SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 6, 2002
ALLIS-CHALMERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1-2199
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER)
OF INCORPORATION)
39-0126090
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
7660 WOODWAY, SUITE 200
HOUSTON, TEXAS 77063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 369-0550
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
(1) Financial Statements of Jens' Oilfield Service, Inc.:
Independent Auditors' Report F-1
Balance Sheets as of December 31, 2001 and March 31, 2001 F-2
Statements of Operations for the Nine Months Ended December
31, 2001 and the Year Ended March 31, 2001 F-4
Statement of Stockholder's Equity for the Nine Months Ended
December 31, 2001 and the Year Ended March 31, 2001 F-5
Statements of Cash Flows for the Nine Months Ended December
31, 2001 and the Year Ended March 31, 2001 F-6
Notes to Financial Statements F-7
(2) Financial Statements of Strata Directional Technologies,
Inc.:
Independent Auditors' Report FF-3
Consolidated Balance Sheets as of December 31, 2001 and
December 31, 2000 FF-4
Consolidated Statements of Operations for the Years Ended
December 31, 2001 and 2000 FF-5
Consolidated Statement of Shareholders' Equity for the
Years Ended December 31, 2001 and 2000 FF-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001 and 2000 FF-7
Notes to Consolidated Financial Statements FF-8
(b) Pro Forma Financial Information:
Unaudited Pro Forma Consolidated Condensed Statement of
Operations for the Year Ended December 31, 2001 P-1
Unaudited Pro Forma Consolidated Condensed Statement of
Financial Position as of December 31, 2001 P-2
Notes to Unaudited Pro Forma Consolidated Condensed
Financial Statements P-3
(c) Exhibits.
NONE.
2
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 hereunto duly authorized.
ALLIS-CHALMERS CORPORATION
By: /s/ Munawar H. Hidayatallah
----------------------------
Munawar H. Hidayatallah
President, Chief Executive
Officer and Chairman
Date: April 22, 2002
4
JENS' OILFIELD SERVICE, INC.
FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 2001 AND
YEAR ENDED MARCH 31, 2001
CONTENTS
Page
Independent auditors' report F-1
Balance sheets F-2
Statements of operations F-4
Statements of stockholder's equity F-5
Statements of cash flows F-6
Notes to financial statements F-7 - F-14
INDEPENDENT AUDITORS' REPORT
Board of Directors
Jens' Oilfield Service, Inc.
Edinburg, Texas
We have audited the accompanying balance sheets of Jens' Oilfield
Service, Inc. as of December 31, 2001 and March 31, 2001, and the
related statements of operations, stockholder's equity, and cash flows
for the nine months ended December 31, 2001 and year ended March 31,
2001. These financial statements are the responsibility of the
Company's 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 Jens'
Oilfield Service, Inc. as of December 31, 2001 and March 31, 2001, and
the results of its operations and its cash flows for the nine months
ended December 31, 2001 and the year ended March 31, 2001 in conformity
with accounting principles generally accepted in the United States of
America.
/s/ Gordon, Hughes & Banks, LLP
GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
April 12, 2002
F-1
JENS' OILFIELD SERVICE, INC.
BALANCE SHEETS
ASSETS
December 31 March 31
2001 2001
------------- -------------
Current assets:
Cash and cash equivalents $ 2,594,933 $ 353,855
Trade accounts receivable (net of allowance for
doubtful accounts of $150,010 and $134,838 at
December 31, 2001 and March 31, 2001, respectively) 1,690,793 1,618,892
Prepaid expenses and other current assets 109,060 103,234
Foreign income tax receivable 135,733 135,733
Prepaid federal income taxes 90,260 78,799
------------- -------------
Total current assets 4,620,779 2,290,513
Property and equipment:
Property and equipment, at cost 13,530,648 13,437,207
Less: accumulated depreciation (10,435,936) (9,491,924)
------------- -------------
Net property and equipment 3,094,712 3,945,283
Other assets:
Customers deposits held in trust 276,401 269,995
Other deposits 30,045 30,045
------------- -------------
Total other assets 306,446 300,040
------------- -------------
Total assets $ 8,021,937 $ 6,535,836
============= =============
See accompanying summary of accounting policies
and notes to financial statements.
F-2
JENS' OILFIELD SERVICE, INC.
BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDER'S EQUITY
Decmber 31 March 31
2001 2001
------------ ------------
Current liabilities:
Accounts payable $ 122,716 $ 77,250
Accrued expenses 335,062 206,817
Current portion of deferred income taxes 2,211 30,791
------------ ------------
Total current liabilities 459,989 314,858
Long-term security deposits 269,995 269,995
Deferred income taxes, less current portion 64,230 112,497
Stockholder's equity:
Common stock - $10 par value, 50,000 shares
authorized, 5,000 shares issued and
outstanding 50,000 50,000
Additional paid in capital 6,187 6,187
Retained earnings 7,184,036 5,794,799
------------ ------------
7,240,223 5,850,986
Less: Treasury shares, 1250 shares, at par value (12,500) (12,500)
------------ ------------
Total stockholder's equity 7,227,723 5,838,486
------------ ------------
Total liabilities and stockholders' equity $ 8,021,937 $ 6,535,836
============ ============
See accompanying summary of accounting policies
and notes to financial statements.
F-3
JENS' OILFIELD SERVICE, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended
December 31, 2001
and Year
Ended March 31, 2001
December 31 March 31
------------ ------------
Net revenue $ 7,563,480 $ 8,338,194
Cost of revenue 3,502,453 4,348,123
------------ ------------
Gross profit 4,061,027 3,990,071
Operating expenses:
Salaries, bonuses, employee benefits and payroll taxes 1,171,552 1,181,082
Other selling, general and administrative costs 617,663 552,839
Repairs and maintenance 268,898 360,653
------------ ------------
Total operating expenses 2,058,113 2,094,574
------------ ------------
Operating income 2,002,914 1,895,497
Other income (expense)
Interest income 34,877 15,015
Gain on disposition of assets - 48,688
Interest (expense) (6,136) (54,599)
------------ ------------
28,741 9,104
Net income before income taxes 2,031,655 1,904,601
------------ ------------
Income taxes (benefit)
United States income taxes 543,539 462,804
Mexico income taxes 175,726 242,667
Deferred income taxes (76,847) (77,486)
------------ ------------
Total income taxes 642,418 627,985
------------ ------------
Net income $ 1,389,237 $ 1,276,616
============ ============
Earnings per share, basic and diluted $ 27.78 $ 25.53
============ ============
Weighted average shares outstanding 50,000 50,000
============ ============
See accompanying summary of accounting policies
and notes to financial statements.
F-4
JENS' OILFIELD SERVICE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
AND YEAR ENDED MARCH 31, 2001
$10 Par Value Paid in Retained Treasury
Common Shares Stock Amount Capital Earning Stock Total
-------------------------------------------------------------------------------------------
Balances, March 31, 2000 5,000 $ 50,000 $ 6,187 $4,518,183 $ (12,500) $4,561,870
Net income - - - 1,276,616 - 1,276,616
----------- ----------- ----------- ----------- ----------- -----------
Balances, March 31, 2001 5,000 50,000 6,187 5,794,799 (12,500) 5,838,486
Net income - - - 1,389,237 - 1,389,237
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 5,000 $ 50,000 $ 6,187 $7,184,036 $ (12,500) $7,227,723
=========== =========== =========== =========== =========== ===========
See accompanying summary of accounting policies
and notes to financial statements.
F-5
JENS' OILFIELD SERVICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
AND YEAR ENDED MARCH 31, 2001
December 31 March 31
2001 2001
------------ ------------
Cash flows from operating activities:
Net income $ 1,389,237 $ 1,276,616
Items not affecting cash:
Depreciation 944,012 1,432,884
Gain on disposition of assets - (48,688)
Deferred income taxes (76,847) (77,486)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (71,901) (342,384)
(Increase) in prepaid expenses and other current assets (5,826) (29,204)
(Increase) decrease in income taxes payable/prepaid (11,461) 18,170
Increase (decrease) in accounts payable 45,466 (86,786)
Increase in accrued expenses 128,245 108,226
(Decrease) in security deposits and trust (6,406) (269,995)
------------ ------------
Net cash flows provided by operating activities 2,334,519 1,981,353
Cash flows from investing activities:
Proceeds from disposition of assets - 48,688
Purchases of property and equipment (93,441) (445,921)
------------ ------------
Net cash (used) by investing activities (93,441) (397,233)
Cash flows from financing activities:
Payments on debt - (1,444,882)
------------ ------------
Net cash flows (used) by investing activities - (1,444,882)
Net increase in cash 2,241,078 139,238
------------ ------------
Cash and cash equivalents
Beginning of period 353,855 214,617
------------ ------------
End of period $ 2,594,933 $ 353,855
============ ============
Cash paid for interest $ 6,136 $ 54,599
============ ============
Cash paid for income taxes
United States $ 540,000 $ 343,000
============ ============
Mexico $ 175,726 $ 242,667
============ ============
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-6
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
------------------
Jens' Oilfield Service, Inc. (the "Company") began business in
1981, leasing oilfield equipment and providing oilrig services
to exploration companies in southern Texas and New Mexico. The
Company expanded to provide services to exploration companies
operating in Mexico beginning in 1996.
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 certain reported amounts and
disclosures. Accordingly, actual results could differ from
those estimates.
Revenue recognition
-------------------
Under the terms of rental agreements, revenues are recognized
on a monthly basis, as the rent is earned. Service revenues
are invoiced and recognized after the service is rendered.
Cost of revenues
----------------
The Company classifies direct expenses incurred in the
rendering of services as cost of revenues. Those direct
expenses include direct labor, supplies and depreciation
expense associated with the Company's property and equipment
that is utilized in the earning of revenue.
Cash equivalents
----------------
For purposes of the statements of cash flows, the Company
considers all liquid investments with maturity of three months
or less to be cash equivalents. Security deposits in a money
market account are held "in trust" and are not considered cash
equivalents.
Accounts receivable
-------------------
Accounts receivable represent uncollected billings for
equipment rentals and oilrig services. The Company's allowance
for doubtful accounts includes those accounts the Company
believes are uncollectible at the date of the balance sheets
but may be recoverable in future years.
Property and equipment
----------------------
Property and equipment is recorded at original cost when
purchased. Depreciation is computed using straight-line
methods over the estimated useful lives of the assets, ranging
from three to twenty years. Maintenance, repairs and renewals
that neither add to the value of the property nor appreciably
prolong its life are charged to expense as incurred. Gains and
losses on disposition of property and equipment are included
in income in the year of disposition. Depreciation expense for
the nine months ended December 31, 2001 and year ended March
31, 2001 was $944,012 and $1,432,884, respectively. The
Company has not capitalized any internal labor in its property
and equipment.
F-7
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
------------
Deferred income taxes are based on the liability method as
prescribed by Statement of Financial Accounting Standards No.
109, ACCOUNTING FOR INCOME TAXES ("SFAS 109"). Under SFAS 109,
deferred income taxes are provided for temporary differences
in recognizing certain income and expense items for financial
reporting and tax reporting purposes.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. For the nine
months ended December 31, 2001 and year ended March 31, 2001,
the Company incurred $30,325 and $36,572 in advertising costs,
respectively.
Impairment of Long-Lived Assets
-------------------------------
Long-lived assets, which include property and equipment, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recorded in the period in
which it is determined that the carrying amount is not
recoverable. The determination of recoverability is made based
upon the estimated undiscounted future net cash flows,
excluding interest expense. The impairment loss is determined
by comparing the fair value, as determined by a discounted
cash flow analysis, with the carrying value of the related
assets.
Financial Instruments
---------------------
Financial instruments consist of cash and cash equivalents,
accounts receivable and accounts payable. The carrying values
of cash and cash equivalents, accounts receivable and accounts
payable approximate fair value.
Segments of an Enterprise and Related Information
-------------------------------------------------
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION (SFAS No. 131), replaces the industry
segment approach under previously issued pronouncements with
F-8
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the management approach. The management approach designates
the internal organization that is used by management for
allocating resources and assessing performance as the source
of the Company's reportable segments. SFAS No. 131 also
requires disclosures about products and services, geographic
areas and major customers. At December 31, 2001, the Company
only operates in one segment.
Income (Loss) Per Common Share
------------------------------
The Company computes income (loss) 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 measured as
the income or loss available to common stockholders divided by
the weighted average outstanding common shares for 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 securities,
stock options, etc.) as if they had been converted at the
beginning of the periods presented. Potential common shares
that have an anti-dilutive effect (e.g., those that increase
income per share or decrease loss per share) are excluded from
diluted earnings per share.
The basic and diluted loss per common share for all periods
presented herein was computed by dividing the net income
attributable to common shares by the weighted average
outstanding common shares for the period. The Company has no
potential common shares outstanding as of December 31, 2001
and March 31, 2001.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board
finalized FASB Statements No. 141, BUSINESS COMBINATIONS
("SFAS No. 141") and No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS ("SFAS No. 142"). SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also
requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
business combinations completed on or after July 1, 2001. It
also requires, upon adoption of SFAS No. 142 that the Company
reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for
impairment at least annually. In addition, SFAS No. 142
requires that the Company identify reporting units for the
F-9
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be
tested for impairment in accordance with the guidance in SFAS
142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at the date, regardless of when
those assets were initially recognized. SFAS 142 requires the
Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS
142.
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS ("SFAS No. 143"). 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 will adopt 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"). 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 will adopt SFAS No. 144 for its fiscal
year beginning January 1, 2002.
F-10
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, March 31,
2001 2001
----------------- ----------------
Machinery and equipment $ 9,800,716 $ 9,759,043
Automobiles and trucks 2,847,353 2,801,430
Buildings 625,369 622,574
Land 25,200 25,200
Land improvements 80,379 80,379
Office equipment 151,631 148,581
----------------- ----------------
13,530,648 13,437,207
Less: accumulated depreciation (10,435,936) (9,491,924)
----------------- ----------------
$ 3,094,712 $ 3,945,283
================= ================
NOTE 3 - LEGAL MATTERS
The Company is involved in various legal proceedings that
arose in the ordinary course of business. The legal
proceedings are at different stages. The Company's insurance
carrier is vigorously defending the Company. In the opinion of
management and their legal counsel, the ultimate gain or loss,
if any, of the Company from all such proceedings can not be
reasonably estimated at this time.
NOTE 4 - OPERATING LEASES
The Company leases certain facilities and equipment under
month-to-month operating lease agreements. Rent expense for
the nine months ended December 31, 2001 and year ended March
31, 2001 was $44,665 and $55,785, respectively. See Note 7 for
the details surrounding a lease agreement the Company has
entered into with its President.
F-11
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - INCOME TAXES
The components of the net deferred tax liability recognized in
accordance with SFAS No. 109 and included in the accompanying
balance sheet at December 31, 2001 and March 31, 2001 are as
follows:
December 31, March 31,
2001 2001
--------------- ---------------
Allowance for doubtful accounts $ (57,754) $ (57,639)
Accumulated depreciation 175,253 228,594
Franchise tax payable (51,058) (27,667)
--------------- ---------------
Net deferred tax liability $ 66,441 $ 143,288
=============== ===============
The allocation of net deferred tax liability by tax authority
is as follows:
December 31, March 31,
2001 2001
--------- ---------
Current:
Federal $ 1,952 $ 27,192
State 259 3,599
--------- ---------
Total Current 2,211 30,791
--------- ---------
Noncurrent:
Federal 56,723 99,348
State 7,507 13,149
--------- ---------
Total Noncurrent 64,230 112,497
--------- ---------
Total $ 66,441 $143,288
========= =========
The temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give
rise to net deferred tax assets relate primarily to the
accelerated depreciation used for income tax purposes, the
allowance for doubtful accounts that is not deductible for
income tax purposes, and state tax credits that will be used
in the future to offset state franchise taxes
Deferred income tax expense consists of the following:
December 31, March 31,
2001 2001
----------- -----------
Current:
Federal $ 25,240 $ 3,042
State 3,340 415
Deferred:
Federal 42,625 65,146
State 5,642 8,883
----------- -----------
Total $ 76,847 $ 77,486
=========== ===========
F-12
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6 - CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance Sheet Risk and Financial
Instruments with Concentrations of Credit Risk," requires
disclosure of significant concentrations of credit risk
regardless of the degree of such risk.
Trade accounts receivable, net of the allowance for doubtful
accounts, were due from customers in the following countries
at December 31, 2001 and March 31, 2001 as follows:
December 31, March 31,
2001 2001
------------- -------------
United States $ 879,561 $ 909,124
Mexico 961,242 844,606
------------- -------------
Total $ 1,840,803 $ 1,753,730
============= =============
The Company generally does not require collateral from their
customers. Credit losses have been minimal and within
management's expectations.
The cash and cash equivalents are deposited with a high
quality financial institution. The cash and cash equivalent
balances are occasionally in excess of federally insured
limits. However, management does not believe the risk to be
significant.
Approximately 36% and 42%, respectively, of the Company's
revenues for the nine months ended December 31, 2001 and year
ended March 31, 2001 were derived from two customers,
including one customer that accounted for 20% and 26%,
respectively, of the Company's revenues. Accounts receivable
at December 31, 2001 and March 31, 2001 includes $1,116,218
and $1,154,286, respectively, from these two customers.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company entered into a lease for a South Texas yard with
its President in the year 2000. The Company paid $19,600 and
$14,000 during the nine months ended December 31, 2001 and
year ended March 31, 2001, respectively, under the terms of
this lease agreement. The lease is renewable on a
month-to-month basis.
F-13
JENS' OILFIELD SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8 - SECURITY DEPOSITS
Under terms of a lease agreement, one customer has deposited
$276,401 and $269,995 at December 31, 2001 and March 31, 2001,
respectively, to cover any repairs needed when the equipment
is returned. Any amounts not used for repairs must be returned
to the customer after the lease expires.
NOTE 9 - SUBSEQUENT EVENTS
On February 6, 2002 and effective on January 31, 2002, the
Company sold 81% of its outstanding common stock to
Allis-Chalmers Corporation ("Allis"). The purchase price
included $10,250,000 in cash; a $4,000,000 note payable with a
7.5% interest rate and the principal due in four years;
$1,000,000 for a non-compete agreement payable monthly over
five years; an additional payment estimated to be from
$1,000,000 to $1,250,000 for working capital; 1,397,849 shares
of Allis' common stock; and the net income for the month
ending January 31, 2002.
F-14
================================================================================
STRATA DIRECTIONAL TECHNOLOGY, INC.,
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
TOGETHER WITH AUDITORS' REPORT
================================================================================
C O N T E N T S
PAGE
NUMBER
------
INDEPENDENT AUDITORS' REPORT..............................................FF-3
CONSOLIDATED BALANCE SHEETS...............................................FF-4
CONSOLIDATED STATEMENTS OF OPERATIONS.....................................FF-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY...........................FF-6
CONSOLIDATED STATEMENTS OF CASH FLOWS.....................................FF-7
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS..........................FF-8 - FF-16
================================================================================
INDEPENDENT AUDITORS' REPORT
----------------------------
January 25, 2002, except for
Note 11 dated February 5, 2002
To the Shareholders
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
Houston, Texas
We have audited the accompanying consolidated balance sheets of STRATA
DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of Company 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 consolidated financial position of STRATA DIRECTIONAL
TECHNOLOGY, INC., AND SUBSIDIARY as of December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Easley, Endres, Parkhill & Brackendorff, P.C.
Easley, Endres, Parkhill & Brackendorff, P.C.
FF-3
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2001 AND 2000
--------------------------------------------------------
2001 2000
------------- -------------
ASSETS
------
CURRENT ASSETS:
Cash $ 1,629,089 $ 123,311
Accounts receivable, net of allowance
of $53,141 and $15,250 1,790,215 2,674,444
Unbilled revenue 146,861 413,444
Prepaid expenses and other 196,393 129,704
Deposits 5,000 27,005
------------- -------------
Total current assets 3,767,558 3,367,908
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost 5,057,529 12,247,552
Less - Accumulated depreciation (2,456,655) (3,473,635)
------------- -------------
Property, plant and equipment, net 2,600,874 8,773,917
------------- -------------
OTHER ASSETS, net 27,701 264,895
------------- -------------
Total assets $ 6,396,133 $ 12,406,720
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Revolving bank credit line $ 898,815 $ 531,955
Accounts payable 1,214,640 1,754,451
Accrued liabilities 559,777 1,238,354
Long-term debt, current 295,375 1,126,931
------------- -------------
Total current liabilities 2,968,607 4,651,691
VENDOR FINANCING 0 500,000
LONG-TERM DEBT 11,827 1,748,535
------------- -------------
Total liabilities 2,980,434 6,900,226
------------- -------------
COMMITMENTS AND CONTINGENCIES, Note 8
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value;
30,000,000 shares authorized,
17,187,500 shares issued and
outstanding 1,718,750 1,718,750
Common stock, $.01 par value;
70,000,000 shares authorized,
16,765,716 shares issued and
outstanding 167,657 167,657
Additional paid-in capital 16,520,776 16,520,776
Accumulated deficit (14,991,484) (12,900,689)
------------- -------------
Total shareholders' equity 3,415,699 5,506,494
------------- -------------
Total liabilities and
shareholders' equity $ 6,396,133 $ 12,406,720
============= =============
The accompanying notes are an integral part of these financial statements.
FF-4
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
2001 2000
------------- -------------
REVENUES $ 12,985,912 $ 11,561,299
COST AND EXPENSES:
Cost of services 10,487,815 9,365,112
Selling, general and administrative costs 1,289,031 1,096,976
Charge for bad debt, net of recoveries (420,566) (50,914)
Depreciation 542,386 675,245
Amortization 226,000 226,000
------------- -------------
Operating income 861,246 248,880
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (305,645) (496,017)
Other income (expense) 11,795 (24,405)
------------- -------------
Net other income (expense) (293,850) (520,422)
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 567,396 (271,542)
DISCONTINUED OPERATIONS (NOTE 9):
Prior year loss from discontinued
operations, including taxes of $5,625 0 (314,129)
Loss from discontinued operations
during phaseout (1,214,187) 0
Loss on sale of assets of discontinued
segment, including taxes of $95,000 (1,444,004) 0
------------- -------------
NET LOSS $ (2,090,795) $ (585,671)
============= =============
The accompanying notes are an integral part of these financial statements.
FF-5
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
Additional
Preferred Common Paid-In Retained
Stock Stock Capital Deficit Total
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 1999 $ 1,718,750 $ 167,657 $ 16,520,776 $(12,315,018) $ 6,092,165
NET LOSS (585,671) (585,671)
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000 1,718,750 167,657 16,520,776 (12,900,689) 5,506,494
NET LOSS (2,090,795) (2,090,795)
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2001 $ 1,718,750 $ 167,657 $ 16,520,776 $(14,991,484) $ 3,415,699
============= ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
FF-6
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
----------------------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,090,795) $ (585,671)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities-
Issuance of PIK Notes in satisfaction of interest 43,145 52,774
Depreciation 1,090,855 1,401,228
Amortization 226,000 232,819
Loss on disposal of fixed asset including disposal of business segment 1,349,513 39,718
Changes in assets and liabilities-
Accounts receivable 884,229 (94,022)
Unbilled revenue 266,584 (40,230)
Prepaid expenses and other (55,495) (52,257)
Deposits 22,005 (20,000)
Accounts payable and other vendor financing (1,039,811) 319,944
Accrued liabilities (678,577) (211,666)
------------ ------------
Net cash provided by (used in) operating activities 17,653 1,042,637
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of disposal proceeds (579,322) (412,486)
Sale of Production Well Testers, Inc. 4,311,997 0
------------ ------------
Net cash provided by (used in) investing activities 3,732,675 (412,486)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) revolving line of credit, net 366,860 (87,075)
Repayment of long term debt (2,611,410) (624,650)
Direct costs of equity and debt financing 0 (5,000)
------------ ------------
Net cash provided by (used in) financing activities (2,244,550) (716,725)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 1,505,778 (86,574)
CASH AND CASH EQUIVALENTS, beginning of year 123,311 209,885
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,629,089 $ 123,311
============ ============
CASH PAID FOR INTEREST $ 484,894 $ 639,738
============ ============
CASH PAID FOR INCOME TAXES $ 0 $ 0
============ ============
The accompanying notes are an integral part of these financial statements.
FF-7
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 2001 AND 2000
--------------------------
1. ORGANIZATION:
-------------
STRATA Directional Technology, Inc., and Subsidiary, (collectively, with its
subsidiary Production Well Testers, Inc., the "Company") was incorporated in the
state of Texas on January 4, 1996, for the purpose of providing directional and
horizontal drilling technology services to the upstream oil and gas industry.
Business Operations
- -------------------
Management of the Company believes it will be successful in meeting its
strategic business objectives. The Company is subject to all of the risks
inherent in the establishment and growth of a developing business, including,
among other things, limited access to capital and intense competition both for
market share and for experienced and competent operating personnel. The
direction of the Company is largely dependent upon the efforts of its key
management personnel; and the efforts of each employee, particularly its
operations and marketing personnel, and its drillers and guidance technicians
who are critical to successful operations and applications of drilling and
guidance technologies.
The energy services business is influenced by a number of factors, including the
current and anticipated prices of oil and natural gas, the expenditures by oil
and gas companies for exploration and development, the availability of drilling
rigs and a variety of political and economic factors including the worldwide
demand for oil. Historically, the energy services market has been highly
cyclical and volatile.
Throughout the first three quarters of 2001, the Company experienced an
improvement in its operations, which resulted in a favorable impact on the
Company's financial position and generated a positive cash flow sufficient for
the Company to sustain its operations and to pay its debt obligations as they
become due. Commencing with the Fourth Quarter of 2001 the Company experienced a
substantial reduction in revenues which has continued into the First Quarter of
2002, and is largely due to a significant decline in the level of drilling
activity by the Company's major customers in the Company's Gulf Coast market
area.
2. SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of STRATA Directional
Technology, Inc., and Subsidiary, after elimination of all significant
intercompany accounts and transactions.
Revenue Recognition
- -------------------
The Company recognizes revenue as services are performed. Billings made in
advance of services performed are deferred and recorded in the accompanying
consolidated balance sheets as deferred revenue.
The Company also recognizes as service revenue, proceeds receivable from
customers and insurance companies for rental tools lost down hole while
performing drilling services.
FF-8
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (continued):
- --------------------------------------------
Use of Estimates
- ----------------
The presentation of the 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.
Fair Values
- -----------
The carrying amounts of cash, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of their fair values due to the short-term
maturities of these instruments. The fair value of the Company's long-term debt
is estimated based on the terms of each debt agreement and approximates carrying
value.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost, including costs to ready
assets for use. Depreciation is computed on the straight-line method over the
estimated useful lives of the assets beginning with the month in which the
property, plant and equipment are placed in service. At December 31, 2001 and
2000, property, plant and equipment were comprised of the following items:
Useful
Lives 2001 2000
------------- ------------- -------------
$ 0 $ 190,800
Land
Buildings 15 years 0 549,443
Computer equipment 3-5 years 325,173 342,681
Furniture and fixtures 7 years 115,336 125,953
Equipment 3-15 years 4,617,020 11,038,675
------------- -------------
5,057,529 12,247,552
Less accumulated depreciation (2,456,655) (3,473,635)
------------- -------------
Net property, plant and equipment $ 2,600,874 $ 8,773,917
============= =============
Repair and maintenance costs are expensed as incurred, and major renewals and
betterments are capitalized. The cost of assets retired or otherwise disposed of
and the related accumulated depreciation are eliminated from the accounts in the
year of disposal. Gains and losses resulting from property disposals are
included in other income (expense).
The Company reviews certain long-lived assets for impairment whenever events
indicate that the carrying amount of an asset may not be recoverable and
recognizes an impairment loss under certain circumstances in the amount by which
the carrying value exceeds the fair value of the asset.
FF-9
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES (continued):
- --------------------------------------------
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid temporary investments, including those
with an original maturity of three months or less, to be cash equivalents. Cash
equivalents consist primarily of interest-bearing accounts.
Other Assets
- ------------
Included in other assets are amounts related to certain contingent, noncompete
agreements and retention payments aggregating $21,646 and $247,646 for 2001 and
2000 respectively, payable as a result of a prior year acquisition. The
aggregate amounts are being amortized over a four year period, commencing March
15, 1998. For both of 2001 and 2000, amortization amounted to $226,000.
Income Taxes
- ------------
The Company files a consolidated income tax return for federal income tax
purposes. Income taxes are provided for under the liability method, which takes
into account differences between financial statement treatment and tax treatment
of certain transactions. Deferred income tax assets represent the tax effects of
activity that has been reflected in the financial statements but will not be
deductible for tax purposes until future periods. Deferred income tax
liabilities represent tax effects of activity that has been reflected in the
financial statements but will not be taxable until future periods.
3. LINES OF CREDIT:
----------------
Vendor Financing
- ----------------
In 1996, and as amended on December 14, 2000, the Company entered into a
long-term vendor financing agreement with a major supplier of drilling motors
for drilling motor rentals, motor lease costs and motor repair costs. The
agreement, as amended, has a term of five years and full amount of the credit
line is payable in four installments, of which $250,000 is due June 30, 2001,
$250,000 is due December 31, 2001, $250,000 is due March 31, 2002 and $250,000
is due June 30, 2002. The credit line bears interest at an annual rate of 8.5
percent. Payment of the interest on the note is not due until maturity; however,
payments with respect to principal and interest may be made by the Company at
any time without bonus or penalty. As of December 31, 2001 and 2000, the Company
had drawn down the full amount of this credit line of $500,000 and $1,000,000
respectively. In 2001 and 2000, interest payments in the amounts of $127,292 and
$119,668, respectively, were paid in relation to this debt. Interest accrued and
unpaid is included in accounts payable. The agreement with the supplier contains
a clause that in the event of a change in the majority ownership of the Company
or a material adverse change in the Company's business, at the supplier's
discretion, all unpaid rental and interest amounts immediately become due and
payable.
Financial Institution
- ---------------------
On March 31, 1999, and as amended on October 13, 1999, the Company entered into
separate financing agreements with Wells Fargo Business Credit, Inc., (formerly,
Norwest Business Credit, Inc.), to borrow up to $2,600,000 under a revolving
credit facility. Under the terms of the agreement, the revolving credit facility
shall not exceed 75 percent of eligible accounts receivable and bears interest
at the Wells Fargo Credit base rate, plus 3.0 percent.
FF-10
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. LONG-TERM DEBT:
---------------
2001 2000
----------- -----------
Term Notes payable to Wells Fargo Business Credit, Inc., and Subsidiary dated
March 31, 1999, as amended, and bearing interest at the Wells Fargo base rate
plus 2.5% and payable in 60 equal monthly installments $ 273,090 $1,009,670
Note payable dated June 30, 1998, to a former shareholder of STRATA for the
purchase of 71,500 shares of common stock of the Company, bearing interest at
8.0% and payable in 60 equal monthly installments of $2,030 each and may be
paid in full without penalty at any time 34,112 54,688
Note payable effective September 30, 1998, to the former shareholder of PWT as
part of the consideration for the purchase by the Company of all of the stock
of PWT, bearing interest at the prime rate of interest as published in the
Wall Street Journal from time to time; interest is payable annually
commencing September 30, 1999, and principal is due in one installment and
payable on September 30, 2003 0 500,000
Promissory Note payable effective March 11, 1999, Stooksberry, Inc., and
Subsidiary as part of the consideration for the purchase of well testing
equipment, bearing interest at 10 % and payable in three installments being
two installments of $250,000 each on May 1, 1999 and May 1, 2000 and the
final installment of $750,000 on May 1, 2001 0 750,000
Convertible secured note agreement dated July 9, 1999, payable to Energy
Spectrum Partners LP, bearing interest at 9% payable quarterly, convertible
at the option of the noteholder, either in whole or in part, into common
stock of the Company at a conversion price of $0.50 per share. Principal is
payable in full in one installment on March 1, 2006 0 500,000
Convertible subordinated note agreements (PIK Notes) dated December 1, 1999,
March 1, 2000, June 1, 2000, September1, 2000 and December 1, 2000, payable
to Energy Spectrum Partners LP, bearing interest at 9% payable quarterly,
convertible at the option of the noteholder, either in whole or in part, into
common stock of the Company at a conversion price of $0.50 per share.
Principal due on each PIK Note is payable in one installment on March 1, 2006 0 61,108
----------- -----------
Total debt 307,202 2,875,466
Less - current portion (295,375) (1,126,931)
----------- -----------
Long-term debt $ 11,827 $ 1,748,535
=========== ===========
The maturities of long-term and subordinated debt for years ended December 31 are as follows:
2002 $295,375
2003 11,827
------------
$307,202
============
FF-11
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS:
-------------------------------------------------
The Company provides drilling technology services to the oil and gas industry.
As such, the Company's operations are sensitive to fluctuations in oil and gas
price levels and exploration activity. Accounts receivable at any given time are
concentrated primarily in major oil companies and independent producers. An
allowance for doubtful accounts is provided when necessary.
In 2001 and 2000, Company's revenues derived from major customers (customers
comprising 10.0% percent or more of sales) were 36.53% and 34.81%, respectively.
6. SHAREHOLDERS' EQUITY:
---------------------
Preferred Stock
- ---------------
In a prior year, Energy Spectrum Partners, LP converted $6,875,000 of
Convertible Notes into 17,187,500 shares of 9% Cumulative Preferred Stock,
Series C. The preferred shares are entitled to receive cash dividends at an
annual rate of $0.036 per share when and if declared by the Board of Directors
out of funds legally available for that purpose. The dividends are fully
cumulative and are payable quarterly, on the last day of each calendar quarter.
No dividends were declared by the Board of Directors in 2001 and 2000. As of
December 31, 2001 and 2000, there were cumulative, undeclared dividends on
preferred stock in the amounts of $1,392,188 and $773,438, respectively.
Preferred stock is convertible at any time into common stock based on a formula
defined in the certificate of designation, preferences and rights. Preferred
shares have an initial liquidation value of $0.40. At the option of the Company,
preferred shares may be redeemed, however, a liquidation premium of up 9.0
percent is payable if the redemption occurs prior to September 1, 2003. The sale
of the Company, its assets or its subsidiary will trigger a mandatory redemption
requirement for preferred shares.
Stock Options
- -------------
In 1997, the Company established a nonqualified stock option plan ("the Plan").
As of December 31, 2001, 149,954 shares of the Company's common stock were
reserved for future issuance under the Plan. The Plan's activities are
summarized as follows:
Weighted
Shares Average Price
----------- -----------
Outstanding, January 1, 2000 902,154 $ 1.12
Granted 1,786,795 $ 0.40
Forfeited (122,111) $ 0.57
-----------
Outstanding, December 31, 2000 2,566,838 $ 0.65
Granted 0 $ 0.00
Forfeited (1,340,795) $ 0.52
-----------
Outstanding, December 31, 2001 1,226,043 $ 0.78
===========
FF-12
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SHAREHOLDERS' EQUITY (continued):
- ---------------------------------
Shares
Outstanding Remaining Fair Value Using Vested Shares at
at December 31, Contractual Life Black-Scholes December 31,
Exercise Price 2001 (years) Model (per share) 2001
- -------------- --------------- --------------- --------------- ---------------
$0.40 585,000 8 $0.19 117,000
$0.45 79,026 4 $0.21 79,026
$1.00 360,500 6 $0.42 216,300
$1.50 150,517 5 $0.72 149,717
$2.00 51,000 6 $0.84 34,600
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
stock options under the fair value method as provided therein. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
options issued in 2001: risk-free interest ranges of 5.46 to 6.49 percent,
expected lives of 10 years, no assumed volatility and no expected dividends.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Set forth below is a
summary of the Company's net loss as reported and pro forma as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
pro forma information is not meant to be representative of the effects on
reported net income for future years because, as provided by SFAS No. 123, only
the effects of awards granted after January 4, 1996, the inception date, through
December 31, 2001, are considered in the pro forma calculation.
2001 2000
------------------------- -------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ------------ ----------- ------------
(In Thousands)
Net Loss $(2,091) $(2,154) $(585) $(821)
=========== ============ =========== ============
7. INCOME TAXES:
-------------
The Company's provision for taxes is summarized as follows:
2001 2000
---------- ----------
Computed federal tax expense (benefit) $(702,370) $(199,128)
State income taxes 70,000 5,625
Plus tax effect of:
Non-deductible expenses 36,877 33,680
Valuation allowance for loss carry-forward 690,493 165,448
---------- ----------
Current tax expense $ 95,000 $ 5,625
========== ==========
FF-13
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
INCOME TAXES (continued):
- -------------------------
Continuing operations $ 0 $ 0
Non-continuing operations 95,000 5,625
---------- ----------
Tax expense $ 95,000 $ 5,625
========== ==========
As of December 31, 2001, the Company has generated net operating loss ("NOL")
carryforwards of approximately $9,092,000 available to reduce future income
taxes for federal tax purposes. These NOL carryforwards begin to expire in 2019
through 2021. A change in ownership, as defined by federal income tax
regulations, could limit the Company's ability to utilize its carryforward to an
annual amount equal to approximately 5% of the fair value of the Company. As the
Company has incurred losses in recent years and the utilization of these
carryforwards could be limited as discussed above, a valuation allowance has
been established to fully reserve the potential tax benefit related to net
operating losses of approximately $3,091,000 at December 31, 2001.
The Company's net temporary differences relate primarily to the depreciation of
fixed assets using accelerated methods for tax purposes and the write-off of
goodwill for book purposes only. As of December 31, 2001 and 2000, the Company
has net deferred tax assets (liabilities) of approximately $699,000 and
$(172,000), respectively. No deferred tax assets or liabilities are recorded in
these financial statements related to temporary differences.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
Service Agreement
- -----------------
The Company has an arrangement with Administaff, pursuant to which the Company
leases certain personnel to perform Company services. Under this arrangement,
personnel compensation, income tax withholdings, insurance, benefits and
workers' compensation of the applicable personnel are administered through
Adminstaff.
Employment Agreements
- ---------------------
The Company maintains employment agreements with two employees, all of whom are
either officers or directors of the Company. The employment agreements contain
certain change-in-control provisions that would entitle each of the employees to
receive one to three times their respective annual compensation including
applicable bonuses, if any, plus continuation of certain benefits should there
be a change-in-control in the Company (as defined) and employment terminates.
The employment agreements also provide for "keyman" life insurance benefits,
severance benefits, disability and death benefits and, as to one officer,
consulting services under certain circumstances.
Earn-Out Payments
- -----------------
The Company has an earn-out arrangement with the sellers from a prior
acquisition, the payment of which is conditional upon the Company exceeding
certain specific earning levels for each of five periods commencing April 1,
1998, and ending March 31, 2002. For each of 2001 and 2000, the specific earning
level was not met, and as a result, no earn-out payments were made.
FF-14
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
COMMITMENTS AND CONTINGENCIES (continued):
- -----------------------------------------
Leases
- ------
The Company leases a fleet of directional drilling motors under short-term
leases. In addition to the lease payments, the Company is billed for repair
costs and other charges to maintain the drilling motors in good working order,
which charges are also paid to the lessor. In addition to the directional motor
fleet, the Company leases certain office space and shop facilities, the longest
of which expires in 2005. The following represents future minimum rental
payments under non-cancelable operating leases for years ended December 31:
2002 $ 126,706
2003 91,566
2004 49,446
2005 6,800
--------------
$ 274,518
==============
Drilling motor requirements in excess of the lease motor fleet capability are
rented directly from motor suppliers. In addition to the rentals of drilling
motors, the Company also rents certain other drilling tools and equipment as
required in order to perform its directional drilling services. Rental expense
for the years ended December 31, 2001 and 2000 was $1,623,072 and $2,106,355,
respectively.
401(k) Plan
- -----------
The Company's subsidiary, PWT, up to the date of sale of its business and
assets, maintained a 401(k) plan ("the 401(k) Plan") for all of its employees
who completed a minimum 1,000 hours of service with the company and had attained
age 18. Under its terms, each eligible employee may contribute up to a maximum
of 9 percent of his annual income into the 401(k) Plan. PWT matched each
employee contribution up to a maximum of 6 percent of the employee's annual
income. In addition, PWT could contribute a further discretionary amount into
the 401(k) Plan based on company profits. In 2001 and 2000 PWT contributed
$54,410 and $64,811, respectively, as matching contributions and $0 and $60,000,
respectively, as discretionary contributions.
Those Company employees who are leased from Administaff (see Note 8, above) are
eligible to participate in an Administaff administered 401(k) Plan pursuant to
which each employee may contribute up to 20 percent of his annual income,
subject to a maximum annual contribution of $10,500, into the 401(k) Plan. The
Company does not contribute to this Plan.
Insurance
- ---------
The Company carries a broad range of insurance coverage, including general and
business auto liability, commercial property and a general umbrella policy.
Management believes that the Company has not incurred significant claims or
losses on any of its insurance policies.
FF-15
STRATA DIRECTIONAL TECHNOLOGY, INC., AND SUBSIDIARY
---------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
COMMITMENTS AND CONTINGENCIES (continued):
- ----------------------------------------
Litigation
- ----------
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
9. SALE OF BUSINESS:
-----------------
Effective September 21, 2001, the Company sold its land and buildings located in
Laurel, MS and New Iberia, LA, together with all of its well-testing business,
equipment and ancillary repair parts inventory for an aggregate sale price of $
4,700,000, of which $388,003 was used to fund a covenant not-to-compete for a
former officer and closing costs. In conjunction with the sale of the well
testing business, the company formally discontinued well testing operations,
which was the principal business of its subsidiary, Production Well Testers,
Inc.
10. RELATED PARTY TRANSACTIONS:
---------------------------
During 2001, the Company repaid its debt to Energy Spectrum Partners, LP, a
shareholder, in its entirety, as more fully described in Note 3.
11. SUBSEQUENT EVENTS:
------------------
Dividend Payment
- ----------------
Effective January 31, 2002, the Company declared and paid "in kind" all
dividends in arrears on the issued and outstanding 9% Cumulative Convertible
Preferred Stock, Series C, through the issuance of 3,609,375 additional shares
of 9% Cumulative Convertible Preferred Stock, Series C to Energy Spectrum
Partners, LP.
Financing Transactions
- ----------------------
Effective February 5, 2002, the Company refinanced its Credit Facilities with
Wells Fargo Credit, Inc. Under the terms of the financing agreement, the
aggregate credit limit has been revised to $4,154,000 which consists of a
Revolving Credit Facility in the amount of up to $2,500,000 and a Term Credit
Facility in the amount of $1,654,000 amortizing over a sixty month period. The
Credit Facilities bear interest at the Wells Fargo Bank, N.A. base rate of
interest plus 2 percent.
Change of Ownership
- -------------------
Effective February 5, 2002, substantially all the issued and outstanding
preferred and common shares of the Company were acquired by Allis-Chalmers
Corporation, Inc. in a share exchange transaction.
FF-16
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001
(In thousands, except per share data)
JENS
ALLIS- JENS OILFIELD PROFROMA
CHALMERS OILFIELD STRATA SERVICES ALLIS-
CONSOLIDATED STRATA SERVICES PURCHASE PURCHASE CHALMERS
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- ------------- ------------- -------------
Sales 4,796 12,986 9,964 - - 27,746
Cost of Sales 3,331 11,030 4,451 - - 18,812
------------- ------------- ------------- ------------- ------------- -------------
Gross Profit 1,465 1,956 5,513 - - 8,934
Marketing and
Administrative Expense 2,898 1,095 2,832 58 (n) 868 (n) 7,751
(880)(o) (880)
Income (Loss) from ------------- ------------- ------------- ------------- ------------- -------------
Operations (1,433) 861 2,681 (58) (12) 2,063
Other Income
Interest Income 41 - (6) - - 35
Interest Expense (869) (306) - 3(p) (1,127)(p)(v) (2,299)
Other (12) 12 35 - (232)(y) (197)
------------- ------------- ------------- ------------- ------------- -------------
Income (Loss) Before Taxes (2,273) 567 2,710 (55) (1,347) (398)
Taxes - - (831) - 588 (q) (243)
Income (Loss)
------------- ------------- ------------- ------------- ------------- -------------
from Continuing Operations (2,273) 567 1,879 (55) (759) (641)
============= ============= ============= ============= ============= =============
Weighted average shares
outstanding 3,952 19,546
============= =============
Pro forma net income (loss)
per common share $ (0.57) $ (0.03)
============= =============
See notes to unaudited pro forma consolidated financial statements.
P-1
ALLIS-CHALMERS CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2001
(In thousands, except per share data)
JENS
ALLIS- JENS OILFIELD PROFROMA
CHALMERS OILFIELD STRATA SERVICES ALLIS-
CONSOLIDATED STRATA SERVICES PURCHASE PURCHASE CHALMERS
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
------------ ------------- -------------- -------------- -------------- --------------
ASSETS
Cash and cash equivalents $ 152 $ 1,629 $ 2,595 $ 349(d) $(3,776)(j)(r) $ 949
Trade Receivables 973 1,937 1,691 - - 4,601
Inventories, net - - - - - -
Due from related party 61 - - - - 61
Other current assets 153 201 335 - 1,000 (j) 1,689
------------ ------------- -------------- -------------- -------------- --------------
Total Current Assets 1,339 3,767 4,621 349 (2,776) 7,300
Net Property, plant and equipment 4,246 2,601 3,095 699(b) 10,416 (i) 21,057
Goodwill and other intangibles, net 5,067 - - 3,974(c) 1,234 (e) 10,275
Other assets 1,813 28 306 - - 2,147
------------ ------------- -------------- -------------- -------------- --------------
Total Assets $ 12,465 $ 6,396 $ 8,022 $ 5,022 $ 8,874 $ 40,779
============ ============= ============== ============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 1,023 $ 1,194 - $ (862)(d) $ 986 (j) $ 2,341
Trade accounts payable 298 1,215 - - - 1,513
Accrued employee benefits 851 - - - - 851
Other current liabilities 786 560 460 1,100 (t) 1,000 (s) 3,906
------------ ------------- -------------- -------------- -------------- --------------
Total Current Liabilities 2,958 2,969 460 238 1,986 8,611
Accrued postretirement benefit
obligations 824 - - - - 824
Long-term debt 6,833 11 - 1,311 (d) 9,641 (j)(u) 17,796
Redeemable Warrant 600 - - - 900 (y) 1,500
Deferred Tax Liability - - 64 - - 64
Other liabilities - - 270 - 1,234 (e) 1,504
Minority Interest - - - 170 (h) 1,664 (m) 1,834
Preferred Stock - 1,719 - (1,719)(f) - -
- - - 3,500 (a) - 3,500
Shareholders' equity
Common stock 1,738 168 38 (168)(f) (38)(k) 1,738
Capital in excess of par value 4,716 16,520 6 (16,520)(f) (6)(k) -
- - - 267 (x) 47 (w) -
- - - 2,952 (g) 630 (l) 8,612
Accumulated earnings (deficit) (5,204) (14,991) 7,184 14,991 (f) (7,184)(k) (5,204)
------------ ------------- -------------- -------------- -------------- --------------
Total Shareholders' Equity 1,250 1,697 7,228 1,522 (6,551) 5,146
------------ ------------- -------------- -------------- -------------- --------------
Total Liabilities and
Shareholders' Equity $ 12,465 $ 6,396 $ 8,022 $ 5,022 $ 8,874 $ 40,779
============ ============= ============== ============== ============== ==============
See notes to unaudited pro forma consolidated financial statements.
P-2
ALLIS-CHALMERS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Allis Chalmers ("Company") completed two acquisitions and related financing on
February 6, 2002 (the "Acquisition Transactions"). The transactions are more
fully described below.
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) $1,234,000 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
December 31, 2001, and (v) 1,397,849 shares of our common stock. We entered into
a three year employment agreement with Mr. Mortensen under which we will pay Mr.
Mortensen a base salary of $150,000 per year. We also entered into a
Shareholders Agreement with Jens and Mr. Mortensen providing for restrictions
against transfer of the stock of Jens by us and Mr. Mortensen, and providing Mr.
Mortensen the option after February 1, 2003, to exchange his shares of stock of
Jens for shares of our common stock with a value equal to 4.6 times the trailing
EBITDA of Jens determined in accordance with GAAP, less any intercompany loans
or third party investments in Jens, times nineteen percent (19%). Our common
stock will be valued based on the average closing bid price for the stock for
the preceding 30 days. Mr. Mortensen has a demand registration right pursuant to
the Shareholder Agreement that requires the Company to register his shares of
the Company under the Securities Act of 1933, as amended, which can be effected
between August 1, 2002 and July 31, 2005 at Mr. Mortensen's cost, along with
piggyback registration rights.
Jens supplies highly specialized equipment and operations to install casing and
production tubing required to drill and complete oil and gas wells.
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.
Strata provides high end directional and horizontal drilling technology for
specific targeted reservoirs that cannot be reached vertically.
P-3
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 1.33 per share of Company common stock for each share
of Series A Preferred Stock until February 1, 2003. After February 1, 2003, the
conversion ratio will change to 1.67 shares of Company common stock for each
share of Series A Preferred Stock or a higher conversion ratio depending on 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 protection in the event of issuances below the conversion price of
the Series A Preferred Stock, 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.
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.
All of the loan facilities except the revolving credit facility were fully drawn
upon at closing. The revolving credit facility was not drawn upon at the time of
closing.
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 warrants for 465,000 shares for $600,000 after two years and warrants for
700,000 shares for $900,000 after three years. All of the warrants are subject
to redemption at the option of the warrant holders for $1,500,000 in cash after
three years by the company. 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.
P-4
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.
The accompanying unaudited pro forma consolidated condensed financial statements
illustrate the effects of the Acquisition Transactions on the Company's results
of operations and financial position. The unaudited pro forma consolidated
condensed statements of operations for the twelve months ended December 31, 2001
are based on the historical statements of operations and assume that the
Acquisition Transactions had occurred as of the beginning of the period
presented. The unaudited pro forma consolidated condensed statement of financial
position as of December 31, 2001 is based on the historical statement of
financial position of the Company and assumes that the Acquisition Transactions
took place on December 31, 2001.
Certain information normally included in the financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The unaudited pro forma consolidated condensed financial
statements should be read in conjunction with our audited financial statements
in our Form 10-K Annual Report including notes thereto for the year ended
December 31, 2001 filed with the SEC.
P-5
ALLIS-CHALMERS CORPORATION
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
financial statements of the Company:
a) Allis Preferred stock issued to Energy Spectrum in exchange for Strata
stock.
b) Recognition of fair value of fixed assets upon the acquisition of Strata.
c) Recognition of goodwill and other intangible assets resulting from the
acquisition.
d) Net increase in debt related to Strata acquisition.
e) Recording of Non-compete obligation for amount payable to seller of Jens.
f) Elimination for consolidation of Strata preferred and common stockholders'
equity.
g) Issuance of Allis common stock to Energy Spectrum upon acquisition of
Strata.
h) To reflect the minority interest in Strata upon consolidation.
i) Recognition of fair value of fixed assets upon the acquisition of Jens.
j) Issuance of new debt related to Jens acquisition (the Senior Term Note of
$4,042,000, the Real estate note for $532,000, subordinated debt of
$3,000,000 and a sellers note for $4,000,000). The Company received cash
in the amount of $6,574,000 in addition to $1,000,000 that was placed in
an escrow fund to be used for the purchase price adjustment discussed in
(w) below.
k) Elimination of Jens stockholders' equity for consolidation purposes.
l) Issuance of Allis common stock to the seller of Jens in connection with
the Jens purchase.
m) To record the minority interest in Jens for consolidation purposes.
n) Increase in depreciation due to the increase in fixed asset values of
acquired companies.
o) Elimination of owners bonus and compensation difference for Jens.
P-6
p) Increase in interest expense due to debt incurred to acquire Jens and
Strata.
q) Reduction in income taxes due to filing acquired companies in a
consolidated tax return.
r) Reduction for cash paid ($10,250,000) to the seller of Jens at closing.
s) Estimated purchase price liability based on working capital to be paid to
the seller of Jens in the second quarter of 2002.
t) Estimated costs of personnel reorganization and other future costs at
Strata.
u) Recording of the new put option for $1,500,000 related to the warrants
issued to lenders and the cancellation of the former put option for
$600,000.
v) The net increase on MCA in interest amortization ($317,000) of the
discount on debt resulting from the warrant put option discussed in (y).
w) Recorded value of warrants given to the Banks.
x) Issuance of warrats for Allis common stock to Energy Spectrum in
acquisition of Strata.
y) Minority interest in Jens income.
P-7