Enterprises, Inc.s historical property and equipment book
values were increased by approximately $3.0 million based
on third-party valuations. Intangible assets include $600,000
assigned to non-compete agreements and $881,000 assigned to
customer lists based on third-party valuations. The intangibles
have a weighted-average useful life of 8 years. |
|
|
|
|
|
Our acquisition of the minority interest in AirComp LLC, or
AirComp, from M-I LLC,
or M-I, and a subordinated note in the principal amount of
$4.8 million, which closed on July 11, 2005. We paid
the purchase price with $7.1 million in cash from
borrowings under our line of credit and the issuance of a new
$4.0 million 5% subordinated note. |
|
|
|
Our acquisition of Specialty, which closed on January 18,
2006. The following table summarizes the allocation of the
purchase price to the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition (in
thousands): |
|
|
|
|
|
|
Accounts receivable
|
|
$ |
7,167 |
|
Other current assets
|
|
|
425 |
|
Property and equipment
|
|
|
90,540 |
|
|
|
|
|
|
Total assets acquired
|
|
|
98,132 |
|
|
|
|
|
Current liabilities
|
|
|
2,058 |
|
Long-term debt
|
|
|
74 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,132 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
96,000 |
|
|
|
|
|
|
|
|
We paid the purchase price with net proceeds from our issuance
of 9% senior notes in January 2006. We incurred approximately
$453,000 of acquisition costs in connection with the Specialty
acquisition. Specialtys historical property and equipment
book values were increased by approximately $71.5 million
based on third-party valuations. |
|
|
|
|
|
Our issuance of $160.0 million aggregate principal amount
of 9% senior notes in January 2006; |
|
|
|
Our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash (of which we borrowed
$5.0 million under our debt facility), 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, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers as the stock component of the
purchase price for DLS; |
32
|
|
|
|
|
Our proposed sale of an additional $80.0 million aggregate
principal amount of our 9% senior notes in order to fund a
portion of the cash component of the purchase price for the DLS
acquisition; and |
|
|
|
|
Our issuance of an additional 2.5 million shares of our
common stock in this offering. The pro forma treats the shares
as having been issued at the August 7, 2006 stock price of
$14.56, the basis for pricing this offering. |
|
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.
Our unaudited pro forma as adjusted condensed consolidated
statement of operations for the three months ended
March 31, 2006 reflects the following transactions as if
such transactions occurred on January 1, 2005:
|
|
|
|
|
Our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash (of which we borrowed
$5.0 million under our debt facility), 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, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers as the stock component of the
purchase price for DLS; |
|
|
|
The proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes in connection with the
pending DLS acquisition; and |
|
|
|
|
Our issuance of an additional 2.5 million shares of our
common stock in this offering. The pro forma treats the shares
as having been issued at the August 7, 2006 stock price of
$14.56, the basis for pricing this offering. |
|
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.
33
Unaudited Pro Forma As Adjusted Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 | |
|
|
| |
|
|
|
|
Financing/ | |
|
|
|
|
Allis-Chalmers | |
|
Rogers | |
|
DLS | |
|
Pro Forma | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Historical | |
|
Historical | |
|
Adjustments(1) | |
|
Adjustments(2) | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
10,661 |
|
|
$ |
583 |
|
|
$ |
244 |
|
|
$ |
(104,072 |
)AA |
|
$ |
108,080 |
AB |
|
$ |
15,496 |
|
Trade receivables, net
|
|
|
38,239 |
|
|
|
1,681 |
|
|
|
21,817 |
|
|
|
|
|
|
|
|
|
|
|
61,737 |
|
Inventories
|
|
|
7,777 |
|
|
|
2,105 |
|
|
|
16,004 |
|
|
|
|
|
|
|
|
|
|
|
25,886 |
|
Prepaids and other
|
|
|
875 |
|
|
|
151 |
|
|
|
7,165 |
|
|
|
|
|
|
|
|
|
|
|
8,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
57,552 |
|
|
|
4,520 |
|
|
|
45,230 |
|
|
|
(104,072 |
) |
|
|
108,080 |
|
|
|
111,310 |
|
Property and equipment, net
|
|
|
174,329 |
|
|
|
1,483 |
|
|
|
109,310 |
|
|
|
50,503 |
AC |
|
|
|
|
|
|
335,625 |
|
Goodwill
|
|
|
12,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,417 |
|
Other intangibles, net
|
|
|
6,399 |
|
|
|
113 |
|
|
|
|
|
|
|
937 |
AD |
|
|
|
|
|
|
7,449 |
|
Debt issuance costs, net
|
|
|
6,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000 |
AE |
|
|
8,414 |
|
Other assets
|
|
|
719 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
257,830 |
|
|
$ |
6,116 |
|
|
$ |
154,542 |
|
|
$ |
(52,632 |
) |
|
$ |
110,080 |
|
|
$ |
475,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
3,144 |
|
|
$ |
360 |
|
|
$ |
8,468 |
|
|
$ |
(6,360 |
)AF |
|
$ |
|
|
|
$ |
5,612 |
|
Trade accounts payable
|
|
|
8,903 |
|
|
|
944 |
|
|
|
15,285 |
|
|
|
|
|
|
|
|
|
|
|
25,132 |
|
Accrued employee benefits
|
|
|
2,064 |
|
|
|
32 |
|
|
|
8,295 |
|
|
|
|
|
|
|
|
|
|
|
10,391 |
|
Accrued interest
|
|
|
3,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053 |
|
Accrued expenses
|
|
|
6,505 |
|
|
|
205 |
|
|
|
1,998 |
|
|
|
431 |
AG |
|
|
|
|
|
|
9,139 |
|
Accounts payable, related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,669 |
|
|
|
1,541 |
|
|
|
34,046 |
|
|
|
(5,929 |
) |
|
|
|
|
|
|
53,327 |
|
Accrued postretirement benefit obligations
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
Long-term debt, net of current maturities
|
|
|
165,999 |
|
|
|
433 |
|
|
|
19,783 |
|
|
|
(7,750 |
)AH |
|
|
76,000 |
AI |
|
|
254,465 |
|
Other long-term liabilities
|
|
|
631 |
|
|
|
|
|
|
|
1,179 |
|
|
|
26,673 |
AJ |
|
|
|
|
|
|
28,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
190,618 |
|
|
|
1,974 |
|
|
|
55,008 |
|
|
|
12,994 |
|
|
|
76,000 |
|
|
|
336,594 |
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
172 |
|
|
|
24 |
|
|
|
42,963 |
|
|
|
(42,961 |
)AK |
|
|
25 |
AL |
|
|
223 |
|
Capital in excess of par value
|
|
|
60,800 |
|
|
|
|
|
|
|
31,606 |
|
|
|
6,418 |
AK |
|
|
34,055 |
AL |
|
|
132,879 |
|
Treasury stock, at cost
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
4 |
AK |
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
6,240 |
|
|
|
4,122 |
|
|
|
24,965 |
|
|
|
(29,087 |
)AK |
|
|
|
|
|
|
6,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
67,212 |
|
|
|
4,142 |
|
|
|
99,534 |
|
|
|
(65,626 |
) |
|
|
34,080 |
|
|
|
139,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
257,830 |
|
|
$ |
6,116 |
|
|
$ |
154,542 |
|
|
$ |
(52,632 |
) |
|
$ |
110,080 |
|
|
$ |
475,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects adjustments for the acquisition of Rogers and the
pending acquisition of DLS. |
|
(2) |
Reflects adjustments for the issuance of 2.5 million shares
of our common stock in this offering and the proposed sale of an
additional $80.0 million aggregate principal amount of our
senior notes to fund a portion of the cash component of the
purchase price for the pending acquisition of DLS. |
34
Unaudited Pro Forma Consolidated Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2006 | |
|
|
| |
|
|
Allis-Chalmers | |
|
DLS | |
|
Rogers | |
|
Pro Forma | |
|
Pro Forma | |
|
Offering | |
|
Pro Forma | |
|
|
Historical | |
|
Historical | |
|
Historical | |
|
Adjustments(1) | |
|
Combined | |
|
Adjustments(2) | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Revenues
|
|
$ |
47,028 |
|
|
$ |
38,800 |
|
|
$ |
2,085 |
|
|
$ |
|
|
|
$ |
87,913 |
|
|
$ |
|
|
|
$ |
87,913 |
|
Cost of revenues
|
|
|
30,445 |
|
|
|
32,663 |
|
|
|
1,105 |
|
|
|
(246 |
)A |
|
|
63,925 |
|
|
|
|
|
|
|
63,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,583 |
|
|
|
6,137 |
|
|
|
980 |
|
|
|
246 |
|
|
|
23,988 |
|
|
|
|
|
|
|
23,988 |
|
General and administrative expense
|
|
|
7,950 |
|
|
|
1,066 |
|
|
|
820 |
|
|
|
33 |
B |
|
|
9,869 |
|
|
|
63 |
C |
|
|
9,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
8,633 |
|
|
|
5,071 |
|
|
|
160 |
|
|
|
213 |
|
|
|
14,119 |
|
|
|
(63 |
) |
|
|
14,056 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
Interest expense
|
|
|
(3,628 |
) |
|
|
(1,681 |
) |
|
|
|
|
|
|
437 |
D |
|
|
(4,872 |
) |
|
|
(1,750 |
)E |
|
|
(6,622 |
) |
|
Other
|
|
|
25 |
|
|
|
(338 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
5,030 |
|
|
|
3,052 |
|
|
|
155 |
|
|
|
650 |
|
|
|
8,929 |
|
|
|
(1,813 |
) |
|
|
7,116 |
|
Taxes
|
|
|
(607 |
) |
|
|
(1,453 |
) |
|
|
|
|
|
|
65 |
F |
|
|
(2,009 |
) |
|
|
|
F |
|
|
(2,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
4,423 |
|
|
|
1,599 |
|
|
|
155 |
|
|
|
715 |
|
|
|
6,920 |
|
|
|
(1,813 |
) |
|
|
5,107 |
|
Discontinued operations
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$ |
4,423 |
|
|
$ |
3,974 |
|
|
$ |
155 |
|
|
$ |
715 |
|
|
$ |
9,295 |
|
|
$ |
(1,813 |
) |
|
$ |
7,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.35 |
|
|
|
|
|
|
$ |
0.23 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.12 |
|
|
|
|
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.47 |
|
|
|
|
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.32 |
|
|
|
|
|
|
$ |
0.21 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.11 |
|
|
|
|
|
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.43 |
|
|
|
|
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,105 |
|
|
|
|
|
|
|
|
|
|
|
2,625 |
G |
|
|
19,730 |
|
|
|
2,500 |
H |
|
|
22,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,113 |
|
|
|
|
|
|
|
|
|
|
|
2,625 |
G |
|
|
21,738 |
|
|
|
2,500 |
H |
|
|
24,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reflects adjustments for the acquisition of Rogers and the
pending acquisition of DLS, including the assumption of $9.1 of
DLS currently existing indebtedness and the issuance of
2.5 million shares of our common stock to the sellers as
the stock component of the purchase price for the DLS
acquisition. |
|
(2) |
Reflects adjustments for the issuance of an additional
2.5 million shares of our common stock in this offering and
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes to fund a portion of the
cash component of the purchase price for the pending acquisition
of DLS. |
35
Unaudited Pro Forma As Adjusted Consolidated Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 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
|
|
$ |
19,334 |
|
|
$ |
5,929 |
|
|
$ |
29,451 |
|
|
$ |
4,732 |
|
|
$ |
|
|
|
$ |
59,446 |
|
|
$ |
|
|
|
$ |
59,446 |
|
Cost of revenues
|
|
|
13,699 |
|
|
|
1,380 |
|
|
|
26,211 |
|
|
|
2,603 |
|
|
|
1,895 |
I |
|
|
45,746 |
|
|
|
|
|
|
|
45,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,635 |
|
|
|
4,549 |
|
|
|
3,240 |
|
|
|
2,129 |
|
|
|
(1,895 |
) |
|
|
13,700 |
|
|
|
|
|
|
|
13,700 |
|
General and administrative expense
|
|
|
3,388 |
|
|
|
1,710 |
|
|
|
984 |
|
|
|
2,079 |
|
|
|
(13 |
)J |
|
|
8,148 |
|
|
|
238 |
K |
|
|
8,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,247 |
|
|
|
2,839 |
|
|
|
2,256 |
|
|
|
50 |
|
|
|
(1,882 |
) |
|
|
5,552 |
|
|
|
(238 |
) |
|
|
5,314 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
28 |
|
|
Interest expense
|
|
|
(521 |
) |
|
|
(51 |
) |
|
|
(1,040 |
) |
|
|
(40 |
) |
|
|
(1,729 |
)D |
|
|
(3,381 |
) |
|
|
(2,669 |
)L |
|
|
(6,050 |
) |
|
Other
|
|
|
148 |
|
|
|
|
|
|
|
1,801 |
|
|
|
408 |
|
|
|
|
|
|
|
2,357 |
|
|
|
|
|
|
|
2,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
1,874 |
|
|
|
2,813 |
|
|
|
3,017 |
|
|
|
421 |
|
|
|
(3,611 |
) |
|
|
4,556 |
|
|
|
(2,907 |
) |
|
|
1,649 |
|
Minority interest
|
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
M |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
(163 |
) |
|
|
|
|
|
|
(739 |
) |
|
|
(288 |
) |
|
|
(141 |
)F |
|
|
(1,345 |
) |
|
|
|
F |
|
|
(1,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
1,567 |
|
|
$ |
2,813 |
|
|
$ |
2,278 |
|
|
$ |
133 |
|
|
$ |
(3,608 |
) |
|
$ |
3,211 |
|
|
$ |
(2,907 |
) |
|
$ |
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.20 |
|
|
|
|
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.18 |
|
|
|
|
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,742 |
N |
|
|
16,374 |
|
|
|
2,500 |
H |
|
|
18,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,742 |
N |
|
|
17,437 |
|
|
|
2,500 |
H |
|
|
19,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Acquisitions of Capcoil, Delta, the minority interest of
M-I in AirComp, W.T.
and Rogers. |
|
(2) |
Reflects adjustments for the acquisitions described in footnote
(1) and the acquisition of Specialty and the pending
acquisition of DLS, including the assumption of
$9.1 million of DLS currently existing indebtedness
and the issuance of 2.5 million shares of our common stock
to the sellers as the stock component of the purchase price for
the DLS acquisition. |
|
(3) |
Reflects adjustments for our $160.0 million senior notes
offering in January 2006, the issuance of an additional
2.5 million shares of our common stock in this offering and
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes to fund a portion of the
cash component of the purchase price for the pending acquisition
of DLS. |
36
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 |
|
|
$ |
32,709 |
|
|
$ |
129,849 |
|
|
$ |
13,429 |
|
|
$ |
|
|
|
$ |
281,331 |
|
|
$ |
|
|
|
$ |
281,331 |
|
Cost of revenues
|
|
|
74,763 |
|
|
|
8,550 |
|
|
|
113,351 |
|
|
|
7,372 |
|
|
|
7,308 |
I |
|
|
211,174 |
|
|
|
|
|
|
|
211,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,581 |
|
|
|
24,159 |
|
|
|
16,498 |
|
|
|
6,057 |
|
|
|
(7,308 |
) |
|
|
70,157 |
|
|
|
|
|
|
|
70,157 |
|
General and administrative expense
|
|
|
17,363 |
|
|
|
7,232 |
|
|
|
3,933 |
|
|
|
4,318 |
|
|
|
(145 |
)O |
|
|
32,701 |
|
|
|
880 |
K |
|
|
33,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
13,218 |
|
|
|
16,927 |
|
|
|
12,565 |
|
|
|
1,739 |
|
|
|
(7,163 |
) |
|
|
37,456 |
|
|
|
(880 |
) |
|
|
36,576 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
192 |
|
|
|
|
|
|
|
192 |
|
|
Interest expense
|
|
|
(4,397 |
) |
|
|
(185 |
) |
|
|
(5,394 |
) |
|
|
(54 |
) |
|
|
(6,912 |
)P |
|
|
(16,942 |
) |
|
|
(8,363 |
)L |
|
|
(25,305 |
) |
|
Other
|
|
|
186 |
|
|
|
72 |
|
|
|
7,127 |
|
|
|
397 |
|
|
|
|
|
|
|
7,782 |
|
|
|
|
|
|
|
7,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
9,007 |
|
|
|
16,950 |
|
|
|
14,298 |
|
|
|
2,138 |
|
|
|
(14,075 |
) |
|
|
28,488 |
|
|
|
(9,243 |
) |
|
|
19,245 |
|
Minority interest
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488 |
M |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
(1,344 |
) |
|
|
|
|
|
|
(3,547 |
) |
|
|
(340 |
) |
|
|
(1,573 |
)F |
|
|
(6,804 |
) |
|
|
|
F |
|
|
(6,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
7,175 |
|
|
|
16,950 |
|
|
|
10,751 |
|
|
|
1,798 |
|
|
|
(15,160 |
) |
|
|
21,625 |
|
|
|
(9,243 |
) |
|
|
12,382 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
7,175 |
|
|
$ |
16,950 |
|
|
$ |
6,613 |
|
|
$ |
1,798 |
|
|
$ |
(15,160 |
) |
|
$ |
17,487 |
|
|
$ |
(9,243 |
) |
|
$ |
8,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.24 |
|
|
|
|
|
|
$ |
0.62 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.24 |
) |
|
|
|
|
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.00 |
|
|
|
|
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.14 |
|
|
|
|
|
|
$ |
0.57 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.22 |
) |
|
|
|
|
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.92 |
|
|
|
|
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,742 |
N |
|
|
17,574 |
|
|
|
2,500 |
H |
|
|
20,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,742 |
N |
|
|
18,980 |
|
|
|
2,500 |
H |
|
|
21,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Acquisitions of Capcoil, Delta, the minority interest of M-I in
AirComp, W.T. and Rogers. |
|
(2) |
Reflects adjustments for the acquisitions described in footnote
(1) and the acquisition of Specialty and the pending
acquisition of DLS, including the assumption of
$9.1 million of DLS currently existing indebtedness
and the issuance of 2.5 million shares of our common stock
to the sellers as the stock component of the purchase price for
the DLS acquisition. |
|
(3) |
Reflects adjustments for our $160.0 million senior notes
offering in January 2006, the issuance of an additional
2.5 million shares of our common stock in this offering and
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes to fund a portion of the
cash component of the purchase price for the pending acquisition
of DLS. |
37
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 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 $4.6 million
in transaction costs. |
|
|
AB) Reflects the net proceeds from this offering and the
net proceeds from the proposed sale of an additional
$80.0 million of senior notes and the repayment of existing
debt. |
|
|
AC) Reflects the
step-up in the basis of
the fixed assets as a result of the acquisition of 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 the proposed sale of an
additional $80.0 million of senior notes. |
|
|
AF) Reflects the repayment of debt of the acquisition of
Rogers and the pending acquisition of DLS prior to such
acquisitions. |
|
|
AG) Reflects the current portion of the non-compete payment
to be paid to the seller of Rogers and expenses related to the
acquisition of Rogers. |
|
|
AH) Reflects the net borrowing to effect the acquisition of
Rogers and the pending acquisition of DLS. $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 the
acquisitions by the seller prior to closing. |
|
|
AI) Reflects the proceeds from the proposed sale of an
additional $80.0 million of senior notes after repaying
$4.0 million of the existing debt. |
|
|
Maturities of pro forma debt obligations at March 31, 2006
are as follows (in thousands): |
|
|
|
|
|
Period Ending:
|
|
|
|
|
March 31, 2007
|
|
$ |
5,432 |
|
March 31, 2008
|
|
|
9,067 |
|
March 31, 2009
|
|
|
1,558 |
|
March 31, 2010
|
|
|
2,156 |
|
March 31, 2011
|
|
|
1,406 |
|
Thereafter
|
|
|
240,458 |
|
|
|
|
|
Total
|
|
$ |
260,077 |
|
|
|
|
|
|
|
|
AJ) Reflects deferred taxes on the pending DLS acquisition
and the long-term portion of non-compete payments to the sellers
of DLS. |
|
|
AK) 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. |
|
|
AL) Reflects the additional stock issued in connection with
this offering, net of expenses. |
|
|
A) Reflects the impact on depreciation expense as a result
of the step-up in basis
of fixed assets and a longer estimated life on DLS assets. |
|
|
B) Reflects the increase in amortization due to the
increase in other intangible assets in connection with the
acquisition of Rogers. |
38
|
|
|
C) Reflects the amortization on the financing fees related
to the proposed sale of an additional $80.0 million of
senior notes. |
|
|
|
D) 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.
Approximately $9.1 million of existing debt for DLS will
remain outstanding after the acquisition. The interest rate
assumed on the $9.1 million of DLS debt was 6.21%, which
was the actual average interest rate on this debt as of
March 31, 2006. Each 0.125% change in this interest rate
would affect interest expense by $11,430 per annum. The interest
expense category for DLS historical financials also
includes bank fees and other financial expenses of approximately
$993,000 for the three months ended March 31, 2006 and
$368,000 for the three months ended March 31, 2005. In
conjunction with the Rogers acquisition, we issued a $750,000
note to the seller bearing interest at a fixed rate of 5%, and
we borrowed $5.0 million under our line of credit. We
assumed an 8% interest rate for this $5.0 million
borrowing, which is our current borrowing rate under our
committed line of credit. Each 0.125% change in this interest
rate would affect interest expense by $6,250 per annum. |
|
|
|
E) Reflects the additional interest expense related to the
proposed sale of an additional $80.0 million of senior
notes. We will repay our $4.0 million, 5% subordinated note
with proceeds of the senior notes offering. We assumed an
interest rate of 9% on the proposed sale of an additional
$80.0 million in senior notes, which is equal to the
interest rate obtained for the $160.0 million of senior
notes issued in January 2006. |
|
|
F) A statutory tax rate of 35% was applied to the
adjustments, but since Allis-Chalmers has a net operating loss
carryforward no tax expense was recorded. In addition, the
Allis-Chalmers net operating loss position offsets the
historical tax liabilities for operations in the United States
of acquired companies. Income taxes for DLS were computed at the
Argentinian statutory rate of 35% as we have no net operating
losses in Argentina to offset the tax liability. The net
operating loss carryforward, after the historical results for
Allis-Chalmers for the year ended December 31, 2005, is
approximately $15.4 million. |
|
|
G) Reflects the issuance of shares of our common stock as
part of the acquisition price for Rogers and DLS.
125,285 shares were issued in the Rogers acquisition and
the consideration for the pending DLS acquisition includes
2.5 million shares of our common stock. |
|
|
H) Reflects the issuance of an additional 2.5 million
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 July 25, 2006 stock price of $15.24, the
basis for the pricing of this offering. |
|
|
I) Reflects the increase in depreciation expense as a
result of the step-up in basis of fixed assets and a longer
estimated life on DLS assets. |
|
|
J) Reflects the increase in amortization due to the
increase in other intangible assets in connection with the
acquisitions of Capcoil, W.T. and Rogers. Also reflects
decreased rent expense of $97,000 that will result from the
acquisition of Specialty. We entered into a new lease for the
Specialty yard with the seller. Entering into this lease was
required by the purchase agreement and was a condition to the
closing of the Specialty acquisition. |
|
|
K) Reflects the amortization on the financing fees related
to our $160.0 million senior notes offering in January 2006
and the proposed sale of an additional $80.0 million of
senior notes. |
|
|
L) Reflects the increased interest expense related to
additional borrowings as a result of the January 2006 senior
notes, and the proposed sale of an additional $80.0 million
of senior notes. We |
39
|
|
|
will repay our $4.0 million 5% subordinated note with
proceeds of the senior notes offering. We assumed an interest
rate of 9% on the proposed sale of an additional
$80.0 million in senior notes, which is equal to the
interest rate obtained for the $160.0 million of senior
notes we issued in January 2006. Interest on the proceeds of the
January 2006 senior notes in excess of the Specialty acquisition
and net of debt repayments is computed at the contractual rate
of 9%. |
|
|
M) Reflects the elimination of the 45% minority interest
position of M-I in AirComp. |
|
|
N) Reflects the issuance of shares of our common stock as
part of the acquisition price for Delta, Capcoil, Rogers and
DLS. 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. |
|
|
O) Reflects the increase in amortization due to the
increase in other intangible assets in connection with the
acquisitions of Capcoil, W.T. and Rogers. Also reflects the
decreased rent expense of $386,000 that will result from the
acquisition of Specialty. We entered into a new lease for the
Specialty yard with the seller, entering into the lease was
required by the purchase agreement and was a condition to the
closing of the Specialty acquisition. |
|
|
|
P) 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.
We borrowed $96.0 million from the $160.0 million
senior notes to fund the acquisition of Specialty. The senior
notes bear interest at a fixed rate of 9%. Approximately
$9.1 million of existing debt for DLS will remain
outstanding after the acquisition is consummated. The interest
rate assumed on the $9.1 million of DLS debt was 6.21%
which was the actual average interest rate on this debt as of
March 31, 2006. Each 0.125% change in this interest rate
would affect interest expense by $11,430 per annum. The
interest expense category for DLS historical financials
also includes bank fees and other financial expenses of
approximately $2.7 million. In conjunction with the Rogers
acquisition, we issued a $750,000 note to the seller bearing
interest at 5% fixed and we borrowed $5.0 million under our
line of credit. We assumed an 8% interest rate for this
$5.0 million borrowing which is our current borrowing rate
under our committed line of credit. Each 0.125% change in this
interest rate would affect interest expense by $6,250 per
annum. To acquire
M-Is 45% interest
in AirComp we issued a new note for $4.0 million to replace
a note for $4.8 million, both notes bore interest at 5.0%. |
|
40
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 and the financial information
for the three months ended March 31, 2005 and 2006 was
derived from our unaudited interim financial statements included
elsewhere in this prospectus. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2001(1) | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
4,796 |
|
|
$ |
17,990 |
|
|
$ |
32,724 |
|
|
$ |
47,726 |
|
|
$ |
105,344 |
|
|
$ |
19,334 |
|
|
$ |
47,028 |
|
Cost of revenues
|
|
|
3,331 |
|
|
|
14,640 |
|
|
|
24,029 |
|
|
|
35,300 |
|
|
|
74,763 |
|
|
|
13,699 |
|
|
|
30,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,465 |
|
|
|
3,350 |
|
|
|
8,695 |
|
|
|
12,426 |
|
|
|
30,581 |
|
|
|
5,635 |
|
|
|
16,583 |
|
General and administrative expense
|
|
|
2,898 |
|
|
|
3,792 |
|
|
|
6,169 |
|
|
|
8,011 |
|
|
|
17,715 |
|
|
|
3,388 |
|
|
|
7,950 |
|
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 |
|
|
|
3,388 |
|
|
|
7,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,433 |
) |
|
|
(1,072 |
) |
|
|
2,625 |
|
|
|
4,227 |
|
|
|
13,218 |
|
|
|
2,247 |
|
|
|
8,633 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(828 |
) |
|
|
(2,207 |
) |
|
|
(2,464 |
) |
|
|
(2,776 |
) |
|
|
(4,397 |
) |
|
|
(521 |
) |
|
|
(3,628 |
) |
|
Factoring costs on note receivable
|
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement on lawsuit
|
|
|
|
|
|
|
|
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of interest in AirComp
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(12 |
) |
|
|
(40 |
) |
|
|
12 |
|
|
|
272 |
|
|
|
186 |
|
|
|
148 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(840 |
) |
|
|
(2,438 |
) |
|
|
1,015 |
|
|
|
(2,504 |
) |
|
|
(4,211 |
) |
|
|
(373 |
) |
|
|
(3,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes and minority interest
|
|
|
(2,273 |
) |
|
|
(3,510 |
) |
|
|
3,640 |
|
|
|
1,723 |
|
|
|
9,007 |
|
|
|
1,874 |
|
|
|
5,030 |
|
Minority interests in income of subsidiaries
|
|
|
|
|
|
|
(189 |
) |
|
|
(343 |
) |
|
|
(321 |
) |
|
|
(488 |
) |
|
|
(144 |
) |
|
|
|
|
Income tax
|
|
|
|
|
|
|
(270 |
) |
|
|
(370 |
) |
|
|
(514 |
) |
|
|
(1,344 |
) |
|
|
(163 |
) |
|
|
(607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
(2,273 |
) |
|
|
(3,969 |
) |
|
|
2,927 |
|
|
|
888 |
|
|
|
7,175 |
|
|
|
1,567 |
|
|
|
4,423 |
|
(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 |
|
|
|
1,567 |
|
|
|
4,423 |
|
Preferred stock dividend
|
|
|
|
|
|
|
(321 |
) |
|
|
(656 |
) |
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common stockholders
|
|
$ |
(4,577 |
) |
|
$ |
(4,290 |
) |
|
$ |
2,271 |
|
|
$ |
764 |
|
|
$ |
7,175 |
|
|
$ |
1,567 |
|
|
$ |
4,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
|
Year Ended December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2001(1) | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Income (loss) per common share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(2.88 |
) |
|
|
(1.14 |
) |
|
|
0.58 |
|
|
|
0.10 |
|
|
|
0.48 |
|
|
|
0.12 |
|
|
|
0.26 |
|
|
Discontinued operations
|
|
|
(2.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.79 |
) |
|
|
(1.14 |
) |
|
|
0.58 |
|
|
|
0.10 |
|
|
|
0.48 |
|
|
|
0.12 |
|
|
|
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(2.88 |
) |
|
|
(1.14 |
) |
|
|
0.50 |
|
|
|
0.09 |
|
|
|
0.44 |
|
|
|
0.11 |
|
|
|
0.23 |
|
|
Discontinued operations
|
|
|
(2.91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.79 |
) |
|
|
(1.14 |
) |
|
|
0.50 |
|
|
|
0.09 |
|
|
|
0.44 |
|
|
|
0.11 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
790 |
|
|
|
3,766 |
|
|
|
3,927 |
|
|
|
7,930 |
|
|
|
14,832 |
|
|
|
13,632 |
|
|
|
17,105 |
|
|
Diluted
|
|
|
790 |
|
|
|
3,766 |
|
|
|
5,850 |
|
|
|
9,510 |
|
|
|
16,238 |
|
|
|
14,695 |
|
|
|
19,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
|
|
| |
|
As of | |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
March 31, 2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
152 |
|
|
$ |
146 |
|
|
$ |
1,299 |
|
|
$ |
7,344 |
|
|
$ |
1,920 |
|
|
$ |
10,661 |
|
Total assets
|
|
|
12,465 |
|
|
|
34,778 |
|
|
|
53,662 |
|
|
|
80,192 |
|
|
|
137,355 |
|
|
|
257,830 |
|
Long-term debt (including current portion)
|
|
|
7,856 |
|
|
|
21,221 |
|
|
|
32,233 |
|
|
|
30,473 |
|
|
|
60,569 |
|
|
|
169,143 |
|
Stockholders equity
|
|
|
1,250 |
|
|
|
1,009 |
|
|
|
4,541 |
|
|
|
35,109 |
|
|
|
60,875 |
|
|
|
67,212 |
|
|
|
(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. |
42
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; rental tools; casing and tubing
services; compressed air drilling services; 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 price, quality of service and equipment, and
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
1,666 on June 30, 2006, according to the Baker Hughes rig
count. Furthermore, directional and horizontal rig counts
increased from 283 as of December 31, 2002 to 688 on
June 30, 2006, which accounted for 32.8% and 41.0% 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
43
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 each period 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. (See Note 2 to our consolidated
financial statements for the three years ended December 31,
2005).
In connection with the formation of AirComp in 2003, we, along
with M-I, contributed assets to AirComp in exchange for a 55%
interest and 45% interest, respectively, in AirComp. We
originally accounted for the formation of AirComp as a joint
venture, but in February 2005 determined that the transaction
should have been accounted for using purchase accounting
pursuant to SFAS No. 141, Business
Combinations and SEC Staff Accounting
Bulletin No. 51 Accounting for Sales of Stock
by a Subsidiary. Consequently, we have restated our
financial statements for the year ended December 31, 2003
and for the first three quarters of 2004 (See Note 2 to our
consolidated financial statements for the three years ended
December 31, 2005).
Management has concluded that the need to restate our financial
statements resulted, in part, from the lack of sufficient
experienced accounting personnel, which in turn resulted in a
lack of effective control over the financial reporting process.
We have implemented a number of actions that we believe address
the deficiencies in our financial reporting process, including
the following:
|
|
|
|
|
The addition of experienced accounting personnel with
appropriate experience and qualifications to perform quality
review procedures and to satisfy our financial reporting
obligations. During August 2004, we hired a new chief financial
officer and in October 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. |
44
|
|
|
|
|
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 capital stock of
Allis-Chalmers Tubular Services Inc., or Tubular. In February
2002, we also purchased substantially all the outstanding common
stock and preferred stock of Strata Directional Technology,
Inc., or 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., or Mountain Air, 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 Energy Inc., or Target. The results of
Target are included in our directional and horizontal drilling
segment as their measurement-while-drilling equipment is
utilized in that segment. On September 1, 2005, we acquired
the casing and tubing service assets of Patterson Services,
Inc., or Patterson. We consolidated the results of these
acquisitions from the day they were acquired.
In January 2006, we acquired 100% of the outstanding stock of
Specialty.
The foregoing acquisitions affect the comparability from period
to period of our historical results, and our historical results
may not be indicative of our future results.
|
|
|
Comparison of Three Months
Ended March 31, 2006 and 2005 |
Our revenues for the three months ended March 31, 2006 were
$47.0 million, an increase of 143.2% compared to
$19.3 million for the three months ended March 31,
2005. Revenues increased in all of our business segments due to
acquisitions completed in the second and third quarters of 2005
and the first quarter of 2006, improved pricing for our
services, the addition of operations and sales personnel, the
opening of new operations offices and the purchase of additional
equipment. Revenues increased most significantly at our rental
tools segment due to the acquisition of Specialty, effective
January 1, 2006 and Delta on April 1, 2005, and at the
compressed air drilling segment due to the
45
acquisition of the air drilling assets of W.T. on July 11,
2005, and improved pricing for our services in West Texas. Our
directional drilling services segment revenues increased in the
2006 period compared to the 2005 period due to improved pricing
for directional drilling services, the acquisition of Target
which provides measurement-while-drilling tools, the addition of
operations and sales personnel, the opening of new operations
offices and the purchase of additional down-hole motors which
increased our capacity and market presence.
Revenues also increased at our casing and tubing services
segment due the acquisition of the casing and tubing assets of
Patterson on September 1, 2005, along with improved market
conditions and increased market penetration for our services in
South Texas, East Texas, Louisiana and the U.S. Gulf of
Mexico. Also contributing to increased revenues was the
acquisition of Capcoil as of May 1, 2005 in our production
services segment.
Our gross profit for the quarter ended March 31, 2006
increased 195.8% to $16.7 million, or 35.4% of revenues,
compared to $5.6 million, or 29.1%, of revenues for the
three months ended March 31, 2005. The increase in gross
profit as a percentage of revenues is due to the acquisition of
Specialty as of January 1, 2006 and the acquisition of
Delta as of April 1, 2005, in the high margin rental tool
business. The increase in gross profit is also due to increased
revenues at our compressed air drilling services segment,
including the acquisition of the air drilling assets of W.T.,
increased revenues and improved pricing in the directional
drilling services segment, improved market conditions for our
domestic casing and tubing segment and the acquisition of
additional casing and tubing assets in September 2005. The
increase in gross profit was partially offset by an increase in
depreciation expense of 264.3% to $3.3 million for the
first quarter of 2006 compared to $0.9 million for the
first quarter of 2005. The increase is due to additional
depreciable assets resulting from the acquisitions and capital
expenditures. 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 $7.3 million in the
first quarter of 2006 period compared to $3.0 million for
the first quarter of 2005. General and administrative expense
increased due to stock option expense, the additional expenses
associated with the acquisitions, and the hiring of additional
sales and administrative personnel. General and administrative
expense also increased because of increased accounting and
consulting fees and other expenses in connection with
initiatives to strengthen our internal control processes, costs
related to Sarbanes-Oxley compliance efforts and increased
corporate accounting and administrative staff. As a percentage
of revenues, general and administrative expenses were 15.6% in
the 2006 quarter and 15.5% in the 2005 quarter.
We adopted SFAS No. 123R, Share-Based Payment,
effective January 1, 2006. This statement requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their grant-date fair values. With the adoption of SFAS
No. 123R, we recorded $0.9 million of expense related
to stock options during the three months ended March 31,
2006. We recorded $83,000 of the stock option expense in direct
costs and the remaining $859,000 of the stock option expense to
general and administrative expense which is consistent with the
cash based compensation for the option holder. We adopted
SFAS No. 123R using 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, we record
compensation cost related to unvested stock awards as of
December 31, 2005 by recognizing the unamortized grant date
fair value of these awards over the remaining vesting periods of
those awards with no change in historical reported earnings.
Therefore, we recorded an expense of $0.9 million
46
related to stock options for the three months ended
March 31, 2006. Prior to January 1, 2006, we accounted
for our stock-based compensation using Accounting Principle
Board Opinion 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. Accordingly, no compensation cost was recognized under
APB No. 25.
Amortization expense was $607,000 in the first quarter of 2006
compared to $394,000 in the first quarter of 2005. The increase
in amortization expense is due to the amortization of intangible
assets in connection with our acquisitions and the amortization
of deferred financing costs.
Income from operations for the three months ended March 31,
2006 totaled $8.6 million, a 284.2% increase over income
from operations of $2.2 million for the three months ended
March 31, 2005, reflecting the increase in our revenues and
gross profit, offset in part by increased general and
administrative expenses, stock option expense and amortization.
Our net interest expense was $3.6 million in the first
quarter of 2006, compared to $521,000 for the first quarter of
2005. Interest expense increased in the 2006 quarter due to the
increased borrowings at a higher average interest rate. In
January of 2006 we issued $160.0 million of senior notes
bearing interest at 9.0% to fund the acquisition of Specialty,
pay off other outstanding debt and for working capital.
Minority interest in income of subsidiaries for the first
quarter of 2006 was $0 compared to $144,000 for the first
quarter of 2005 due to the acquisition of the minority interest
in AirComp, as of July 11, 2005.
We had net income of $4.4 million for the first quarter of
2006, an increase of 182.3%, compared to net income of
$1.6 million for the first quarter of 2005.
The following table compares revenues and income from operations
for each of our business segments. Income (loss) from operations
consists of revenues less cost of revenues, general and
administrative expenses, and depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues | |
|
Income (Loss) from Operations | |
|
|
| |
|
| |
|
|
|
|
Three Months Ended | |
|
|
|
|
|
Three Months Ended | |
|
|
|
|
|
|
March 31, | |
|
|
|
|
|
March 31, | |
|
|
|
|
2006 | |
|
2005 | |
|
Change | |
|
2006 | |
|
2005 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Directional drilling services
|
|
$ |
15,054 |
|
|
$ |
9,901 |
|
|
$ |
5,153 |
|
|
$ |
2,605 |
|
|
$ |
1,878 |
|
|
$ |
727 |
|
Rental tools
|
|
|
10,421 |
|
|
|
373 |
|
|
|
10,048 |
|
|
|
4,998 |
|
|
|
(80 |
) |
|
|
5,078 |
|
Casing and tubing services
|
|
|
9,459 |
|
|
|
3,560 |
|
|
|
5,899 |
|
|
|
1,851 |
|
|
|
1,327 |
|
|
|
524 |
|
Compressed air drilling services
|
|
|
9,099 |
|
|
|
4,181 |
|
|
|
4,918 |
|
|
|
2,237 |
|
|
|
527 |
|
|
|
1,710 |
|
Production services
|
|
|
2,995 |
|
|
|
1,319 |
|
|
|
1,676 |
|
|
|
277 |
|
|
|
(39 |
) |
|
|
316 |
|
General corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,335 |
) |
|
|
(1,366 |
) |
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
47,028 |
|
|
$ |
19,334 |
|
|
$ |
27,694 |
|
|
$ |
8,633 |
|
|
$ |
2,247 |
|
|
$ |
6,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directional Drilling Services Segment. Revenues for the
quarter ended March 31, 2006 for our directional drilling
services segment were $15.1 million, an increase of 52.0%
from the $9.9 million in revenues for the quarter ended
March 31, 2005. Income from operations increased 38.7% to
$2.6 million for the first quarter of 2006 from
$1.9 million for the comparable 2005 period. The improved
results for this segment are due to the increase in drilling
activity in the Texas and Gulf Coast areas, improved pricing for
directional and horizontal drilling services, the acquisition of
Target as of August 1, 2005, the establishment of new
operations in West Texas and Oklahoma, and the addition of
operations and
47
sales personnel which increased our capacity and market
presence. Our increased operating expenses as a result of the
addition of operations and personnel were more than offset by
the growth in revenues and improved pricing for our services.
Rental Tools Segment. Revenues for the quarter ended
March 31, 2006 for the rental tools segment were
$10.4 million, from $373,000 in revenues for the quarter
ended March 31, 2005. Income from operations increased to
$5.0 million in the 2006 period compared to loss from
operations of $80,000 in the 2005 period. Our rental tools
revenues and operating income for the first quarter of 2006
increased compared to the prior year due primarily due to the
acquisitions of Specialty and Delta. The acquisition of
Specialty increased the rental tool revenue by $8.9 million
for the quarter ended March 31, 2006. Delta was acquired as
of April 1, 2005, and Specialty was acquired as of
January 1, 2006, the effective date of their respective
acquisitions. Safco-Oil Field Products, Inc., or Safco, Delta
and Specialty were merged in February 2006 to
form Allis-Chalmers Rental Tools, Inc., or Rental Tools.
Casing and Tubing Services Segment. Revenues for the
quarter ended March 31, 2006 for the casing and tubing
services segment were $9.5 million, an increase of 165.7%
from the $3.6 million in revenues for the quarter ended
March 31, 2005. Revenues from domestic operations increased
to $8.0 million in the 2006 period from $1.9 million
in the 2005 period as a result of the acquisition of the casing
and tubing assets of Patterson on September 1, 2005, which
resulted in increased market penetration for our services in
South Texas, East Texas, Louisiana and the U.S. Gulf of
Mexico. Revenues from Mexico operations decreased to
$1.5 million in the first quarter of 2006 from
$1.7 million in the 2005 period. Income from operations
increased 39.5% to $1.9 million in the first quarter of
2006 from $1.3 million in the first quarter of 2005. The
increase in this segments operating income is due to our
increased revenues from domestic operations. The operating
income as a percentage of revenue decreased to 19.6% for the
three months ended March 31, 2006 compared to 37.3% for the
same period of 2005. The decrease in operating income as a
percentage of revenues is due to the increase in domestic
revenues as compared to Mexico revenues, which have higher
operating income margins.
Compressed Air Drilling Services Segment. Our compressed
air drilling revenues were $9.1 million for the three
months ended March 31, 2006, an increase of 117.6% compared
to $4.2 million in revenues for the three months ended
March 31, 2005. Income from operations increased to
$2.2 million in the 2006 period compared to income from
operations of $527,000 in the 2005 period. Our compressed air
drilling revenues and operating income for the first quarter of
2006 increased compared to the prior year due primarily due to
the acquisition of the air drilling assets of W.T. as of
July 11, 2005, improved pricing for our services and our
investment in additional equipment.
Production Services Segment. Operations for this segment
consist of Downhole Injection Services, LLC, or Downhole, which
was acquired December 1, 2004, and Capcoil which was
acquired May 1, 2005. Downhole and Capcoil were merged in
February 2006, to form Allis-Chalmers Production Services,
Inc., or Production Services. Revenues were $3.0 million
for the three months ended March 31, 2006, an increase of
127.1% compared to $1.3 million in revenues for the three
months ended March 31, 2005. Income from operations
increased to $277,000 in the 2006 period compared to loss from
operations of $39,000 in the 2005 period. Our production
services revenues and operating income for the first quarter of
2006 increased compared to the prior year due primarily due to
the acquisition of Capcoil.
General Corporate. General corporate expenses increased
$1.9 million to $3.3 million for the three months
ended March 31, 2006 compared to $1.4 million for the
three months ended March 31, 2005. The increase was due to
stock option expense of $0.9 million recorded in 2006 with
the adoption of SFAS 123R, the increase in accounting and
administrative staff to support the growing organization,
48
increased franchise taxes based on our increased authorized
shares and cost related to our Sarbanes-Oxley compliance effort.
|
|
|
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 substantially all of the assets of
Diamond Air Drilling Services, Inc. and Marquis Bit Co., LLC,
which we refer to collectively as 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
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 Production Services. Safco and Delta comprise our rental
tool segment and were merged in February 2006 with Specialty to
form Rental Tools.
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.
49
Amortization expense was $1.8 million for the year ended
December 31, 2005 compared to $0.9 million for the
year ended December 31, 2004. The increase in amortization
expense is due to the amortization of intangible assets in
connection with our acquisitions and the amortization of
deferred financing costs.
Income from operations for the year ended December 31, 2005
totaled $13.2 million, a 212.7% increase over the
$4.2 million in income from operations for the year ended
December 31, 2004, reflecting the increase in our revenues
and gross profit, offset in part by increased general and
administrative expenses.
Our interest expense was $4.4 million for the year ended
December 31, 2005, compared to $2.8 million for the
year ended December 31, 2004. Interest expense increased
during 2005 due to the increased borrowings associated with the
acquisitions completed in the second and third quarters of 2005,
equipment purchases and higher average interest rates, offset in
part by the prepayment, in December 2004, of our 12%
$2.4 million subordinated note. Additionally, in 2005, we
incurred debt retirement expense of $1.1 million related to
the refinancing of our debt. This amount includes prepayment
penalties and the write-off of deferred financing fees from a
previous financing.
Minority interest in income of subsidiaries for the year ended
December 31, 2005 was $488,000 compared to $321,000 for the
corresponding period in 2004 due to the increase in
profitability at AirComp due in part to the acquisition of
Diamond Air as of November 1, 2004. The minority interest
at AirComp was acquired on July 11, 2005 and the minority
interest in Tubular, which was 19%-owned by director Jens
Mortensen, was acquired on September 30, 2004.
We had net income attributed to common stockholders of
$7.2 million for the year ended December 31, 2005, an
increase of 839.1%, compared to 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
50
downhole motors which increased our capacity and market presence
and the acquisition of Target, a provider of
measurement-while-drilling equipment, effective August 2005. Our
operating income increased due to higher revenue explained above
and cost savings achieved as a result of the purchases of most
of the downhole motors used in directional drilling, which we
had previously rented.
Compressed Air Drilling Services Segment. Our compressed
air drilling revenues were $25.7 million for the year ended
December 31, 2005, an increase of 122.0% compared to
$11.6 million in revenues for the year ended
December 31, 2004. Income from operations increased 380.1%
to $5.6 million in 2005 compared to income from operations
of $1.2 million in 2004. Our compressed air drilling
revenues and operating income for the 2005 period increased
compared to the 2004 period due in part to the acquisition of
the air drilling assets of W.T., the 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 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
51
statements beginning with the quarter ended September 30,
2003. Also contributing to the increase in revenues was an
increase in Mexico revenues at our casing and tubing services
segment, which was offset in part by a decrease in domestic
revenues for this segment due to increased competition for
casing and tubing services in South Texas. Finally, in the
second half of 2004, we acquired Safco, our rental tools
subsidiary, as of September 1, and as of December 1,
2004, we acquired Downhole, our production services subsidiary.
Our gross margin for the year ended December 31, 2004
increased 42.9% to $12.4 million, or 26.0% of revenues,
compared to $8.7 million, or 26.6% of revenues for the year
ended December 31, 2003, due to the increase in revenues in
the directional drilling services segment, the compressed air
drilling services segment and from Mexico, which more than
offset lower revenues and higher costs in our domestic casing
and tubing segment. Our cost of revenues consists principally of
our labor costs and benefits, equipment rentals, maintenance and
repairs of our equipment, depreciation, insurance and fuel.
Because many of our costs are fixed, our gross profit as a
percentage of revenues is generally affected by our level of
revenues.
General and administrative expense was $7.1 million in the
2004 period compared to $5.3 million for 2003. General and
administrative expense increased in 2004 due to additional
expenses associated with the inclusion of AirComp for a full
year, the acquisitions completed in the second half of 2004, and
the hiring of additional sales and administrative personnel at
each of our subsidiaries. General and administrative expense
also increased because of increased professional fees and other
expenses related to our financing and acquisition activities,
including the listing of our common stock on the American Stock
Exchange, and increased corporate accounting and administrative
staff. As a percentage of revenues, general and administrative
expenses were 14.9% in 2004 and 16.2% in 2003.
Depreciation and amortization was $3.6 million for the year
ended December 31, 2004 compared to $2.9 million for
the year ended December 31, 2003. The increase was due to
the inclusion of AirComp for a full year and the increase in our
assets resulting from our capital expenditures and the
acquisitions completed in 2004.
Income from operations for the year ended December 31, 2004
totaled $4.2 million, a 61.0% increase over the
$2.6 million in income from operations for the prior year,
reflecting the increase in our revenues and gross profit, offset
in part by an increase in general and administrative expense.
Income from operations in the year ended December 31, 2004
includes $188,000 in additional accrued expense for
post-retirement medical benefits pursuant to our plan of
reorganization. The increase in this accrued expense was based
on the present value of the expected retiree benefit obligations
as determined by a third-party actuary. Income from operations
for the 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 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.
52
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.
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
53
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 complete acquisitions and acquire and
maintain equipment, and to fund our working capital
requirements. Our primary sources of liquidity are borrowings
under our revolving lines of credit, proceeds from the issuance
of debt and equity securities and cash flows from operations. We
had cash and cash equivalents of $10.7 million at
March 31, 2006 compared to $1.9 million at
December 31, 2005, $7.3 million at December 31,
2004 and $1.3 million at December 31, 2003.
In the three months ended March 31, 2006, our operating
activities used $5.6 million in cash compared to a use of
$822,000 for the same period in 2005. Net income for the three
months ended March 31, 2006 increased to $4.4 million,
compared to $1.6 million in the 2005 period. The
$4.4 million in net income for the 2006 period includes a
charge of $0.9 million related to the expensing of stock
options as required under SFAS No. 123R. Revenues and
income from operations increased in the first three months of
2006 due to acquisitions completed in the first quarter of 2006
and the second and third quarters of 2005, the investment in
additional equipment, the opening of new operations offices and
the addition of operations and sales personnel. Non-cash
expenses totaled $4.9 million during the first three months
of 2006 consisting of $3.9 million of depreciation and
amortization, $0.9 million from the expensing of stock
options, $355,000 of imputed interest related to the effective
date of the Specialty acquisition, $180,000 related to increases
to the allowance for doubtful accounts receivables, offset by
$514,000 on the gain from asset retirements. Non-cash expenses
during the first three months of 2005 totaled $1.5 million,
consisting of depreciation and amortization expense of
$1.3 million and minority interest of $144,000.
During the three months ended March 31, 2006, changes in
operating assets and liabilities used $14.9 million in
cash, principally due to an increase of $4.3 million in
accounts receivable, an increase of $1.5 million in
inventory, a decrease of $1.3 million in accounts payable,
and a decrease of $11.0 million in an accrued expense,
offset in part by an increase of $2.8 million in accrued
interest. Accounts receivable increased due to the increase in
our revenues in the first three months of 2006. Other inventory
increased primarily due to increased activity levels. The
decrease in accrued expenses can be attributed to accrued
bonuses of Specialty that we paid in connection with the
acquisition. The increase in accrued interest relates to our
9.0% senior notes.
During the three months ended March 31, 2005, changes in
operating assets and liabilities used $3.8 million in cash,
principally due to an increase of $3.4 million in accounts
receivable, an increase of $515,000 in inventory and other
assets, and a decrease of $92,000 in accrued expenses, offset in
part by an increase in accrued salaries, benefits and payroll
taxes of $185,000. Accounts receivable increased by
$3.4 million at March 31, 2005 due to the increase in
our revenues in the first quarter of 2005. Other assets
increased due primarily to an increase in prepaid insurance
related to insurance premium deposits required for our policies
that went into affect April 1, 2005.
54
During the three months ended March 31, 2006, we used
$89.8 million in investing activities, consisting of
$83.4 million for the acquisition of Specialty, net of cash
received and $7.6 million for capital expenditures, offset
by $1.2 million of proceeds from equipment sales. Included
in the $7.6 million for capital expenditures was
$2.6 million for the expansion of our
measurement-while-drilling
equipment used in the directional drilling segment and
$2.2 million for additional equipment in our compressed air
drilling services segment. A majority of our equipment sales
relate to items lost in hole by our customers.
During the first three months of 2005, we used $2.7 million
in investing activities, consisting principally of the purchase
of equipment of $1.6 million for casing equipment,
approximately $263,000 for the purchase of downhole motors and
approximately $779,000 for new compressed air drilling equipment.
During the three months ended March 31, 2006, financing
activities provided $104.1 million in cash. We received
$161.4 million in proceeds from long-term debt, repaid
$43.5 million in borrowings under long-term debt
facilities, repaid $3.0 million in related party debt,
repaid $6.4 million under our line of credit and paid $5.3
in debt issuance costs. We also received $972,000 in proceeds
from the exercise of options and warrants. On January 18,
2006, we closed on a private offering of $160.0 million
aggregate principal amount of our senior notes. The notes are
due January 15, 2014 and bear interest at 9.0%. The
proceeds from the sale of the notes were used to fund the
Specialty acquisition, to repay existing debt and for general
corporate purposes.
During the three months ended March 31, 2005, financing
activities provided a net of $2.2 million in cash. We
received $2.4 million, net, in borrowings under long-term
debt facilities and paid $178,000 in debt issuance costs.
Prior to January 18, 2006, we were party to a July 2005
credit agreement that provided for the following senior secured
credit facilities:
|
|
|
|
|
A $13.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivable plus 50% of
eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be
used to finance working capital requirements and other general
corporate purposes, including the issuance of standby letters of
credit. Outstanding borrowings under this line of credit were
$6.4 million at a margin above prime and LIBOR rates plus
margin averaging approximately 8.1% as of December 31, 2005. |
|
|
|
Two term loans totaling $42.0 million. Outstanding
borrowings under these term loans were $42.0 million as of
December 31, 2005. These loans were at LIBOR rates plus a
margin which averages approximately 7.8% at December 31,
2005. |
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.
All amounts outstanding under our July 2005 credit agreement
were paid off with the proceeds of our senior notes offering on
January 18, 2006. On January 18, 2006, we also
executed an amended and
55
restated credit agreement which provides for a
$25.0 million revolving line of credit with a maturity of
January 2010. Our January 2006 amended and restated credit
agreement contains customary events of default and financial
covenants and limits our ability to incur additional
indebtedness, make capital expenditures, pay dividends or make
other distributions, create liens and sell assets. Our
obligations under the January 2006 amended and restated credit
agreement are secured by substantially all of our assets.
At March 31, 2006, we had $169.1 million in
outstanding indebtedness, of which $166.0 million was long
term debt and $3.1 million was the current portion of long
term debt.
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.
As of December 31, 2005, Tubular had a subordinated note
outstanding and 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 was
January 31, 2006. The subordinated note was subordinated to
the rights of our bank lenders. 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. At
March 31, 2006 and December 31, 2005 the outstanding
amounts due were $500,000.
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 was repaid
on its maturity of 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
March 31, 2006 and December 31, 2005 were $615,000 and
$698,000, 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 March 31, 2006 and
December 31, 2005, the principal and accrued interest on
these notes totaled approximately $96,000.
56
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 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 repaid in full in January 2006 with
proceeds from our senior notes offering.
We have various equipment financing loans with interest rates
ranging from 5% to 8.2% and terms ranging from 2 to
5 years. As of March 31, 2006 and December 31,
2005, the outstanding balances for equipment financing loans
were $2.8 million and $1.9 million, respectively. We
also have various capital leases with terms that expire in 2008.
As of March 31, 2006 and December 31, 2005, amounts
outstanding under capital leases were $796,000 and $917,000,
respectively. In January 2006, we prepaid $350,000 of the
outstanding equipment loans with proceeds from our senior notes
offering.
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(a)
|
|
$ |
59,652 |
|
|
$ |
5,158 |
|
|
$ |
53,887 |
|
|
$ |
607 |
|
|
$ |
|
|
Capital leases(b)
|
|
|
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) |
In January of 2006 we issued $160.0 million of senior notes
due 2014 and repaid $48.5 million of debt due in
2-3 years and
$3.1 million due in less than one year. |
|
|
(b) |
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.
Capital Requirements
We have identified capital expenditure projects that we expect
will require up to approximately $14.0 million for the
remainder of 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. The acquisition of assets could require
additional financing, which we currently anticipate would be
borrowed under our bank facility. Any such borrowing would
require the consent of our lenders under our bank credit
facilities. We also 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 natural gas
57
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 and the proceeds of the pending offering. There can be
no assurance that we will be successful in raising the
additional debt or equity capital or that we can do so on terms
that will be acceptable to us.
Recent Developments
|
|
|
Amendments to Credit Agreement |
In conjunction with this offering and the pending acquisition of
DLS, we expect to amend the credit agreement governing our
$25.0 million credit facility to, among other things,
provide for the acquisition of DLS, permit the net proceeds from
this offering and the issuance of an additional
$80.0 million of our senior notes to be used for the
acquisition of DLS, increase the sub-limit for the issuance of
stand-by letters of credit, increase permitted capital
expenditures and increase permitted indebtedness at DLS.
|
|
|
Second Quarter 2006 Results |
On July 20, 2006, we announced our results for the quarter
ended June 30, 2006.
Revenues for the second quarter 2006 rose 156.4% to
$60.5 million compared to $23.6 million for the second
quarter of 2005. The solid growth in revenues was due to
continued success with integrating recent acquisitions while
expanding operating locations, personnel and equipment and
growing our customer base in response to strong demand for our
products and services.
Income from operations grew 444.6%, which was substantially
higher than the percentage growth in revenues, to
$15.9 million for second quarter 2006, from
$2.9 million in last years second quarter.
Net income for the second quarter of 2006 attributed to common
shares increased 442.3% to $9.6 million, or $0.50 per
diluted share, compared to net income of $1.8 million, or
$0.12 per diluted share, in the second quarter of 2005. Weighted
average shares of common stock outstanding on a diluted basis
increased to 19.1 million shares for the second quarter of
2006 from 15.1 million shares for the second quarter of
2005.
EBITDA increased 396.8% to $20.4 million for the second
quarter of 2006, from $4.1 million in the second quarter of
2005.
EBITDA is a non-GAAP financial measure that we define as net
income before interest, taxes, depreciation and amortization.
The following table reconciles our net income, the most directly
comparable GAAP financial measure, to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
June 30, | |
|
|
| |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In Thousands) | |
Net income
|
|
$ |
1,769 |
|
|
$ |
9,594 |
|
Interest expense, net
|
|
|
645 |
|
|
|
3,797 |
|
Income taxes
|
|
|
166 |
|
|
|
2,474 |
|
Depreciation and amortization
|
|
|
1,518 |
|
|
|
4,494 |
|
|
|
|
|
|
|
|
EBITDA
|
|
$ |
4,098 |
|
|
$ |
20,359 |
|
Revenue for the first six months of 2006 rose 150.4% to
$107.5 million compared to $42.9 million for the first
six months of 2005. Income from operations grew to
$24.5 million in 2006 from $5.2 million during the
comparable six months in 2005, representing a 374.8% increase.
Net income for
58
the first six months of 2006 rose 320.2% to $14.0 million,
or $0.74 per diluted shares, from net income of
$3.3 million or $0.22 per diluted share in the first six
months of 2005. Weighted average shares of common stock
outstanding on a diluted basis increased to 19.0 million
shares for the six month period of 2006 from 14.9 million
shares for the same period of 2005.
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.
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
59
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 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 Statement.
SFAS No. 154 is effective for fiscal years beginning
after December 15, 2005. We adopted the provisions of
SFAS No. 154 as of January 1, 2006 and the
adoption did not have a material impact on our results of
operations.
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 adopted
SFAS No. 123R as of January 1, 2006 and used 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. See Note 3 of our
unaudited consolidated condensed financial statements for the
three months ended March 31, 2006, for a more detailed
description of our adoption of SFAS No. 123R.
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
60
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 adopted the provisions of
SFAS No. 151, on a prospective basis, as of
January 1, 2006 and the adoption did not have a material
impact on our 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 affecting our
adjustable rate debt, and any future refinancing of our fixed
rate debt and our 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. During the three months ended March 31,
2006, we repaid all variable interest rate debt.
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
March 31, 2006, we had $9.3 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. To date, such payments have not been
material in amount.
61
OUR 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 $96.0 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
$281.3 million, net income of $8.2 million and EBITDA
of $68.7 million for the fiscal year ended
December 31, 2005. Giving pro forma as adjusted effect to
the Rogers and DLS acquisitions, we would have generated
revenues of $87.9 million, net income of $7.5 million
and EBITDA of $22.9 million for the three months ended
March 31, 2006.
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., or
Mountain Air. |
|
|
|
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., formerly known as
Jens Oilfield Service, Inc. and substantially all of the
capital stock of Strata Directional Technology, Inc., or Strata. |
|
|
|
In July 2003, we entered into a limited liability company
operating agreement with M-I LLC, or M-I, a joint venture
between Smith International and Schlumberger N.V., to form a
Delaware |
62
|
|
|
|
|
limited liability company named
AirComp LLC, or AirComp. Pursuant to this agreement, we owned
55% and M-I owned 45%
of AirComp. |
|
|
|
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.,
or 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., or 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., or Patterson, 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 81% from
918 in 2000 to 1,666 in June 2006, while the average
natural gas rig count increased 89% from 720 in 2000 to 1,359 in
June 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.
63
This is largely a function of increasing decline rates for
natural gas wells in the United States. We 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.
64
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 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 $35.3 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. |
65
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.
Rental Tools. We provide specialized rental equipment,
including premium drill pipe, heavy weight spiral drill pipe,
tubing work strings, blow out preventors, 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, 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
66
supervision for provision of the casing and tubing crew and
torque turn service. The term of the lease agreement pursuant to
which we provide the equipment and Matyep provides the above
listed items continues for as long as Matyep is successful in
maintaining its casing and tubing business with Pemex. Services
to offshore drilling operations in Mexico are traditionally
seasonal, with less activity during the first quarter of each
calendar year due to weather conditions.
For the years ended December 31, 2005, 2004 and 2003, our
Mexico operations accounted for approximately $6.4 million,
$5.1 million and $3.7 million, respectively, of our
revenues. We provide extended payment terms to Matyep and
maintain a high accounts receivable balance due to these terms.
The accounts receivable balance was approximately
$2.2 million at December 31, 2005 and approximately
$968,000 at December 31, 2004. Tubular has been providing
services to Pemex in association with Matyep since 1997.
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
67
service personnel and associated equipment on a turn key hourly
basis. We do not provide the chemicals injected into the well.
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.
68
We believe that there are five major directional drilling
companies, Schlumberger, Halliburton, Baker Hughes, W-H Energy
Services (Pathfinder) and Weatherford, that market both
worldwide and in the United States as well as numerous small
regional players.
Our largest competitor for compressed air drilling services is
Weatherford. Weatherford focuses on large projects, but also
competes in the more common compressed air, mist, foam and
aerated mud drilling applications. Other competition comes from
smaller regional companies.
Two large companies, Franks Casing Crew and Rental Tools
and Weatherford, have a substantial portion of the casing and
tubing market in South Texas. The market remains highly
competitive and fragmented with numerous 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 July 1, 2006, we had
approximately 780 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
69
environment. While we are not currently aware of any situation
involving an environmental claim that would likely have a
material adverse effect on us, it is possible that an
environmental claim could arise that could cause our business to
suffer. We do not anticipate any material expenditures to comply
with environmental regulations affecting our operations.
In addition to claims based on our current operations, we are
from time to time named in environmental claims relating to our
activities prior to our reorganization in 1988. See
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 July 1, 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 |
|
|
Broussard, Louisiana |
|
|
Houma, Louisiana |
|
|
Buffalo, Texas |
|
Rental Tools
|
|
Houston, Texas |
|
|
Broussard, Louisiana |
70
|
|
|
Business Segment |
|
Location |
|
|
|
Production Services
|
|
Midland, Texas |
|
|
Corpus Christi, Texas |
|
|
Kilgore, Texas |
|
|
Carthage, Texas |
|
|
Cordell, Oklahoma |
General Corporate
|
|
Houston, Texas |
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
71
liabilities with respect to hazardous waste sites, we are under
a continuing obligation to provide information with respect to
our products to federal and state agencies. The A-C
Reorganization Trust, under its mandate to provide plan of
reorganization implementation services to us, has responded to
these informational requests because pre-bankruptcy activities
are involved.
We were advised in late 2005 that the A-C Reorganization Trust
is in the process of terminating and distributing its assets,
and as a result, we will assume the responsibility of responding
to claimants and to the EPA and state agencies previously
undertaken by the A-C Reorganization Trust. However, we have
been advised by the A-C Reorganization Trust that its cost of
providing these services has not been material in the past, and
therefore we do not expect to incur material expenses as a
result of responding to such requests. However, there can be no
assurance that we will not be subject to environmental claims
relating to pre-bankruptcy activities that would have a
material, adverse effect on us.
We are named as a defendant from time to time in product
liability lawsuits alleging personal injuries resulting from our
activities prior to our reorganization involving asbestos. These
claims are referred to and handled by a special products
liability trust formed to be responsible for such claims in
connection with our reorganization. As with environmental
claims, we do not believe we are liable for product liability
claims relating to our business prior to our bankruptcy;
moreover, the products liability trust continues to defend all
such claims. However, there can be no assurance that we will not
be subject to material product liability claims in the future.
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.
72
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 the issuance and
sale of 2.5 million shares of our common stock in this
offering and the offering and sale of $80.0 million
additional principal amount of our senior notes); however, under
the stock purchase agreement, we plan to reduce the cash
consideration to $93.2 million, in consideration for DLS
retaining $9.1 million of its currently existing
indebtedness; and |
|
|
|
an additional 2.5 million shares of our common stock
issuable to the sellers, 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 1,566 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
73
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. For the three
months ended March 31, 2006, DLS generated revenues of
$22.9 million in its drilling segment, $11.2 million
in its completion and repair segment (which includes workover
and pulling functions) and $4.7 million in its drilling
fluids/ other services segment.
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 July 1, 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, or
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 18.9 trillion cubic feet, or Tcf.
Natural gas production in Argentina has increased steadily over
the last decade to become Latin Americas largest natural
gas producer. Natural gas is now the countrys dominant
fuel source, accounting for 46% of primary energy consumption in
2003.
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, or 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.
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, 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 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.
74
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, or Tcf, and
proven crude oil reserves of 440 Million barrels in 2005.
Bolivias natural gas production satisfies current
consumption levels and allows Bolivia to be a net exporter of
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 July 1, 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 |
|
111 |
|
|
|
11,500 |
|
|
GARDNER-DENVER |
|
|
800 |
|
|
Comodoro Rivadavia |
|
113 |
|
|
|
12,500 |
|
|
GARDNER-DENVER |
|
|
1000 |
|
|
Comodoro Rivadavia |
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Neuquén |
|
146 |
|
|
|
12,500 |
|
|
GARDNER-DENVER |
|
|
1000 |
|
|
Neuquén |
|
147 |
|
|
|
14,800 |
|
|
INGERSOLL-RAND |
|
|
1500 |
|
|
Neuquén |
|
149 |
|
|
|
11,500 |
|
|
INGERSOLL-RAND |
|
|
1100 |
|
|
Neuquén |
|
152 |
|
|
|
16,400 |
|
|
NATIONAL |
|
|
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
July 1, 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 |
|
302 |
|
|
|
9,800 |
|
|
WAGNER-MOREHOUSE |
|
|
250 |
|
|
Comodoro Rivadavia |
|
304 |
|
|
|
9,800 |
|
|
WAGNER-MOREHOUSE |
|
|
250 |
|
|
Comodoro Rivadavia |
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rig |
|
Approximate |
|
|
|
|
|
|
No. |
|
Drilling/W.O. Depth (ft) |
|
Type |
|
Horsepower |
|
Operating Area |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
IDECO |
|
|
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 July 1, 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.
77
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.
78
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
drilling and fluid services required in the area where
Repsol-YPF is drilling.
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
79
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 July 1, 2006, DLS employed approximately 1,566
employees, including approximately 1,499 employees in
Argentina and approximately 67 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.
80
OUR MANAGEMENT
Board of Directors and Executive Officers
Our executive officers and directors are:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Munawar H. Hidayatallah
|
|
|
62 |
|
|
Chairman and Chief Executive Officer |
David Wilde
|
|
|
51 |
|
|
President and Chief Operating Officer |
Victor M. Perez
|
|
|
53 |
|
|
Chief Financial Officer |
Theodore F. Pound III
|
|
|
52 |
|
|
General Counsel and Secretary |
Bruce Sauers
|
|
|
42 |
|
|
Vice President and Corporate Controller |
David K. Bryan
|
|
|
49 |
|
|
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
|
|
|
54 |
|
|
President and Chief Executive Officer of AirComp L.L.C. |
Jens H. Mortensen, Jr.
|
|
|
53 |
|
|
Vice Chairman |
John E. McConnaughy, Jr.
|
|
|
77 |
|
|
Director(1) |
Victor F. Germack
|
|
|
66 |
|
|
Director(1) |
Thomas E. Kelly
|
|
|
51 |
|
|
Director(2) |
Thomas O. Whitener, Jr.
|
|
|
59 |
|
|
Director(2)(3) |
Robert E. Nederlander
|
|
|
73 |
|
|
Director(1)(3) |
Jeffrey R. Freedman
|
|
|
59 |
|
|
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
from its formation in February 2000 until it merged with us in
May 2001. From December 1994 until August 1999,
Mr. Hidayatallah was the Chief Financial Officer and a
director of IRI International, Inc., which was acquired by
National Oilwell, Inc. in early 2000. IRI International, Inc.
manufactured, sold and rented oilfield equipment to the oilfield
and natural gas exploration and production sectors. From August
1999 until February 2001, Mr. Hidayatallah worked as a
consultant to IRI International, Inc. and Riddell Sports Inc.
David Wilde became our President and Chief Operating
Officer in February 2005. Mr. Wilde was President and Chief
Executive Officer of Strata from October 2003 through February
2005 and served as Stratas President and Chief Operating
Officer from July 2003 until October 2003. From February 2002
until July 2003, Mr. Wilde was our Executive Vice President
of Sales and Marketing. From May 1999 until February 2002,
Mr. Wilde served as Sales and Operations Manager at Strata.
Mr. Wilde has more than 30 years experience in
the directional drilling and rental tool sectors of the oilfield
services industry.
81
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.
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.
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 IHS/
Spindletop Tubular Services, a division of Patterson.
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 subsidiary since its formation
on July 1, 2003, and served as a consultant to M-I in the
area of compressed air
82
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
Tubular, 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 Arrow Resources Development Inc. 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 (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 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
83
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., beginning in January
1988 and resigned all positions in January 2002. The new
management changed Megos name to Leisure Industries
Corporation of America and later 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. and NOVT Corporation. 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.
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,
84
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). Information on our website is not
incorporated into this prospectus and is not a part of this
prospectus.
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 year ended December 31, 2005 and initially
selected UHY Mann Frankfort Stein & Lipp CPAs, LLP as our
independent auditors for the fiscal year ended December 31,
2006. On June 1, 2006, the partners of UHY Mann Frankfort
Stein & Lipp CPAs, LLP announced that they were joining UHY
LLP, a New York limited liability partnership. UHY LLP is the
independent registered public accounting firm with which UHY
Mann Frankfort Stein & Lipp CPAs, LLP has an affiliation.
UHY LLP is a legal entity that is separate from UHY Mann
Frankfort Stein & Lipp CPAs, LLP. On June 15, 2006, UHY
Mann Frankfort Stein & Lipp CPAs, LLP notified us that it
has ceased to provide audit services to us, and accordingly,
resigned as our independent auditors on that date. On
June 15, 2006, the Audit Committee engaged UHY LLP as our
independent auditors for our fiscal year ending
December 31, 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). Information on our website is not
incorporated into this prospectus and is not a part of this
prospectus.
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).
Information on our website is not incorporated into this
prospectus and is not a part of this prospectus.
85
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, 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.
86
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our
outstanding common stock as of July 1, 2006 (both before
and immediately following the DLS transactions) 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; and |
|
|
|
each other person known by us to be a beneficial owner of more
than 5.0% of our outstanding common stock. |
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Common Stock | |
|
|
Number of | |
|
Beneficially Owned | |
|
|
Shares | |
|
| |
|
|
Beneficially | |
|
Before DLS | |
|
After DLS | |
Name and Address |
|
Owned | |
|
Transactions(1) | |
|
Transactions(2) | |
|
|
| |
|
| |
|
| |
Named executive officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Munawar H. Hidayatallah(3)
|
|
|
1,686,666 |
|
|
|
9.0 |
|
|
|
7.1 |
|
|
David Wilde(4)
|
|
|
249,966 |
|
|
|
1.3 |
|
|
|
1.1 |
|
|
Victor M. Perez(5)
|
|
|
51,667 |
|
|
|
* |
|
|
|
* |
|
|
Terence P. Keane(6)
|
|
|
25,000 |
|
|
|
* |
|
|
|
* |
|
|
David Bryan(7)
|
|
|
68,666 |
|
|
|
* |
|
|
|
* |
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jens H. Mortensen, Jr.(8)
|
|
|
1,600,591 |
|
|
|
8.6 |
|
|
|
6.8 |
|
|
John E. McConnaughy, Jr.(9)
|
|
|
100,000 |
|
|
|
* |
|
|
|
* |
|
|
Victor F. Germack(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Kelly(11)
|
|
|
14,201 |
|
|
|
* |
|
|
|
* |
|
|
Thomas O. Whitener, Jr.(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert E. Nederlander(13)
|
|
|
715,594 |
|
|
|
3.9 |
|
|
|
3.0 |
|
|
Jeffrey R. Freedman(14)
|
|
|
119,000 |
|
|
|
* |
|
|
|
* |
|
|
Leonard Toboroff(15)
|
|
|
695,594 |
|
|
|
3.8 |
|
|
|
3.0 |
|
All directors and executive officers as a group
(18 persons)
|
|
|
5,443,279 |
|
|
|
28.2 |
|
|
|
22.4 |
|
Other 5% holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palo Alto Investors(16)
|
|
|
2,208,767 |
|
|
|
11.9 |
|
|
|
9.4 |
|
|
Steve Emerson(17)
|
|
|
1,007,100 |
|
|
|
5.4 |
|
|
|
4.3 |
|
87
|
|
(1) |
Based upon an aggregate of 18,514,260 shares outstanding as
of July 1, 2006. |
|
(2) |
Based on an aggregate of 23,514,260 shares to be
outstanding following the issuance of 2,500,000 shares in
this offering and the issuance of an additional
2,500,000 shares as the stock component of the purchase
price for the DLS acquisition. |
|
(3) |
Mr. Hidayatallah is the trustee of the Hidayatallah Family
Trust, which is the record owner of 1,686,666 shares of our
common stock, and Mr. Hidayatallah holds options to
purchase 283,333 shares of common stock, none of which
options are exercisable within 60 days.
Mr. Hidayatallahs address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
(4) |
Mr. Wilde holds options to purchase 408,300 shares of
common stock, of which 244,966 are exercisable within
60 days. Mr. Wildes address is
5075 Westheimer, Suite 890, Houston, TX 77056. |
|
(5) |
Mr. Perez holds 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. |
|
(6) |
Mr. Keane holds 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. |
|
(7) |
Mr. Bryan holds 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. |
|
(8) |
Mr. Mortensens address is 5075 Westheimer,
Suite 890, Houston, TX 77056. |
|
|
(9) |
Mr. McConnaughys address is 2 Parklands Drive,
Darien, CT 06820. |
|
|
(10) |
Mr. Germacks address is 845 3rd Avenue,
Suite 1410, New York, NY 10022. |
|
(11) |
Mr. Kellys address is 450 North Marienfield,
Suite 200, Midland, TX 79701. |
|
(12) |
Mr. Whiteners address is 5956 Sherry Lane,
Suite 900, Dallas, TX 75225. |
|
(13) |
Includes 715,594 shares of common stock owned directly by
Mr. Nederlander or by RER Corp. or QEN Corp., corporations
controlled by Mr. Nederlander. Mr. Nederlanders
address is 1450 Broadway, Suite 2001, New York, NY
10018. |
|
(14) |
Mr. Freedmans address is 123 Via Verde Way, Palm
Beach, FL 33418. |
|
(15) |
Mr. Toboroffs address is 1450 Broadway,
Suite 2001, New York, NY 10018. |
|
(16) |
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. |
|
(17) |
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. |
88
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
$80.0 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.
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.
89
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 maturity date. As of
March 31, 2006, after giving effect to the acquisition of
Rogers and the DLS transactions, as if each such transaction had
occurred on that date, we would have had approximately
$8.0 million of unused availability under our new credit
facility.
90
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 the stock and
other outstanding equity interests of our subsidiaries.
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.
In conjunction with this offering and the pending acquisition of
DLS, we expect to amend the credit agreement to, among other
things, provide for the acquisition of DLS, permit the net
proceeds from this offering and the issuance of an additional
$80.0 million of our senior notes to be used for the
acquisition of DLS, increase the sub-limit for the issuance of
stand-by letters of credit, increase permitted capital
expenditures and increase permitted indebtedness at DLS.
91
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 reserved an additional 1,843,633 shares of common stock
for issuance under our equity compensation plans, of which
1,600,534 shares are currently issuable upon the exercise of
outstanding
92
options with a weighted average exercise price of $6.40 per
share. In addition, we have reserved 71,000 shares of common
stock for issuance upon the exercise of outstanding warrants
(with a weighted average exercise price of $4.98 per share)
and 4,000 shares for issuance upon the exercise of outstanding
options (with an exercise price of $13.75 per share)
granted to former and continuing board members in 1999 and 2000.
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 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.
93
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 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.
94
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 plan to enter 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 plan to agree to sell to the
underwriters, and each underwriter plans to agree 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
|
|
|
|
|
A.G. Edwards & Sons, Inc.
|
|
|
|
|
Johnson Rice & Company L.L.C.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,500,000 |
|
|
|
|
|
|
The underwriting agreement will provide 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 will be 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 will provide 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
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
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 intend to grant the underwriters the option, exercisable for
thirty (30) days from the date of this prospectus, to
purchase up to 375,000 additional shares of common stock at the
price set forth on the cover of this prospectus. 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.
95
Upon or prior to execution of the underwriting agreement, we and
each of our executive officers and directors will have agreed
that, subject to certain conditions and exceptions, 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.
European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State) the underwriters have
represented and agreed that they have not made and will not make
an offer of the shares of our common stock to the public in that
Relevant Member State except that it may, with effect from and
including the Relevant
96
Implementation Date, make an offer of shares of our common stock
to the public in that Relevant Member State:
(a) in (or in Germany, where the offer starts within) the
period beginning on the date of publication of a prospectus in
relation to those shares of our common stock which have been
approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive
and ending on the date which is 12 months after the date of
such publication;
(b) at any time to legal entities which are authorized or
regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to
invest in securities;
(c) at any time to any legal entity which has two or more
of (1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000 as
shown in its last annual or consolidated accounts; or
(d) at any time in any other circumstances which do not
require the publication by the issuer of a prospectus pursuant
to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares of our common stock to the public in
relation to any shares of our common stock in any Relevant
Member State means to communication in any form and by any means
of sufficient information on the terms of the offer and the
shares of our common stock to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
United Kingdom
Each of the underwriters has represented and agreed that:
1. No deposit taking:(a) is a person whose ordinary
activities involve it in acquiring, holding, managing or
disposing of investments (as principal or agent) for the
purposes of its business and (b) it has not offered or sold
and will not offer or sell any shares of our common stock other
than to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or who
it is reasonable to expect will acquire, hold, manage or dispose
of investments (as principal or agent) for the purposes of their
businesses where the issue of the shares of our common stock
would otherwise constitute a contravention of Section 19 of
the Financial Services and Markets Act of 2000, or the FSMA, by
us.
2. Financial promotion: it has only communicated or caused
to be communicated and will only communicate or cause to be
communicated an invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the FSMA)
received by it in connection with the issue or sale of any
shares of our common stock in circumstances in which
Section 21(1) of the FSMA does not, or in the case of
Allis-Chalmers, would not, if it was not an authorized
institution, apply to Allis-Chalmers; and
3. General compliance: it has complied and will comply with
all applicable provisions of the FSMA with respect to anything
done by it in relation to any shares of our common stock in,
from or otherwise involving the United Kingdom.
97
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. as of and for the years ended December 31, 2005 and
2004 included in this prospectus have been audited by UHY Mann
Frankfort Stein & Lipp CPAs, LLP, independent
registered public accounting firm, as 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 Allis-Chalmers Energy
Inc. as of and for the year ended December 31, 2003
included in this prospectus have been audited by Gordon, Hughes
and Banks, LLP, independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein,
and are included 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. included
in this prospectus have been audited by UHY Mann Frankfort
Stein & Lipp CPAs, LLP, independent auditors, 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.
98
INDEX TO FINANCIAL STATEMENTS
|
|
|
ALLIS-CHALMERS ENERGY INC.
|
|
|
|
|
F-4 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
|
|
F-9 |
|
|
F-10 |
|
|
F-49 |
|
|
F-50 |
|
|
F-51 |
|
|
F-52 |
|
DELTA RENTAL SERVICE, INC.
|
|
|
|
|
F-66 |
|
|
F-67 |
|
|
F-69 |
|
|
F-70 |
|
|
F-71 |
|
|
F-72 |
|
|
F-76 |
|
|
F-77 |
|
|
F-78 |
|
|
F-79 |
|
CAPCOIL TUBING SERVICES, INC.
|
|
|
|
|
F-80 |
|
|
F-81 |
|
|
F-83 |
|
|
F-84 |
|
|
F-85 |
|
|
F-92 |
|
|
F-93 |
|
|
F-95 |
F-1
|
|
|
|
|
F-96 |
|
|
F-97 |
|
W. T. ENTERPRISES, INC.
|
|
|
|
|
F-98 |
|
|
F-99 |
|
|
F-100 |
|
|
F-101 |
|
|
F-102 |
|
|
F-103 |
|
|
F-108 |
|
|
F-109 |
|
|
F-110 |
|
|
F-111 |
|
SPECIALTY RENTAL TOOLS, INC.
|
|
|
|
|
F-112 |
|
|
F-113 |
|
|
F-114 |
|
|
F-115 |
|
|
F-116 |
|
|
F-117 |
Supplemental Information
|
|
|
|
|
F-125 |
|
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
|
|
|
|
|
F-126 |
|
|
F-127 |
|
|
F-128 |
|
|
F-129 |
|
|
F-130 |
|
|
F-131 |
|
|
F-146 |
|
|
F-147 |
F-2
|
|
|
|
|
F-148 |
|
|
F-149 |
|
|
F-150 |
|
|
|
F-166 |
|
|
F-170 |
|
|
F-171 |
|
|
F-172 |
|
|
F-174 |
|
|
F-176 |
F-3
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-4
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-5
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-6
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-7
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-8
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-9
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-10
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-11
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. Proceeds from customers
for the cost of oilfield rental equipment that is involuntarily
damaged or lost-in-hole are reflected as revenues. We recognized
revenue from damaged or lost in-hole of $970,000, $41,000 and
$252,000 for the years ended December 31, 2005, 2004 and
2003, respectively. 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.
F-12
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We consider all highly liquid investments with an original
maturity of three months or less at the time of purchase to be
cash equivalents.
Inventories 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.
F-13
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial instruments consist of cash and cash equivalents,
accounts receivable and payable, and debt. The carrying value of
cash and cash equivalents and accounts receivable and payable
approximate fair value due to their short-term nature. We
believe the fair values and the carrying value of our debt would
not be materially different due to the instruments
interest rates approximating market rates for similar borrowings
at December 31, 2005 and 2004.
|
|
|
Concentration of Credit
and Customer Risk |
Financial instruments that potentially subject us to
concentrations of credit risk consist principally of cash and
cash equivalents and trade accounts receivable. We transact our
business with several financial institutions. However, the
amount on deposit in two financial institutions exceeded the
$100,000 federally insured limit at December 31, 2005 by a total
of $2.0 million. Management believes that the financial
institutions are financially sound and the risk of loss is
minimal.
We sell our services to major and independent domestic and
international oil and gas companies. We perform ongoing credit
valuations of our customers and provide allowances for probable
credit losses where appropriate. In 2005, none of our customers
accounted for more than 10% of our consolidated revenues. In the
year ended December 31, 2004, Matyep in Mexico represented
10.8%, and Burlington Resources represented 10.1% of our
consolidated revenues, respectively. In the year ended December
31, 2003, Matyep, Burlington 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
F-14
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercise prices at or above the market value of the stock on the
grant date, we adopted the disclosure-only provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting For Stock-Based Compensation
(SFAS 123). We also adopted the
disclosure-only provisions of SFAS No. 123 for the
stock options granted to our employees and directors.
Accordingly, no compensation cost has been recognized under APB
No. 25. Had compensation expense for the options granted
been recorded based on the fair value at the grant date for the
options, consistent with the provisions of SFAS 123, our
net income/(loss) and net income/(loss) per share for the years
ended December 31, 2005, 2004, and 2003 would have been
decreased to the pro forma amounts indicated below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
|
|
| |
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
|
|
(Restated) | |
|
(Restated) | |
Net income attributed to common stockholders as reported:
|
|
|
|
$ |
7,175 |
|
|
$ |
764 |
|
|
$ |
2,271 |
|
Less total stock based employee compensation expense determined
under fair value based method for all awards net of tax related
effects
|
|
|
|
|
(4,284 |
) |
|
|
(1,072 |
) |
|
|
(2,314 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net income (loss) attributed to common
stockholders
|
|
|
|
$ |
2,891 |
|
|
$ |
(308 |
) |
|
$ |
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
As reported |
|
$ |
0.48 |
|
|
$ |
0.10 |
|
|
$ |
0.58 |
|
|
|
Pro forma |
|
$ |
0.19 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.01 |
) |
|
Diluted
|
|
As reported |
|
$ |
0.44 |
|
|
$ |
0.09 |
|
|
$ |
0.50 |
|
|
|
Pro forma |
|
$ |
0.18 |
|
|
$ |
(0.04 |
) |
|
$ |
(0.01 |
) |
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.
F-15
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Pension and Other Post
Retirement Benefits |
SFAS No. 132, Employers Disclosures About
Pension And Other Post Retirement Benefits
(SFAS No. 132), requires certain
disclosures about employers pension and other post
retirement benefit plans and specifies the accounting and
measurement or recognition of those plans. SFAS No. 132
requires disclosure of information on changes in the benefit
obligations and fair values of the plan assets that facilitates
financial analysis. Please see Note 3 for further
disclosure in accordance with SFAS No. 132.
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-16
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-17
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-18
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 $4.9 million at
the time of acquisition. As a result of the increase in fixed
assets and the reversal of
F-19
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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-20
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-21
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-22
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-23
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-24
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-25
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-26
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
F-27
ALLIS-CHALMERS ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquisitions had occurred as of beginning of the period, based
on the historical results of the acquisitions (unaudited) (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
$ |
110,383 |
|
|
$ |
70,988 |
|
|
$ |
52,588 |
|
Operating income
|
|
$ |
14,143 |
|
|
$ |
8,233 |
|
|
$ |
4,276 |
|
Net income
|
|
$ |
8,180 |
|
|
$ |
4,000 |
|
|
$ |
2,459 |
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.55 |
|
|
$ |
0.46 |
|
|
$ |
0.53 |
|
|
Diluted
|
|
$ |
0.50 |
|
|
$ |
0.48 |
|
|
$ |
0.48 |
|
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-28
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-29
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-30
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-31
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-32
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-33
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-34
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-35
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-36
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-37
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-38
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-39
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-40
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-41
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-42
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-43
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 |
|
|
|
|
|
|
|
|
|
|
|
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-44
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 |
|
|
|
|
|
|
|
|
|
|
|
Note 19 Supplemental Cash Flows Information (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
Interest paid
|
|
$ |
3,924 |
|
|
$ |
2,159 |
|
|
$ |
2,341 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$ |
676 |
|
|
$ |
514 |
|
|
$ |
370 |
|
|
|
|
|
|
|
|
|
|
|
Other non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of property & equipment in connection with direct
financing lease (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) on settlement of debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,034 |
) |
Amortization of discount on debt
|
|
|
|
|
|
|
|
|
|
|
442 |
|
Purchase of equipment financed through assumption of debt or
accounts payable
|
|
|
592 |
|
|
|
|
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
592 |
|
|
$ |
|
|
|
$ |
314 |
|
|
|
|
|
|
|
|
|
|
|
F-45
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-46
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-47
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-48
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
ASSETS |
Cash and cash equivalents
|
|
$ |
10,661 |
|
|
$ |
1,920 |
|
Trade receivables, net
|
|
|
38,239 |
|
|
|
26,964 |
|
Inventory
|
|
|
7,777 |
|
|
|
5,945 |
|
Prepaid expenses and other
|
|
|
875 |
|
|
|
823 |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
57,552 |
|
|
|
35,652 |
|
Property and equipment, net
|
|
|
174,329 |
|
|
|
80,574 |
|
Goodwill
|
|
|
12,417 |
|
|
|
12,417 |
|
Other intangible assets, net
|
|
|
6,399 |
|
|
|
6,783 |
|
Debt issuance costs, net
|
|
|
6,414 |
|
|
|
1,298 |
|
Other assets
|
|
|
719 |
|
|
|
631 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
257,830 |
|
|
$ |
137,355 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current maturities of long-term debt
|
|
$ |
3,144 |
|
|
$ |
5,632 |
|
Trade accounts payable
|
|
|
8,903 |
|
|
|
9,018 |
|
Accrued salaries, benefits and payroll taxes
|
|
|
2,064 |
|
|
|
1,271 |
|
Accrued interest
|
|
|
3,053 |
|
|
|
289 |
|
Accrued expenses
|
|
|
6,505 |
|
|
|
4,350 |
|
Accounts payable, related parties
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,669 |
|
|
|
20,620 |
|
Accrued postretirement benefit obligations
|
|
|
319 |
|
|
|
335 |
|
Long-term debt, net of current maturities
|
|
|
165,999 |
|
|
|
54,937 |
|
Other long-term liabilities
|
|
|
631 |
|
|
|
588 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
190,618 |
|
|
|
76,480 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
Preferred stock, $0.01 par value (25,000,000 shares
authorized, no shares issued)
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value (100,000,000 shares
authorized; 17,225,330 issued and outstanding at March 31,
2006 and 16,859,988 issued and outstanding at December 31,
2005)
|
|
|
172 |
|
|
|
169 |
|
Capital in excess of par value
|
|
|
60,800 |
|
|
|
58,889 |
|
Retained earnings
|
|
|
6,240 |
|
|
|
1,817 |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
67,212 |
|
|
|
60,875 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
257,830 |
|
|
$ |
137,355 |
|
|
|
|
|
|
|
|
The accompanying Notes are an integral part of the Consolidated
Condensed Financial Statements.
F-49
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED INCOME STATEMENTS
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
|
|
(Restated) | |
Revenues
|
|
$ |
47,028 |
|
|
$ |
19,334 |
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
27,115 |
|
|
|
12,785 |
|
|
Depreciation
|
|
|
3,330 |
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
30,445 |
|
|
|
13,699 |
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
16,583 |
|
|
|
5,635 |
|
General and administrative
|
|
|
7,343 |
|
|
|
2,994 |
|
Amortization
|
|
|
607 |
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8,633 |
|
|
|
2,247 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest, net
|
|
|
(3,628 |
) |
|
|
(521 |
) |
|
Other
|
|
|
25 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(3,603 |
) |
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
Income before minority interest and income taxes
|
|
|
5,030 |
|
|
|
1,874 |
|
Minority interest in income of subsidiaries
|
|
|
|
|
|
|
(144 |
) |
Provision for taxes
|
|
|
(607 |
) |
|
|
(163 |
) |
|
|
|
|
|
|
|
Net income
|
|
$ |
4,423 |
|
|
$ |
1,567 |
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.26 |
|
|
$ |
0.12 |
|
|
|
Diluted
|
|
$ |
0.23 |
|
|
$ |
0.11 |
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,105 |
|
|
|
13,632 |
|
|
|
Diluted
|
|
|
19,113 |
|
|
|
14,695 |
|
The accompanying Notes are an integral part of the Consolidated
Condensed Financial Statements.
F-50
ALLIS-CHALMERS ENERGY INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,423 |
|
|
$ |
1,567 |
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,330 |
|
|
|
914 |
|
|
|
Amortization
|
|
|
607 |
|
|
|
394 |
|
|
|
Imputed interest
|
|
|
355 |
|
|
|
|
|
|
|
Stock option expense
|
|
|
942 |
|
|
|
|
|
|
|
Allowance for bad debts
|
|
|
180 |
|
|
|
|
|
|
|
Minority interest in income of subsidiaries
|
|
|
|
|
|
|
144 |
|
|
|
Gain on sale of property and equipment
|
|
|
(514 |
) |
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) in trade receivable
|
|
|
(4,288 |
) |
|
|
(3,416 |
) |
|
|
|
(Increase) in inventory
|
|
|
(1,484 |
) |
|
|
(91 |
) |
|
|
|
Decrease (increase) in other current assets
|
|
|
7 |
|
|
|
(408 |
) |
|
|
|
(Increase) in other assets
|
|
|
(88 |
) |
|
|
(16 |
) |
|
|
|
(Decrease) increase in accounts payable
|
|
|
(1,286 |
) |
|
|
4 |
|
|
|
|
Increase (decrease) in accrued interest
|
|
|
2,764 |
|
|
|
(10 |
) |
|
|
|
(Decrease) in accrued expenses
|
|
|
(11,017 |
) |
|
|
(92 |
) |
|
|
|
Increase in accrued salaries, benefits and payroll taxes
|
|
|
483 |
|
|
|
185 |
|
|
|
|
Increase in other long-term liabilities
|
|
|
27 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
|
|
|
(5,559 |
) |
|
|
(822 |
) |
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash received
|
|
|
(83,447 |
) |
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
1,200 |
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(7,586 |
) |
|
|
(2,728 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities
|
|
|
(89,833 |
) |
|
|
(2,728 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from exercises of options and warrants
|
|
|
972 |
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
161,412 |
|
|
|
2,383 |
|
|
Repayments on long-term debt
|
|
|
(43,481 |
) |
|
|
|
|
|
Repayments on related party debt
|
|
|
(3,031 |
) |
|
|
|
|
|
Repayments on line of credit
|
|
|
(6,400 |
) |
|
|
|
|
|
Debt issuance costs
|
|
|
(5,339 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities
|
|
|
104,133 |
|
|
|
2,205 |
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
8,741 |
|
|
|
(1,345 |
) |
Cash and cash equivalents at beginning of year
|
|
|
1,920 |
|
|
|
7,344 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
10,661 |
|
|
$ |
5,999 |
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
586 |
|
|
$ |
437 |
|
|
Income taxes paid
|
|
$ |
232 |
|
|
$ |
163 |
|
The accompanying Notes are an integral part of the Consolidated
Condensed Financial Statements.
F-51
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
Note 1 Nature of Business and Summary of
Significant Accounting Policies
Nature of Operations
We are a multi-faceted oilfield service 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; rental tools; casing and tubing
services; compressed air drilling services; 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 price, quality of service and equipment and
general reputation and experience of our personnel. The
principal operating costs are direct and indirect labor and
benefits, repairs and maintenance of our equipment, insurance,
equipment rentals, fuel, depreciation and general and
administrative expenses.
Basis of Presentation
Our unaudited consolidated condensed financial statements
included herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission, or SEC.
Accordingly, certain information and disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. We believe that the presentations and disclosures
herein are adequate to make the information not misleading. The
unaudited consolidated condensed financial statements reflect
all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the interim periods. These
unaudited consolidated condensed financial statements should be
read in conjunction with our audited consolidated financial
statements included in our Annual Report on
Form 10-K for the
year ended December 31, 2005. The results of operations for
the interim periods are not necessarily indicative of the
results of operations to be expected for the full year.
Certain reclassifications have been made to the prior
years consolidated condensed financial statements to
conform with the current period presentation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Future events and
their effects cannot be perceived with certainty. Accordingly,
our accounting estimates require the exercise of judgment. While
management believes that the estimates and assumptions used in
the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates.
Estimates are used for, but are not limited to, determining the
following: allowance for doubtful accounts, recoverability of
long-lived assets and intangibles, useful lives used in
depreciation and amortization, income taxes and valuation
allowances. The accounting estimates used in the
F-52
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
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.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 requires retroactive application of a
voluntary change in accounting principle to prior period
financial statements unless it is impracticable.
SFAS No. 154 also requires that a change in method of
depreciation, amortization or depletion for long-lived,
non-financial assets be accounted for as a change in accounting
estimate that is affected by a change in accounting principle.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 is effective for fiscal years beginning
after December 15, 2005. We adopted the provisions of
SFAS No. 154 as of January 1, 2006 and the
adoption did not have a material impact on our results of
operations.
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 adopted the provisions of
SFAS 151, on a prospective basis, as of January 1,
2006 and the adoption did not have a material impact on our
results of operations.
Effective January 1, 2006, we adopted
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. This statement requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their grant-date
fair values. See Note 3 for a more detailed description of
our adoption of SFAS No. 123R.
Note 2 Acquisitions
Effective January 1, 2006, we acquired 100% of the
outstanding stock of Specialty Rental Tools, Inc., or Specialty,
for $96.0 million in cash. The results of Specialtys
operations have been included in the consolidated financial
statements since that date. 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. For the year ended
December 31, 2005, Specialty had revenues of
$29.6 million. The following table
F-53
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
summarizes the allocation of the purchase price to the estimated
fair value of the assets acquired and liabilities assumed at the
date of acquisition:
|
|
|
|
|
|
Accounts receivable
|
|
$ |
7,167 |
|
Other current assets
|
|
|
425 |
|
Property and equipment
|
|
|
90,540 |
|
|
|
|
|
|
Total assets acquired
|
|
|
98,132 |
|
|
|
|
|
Current liabilities
|
|
|
2,058 |
|
Long-term debt
|
|
|
74 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,132 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
96,000 |
|
|
|
|
|
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.
Effective August 1, 2005, we acquired 100% of the
outstanding capital stock of Target Energy Inc., or 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. The results of Target
are included in our directional and horizontal drilling segment
as their measurement while drilling, or MWD, equipment is
utilized in that segment.
On July 11, 2005, we acquired the compressed air drilling
assets of W.T. Enterprises, Inc., or WT, 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 L.L.C., or AirComp, and a 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.
On May 1, 2005, we acquired 100% of the outstanding capital
stock of Capcoil Tubing Services, Inc., or 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 April 1, 2005, we acquired 100% of the outstanding stock
of Delta Rental Service, Inc., or Delta, for $4.6 million
in cash, 223,114 shares of our common stock and two
promissory notes totaling $350,000. The purchase price was
allocated to fixed assets and inventory. Delta, located in
Lafayette, Louisiana, is a rental tool company providing
specialty rental items to the oil and gas industry such as
spiral heavy weight drill pipe, test plugs used to test blow-out
preventors, well head retrieval tools, spacer spools and
assorted handling tools.
F-54
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
These 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 condensed income statement. The following unaudited
pro forma consolidated summary financial information illustrates
the effects of the acquisition of Specialty, WT, the minority
interest in AirComp, Capcoil and Delta as if the acquisitions
had occurred as of January 1, 2005, based on the historical
statements of operations (in thousands, except per share
amounts).
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues
|
|
$ |
47,028 |
|
|
$ |
29,364 |
|
Operating income
|
|
|
8,633 |
|
|
|
4,245 |
|
Net income
|
|
|
4,423 |
|
|
|
1,331 |
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.26 |
|
|
$ |
0.09 |
|
|
Diluted
|
|
$ |
0.23 |
|
|
$ |
0.09 |
|
Note 3 Stock-Based Compensation
We adopted SFAS No. 123R, Share-Based Payment,
effective January 1, 2006. This statement requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their grant-date fair values. 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 adopted SFAS No. 123R using
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, we record compensation cost related to
unvested stock awards as of December 31, 2005 by
recognizing the unamortized grant date fair value of these
awards over the remaining vesting periods of those awards with
no change in historical reported earnings. We estimated
forfeiture rates for the first quarter of 2006 based on our
historical experience.
The Black-Scholes model incorporates assumptions to value
stock-based awards. The risk-free rate of interest is the
related U.S. Treasury yield curve for periods within the
expected term of the option at the time of grant. The dividend
yield on our common stock is assumed to be zero as we have
historically not paid dividends and have no current plans to do
so in the future. The expected volatility is based on historical
volatility of our common stock.
Prior to January 1, 2006, we accounted for our stock-based
compensation using Accounting Principle Board Opinion
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 SFAS No. 123, Accounting For
Stock-Based Compensation. We also adopted the
disclosure-only provisions of SFAS No. 123 for the
stock options granted to our employees and directors.
Accordingly, no compensation cost was recognized under APB
No. 25.
F-55
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
A summary of our stock option activity and related information
as of March 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Weighted- | |
|
|
|
|
Shares | |
|
Average | |
|
Average | |
|
Aggregate | |
|
|
Under | |
|
Exercise | |
|
Contractual | |
|
Intrinsic Value | |
|
|
Option | |
|
Price | |
|
Life (Years) | |
|
(millions) | |
|
|
| |
|
| |
|
| |
|
| |
Balance at beginning of period
|
|
|
2,860,867 |
|
|
$ |
5.10 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(32,000 |
) |
|
|
4.30 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(51,900 |
) |
|
|
3.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,776,967 |
|
|
|
5.14 |
|
|
|
8.57 |
|
|
$ |
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,909,967 |
|
|
|
4.18 |
|
|
|
8.26 |
|
|
$ |
18.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between the
closing price of our common stock on the last trading day of the
first quarter of 2006 and the exercise price, multiplied by the
number of in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on March 31,
2006. The total intrinsic value of options exercised and cash
received from option exercises during the three months ended
March 31, 2006 was $588,000 and $188,000, respectively.
There were no options exercised during the three months ended
March 31, 2005.
No options were granted in the first quarter of 2006. The
following summarizes the assumptions used in the March 31,
2005 Black-Scholes model:
|
|
|
|
|
Expected dividend yield
|
|
|
|
|
Expected price volatility
|
|
|
89.76 |
% |
Risk-free interest rate
|
|
|
7.0 |
% |
Expected life of options
|
|
|
7 years |
|
Weighted average fair value of options granted at market value
|
|
|
$3.86 |
|
F-56
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
The following table illustrates the pro-forma effect on net
income and net income per share for the three months ended
March 31, 2005 had we applied the fair value recognition
provisions of SFAS No. 123R (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended, | |
|
|
|
|
March 31, 2005 | |
|
|
|
|
| |
Net income: As reported
|
|
|
|
|
|
$ |
1,567 |
|
Less total stock based employee compensation expense determined
under fair value based method for all awards net of tax related
effects
|
|
|
|
|
|
|
(2,902 |
) |
|
|
|
|
|
|
|
Pro-forma net income (loss) to common stockholders
|
|
|
|
|
|
$ |
(1,335 |
) |
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
As reported |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
Diluted
|
|
|
As reported |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma |
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
Note 4 Income Per Common Share
We compute income per common share in accordance with the
provisions of SFAS No. 128, Earnings Per Share.
SFAS No. 128 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. 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.
F-57
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
The components of basic and diluted earnings per share are as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
|
|
(Restated) | |
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,423 |
|
|
$ |
1,567 |
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic earnings per share weighted average shares
outstanding
|
|
|
17,105 |
|
|
|
13,632 |
|
Effect of potentially dilutive common shares:
|
|
|
|
|
|
|
|
|
|
Warrants and employee and director stock options
|
|
|
2,008 |
|
|
|
1,063 |
|
|
|
|
|
|
|
|
Diluted earnings per share weighted average shares
outstanding and assumed conversions
|
|
|
19,113 |
|
|
|
14,695 |
|
|
|
|
|
|
|
|
Net income per share basic
|
|
$ |
0.26 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
$ |
0.23 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
Note 5 Goodwill and Intangible Assets
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill and indefinite-lived intangible
assets are not permitted to be amortized. Goodwill and
indefinite-lived intangible assets remain on the balance sheet
and are tested for impairment on an annual basis, or when there
is reason to suspect that their values may have been diminished
or impaired. Goodwill and indefinite-lived intangible assets
listed on the balance sheet totaled $12.4 million at
March 31, 2006 and December 31, 2005. Based on
impairment testing performed during 2005 pursuant to the
requirements of SFAS No. 142, these assets were not
impaired.
Intangible assets with definite lives continue to be amortized
over their estimated useful lives. Definite-lived intangible
assets that continue to be amortized under
SFAS No. 142 relate to our purchase of
customer-related and marketing-related intangibles. These
intangibles have useful lives ranging from five to ten years.
Amortization of intangible assets for the three months ended
March 31, 2006 and 2005 were $384,000 and $166,000,
respectively. At March 31, 2006, intangible assets totaled
$6.4 million, net of $3.1 million of accumulated
amortization.
Note 6 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 SFAS No. 128. The effect of the
restatement is to reduce weighted average
F-58
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
diluted shares outstanding for each period and to reduce
weighted average basic shares outstanding for the quarter ended
September 30, 2004. Consequently, weighted average diluted
earnings per share were increased for each period and weighted
average basic earnings per share was increased for the quarter
ended September 30, 2004.
A restated earnings per share calculation for the three months
ended March 31, 2005 reflecting the above adjustments to
our results as previously presented is presented below. The
amounts are in thousands, except for per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 | |
|
|
| |
|
|
As | |
|
|
|
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 |
|
Note 7 Inventory
Inventory is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Hammer bits
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$ |
1,507 |
|
|
$ |
1,402 |
|
|
Work in process
|
|
|
948 |
|
|
|
787 |
|
|
Raw materials
|
|
|
471 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
Total hammer bits
|
|
|
2,926 |
|
|
|
2,422 |
|
Hammers
|
|
|
589 |
|
|
|
584 |
|
Drive pipe
|
|
|
663 |
|
|
|
666 |
|
Rental supplies
|
|
|
404 |
|
|
|
64 |
|
Chemicals
|
|
|
477 |
|
|
|
201 |
|
Coiled tubing and related inventory
|
|
|
1,672 |
|
|
|
1,145 |
|
Shop supplies and related inventory
|
|
|
1,046 |
|
|
|
863 |
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$ |
7,777 |
|
|
$ |
5,945 |
|
|
|
|
|
|
|
|
F-59
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
Note 8 Debt
Our long-term debt consists of the following: (in thousands)
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Senior notes
|
|
$ |
160,000 |
|
|
$ |
|
|
Bank term loans
|
|
|
|
|
|
|
42,090 |
|
Revolving line of credit
|
|
|
|
|
|
|
6,400 |
|
Subordinated note payable to M-I LLC
|
|
|
4,000 |
|
|
|
4,000 |
|
Subordinated seller note
|
|
|
|
|
|
|
3,031 |
|
Seller note
|
|
|
850 |
|
|
|
850 |
|
Notes payable under non-compete agreements
|
|
|
615 |
|
|
|
698 |
|
Notes payable to former directors
|
|
|
96 |
|
|
|
96 |
|
Real estate loan
|
|
|
|
|
|
|
548 |
|
Equipment and vehicle installment notes
|
|
|
2,786 |
|
|
|
1,939 |
|
Capital lease obligations
|
|
|
796 |
|
|
|
917 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
169,143 |
|
|
|
60,569 |
|
Less: short-term debt and current maturities
|
|
|
3,144 |
|
|
|
5,632 |
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$ |
165,999 |
|
|
$ |
54,937 |
|
|
|
|
|
|
|
|
Senior notes, bank loans and line of credit
agreements
On January 18, 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 aggregate
principal amount of our senior notes. The notes are due
January 15, 2014 and bear interest at 9.0%. The proceeds
were used to fund the acquisition of Specialty, to repay
existing debt and for general corporate purposes.
Prior to January 18, 2006, we were party to a July 2005
credit agreement that provided for the following senior secured
credit facilities:
|
|
|
|
|
A $13.0 million revolving line of credit. Borrowings were
limited to 85% of eligible accounts receivable plus 50% of
eligible inventory (up to a maximum of $2.0 million of
borrowings based on inventory). This line of credit was to be
used to finance working capital requirements and other general
corporate purposes, including the issuance of standby letters of
credit. Outstanding borrowings under this line of credit were
$6.4 million at a margin above prime and LIBOR rates plus
margin averaging approximately 8.1% as of December 31, 2005. |
|
|
|
Two term loans totaling $42.0 million. Outstanding
borrowings under these term loans were $42.0 million as of
December 31, 2005. These loans were at LIBOR rates plus a
margin which averages approximately 7.8% at December 31,
2005. |
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
F-60
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
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.
All amounts outstanding under our July 2005 credit agreement
were paid off with the proceeds of our senior notes offering on
January 18, 2006. On January 18, 2006, we also
executed an amended and restated credit agreement which provides
for a $25.0 million revolving line of credit with a
maturity of January 2010. Our January 2006 amended and restated
credit agreement contains customary events of default and
financial covenants and limits our ability to incur additional
indebtedness, make capital expenditures, pay dividends or make
other distributions, create liens and sell assets. Our
obligations under the January 2006 amended and restated credit
agreement are secured by substantially all of our assets.
Notes payable and real estate loan
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.
As of December 31, 2005, Allis-Chalmers Tubular Services
Inc., or Tubular, had a subordinated note outstanding and
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 was January 31, 2006. The
subordinated note was subordinated to the rights of our bank
lenders. 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 Compressed Air Inc., or
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. At
March 31, 2006 and December 31, 2005 the outstanding
amounts due were $500,000.
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 was repaid
on its maturity of 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-Oil Field Products, Inc.,
or Safco,, we also agreed to pay a total of $150,000 to the
sellers in exchange for a non-compete
F-61
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
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
March 31, 2006 and December 31, 2005 were $615,000 and
$698,000, 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 March 31, 2006 and
December 31, 2005, the principal and accrued interest on
these notes totaled approximately $96,000.
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 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 repaid in full in January 2006 with
proceeds from our senior notes offering.
Other debt
We have various equipment financing loans with interest rates
ranging from 5% to 8.2% and terms ranging from 2 to
5 years. As of March 31, 2006 and December 31,
2005, the outstanding balances for equipment financing loans
were $2.8 million and $1.9 million, respectively. We
also have various capital leases with terms that expire in 2008.
As of March 31, 2006 and December 31, 2005, amounts
outstanding under capital leases were $796,000 and $917,000,
respectively. In January 2006, we prepaid $350,000 of the
outstanding equipment loans with proceeds from our senior notes
offering.
Note 9 Stockholders Equity
We also had options and warrants exercised in the first quarter
of 2006, those exercises resulted in 365,342 shares of our
common stock being issued for approximately $972,000. We
recognized $942,000 of compensation expense related to stock
options in the first quarter of 2006 that was recorded as
additional paid in capital (see Note 3).
F-62
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
Note 10 Segment Information
At March 31, 2006, we had five operating segments including
Directional Drilling Services (Strata and Target), Rental Tools,
Casing and Tubing Services (Tubular Service), Compressed Air
Drilling Services (AirComp) and Production Services. 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
15,054 |
|
|
$ |
9,901 |
|
|
Rental tools
|
|
|
10,421 |
|
|
|
373 |
|
|
Casing and tubing services
|
|
|
9,459 |
|
|
|
3,560 |
|
|
Compressed air drilling services
|
|
|
9,099 |
|
|
|
4,181 |
|
|
Production services
|
|
|
2,995 |
|
|
|
1,319 |
|
|
|
|
|
|
|
|
|
|
$ |
47,028 |
|
|
$ |
19,334 |
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
2,605 |
|
|
$ |
1,878 |
|
|
Rental tools
|
|
|
4,998 |
|
|
|
(80 |
) |
|
Casing and tubing services
|
|
|
1,851 |
|
|
|
1,327 |
|
|
Compressed air drilling services
|
|
|
2,237 |
|
|
|
527 |
|
|
Production services
|
|
|
277 |
|
|
|
(39 |
) |
|
General corporate
|
|
|
(3,335 |
) |
|
|
(1,366 |
) |
|
|
|
|
|
|
|
|
|
$ |
8,633 |
|
|
$ |
2,247 |
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
289 |
|
|
$ |
150 |
|
|
Rental tools
|
|
|
1,671 |
|
|
|
88 |
|
|
Casing and Tubing services
|
|
|
699 |
|
|
|
440 |
|
|
Compressed air drilling services
|
|
|
684 |
|
|
|
448 |
|
|
Production services
|
|
|
293 |
|
|
|
136 |
|
|
General corporate
|
|
|
301 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
$ |
3,937 |
|
|
$ |
1,308 |
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
2,698 |
|
|
$ |
263 |
|
|
Rental tools
|
|
|
684 |
|
|
|
17 |
|
|
Casing and tubing services
|
|
|
1,127 |
|
|
|
1,640 |
|
|
Compressed air drilling services
|
|
|
2,224 |
|
|
|
779 |
|
|
Production services
|
|
|
681 |
|
|
|
20 |
|
|
General corporate
|
|
|
172 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
$ |
7,586 |
|
|
$ |
2,728 |
|
|
|
|
|
|
|
|
F-63
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
| |
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Goodwill:
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
4,168 |
|
|
$ |
4,168 |
|
|
Rental tools
|
|
|
|
|
|
|
|
|
|
Casing and tubing services
|
|
|
3,673 |
|
|
|
3,673 |
|
|
Compressed air drilling services
|
|
|
3,950 |
|
|
|
3,950 |
|
|
Production services
|
|
|
626 |
|
|
|
626 |
|
|
General corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,417 |
|
|
$ |
12,417 |
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Directional drilling services
|
|
$ |
26,284 |
|
|
$ |
20,960 |
|
|
Rental tools
|
|
|
104,101 |
|
|
|
8,034 |
|
|
Casing and tubing services
|
|
|
46,803 |
|
|
|
45,351 |
|
|
Compressed air drilling services
|
|
|
48,645 |
|
|
|
46,045 |
|
|
Production services
|
|
|
13,392 |
|
|
|
12,282 |
|
|
General corporate
|
|
|
18,605 |
|
|
|
4,683 |
|
|
|
|
|
|
|
|
|
|
$ |
257,830 |
|
|
$ |
137,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three | |
|
|
Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
45,089 |
|
|
$ |
17,561 |
|
|
International
|
|
|
1,939 |
|
|
|
1,773 |
|
|
|
|
|
|
|
|
|
|
$ |
47,028 |
|
|
$ |
19,334 |
|
|
|
|
|
|
|
|
Note 11 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.
On December 31, 2004, Mountain Air was a defendant in
an action brought in April 2004 in the District Court of Mesa
County, Colorado, by the former owner of Mountain Air Drilling
Service Company, Inc., from whom Mountain 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), on the basis that Mountain Air
failed to provide financial statements required by the note. We
raised several defenses to the plaintiffs claim. In March
2005, we reached an agreement with the plaintiff to settle the
action and paid to the plaintiff
F-64
ALLIS-CHALMERS ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
$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 also 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 12 Subsequent Events
On April 4, 2006, we completed the acquisition of Rogers
Oil Tool Services, Inc., or Rogers, based in Lafayette,
Louisiana, for a total consideration of approximately
$13.7 million, which includes $11.3 million in cash,
$1.6 million in our common stock and a $750,000 three-year
promissory note. In addition, we purchased all the patents and
proprietary technology that Tommie L. Rogers, Rogers
founder and Chief Executive Officer, developed at Rogers. Rogers
provides service for tubing tongs and casing tongs and by
renting and selling specialized automated power tongs to the
snubbing and well control markets. Rogers also rents and sells
drill pipe tongs, accessories, hydraulic power units and
hydraulic tong positioners.
In April 2006, we entered into a stock purchase agreement for
the acquisition of all of the outstanding capital stock of DLS
Drilling, Logistics & Services Corporation. We
anticipate that the purchase price will consist of
$102.3 million in cash and 2.5 million shares of our
common stock. 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 currently 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.
In May of 2006, we filed a registration statement for an
offering of common stock in the amount of $80.0 million to
fund a portion of the cash purchase price of DLS.
F-65
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 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 Delta Rental Service, Inc. as of December 31, 2004 and
2003 and the results of their operations and cash flows for the
years 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 |
Lafayette, Louisiana
March 23, 2005
F-66
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-67
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-68
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-69
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-70
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-71
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-72
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-73
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-74
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-75
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-76
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-77
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-78
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-79
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-80
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-81
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-82
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-83
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-84
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-85
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-86
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-87
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-88
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-89
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-90
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-91
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-80 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-93
and F-94 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-92
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-93
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-94
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-95
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-96
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-97
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-98
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-99
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-100
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-101
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 |
) |
|
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
|
|
|
234,690 |
|
|
|
734,105 |
|
|
|
147,478 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant, and equipment
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Principal payments received on shareholder loans
|
|
|
1,707 |
|
|
|
6,318 |
|
|
|
5,695 |
|
Capital expenditures on property, plant, and equipment
|
|
|
(37,899 |
) |
|
|
(406,618 |
) |
|
|
(220,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Investing Activities
|
|
|
(36,192 |
) |
|
|
(400,300 |
) |
|
|
(189,690 |
) |
|
|
|
|
|
|
|
|
|
|
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-102
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-103
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-104
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-105
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-106
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-107
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-108
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-109
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-110
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-111
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, 2004 and 2003, 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.
As discussed in Note J to the financial statements, the
accompanying financial statements have been restated.
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,
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.
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, except for Note J, as to which the
date is July 14, 2006.
F-112
SPECIALTY RENTAL TOOLS, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
17,476,515 |
|
|
$ |
11,038,970 |
|
|
$ |
9,097,762 |
|
Trade receivables, net
|
|
|
7,253,603 |
|
|
|
5,437,713 |
|
|
|
3,206,942 |
|
Inventory
|
|
|
347,978 |
|
|
|
256,888 |
|
|
|
181,368 |
|
Prepaid expenses and other
|
|
|
63,266 |
|
|
|
82,256 |
|
|
|
66,910 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
25,141,362 |
|
|
|
16,815,827 |
|
|
|
12,552,982 |
|
Property and Equipment, net
|
|
|
19,045,776 |
|
|
|
12,285,735 |
|
|
|
9,103,656 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
44,187,138 |
|
|
$ |
29,101,562 |
|
|
$ |
21,656,638 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,379,752 |
|
|
$ |
1,217,857 |
|
|
$ |
1,280,641 |
|
Accrued liabilities
|
|
|
608,797 |
|
|
|
291,195 |
|
|
|
260,650 |
|
Current portion of notes payable
|
|
|
3,084,046 |
|
|
|
1,488,466 |
|
|
|
1,021,530 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
5,072,595 |
|
|
|
2,997,518 |
|
|
|
2,562,821 |
|
Notes Payable, less current portion
|
|
|
429,184 |
|
|
|
1,566,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,501,779 |
|
|
|
4,564,054 |
|
|
|
2,562,821 |
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
155,655 |
|
|
|
155,655 |
|
|
|
155,655 |
|
Treasury stock, at cost
|
|
|
(736,000 |
) |
|
|
(736,000 |
) |
|
|
(736,000 |
) |
Retained earnings
|
|
|
39,265,704 |
|
|
|
25,117,853 |
|
|
|
19,674,162 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
38,685,359 |
|
|
|
24,537,508 |
|
|
|
19,093,817 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$ |
44,187,138 |
|
|
$ |
29,101,562 |
|
|
$ |
21,656,638 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-113
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
|
|
|
Revenues, Net
|
|
$ |
32,708,504 |
|
|
$ |
19,345,433 |
|
|
$ |
17,662,475 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
5,103,071 |
|
|
|
2,954,085 |
|
|
|
3,166,356 |
|
General and administrative
|
|
|
7,232,127 |
|
|
|
5,218,634 |
|
|
|
4,857,507 |
|
Depreciation
|
|
|
3,447,210 |
|
|
|
2,434,682 |
|
|
|
2,543,332 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
15,782,408 |
|
|
|
10,607,401 |
|
|
|
10,567,195 |
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
16,926,096 |
|
|
|
8,738,032 |
|
|
|
7,095,280 |
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
136,597 |
|
|
|
46,173 |
|
|
|
66,282 |
|
Interest expense
|
|
|
(184,856 |
) |
|
|
(11,987 |
) |
|
|
(58,442 |
) |
Other, net
|
|
|
72,515 |
|
|
|
(76,917 |
) |
|
|
(95,327 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
24,256 |
|
|
|
(42,731 |
) |
|
|
(87,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$ |
16,950,352 |
|
|
$ |
8,695,301 |
|
|
$ |
7,007,793 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-114
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
| |
|
Treasury | |
|
Retained | |
|
|
|
|
Shares | |
|
Amount | |
|
Stock | |
|
Earnings | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2003
|
|
|
225 |
|
|
$ |
155,655 |
|
|
$ |
(736,000 |
) |
|
$ |
25,467,954 |
|
|
$ |
24,887,609 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,007,793 |
|
|
|
7,007,793 |
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,801,585 |
) |
|
|
(12,801,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,950,352 |
|
|
|
16,950,352 |
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,802,501 |
) |
|
|
(2,802,501 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 (Restated)
|
|
|
225 |
|
|
$ |
155,655 |
|
|
$ |
(736,000 |
) |
|
$ |
39,265,704 |
|
|
$ |
38,685,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-115
SPECIALTY RENTAL TOOLS, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,950,352 |
|
|
$ |
8,695,301 |
|
|
$ |
7,007,793 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,447,210 |
|
|
|
2,434,682 |
|
|
|
2,543,332 |
|
|
Gain on sale of assets
|
|
|
(1,865,949 |
) |
|
|
(1,098,488 |
) |
|
|
(332,431 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,815,890 |
) |
|
|
(2,230,771 |
) |
|
|
777,986 |
|
|
Inventory
|
|
|
(91,090 |
) |
|
|
(75,520 |
) |
|
|
78,267 |
|
|
Prepaid expenses and other
|
|
|
18,990 |
|
|
|
(15,346 |
) |
|
|
(14,604 |
) |
|
Accounts payable
|
|
|
161,895 |
|
|
|
(62,784 |
) |
|
|
43,879 |
|
|
Accrued liabilities
|
|
|
317,602 |
|
|
|
30,545 |
|
|
|
10,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
17,123,120 |
|
|
|
7,677,619 |
|
|
|
10,114,741 |
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(11,429,761 |
) |
|
|
(5,796,433 |
) |
|
|
(921,949 |
) |
|
Proceeds from sale of property and equipment
|
|
|
3,135,857 |
|
|
|
1,334,493 |
|
|
|
1,088,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(8,293,904 |
) |
|
|
(4,461,940 |
) |
|
|
166,089 |
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholder
|
|
|
(2,802,501 |
) |
|
|
(3,251,610 |
) |
|
|
(12,801,585 |
) |
|
Proceeds from notes payable
|
|
|
3,000,000 |
|
|
|
3,000,000 |
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(2,589,170 |
) |
|
|
(1,022,861 |
) |
|
|
(1,493,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(2,391,671 |
) |
|
|
(1,274,471 |
) |
|
|
(14,295,025 |
) |
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
6,437,545 |
|
|
|
1,941,208 |
|
|
|
(4,014,195 |
) |
Cash and cash equivalents Beginning of year
|
|
|
11,038,970 |
|
|
|
9,097,762 |
|
|
|
13,111,957 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents End of year
|
|
$ |
17,476,515 |
|
|
$ |
11,038,970 |
|
|
$ |
9,097,762 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
184,856 |
|
|
$ |
11,987 |
|
|
$ |
58,442 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to financial statements.
F-116
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
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.
Payments from customers for the cost of oilfield rental
equipment that is damaged or lost-in-hole are reflected as
revenues with the carrying value of the related equipment
charged to cost of 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, $35,087 and $38,266 at December 31,
2005, 2004 and 2003, 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
F-117
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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, $196,000 and $245,000 for years ended
December 31, 2005, 2004 and 2003, 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.
For the year ended December 31, 2003, 50% of the
Companys revenues were generated from two unrelated
customers.
Note C Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated | |
|
December 31, | |
|
|
Useful | |
|
| |
|
|
Lives | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Rental equipment
|
|
|
7 - 10 years |
|
|
$ |
37,346,425 |
|
|
$ |
27,390,801 |
|
|
$ |
23,338,565 |
|
Automobiles
|
|
|
5 years |
|
|
|
508,535 |
|
|
|
410,094 |
|
|
|
330,734 |
|
Furniture and fixtures
|
|
|
5 - 7 years |
|
|
|
12,369 |
|
|
|
12,369 |
|
|
|
1,835 |
|
Leasehold improvements
|
|
|
15 - 39 years |
|
|
|
161,091 |
|
|
|
161,091 |
|
|
|
105,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,028,420 |
|
|
|
27,974,355 |
|
|
|
23,776,560 |
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(18,982,644 |
) |
|
|
(15,688,620 |
) |
|
|
(14,672,904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,045,776 |
|
|
$ |
12,285,735 |
|
|
$ |
9,103,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-118
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note D Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Note payable to bank (1)
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,021,530 |
|
Note payable to bank (2)
|
|
|
1,531,520 |
|
|
|
3,000,000 |
|
|
|
|
|
Note payable to bank (3)
|
|
|
1,907,252 |
|
|
|
|
|
|
|
|
|
Note payable to GMAC (4)
|
|
|
34,869 |
|
|
|
55,002 |
|
|
|
|
|
Note payable to Ford Credit (5)
|
|
|
39,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,513,230 |
|
|
|
3,055,002 |
|
|
|
1,021,530 |
|
Less: current portion
|
|
|
3,084,046 |
|
|
|
1,488,466 |
|
|
|
1,021,530 |
|
|
|
|
|
|
|
|
|
|
|
Total notes payable long-term
|
|
$ |
429,184 |
|
|
$ |
1,566,536 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
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 August 2002, the Company raised $3,000,000 under a note
payable agreement from Iberia Bank, a financial institution in
Louisiana. The note bore interest at a rate of prime less 1% and
was payable in installments over 24 months. The Company
repaid the note in August 2004.
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.
F-119
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
|
|
|
(5) 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, 2004 and 2003, the Company had 2,500
shares issued and 225 common shares outstanding.
Treasury Stock: The Company has repurchased common stock
as treasury stock. As of December 31, 2005, 2004 and 2003,
the Company owned 2,275 shares of treasury stock.
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, 2004 and
2003, the Company made contributions of approximately $175,000,
$163,000 and $155,000 respectively, to the Plan.
Note G Related Party Transactions
The Company paid the shareholder $648,000, $288,000 and $144,000
for the years ended December 31, 2005, 2004 and 2003,
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 2 and Note 3 as stated in Note D
of the financial statements.
F-120
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note J Restatement
At December 31, 2005 the Company had accrued approximately
$12,400,000 in bonuses payable to certain employees upon
acquisition of the Company by Allis-Chalmers Energy, Inc. The
employee bonuses were contingent upon the acquisition of the
Company, which was not consummated until January 18, 2006,
therefore no liability existed as of December 31, 2005.
Accordingly, the Company restated its financial statements to
reverse the accrual of approximately $12,400,000 at
December 31, 2005.
A restated balance sheet at December 31, 2005, a restated
statement of income, and restated statement of cash flows for
the year ended December 31, 2005, reflecting the above
adjustment is presented below.
F-121
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
As Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
17,476,515 |
|
|
$ |
|
|
|
$ |
17,476,515 |
|
|
Trade receivables, net
|
|
|
7,253,603 |
|
|
|
|
|
|
|
7,253,603 |
|
|
Inventory
|
|
|
347,978 |
|
|
|
|
|
|
|
347,978 |
|
|
Prepaid expenses and other
|
|
|
63,266 |
|
|
|
|
|
|
|
63,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
25,141,362 |
|
|
|
|
|
|
|
25,141,362 |
|
PROPERTY AND EQUIPMENT, net
|
|
|
19,045,776 |
|
|
|
|
|
|
|
19,045,776 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
44,187,138 |
|
|
$ |
|
|
|
$ |
44,187,138 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,379,752 |
|
|
$ |
|
|
|
$ |
1,379,752 |
|
|
Accrued liabilities
|
|
|
13,008,797 |
|
|
|
(12,400,000 |
) |
|
|
608,797 |
|
|
Current portion of notes payable
|
|
|
3,084,046 |
|
|
|
|
|
|
|
3,084,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
17,472,595 |
|
|
|
(12,400,000 |
) |
|
|
5,072,595 |
|
NOTES PAYABLE, less current portion
|
|
|
429,184 |
|
|
|
|
|
|
|
429,184 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
17,901,779 |
|
|
|
(12,400,000 |
) |
|
|
5,501,779 |
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
155,655 |
|
|
|
|
|
|
|
155,655 |
|
|
Treasury stock, at cost
|
|
|
(736,000 |
) |
|
|
|
|
|
|
(736,000 |
) |
|
Retained earnings
|
|
|
26,865,704 |
|
|
|
12,400,000 |
|
|
|
39,265,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS DEFICIT
|
|
|
26,285,359 |
|
|
|
12,400,000 |
|
|
|
38,685,359 |
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$ |
44,187,138 |
|
|
$ |
|
|
|
$ |
44,187,138 |
|
|
|
|
|
|
|
|
|
|
|
F-122
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
As Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
REVENUES, NET
|
|
$ |
32,708,504 |
|
|
$ |
|
|
|
$ |
32,708,504 |
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
5,103,071 |
|
|
|
|
|
|
|
5,103,071 |
|
|
General and administrative
|
|
|
19,632,127 |
|
|
|
(12,400,000 |
) |
|
|
7,232,127 |
|
|
Depreciation
|
|
|
3,447,210 |
|
|
|
|
|
|
|
3,447,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EXPENSES
|
|
|
28,182,408 |
|
|
|
(12,400,000 |
) |
|
|
15,782,408 |
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
4,526,096 |
|
|
|
12,400,000 |
|
|
|
16,926,096 |
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
136,597 |
|
|
|
|
|
|
|
136,597 |
|
|
Interest expense
|
|
|
(184,856 |
) |
|
|
|
|
|
|
(184,856 |
) |
|
Other, net
|
|
|
72,515 |
|
|
|
|
|
|
|
72,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE)
|
|
|
24,256 |
|
|
|
|
|
|
|
24,256 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$ |
4,550,352 |
|
|
$ |
12,400,000 |
|
|
$ |
16,950,352 |
|
|
|
|
|
|
|
|
|
|
|
F-123
SPECIALTY RENTAL TOOLS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 | |
|
|
| |
|
|
As Reported | |
|
Adjustments | |
|
As Restated | |
|
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
4,550,352 |
|
|
$ |
12,400,000 |
|
|
$ |
16,950,352 |
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,447,210 |
|
|
|
|
|
|
|
3,447,210 |
|
|
Gain on sale of assets
|
|
|
(1,865,949 |
) |
|
|
|
|
|
|
(1,865,949 |
) |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(1,815,890 |
) |
|
|
|
|
|
|
(1,815,890 |
) |
|
Inventory
|
|
|
(91,090 |
) |
|
|
|
|
|
|
(91,090 |
) |
|
Prepaid Expenses and other
|
|
|
18,990 |
|
|
|
|
|
|
|
18,990 |
|
|
Accounts Payable
|
|
|
161,895 |
|
|
|
|
|
|
|
161,895 |
|
|
Accrued liabilities
|
|
|
12,717,602 |
|
|
|
(12,400,000 |
) |
|
|
317,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
17,123,120 |
|
|
|
|
|
|
|
17,123,120 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(11,429,761 |
) |
|
|
|
|
|
|
(11,429,761 |
) |
|
Proceeds from sale of property and equipment
|
|
|
3,135,857 |
|
|
|
|
|
|
|
3,135,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(8,293,904 |
) |
|
|
|
|
|
|
(8,293,904 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to shareholder
|
|
|
(2,802,501 |
) |
|
|
|
|
|
|
(2,802,501 |
) |
|
Proceeds from notes payable
|
|
|
3,000,000 |
|
|
|
|
|
|
|
3,000,000 |
|
|
Repayment of notes payable
|
|
|
(2,589,170 |
) |
|
|
|
|
|
|
(2,391,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES
|
|
|
(2,391,671 |
) |
|
|
|
|
|
|
(2,391,671 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
6,437,545 |
|
|
|
|
|
|
|
6,437,545 |
|
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
|
|
|
11,038,970 |
|
|
|
|
|
|
|
11,038,970 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS END OF YEAR
|
|
$ |
17,476,515 |
|
|
$ |
|
|
|
$ |
17,476,515 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
186,856 |
|
|
$ |
|
|
|
$ |
186,856 |
|
|
|
|
|
|
|
|
|
|
|
F-124
SPECIALTY RENTAL TOOLS, INC.
SCHEDULE I SCHEDULE OF GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Restated) | |
|
|
|
|
Salaries and wages
|
|
$ |
2,808,822 |
|
|
$ |
2,449,073 |
|
|
$ |
2,340,807 |
|
Retirement plan expenses
|
|
|
174,863 |
|
|
|
163,261 |
|
|
|
155,409 |
|
Selling expenses
|
|
|
486,323 |
|
|
|
325,595 |
|
|
|
292,420 |
|
Shop supplies
|
|
|
774,694 |
|
|
|
500,783 |
|
|
|
571,038 |
|
Shop maintenance
|
|
|
321,111 |
|
|
|
43,691 |
|
|
|
46,767 |
|
Rent
|
|
|
648,000 |
|
|
|
288,257 |
|
|
|
180,000 |
|
Insurance
|
|
|
461,198 |
|
|
|
404,886 |
|
|
|
345,318 |
|
Automobile expenses
|
|
|
242,276 |
|
|
|
161,549 |
|
|
|
145,333 |
|
Advertising
|
|
|
253,624 |
|
|
|
196,037 |
|
|
|
244,695 |
|
Taxes, licenses and other
|
|
|
565,751 |
|
|
|
377,022 |
|
|
|
415,390 |
|
Bad debt expense, net of recoveries
|
|
|
103,609 |
|
|
|
81,389 |
|
|
|
(59,220 |
) |
Office expense
|
|
|
57,424 |
|
|
|
49,648 |
|
|
|
26,814 |
|
Uniforms
|
|
|
25,555 |
|
|
|
17,971 |
|
|
|
19,800 |
|
Utilities
|
|
|
88,091 |
|
|
|
115,565 |
|
|
|
69,006 |
|
Dues and subscriptions
|
|
|
8,083 |
|
|
|
7,375 |
|
|
|
8,956 |
|
Professional fees
|
|
|
211,563 |
|
|
|
34,739 |
|
|
|
52,112 |
|
Other
|
|
|
1,140 |
|
|
|
1,793 |
|
|
|
2,862 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,232,127 |
|
|
$ |
5,218,634 |
|
|
$ |
4,857,507 |
|
|
|
|
|
|
|
|
|
|
|
F-125
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.
Buenos Aires, Argentina
March 2, 2006, except in respect of Note 22 for which
the date is June 9, 2006.
Sibille
/s/ Ariel S. Eisenstein
Partner
F-126
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 |
|
|
Assets of discontinued operations (Note 22)
|
|
|
7,276 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
55,542 |
|
|
|
42,289 |
|
|
|
|
|
|
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net (Note 8)
|
|
|
110,510 |
|
|
|
97,799 |
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
12,659 |
|
|
Investments
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total Non-Current Assets
|
|
|
110,512 |
|
|
|
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 tax 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-127
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 |
) |
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
16,498 |
|
|
|
13,906 |
|
|
|
12,357 |
|
General and Administrative Expenses
|
|
|
(3,933 |
) |
|
|
(3,430 |
) |
|
|
(3,140 |
) |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
12,565 |
|
|
|
10,476 |
|
|
|
9,217 |
|
Net Financial Expenses (Note 16)
|
|
|
(5,394 |
) |
|
|
(4,585 |
) |
|
|
(4,030 |
) |
Other Income (Expenses) (Note 16)
|
|
|
7,127 |
|
|
|
1,000 |
|
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Income Tax
|
|
|
14,298 |
|
|
|
6,891 |
|
|
|
5,021 |
|
Income Tax (Note 14)
|
|
|
(3,547 |
) |
|
|
(3,030 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
10,751 |
|
|
|
3,861 |
|
|
|
1,114 |
|
Loss on Discounted Operations, net of Income Tax Benefit of
$2,228, $705, and $0, respectively (Note 22)
|
|
|
(4,138 |
) |
|
|
(1,309 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
6,613 |
|
|
|
2,552 |
|
|
|
1,114 |
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-128
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-129
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 |
|
|
Loss on discontinued operations
|
|
|
4,138 |
|
|
|
1,309 |
|
|
|
|
|
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
|
|
|
4,629 |
|
|
|
6,347 |
|
|
|
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 property, plant and equipment
|
|
|
(22,195 |
) |
|
|
(12,184 |
) |
|
|
(12,640 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investment activities
|
|
|
(22,131 |
) |
|
|
(12,011 |
) |
|
|
(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 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investments activities
|
|
|
(983 |
) |
|
|
(14,673 |
) |
|
|
|
|
|
Net cash used in financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operations
|
|
|
(983 |
) |
|
|
(14,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-130
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 made certain investments in oil and
natural gas exploration activities (see Note 22).
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. Also, these financial statements reflect certain
reclassifications to present the oil and gas operations on a
discontinued operations basis as a consequence of the
transaction described in Note 22.
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
F-131
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)
the company considers all highly liquid instruments with
original maturities of three months or less to be cash
equivalents.
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 |
|
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 successful efforts method of accounting
and certain amortizable intangibles to be held and used or
disposed of, see Note 22).
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.
F-132
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)
|
|
|
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 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
F-133
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)
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-134
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 |
) |
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
110,510 |
|
|
|
97,799 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Carried at cost, which is lower than estimated fair market value. |
F-135
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-136
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-137
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 from continuing
operations for each year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
(3,023 |
) |
|
|
(2,710 |
) |
|
|
|
|
Deferred
|
|
|
(524 |
) |
|
|
(320 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(3,547 |
) |
|
|
(3,030 |
) |
|
|
(3,907 |
) |
|
|
|
|
|
|
|
|
|
|
A reconciliation between the income tax expense and income tax
from continuing operations computed by applying the statutory
rate to income from continuing operations 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 from continuing operations before income tax
|
|
|
14,298 |
|
|
|
|
|
|
|
6,891 |
|
|
|
|
|
|
|
5,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax (*)
|
|
|
4,941 |
|
|
|
34.6% |
|
|
|
2,358 |
|
|
|
34.2% |
|
|
|
1,722 |
|
|
|
34.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non taxable income(**)
|
|
|
(2,333 |
) |
|
|
16.3% |
|
|
|
(573 |
) |
|
|
8.3% |
|
|
|
|
|
|
|
|
|
Non taxable-exempt operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
8.4% |
|
Foreign exchange remeasurement
|
|
|
939 |
|
|
|
6.6% |
|
|
|
1,245 |
|
|
|
18.1% |
|
|
|
1,761 |
|
|
|
35.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
3,547 |
|
|
|
24.8% |
|
|
|
3,030 |
|
|
|
44.0% |
|
|
|
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. |
|
|
(**) |
Taxable income generated by the Companys operations in the
Province of Tierra de Fuego are exempt from Argentine income tax. |
The loss on discontinued operations is presented net of the
related tax effect (see Note 22).
F-138
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 14. Income tax
(continued)
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 |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
F-139
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Note 17)
|
|
|
7,217 |
|
|
|
2,104 |
|
|
|
0 |
|
Other
|
|
|
(90 |
) |
|
|
(1,104 |
) |
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
7,127 |
|
|
|
1,000 |
|
|
|
(166 |
) |
|
|
|
|
|
|
|
|
|
|
Between July 2004 and December 2005, the Company earned
commissions for the assistance provided by DLS management to a
related party (see Note 17) in securing significant
contracts with certain unrelated parties. The commissions were
calculated as a percentage of the actual revenue generated by
such contracts and accrued over the term of the contracts. This
is a non-recurring income.
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.
F-140
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)
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 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
F-141
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)
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.
|
|
|
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.
F-142
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
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. |
|
|
|
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.
F-143
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)
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 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. Discontinued
operations
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, and
dry hole expense of USD 1,420 and USD 382 was
incurred, respectively. The Company 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. In March 2006,
the Company entered into an agreement to sell its interest in
the exploratory block to Barrancas Sur S.A. and received
proceeds equal to the book value of the oil and gas properties
as of the date of sale. The assets related to these
oil & gas activities are presented as Assets of
discontinued operations on the consolidated balance sheet,
while the related expenses are presented as Loss from
discontinued operations (net of income tax) on the
consolidated statements of income.
In connection with its oil & gas exploratory assets,
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
F-144
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 22. Discontinued operations
(continued)
using the units of production method. As of December 31,
2005, the Company did not generate 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.
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
Assets of discontinued operations |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Oil and gas unproved properties
|
|
|
6,701 |
|
|
|
11,647 |
|
Oil and gas construction work in progress
|
|
|
575 |
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
|
7,276 |
|
|
|
12,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
Loss on discontinued operations |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Dry hole expense
|
|
|
(1,420 |
) |
|
|
(382 |
) |
|
|
|
|
Impairment charges on unproved properties
|
|
|
(4,946 |
) |
|
|
(1,632 |
) |
|
|
|
|
Income tax benefits on discontinued operations
|
|
|
2,228 |
|
|
|
705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
(1,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-145
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
|
|
|
|
|
(Unaudited) |
|
|
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 4)
|
|
|
244 |
|
|
|
731 |
|
|
Accounts receivable (Note 5)
|
|
|
21,817 |
|
|
|
26,826 |
|
|
Parts and supplies (Note 6)
|
|
|
16,004 |
|
|
|
16,640 |
|
|
Prepaid and other current assets (Note 7)
|
|
|
7,165 |
|
|
|
4,069 |
|
|
Assets of discontinued operations (Note 3)
|
|
|
|
|
|
|
7,276 |
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
45,230 |
|
|
|
55,542 |
|
|
|
|
|
|
|
|
|
|
Non-Current Assets
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net (Note 8)
|
|
|
109,310 |
|
|
|
110,510 |
|
|
Investments
|
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Total Non-Current Assets
|
|
|
109,312 |
|
|
|
110,512 |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
154,542 |
|
|
|
166,054 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts payable and accrued expenses (Note 9)
|
|
|
15,285 |
|
|
|
13,522 |
|
|
Short-term debt (Note 10)
|
|
|
8,468 |
|
|
|
8,690 |
|
|
Payroll and accrued taxes (Note 11)
|
|
|
8,295 |
|
|
|
7,976 |
|
|
Other liabilities (Note 12)
|
|
|
1,998 |
|
|
|
9,188 |
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
34,046 |
|
|
|
39,376 |
|
|
|
|
|
|
|
|
|
|
Non-Current Liabilities
|
|
|
|
|
|
|
|
|
|
Other liabilities (Note 12)
|
|
|
452 |
|
|
|
782 |
|
|
Long-term debt (Note 13)
|
|
|
19,783 |
|
|
|
29,640 |
|
|
Deferred income tax liability
|
|
|
727 |
|
|
|
696 |
|
|
|
|
|
|
|
|
|
|
Total Non-Current Liabilities
|
|
|
20,962 |
|
|
|
31,118 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
55,008 |
|
|
|
70,494 |
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Common stock (Note 22)
|
|
|
42,963 |
|
|
|
42,963 |
|
|
Additional paid-in capital (Note 22)
|
|
|
31,606 |
|
|
|
31,606 |
|
|
Retained earnings
|
|
|
24,965 |
|
|
|
20,991 |
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
99,534 |
|
|
|
95,560 |
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
154,542 |
|
|
|
166,054 |
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-146
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF INCOME
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Sales and Other Operating Revenues (Note 15)
|
|
|
38,800 |
|
|
|
29,451 |
|
Operating Costs and Expenses (Note 16)
|
|
|
(32,663 |
) |
|
|
(26,211 |
) |
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,137 |
|
|
|
3,240 |
|
General and Administrative Expenses
|
|
|
(1,066 |
) |
|
|
(984 |
) |
|
|
|
|
|
|
|
Operating Income
|
|
|
5,071 |
|
|
|
2,256 |
|
Net Financial Expenses (Note 16)
|
|
|
(1,681 |
) |
|
|
(1,040 |
) |
Other (Expenses) Income (Note 16)
|
|
|
(338 |
) |
|
|
1,801 |
|
|
|
|
|
|
|
|
Income from Continuing Operations Before Income Tax
|
|
|
3,052 |
|
|
|
3,017 |
|
|
|
|
|
|
|
|
Income Tax (Note 14)
|
|
|
(1,453 |
) |
|
|
(739 |
) |
Income from Continuing Operations
|
|
|
1,599 |
|
|
|
2,278 |
|
Income from Discontinued Operations, net of Income Tax Benefit
of $2,375 (Note 3)
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
3,974 |
|
|
|
2,278 |
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-147
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
UNAUDITED INTERIM CONSOLIDATED STATEMENT 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 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
27,466 |
|
|
|
|
|
|
|
14,378 |
|
|
|
84,807 |
|
Net income for the three months ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,278 |
|
|
|
2,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2005
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
27,466 |
|
|
|
|
|
|
|
16,656 |
|
|
|
87,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
31,606 |
|
|
|
|
|
|
|
20,991 |
|
|
|
95,560 |
|
Net income for the three months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,974 |
|
|
|
3,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2006
|
|
|
42,963,374 |
|
|
|
42,963 |
|
|
|
31,606 |
|
|
|
|
|
|
|
24,965 |
|
|
|
99,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to the consolidated financial
statements
F-148
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Net Income
|
|
|
3,974 |
|
|
|
2,278 |
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
Deferred income tax
|
|
|
113 |
|
|
|
96 |
|
|
Income from discontinued operations
|
|
|
(2,375 |
) |
|
|
|
|
|
Depreciation, depletion and amortization
|
|
|
2,933 |
|
|
|
2,129 |
|
|
Net gain on the sale of property, plant and equipment
|
|
|
(15 |
) |
|
|
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
Decrease in parts and supplies
|
|
|
636 |
|
|
|
113 |
|
|
Decrease (increase) in accounts receivable trade
|
|
|
5,009 |
|
|
|
(2,337 |
) |
|
Increase in prepaid expenses and other current assets, net of
deferred income tax
|
|
|
(803 |
) |
|
|
(209 |
) |
|
(Decrease) increase in trade accounts payable and accrued
expenses, payroll and accrued taxes and current other liabilities
|
|
|
(5,438 |
) |
|
|
1,153 |
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
4,034 |
|
|
|
3,223 |
|
|
|
|
|
|
|
|
Investment activities
|
|
|
|
|
|
|
|
|
|
Purchase of investments
|
|
|
|
|
|
|
(10 |
) |
|
Proceeds from the sale of property, plant and equipment
|
|
|
757 |
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(2,475 |
) |
|
|
(1,603 |
) |
|
|
|
|
|
|
|
Net cash used in investment activities
|
|
|
(1,718 |
) |
|
|
(1,613 |
) |
|
|
|
|
|
|
|
Financing
|
|
|
|
|
|
|
|
|
|
Net decrease in Short-term debt and Long-term debt
|
|
|
(10,079 |
) |
|
|
(2,746 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(10,079 |
) |
|
|
(2,746 |
) |
|
|
|
|
|
|
|
Cash flow from discontinued operations
|
|
|
|
|
|
|
|
|
|
Net cash provided by operations
|
|
|
|
|
|
|
|
|
|
Net cash provided by investment activities
|
|
|
7,276 |
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
7,276 |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(487 |
) |
|
|
(1,136 |
) |
Cash and cash equivalents at the beginning of the period
|
|
|
731 |
|
|
|
1,496 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
|
244 |
|
|
|
360 |
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
2,125 |
|
|
|
692 |
|
See the accompanying notes to the consolidated financial
statements
F-149
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS
Amounts expressed in thousands of US Dollars
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 made certain investments in oil and
natural gas exploration activities (now discontinued, see
Note 3).
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. (See Note 23)
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 unaudited interim 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. The balance sheet as of
December 31, 2005 presented for comparative purposes and
related notes reflect certain reclassifications to present the
oil and gas operations on a discontinued operations basis as a
consequence of the transaction described in Note 3.
In the opinion of management, the unaudited interim consolidated
financial statements included herein reflects all adjustments,
consisting only of normal recurring adjustments, which are
necessary for a fair presentation of the Companys
financial position, results of operations and cash flow for the
interim periods presented. The results of operations for the
interim periods presented herein are not necessarily indicative
of the results to be expected for a full year or any other
interim period.
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). |
F-150
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
|
|
|
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 unaudited interim
consolidated statements of cash flows the company considers all
highly liquid instruments with original maturities of three
months or less to be cash equivalents.
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 |
|
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 successful efforts method of accounting
and certain amortizable intangibles to be held and used or
disposed of See Note 3).
F-151
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
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
periods results of operations and are included under
financial expenses, net on the Unaudited Interim Consolidated
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 regulations and local and
international political and economic conditions. There can be no
assurance that
F-152
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 2. Significant accounting
policies and presentation (continued)
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.
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. Discontinued
operations
From mid-2004 through March 2006, the Company participated in
certain oil and gas exploration activities. 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 the years ended December 31, 2005 and 2004 in the amount
of USD 983 and USD 979 respectively, and dry hole expense of USD
1,420 and USD 382 was incurred, respectively. The Company
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.
The Company followed the successful efforts method of
accounting. Costs of property acquisitions, successful
exploratory wells and support equipment and facilities were
capitalized. Costs of capitalized oil and gas properties would
be amortized using the units of production method. As of
March 31, 2006, the Company did not generate any sales of
oil or gas and all activities to date were exploratory in
nature. Unsuccessful exploratory wells were expensed when
determined to be non-productive. Overhead and all exploration
cost other than exploratory drilling were charged against income
as incurred. The Company disposed of its interest in oil and gas
exploration activities in March 2006 and received proceeds equal
to the book value of the oil and gas properties as of the date
of sale (see Note 17).
F-153
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 3. Discontinued operations
(continued)
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
Three months | |
|
|
ended March 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Pretax income from discontinued operations
|
|
|
|
|
|
|
|
|
Gain/loss on sale of discontinued operations
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
March 31 | |
|
December 31 | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Oil and gas unproved properties
|
|
|
|
|
|
|
6,701 |
|
Oil and gas construction work in progress
|
|
|
|
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,276 |
|
|
|
|
|
|
|
|
|
|
Note 4. |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
March 31 | |
|
December 31 | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash on hand and in banks
|
|
|
244 |
|
|
|
331 |
|
Time deposits
|
|
|
|
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
244 |
|
|
|
731 |
|
|
|
|
|
|
|
|
|
|
Note 5. |
Accounts receivable |
|
|
|
|
|
|
|
|
|
Trade
|
|
|
21,817 |
|
|
|
26,826 |
|
|
|
|
|
|
|
|
|
|
|
21,817 |
|
|
|
26,826 |
|
|
|
|
|
|
|
|
No allowance for potential credit losses was deemed necessary as
of March 31, 2006 and December 31, 2005 based on an
evaluation of outstanding customer balances at each date.
|
|
Note 6. |
Parts and supplies |
|
|
|
|
|
|
|
|
|
|
|
March 31 | |
|
December 31 | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Drilling fluids
|
|
|
1,807 |
|
|
|
1,741 |
|
Materials, supplies, spare parts and others
|
|
|
13,483 |
|
|
|
13,916 |
|
Goods in transit
|
|
|
714 |
|
|
|
983 |
|
|
|
|
|
|
|
|
|
|
|
16,004 |
|
|
|
16,640 |
|
|
|
|
|
|
|
|
|
|
Note 7. |
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|
Prepaid taxes
|
|
|
2,155 |
|
|
|
2,073 |
|
Deferred tax asset
|
|
|
2,602 |
|
|
|
309 |
|
Prepaid expenses
|
|
|
2,408 |
|
|
|
1,036 |
|
Deferred mobilization costs
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
7,165 |
|
|
|
4,069 |
|
|
|
|
|
|
|
|
F-154
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 8. |
Property, plant and equipment |
|
|
|
|
|
|
|
|
|
|
Drilling activities:
|
|
|
|
|
|
|
|
|
|
Drilling rigs
|
|
|
92,648 |
|
|
|
91,585 |
|
|
Rig equipment
|
|
|
18,134 |
|
|
|
17,372 |
|
|
Workover rigs
|
|
|
15,784 |
|
|
|
15,549 |
|
|
Rig held for future use(1)
|
|
|
10,752 |
|
|
|
10,752 |
|
|
Pulling rigs
|
|
|
7,324 |
|
|
|
7,324 |
|
|
Trucks and transportation equipment
|
|
|
3,755 |
|
|
|
3,559 |
|
|
Buildings
|
|
|
2,073 |
|
|
|
2,826 |
|
|
Trailers and facilities
|
|
|
1,390 |
|
|
|
1,359 |
|
|
Other
|
|
|
8,761 |
|
|
|
8,599 |
|
|
|
|
|
|
|
|
|
|
|
160,621 |
|
|
|
158,925 |
|
Accumulated depreciation
|
|
|
(51,311 |
) |
|
|
(48,415 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
109,310 |
|
|
|
110,510 |
|
|
|
|
|
|
|
|
|
|
(1) |
Carried at cost, which is lower than estimated fair market value. |
|
|
Note 9. |
Trade accounts payable and accrued expenses |
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Trade creditors
|
|
|
13,076 |
|
|
|
11,724 |
|
Accrued expenses
|
|
|
2,209 |
|
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
15,285 |
|
|
|
13,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of long term debt maturing within one year
|
|
|
8,468 |
|
|
|
8,690 |
|
|
|
|
|
|
|
|
|
|
|
8,468 |
|
|
|
8,690 |
|
|
|
|
|
|
|
|
|
|
Note 11. |
Payroll and accrued taxes |
|
|
|
|
|
|
|
|
|
Payroll
|
|
|
5,067 |
|
|
|
5,203 |
|
Taxes
|
|
|
3,228 |
|
|
|
2,773 |
|
|
|
|
|
|
|
|
|
|
|
8,295 |
|
|
|
7,976 |
|
|
|
|
|
|
|
|
F-155
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 12. |
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
Customer financing of rig purchases
|
|
|
1,579 |
|
|
|
1,850 |
|
Note payable
|
|
|
|
|
|
|
7,177 |
|
Other
|
|
|
419 |
|
|
|
161 |
|
|
|
|
|
|
|
|
Total
|
|
|
1,998 |
|
|
|
9,188 |
|
|
|
|
|
|
|
|
Non-Current
|
|
|
|
|
|
|
|
|
Customer financing of rig purchases
|
|
|
452 |
|
|
|
782 |
|
|
|
|
|
|
|
|
Total
|
|
|
452 |
|
|
|
782 |
|
|
|
|
|
|
|
|
These liabilities are denominated in US dollars, except for
USD 419 and USD 161 which were denominated in
Argentine pesos as of March 31, 2006 and December 31,
2005, respectively. The amounts of USD 2,031 and
USD 2,632 accrued interest at a 8% p.a. rate in the period
ended on March 31, 2006 and the year ended
December 31, 2005, respectively. The amount of
USD 7,177 accrued interest at a 6% p.a. rate and was
retired by the Company subsequent to December 31, 2005. The
remaining other liabilities current (USD 419 and
USD 161 as of March 31, 2006 and December 31,
2005, respectively) did not bear interest.
Other liabilities non-current as of March 31,
2006 become due between April 1 and July 31, 2007.
F-156
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
10,78% loan agreement due 2006(2)
|
|
|
|
|
|
|
1,110 |
|
6,31% loan agreement due 2006(1)
|
|
|
1,838 |
|
|
|
2,142 |
|
6,31% loan agreement due 2007(1)
|
|
|
2,376 |
|
|
|
|
|
6,31% loan agreement due 2008(1)
|
|
|
2,376 |
|
|
|
2,376 |
|
5,51% loan agreement due 2009(1)
|
|
|
1,500 |
|
|
|
1,500 |
|
6,56% loan agreement due 2010(1)
|
|
|
700 |
|
|
|
700 |
|
6,56% loan agreement due 2011(1)
|
|
|
350 |
|
|
|
350 |
|
10,78% loan a agreement due 2007(2)
|
|
|
|
|
|
|
733 |
|
3,49% loan agreement due 2007(1)
|
|
|
|
|
|
|
2,376 |
|
6% loan agreement due 2006(1)
|
|
|
4,404 |
|
|
|
5,438 |
|
6% loan agreement due 2007(1)
|
|
|
4,467 |
|
|
|
7,163 |
|
6% loan agreement due 2008(1)
|
|
|
3,208 |
|
|
|
7,514 |
|
6% loan agreement due 2009(1)
|
|
|
7,032 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
Subtotal
|
|
|
28,251 |
|
|
|
38,330 |
|
|
|
|
|
|
|
|
Less: Long-term debt maturing within one year
|
|
|
8,468 |
|
|
|
8,690 |
|
|
|
|
|
|
|
|
|
|
|
19,783 |
|
|
|
29,640 |
|
|
|
|
|
|
|
|
|
|
(1) |
Denominated in US dollars |
|
(2) |
Denominated in Argentine pesos |
Future maturities of long-term debt as of March 31, 2006
were as follows:
|
|
|
|
|
|
|
|
|
2006 and 1st quarter 2007
|
|
|
8,468 |
|
|
|
|
|
2007
|
|
|
4,617 |
|
|
|
|
|
2008
|
|
|
5,584 |
|
|
|
|
|
2009
|
|
|
8,532 |
|
|
|
|
|
2010
|
|
|
700 |
|
|
|
|
|
Thereafter
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
Total long term debt
|
|
|
28,251 |
|
|
|
|
|
|
|
|
|
|
|
|
F-157
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
The components of the income tax expense from continuing
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended | |
|
|
March 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Current
|
|
|
(1,340 |
) |
|
|
(643 |
) |
Deferred
|
|
|
(113 |
) |
|
|
(96 |
) |
|
|
|
|
|
|
|
Total
|
|
|
(1,453 |
) |
|
|
(739 |
) |
|
|
|
|
|
|
|
The Companys consolidated effective income tax rate for
continuing operations for the three months ended March 31,
2006 was 47.6% as compared to 24.5% for the corresponding period
in 2005. The lower rate in 2005 was principally the result of
higher income in zero tax jurisdictions.
The results from discontinued operations are presented net of
the related tax effect (See Note 3).
A reconciliation between the income tax expense and income tax
computed by applying the statutory rate to income from
continuing operations before income taxes is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of | |
|
|
|
Percent of | |
|
|
|
|
Pre-tax | |
|
|
|
Pre-tax | |
|
|
2006 | |
|
income | |
|
2005 | |
|
income | |
|
|
| |
|
| |
|
| |
|
| |
Income from continuing operations before income tax
|
|
|
3,052 |
|
|
|
100% |
|
|
|
3,017 |
|
|
|
100% |
|
Theoretical income tax(*)
|
|
|
1,032 |
|
|
|
33.8% |
|
|
|
1,029 |
|
|
|
34.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non taxable result exempt operation
|
|
|
222 |
|
|
|
7.3% |
|
|
|
(753 |
) |
|
|
-25.0% |
|
Non taxable income (**)
|
|
|
(13 |
) |
|
|
-0.4% |
|
|
|
(17 |
) |
|
|
-0.5% |
|
Foreign exchange remeasurement
|
|
|
212 |
|
|
|
6.9% |
|
|
|
480 |
|
|
|
15.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operations
|
|
|
1,453 |
|
|
|
47.6% |
|
|
|
739 |
|
|
|
24.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) |
The theoretical income tax rate applied represents the weighted
average of 35% of Argentine income tax and 25% of Bolivian
income tax for continuing operations. |
|
(**) |
Taxable income generated by the Companys operations in the
province of Tierra del Fuego are exempt from Argentine income
tax for continuing operations. |
F-158
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 15. |
Sales and other operating revenues |
|
|
|
|
|
|
|
|
|
|
|
Period ended March 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
By type of service provided
|
|
|
|
|
|
|
|
|
Drilling
|
|
|
22,898 |
|
|
|
17,251 |
|
Workover
|
|
|
7,580 |
|
|
|
5,893 |
|
Pulling
|
|
|
3,599 |
|
|
|
3,059 |
|
Mud Services
|
|
|
4,723 |
|
|
|
3,227 |
|
Other Revenues
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
38,800 |
|
|
|
29,451 |
|
|
|
|
|
|
|
|
By location
|
|
|
|
|
|
|
|
|
Argentina
|
|
|
37,733 |
|
|
|
28,260 |
|
Bolivia
|
|
|
1,067 |
|
|
|
1,191 |
|
|
|
|
|
|
|
|
|
|
|
38,800 |
|
|
|
29,451 |
|
|
|
|
|
|
|
|
Sales to significant customers were as follows:
|
|
|
|
|
|
|
|
|
Pan American Energy LLC (see Notes 17 and 18)
|
|
|
22,796 |
|
|
|
17,413 |
|
Repsol YPF S.A.
|
|
|
6,499 |
|
|
|
4,421 |
|
Sales to other customers
|
|
|
9,505 |
|
|
|
7,617 |
|
|
|
|
|
|
|
|
|
|
|
38,800 |
|
|
|
29,451 |
|
|
|
|
|
|
|
|
F-159
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 16. |
Detail of expenses |
|
|
|
|
|
|
|
|
|
|
|
Period ended March 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Operating costs and expenses
|
|
|
|
|
|
|
|
|
Payroll and related taxes
|
|
|
10,889 |
|
|
|
8,372 |
|
Fuel, lubricants & materials
|
|
|
8,404 |
|
|
|
7,758 |
|
Third party services
|
|
|
7,038 |
|
|
|
4,695 |
|
Depreciation
|
|
|
2,933 |
|
|
|
2,129 |
|
Repairs and maintenance
|
|
|
925 |
|
|
|
1,024 |
|
Fleet expenses
|
|
|
680 |
|
|
|
884 |
|
Insurance
|
|
|
370 |
|
|
|
307 |
|
Other expenses
|
|
|
1,424 |
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
32,663 |
|
|
|
26,211 |
|
|
|
|
|
|
|
|
Net Financial Expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
688 |
|
|
|
672 |
|
Interest income
|
|
|
(4 |
) |
|
|
(1 |
) |
Other financing charges
|
|
|
818 |
|
|
|
369 |
|
Foreign currency losses
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681 |
|
|
|
1,040 |
|
|
|
|
|
|
|
|
Other (Expenses) Income
|
|
|
|
|
|
|
|
|
Commissions earned
|
|
|
|
|
|
|
1,764 |
|
Other
|
|
|
(338 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
(338 |
) |
|
|
1,801 |
|
|
|
|
|
|
|
|
Between July 2004 and December 2005, the Company earned
commissions for the assistance provided by DLS management to a
related party (see Note 17) in securing significant
contracts with certain unrelated parties. The commissions were
calculated as a percentage of the actual revenue generated by
such contracts and accrued over the term of the contracts. This
was a non-recurring income.
|
|
Note 17. |
Certain agreements 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 the periods ended March 31, 2006 and
2005 Company billed PAE a net aggregate of approximately
USD 22,796 and USD 17,413 respectively in respect of
drilling and related services provided by DLS; services rendered
to PAE represented approximately 59% of DLSs revenue in
both periods. Also under the strategic agreement, DLS borrowed
from PAE the amount of USD 5,545 during
F-160
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
2004 to purchase rigs to be used in drilling services to this
customer. This loan bears interest at a 8% p.a. rate.
In the periods ended March 31, 2006 and 2005 the Company
paid an aggregate amount of approximately USD 2,151 and
USD 1,598 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 March 31, 2006 and
as of December 31, 2005 was USD 19,111 and
USD 27,043 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. In March 2006, the Company
entered into an agreement to sell its interest in the
exploratory block to its co-owner Barrancas Sur S.A. The
transfer was made at the book value on the date of sale.
In 2006 the Company sold real property in the amount of
USD 750 to a related party.
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 the periods ended
March 2006 and 2005 the Company paid to such related parties an
aggregate amount of approximately USD 446 and USD 244
respectively, in respect of said items.
In the period ended March 31, 2005, the Company earned
commissions from Interoil Services Enterprise Limited, a related
party, in the amount of USD 1,764.
The following table summarizes the outstanding balances at each
period and year end, arising from the transactions described
above.
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Accounts receivable trade
|
|
|
10,410 |
|
|
|
5,076 |
|
Trade accounts payable and accrued expenses
|
|
|
942 |
|
|
|
1,073 |
|
Short term debt
|
|
|
6,000 |
|
|
|
5,437 |
|
Long term debt
|
|
|
13,111 |
|
|
|
21,605 |
|
Other liabilities current
|
|
|
1,579 |
|
|
|
9,027 |
|
Other liabilities non-current
|
|
|
452 |
|
|
|
782 |
|
Note 18. Commitments and
contingencies
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
F-161
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
Note 18. Commitments and
contingencies (continued)
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 59% of DLS revenue in both
periods ended March 31, 2006 and 2005, respectively. 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 derived 17% and 15% of its revenues from this
contract, in the three month periods ended on March 31,
2006 and 2005, respectively.
|
|
|
18.3. Source of drilling
fluids |
DLS purchases a wide variety of drilling fluids as well as
components made by 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.
F-162
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
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 March 31, 2006 is
USD 70 for each of the next three years. The total rental
expense associated with this lease for the periods ended
March 31, 2006 and 2005 was USD 16 and USD 17,
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
March 31, 2006. 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
|
|
|
244 |
|
|
|
244 |
|
Accounts receivable
|
|
|
21,817 |
|
|
|
21,817 |
|
Accounts payable
|
|
|
15,285 |
|
|
|
15,285 |
|
Short-term debt
|
|
|
8,468 |
|
|
|
8,468 |
|
Long-term debt
|
|
|
19,783 |
|
|
|
19,783 |
|
Other liabilities
|
|
|
2,450 |
|
|
|
2,450 |
|
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. |
|
|
|
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 are effective for
inventory costs incurred during fiscal years beginning after
June 15, 2005, and are applied prospectively. The adoption
of this statement did 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-
F-163
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 21. |
New accounting pronouncements (continued) |
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 adoption of this
statement did 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 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.
In December 2004, the FASB issued SFAS No. 123 (revised
2004), Share-Based Payment, which addresses the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services, with a primary focus on transactions in
which an entity obtains employee services in share-based payment
transactions. This Statement is a revision to Statement 123
and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance.
This Statement requires measurement of the cost of employee
services received in exchange for stock compensation based on
the grant-date fair value of the employee stock options.
Incremental compensation costs arising from subsequent
modifications of awards after the grant date must be
F-164
DLS DRILLING, LOGISTICS & SERVICES CORPORATION
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts expressed in thousands of US Dollars
|
|
Note 21. |
New accounting pronouncements (continued) |
recognized. The adoption of this Statement on January 1,
2006 did not have any effect on its financial positions or
results of operations.
On February 16, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments, which
amends SFAS No. 133 and No. 140 and allows financial
instruments that have embedded derivatives that otherwise would
require bifurcation from the host to be accounted for as a
whole, if the holder irrevocably elects to account for the whole
instrument on a fair value basis. Subsequent changes in the fair
value of the instrument would be recognized in earnings. The
provisions of this Statement effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. The adoption of this Statement is not
expected to have any material impact on the Companys
financial position or the results of its operations.
Note 22. Stockholders equity
At March 31, 2006, and December 31, 2005, 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 a 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 23. |
Subsequent events |
Dated April 27, 2006, the shareholders of the Company
signed a Stock Purchase Agreement with Allis Chalmers Energy Inc.
The terms and conditions of the proposed transactions are set
forth in the S-1 registration statement filed by Allis Chalmers
Energy Inc. with the Securities and Exchange Commission (U.S.).
F-165
UNAUDITED PRO FORMA AS ADJUSTED
CONSOLIDATED FINANCIAL INFORMATION
Introduction
Our unaudited pro forma as adjusted balance sheet as of
March 31, 2006 reflects the following transactions as if
they occurred on March 31, 2006:
|
|
|
|
|
Our acquisition of Rogers, which closed on April 3, 2006.
The following table summarizes the preliminary allocation of the
purchase price to the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition: |
|
|
|
|
|
|
Current assets
|
|
$ |
4,520 |
|
Property and equipment
|
|
|
9,886 |
|
Intangible assets
|
|
|
1,050 |
|
|
|
|
|
|
Total assets acquired
|
|
|
15,456 |
|
|
|
|
|
Current liabilities
|
|
|
1,612 |
|
Long-term debt
|
|
|
44 |
|
Other long term liabilities
|
|
|
100 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,756 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
13,700 |
|
|
|
|
|
|
|
|
We paid the purchase price with $11.3 million in cash (of
which we borrowed $5.0 million under our line of credit), a
$750,000 seller financed note and 125,285 newly issued shares of
our common stock, which had a value of $1.7 million. We
incurred approximately $341,000 of acquisition costs in
connection with the Rogers acquisition. Rogers historical
property and equipment book values were increased by
approximately $8.4 million based on third-party valuations.
Intangible assets include $900,000 assigned to patents and
$150,000 assigned to a non-compete agreement based on
third-party valuations and employment contracts. The intangibles
have a weighted-average useful life of nine years. We do not
expect any material differences from the preliminary allocation
of the purchase price and actual purchase price allocation. |
|
|
|
|
|
Our pending acquisition of DLS, for the consideration described
above under DLS Business, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers, as adjusted for this offering and
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes to fund a portion of the
cash component of the purchase price for this acquisition. The
following table summarizes the preliminary allocation of the
purchase price to the estimated fair value of the assets
expected to be acquired and liabilities expected to be assumed
at the date of acquisition: |
|
|
|
|
|
|
Current assets
|
|
$ |
45,230 |
|
Property and equipment
|
|
|
151,410 |
|
Other long-term assets
|
|
|
2 |
|
|
|
|
|
|
Total assets acquired
|
|
|
196,642 |
|
|
|
|
|
Current liabilities
|
|
|
25,578 |
|
Long-term debt
|
|
|
9,140 |
|
Other long term liabilities
|
|
|
27,752 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
62,470 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
134,172 |
|
|
|
|
|
F-166
|
|
|
We expect to incur approximately $4.6 million of
acquisition costs in connection with this acquisition. DLS
historical property and equipment values are expected to be
increased by approximately $44.7 million based on
third-party valuations. We do not expect any material
differences from the preliminary allocation of the purchase
price and actual purchase price allocation. |
Our unaudited pro forma as adjusted condensed consolidated
statement of operations for the year ended December 31,
2005 and for the three months ended March 31, 2005 reflects
the following transactions as if such transactions occurred on
January 1, 2005:
|
|
|
|
|
Our acquisition of Delta Rental Service, Inc., which closed on
April 1, 2005. The following table summarizes the
allocation of the purchase price to the estimated fair value of
the assets acquired and liabilities assumed at the date of
acquisition: |
|
|
|
|
|
|
Current assets
|
|
$ |
1,327 |
|
Property and equipment
|
|
|
5,529 |
|
Intangible assets
|
|
|
150 |
|
|
|
|
|
|
Total assets acquired
|
|
|
7,006 |
|
|
|
|
|
Current liabilities
|
|
|
633 |
|
Long-term debt
|
|
|
523 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,156 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
5,850 |
|
|
|
|
|
|
|
|
We paid the purchase price with approximately $4.5 million
in cash, newly issued shares of our common stock valued at
approximately $1.0 million and two promissory notes
totaling $350,000 in principal amount. We incurred approximately
$28,000 of acquisition costs in connection with the Delta
acquisition. Deltas historical property and equipment
values were increased by approximately $4.2 million based
on third-party valuations. The fair value of the $150,000
non-compete intangible asset was based on the related employment
contract and has a useful life of 3 years. |
|
|
|
|
|
Our acquisition of Capcoil Tubing Services, Inc., which closed
on May 2, 2005. The following table summarizes the
allocation of the purchase price to the estimated fair value of
the assets acquired and liabilities assumed at the date of
acquisition: |
|
|
|
|
|
|
Current assets
|
|
$ |
1,706 |
|
Property and equipment
|
|
|
2,908 |
|
Other long-term assets
|
|
|
11 |
|
Intangible assets
|
|
|
1,389 |
|
Goodwill
|
|
|
184 |
|
|
|
|
|
|
Total assets acquired
|
|
|
6,198 |
|
|
|
|
|
Current liabilities
|
|
|
847 |
|
Long-term debt
|
|
|
1,851 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,698 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
3,500 |
|
|
|
|
|
|
|
|
We paid the purchase price with approximately $2.7 million
in cash and newly issued shares of our common stock valued at
approximately $750,000. Approximately $26,000 of acquisition
costs in connection with the Capcoil acquisition. Capcoils
historical property and equipment book values were increased by
approximately $1.0 million based on third-party valuations.
Intangible assets include $1.0 million assigned to
non-compete agreements included in employment |
F-167
|
|
|
contracts and $364,000 assigned to customer lists based on
third-party valuations. The intangibles have a weighted-average
useful life of 5 years. |
|
|
|
|
|
Our acquisition of the assets of W.T. Enterprises, Inc., which
closed on July 11, 2005. The following table summarizes the
allocation of the purchase price to the estimated fair value of
the assets acquired at the date of acquisition: |
|
|
|
|
|
|
Property and equipment
|
|
$ |
4,500 |
|
Intangible assets
|
|
|
1,481 |
|
Goodwill
|
|
|
82 |
|
|
|
|
|
|
Total assets acquired
|
|
$ |
6,063 |
|
|
|
|
|
|
|
|
We paid the purchase price with borrowings under our line of
credit. We incurred approximately $63,000 of acquisition costs
in connection with the W.T. Enterprises, Inc. acquisition. W.T.
Enterprises, Inc.s historical property and equipment book
values were increased by approximately $3.0 million based
on third-party valuations. Intangible assets include $600,000
assigned to non-compete agreements and $881,000 assigned to
customer lists based on third-party valuations. The intangibles
have a weighted-average useful life of 8 years. |
|
|
|
|
|
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,
which closed on July 11, 2005. We paid the purchase price
with $7.1 million in cash from borrowings under our line of
credit and the issuance of a new $4.0 million 5%
subordinated note. |
|
|
|
Our acquisition of Specialty, which closed on January 18,
2006. The following table summarizes the allocation of the
purchase price to the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition: |
|
|
|
|
|
|
Accounts receivable
|
|
$ |
7,167 |
|
Other current assets
|
|
|
425 |
|
Property and equipment
|
|
|
90,540 |
|
|
|
|
|
|
Total assets acquired
|
|
|
98,132 |
|
|
|
|
|
Current liabilities
|
|
|
2,058 |
|
Long-term debt
|
|
|
74 |
|
|
|
|
|
|
Total liabilities assumed
|
|
|
2,132 |
|
|
|
|
|
|
Net assets acquired
|
|
$ |
96,000 |
|
|
|
|
|
|
|
|
We paid the purchase price with net proceeds from our issuance
of 9% senior notes in January 2006. We incurred approximately
$453,000 of acquisition costs in connection with the Specialty
acquisition. Specialtys historical property and equipment
book values were increased by approximately $71.5 million
based on third-party valuations. |
|
|
|
|
|
our issuance of $160.0 million aggregate principal amount
of 9% senior notes in January 2006; |
|
|
|
our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash (of which we borrowed
$5.0 million under our debt facility), 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
above under DLS Business, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers as the stock component of the
purchase price for DLS; |
F-168
|
|
|
|
|
our proposed sale of an additional $80.0 million aggregate
principal amount of our 9% senior notes in order to fund a
portion of the cash component of the purchase price for the DLS
acquisition; and |
|
|
|
|
our issuance of an additional 2.5 million shares of our
common stock as a result of this offering. The pro forma treats
the shares as having been issued at the August 7, 2006
stock price of $14.56, the basis for pricing this offering. |
|
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.
Our unaudited pro forma as adjusted condensed consolidated
statement of operations for the three months ended
March 31, 2006 reflects the following transactions as if
such transactions occurred on January 1, 2005:
|
|
|
|
|
our acquisition of Rogers, which closed on April 3, 2006,
for $11.3 million in cash (of which we borrowed
$5.0 million under our debt facility), 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
above under DLS Business, including the
assumption of $9.1 million of DLS currently existing
indebtedness and the issuance of 2.5 million shares of our
common stock to the sellers as the stock component of the
purchase price therefor; |
|
|
|
the proposed sale of an additional $80.0 million aggregate
principal amount of our senior notes in connection with the
pending DLS acquisition; and |
|
|
|
|
our issuance of an additional 2.5 million shares of our
common stock as a result of this offering. The pro forma treats
the shares as having been issued at the August 7, 2006
stock price of $14.56, the basis for pricing this offering. |
|
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.
F-169
ALLIS-CHALMERS ENERGY INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL
POSITION
AS OF MARCH 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allis- | |
|
|
|
Rogers | |
|
|
|
DLS | |
|
Financing | |
|
Allis- | |
|
|
Chalmers | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Pro Forma | |
|
Pro Forma | |
|
Chalmers | |
|
|
Consolidated | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
10,661 |
|
|
$ |
583 |
|
|
$ |
(6,300 |
)AA |
|
$ |
244 |
|
|
$ |
(97,772 |
)AB |
|
$ |
108,080 |
AC |
|
$ |
15,496 |
|
Trade receivables, net
|
|
|
38,239 |
|
|
|
1,681 |
|
|
|
|
|
|
|
21,817 |
|
|
|
|
|
|
|
|
|
|
|
61,737 |
|
Inventories
|
|
|
7,777 |
|
|
|
2,105 |
|
|
|
|
|
|
|
16,004 |
|
|
|
|
|
|
|
|
|
|
|
25,886 |
|
Prepaids and other
|
|
|
875 |
|
|
|
151 |
|
|
|
|
|
|
|
7,165 |
|
|
|
|
|
|
|
|
|
|
|
8,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
57,552 |
|
|
|
4,520 |
|
|
|
(6,300 |
) |
|
|
45,230 |
|
|
|
(97,772 |
) |
|
|
108,080 |
|
|
|
111,310 |
|
Property and equipment, net
|
|
|
174,329 |
|
|
|
1,483 |
|
|
|
8,403 |
AD |
|
|
109,310 |
|
|
|
42,100 |
AD |
|
|
|
|
|
|
335,625 |
|
Goodwill
|
|
|
12,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,417 |
|
Other intangibles, net
|
|
|
6,399 |
|
|
|
113 |
|
|
|
937 |
AE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,449 |
|
Debt issuance costs, net
|
|
|
6,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000 |
AF |
|
|
8,414 |
|
Other assets
|
|
|
719 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$ |
257,830 |
|
|
$ |
6,116 |
|
|
$ |
3,040 |
|
|
$ |
154,542 |
|
|
$ |
(55,672 |
) |
|
$ |
110,080 |
|
|
$ |
475,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
3,144 |
|
|
$ |
360 |
|
|
$ |
(360 |
) AG |
|
$ |
8,468 |
|
|
$ |
(6,000 |
)AG |
|
$ |
|
|
|
$ |
5,612 |
|
Trade accounts payable
|
|
|
8,903 |
|
|
|
944 |
|
|
|
|
|
|
|
15,285 |
|
|
|
|
|
|
|
|
|
|
|
25,132 |
|
Accrued employee benefits
|
|
|
2,064 |
|
|
|
32 |
|
|
|
|
|
|
|
8,295 |
|
|
|
|
|
|
|
|
|
|
|
10,391 |
|
Accrued interest
|
|
|
3,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053 |
|
Accrued expenses
|
|
|
6,505 |
|
|
|
205 |
|
|
|
431 |
AH |
|
|
1,998 |
|
|
|
|
|
|
|
|
|
|
|
9,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
23,669 |
|
|
|
1,541 |
|
|
|
71 |
|
|
|
34,046 |
|
|
|
(6,000 |
) |
|
|
|
|
|
|
53,327 |
|
Accrued postretirement benefit obligations
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
319 |
|
Long-term debt, net of current maturities
|
|
|
165,999 |
|
|
|
433 |
|
|
|
5,361 |
AI |
|
|
19,783 |
|
|
|
(13,111 |
)AI |
|
|
76,000 |
AJ |
|
|
254,465 |
|
Other long-term liabilities
|
|
|
631 |
|
|
|
|
|
|
|
100 |
AK |
|
|
1,179 |
|
|
|
26,573 |
AL |
|
|
|
|
|
|
28,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
190,618 |
|
|
|
1,974 |
|
|
|
5,532 |
|
|
|
55,008 |
|
|
|
7,462 |
|
|
|
76,000 |
|
|
|
336,594 |
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
172 |
|
|
|
24 |
|
|
|
(23 |
)AM |
|
|
42,963 |
|
|
|
(42,938 |
)AM |
|
|
25 |
AN |
|
|
223 |
|
Capital in excess of par value
|
|
|
60,800 |
|
|
|
|
|
|
|
1,649 |
AM |
|
|
31,606 |
|
|
|
4,769 |
AM |
|
|
34,055 |
AN |
|
|
132,879 |
|
Treasury stock, at cost
|
|
|
|
|
|
|
(4 |
) |
|
|
4 |
AM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
6,240 |
|
|
|
4,122 |
|
|
|
(4,122 |
)AM |
|
|
24,965 |
|
|
|
(24,965 |
)AM |
|
|
|
|
|
|
6,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
67,212 |
|
|
|
4,142 |
|
|
|
(2,492 |
) |
|
|
99,534 |
|
|
|
(63,134 |
) |
|
|
34,080 |
|
|
|
139,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$ |
257,830 |
|
|
$ |
6,116 |
|
|
$ |
3,040 |
|
|
$ |
154,542 |
|
|
$ |
(55,672 |
) |
|
$ |
110,080 |
|
|
$ |
475,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma consolidated financial
statements.
F-170
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allis- | |
|
|
|
Rogers | |
|
|
|
DLS | |
|
|
|
Allis- | |
|
|
Chalmers | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Purchase | |
|
Offering | |
|
Chalmers | |
|
|
Consolidated | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
47,028 |
|
|
$ |
2,085 |
|
|
$ |
|
|
|
$ |
38,800 |
|
|
|
|
|
|
|
|
|
|
$ |
87,913 |
|
Cost of revenues
|
|
|
30,445 |
|
|
|
1,105 |
|
|
|
121 |
A |
|
|
32,663 |
|
|
|
(409 |
) B |
|
|
|
|
|
|
63,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,583 |
|
|
|
980 |
|
|
|
(121 |
) |
|
|
6,137 |
|
|
|
409 |
|
|
|
|
|
|
|
23,988 |
|
General and administrative expense
|
|
|
7,950 |
|
|
|
820 |
|
|
|
33 |
C |
|
|
1,066 |
|
|
|
|
|
|
|
63 |
D |
|
|
9,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
8,633 |
|
|
|
160 |
|
|
|
(154 |
) |
|
|
5,071 |
|
|
|
409 |
|
|
|
(63 |
) |
|
|
14,056 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Interest expense
|
|
|
(3,628 |
) |
|
|
|
|
|
|
(109 |
)E |
|
|
(1,681 |
) |
|
|
546 |
F |
|
|
(1,750 |
) G |
|
|
(6,622 |
) |
|
Other
|
|
|
25 |
|
|
|
(7 |
) |
|
|
|
|
|
|
(338 |
) |
|
|
|
|
|
|
|
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
5,030 |
|
|
|
155 |
|
|
|
(263 |
) |
|
|
3,052 |
|
|
|
955 |
|
|
|
(1,813 |
) |
|
|
7,116 |
|
Taxes
|
|
|
(607 |
) |
|
|
|
|
|
|
|
H |
|
|
(1,453 |
) |
|
|
51 |
T |
|
|
|
H |
|
|
(2,009 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
4,423 |
|
|
|
155 |
|
|
|
(263 |
) |
|
|
1,599 |
|
|
|
1,006 |
|
|
|
(1,813 |
) |
|
|
5,107 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
2,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
4,423 |
|
|
$ |
155 |
|
|
$ |
(263 |
) |
|
$ |
3,974 |
|
|
$ |
1,006 |
|
|
$ |
(1,813 |
) |
|
$ |
7,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.21 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,105 |
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
22,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
19,113 |
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
24,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-171
ALLIS-CHALMERS ENERGY INC AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 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 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
19,334 |
|
|
$ |
821 |
|
|
$ |
|
|
|
$ |
1,534 |
|
|
$ |
|
|
|
$ |
927 |
|
|
$ |
|
|
|
$ |
|
|
Cost of revenues
|
|
|
13,699 |
|
|
|
211 |
|
|
|
82 |
A |
|
|
959 |
|
|
|
99 |
A |
|
|
623 |
|
|
|
(9 |
)A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,635 |
|
|
|
610 |
|
|
|
(82 |
) |
|
|
575 |
|
|
|
(99 |
) |
|
|
304 |
|
|
|
9 |
|
|
|
|
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
3,388 |
|
|
|
985 |
|
|
|
|
|
|
|
281 |
|
|
|
28 |
K |
|
|
151 |
|
|
|
23 |
K |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
2,247 |
|
|
|
(375 |
) |
|
|
(82 |
) |
|
|
294 |
|
|
|
(127 |
) |
|
|
153 |
|
|
|
(14 |
) |
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(521 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
10 |
R |
|
|
Other
|
|
|
148 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
1,874 |
|
|
|
(267 |
) |
|
|
(82 |
) |
|
|
274 |
|
|
|
(127 |
) |
|
|
144 |
|
|
|
(14 |
) |
|
|
10 |
|
Minority interest
|
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
L |
Taxes
|
|
|
(163 |
) |
|
|
(142 |
) |
|
|
142 |
H |
|
|
(101 |
) |
|
|
101 |
H |
|
|
(45 |
) |
|
|
45 |
H |
|
|
|
H |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
1,567 |
|
|
$ |
(409 |
) |
|
$ |
60 |
|
|
$ |
173 |
|
|
$ |
(26 |
) |
|
$ |
99 |
|
|
$ |
31 |
|
|
$ |
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,632 |
|
|
|
|
|
|
|
55 |
P |
|
|
|
|
|
|
62 |
P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,695 |
|
|
|
|
|
|
|
55 |
P |
|
|
|
|
|
|
62 |
P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty | |
|
|
|
|
|
Rogers | |
|
|
|
DLS | |
|
|
|
Allis- | |
|
|
Specialty | |
|
Purchase | |
|
Debt | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Purchase | |
|
Offering | |
|
Chalmers | |
|
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
5,929 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,450 |
|
|
$ |
|
|
|
$ |
29,451 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
59,446 |
|
Cost of revenues
|
|
|
1,380 |
|
|
|
1,391 |
A |
|
|
|
|
|
|
810 |
|
|
|
121 |
A |
|
|
26,211 |
|
|
|
169 |
B |
|
|
|
|
|
|
45,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,549 |
|
|
|
(1,391 |
) |
|
|
|
|
|
|
640 |
|
|
|
(121 |
) |
|
|
3,240 |
|
|
|
(169 |
) |
|
|
|
|
|
|
13,700 |
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
1,710 |
|
|
|
(97 |
)M |
|
|
175 |
N |
|
|
662 |
|
|
|
33 |
K |
|
|
984 |
|
|
|
|
|
|
|
63 |
D |
|
|
8,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
2,839 |
|
|
|
(1,294 |
) |
|
|
(175 |
) |
|
|
(22 |
) |
|
|
(154 |
) |
|
|
2,256 |
|
|
|
(169 |
) |
|
|
(63 |
) |
|
|
5,314 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
Interest expense
|
|
|
(51 |
) |
|
|
(2,160 |
)S |
|
|
(919 |
)O |
|
|
|
|
|
|
(109 |
)E |
|
|
(1,040 |
) |
|
|
530 |
F |
|
|
(1,750 |
) G |
|
|
(6,050 |
) |
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
1,801 |
|
|
|
|
|
|
|
|
|
|
|
2,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
2,813 |
|
|
|
(3,454 |
) |
|
|
(1,094 |
) |
|
|
270 |
|
|
|
(263 |
) |
|
|
3,017 |
|
|
|
361 |
|
|
|
(1,813 |
) |
|
|
1,649 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
|
|
|
|
|
H |
|
|
|
H |
|
|
|
|
|
|
|
H |
|
|
(739 |
) |
|
|
(443 |
) T |
|
|
|
H |
|
|
(1,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
2,813 |
|
|
$ |
(3,454 |
) |
|
$ |
(1,094 |
) |
|
$ |
270 |
|
|
$ |
(263 |
) |
|
$ |
2,278 |
|
|
$ |
(82 |
) |
|
$ |
(1,813 |
) |
|
$ |
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
18,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
19,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-173
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 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
105,344 |
|
|
$ |
821 |
|
|
$ |
|
|
|
$ |
2,161 |
|
|
$ |
|
|
|
$ |
2,057 |
|
|
$ |
|
|
|
$ |
|
|
Cost of revenues
|
|
|
74,763 |
|
|
|
211 |
|
|
|
82 |
A |
|
|
1,458 |
|
|
|
132 |
A |
|
|
1,331 |
|
|
|
187 |
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,581 |
|
|
|
610 |
|
|
|
(82 |
) |
|
|
703 |
|
|
|
(132 |
) |
|
|
726 |
|
|
|
(187 |
) |
|
|
|
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
17,363 |
|
|
|
985 |
|
|
|
|
|
|
|
421 |
|
|
|
28 |
K |
|
|
342 |
|
|
|
75 |
K |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
13,218 |
|
|
|
(375 |
) |
|
|
(82 |
) |
|
|
282 |
|
|
|
(160 |
) |
|
|
384 |
|
|
|
(262 |
) |
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,397 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
21 |
R |
|
|
Other
|
|
|
186 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
9,007 |
|
|
|
(267 |
) |
|
|
(82 |
) |
|
|
256 |
|
|
|
(160 |
) |
|
|
367 |
|
|
|
(262 |
) |
|
|
21 |
|
Minority interest
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
488 |
L |
Taxes
|
|
|
(1,344 |
) |
|
|
(142 |
) |
|
|
142 |
H |
|
|
(87 |
) |
|
|
87 |
H |
|
|
(111 |
) |
|
|
111 |
H |
|
|
|
H |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
7,175 |
|
|
|
(409 |
) |
|
|
60 |
|
|
|
169 |
|
|
|
(73 |
) |
|
|
256 |
|
|
|
(151 |
) |
|
|
509 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributed to common shares
|
|
$ |
7,175 |
|
|
$ |
(409 |
) |
|
$ |
60 |
|
|
$ |
169 |
|
|
$ |
(73 |
) |
|
$ |
256 |
|
|
$ |
(151 |
) |
|
$ |
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,832 |
|
|
|
|
|
|
|
55 |
P |
|
|
|
|
|
|
62 |
P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,238 |
|
|
|
|
|
|
|
55 |
P |
|
|
|
|
|
|
62 |
P |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty | |
|
|
|
|
|
Rogers | |
|
|
|
DLS | |
|
|
|
Allis- | |
|
|
Specialty | |
|
Purchase | |
|
Debt | |
|
Rogers | |
|
Purchase | |
|
DLS | |
|
Purchase | |
|
Offering | |
|
Chalmers | |
|
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Historical | |
|
Adjustments | |
|
Adjustments | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
32,709 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,390 |
|
|
$ |
|
|
|
$ |
129,849 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
281,331 |
|
Cost of revenues
|
|
|
8,550 |
|
|
|
5,564 |
A |
|
|
|
|
|
|
4,372 |
|
|
|
499 |
A |
|
|
113,351 |
|
|
|
674 |
B |
|
|
|
|
|
|
211,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,159 |
|
|
|
(5,564 |
) |
|
|
|
|
|
|
4,018 |
|
|
|
(499 |
) |
|
|
16,498 |
|
|
|
(674 |
) |
|
|
|
|
|
|
70,157 |
|
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expense
|
|
|
7,232 |
|
|
|
(386 |
)Q |
|
|
700 |
N |
|
|
2,570 |
|
|
|
138 |
K |
|
|
3,933 |
|
|
|
|
|
|
|
180 |
D |
|
|
33,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
16,927 |
|
|
|
(5,178 |
) |
|
|
(700 |
) |
|
|
1,448 |
|
|
|
(637 |
) |
|
|
12,565 |
|
|
|
(674 |
) |
|
|
(180 |
) |
|
|
36,576 |
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
192 |
|
|
|
Interest expense
|
|
|
(185 |
) |
|
|
(8,640 |
)S |
|
|
(1,363 |
)O |
|
|
|
|
|
|
(438 |
)E |
|
|
(5,394 |
) |
|
|
2,145 |
F |
|
|
(7,000 |
) G |
|
|
(25,305 |
) |
|
|
Other
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
7,127 |
|
|
|
|
|
|
|
|
|
|
|
7,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
16,950 |
|
|
|
(13,818 |
) |
|
|
(2,063 |
) |
|
|
1,782 |
|
|
|
(1,075 |
) |
|
|
14,298 |
|
|
|
1,471 |
|
|
|
(7,180 |
) |
|
|
19,245 |
|
Minority interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
|
|
|
|
|
H |
|
|
|
H |
|
|
|
|
|
|
|
H |
|
|
(3,547 |
) |
|
|
(1,972 |
)T |
|
|
|
H |
|
|
(6,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
16,950 |
|
|
|
(13,818 |
) |
|
|
(2,063 |
) |
|
|
1,782 |
|
|
|
(1,075 |
) |
|
|
10,751 |
|
|
|
(501 |
) |
|
|
(7,180 |
) |
|
|
12,382 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
|
|
|
|
(4,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
16,950 |
|
|
$ |
(13,818 |
) |
|
$ |
(2,063 |
) |
|
$ |
1,782 |
|
|
$ |
(1,075 |
) |
|
$ |
6,613 |
|
|
$ |
(501 |
) |
|
$ |
(7,180 |
) |
|
$ |
8,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.62 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.57 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
20,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
I |
|
|
|
|
|
|
2,500 |
I |
|
|
2,500 |
J |
|
|
21,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-175
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 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. |
|
AB)
|
|
Reflects the cash needed to complete the acquisition. |
|
AC)
|
|
Reflects the cash raised from this offering and the proposed
offering, issuance and sale of additional senior notes. |
|
AD)
|
|
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. |
|
AE)
|
|
Intangibles associated with the acquisition of Rogers. |
|
AF)
|
|
Fees and expenses related to the proposed offering, issuance and
sale of an additional $80.0 million of senior notes. |
|
AG)
|
|
Reflects the repayment of debt of the acquisitions prior to the
acquisition. |
|
AH)
|
|
Reflects the current portion of the non-compete payment to be
paid to the seller and acquisition expenses. |
|
AI)
|
|
Reflects the net borrowing to effect the acquisition Rogers and
the pending acquisition of DLS. We borrowed $5.0 million
for the Rogers acquisition in addition to the $750,000 note
issued to the seller, offset by debt repayments on both
acquisitions by the seller prior to closing. |
|
AJ)
|
|
Reflects the proceeds of the proposed sale of an additional
$80.0 million of senior notes and the repayment of a
$4.0 million subordinated note. |
|
AK)
|
|
Reflects the long-term portion of non-compete payments to the
sellers. |
|
AL)
|
|
Reflects deferred taxes on the acquisition due to differences
between the book and tax basis of acquired assets. |
|
AM)
|
|
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 (in each case as the stock component of the purchase
price of such transaction). |
|
AN)
|
|
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. |
|
B) |
|
Reflects the impact on depreciation expense as a result of the
step-up in basis of fixed assets and a longer estimated life on
DLS assets. |
|
C) |
|
Reflects the increase in amortization due to the increase in
other intangible assets in connection with the acquisition of
Rogers. |
|
D) |
|
Reflects the amortization on the financing fees related to the
proposed offering, issuance and sale of an additional
$80.0 million of senior notes. |
F-176
ALLIS-CHALMERS ENERGY INC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
|
|
|
E) |
|
Reflects the interest expense related to cash borrowed to affect
the acquisitions. In conjunction with the Rogers acquisition, we
issued a $750,000 note to the seller bearing interest at 5%
fixed and we borrowed $5.0 million under our line of
credit. We assumed an 8% interest rate for this
$5.0 million borrowing which is our current borrowing rate
under our committed line of credit. Each 0.125% of change in
this interest rate would affect interest expense by
$6,250 per annum. |
|
F) |
|
Reflects the elimination of interest expense due to historical
debt not being assumed or replaced. Approximately
$9.1 million of existing debt for DLS will remain
outstanding after the acquisition. The interest rate assumed on
the $9.1 million of DLS debt was 6.21%, which was the
actual average interest rate on this debt as of March 31,
2006. Each 0.125% change in this interest rate would affect
interest expense by $11,430 per annum. The interest expense
category for DLS historical financials also includes other
bank fees of approximately $993,000 and $368,000 at
March 31, 2006 and 2005, respectively and $2.7 million
at December 31, 2005. |
|
G) |
|
Reflects the interest expense related to the proposed offering,
issuance and sale of an additional $80.0 million of senior
notes offset by reduction of interest on existing debt that will
be repaid in conjunction with the offerings. We will repay our
$4.0 million, 5% subordinated note with proceeds of the
senior notes offering. We assumed an interest rate of 9% on the
proposed sale of an additional $80.0 million in senior
notes, which is equal to the interest rate obtained for the
$160.0 million of senior notes issued in January 2006. |
|
H) |
|
A statutory tax rate of 35% was applied to the adjustments, but
since Allis-Chalmers has a net operating loss carryforward no
tax expense was recorded. In addition, the Allis-Chalmers net
operating loss position offset the historical tax liabilities of
acquired companies. The net operating loss carryforward, after
the historical results for Allis-Chalmers for the year ended
December 31, 2005, is approximately $15.4 million. |
|
I) |
|
Reflects the issuance of shares of our common stock as part of
the acquisition price for Rogers and DLS. The Rogers acquisition
included consideration of $1,650,000 in stock which equated to
125,285 shares of our common stock. The stock component of the
purchase price for the pending DLS acquisition is comprised of
2.5 million shares of our common stock. |
|
|
J) |
|
Reflects the issuance of an additional 2.5 million shares
of our common stock as a result of this offering. The pro forma
treats the shares as having been issued at the August 7,
2006 stock price of $14.56, the basis for pricing this offering. |
|
|
K) |
|
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. |
|
L) |
|
Reflects the elimination of the 45% minority interest position
of M-I. |
|
M) |
|
Reflects decreased rent expense of $97,000 that will result from
the acquisition of Specialty. We entered into a new lease for
the Specialty yard with the seller. Entering into this lease was
required by the purchase agreement and was a condition to the
closing of the Specialty acquisition. |
F-177
ALLIS-CHALMERS ENERGY INC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (Continued)
|
|
|
N) |
|
Reflects the amortization on the financing fees related to the
$160.0 million senior notes offering in January 2006. |
|
O) |
|
Reflects the interest expense related to the proceeds of the
$160.0 million senior notes offering in January 2006 in
excess of cash needed for the Specialty acquisition. The senior
notes have a fixed interest rate of 9%. |
|
P) |
|
Reflects the issuance of shares of our common stock as part of
the acquisition price for Delta, and Capcoil. The Delta
acquisition included consideration of $1.0 million in our
common stock, the Capcoil acquisition included consideration of
$765,000 in common stock. |
|
Q) |
|
Reflects decreased rent expense of $386,000 that will result
from the acquisition of Specialty. We entered into a new lease
for the Specialty yard with the seller. Entering into this lease
was required by the purchase agreement and was a condition to
the closing of the Specialty acquisition. |
|
R) |
|
To acquire M-Is
45% interest in AirComp we issued a new note for
$4.0 million to replace a note for $4.8 million, both
notes bore interest at 5.0%. |
|
S) |
|
Reflects the interest expense on the $96.0 million of the
$160.0 million of senior notes issued in January 2006
used to complete the acquisition of Specialty. The senior notes
have a fixed interest rate of 9%. |
|
T) |
|
Income taxes for DLS were computed at the Argentinian statutory
rate of 35%.
Allis-Chalmers has no
net operating losses in Argentina to offset the tax liability. |
F-178
2,500,000 shares
Allis-Chalmers Energy Inc.
Common Stock
PROSPECTUS
RBC Capital
Markets
|
|
A.G. Edwards |
Johnson Rice & Company L.L.C. |
,
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
|
|
$ |
9,844 |
|
NASD filing fee
|
|
|
9,703 |
|
American Stock Exchange supplemental listing application fee
|
|
|
30,000 |
|
Accounting fees and expenses
|
|
|
50,000 |
|
Legal fees and expenses
|
|
|
200,000 |
|
Printing and engraving expenses
|
|
|
150,000 |
|
Transfer agent fees and expenses
|
|
|
25,000 |
|
Miscellaneous fees and expenses
|
|
|
50,000 |
|
|
|
|
|
|
Total
|
|
$ |
524,547 |
|
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 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
II-1
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
Securities Act within 270 days following January 18,
2006. If we fail to comply with certain obligations
II-2
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 June 2004, we issued a warrant to purchase 16,000 shares
of our common stock to director Jeffrey Freedman and a warrant
to purchase 4,000 shares of stock to Capital Growth
Financial LLC, each at an exercise price of $4.65 per share
in consideration of financial advisory services to be provided
by Mr. Freedman pursuant to a consulting agreement.
Mr. Freedman exercised his warrant 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, 46,776,
266,666 and 266,667 shares, respectively, were exercised
between September 2005 and March 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 amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
city of Houston, State of Texas, on this 8th day of August,
2006.
|
|
|
ALLIS-CHALMERS ENERGY INC. |
|
|
|
|
|
Victor M. Perez |
|
Chief Financial Officer |
Pursuant to requirements of the Securities Act, this amendment
has been signed on August 8, 2006 by the following persons
in the capacities indicated.
|
|
|
*
Munawar
H. Hidayatallah
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer) |
|
*
David
Wilde
President and Chief Operating Officer |
|
/s/ Victor M. Perez
Victor
M. Perez
Chief Financial Officer
(Principal Financial Officer) |
|
*
Bruce
Sauers
Chief Accounting Officer
(Principal Accounting Officer) |
|
*
Jeffrey
R. Freedman
Director |
|
*
Victor
F. Germack
Director |
|
*
Thomas
E. Kelly
Director |
|
John
E. McConnaughy, Jr.
Director |
|
*
Jens
H. Mortensen, Jr.
Director |
|
*
Robert
E. Nederlander
Director |
|
*
Leonard
Toboroff
Director |
|
*
Thomas
O. Whitener, Jr.
Director |
|
|
*By: /s/ Victor M.
Perez
Attorney-in-fact |
|
|
II-6
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. (incorporated by reference to the Registrants
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006) |
|
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). |
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
4 |
.5 |
|
2003 Incentive Stock Plan (incorporated by reference to
Registrants Annual Report on Form 10-K for the year
ended December 31, 2002). |
|
4 |
.6 |
|
Form of Option Certificate issued pursuant to 2003 Incentive
Stock Plan (incorporated by reference to Registrants
Annual Report on Form 10-K for the year ended
December 31, 2002). |
|
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). |
|
10 |
.36 |
|
Stock Purchase Agreement dated December 20, 2005, by and
between Allis-Chalmers Energy, Inc. and Joe Van Matie
(incorporated by reference to the Registrants Annual
Report on Form 10-K filed on March 22, 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 (included in Exhibit 5.1). |
|
24 |
.1** |
|
Power of Attorney (previously filed on the signature page of
this registration statement). |
|
|
|
** |
Previously filed. |
|
|
|
Compensation plan or arrangement. |