SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM _______________ TO _______________
Commission file number 1-2199
ALLIS-CHALMERS CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 39-0126090
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7660 Woodway, Suite 200, Houston, Texas 77063
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(Address of principal executive offices) (Zip code)
(713) 369-0550
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
At May 14, 2002 were 19,545,840 shares of Common Stock outstanding.
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
Three Months Ended
March 31
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2002 2001
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Sales $ 3,253 $ 606
Cost of sales 2,614 469
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Gross margin 639 137
Marketing and administrative expense 840 287
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Income/(loss) from operations (201) (150)
Other income (expense)
Interest income 30 --
Interest expense (423) (94)
Other 1 (26)
Minority interest (17) --
------------ ------------
Net income/(loss) before income taxes (610) (270)
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Provision for income taxes (30) --
Net income/(loss) (640) (270)
------------ ------------
Preferred stock dividend (58) --
Net income/(loss) attributed to common shares $ (698) $ (270)
============ ============
Net income/(loss) per common share $ (.04) $ (.06)
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Weighted average number of common shares
outstanding 16,274 4,500
============ ============
This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
2
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
March 31, December 31,
2002 2001
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Assets
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Cash and cash equivalents $ 244 $ 152
Trade receivables, net 3,516 973
Due from related party 38 61
Other current assets 1,462 153
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Total current assets 5,260 1,339
Property, plant and equipment, net 19,771 4,246
Goodwill and other intangibles, net 11,040 5,067
Debt issuance costs, net 694 180
Lease deposit 701 701
Note receivable 791 791
Other assets 26 141
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Total Assets $ 38,283 $ 12,465
========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current maturities of long-term debt $ 2,234 $ 1,023
Trade accounts payable 902 298
Income tax payable 50 --
Accrued employee benefits and payroll taxes 628 851
Accrued interest 245 176
Accrued expenses 2,616 610
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Total current liabilities 6,675 2,958
Accrued postretirement benefit obligations 815 824
Long-term debt, less current portion 18,020 6,833
Deferred income tax 64 --
Other long-term liabilities 1,352 600
Minority interest 1,851 --
Redeemable warrant 1,500 600
Redeemable convertible preferred stock 3,558 --
Common shareholders' equity:
Common stock, $.15 par value (110,000,000 shares
authorized; 19,545,840 issued and outstanding at
March 31, 2002 and 11,588,128 issued and
outstanding at December 31, 2001) 2,932 1,738
Capital in excess of par value 7,418 4,716
Accumulated deficit (5,902) (5,204)
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Total shareholders' equity 4,448 1,250
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Total liabilities and shareholders' equity $ 38,283 $ 12,465
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This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
3
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended
March 31
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2002 2001
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Cash flows from operating activities:
Net (loss) $ (640) $ (270)
Adjustments to reconcile net (loss) to net cash
(used) by operating activities:
Depreciation expense 381 51
Amortization expense 110 20
Minority interest 17 --
Amortization of discount on debt 100 --
Changes in operating assets and liabilities:
Accounts receivables, net 67 (504)
Due from related party 23 --
Other current assets 24 --
Lease deposit -- (701)
Other assets 126 207
Accrued interest payable (31) --
Accounts payable (251) 478
Accrued expenses (43) --
Accrued employee benefits and payroll taxes (400) --
Other long-term liabilities 136 --
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Net cash (used) by operating activities (381) (719)
Cash flows from investing activities:
Acquisition of MCA, net of cash acquired -- (9,813)
Acquisition of Jens, net of cash acquired (7,762) --
Acquisition of Strata, net of cash acquired (177) --
Capital expenditures (54) (51)
Proceeds from sale of equipment -- 3,549
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Net cash (used) by investing activities (7,993) (6,315)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of repayments 9,005 5,550
Proceeds from issuance of common stock -- 1,838
Debt issuance costs (539) (153)
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Net cash provided by financing activities 8,466 7,235
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Net increase in cash and cash equivalents 92 201
Cash and cash equivalents at beginning of period 152 4
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Cash and cash equivalents at end of period $ 244 $ 205
============ ============
Supplemental information - interest paid $ 424 $ 95
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4
ALLIS-CHALMERS CORPORATION AND CONSOLIDATED SUBSIDIARIES
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STATEMENTS OF CASH FLOWS (CONTINUED)
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Non-cash investing and financing transactions in connection
with the acquisition of Mountain Air assets:
Fair value of net assets acquired $ (9,970)
Goodwill and other intangibles (2,656)
Note payable to prior owner 2,200
Other adjustments 579
---------
Net cash paid to acquire subsidiary $ (9,847)
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Non-cash investing and financing transactions in connection
with the acquisition of Jens' Oilfield Service, Inc.:
Fair value of net assets acquired $(11,204)
Goodwill and other intangibles (1,235)
Note payable to prior owner 4,000
Value of common stock issued 677
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Net cash paid to acquire subsidiary $ (7,762)
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Non-cash investing and financing transactions in connection
with the acquisition of Strata Directional Technology, Inc.
Fair value of net assets acquired $ (2,073)
Goodwill and other intangibles (4,823)
Issuance of preferred stock 3,500
Value of common stock issued 3,219
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Net cash paid to acquire subsidiary $ (177)
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This interim statement is unaudited.
The accompanying Notes are an integral part of the Financial Statements.
5
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SMUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This interim financial data should be read in conjunction with the consolidated
financial statements and related notes, management's discussion and analysis and
other information included in Allis-Chalmers Corporation's ("Allis-Chalmers" or
the "Company") Annual Report on Form 10-K for the year ended December 31, 2001,
and the Current Reports on Forms 8-K and 8-K/A filed on February 21, 2002 and
April 22, 2002, respectively.
All adjustments considered necessary for a fair presentation of the results of
operations have been included in the unaudited financial statements. The results
of operations for any interim period are not necessarily indicative of the
Company's operating results for a full year.
ORGANIZATION OF BUSINESS
On May 9, 2001, OilQuip Rentals, Inc., an oil and gas rental company
("OilQuip"), merged into a subsidiary of Allis-Chalmers Corporation
("Allis-Chalmers" or the "Company"). In the merger, all of OilQuip's outstanding
common stock was converted into 400,000 shares of Allis-Chalmers' common stock
and the right to receive an additional 9,600,000 shares of Allis-Chalmers'
common stock upon the filing of an amendment to the Amended and Restated
Certificate of Incorporation ("Certificate") to authorize the issuance of such
shares. That authorization and issuance occurred on October 15, 2001.
For legal purposes, Allis-Chalmers acquired OilQuip, the parent company of
Mountain Compressed Air, Inc. ("MCA"). However, for accounting purposes OilQuip
was treated as the acquiring company in a reverse acquisition of Allis-Chalmers.
The financial statements prior to the merger, including those for the period in
the three months ended March 31, 2001, are the financial statements of OilQuip.
OilQuip was incorporated on February 4, 2000 to find and acquire targets to
operate as subsidiaries.
During the period February 4, 2000 (Inception) to February 6, 2001, OilQuip had
been in the development stage. OilQuip's activities through February 6, 2001
consisted of developing its business plan, raising capital and negotiating with
potential acquisition targets.
On February 6, 2001, OilQuip, through its subsidiary, MCA, acquired certain
assets of Mountain Air Drilling Service Co., Inc. ("Mountain Air"), whose
business consists of providing equipment and trained personnel in the four
corner areas of the southwestern United States. MCA primarily provides
compressed air equipment and trained operators to companies in the business of
drilling for natural gas. With the acquisition of Mountain Air assets, OilQuip
ceased to be in the development stage.
On December 12, 2001, the Company sold its wholly owned subsidiary, Houston
Dynamic Service, Inc. ("HDS"), to Clayton Lau, the general manager of HDS, in a
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management buy-out. In conjunction with the sale of HDS, the Company formally
discontinued the operations related to precision machining of rotating
equipment, which was the principal HDS business.
On February 6, 2002, The Company purchased 81% of the outstanding stock of Jens
Oil Field Service, Inc. ("Jens"). Jens supplies highly specialized equipment and
operations to install casing and production tubing required to drill and
complete oil and gas wells. The Company also purchased substantially all the
outstanding common stock and preferred stock of Strata Directional Technology,
Inc. ("Strata"). Strata provides high end directional and horizontal drilling
technology for specific targeted reservoirs that cannot be reached vertically.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Future events and their effects cannot be perceived
with certainty. Accordingly, the Company's accounting estimates require the
exercise of judgment. While management believes that the estimates and
assumptions used in the preparation of the consolidated financial statements are
appropriate, actual results could differ from those estimates. Estimates are
used for, but are not limited to, determining the following: allowance for
doubtful accounts reserves, recoverability of long-lived assets, useful lives
used in depreciation and amortization, income taxes and related valuation
allowances, and insurance and legal accruals. The accounting estimates used in
the preparation of the consolidated financial statements may change as new
events occur, as more experience is acquired, as additional information is
obtained and as the Company's operating environment changes.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS 143 requires that the fair value of a
liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS 143 on its consolidated financial statements. The Company will
adopt SFAS 143 for its fiscal year beginning January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). SFAS 144 addresses the financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 replaces SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
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certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. SFAS 144 is not expected to materially change the
methods used by the Company to measure impairment losses on long-lived assets,
but may result in future dispositions being reported as discontinued operations
to a greater extent than is currently permitted. The Company adopted SFAS 144
for its fiscal year beginning January 1, 2002.
NOTE 2 - ACQUISITIONS
On January 25, 2001, OilQuip formed a subsidiary, MCA, a Texas corporation. On
February 6, 2001, MCA acquired the business and certain assets of Mountain Air,
a private company, for $10,000,000 (including a $200,000 deposit paid in 2000)
in cash and a $2,200,000 promissory note to the sellers (with interest at 5 3/4
percent and principal and interest due February 6, 2006). The acquisition was
accounted for using the purchase method of accounting. Goodwill of $3,660,000
and other identifiable intangible assets of $800,000 were recorded with the
acquisition.
On May 9, 2001, OilQuip merged into a subsidiary of Allis-Chalmers. In the
Merger, all of OilQuip's outstanding common stock was converted initially into
10,000,000 million shares of Allis-Chalmers' common stock. The acquisition was
accounted for using the purchase method of accounting as a reverse acquisition.
Goodwill of $194,000 and other identifiable intangible assets of $725,000 were
recorded in connection with the merger. Effective on the date of the merger,
OilQuip retroactively became the reporting company. As a result, financial
statements prior to the merger are those of OilQuip.
The Company completed two acquisitions and related financing on February 6,
2002.
The Company purchased 81% of the outstanding stock of Jens Oil Field Service,
Inc. ("Jens"). Jens supplies highly specialized equipment and operations to
install casing and production tubing required to drill and complete oil and gas
wells. The Company also purchased substantially all the outstanding common stock
and preferred stock of Strata Directional Technology, Inc. ("Strata"). Strata
provides high end directional and horizontal drilling technology for specific
targeted reservoirs that cannot be reached vertically.
The purchase price for Jens and Strata was (i) $10,250,000 in cash, (ii) a
$4,000,000 note payable due in four years, (iii) $1,000,000 for a non-compete
agreement payable for five years, (iv) 7,957,712 shares of common stock of the
Company, (v) 3,500,000 shares of a newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock") and (vi)
an additional payment estimated to be from $1,000,000 to $1,250,000, based upon
Jens' working capital on February 1, 2002.
In connection with the acquisition of Strata and Jens, the Company's bank
provided financing of $12,728,396 consisting of revolving credit facilities in
the amount of $3,500,000, term facilities in the amount of $5,696,396 and a
subordinated loan in the amount of $3,000,000.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. 3,500,000 shares of Series A Preferred stock were
issued to the seller, Energy Spectrum. The Series A Preferred stock has
8
cumulative dividends at ten percent (10%) per annum payable in cash or
additional Series A Preferred Stock. Additionally, the Series A Preferred Stock
is convertible into common stock of the Company. The Series A Preferred Stock is
also subject to mandatory redemption on or before February 4, 2004 or earlier
from the net proceeds of new equity sales and optional redemption by the Company
at any time. The redemption price of the Series A Preferred Stock is $1.00 per
share. In addition, in connection with the Strata acquisition, Energy Spectrum
was issued warrants for 437,500 shares of Company common stock at an exercise
price of $0.15 per share.
The acquisitions ware accounted for using the purchase method of accounting.
Goodwill of $4,807,000 was recorded with the acquisition of Strata and other
identifiable intangible assets of $1,235,000 were recorded with the acquisition
of Jens.
The Company issued to the banks warrants for 1,165,000 shares of common stock at
an exercise price of $0.15 per share and 335,000 warrants to purchase common
stock at a $1.00 per share in connection with their subordinated debt financing.
All of these shares are subject to redemption at the option of the warrant
holders for $1,500,000 after three years by the Company.
As a result of these transactions, the Company has approximately 19.5 million
shares of common stock outstanding at March 31, 2002, as well as options and
warrants to purchase up to 9.6 million additional shares. Substantially all of
the Company's tangible assets have been pledged as collateral on the loans from
the banks.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisition of Jens and Strata on the Company's
results of operations, based on the historical statements of operations, as if
the transactions had occurred as of the beginning of the periods presented. The
discontinued HDS operations were not included in the pro forma information.
Quarter ended March 31,
----------------------------
2002 2001
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(in thousands)
Revenues $ 4,404 $ 7,256
Operating income/ (loss) $ (140) $ 1,435
Net income/ (loss) $ (757) $ 563
Income (loss) per share $ (0.05) $ .11
NOTE 3- LONG-TERM DEBT
Long-term debt is primarily a result of the costs of the acquisitions of certain
assets of Mountain Air, Jens' Oilfield Service, Inc. and Strata Directional
Technology, Inc.
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Mountain Compressed Air:
o A term loan in the amount of $3,550,000 at variable interest rates
related to the Prime or LIBOR rates (5.125% at March 31, 2002),
interest payable quarterly, with quarterly principal payments of
$147,917 due on the last day of April, July, October and January.
The maturity date of the loan is February 7, 2004.
o A seller's note in the amount of $2,200,000 at 5.75% simple
interest. The principal and interest are due on February 6, 2004.
o Subordinated debt in the amount of $2,000,000 at 12% interest
payable quarterly commencing on April 1, 2001. The principal will
be due on January 31, 2004. In connection with incurring the debt,
the Company issued redeemable warrants valued at $600,000, which
have been recorded as discount to the subordinated debt and a
liability. The discount is amortizable over three years as
additional interest expense.
o A delayed draw term loan in the amount of $282,291 at LIBOR plus
0.5% interest payable quarterly commencing on November 30, 2001
(Interest rate of 5.25% at March 31, 2002). The principal will be
due on February 7, 2004.
Jens' Oilfield Service:
o A term loan in the amount of $4,042,369 at variable interest rates
related to the Prime rates plus 1.5% (6.25% at March 31, 2002),
interest and principal payments of $67,373 due monthly. The
maturity date of the loan is February 1, 2007.
o A Real Estate loan in the amount of $532,000 at variable interest
rates related to the Prime rates plus 1.5% (6.25% at March 31,
2002), interest and principal payments of $14,778 due monthly. The
maturity date of the loan is February 1, 2005.
o A seller's note in the amount of $4,000,000 at 7.5% simple
interest. Interest payments are due quarterly beginning on April1,
2002 and continuing each January, April, July and October. The
principal will be due on January 31, 2006.
o Subordinated debt in the amount of $2,000,000 at 12% interest
payable monthly commencing on March 1, 2002. The principal will be
due on January 31, 2005. In connection with incurring the debt,
the Company issued redeemable warrants valued at $900,000, which
have been recorded as discount to the subordinated debt and a
liability. The discount is amortizable over three years as
additional interest expense.
o At March 31, 2002, the Company has a $1,000,000 line of credit at
Wells Fargo bank, of which $25,000 was outstanding. The committed
line of credit is due on February 1, 2005. Interest accrues at a
rate equal to the Prime rate plus 1.5% for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted
portion.
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Strata Directional Technology, Inc.:
o A term loan in the amount of $1,654,000 at variable interest rates
related to the Prime rates plus 2.0% (6.25% at March 31, 2002),
interest and principal payments of $27,567 due monthly. The
maturity date of the loan is February 1, 2007.
o At March 31, 2002, the Company has a $2,500,000 line of credit at
Wells Fargo bank, of which $332,000 was outstanding. The committed
line of credit is due on February 1, 2005. Interest accrues at a
rate equal to the Prime rate plus 2.0% for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted
portion.
In addition to the above acquisition debt, there is also debt resulting from the
Allis-Chalmers Board establishing an arrangement by which to compensate former
and continuing Board members who had served from 1989 to March 31, 1999 without
compensation. Pursuant to the arrangement, in 1999, Allis-Chalmers issued
promissory notes totaling $325,000 to current or former directors and officers.
The notes bear interest at the rate of 5% and are due March 28, 2005. At March
31, 2002, the notes are recorded at $358,000, including accrued interest.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements.
The Company has issued redeemable warrants that are exercisable for a maximum of
1,350,000 shares of the Company's common stock at an exercise price of $0.15 per
share. The warrants are exercisable beginning January 31, 2004. The warrants are
subject to a cash redemption provision ("put") at the discretion of the warrant
holder beginning January 31, 2004 and extending through January 31, 2006 if the
warrant holder decides not to exercise the warrants. The Company has recorded a
liability of $1,500,000 and is amortizing the effects of the put to interest
expense over the life of the debt instrument.
NOTE 4 - SHAREHOLDERS' EQUITY
The changes in common shareholders' equity for the three months ended March 31,
2002 were as follows:
Allis-Chalmers balance at 12/31/01 $ 1,250,000
Jens' Oilfield acquisition 677,000
Strata Directional acquisition 3,219,000
Net (loss) Three Months ended March 31, 2002 (698,000)
------------
Total Shareholders' Equity at 3/31/02 $ 4,448,000
============
Allis-Chalmers acquired 81% of Jens' Oilfield Service. The business combination
was accounted for as a purchase. As a result, $677,000, the value of the
Allis-Chalmers common stock issued at the date of the acquisition, was added to
shareholders' equity.
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Allis-Chalmers acquired 95% of Strata Directional Technology. The business
combination was accounted for as a purchase. As a result, $3,219,000, the value
of Allis-Chalmers common stock issued at the date of the acquisition, was added
to shareholders' equity.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. 3,500,000 shares of Series A Preferred stock were
issued to the seller, Energy Spectrum. The Series A Preferred stock has
cumulative dividends at ten percent (10%) per annum payable in cash or
additional Series A Preferred Stock. Additionally, the Series A Preferred Stock
is convertible into common stock of the Company. The Series A Preferred Stock is
also subject to mandatory redemption on or before February 4, 2004 or earlier
from the net proceeds of new equity sales and optional redemption by the Company
at any time. The redemption price of the Series A Preferred Stock is $1.00 per
share. In addition, in connection with the Strata acquisition, Energy Spectrum
was issued warrants for 437,500 shares of Company common stock at an exercise
price of $0.15 per share.
NOTE 5 - GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
(Goodwill and Other Intangible Assets). The Company adopted SFAS No. 142 as of
January 1, 2002. SFAS No. 142 defines the accounting treatment of goodwill and
other intangible assets derived from business combinations and supersedes APB
Opinion No. 17. This statement requires us to discontinue amortization of
goodwill and requires that the Company test goodwill and other intangible assets
for impairment in a specific manner on an annual basis or when certain events
trigger such a test. The following is the proforma effect of implementing SFAS
No. 142. The Company has recorded $4,823,000 of goodwill at March 31, 2002
related to Strata, which was acquired in February 2002. The Company has not
performed the transitional goodwill impairment test on Strata as of the date of
this filing but will complete it in the second quarter of 2002. The Company
cannot predict the amount, if any, of an adjustment to goodwill as a result of
this test.
Three Months Ended
March 31,
(in thousands, except per share)
2002 2001
-------- --------
Reported net income (loss) $ (698) $ (270)
Goodwill amortization -- 20
-------- --------
Adjusted net income (loss) $ (698) $ (250)
======== ========
Earnings per share:
Reported net income (loss) per share $ (.04) $ (.06)
Goodwill amortization per share -- .01
-------- --------
Adjusted net income (loss) per share $ (.04) $ (.05)
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
--------------------------------------------------------------------------------
BACKGROUND
----------
Prior to 2001, we operated primarily through HDS. In May 2001, as part of a
strategy to acquire and develop businesses in the natural gas and oil services
industry, we consummated a merger (the "OilQuip Merger") in which we acquired
100% of the capital stock of OilQuip Rentals, Inc. ("OilQuip"), which owned 100%
of the capital stock of MCA. In December 2001, we disposed of HDS, and in
February 2002, we acquired substantially all of the capital stock of Strata and
approximately 81% of the capital stock of Jens. (see "--Recent Developments
--Acquisition of Jens Oilfield Service, Inc, and Strata Directional Drilling,
Inc.; Disposition of HDS," below). Our business conducted in 2001 did not
include the operations of Jens and Strata, which will be material to our
continuing business operations.
For accounting purposes, the OilQuip Merger was treated as a reverse acquisition
of Allis-Chalmers and financial statements presented herein for periods prior to
May 2001 present the results of operations and financial condition of OilQuip.
As a result of the OilQuip Merger, the fixed assets, and goodwill and other
intangibles of Allis-Chalmers in existence immediately prior to the Merger (the
"Prior A-C Assets") were increased by $2,691,000. The fixed assets included in
the Prior A-C Assets are being depreciated over 10 years.
CRITICAL ACCOUNTING POLICIES
----------------------------
We have identified the policies below as critical to our business operations and
the understanding of our results of operations. The impact and any associated
risks related to these policies on our business operations is discussed
throughout management's Discussion and Analysis of Financial Condition and
Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in the Annual Report on Form 10-K filed on April 1, 2002. Note that
our preparation of this Quarterly Report on Form 10-Q requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
other intangibles, and other assets comprise a significant amount of the
Company's total assets. The Company makes judgments and estimates in conjunction
with the carrying value of these assets, including amounts to be capitalized,
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depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically 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 the
Company to make long-term forecasts of its future revenues and costs related to
the assets subject to review. These forecasts require assumptions about demand
for the Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to these
assumptions could require a provision for impairment in a future period. The
Company has $4,802,000 of goodwill at March 31, 2002 related to Strata, which
was acquired in February 2002. The Company has not performed the transitional
goodwill impairment test on Strata in accordance with SFAS No. 142 as of the
date of this filing but will complete it in the second quarter of 2002. The
Company cannot predict the amount, if any, of an adjustment to goodwill as a
result of this test.
RESULTS OF OPERATIONS
---------------------
Results of operations for 2001 reflect the business operations of OilQuip. From
its inception on February 4, 2000 to February 6, 2001, OilQuip was in the
developmental stage. OilQuip's activities for the period prior to February 6,
2001 consisted of developing its business plan, raising capital and negotiating
with potential acquisition targets. Therefore, the results for operations prior
to February 6, 2001 had no sales, cost of sales, or marketing and administrative
expenses that would be reflective of the ongoing company. On February 6, 2001,
OilQuip acquired the assets of Mountain Air which conducted natural gas
exploration equipment rental and services operations. On May 9, 2001, OilQuip
acquired the Prior A-C Assets, including the operations of HDS. The results of
operation of HDS, which was sold in December 2001, are included in discontinued
operations from May 9, 2001. On February 6, 2002, Allis-Chalmers acquired 81% of
the outstanding stock for Jens Oilfield Service, Inc. which supplies highly
specialized equipment and operations to install casing and production tubing
required to drill and complete oil and gas wells. The Company also purchased
substantially all the outstanding common stock and preferred stock of Strata
Directional Technology, Inc. which provides high end directional and horizontal
drilling technology for specific targeted reservoirs that cannot be reached
vertically. The results from these operations impact the first quarter of 2002.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO MARCH 31, 2001:
-------------------------------------------------------------
Sales for the three months ended March 31, 2002 totaled $3,253,000, reflecting
two months of revenue for Jens and Strata following the acquisitions. In the
comparable period of 2001, revenues were $606,000.
Gross margin, as a percentage of sales, was 19.6% in the first quarter of 2002
compared with 22.6 % in the first quarter of 2001.
General and administrative expense was $840,000 in the first quarter of 2002
compared with $287,000 in the first quarter of 2001, increasing as a result of
the Jens and Strata acquisitions.
14
We had EBITDA (earnings before interest, income taxes, depreciation and
amortization) of $290,000 for the three months ended March 31, 2002 compared
with a negative EBITDA of ($78,000) for the three months ended March 31, 2001.
We incurred a net loss of $(698,000), or ($0.04) per common share, for the first
quarter of 2002 compared with a loss of ($270,000), or ($0.06) per common share,
for the first quarter of 2001.
PRO FORMA RESULTS
Pro forma results of operation set forth below includes results of operations of
the Oilquip, MCA, Jens and Strata subsidiaries for all of the first quarter of
2002 and 2001. These pro forma financial statements should be read in
conjunction with the historical financial statements included herein.
Pro forma sales in the first quarter of 2002 totaled $4,404,000 compared with
$7,256,000 for the first quarter of 2001. The decline in pro forma revenues
reflects the overall decline in the oilfield services industry. The total rigs
operating in the United States per Baker Hughes, Inc. declined from 1,164 at
March 31, 2001 to 763 at March 31, 2002, a decrease of 34 %.
Pro forma gross profit totaled $813,000 for a gross profit margin of 18.4% of
sales in the three months ended March 31, 2002. Pro forma gross profit for the
comparable quarter in the prior year totaled $ 2,386,000 for a gross profit
margin of 32.9% of sales. The decline in profit margin results reflects the
decrease in revenues offset partially by cost reductions.
The Company had pro forma EBITDA and an operating loss of $480,000 and
($140,000), respectively, for the three months ended March 31, 2002. The pro
forma EBITDA and operating income for the comparable quarter in the prior year
were $1,900,000 and $1,435,000, respectively.
The Company incurred a pro forma net loss of ($757,000), or ($0.05) per common
share, for the first quarter of 2002 compared to a pro forma net income of
$563,000, or $0.11 per common share, for the first quarter of 2001.
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
Cash and cash equivalents totaled $244,000 at March 31, 2002, an increase from
$152,000 at December 31, 2001 mainly due to the acquisitions of Jens and Strata
and the related financings.
Net trade receivables at March 31, 2002 were $3,516,000. This increased
significantly from the December 31, 2001 balance of $973,000 due to the
acquisitions of Jens and Strata.
15
Net property, plant and equipment were $19,771,000 at March 31, 2002, a
significant increase over the total at December 31, 2001, as a result of the
acquisitions of Jens and Strata. Capital expenditures for the first quarter of
2002 were $54,000. Capital expenditures for the year 2002 are projected to be
approximately $350,000.
Trade accounts payable at March 31, 2002 were $902,000. This increased
significantly from the December 31, 2001 balance due the acquisition of Jens and
Strata.
Other current liabilities, excluding the current portion of long term debt, were
$3,539,000 consisting of an estimated liability for an acquisition purchase
price adjustment of $1,000,000, interest in the amount of $245,000, accrued
salary and benefits in the amount of $628,000, accrued federal income taxes of
$50,000, and legal and professional expenses in the amount of $1,616,000. All of
these balance sheet accounts increased significantly from the December 31, 2001
balances due to the acquisition of Jens and Strata.
Long term debt was $20,254,000 at March 31, 2002 including current maturities.
As described below in, "-- Recent Developments --Acquisition of Jens Oilfield
Service, Inc. and Strata Directional Drilling, Inc." the Company incurred an
additional $13.2 million in long-term debt in connection with the acquisition of
Jens and Strata in February 2002.
In addition to the debt discussed above, the Company had available lines of
credit totaling $1,407,000 at March 31, 2002, of which $1,050,000 was available
and unused.
Our long term capital needs are to provide funds for the existing operations,
the retirement of existing debt, the redemption of the Series A Preferred Stock
and to secure funds for the acquisitions in the oil and gas equipment rental and
services industry. To continue our growth through additional acquisitions we
will require additional financing, which may include the issuance of new equity
or debt securities, as well as secured and unsecured loans (substantially all of
our assets are pledged to secure our existing financing). We have had
discussions regarding the issuance of additional equity securities; however,
there can be no assurance that we will be able to consummate any such
transaction.
RECENT DEVELOPMENTS --ACQUISITION OF JENS' OILFIELD SERVICE, INC. AND STRATA
DIRECTIONAL TECHNOLOGY, INC.
--------------------------------------------------------------------------------
JENS OIL FIELD TRANSACTION
We purchased 81% of the outstanding stock of Jens for (i) $10,250,000 in cash,
(ii) a $4,000,000 note payable with a 7.5% interest rate and the principal due
in four years, (iii) $1,000,000 for a non-compete agreement payable monthly for
five years, (iv) an additional payment estimated to be from $1,000,000 to
$1,250,000, based upon Jens' working capital as of February 1, 2002, (v)
1,397,849 shares of our common stock, and (vi) an amount equal to the net income
of Jens for the period January 1, 2002 through January 31, 2002. We entered into
a three year employment agreement with Mr. Mortensen under which we will pay Mr.
Mortensen a base salary of $150,000 per year. We also entered into a
Shareholders Agreement with Jens and Mr. Mortensen providing for restrictions
against transfer of the stock of Jens by us and Mr. Mortensen, and providing Mr.
16
Mortensen the option after February 1, 2003, to exchange his shares of stock of
Jens for shares of our common stock with a value equal to 4.6 times the trailing
EBITDA of Jens determined in accordance with GAAP, less any intercompany loans
or third party investments in Jens, times nineteen percent (19%). Our common
stock will be valued based on the average closing bid price for the stock for
the preceding 30 days. Mr. Mortensen has a demand registration right pursuant to
the Shareholder Agreement that requires the Company to register his shares of
the Company under the Securities Act of 1933, as amended, which can not be
effected until after August 1, 2002, and within 3 years thereafter at Mr.
Mortensen's cost, along with piggyback registration rights.
STRATA ACQUISITION
We acquired 100% of the preferred stock and 95% of the common stock of Strata in
consideration for the issuance to Energy Spectrum Partners, LP ("Energy
Spectrum") of 6,559,863 shares of our common stock, warrants to purchase an
additional 437,500 shares of Company common stock at an exercise price of $0.15
per share and 3,500,000 shares of a newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock"). In
addition, in the event the Series A Preferred Stock is not converted or redeemed
prior to February 4, 2004, an additional warrant will be issued to Energy
Spectrum which will entitle it to acquire 875,000 shares at an exercise price of
$0.15 per share. Energy Spectrum, which is now our largest shareholder, is a
private equity fund headquartered in Dallas.
The Series A Preferred Stock issued to Energy Spectrum in connection with the
Strata transaction has cumulative dividends at $ .10 per share payable in cash
or additional Series A Preferred Stock. Additionally, the Series A Preferred
Stock is convertible at $0.75 per share of Company common stock until February
1, 2003, when the conversion price will be lowered to the lesser of (i) $0.60
per share or (ii) 75% of the market price calculated in accordance with the
certificate of designations of the Series A Preferred Stock. The Series A
Preferred Stock is also subject to anti-dilution in the event of issuances below
the conversion price of the Series A Preferred Stock and is subject to mandatory
redemption on the second anniversary date of issuance or earlier from the net
proceeds of new equity sales and is subject to optional redemption by us at any
time. The redemption price of the Series A Preferred Stock is $1.00 per share
plus an amount equal to all accrued and unpaid dividends to such date. In
addition, the holder of the Series A Preferred Stock is entitled to appoint
three directors to our Board of Directors and three persons designated by Energy
Spectrum, Thomas O. Whitener, Jr., James W. Spann, and Michael D. Tapp, were
appointed as directors upon consummation of the acquisition of Strata. We also
granted Energy Spectrum registration rights which includes two demand
registrations at our expense and piggyback registration rights.
BANK FINANCING
In connection with the acquisition of Jens, Wells Fargo Bank and its affiliates
(the "Banks") provided $5,574,396 in financing consisting of a revolving credit
facility in the amount of $1,000,000, a term equipment facility in the amount of
$4,042,396 and a real estate term facility in the amount of $532,000. The
facilities have a floating interest rate and a maturity date of February 1,
2005.
17
In connection with the acquisition of Strata, the Banks provided financing of
$4,154,000 consisting of a revolving credit facility in the amount of $2,500,000
and a term facility in the amount of $1,654,000. The facilities have a floating
interest rate and a maturity date of February 1, 2005.
In connection with the Jens and Strata acquisitions, the banks also made a
subordinated loan to us in the amount of $3,000,000. This loan has a 12.0%
interest rate and a maturity date of February 1, 2005. Energy Capital has been
issued warrants for 1,165,000 shares of common stock at a $0.15 exercise price
and 335,000 warrants to purchase common stock at $1.00 per share exercise price
in connection with their subordinated debt financing. We have the right to
redeem 465,000 of these warrant for $600,000 after two years and 700,000 of
these warrants for $900,000 after three years. In addition, previously issued
warrants to purchase common stock of MCA were cancelled.
Substantially all of the Company's tangible assets have been pledged as
collateral on the loans from the Banks.
As a result of the transactions described above, we have outstanding
approximately 19.5 million shares of common stock, as well as preferred stock,
options and warrants convertible into or exercisable for an additional 9.6
million shares.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of long-lived assets and the
associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability associated with an asset retirement be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated retirement costs are capitalized as part of the carrying amount of
the long-lived asset and subsequently depreciated over the life of the asset.
The Company has not completed its analysis of the impact, if any, of the
adoption of SFAS No. 143 on its consolidated financial statements. The Company
has adopted SFAS No. 143 for its fiscal year beginning January 1, 2003.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No. 144
replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets and modifies the accounting and reporting of
discontinued operations. SFAS No. 144 is not expected to materially change the
methods used by the Company to measure impairment losses on long-lived assets,
but may result in future dispositions being reported as discontinued operations
to a greater extent than is currently permitted. The Company has adopted SFAS
No. 144 for its fiscal year beginning January 1, 2002.
18
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains forward-looking statements (within the meaning
of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934) regarding our business, financial
condition, results of operations and prospects. Words such as expects,
anticipates, intends, plans, believes, seeks, estimates and similar expressions
or variations of such words are intended to identify forward-looking statements,
but are not the exclusive means of identifying forward-looking statements in
this Report on Form 10-Q.
Although forward-looking statements in this Report on Form 10-Q reflect the good
faith judgment of our management, such statements can only be based on facts and
factors we currently know about. Consequently, forward-looking statements are
inherently subject to risks and uncertainties, and actual results and outcomes
may differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed elsewhere in this Report on Form 10-Q, in our Annual Report on Form
10K (including without limitation in the "Risk Factors" Section), and in our
other SEC filings and publicly available documents. Readers are urged not to
place undue reliance on these forward-looking statements, which speak only as of
the date of the this Report on Form 10-Q. We undertake no obligation to revise
or update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this Report on Form 10-Q.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
*10.18 Employment Agreement dated April 1, 2002 by and between
Allis-Chalmers Corporation and V. William Archer III
*10.19 Employment Agreement dated April 1, 2002 by and between
Allis-Chalmers Corporation and Jeffrey R. Freedman
*10.20 2002 Incentive Stock Plan
*10.21 Form of Option Agreement Issued Under 2002 Incentive Stock Plan
* Compensation Plan or Agreement
(b) Reports on Form 8-K: A report on Form 8-K was filed on February 21, 2002,
reporting the Acquisitions of Jens' Oilfield Service, Inc and Strata
Directional Technology, Inc. On April 22, 2002, the Company filed an
amendment to the 8-K to include financial statements and pro forma
statements relating to the Acquisitions.
20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Allis-Chalmers Corporation
--------------------------
(Registrant)
/s/Munawar H. Hidayatallah
--------------------------
Munawar H. Hidayatallah
President, Chief Executive Officer
And Chairman
May 14, 2002
21