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<SEC-DOCUMENT>0001019687-03-000751.txt : 20030415
<SEC-HEADER>0001019687-03-000751.hdr.sgml : 20030415
<ACCEPTANCE-DATETIME>20030415131504
ACCESSION NUMBER: 0001019687-03-000751
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 20
CONFORMED PERIOD OF REPORT: 20021231
FILED AS OF DATE: 20030415
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ALLIS CHALMERS CORP
CENTRAL INDEX KEY: 0000003982
STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590]
IRS NUMBER: 390126090
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 002-59583
FILM NUMBER: 03650068
BUSINESS ADDRESS:
STREET 1: 7660 WOODWAY #200
CITY: HOUSTON
STATE: TX
ZIP: 77063
BUSINESS PHONE: 713-369-0550
MAIL ADDRESS:
STREET 1: 7660 WEELWAY
STREET 2: #200
CITY: HOUSTON
STATE: TX
ZIP: 77063
FORMER COMPANY:
FORMER CONFORMED NAME: ALLIS CHALMERS MANUFACTURING CO
DATE OF NAME CHANGE: 19710614
</SEC-HEADER>
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>allis_10k-123102.txt
<TEXT>
<PAGE>
UNITED STATE SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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
-----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 39-0126090
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7660 WOODWAY, SUITE 200, HOUSTON, TEXAS 77063
---------------------------------------------
(Address of principal executive offices) (Zip code)
(713) 369-0550
--------------
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.15 PER SHARE
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 if the disclosure of delinquent filers pursuant to ITEM
405 of Regulation S-K (ss.220.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the common equity held by non-affiliates of the
registrant, computed using the average of the bid and ask price of the common
stock of $1.40 per share on June 28, 2002, as reported on the OTC Bulletin
Board, was approximately $2,675,705 (affiliates included for this computation
only: directors, executive officers and holders of more than 5% of the
registrant's common stock).
At March 28, 2003, there were 19,633,340 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Information Statement to be filed by the registrant
on or prior to April 30, 2003 are incorporated by reference into Part III of
this Form 10-K.
<PAGE>
2001 FORM 10-K CONTENTS
-----------------------
PART I
ITEM PAGE
---- ----
1. Business............................................................. 3
2. Properties........................................................... 9
3. Legal Proceedings.................................................... 9
4. Submission of Matters to a Vote of 11 Security Holders...............11
PART II
5. Market for Registrant's Common Equity 12 and Related
Stockholder Matters................................................12
6. Selected Financial Data..............................................12
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
7A. Quantitative and Qualitative Disclosures about
Market Risk........................................................30
8. Financial Statements.................................................30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................61
PART III
10. Directors and Executive Officers of the Registrant..................61
11. Executive Compensation..............................................61
12. Security Ownership of Certain Beneficial Owners and Management......61
13. Certain Relationships and Related Transactions......................61
14. Controls and Procedures.............................................61
PART IV
15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...........................................................62
Signatures and Certifications................................................65
<PAGE>
PART I.
ITEM 1. BUSINESS
--------
This document contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such
differences include, but are not limited to, the general condition of the oil
and natural gas drilling industry, demand for our oil and natural gas service
and rental products, and competition. Other factors are identified in our
Securities and Exchange Commission filings and elsewhere in this Form 10-K under
the heading "Risk Factors" located at the end of "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations."
GENERAL
- -------
We were incorporated in 1913 under Delaware law. We reorganized in bankruptcy in
1988, and sold all of our major businesses. In May 2001, we consummated a merger
in which we acquired OilQuip Rentals, Inc. (OilQuip) and its wholly owned
subsidiary, Mountain Compressed Air, Inc. ("Mountain Air"), in exchange for
shares of our common stock, which upon issuance represented over 85% of our
outstanding common stock. In February 2002, we acquired approximately 81% of the
capital stock of Jens' Oilfield Service, Inc. ("Jens'") and substantially all of
the capital stock of Strata Directional Technology, Inc. ("Strata"). In December
2001, we sold Houston Dynamic Services, Inc., which conducted a machine repair
business. Our business conducted in 2001 did not include the operations of Jens'
and Strata, which will be material to our continuing business operations.
Through Mountain Air, Jens' and Strata, and through additional acquisitions in
the oil and natural gas drilling services industry, we intend to exploit
opportunities in the oil and natural gas service and rental industry. Currently,
we receive 80% to 85% of our revenues from natural gas drilling services and the
balance from oil drilling services; however, most of our services can be
utilized for either activity. Mountain Air, Strata and Jens' had revenues of
approximately $3.7 million, $6.5 million and $7.8 million, respectively, during
the year ended December 31, 2002 (Strata and Jens' revenues represent results
for the period February 6, 2002 through December 31, 2002). See "Item 8.
Financial Statements," for additional asset, revenue and profit and loss
information for each of our subsidiaries.
INDUSTRY OVERVIEW
- -----------------
Oil and natural gas producers tend to focus on their core competencies of
identifying reserves, which has resulted in the extensive outsourcing of
drilling and service functions. The use of service companies allows gas
companies to avoid the capital and maintenance costs of the equipment in what is
already a capital intensive industry.
As drilling becomes increasingly more technical and costly, exploration and
production companies are increasingly demanding higher quality equipment and
service from equipment and service providers. Major gas companies are currently
consolidating their supplier base to streamline their purchasing operations and
generate economies of scale by purchasing from just a few suppliers. Producers
are favoring larger suppliers that provide a comprehensive list of products and
services. Companies that can meet customer's demands will continue to earn new
and repeat business. We believe many businesses in the highly fragmented
oilfield industry lack sufficient size (many businesses generate annual revenues
of less than $15 million), lack depth of management (many businesses are
family-owned and managed) and have unsophisticated production techniques and
control capabilities. Accordingly, we believe we can offer customers crucial
advantages over our competitors.
3
<PAGE>
We believe that opportunities exist in the oil and gas service industry, and
that consolidation among larger oilfield service providers has created an
opportunity for us to compete effectively in certain niche markets which are
under-served by larger oilfield service and equipment companies and in which we
can provide better products and services than the smaller, fragmented
competitors currently providing a significant portion of the services in this
industry.
BUSINESS STRATEGY
- -----------------
Our strategy is based on broadening the geographic scope of our products and
services primarily within two areas of the oilfield services and equipment
industry: (a) casing and tubing handling services and equipment and (b) drilling
services. We intend to implement this growth strategy through internal expansion
and the acquisition of companies operating within these segments. We intend to
seek to identify and acquire companies with significant management and field
expertise, strong client relationships and high quality products and services.
With typically less than $20 million in revenues, each target company is likely
to have limited financial resources for expansion and few exit alternatives for
the owners. As discussed under "Risk Factors" at the end of "Item 7,
Management's Discussion and Analysis of Results of Operation and Financial
Condition", there can be no assurance that we will be able to complete any
further acquisitions.
DESCRIPTION OF SUBSIDIARIES' BUSINESSES
- ---------------------------------------
JENS' OILFIELD SERVICE, INC. Jens', founded in 1982, is headquartered in
Edinburg, Texas. Jens' supplies specialized equipment and trained operators to
install casing and tubing, change out drill pipe and retrieve production tubing
to both onshore and offshore drilling and workover operations. Most wells
drilled for oil and natural gas require some form of casing and tubing to be
installed in the completion phase of a well. Management believes that through
geographic expansion, the Company can optimize the utilization of both its
equipment and personnel by accessing additional niche markets underserved by the
larger oilfield service companies in the U.S. and Mexico.
Jens' has an extensive inventory of specialized equipment consisting of casing
tongs and laydown machines in various sizes, powered by diesel motors and driven
by hydraulic pumps. Non-powered equipment consists of elevators, slips, links
and projectors. Jens' also maintains a fleet of other revenue generating
equipment such as forklifts and delivery trucks that transport Jens' various
rental equipment and transfer the customers' casing from truck to pipe rack.
Jens' charges its customer for tong trucks, laydown trucks, and personnel on a
hourly basis portal to portal and rental equipment on a daily basis portal to
portal. The customer is liable for damaged or lost equipment.
Jens' has been operating in the Rio Grande Valley for over 20 years. Jens'
currently provides service primarily to South Texas and to Mexico. Although
there are two large companies, Frank's Casing Crew and Rental Tools Inc. and
Weatherford International Inc. ("Weatherford"), which have a substantial portion
of the casing crew market, it remains highly competitive and fragmented with at
least 30 casing crew companies working in the U.S. Jens' believes it has several
competitive advantages including:
o A well-established, loyal customer base in South Texas and Mexico
o An experienced management team with at least 15 years of service with
Jens'
o An extensive inventory of specialized equipment; (d) a reputation for
customer responsiveness
o Substantial drilling activity in South Texas, primarily a natural gas
market
o An excellent relationship with its Mexican joint venture partner
(discussed below), which enables Jens' to penetrate the Mexican market.
4
<PAGE>
For the years ended December 31, 2002 and 2001, El Paso Energy Corp, accounted
for about approximately $1.4 million, or 18%, and approximately $1.2 million or
16%, respectively, of Jens' revenues. Jens' top ten customers accounted for $4.1
million, or 52%, and $4.2 million, or 42%, of revenues for the years ended
December 31, 2002 and 2001, respectively.
Jens' operates in Mexico through Jens' Mexican joint venture partner, Materiales
y Equipo Petroleo, S.A. de C.V. ("Maytep") in Villa Hermosa, Reynosa, Vera Cruz,
and Ciudad de Carmen, Mexico. Jens' provides substantially all of the necessary
equipment and Maytep provides all labor, repairs, maintenance, insurance, and
supervision for provision of the casing crew and torque turn service for
Petroleos Mexicanos ("Pemex"). Jens' has approximately $8.0 million of equipment
in Mexico, and has operated profitably in Mexico since 1997. In addition, Maytep
is responsible for the preparation of billing invoices, collection of Pemex
receivables, and the import and export of equipment. Bidding protocol for Pemex
requires that service providers with Mexican ownership like Maytep be awarded
contracts as long as they are reasonably competitive.
Maytep is responsible for payment to Jens', even if it is unable to collect
payment on a timely basis, though in the past the Company's receipt of payments
has been delayed for significant periods of time by failure of Pemex to pay
amounts due Maytep on a timely basis. Jens' primary competitors in Mexico are
South American Enterprises and Weatherford, both of which provide similar
operations.
For the years ended December 31, 2002, 2001 and 2000, Jens' Mexico operations
accounted for approximately $2.7 million, $2.4 and $2.2 million, respectively,
of Jens' revenues.
STRATA DIRECTIONAL TECHNOLOGY, INC. Strata Directional Technology, Inc.
("Strata"), founded in 1996, is headquartered in Houston, Texas. Energy Spectrum
Partners LP, a Dallas based private equity fund, ("Energy Spectrum") has been
Strata's equity sponsor since August 1997. Strata provides high quality
directional, horizontal and measure while drilling, or MWD, drilling services to
oil and gas companies operating both onshore and offshore in Texas and
Louisiana. Management believes there are several advantages to horizontal and
directional drilling applications including:
o Improved reservoir production performance beyond conventional vertical
wells
o Reduction of the number of field development wells
o Reduction of water and gas coning problems
o Improvement of total cumulative recoverable reserves
o Faster payouts to the E&P companies
Strata provides specialized directional drilling services in niche markets,
principally in the Gulf Coast region (Texas and Louisiana), including the Austin
Chalk, where specialized, technically focused applications are necessary.
Strata's teams of highly experienced personnel utilizing state of the art tools
and engineering provide services to customers both onshore and offshore.
Services provided include tailored well planning and engineering to meet
drilling performance and geological or reservoir targets set by the customer,
directional drilling tool configuration, well site directional drilling
supervisors and guidance operators, new well and reentry drilling, steerable
drilling, and log while drilling, or LWD.
Swift Energy and Anadarko Petroleum each accounted for more than 10% of Strata's
annual revenues in each of the last three years. Strata's top ten customers
accounted for $5.2 million, or 75%, and $9.8 million, or 75%, of revenues for
the years ended 2002 and 2001, respectively.
There are three directional drilling companies, Schlumberger, Halliburton and
Baker Hughes, who dominate the market both worldwide and in the U.S., as well as
numerous small regional players, including Strata. There are believed to be at
least 50 regional directional and horizontal drilling companies operating in the
U.S. Management estimates that the regional market companies account for
approximately 15% of the domestic market.
5
<PAGE>
MOUNTAIN COMPRESSED AIR, INC. Mountain Air, whose predecessor was founded in
1975, is headquartered in Farmington, New Mexico. Mountain Air provides
compressed air equipment and trained operators to companies drilling for natural
gas in the southwestern U.S. Mountain Air and its predecessor have provided
equipment and services for natural gas drilling and workover in the San Juan
Basin and Rocky Mountain region of the U.S. for over 25 years. The primarily
fabrication facility is in Grand Junction while the administrative and field
equipment facility is in Farmington, New Mexico. Management believes that
underbalanced drilling provides a cost-effective alternative to traditional
drilling and workover methods for certain types of reservoirs. As underbalanced
drilling activity increases in North America, management believes its drilling
and workover operations will expand. Management believes that there are
opportunities for both organic and acquisition growth in this sector onshore and
offshore.
Air drilling is a method of rotary drilling that uses compressed air, mist or
foam as the circulation medium, rather than mud. It is used primarily in
formations containing small amounts of water and is favored in natural gas
formations that are stable enough to allow drilling with air, or where
conditions do not allow the use of drilling fluids. As the bit drills, the
compressors provide air to move the cuttings away from the drill bit's teeth and
lift them to the surface for disposal. Air, unlike mud, exerts very low pressure
on the bottom of the hole. As a result, the drilling rate can be dramatically
increased, thus saving the customer substantial drilling expense.
Underbalanced air drilling has certain competitive advantages due to the speed
with which wells can be drilled utilizing air drilling technology compared to
traditional drilling with mud. Underbalanced air drilling's competitive
advantage over traditional drilling includes lower overall fuel and operating
costs due to quicker drilling and no additional mud or fluid costs. Mountain Air
is recognized regionally as an industry leader in underbalanced drilling. With
over 30 years of drilling experience, Mountain Air has developed extensive
knowledge of downhole conditions and specialized mists and foams, which provide
a more efficient and safer drilling method. It has been a pioneer in developing
highly technical equipment, procedures and processes to increase rate of
penetration and bit life, and to drill successfully in "lost circulation" zones.
Due to the highly technical nature of underbalanced drilling, a highly trained
staff of field service personnel, parts inventory and a diversified fleet of air
compressors are often necessary to perform such functions in the most economic
and safe manner.
Mountain Air has a fleet of 38 identical Gardner-Denver two-stage reciprocating
compressors that are powered by Caterpillar diesel engines and use a piston-type
compressor. Mountain Air's nearly exclusive use of a piston type air compressor
results in low fuel consumption and reliable performance, which sets it apart
form its competitors which generally use engines that consume significantly more
fuel.
Mountain Air provides air compressors, air boosters and mist pumps for both
underbalanced drilling and workover activities. Once a well has been drilled in
an under balanced process, any workover drilling activity will also use the same
process to avoid damaging the reservoir.
Mountain Air has concentrated its operations in New Mexico, Colorado and Utah.
However, it has performed work in Wyoming, Texas, Louisiana, California, Nevada
and the Gulf of Mexico. Mountain Air has relied on long-term relationships to
generate sales. As a result, it is dependent on a few select customers for the
majority of its revenues. Mountain Air's top three customers accounted for more
than 85% of annual revenues in each of the last three years. Burlington
Resources accounted for approximately 50% of revenues in 2002 and more than 65%
of revenues during 2001 and 2002.
6
<PAGE>
Mountain Air maintains a substantial market share in its operating region and
has one major competitor, Weatherford. Management believes that its fuel
efficient equipment combined with its extensive knowledge of the geographic
region, expertise in air drilling applications, existing client relationships,
and team of skilled operators gives it a distinct competitive advantage in its
operating region. There are a number of other, larger and better capitalized
companies operating throughout the Southwest, and expanding into these regions
would require significant capital expenditures.
Cyclical Nature of Equipment Rental and Services Industry
- ---------------------------------------------------------
The oil and gas equipment rental and services industry is highly cyclical. The
most critical factor in assessing the outlook for the industry is worldwide
supply and demand for oil and natural gas (the supply and demand for oil and gas
are generally correlative). Its peaks and valleys are further apart than those
of many other cyclical industries. This is primarily a result of the industry
being driven by commodity demand and corresponding price increases. As demand
increases, producers raise their prices. The price escalation enables producers
to increase their capital expenditures. The increased capital expenditures
ultimately result in greater revenues and profits for services and equipment
companies.
After experiencing a strong market throughout most of 2000 and the first half of
2001, the energy services industry experienced a significant drop-off due to
lower demand for hydrocarbons (particularly natural gas), which the company
believes was largely a function of the U.S. recession, a warm winter and
increased inventory levels. This trend continued for most of 2002; however, in
the fourth quarter of 2002, the market experienced an increase in demand due to
a colder than expected winter and decreased inventory levels. Management
believes that energy services activity will rebound in 2003 due to increased
demand, declining production rates. Because of these market fundamentals for
natural gas, management believes the long-term trend of activity in the oilfield
services market are favorable; however, these factors could be more than offset
by other developments affecting the worldwide supply and demand for oil and
natural gas products.
COST CONTAINMENT PROGRAM. Upon consummation of the Jens' and Strata transactions
in February 2002, we implemented a company-wide cost containment program. The
program's goal was to lower each subsidiary's operating breakeven costs such
that the debt outstanding could be serviced at depressed revenue levels. These
measures included:
o Eliminating and consolidating a number of management and other
positions, and changing employment policies to reduce employee
idle time and overtime expenses.
o Entering into a lease transaction (with a sale option) all of
Strata's Measure While Drilling ("MWD") equipment to Target
MWD, Inc. and selling certain of Strata's drilling tools (such
as non-magnetic drill collars, crossover subs, float subs and
orienting subs) to Gammalloy Ltd., and negotiating a preferred
pricing structure and lease arrangement with each purchaser
which enables Strata to lease the equipment back on an
as-needed basis, market package jobs, reduce capital
expenditures, lower the cost of equipment per job, and expand
capabilities. The net proceeds of these transactions,
approximately $290,000, were used to reduce Strata's term
debt.
o Negotiating a lease arrangement for downhole drilling motors
with National Oilwell that further reduces Strata's capital
expenditure requirements and increases its competitiveness by
providing an extensive supply of downhole motors with
immediate availability;
Competition
- -----------
As discussed above, we experience significant competition in all areas of our
business. In general, the markets in which we compete are highly fragmented, and
a large number of companies offer services that overlap and are competitive with
our services and products. We believe that the principal competitive factors are
technical and mechanical capabilities, management experiences, past performance
and price. While we have considerable experience, there are many other companies
that have comparable skills. Many of our competitors are larger and have greater
financial resources than we do.
7
<PAGE>
Suppliers
- ---------
MOUNTAIN AIR. Where possible, Mountain Air purchases equipment from a number of
suppliers and at auctions on an opportunistic basis. The equipment provided by
these suppliers is customized and often times overhauled by Mountain Air in
order to improve performance. In other instances, equipment must be made to
order. As a result of purchasing the majority of its equipment at auction,
Mountain Air is not significantly dependent upon any one supplier.
Strata
- ------
The equipment required for Strata's operations is generally leased, and Strata
has only a single supplier for most or all of each type of equipment it uses
(downhole motors, tubing, and MWD and LWD equipment), and is therefore dependent
upon these suppliers. However, other suppliers of such equipment are available.
Strata has entered into preferred leasing agreements with its current suppliers,
which assure the availability of equipment through 2006 for its tubing, MWD and
LWD equipment. Strata has an indefinite contract with its supplier of downhole
motors.
Jens'
- -----
Historically, Jens' has sought to purchase equipment at auction or on an
opportunistic basis; however, there is currently a shortage of casing and tubing
equipment, which is available new from four suppliers. Management believes there
is a six to eight month backlog on orders to these suppliers. However, Jens'
currently owns sufficient equipment for its projected operations over the next
12 months, and believes the shortage of equipment will result in increased
demand for its services.
Backlog
- -------
We do not have a backlog of orders because our customers utilize our services on
an as-needed basis without significant on-going commitments.
Employees
- ---------
Our strategy is to acquire Companies with strong management and to enter into
long-term employment contracts with key employees in order to preserve customer
relationships and assure continuity following acquisition. We believe we have
good relations with our employees, none of which are represented by a union. We
actively train employees across various functions, which we believe is crucial
to motivate our workforce and maximize efficiency. Employees showing a higher
level of skill are trained on the more technically complex equipment and given
greater responsibility. All employees are responsible for on-going quality
assurance.
At December 31, 2002, we had 143 employees, which included 22 Mountain Air
employees, 85 Jens' employees, 32 Strata employees and 4 employees of
Allis-Chalmers Corporation.
Insurance
- ---------
We carry a variety of insurance for our operations, and are partially
self-insured for certain claims in amounts that we believe to be customary and
reasonable. However, there is a risk that our insurance may not be sufficient to
cover any particular loss or that insurance may not cover all losses. Finally,
insurance rates have in the past been subject to wide fluctuation, and changes
in coverage could result in less coverage, increases in cost or higher
deductibles and retentions.
8
<PAGE>
Federal Regulations and Environmental Matters
- ---------------------------------------------
Our operations are subject to federal, state and local laws and regulations
relating to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Because we provide services to companies producing oil and gas, which
are toxic substances, we may become subject to claims relating to the release of
such substances into the environment. While we are not currently aware of any
situation involving an environmental claim that would likely have a material
adverse effect on us, it is always possible that an environmental claim could
arise that could cause our business to suffer.
In addition to claims based on our current operations, we are from time to time
subject to environmental claims relating to our activities prior to our
bankruptcy in 1988 (See, "Item 2. Legal Proceedings").
Houston Dynamic Service, Inc.
- -----------------------------
Houston Dynamic Service, Inc which we sold on December 12, 2001, serviced and
repaired various types of mechanical equipment, including compressors, pumps,
turbines, engines and other machinery, providing repair, inspection, testing and
other services for various industrial customers, including those in the
petrochemical, chemical, refinery, utility, waste and waste treatment, minerals
processing, power generation, pulp and paper and irrigation industries.
Intellectual Property Rights
- ----------------------------
As part of our overall corporate strategy to focus on its core business of
providing services to the oil and gas industry and to increase shareholder
value, we are investigating the sale or license of our worldwide rights to
patents, trade names and logos for products and services outside the energy
sector.
ITEM 2. PROPERTIES
----------
Mountain Air leases an approximately 6,000 square foot facility in Grand
Junction, Colorado, which includes offices, shop and a warehouse. It also leases
an approximately 10,000 square foot facility in Farmington, New Mexico, which
includes offices, shop and a warehouse.
Jens' owns facilities located in Edinburg, Texas on approximately 8 acres. One
building has approximately 5,000 square foot of office space, 5,000 square feet
of additional expansion capacity and 2,500 square feet of storage capability.
Additionally, there is a 10,000 square foot mechanical repair, tool storage and
maintenance facility. In addition to the property above, Jens' lease yards
located in Victoria and Pearsall, Texas. The yard in Pearsall is owned by Jens
Mortensen, a current executive of the Company.
Strata leases office space and a shop in Houston, Texas. In connection with the
acquisition of Strata, we relocated our principal executive offices to Strata's
offices in Houston, Texas.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
Reorganization Proceedings Under Chapter 11 of the United States Bankruptcy
- ---------------------------------------------------------------------------
Code.
- -----
On June 29, 1987, we filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. Our plan of reorganization was confirmed by the
Bankruptcy Court after acceptance by our creditors and stockholders, and was
consummated on December 2, 1988.
At confirmation of our plan of reorganization, the United States Bankruptcy
Court approved the establishment of the A-C Reorganization Trust as the primary
vehicle for distributions and the administration of claims under our plan of
reorganization, two trust funds to service health care and life insurance
programs for retired employees and a trust fund to process and liquidate future
product liability claims. The trusts assumed responsibility for substantially
all remaining cash distributions to be made to holders of claims and interests
pursuant to our plan of reorganization. We were thereby discharged of all debts
that arose before confirmation of our plan of reorganization.
We do not administer any of the aforementioned trusts and retain no
responsibility for the assets transferred to or distributions to be made by such
trusts pursuant to our plan of reorganization.
As part of our plan of reorganization, we settled U.S. Environmental Protection
Agency ("EPA") claims for cleanup costs at all known sites where we were alleged
to have disposed of hazardous waste. The EPA settlement included both past and
future cleanup costs at these sites and released us of liability to other
potentially responsible parties in connection with these specific sites. In
addition, we negotiated settlements of various environmental claims asserted by
certain state environmental protection agencies.
Subsequent to our bankruptcy reorganization, the EPA and state environmental
protection agencies have in certain cases asserted we are liable for cleanup
costs or fines in connection with several hazardous waste disposal sites
containing products manufactured by us prior to consummation of the Plan of
Reorganization. In each instance, we have taken the position that the cleanup
cost or other liabilities related to these sites were discharged in the
bankruptcy, and the cases have been disposed of without material cost. A number
of Federal Courts of Appeal have issued rulings consistent with this position
and based on such rulings we believe that we will continue to prevail in our
position that our liability to the EPA and third parties for claims for
environmental cleanup costs that had pre-petition triggers have been discharged.
However, there can be no assurance that we will not be subject to environmental
claims relating to pre-bankruptcy activities that would have a material, adverse
effect on us.
The EPA and certain state agencies continue from time to time request
information in connection with various waste disposal sites containing products
manufactured by us before consummation of the Plan of Reorganization that were
disposed of by other parties. Although we have been discharged of liabilities
with respect to hazardous waste sites, we are under a continuing obligation to
provide information with respect to our products to federal and state agencies.
The A-C Reorganization Trust, under its mandate to provide Plan of
Reorganization implementation services to us, has responded to these
informational requests because pre-bankruptcy activities are involved, and
therefore we do not incur material expenses as a result of responding to such
requests.
No environmental claims have been asserted against us involving our
post-bankruptcy operations. However, there can be no assurance that we will not
be subject to material environmental claims in the future.
10
<PAGE>
We are named as a defendant from time to time in product liability lawsuits
alleging personal injuries resulting from our activities prior to our
reorganization involving asbestos. These claims are referred to and handled by a
special products liability trust formed to be responsible for such claims in
connection with our reorganization. As with environmental claims, we do not
believe we are liable for product liability claims relating to our business
prior to our bankruptcy; moreover, the products liability trust is defending
(and is responsible for costs associated with) all such claims. However, there
can be no assurance that we will not be subject to material product liability
claims in the future.
We are subject to legal proceedings, claims and litigation arising in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
-------------------------------------------------------------
MARKET INFORMATION. There is no established public trading market for the common
stock, which is traded on the Over the Counter Bulletin Board. We are
investigating listing our common stock on an exchange; however, we do not
currently meet the listing requirement of any national U.S. exchange.
The following table sets forth, for the periods indicated, the high and low bid
information for the common stock, as determined from sporadic quotations on the
Over-the-Counter Bulletin Board, as well as the total number of shares of common
stock traded during the periods indicated:
<TABLE>
<CAPTION>
CALENDAR QUARTER HIGH LOW VOLUME
- ----------------------------------------------------------------------------------------
2001 (# OF SHARES)
<S> <C> <C> <C>
First Quarter............................... 1.75 1.44 12,100
Second Quarter.............................. 2.50 1.30 18,600
Third Quarter............................... 1.85 1.07 6,200
Fourth Quarter............................. 1.70 .90 8,200
2002
First Quarter............................... 1.25 .40 239,800
Second Quarter.............................. 2.00 .75 31,100
Third Quarter............................... 1.40 .75 15,400
Fourth Quarter............................. 1.01 .12 243,100
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
HOLDERS. As of March 27, 2003, there were approximately 6,800 holders of our
common stock. On March 27, 2003, the bid price for our common stock was $0.18,
and the last reported sale price was $0.75 on March 10, 2003.
DIVIDENDS. No dividends were declared or paid during the past three years, and
no dividends are anticipated to be declared or paid in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
As discussed in "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation", in May 2001, for financial
reporting purposes, we were deemed to be acquired by OilQuip Rentals, Inc.
Accordingly, the following data for periods prior to May 2001 reflect only the
operations of OilQuip Rentals, Inc., which was incorporated in February 2000,
and, from February 2001, its subsidiary, Mountain Air.
12
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<CAPTION>
Year Ended December 31,
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA: 2002 2001 2000
---- ---- ----
<S> <C> <C> <C>
Sales $ 17,990 $ 4,796 $ -
Income (loss) from continuing
Operations $ (3,969) $ (2,273) $ (627)
Net income (loss) $ (3,969) $ (4,577) $ (627)
Net income (loss) attributed to common
shareholders $ (4,290) $ (4,577) $ (627)
Per Share Data:
Net (loss) income per
common
share, basic and diluted $ (0.23) $ (1.15) $ (1.57)
Weighted average number of common
shares outstanding, basic and diluted 18,831 3,952 400
CONSOLIDATED BALANCE SHEET DATA
YEAR ENDED DECEMBER 31,
2002 2001 2000
---- ---- ----
Total Assets $ 34,778 $ 12,465 $ 2,360
Long-term debt classified as:
Current $ 13,890 $ 1,023 $ -
Long Term $ 7,731 $6,833 $ -
Stockholders' Equity $1,009 $1,250 $ 2,348
Book value per share $ 0.05 $0.32 $5.87
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
-------------------------------------------------
BACKGROUND
- ----------
Prior to 2001, we operated primarily through Houston Dynamic Services, Inc
("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 Mountain Air. 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'.
Our business conducted in 2001 did not include the operations of Jens' and
Strata.
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.
13
<PAGE>
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 "Item 8 -- Financial Statements." Note that our preparation of
this Annual Report on Form 10-K 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.
REVENUE RECOGNITION. Our revenue recognition policy is significant because our
revenue is a key component of our results of operations. In addition, our
revenue recognition policy determines the timing of certain expenses, such as
commissions and royalties. We follow very specific and detailed guidelines in
measuring revenue; however, certain judgments affect the application of our
revenue policy. Revenue results are difficult to predict, and any shortfall in
revenue or delay in recognizing revenue could cause our operating results to
vary significantly from quarter to quarter and could result in future operating
losses. Revenues are recognized by the Company and its subsidiaries as services
are provided.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets, which include property,
plant and equipment, goodwill and other intangibles, comprise a significant
amount of the Company's total assets. The Company makes judgments and estimates
in conjunction with the carrying value of these assets, including amounts to be
capitalized, depreciation and amortization methods and useful lives.
Additionally, the carrying values of these assets are 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.
GOODWILL AND OTHER INTANGIBLES - The Company has recorded approximately
$10,479,000 of goodwill and other identifiable intangible assets. The Company
performs purchase price allocations when it makes a business combination.
Business combinations and subsequent purchase price allocations have been
consummated for purchase of the Mountain Air, Strata and Jens' operating
segments. The excess of the purchase price after allocation of fair values to
tangible assets are allocated to goodwill and other identifiable intangibles.
Subsequently, the Company has performed its initial impairment tests and annual
impairment tests in accordance with Financial Accounting Standards Board No.
141, BUSINESS COMBINATIONS, and Financial Accounting Standards Board No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. These valuations required the use of
third-party valuation experts who in turn developed assumptions to value the
carrying value of the individual reporting units. Significant and unanticipated
changes to these assumptions could require a provision for impairment in a
future period.
NEW ACCOUNTING PRONOUNCEMENTS
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.
14
<PAGE>
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of SFAS No. 146 will apply to any exit or disposal activities
initiated by the Company after December 31, 2002. SFAS No. 146 is not expected
to have a material effect on the results of operations or financial position of
the Company.
SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.
In December 2002, the FASB approved SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO.
123 ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock based compensation using the methods detailed in the
stock-based compensation accounting policy.
RESULTS OF OPERATIONS
- ---------------------
Results of operations for 2001 and 2000 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 for prior to February 6, 2001 reflect no sales, cost of sales, or
marketing and administrative expenses that would be reflective of an operating
company. On February 6, 2001, OilQuip acquired the assets of Mountain Air, which
provides air drilling services to natural gas exploration operations
("Compressed Air Drilling Services"). 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 ("Casing Services"). On February 6, 2002,
the Company also purchased substantially all the outstanding common stock and
preferred stock of Strata Directional Technology, Inc., which provides high-end
directional and horizontal drilling services for specific targeted reservoirs
that cannot be reached vertically ("Directional Drilling Services"). The results
from these operations are included from February 1, 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO DECEMBER 31, 2001:
- ----------------------------------------------------------
Sales for the year 2002 totaled $17,990,000, reflecting the revenue of Jens' and
Strata, which were acquired in February, 2002. In the comparable period of 2001,
revenues were $4,796,000. Revenues for the year ended December 31, 2002 for the
Casing Services, Directional Drilling Services, and Compressed Air Drilling
Services segments were $7,796,000, $6,529,000 and $3,665,000, respectively.
Revenues for the Compressed Air Drilling Services segment decreased from
$4,796,000 for the year ended December 31, 2001 primarily due to lower revenues
resulting from the decline in revenues from Burlington Resources, from
$3,310,788 to $1,827,681. Burlington Resources represented 49.9% and 62.6% of
the Compressed Air Drilling Services revenues in 2002 and 2001, respectively.
Revenues also declined as a result of an overall downturn in the petroleum
industry. Rig counts in the Southwestern United States (in which most of the
Company's revenues are derived) provide a measure of oil and natural gas
drilling activities. These rig counts decreased from 1,275 on June 30, 2001 to
840 at June 30, 2002, based upon the Baker Hughes gulf coast region rig count.
15
<PAGE>
Gross margin ratio, as a percentage of sales, was 17.1% for the year ended
December 31, 2002 compared with 30.5% for the year ended December 31, 2001. The
gross margin ratio declined as a result of the Jens' and Strata acquisitions in
2002 and lower gross margin ratios at Mountain Air resulting from lower
revenues. Because we have made significant investments in equipment and
personnel many of our costs are fixed, and as a result, our gross profit margins
are severely impacted by decreases in revenues.
General and administrative expense was $3,792,000 in 2002 compared with
$2,898,000 in 2001. The general administrative expenses increased in 2002
compared to 2001 due to the acquisition of Jens' and Strata. During the third
quarter of 2002, in response to the default of its debt covenants, the Company
restructured itself in order to contain costs and recorded charges related to
the reorganization in the amount of $495,000. These charges consisted of related
payroll costs for terminated employees of $307,000, consulting fees of $113,000,
and costs associated with a terminated rent obligation of $75,000. The Company
also recorded one-time charges for costs related to abandoned acquisitions and
an abandoned private placement in the amount of $233,000.
Operating income (loss) for the year 2002 totaled ($1,440,000), reflecting the
operating income (loss) of Jens' and Strata, which were acquired in February
2002. In the comparable period of 2001, operating income (loss) was
($1,433,000). Operating income (loss) for the year ended December 31, 2002 for
the Casing Services, Directional Drilling Services, Compressed Air Drilling
Services and General Corporate segments were $2,255,000, ($576,000), ($945,000)
and ($2,174,000), respectively. Operating income for the Compressed Air Drilling
Services segment decreased from income of $433,000 for the year ended December
31, 2001 primarily due to lower revenues resulting from the overall downturn in
the petroleum industry. Operating (loss) for the General Corporate segment
increased from ($1,866,000) for the year ended December 31, 2001. During the
third quarter of 2002, in response to the default of its debt covenants, the
Company reorganized itself in order to contain costs and recorded charges
related to the reorganization in the amount of $495,000. These charges consisted
of related payroll costs for terminated employees of $307,000, consulting fees
of $113,000, and costs associated with a terminated rent obligation of $75,000.
The Company also recorded one-time charges for costs related to abandoned
acquisitions and an abandoned private placement in the amount of $233,000.
We incurred a net loss attributed to common shareholders of ($4,290,000), or
($0.23) per common share, for the year ended December 31,2002 compared with a
loss of ($4,577,000), or ($1.15) per common share, for the year end December 31
2001. The net loss for 2002 included a discount given to the holder of the HDS
note in the amount of $191,000 as an incentive to pay-off the note in September
2002. During the third quarter of 2002, in response to the default of its debt
covenants, the Company reorganized itself in order to contain costs and recorded
charges related to the reorganization in the amount of $495,000. These charges
consisted of related payroll costs for terminated employees of $307,000,
consulting fees of $113,000, and costs associated with a terminated rent
obligation of $75,000. The Company also recorded one-time charges for costs
related to abandoned acquisitions and an abandoned private placement in the
amount of $233,000.
PRO FORMA RESULTS
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information. Pro forma results of operations set forth
below includes results of operations for all of 2002 and 2001. These financial
statements should be read in conjunction with the pro forma financial statements
included herein.
16
<PAGE>
Pro forma sales for the year 2002 totaled $19,142,000, reflecting the revenue of
Mountain Air, Jens' and Strata. In the comparable period of 2001, pro forma
sales were $28,244,000. Pro forma revenues for the year ended December 31, 2002
for the Casing Services, Directional Drilling Services, and Compressed Air
Drilling Services segments were $8,500,000, $6,977,000 and $3,665,000,
respectively. Pro forma revenues for the year ended December 31, 2001 for the
Casing Services, Directional Drilling Services and Compressed Air Drilling
Services segments were $9,949,000, $12,986,000 and $5,289,000, respectively. The
decrease in 2002 compared to 2001 was primarily due to lower revenues resulting
from the overall downturn in the petroleum industry. Revenues for Casing
Services, Directional Drilling Services and Compressed Air Drilling Services
declined 17%, 47% and 37% in 2002 compared to 2001.
Pro forma gross margin, as a percentage of sales, was 18.4% for the year ended
December 31, 2002 compared with a pro forma gross margin of 33.8 % for the year
ended December 31, 2001. The gross margin ratio declined as a result of the
Jens' and Strata acquisitions in 2002 and lower gross margin ratios at Mountain
Air resulting from lower revenues.
Pro forma general and administrative expense was $3,040,000 in 2002 compared
with $4,719,000 in 2001. The pro forma general and administrative expense
decreased in 2002 due to cost reductions at Strata and Corporate.
The Company had pro forma operating (loss) for the year 2002 of ($401,000) as
compared to pro forma operating income of $4,089,000 in 2001. Pro forma
operating income (loss) for the year ended December 31, 2002 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $2,756,000, ($584,000), ($795,000) and
($1,778,000), respectively. The pro forma operating income for the year ended
December 31, 2001 for the Casing Services, Directional Drilling Services,
Compressed Air Drilling Services and General Corporate segments were $3,954,000,
$1,420,000, $581,000 and ($1,866,000), respectively. The decrease in pro forma
operating income for 2002 was primarily due to lower revenues resulting from the
overall downturn in the petroleum industry.
The Company incurred a pro forma net loss of ($4,431,000), or ($0.24) per common
share, for the year ended December 31, 2002 compared with a pro forma net loss
of ($71,000), or ($0.02) per common share, for the year ended December 31 2001.
The pro forma net loss for 2002 included a factoring discount given to the
holder of the HDS note in the amount of $191,000 as an incentive to pay-off the
note by September 30, 2002. During the third quarter of 2002, in response to the
default of its debt covenants, the Company reorganized itself in order to
contain costs and recorded charges related to the reorganization in the amount
of $495,000. These charges consisted of related payroll costs for terminated
employees of $307,000, consulting fees of $113,000, and costs associated with a
terminated rent obligation of $75,000. The Company also recorded one-time
charges for costs related to an abandoned acquisitions and an abandoned private
placement in the amount of $233,000.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO PERIOD FEBRUARY 4, 2000 (INCEPTION)
THROUGH DECEMBER 31, 2000:
- --------------------------------------------------------------------------------
Sales for the year 2001 totaled $4,796,000, reflecting the revenue of Mountain
Air following the acquisition of the assets from Mountain Air's predecessor,
Mountain Air Drilling, Inc. (the "Mountain Air Acquisition"). In the period
February 4, 2000 (inception) through December 31, 2000, OilQuip had no revenues.
17
<PAGE>
Gross margin, as a percentage of sales, was 30.5% in 2001.
General and administrative expense was $2,898,000 in 2001 compared with $627,000
in the period February 4, 2000 (inception) through December 31, 2000 increasing
as a result of the Mountain Air Acquisition and the issuance of stock options in
2001.
We incurred a net loss from continuing operations of ($2,273,000), or ($0.57)
per common share, for the year 2001 compared with a loss by OilQuip of
($627,000), or ($1.57) per common share, for the period from February 4, 2000
(inception) through December 31, 2000. The Company incurred a net loss of
($4,577,000), or ($1.15) per common share, for the year 2001 compared with a
loss by OilQuip of ($627,000), or ($1.57) per common share, for the period
February 4, 2000 (inception) through December 31, 2000.
The loss from discontinued operations for 2001 of ($2,304,000) includes a loss
of ($2,013,000) on the sale of HDS.
PRO FORMA RESULTS
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information. Pro forma results of operations set forth
below includes results of operations for all of 2001 and 2000. These financial
statements should be read in conjunction with the pro forma financial statements
included herein.
Pro forma sales for the year 2001 totaled $28,224,000, reflecting the revenue of
Mountain Air, Jens' and Strata. In the comparable period of 2000, pro forma
sales were $24,653,000. Pro forma revenues for the year ended December 31, 2001
for the Casing Services, Directional Drilling Services, and Compressed Air
Drilling Services segments were $9,949,000, $12,986,000 and $5,289,000,
respectively. Pro forma revenues for the year ended December 31, 2000 for the
Casing Services, Directional Drilling Services and Compressed Air Drilling
Services segments were $7,400,000, $11,561,000 and $5,692,000, respectively. The
increase in 2001 compared to 2000 was primarily due to higher revenues resulting
from the overall upturn in the petroleum industry. Revenues for Casing Services
and Directional Drilling Services increased 34% and 12%, and revenues for
Compressed Air Drilling Services declined 8% in 2001 compared to 2000.
Pro forma gross margin, as a percentage of sales, was 33.8% for the year ended
December 31, 2001 compared with a pro forma gross margin of 26.7 % for the year
ended December 31, 2000. The gross margin ratio increased as a result of higher
gross margin ratios at each of Jens', Strata, and Mountain Air resulting from
higher revenues.
Pro forma general and administrative expense was $4,719,000 in 2001 compared
with $3,916,000 in 2000. The pro forma general and administrative expense
increased in 2001 due to higher employee costs.
The Company had pro forma operating income for the year 2001 of $4,089,000 as
compared to pro forma operating income of $2,678,000 in 2000. Pro forma
operating income (loss) for the year ended December 31, 2001 for the Casing
Services, Directional Drilling Services, Compressed Air Drilling Services and
General Corporate segments were $3,954,000, $1,420,000, $581,000 and
($1,866,000), respectively. The pro forma operating income for the year ended
December 31, 2000 for the Casing Services, Directional Drilling Services,
Compressed Air Drilling Services and General Corporate segments were $2,313,000,
$564,000, $742,000 and ($941,000), respectively. The increase in pro forma
operating income for 2001 was primarily due to higher revenues resulting from
the overall upturn in the petroleum industry.
18
<PAGE>
The Company incurred a pro forma net loss of ($71,000), or ($0.02) per common
share, for the year ended December 31,2001 compared with a pro forma net income
of $269,000, or $0.67 per common share, for the year end December 31 2000. The
pro forma net loss for 2001 included increased employee costs, interest expense
and lower margins at Mountain Air.
SCHEDULE OF CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's obligations and commitments to make
future payments under its notes payable, operating leases, employment contracts
and consulting agreements for the periods specified as of December 31, 2002.
<TABLE>
<CAPTION>
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------
AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- ----------------------- ----- ------ --------- --------- -------
<S> <C> <C> <C> <C> <C>
Note payable $ 21,221,000 $ 13,890,000 $ 3,064,000 $ 4,267,000 $ -
Interest Payments on note payable 1,804,000 1,181,000 260,000 363,000 -
Operating Lease 2,990,000 1,232,000 1,589,000 169,000 -
Employment Contracts 1,916,000 1,180,000 736,000 - -
Total Contractual Cash Obligations $ 27,931,000 $ 17,483,000 $ 5,649,000 $ 4,799,000 $ -
========== ========== ========= ========= ========
</TABLE>
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Cash and cash equivalents totaled $ 146,000 at December 31, 2002 as compared to
$152,000 at December 31, 2001.
Net trade receivables at December 31, 2002 were $4,409,000 as compared to
$973,000 at December 31, 2001, due to the Jens' and Strata Acquisitions.
Net property, plant and equipment were $17,124,000 at December 31, 2002 as
compared to $4,246,000 at December 31, 2001, as a result of Jens' and Strata
Acquisitions. Capital expenditures for the year 2002 were $518,000. Capital
expenditures for the year 2001 were $402,000. Capital expenditures for 2003 are
projected to be approximately $600,000.
Trade accounts payable at December 31, 2002 were $2,106,000 as compared to
$298,000 at December 31, 2001, primarily due the Jens' and Strata Acquisitions.
Other current liabilities, excluding the current portion of long-term debt, at
December 31, 2002 were $2,597,000 consisting of interest in the amount of
$811,000, accrued salary and benefits in the amount of $280,000, income taxes
payable of $45,000, accrued restructuring costs of $606,000, advance from
officers of the Company of $99,000, accrued operating expenses of $ 543,000, and
legal and professional expenses in the amount of $213,000. Included in accrued
restructuring costs was compensation in the amount of $244,000 due to former
employees of the Company. At December 31, 2001 other current liabilities,
excluding the current portion of long-term debt, were $1,637,000 consisting of
interest in the amount of $176,000, accrued salary and benefits in the amount of
$851,000, and legal and professional expenses in the amount of $610,000. All of
these balance sheet accounts increased significantly from December 31, 2001
balances due to the Jens' and Strata Acquisitions. Included in salary and
benefits payable at December 31, 2001 was deferred compensation in the amount of
$318,000 due the CEO of the Company.
19
<PAGE>
Long-term debt including current maturities was $21,221,000 at December 31, 2002
as compared to $7,856,000 at December 31, 2001. The increase in long-term debt
was primarily a result of the cost of the Jens' and Strata Acquisitions in
February 2002. The long-term debt is as follows (as discussed below, all bank
debt may be accelerated and may be come due and payable, if the Company fails to
refinance the Mountain Air bank debt due on June 30, 2003):
MOUNTAIN AIR. At December 31, 2002, Mountain Air had the following debt
outstanding:
o A term loan payable to Wells Fargo Energy in the amount of $3,550,000 at a
floating interest rate with quarterly principal payments of $147,917 (the
interest rate was 5.25% at December 31, 2002). At December 31, 2002, the
outstanding amount due was $2,392,000. The maturity date of the loan is
June 30, 2003.
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, 2006.
o Subordinated debt payable to Wells Fargo Energy Capital in the amount of
$2,000,000 at 12% interest. The principal will be due on June 30, 2003. In
connection with incurring the debt, the Company issued redeemable
warrants, which have been recorded as a liability of $600,000 and as
discount to the face amount of the debt. This amount is amortizable over
three years as additional interest expense. $200,000 of this debt was
amortized in 2002, and $183,000 of this debt was amortized in 2001.
o A delayed draw term loan payable to Wells Fargo Energy in the amount of
$282,291 at LIBOR plus 0.5% interest payable quarterly commencing on
November 30, 2001 (the interest rate was 4.75% at December 31, 2002). At
December 31, 2002, the outstanding amount due was $160,000. The principal
will be due on June 30, 2003.
o A $500,000 line of credit at Wells Fargo bank, of which $330,000 was
outstanding at December 31, 2002. The committed line of credit is due on
June 30, 2003. Interest accrues at a rate equal to the Prime rate plus
0.5% to 1.25% (4.75% at December 31, 2002) for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted portion.
JENS'. On December 31, 2002, Jens' had the following debt outstanding:
o A term loan payable to Wells Fargo Business Credit, Inc. in the amount of
$4,042,396 at a floating interest rate with monthly principal payments of
$67,373 (the interest rate was 8.75% at December 31, 2002). At December
31, 2002, the outstanding amount due was $3,369,000. The maturity date of
the loan is February 1, 2005.
o A seller's note payable to Jens Mortensen in the amount of $4,000,000 at
7.5% simple interest with quarterly interest payments. At December 31,
2002 $275,000 of interest was accrued and was included in accrued
interest. The principal and interest are due on January 31, 2006.
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<PAGE>
o A real estate loan payable to Wells Fargo Business Credit, Inc. in the
amount of $532,000 at a floating interest rate with monthly principal
payments of $14,778 (the interest rate was 8.75% at December 31, 2002). At
December 31, 2002, the outstanding amount due was $384,000. The principal
will be due on February 1, 2005.
o A $1,000,000 line of credit at Wells Fargo bank, of which $67,000 was
outstanding at December 31, 2002. The committed line of credit is due on
January 31, 2005. Interest accrues at a floating rate plus 3% (8.75% at
December 31, 2002) for the committed portion. Additionally, the Company
pays a 0.05% fee for the uncommitted portion.
o In conjunction with the purchase of Jens', the Company agreed to pay a
total of $1,234,560 to the Seller of Jens' in exchange for a non-compete
agreement. The Company is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of December 31, 2002, the balance due is
approximately $1,008,000 including $247,000 classified as short-term.
STRATA. On December 31, 2002, Strata had the following debt outstanding:
o A term loan payable to Wells Fargo Business Credit, Inc. in the amount of
$1,654,000 at a floating interest rate with monthly principal payments of
$27,567 (the interest rate was 9.25% at December 31, 2002). At December
31, 2002, the outstanding amount due was $1,041,000. The maturity date of
the loan is February 1, 2005. In addition to the monthly principal
payments, in June 2002, the Company entered into an agreement with Target
MWD to lease its MWD kits. According to the terms of the lease, Target MWD
is required to make monthly payments of $15,000 to $20,000, which are
being applied to reduce the outstanding principal balance of this loan.
o A $2,500,000 line of credit at Wells Fargo bank, of which $1,275,000 was
outstanding at December 31, 2002. The committed line of credit is due on
January 31, 2005. Interest accrues at a floating rate plus 3% (9.25% at
December 31, 2002) for the committed portion. Additionally, the Company
pays a 0.05% fee for the uncommitted portion.
o In 1996 and as amended in 2000 and 2002, Strata entered into a short-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, provides for repayment of all amounts due no later
than September 30, 2003. Payment of the interest on the note is due
monthly; however, the Company may make payments with respect to principal
and interest at any time without bonus or penalty. The vendor financing
incurs interest at a rate of 8.0%. As of December 31, 2002, the
outstanding balance, including accrued interest, is approximately
$455,000.
o A note payable dated June 30, 1998, to a former shareholder of Strata
Directional Technology, Inc., bearing interest at 8% and payable in 60
equal monthly installments of $2,030 each. The note matures and will be
paid in full prior to June 30, 2003. The balance at December 31, 2002 was
approximately $12,000.
ALLIS-CHALMERS. At December 31, 2002, Allis-Chalmers had the following debt and
other obligations outstanding:
o Subordinated debt payable to Wells Fargo Energy Capital in the amount of
$3,000,000 at 12% interest. The principal amount is due on January 31,
2005. In connection with incurring the debt, the Company issued redeemable
warrants, which have been recorded as a liability of $900,000 and as a
discount to the face amount of the debt. This amount is amortizable over
three years beginning February 6, 2002, as additional interest expense.
$275,000 was amortized in 2002.
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o In connection with the acquisition of Strata we issued 3,500,000 shares of
Series A 10% Cumulative convertible Preferred Stock. Those shares, along
with accrued and unpaid dividend rights, are redeemable at the option of
the holder on February 1, 2004, for $4,200,000.
o In 1999, we compensated former and continuing directors who had served
without compensation from 1989 to March 31, 1999 without compensation by
issuing promissory notes totaling $325,000. The notes bear interest at the
rate of 5% and are due March 28, 2005. At December 31, 2002, the principal
and accrued interest on these notes totaled approximately $370,000.
o Associated with the issuance of the $2 million Subordinated debt recorded
by Mountain Air and the $3 million Subordinated debt recorded by
Allis-Chalmers (collectively, the "subordinated debt"), the Company issued
redeemable warrants that are exercisable for a maximum of 1,165,000 shares
of the Company's common stock at an exercise price of $0.15 per share
("Warrants A and B") and non-redeemable warrants that are exercisable for
a maximum of 335,000 shares of the Company's common stock at $1.00 per
share ("Warrant C"). Warrants A and B are subject to cash redemption
provisions ("puts") of $600,000 and $900,000, respectively, at the
discretion of the warrant holders beginning at the earlier of the final
maturity date of the subordinated debt or three years from the closing of
the subordinated debt (January 31, 2004 and January 31, 2005,
respectively). Warrant C does not contain any such puts or provisions. In
addition, previously issued warrants to purchase common stock of Mountain
Air were cancelled. The Company has recorded a liability of $600,000 at
Mountain Air and $900,000 at Allis-Chalmers for a total of $1,500,000 and
is amortizing the effects of the puts to interest expense over the life of
the related subordinated debt instruments.
In addition to the debt discussed above, the Company had available lines of
credit totaling $4,000,000 at December 31, 2002, of which $1,672,000 was
outstanding as compared to an available line of credit totaling $775,00 at
December 31, 2001, of which $375,000 was outstanding. The increase in lines of
credit was due to the Jens' and Strata Acquisitions.
On July 16, 2002, our lenders declared the Company and our subsidiaries to be in
default under our numerous credit agreements with Wells Fargo Bank and its
affiliates (the Bank Lenders). The defaults resulted primarily from our failure
to meet financial covenants as a result of decreased revenues. As a result of
these defaults the Bank Lenders imposed default interest rates retroactive to
April 1, 2002, resulting in an increase of approximately $15,000 in monthly
interest payments. Additionally the Bank Lenders suspended interest payments
(aggregating $275,000 through December 31, 2002) on a $4.0 million subordinated
seller note issued to the Bank Lenders in connection with the Jens' acquisition,
which resulted in Jens' default under the terms of the subordinated seller note,
and suspended interest payments (aggregating $150,000 through December 31, 2002)
on a $3.0 million subordinated bank note issued in connection with the Jens'
acquisition, which resulted in Jens' default under the terms of such note.
Pursuant to the terms of inter-creditor agreements between our lenders, the
holders of such obligations are precluded from taking action to enforce such
obligations without the consent of the Bank Lenders.
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements (the "Forbearance Agreements"), which amended certain operating
covenants. In addition the Bank Lenders agreed to forbear from taking action
(but did not waive the underlying defaults) with respect to the alleged defaults
for a period of six months ending June 30, 2003 (the "Forbearance Period").
Pursuant to the Forbearance Agreements:
22
<PAGE>
Mountain Air's obligations have been modified as follows:
o Mountain Air was allowed to apply a security deposit
to offset payments on its equipment lease, lowering
additional payments from $58,574 to $35,000 per month
during the Forbearance Period, after which lease
payments will return to $58,574 per month though
February 15, 2006, on which date a final payment of
$58,574 will be due.
o Principal payments on its senior debt have been
reduced during the Forbearance Period from $57,000 to
$45,000 per month.
o Interest payments on its subordinated debt have been
reduced during the Forbearance Period from 12% to 6%
(with the balance being accrued).
o All of Mountain Air's senior and subordinated debt of
approximately $4,882,000 will be due and payable on
June 30, 2003.
Jens' obligations have been amended as follows:
o During the Forbearance Period, Jens' has been allowed
to resume payments of $30,000 per month on its
subordinated debts to Wells Fargo Energy Capital.
o The interest rate on Jens' senior debt has been
increased to prime plus 3%.
o Jens' has been allowed to distribute $300,000 to
Allis-Chalmers Corporation to allow Allis-Chalmers
Corporation to pay legal, accounting and other
expenses in connection with the preparation of its
financial statements for the year ended December 31,
2002, its Securities and Exchange Commission filing,
and shareholder communications.
Strata's obligations have been amended as follows:
o The interest rate on Strata's term debt and revolving
debt has been increased to prime plus 3-1/2%.
The Company have made all outstanding principal and interest payments on all
senior debt to the Bank Lenders. We also believe the Company will be able to
comply with the terms of the Forbearance Agreements during the Forbearance
Period. However, on June 30, 2003, $4,882,000 of debt owed by Mountain Air will
become due and the forbearance with respect to Jens' and Strata's debts to the
Bank Lenders will expire. We are negotiating with the Bank Lenders to amend or
replace the Mountain Air credit agreements with the Bank Lenders, and in
connection with any amendment will seek a waiver of past defaults. However,
there can be no assurance that we will be able to amend the terms of or
refinance the outstanding debt to the Bank Lenders, or do so on favorable terms.
If we are unable to renegotiate or refinance the Company debt, the Bank Lenders
will have the right to accelerate all amounts due them (which totaled
$14,264,000, at March 31 2003), and to foreclose on the assets securing their
loans, which constitute substantially all of the assets of the Company. In such
event, we may be unable to continue operations. Accordingly, the bank debt and
the subordinated seller note are recorded as current liabilities on the
Company's financial statements, and as a result the Company had a working
capital deficit of $13,016,000 at December 31, 2002. Because of the foregoing
risks, our auditors have qualified their opinion regarding our financial
statements to include a "going concern" exception, which indicates that their
evaluation of our financial condition is premised upon the assumption that we
will continue operations and that based upon our current financial condition
there is a risk that we may not be able to do so.
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<PAGE>
Our long-term capital needs are to refinance our existing debt, provide funds
for existing operations, redeem the Series A Preferred Stock and to secure funds
for acquisitions in the oil and gas equipment rental and services industry. In
order to pay our debts as they become due, including the amounts due to the Bank
Lenders described above we will require additional financing within three
months, which may include the issuance of new warrants or other equity or debt
securities, as well as secured and unsecured loans. Any new issuance of equity
securities would further dilute existing shareholders.
RECENT DEVELOPMENTS --ACQUISITION OF JENS' OILFIELD SERVICE, INC. AND STRATA
DIRECTIONAL TECHNOLOGY, INC.
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Jens' Oil Field Acquisition
- ---------------------------
In February 2002, 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) $1,234,560 for a non-compete
agreement payable monthly for five years, (iv) an additional payment of $841,000
based upon Jens' working capital as of February 1, 2002 and (v) 1,397,849 shares
of our common stock. We entered into a three-year employment agreement with Mr.
Mortensen under which we will pay Mr. Mortensen a base salary of $150,000 per
year. We also entered into a Shareholders Agreement with Jens' and Mr. Mortensen
providing for restrictions against transfer of the stock of Jens' by us and Mr.
Mortensen, and providing Mr. Mortensen the option after February 1, 2003, to
exchange his shares of stock of Jens' for shares of our common stock with a
value equal to 4.6 times the trailing EBITDA (Earnings Before Interest, Tax,
Depreciation and Amortization) of Jens' determined in accordance with GAAP
(Generally Accepted Accounting Principles), less any inter-company 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 exercised
until August 1, 2005, 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 newly created Series A 10% Cumulative
Convertible Preferred Stock of the Company ("Series A Preferred Stock"). In
addition, as a result of our failure to redeem the Series A Preferred Stock
prior to February 4, 2003, we issued to Energy Spectrum an additional warrant 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, Texas. In May 2002, we purchased the remaining minority interest in
Strata in exchange for 87,500 shares of the Allis-Chalmers common stock.
The Series A Preferred Stock issued to Energy Spectrum in connection with the
Strata transaction is entitled to receive cumulative annual dividends of $ .10
per share payable in cash or additional shares of Series A Preferred Stock. No
dividends have been declared to date but the Company accrues the obligation to
issue additional shares of Series A Preferred Stock. Additionally, each share of
Series A Preferred Stock is convertible into two shares of our common stock. The
Series A Preferred Stock is also subject to anti-dilution in the event we issue
our common stock at a price below $ 0.50 per share and is subject to mandatory
redemption on the second anniversary date of issuance or earlier from the net
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<PAGE>
proceeds of new equity sales, and is subject to optional redemption by us at
anytime. At the option of Energy Spectrum, on February 1, 2004, we will be
obligated to redeem the Series A Preferred Stock, along with accrued and unpaid
dividend rights, for $4,200,000. Based on our current operations, it appears
unlikely that we will be able to secure financing to enable us to redeem the
Series A Preferred Stock, and we will therefore attempt to renegotiate its
terms. In addition, Energy Spectrum is entitled to appoint a number of directors
to our Board of Directors, which most closely approximates its percentage
ownership of our common stock on a fully-diluted basis. Currently, this entitles
Energy Spectrum to elect one-half, or five of our directors. Currently, three
persons designated by Energy Spectrum, Thomas O. Whitener, Jr., James W. Spann,
and Michael D. Tapp, serve on our board of directors. We also granted Energy
Spectrum registration rights, which includes two demand registrations at our
expense, and piggyback registration rights.
RISK FACTORS
This Annual Report on Form 10-K (including without limitation the following Risk
Factors) 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 Annual
Report on Form 10-K.
Although forward-looking statements in this Annual Report on Form 10-K 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 below and elsewhere in this Annual Report on Form 10-K and in our
other SEC filings and publicly available documents. Readers are urged not to
place undue reliance on these forward-looking statements, which speak only as of
the date of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
Low prices for oil and natural gas will adversely affect the demand for our
services and products.
- --------------------------------------------------------------------------------
The natural gas exploration and drilling business is highly cyclical.
Exploration and drilling activity declines as marginally profitable projects
become uneconomic and either are delayed or eliminated. A decline in the number
of operating oil rigs would adversely affect our business. Accordingly, when oil
and natural gas prices are relatively low, our revenues and income will suffer.
The oil and gas industry is extremely volatile and subject to change based on
political and economic factors outside our control.
We are highly leveraged and are in default under credit agreements with our
lenders.
- --------------------------------------------------------------------------------
As a result of acquisition financing, we are highly leveraged. At March 31,
2003, we had approximately $14,264,000 of lender debt outstanding. In 2002, we
defaulted under our credit agreements and as a result of such defaults in July
2002 our senior lenders required us to suspend payments on our subordinated
debt. Our lenders have agreed to forbear taking action with respect to our debt
until June 30, 2003, and we are attempting to refinance our debt. However, if we
fail to refinance our debt, our lenders could accelerate all outstanding debt
and foreclose upon the assets securing our debt, which constitute substantially
all of our assets. Our level of debt will impair our ability to obtain
additional financing, makes us more vulnerable to economic downturns and
declines in oil and natural gas prices, and makes us more vulnerable to
increases in interest rates. We may not maintain sufficient revenues to meet our
debt obligations or to fund our operations. Our lack of funds may limit our
flexibility in planning for, or reacting to, changes in our business and
industry, place us at a competitive disadvantage compared to our competitors
that have greater access to funds, limit our ability to borrow additional funds.
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<PAGE>
We are the subject of a going concern opinion from our independent auditors,
which means that we may not be able to continue operations unless we can obtain
additional funding.
- --------------------------------------------------------------------------------
As shown in the accompanying financial statements, we had a net loss of
$3,969,000 in 2002 and have $4,882,000 in debt due in June 2003. At December 31,
2002, our current liabilities exceeded our current assets by $13,016,000 and our
net worth was $1,009,000. These factors, among others, indicate that unless we
are successful in refinancing our debt, we may be unable to continue as a going
concern for a reasonable period of time. Our independent auditors have added an
explanatory paragraph to their audit opinion issued in connection with our
financial statements for the year ended December 31, 2002, which states that the
financial statements raise substantial doubt as to our ability to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
To service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
- --------------------------------------------------------------------------------
Our ability to fund operations, to make payments on or refinance our
indebtedness, and to fund planned acquisitions and capital expenditures will
depend on our ability to generate cash in the future. This ability, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.
Our failure to obtain additional financing may adversely affect us.
- -------------------------------------------------------------------
We must refinance debt becoming due in June 2003 in order to continue
operations. Expansion of our operations through the acquisition of additional
companies will require substantial amounts of capital. The availability of
financing may affect our ability to expand. There can be no assurance that funds
for such expansion, whether from equity or debt financings or other sources,
will be available or, if available, will be on terms satisfactory to us. We may
also enter into strategic partnerships for the purpose of developing new
businesses. Our future growth may be limited if we are unable to complete
acquisitions or strategic partnerships.
Mandatory redemption of series a 10% cumulative convertible preferred stock.
- ----------------------------------------------------------------------------
We have outstanding 3,500,000 shares of Series A 10% Cumulative Convertible
Preferred Stock, (the "Preferred Stock"). Pursuant to the terms of the
certificate of Designation, Preferences and Rights of the preferred stock, the
company will be obligated on February 1, 2004 to redeem the outstanding
Preferred Stock, along with cumulative dividend rights, for $4,200,000.
We may have difficulties integrating acquired businesses.
- ---------------------------------------------------------
We may not be able to successfully integrate the business of our operating
subsidiaries or any business we acquire in the future. The integration of the
businesses will be complex and time consuming and may disrupt our future
business. We may encounter substantial difficulties, costs and delays involved
in integrating common information and communication systems, operating
procedures, financial controls and human resources practices, including
incompatibility of business cultures and the loss of key employees and
customers. The various risks associated with our acquisition of businesses and
uncertainties regarding the profitability of such operations could have a
material adverse effect on us.
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<PAGE>
Our success is dependent upon our ability to acquire and integrate additional
businesses.
- --------------------------------------------------------------------------------
Our business strategy is to acquire companies operating in the oil and natural
gas equipment rental and services industry. However, there can be no assurance
that we will be successful in acquiring any additional companies. Our successful
acquisition of new companies will depend on various factors, including our
ability to obtain financing, the competitive environment for acquisitions, as
well as the integration issues described in the preceding paragraph. There can
be no assurance that we will be able to acquire and successfully operate any
particular business that we will be able to expand into areas that we have
targeted
We may not experience expected synergies.
- -----------------------------------------
We may not be able to achieve the synergies we expect from the combination of
businesses, including our plans to reduce overhead through shared facilities and
systems, to cross-market to the businesses' customers, and to access a larger
pool of customers due to the combined businesses' ability to provide a larger
range of services.
There is no trading market for our common stock
- -----------------------------------------------
Our common stock is not registered on any exchange or NASDAQ and is traded only
sporadically on the Over the Counter Bulletin Board. We are investigating
listing our common stock on an exchange; however, we do not currently meet the
listing requirement of any national U.S. exchange, and there can be no assurance
that we will be able to list our common stock on any exchange in the future
There can be no assurance that an active market for our common stock will
develop in the future.
We do not expect to pay dividends on our common stock
- -----------------------------------------------------
We have not within the last ten years paid, and have no intentions in the
foreseeable future to pay, any cash dividends on our common stock. Therefore an
investor in our common stock, in all likelihood, will realize a profit on his
investment only if the market price of our common stock increases in value.
Existing stockholders may be diluted in connection with additional financings.
- ------------------------------------------------------------------------------
We expect to issue additional equity securities to repay debt, in connection
with the acquisition of additional businesses, as well as in connection with
employee benefit plans and other plans. Such issuances will dilute the holdings
of existing stockholders. Such securities may be prior to or on a parity with,
our common stock.
Competition could cause our business to suffer.
- -----------------------------------------------
The natural gas equipment rental and services industry is highly competitive.
Despite recent consolidation activities, the industry remains highly fragmented.
Some of our competitors are significantly larger and have greater financial,
technological and operating resources than we do. In addition, a number of
individual and regional operators compete with us throughout our existing and
targeted markets. These competitors compete with us both for customers and for
acquisitions of other businesses. This competition may cause our business to
suffer.
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<PAGE>
Our products and services may become obsolete.
- ----------------------------------------------
Our business success is dependent upon providing our customers efficient,
cost-effective oil and gas drilling equipment and technology. It is possible
that competing technologies may render our equipment and technologies obsolete,
and have a material adverse effect on us.
Our historical results are not an indicator of future operations.
- -----------------------------------------------------------------
Our business is conducted through three subsidiaries, one of which was acquired
in February 2001 and two of which were acquired in February 2002. As a result,
past performance is not indicative of future results and our likelihood of
success must be considered in light of the volatility of our industry, our
leveraged condition, competition, and other factors set forth herein.
We are controlled by a few stockholders.
- ----------------------------------------
A small number of stockholders effectively control us. Energy Spectrum Partners,
LP ("Energy Spectrum"), our President, Chief Executive Officer and Chairman
Munawar H. Hidayatallah, and Colebrook Investments, Inc. beneficially own
approximately 54.6%, 22.3% and 17.2%, respectively, of our common stock. The
shares of common stock beneficially owned by Energy Spectrum include 7,875,000
shares issuable upon the conversion of Series A Preferred Stock (the "Preferred
Stock"), including accrued dividend rights, and 1,312,500 shares of our common
stock issuable upon the exercise of outstanding warrants. In addition, at
February 28 2003, the Series A Preferred stock had accrued cumulative dividend
rights entitling it to receive either $379,167 in cash or $379,167 additional
shares of Preferred stock. As the holder of the Preferred Stock, Energy Spectrum
has the right to elect a number of directors to our Board of Directors, which
most closely reflects Energy Spectrum's ownership interest in our common stock
on a fully-diluted basis. Currently, Energy Spectrum is entitled to elect five
of our directors. Energy Spectrum and either Mr. Hidayatallah or Colebrook
Investments, Inc., voting together, will have the power to control the outcome
of all matters requiring stockholder approval, including the election of our
directors or a proposed change in control of the Company.
No natural person controls Colebrooke, and none of our officers or directors has
a financial interest in Colebrooke. The owner of all of Colebrooke's shares is
Jupiter Trust, a Guernsey trust. The corporate trustee of Jupiter Trust is the
Ansbacher Trust Company ("Ansbacher"), a Guernsey trust in which action is taken
upon majority vote of such trust's three directors, Messrs. Robert Bannister and
Phillip Retz and Ms. Rachel Whatley. Such directors have absolute discretion to
take action and make investment decisions on behalf of Ansbacher and can be
deemed to control Ansbacher, which has sole voting and dispository power over
the shares of Colebrooke. There are no individual directors of Colebrooke; the
corporate director for Colebrooke is Plaiderie Corporate Directors One Limited,
a Guernsey Company ("Plaiderie"). Plaiderie is wholly-owned by Ansbacher
Guernsey Limited ("Ansbacher Limited"), a controlled registered bank in
Guernsey. The ultimate parent of Ansbacher Limited is First Rand Limited ("First
Rand"), a publicly-owned company listed on the Johannesburg Stock Exchange.
First Rand can be deemed to control Plaiderie.
Dependence upon key personnel.
- ------------------------------
We are dependent upon the efforts and skills of our executives, including our
President, Chief Executive Officer and Chairman Munawar H. Hidayatallah, to
manage our business as well as to identify and consummate additional
acquisitions. In addition, our business strategy is to acquire businesses, which
are dependent upon skilled management personnel, and to retain such personnel to
operate the business. The loss of the services of Mr. Hidayatallah or one or
more of our key personnel at our operating subsidiaries could have a material
adverse effect on us. We do not maintain key man insurance on any of our
personnel. In addition, our development and expansion will require additional
experienced management and operations personnel. No assurance can be given that
we will be able to identify and retain such employees.
28
<PAGE>
Our customers' credit risks could cause our business to suffer.
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Our customers are engaged in the oil and natural gas drilling business in the
southwestern United States and Mexico. This concentration of customers may
impact our overall exposure to credit risk, in that customers may be similarly
affected by changes in economic and industry conditions.
We are vulnerable to personal injury and property damage.
- ---------------------------------------------------------
Our services are used for the exploration and production of oil and natural gas.
These operations are subject to inherent hazards that can cause personal injury
or loss of life, damage to or destruction of property, equipment, the
environment and marine life, and suspension of operations. Litigation arising
from an accident at a location where our products or services are used or
provided may result in our being named as a defendant in lawsuits asserting
potentially large claims. We maintain customary insurance to protect our
business against these potential losses. However, we could become subject to
material uninsured liabilities.
Government regulations could cause our business to suffer.
- ----------------------------------------------------------
We are subject to various federal, state and local laws and regulations relating
to the energy industry in general and the environment in particular.
Environmental laws have in recent years become more stringent and have generally
sought to impose greater liability on a larger number of potentially responsible
parties. Although we are not aware of any proposed material changes in any such
statutes, rules or regulations, any changes could cause our business to suffer.
Labor costs or the unavailability of skilled workers could cause our business to
suffer.
- --------------------------------------------------------------------------------
We are dependent upon the available labor pool of skilled employees. We are also
subject to the Fair Labor Standards Act, which governs such matters as a minimum
wage, overtime and other working conditions. A shortage in the labor pool or
other general inflationary pressures or changes in applicable laws and
regulations could require us to enhance our wage and benefits packages. There
can be no assurance that our labor costs will not increase. Any increase in our
operating costs could cause our business to suffer.
We may be subject to certain environmental liabilities relating to discontinued
operations.
- --------------------------------------------------------------------------------
We were reorganized under the bankruptcy laws in 1988; since that time, a number
of parties, including the Environmental Protection Agency (the "EPA"), have
asserted that we are responsible for the cleanup of hazardous waste sites. These
assertions have been made only with respect to our pre-bankruptcy activities. We
believe such claims are barred by applicable bankruptcy law; however, if we do
not prevail with respect to these claims, we could become subject to material
environmental liabilities.
We may be subject to certain products liability claims.
- -------------------------------------------------------
We were reorganized under the bankruptcy laws in 1988; since that time we have
been regularly named in products liability lawsuits primarily resulting from our
manufacture of products containing asbestos. In connection with our bankruptcy a
special products liability trust was established to be responsible for such
claims. We believe that claims against Allis-Chalmers Corporation are banned by
applicable bankruptcy law, and that the Products Liability trust will continue
to be responsible for these claims, and since 1988 no court has ruled that we
are responsible for such claims. However, if the products liability trust were
terminated and its funds disbursed, and if we did not prevail in our claim that
our bankruptcy bars claims against us, we could become subject to material
products liabilities related to our pre-bankruptcy activities. We have not
manufactured products containing asbestos since our bankruptcy.
29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
None.
ITEM 8. FINANCIAL STATEMENTS.
---------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
PAGE
----
Financial Statements:
Independent Auditors' Report 31
Consolidated Statements of Operations for the Years Ended
December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 32
Consolidated Balance Sheets as of December 31, 2002 and 2001 33
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 34
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, December 31, 2001 and the period
February 4, 2000 (Inception) through December 31, 2000 35
Notes to Consolidated Financial Statements 36
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Allis-Chalmers Corporation
Houston, Texas
We have audited the accompanying consolidated balance sheets of Allis-Chalmers
Corporation as of December 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years then ended and for the period from February 4, 2000 (Inception) to
December 31, 2000. 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 Allis-Chalmers Corporation as
of December 31, 2002 and 2001, and the results of their consolidated operations
and cash flows for each of the years ended December 31, 2002 and 2001, and the
period February 4, 2000 (Inception) to December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $3,969,000 during the year ended December 31,
2002, and, as of that date, had a working capital deficiency of $13,016,000 and
net worth of $1,009,000. As described more fully in Notes 1 and 8 to the
financial statements, the Company has obtained waivers on its loan covenant
violations through June 30, 2003. On that date, approximately $4,882,000 of
current debt becomes due. After June 30, 2003, if the Company continues to be in
default of its other loan covenants, the lenders may demand repayment of the
loans. Negotiations are presently under way to obtain revised loan agreements to
permit the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company cannot predict what the outcome of the
negotiations will be. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/S/ GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
March 7, 2003
31
<PAGE>
<TABLE>
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
<CAPTION>
Period from
February 4, 2000
Year Ended Year Ended through December
December 31, 2002 December 31, 2001 31, 2000
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues $ 17,990 $ 4,796 $ -
Cost of revenues 14,910 3,331 -
----------------- ----------------- -----------------
Gross margin 3,080 1,465 -
General and administrative expense 3,792 2,898 383
Personnel restructuring costs 495 - -
Abandoned acquisition/private placement costs 233 - 244
----------------- ----------------- -----------------
Total operating expenses 4,520 2,898 627
----------------- ----------------- -----------------
(Loss) from operations (1,440) (1.433) (627)
Other income (expense):
Interest income 49 41 -
Interest expense (2,256) (869) -
Minority interest (189) - -
Factoring costs on note receivable (191) - -
Other 58 (12) -
----------------- ----------------- -----------------
Total other income (expense) (2,529) (840) -
----------------- ----------------- -----------------
Net (loss) before income taxes (3,969) (2.273) (627)
Provision for income tax - - -
----------------- ----------------- -----------------
Net (loss) from continuing operations (3,969) (2,273) (627)
(Loss) from discontinued operations - (291) -
(Loss) on sale of discontinued operations - (2,013) -
----------------- ----------------- -----------------
Net (loss) from discontinued operations - (2,304) -
Net (loss) (3,969) (4,577) (627)
----------------- ----------------- -----------------
Preferred stock dividend (321) - -
----------------- ----------------- -----------------
Net (loss) attributed to common stockholders $ (4,290) $ (4,577) $ (627)
================= ================= =================
(Loss) per common share (basic and diluted)
Continuing operations $ (.23) $ (.57) $ (1.57)
Discontinued operations - (.58) -
----------------- ----------------- -----------------
Net (loss) per common share $ (.23) $ (1.15) $ (1.57)
================= ================= =================
Weighted average number of common shares outstanding:
Basic 18,831 3,952 400
================= ================= =================
Diluted 18,831 3,952 400
================= ================= =================
The accompanying Notes are an integral part of the Financial Statements
32
</TABLE>
<PAGE>
<TABLE>
ALLIS-CHALMERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<CAPTION>
December 31
2002 2001
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 146 $ 152
Trade receivables, net of allowance for doubtful accounts of
$32 and $0, respectively 4,409 973
Due from related party (Note 14) - 61
Lease deposit (Note 9) 525 -
Lease receivable, current (Note 13) 180 -
Prepaids and other current assets 317 153
------------- -------------
Total current assets 5,577 1,339
Property and equipment, net of accumulated depreciation of
$2,340 and $644 at December 31, 2002 and 2001, respectively 17,124 4,426
Goodwill 7,829 3,951
Other intangible assets, net of accumulated amortization of
$894 and $403 at December 31, 2002 and 2001, respectively 2,650 1,116
Debt issuance costs, net of accumulated amortization of
$331 and $79 at December 31, 2002 and 2001, respectively 515 180
Lease receivable, less current portion (Note 13) 1,042 -
Lease deposit (Note 9) - 701
Note receivable - 791
Other assets 41 141
------------- -------------
Total Assets $ 34,778 $ 12,465
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt (Note 8) $ 13,890 $ 1,023
Trade accounts payable 2,106 298
Accrued employee salaries, benefits and payroll taxes 280 851
Accrued interest 811 176
Accrued expenses 1,506 610
------------- -------------
Total current liabilities 18,593 2,958
Accrued postretirement benefit obligations (Note 3) 670 824
Long-term debt, net of current maturities (Note 8) 7,331 6,833
Other long-term liabilities 270 -
Minority interest 1,584 -
Redeemable warrants (Notes 8 and 12) 1,500 600
Redeemable convertible preferred stock, $0.01 par value
(4,200,000 shares authorized; 3,500,000 issued and
outstanding at December 31, 2002) ($1 redemption value)
including accrued dividends (Note 10) 3,821 -
COMMON STOCKHOLDERS' EQUITY (NOTE 10)
Common stock, $.15 par value (110,000,000 shares authorized;
19,633,340 and 11,588,128 issued and outstanding at
December 31, 2002 and 2001 respectively) 2,945 1,738
Capital in excess of par value 7,237 4,716
Accumulated (deficit) (9,173) (5,204)
------------- -------------
Total shareholders' equity 1,009 1,250
------------- -------------
Total liabilities and shareholders' equity $ 34,778 $ 12,465
============= =============
The accompanying Notes are an integral part of the Financial Statements.
33
</TABLE>
<PAGE>
<TABLE>
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except number of shares)
<CAPTION>
PREFERRED STOCK COMMON STOCK CAPITAL IN
------------------------ ------------------------ EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE (DEFICIT) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, February 4, 2000
(Inception) - $ - - $ - $ - $ - $ -
Issuance of common stock subscribed
at $94 per share - - 4,250 - 400 - 400
Issuance of common stock for
conversion of notes payable at $250
per share - - 1,000 - 250 - 250
Issuance of common stock for cash at
$326 per share - - 307 - 100 - 100
Issuance of common stock subscribed
at $326 per share - - 3,068 - 1,000 - 1,000
Issuance of common stock subscribed
at $350 per share - - 1,250 - 438 - 438
Contributed capital and services - - - - 787 - 787
Retroactive effect of
Recapitalization on May 9, 2001 - - 390,125 60 (60) - -
Net (loss) - - - - (627) (627)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2000 - - 400,000 60 2,915 (627) 2,348
Issuance of common stock in
connection with Recapitalization - - 11,118,128 1,678 1,101 - 2,779
Issuance of stock options for
services - - - - 500 - 500
Issuance of stock purchase warrants
for services - - - - 200 - 200
Net (loss) - - - - - (4,577) (4,577)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2001 11,588,128 1,738 4,716 (5,204) 1,250
Issuance of common stock in
connection with the purchase of Jens' - - 1,397,849 210 420 - 630
Issuance of stock purchase warrants
in connection with the purchase of
Jens' - - - - 47 - 47
Issuance of preferred and common
stock in connection with the
purchase of Strata 3,500,000 3,500 6,559,863 984 1,968 - 2,952
Issuance of stock purchase warrants
in connection with the purchase of
Strata - - - - 267 - 267
Issuance of common stock in
connection with the purchase of
Strata - - 87,500 13 140 - 153
Accrual of preferred dividends - 321 - - (321) - (321)
Net (Loss) - - - - - (3,969) (3,969)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 2002 3,500,000 $ 3,821 19,633,340 $ 2,945 $ 7,237 $ (9,173) $ 1,009
=========== =========== =========== =========== =========== =========== ===========
The accompanying Notes are an integral part of the Financial Statements.
34
</TABLE>
<PAGE>
<TABLE>
ALLIS-CHALMERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Period from
February 4, 2000
Year Ended Year Ended through
December 31, 2002 December 31, 2001 December 31, 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $ (3,969) $ (4,577) $ (627)
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation expense 1,837 621 -
Amortization expense 744 482 -
Abandoned acquisition costs - - 244
Contributed services - - 250
Issuance of stock options for services - 500 -
Amortization of discount on debt 475 183 -
Minority interest in income of subsidiary 189 - -
Loss on sale of property 119 - -
Changes in working capital:
Decrease (increase) in accounts receivable (713) (511) (124)
Decrease (increase) in due from related party 61 43 -
Decrease (increase) in other current assets 1,644 (139) 538
Decrease (increase) in other assets 902 - -
Decrease (increase) lease deposit 176 - -
(Decrease) increase in accounts payable 1,316 238 12
(Decrease) increase in accrued interest 651 176 -
(Decrease) increase in accrued expenses (339) 156 -
(Decrease) increase in other long-term liabilities (123) - -
(Decrease) increase in accrued employee
benefits and payroll taxes (788) 463 -
Discontinued operations
Loss on sale of HDS operations - 2,013 -
Operating cash provided (used) - 381 -
Depreciation and amortization - 124 -
---------------- ---------------- ----------------
Net cash provided by operating activities 2,182 153 293
Cash flows from investing activities:
Recapitalization, net of cash received - (88) -
Business acquisition costs - (141) (624)
Acquisition of MADSCO assets, net of cash Acquired - (9,534) -
Acquisition of Jens', net of cash acquired (8,120) - -
Acquisition of Strata, net of cash acquired (179) - -
Purchase of equipment (518) (402) -
Proceeds from sale-leaseback of equipment,
net of lease deposit - 2,803 -
Proceeds from sale of equipment 367 45 -
---------------- ---------------- ----------------
Net cash (used) by investing activities (8,450) (7,317) (624)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,683 5,832 -
Payments on long-term debt (4,079) (489) -
Proceeds from issuance of common stock, net - 1,838 350
Borrowings on lines of credit 7,050 375 (15)
Payments on lines of credit (5,804) - -
Debt issuance costs (588) (244) -
---------------- ---------------- ----------------
Net cash provided by financing activities 6,262 7,312 335
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents (6) 148 4
Cash and cash equivalents at beginning of year 152 4 -
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 146 $ 152 $ 4
================ ================ ================
Supplemental information - interest paid $ 1,082 $ 802 $ -
================ ================ ================
The accompanying Notes are an integral part of the Financial Statements.
35
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION OF BUSINESS
OilQuip Rentals, Inc., an oil and gas rental company ("OilQuip"), was
incorporated on February 4, 2000 to find and acquire acquisition targets to
operate as subsidiaries.
On January 25, 2001, OilQuip formed a subsidiary, Mountain Air (Note 1), a Texas
corporation.
On February 6, 2001, OilQuip, through its subsidiary, Mountain Air, acquired
certain assets of Mountain Air Drilling Service Co., Inc. ("MADSCO"), whose
business consists of providing equipment and trained personnel in the four
corner areas of the southwestern United States. Mountain Air primarily provides
compressed air equipment and trained operators to companies in the business of
drilling for natural gas. With the acquisition of MADSCO assets, OilQuip ceased
to be in the development stage.
On May 9, 2001, 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. ("Mountain Air"). 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 2000, are the financial statements of OilQuip. As a result of
the merger, the fixed assets, goodwill and other intangibles of Allis-Chalmers
were increased by $2,691,000.
On November 30, 2001, the Company entered into an agreement to sell its wholly
owned subsidiary, Houston Dynamic Service, Inc. ("HDS"), to the general manager
of HDS in a management buy-out. The sale of HDS was finalized on December 12,
2001.
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, Allis-Chalmers acquired 81% of the outstanding stock of
Jens' Oilfield Service, Inc. ("Jens'"), 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. ("Strata"), which provides high-end directional and horizontal
drilling services for specific targeted reservoirs that cannot be reached
vertically.
VULNERABILITIES AND CONCENTRATIONS
The Company provides oilfield services in several regions including the states
of Texas, New Mexico, Utah, and New Mexico and southern portions of Mexico. The
nature of the Company's operations and the many regions in which it operates
subject it to changing economic, regulatory and political conditions. The
company believes it is vulnerable to the risk of near-term and long-term severe
changes in the demand and subsequent price for oil and natural gas.
36
<PAGE>
BASIS OF PRESENTATION AND LIQUIDITY
The accompanying financial statements have been prepared on the basis of
accounting principles applicable to a going concern, which contemplates the
realization of assets and extinguishment of liabilities in the normal course of
business. As shown in the accompanying financial statements, as of December 31,
2002, the Company has a negative working capital of $13,016,000 including
approximately $4,882,000 of debt principal payments due on June 30, 2003 and a
net worth of $1,009,000.
As further discussed in Note 8, on July 16, 2002, the Company's lenders declared
the Company and its subsidiaries to be in default under numerous credit
agreements with Wells Fargo Bank and its affiliates (the Bank Lenders).
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements, which amended certain operating covenants. In addition the Bank
Lenders agreed to forbear from taking action (but did not waive the underlying
defaults) with respect to the alleged defaults for a period of six months ending
June 30, 2003. As a result, $8,757,829 was classified from non-current to
current liabilities.
The Company's long-term capital needs are to refinance existing debt, provide
funds for existing operations, and redeem the Series A Preferred Stock and to
secure funds for acquisitions in the oil and gas equipment rental and services
industry. In order to pay debts as they become due, including the amounts due to
the Bank Lenders described above, additional financing will be required, which
may include the issuance and subsequent exercise of new warrants or other equity
or debt securities, as well as secured and unsecured loans. Any new issuance of
equity securities would further dilute existing shareholders.
These factors indicate that the Company may be unable to continue in existence.
The Company's financial statements do not include any adjustments related to the
carrying value of assets or the amount and classification of liabilities that
might be necessary should the Company be unable to continue in existence. The
Company's ability to establish itself as a going concern is dependent upon its
ability to refinance existing debt.
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, recoverability of long-lived assets, useful lives used in
depreciation and amortization, income taxes and related valuation allowances.
The accounting estimates used in the preparation of the consolidated financial
statements may change as new events occur, as more experience is acquired, as
additional information is obtained and as the Company's operating environment
changes.
37
<PAGE>
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Allis-Chalmers and
its subsidiaries. The Company's subsidiaries are Mountain Air, Jens', and
Strata. All significant inter-company transactions have been eliminated.
REVENUE RECOGNITION
The Company's revenue recognition policy is significant because revenue is a key
component of results of operations. In addition, revenue recognition determines
the timing of certain expenses, such as commissions and royalties. The Company
follows very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of the revenue policy. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause operating results to vary significantly from quarter to
quarter and could result in future operating losses. Revenues are recognized by
the Company and its subsidiaries as services are provided.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company established an allowance for uncollectible trade accounts receivable
based on historical collection experience and management's evaluation of
collectibility of outstanding accounts receivable. As of December 31, 2002 and
2001, the Company had recorded an allowance of doubtful accounts of $31,000 and
$0, respectively. Bad debt expense was $31,000, and $0 for the years ended
December 31, 2002 and 2001, and $0 for the period from February 4, 2000
(Inception) thru December 31 2000.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment represents the cost of equipment in use in the operations
of the Company.
Maintenance and repairs are charged to operations when incurred. Refurbishments
and renewals are capitalized when the value of the equipment is enhanced for an
extended period. When property and equipment are sold or otherwise disposed of,
the asset account and related accumulated depreciation account are relieved, and
any gain or loss is included in operations.
The cost of property and equipment currently in service is depreciated over the
estimated useful lives of the related assets, which range from three to fifteen
years. Depreciation is computed on the straight-line method for financial
reporting purposes. Depreciation expense charged to operations was $1,837,000
for the year ended December 31, 2002, $621,000 for the year ended December 31,
2001 and $0 for the period from February 4, 2000 (Inception) through December
31, 2000.
38
<PAGE>
GOODWILL, INTANGIBLE ASSETS AND AMORTIZATION
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No.
142"). Goodwill, including goodwill associated with equity method investments,
and intangible assets with infinite lives are no longer amortized, but tested
for impairment annually or more frequently if circumstances indicate that
impairment may exist. Intangible assets with finite useful lives are amortized
either on a straight-line basis over the asset's estimated useful life or on a
basis that reflects the pattern in which the economic benefits of the intangible
assets are realized.
The effects of adopting SFAS No.142 on the Company are that approximately
$7,829,000 of goodwill is no longer being amortized. The Company performs
impairment test on the carrying value of its goodwill at each reporting unit and
as of December 31, 2002, no evidence of impairment exists.
In 2001 and 2000, goodwill was amortized using the straight-line method over its
expected useful life.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, which include property, plant and equipment, goodwill and
other intangibles, and certain other assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recorded in the period in which it is
determined that the carrying amount is not recoverable. The determination of
recoverability is made based upon the estimated undiscounted future net cash
flows, excluding interest expense. The impairment loss is determined by
comparing the fair value, as determined by a discounted cash flow analysis, with
the carrying value of the related assets.
On January 1, 2002, the Company adopted 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 and 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. The adoption has had on the
Company's operations.
FINANCIAL INSTRUMENTS
Financial instruments consist of cash and cash equivalents, accounts receivable
and payable, and debt. The carrying values of cash and cash equivalents,
accounts receivable and payable approximate fair value. The Company believes the
fair values and the carrying value of the debt would not be materially different
due to the instruments' interest rates approximating market rates for similar
borrowings at December 31, 2002 and 2001.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
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 concentration of credit risk regardless
of the degree of such risk.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company does not have concentrations of credit risk within their
cash and cash equivalents as their deposits are at several financial
institutions.
Approximately 20% of the Company's revenues for the year ended December 31, 2002
were derived from two customers as compared to approximately 79% of the
Company's revenues for the year ended December 31, 2001, including one customer
that accounted for 65% of the Company's revenues in 2001. There were no revenues
for the period February 4, 2000 through December 31, 2000. Accounts receivable
at December 31, 2002 includes $706,000 as compared to $550,000 at December 31,
2001 from these two customers.
39
<PAGE>
DEBT ISSUANCE COSTS
The costs related to the issuance of debt are capitalized and amortized to
interest expense using straight-line or interest methods depending upon the
principal payment stream of each of the notes over the lives of the related
debt.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expenses for the year ended December 31, 2002 and 2001, and the period February
4, 2000 through December 31, 2000 totaled $96,500, $31,400 and $0, respectively.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, ACCOUNTING FOR INCOME
TAXES ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or income tax returns. Under this
method, the deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
COMPREHENSIVE INCOME
There are no adjustments necessary to net loss as presented in the accompanying
statements of operations to derive comprehensive income in accordance with SFAS
No. 130, REPORTING COMPREHENSIVE INCOME.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to current year
presentation.
PERSONNEL RESTRUCTURING COSTS
The Company has recorded and classified separately from recurring selling,
general and administrative costs those costs incurred to terminate and relocate
several members of management that occurred in September 2002.
BUSINESS ACQUISITION COSTS
The Company capitalizes direct costs associated with successful business
acquisitions and expenses acquisition costs for unsuccessful acquisition
efforts.
40
<PAGE>
CAPITAL STRUCTURE
The Company utilizes SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE, which requires companies to disclose all relevant information
regarding their capital structure.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation using Accounting Principle
Board Opinion No. 25 ("APB No. 25"). Under APB 25, compensation expense is
recognized for stock options with an exercise price that is less than the market
price on the grant date of the option. For stock options with exercise prices at
or above the market value of the stock on the grant date, the Company adopted
the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"). The Company also adopted the disclosure-only
provisions of SFAS No. 123 for the stock options granted to the employees and
directors of the Company. Accordingly, no compensation cost has been recognized
for these options other than $500,000 recognized in 2001 under APB No. 25. Had
compensation expense for the options granted been recorded based on the fair
value at the grant date for the options, consistent with the provisions of SFAS
123, the Company's net loss and net loss per share for the years ended December
31, 2002 and 2001 would have been increased to the pro forma amounts indicated
below. No options were issued to employees or directors in either of the years
ended December 31, 2002 and 2001 except 500,000 options issued and accounted for
under APB No. 25 (Note 11).
(in thousands, except
per share) FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001
---- ----
Net (loss): As reported $ (3,969) $ (4,577)
Pro forma (3,969) (4,717)
========== ==========
Net (loss) per share: As reported $ (0.23) $ (1.15)
Pro forma (0.23) (1.19)
========== ==========
There were no options granted in 2002. The fair value of the common stock
options granted during 2001, for disclosure purposes only, was estimated on the
grant dates using the Black Scholes Pricing Model and the following assumptions.
FOR THE YEAR ENDED DECEMBER 31,
2002 2001
---- ----
Expected dividend yield -- --
Expected price volatility -- 100%
Risk-free interest rate -- 5%
Expected life of options -- 4 years
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 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, 2002, the
Company operates in three segments organized by service line including casing
services, directional drilling services and compressed air drilling services. At
December 31, 2001, the Company operated only one segment. Please see Note 15 for
further disclosure in accordance with SFAS No. 131.
41
<PAGE>
PENSION AND OTHER POST RETIREMENT BENEFITS
SFAS No. 132, EMPLOYER'S DISCLOSURES ABOUT PENSION AND OTHER POST RETIREMENT
BENEFITS ("SFAS No. 132"), requires certain disclosures about employers' pension
and other post retirement benefit plans and specifies the accounting and
measurement or recognition of those plans. SFAS No. 132 requires disclosure of
information on changes in the benefit obligations and fair values of the plan
assets that facilitates financial analysis.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("SFAS No. 133"), establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Currently, as the
Company has no derivative instruments, the adoption of SFAS No. 133 has no
impact on the Company's financial condition or results of operations.
INCOME (LOSS) PER COMMON SHARE
The Company computes 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 loss attributable to common shares by the weighted
average outstanding common shares for the period. Potential common shares were
not included in the computation of weighted average shares outstanding because
their inclusion would be anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
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.
42
<PAGE>
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES ("SFAS No. 146"). SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. The
provisions of SFAS No. 146 will apply to any exit or disposal activities
initiated by the Company after December 31, 2002. SFAS No. 146 is not expected
to have a material effect on the results of operations or financial position of
the Company.
SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, was issued in
December 2002 and is not expected to apply to the Company's current or planned
activities.
In December 2002, the FASB approved SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB STATEMENT NO.
123 ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company will continue to
account for stock based compensation using the methods detailed in the
stock-based compensation accounting policy.
NOTE 2 - EMERGENCE FROM CHAPTER 11
Allis-Chalmers Corporation emerged from Chapter 11 proceedings on October 31,
1988 under a plan of reorganization, which was consummated on December 2, 1988.
The Company was thereby discharged of all debts that arose before confirmation
of its First Amended and Restated Joint Plan of Reorganization ("Plan of
Reorganization"), and all of its capital stock was cancelled and made eligible
for exchange for shares of common stock of the reorganized Company ("Common
Stock"). On May 9, 2001, the reverse merger with OilQuip described in Note 1
constituted the event whereby the exchange of shares of common stock of the
reorganized Company occurred.
NOTE 3 - PENSION AND POSTRETIREMENT BENEFIT OBLIGATIONS
Pension Plan
- ------------
In 1994, the Company's independent pension actuaries changed the assumptions for
mortality and administrative expenses used to determine the liabilities of the
Allis-Chalmers Consolidated Pension Plan (the "Consolidated Plan"), and as a
result the Consolidated Plan was under funded on a present value basis. The
Company was unable to fund its obligations and in September 1997 obtained from
the Pension Benefit Guaranty Corporation ("PBGC") a "distress" termination of
the Consolidated Plan under section 4041(c) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The PBGC agreed to a plan
termination date of April 14, 1997. The PBGC became trustee of the terminated
Consolidated Plan on September 30, 1997.
Upon termination of the Consolidated Plan, the Company and its subsidiaries
incurred a liability to the PBGC that the PBGC estimated to be approximately
$67.9 million (the "PBGC Liability")
In September 1997, the Company and the PBGC entered into an agreement in
principle for the settlement of the PBGC Liability, which required, among other
things, satisfactory resolution of the Company's tax obligations with respect to
the Consolidated Plan under Section 4971 of the Internal Revenue Code of 1986,
as amended ("Code"). In August 1998, the Company and the Internal Revenue
Service ("IRS") settled the Company's tax liability under Code Section 4971 for
$75,000.
43
<PAGE>
In June 1999, the Company and the PBGC entered into an agreement for the
settlement of the PBGC Liability (the "PBGC Agreement"). Pursuant to the terms
of the PBGC Agreement, the Company issued 585,100 shares of its common stock to
the PBGC, reducing the pension liability by the estimated fair market value of
the shares to $66.9 million (the Company has a right of first refusal with
respect to the sale of such shares). In connection with the PBGC Agreement, the
Company and the PBGC entered into the following agreements: (i) a Registration
Rights Agreement (the "Registration Rights Agreement"); and (ii) a Lock-Up
Agreement by and among Allis-Chalmers, the PBGC, and others. In connection with
the merger with OilQuip described below, the Lock-Up Agreement was terminated
and the Registration Rights Agreement was amended to provide the PBGC the right
to have its shares of common stock registered under the Securities Act of 1933
on Form S-3 during the 12 month period following the Merger (to the extent the
Company is eligible to use Form S-3 which it currently is not) and thereafter to
have its shares registered on Form S-1 or S-2.
In order to satisfy and discharge the PBGC Liability, the PBGC Agreement
provided that the Company had to either: (i) receive, in a single transaction or
in a series of related transactions, debt financing which made available to the
Company at least $10 million of borrowings or (ii) consummate an acquisition, in
a single transaction or in a series of related transactions, of assets and/or a
business where the purchase price (including funded debt assumed) is at least
$10 million ("Release Event").
The merger with OilQuip (the "Merger") on May 9, 2001 (as described in Note 1)
constituted a Release Event, which satisfied and discharged the PBGC Liability.
In connection with the Merger, the Company and the PBGC agreed that the PBGC
should have the right to appoint one member of the Board of Directors of the
Company for so long as it holds at least 117,020 shares of the common stock. In
connection with the Merger, the Lock-Up Agreement was terminated in its
entirety. As of December 31, 2002 and 2001, the Company is no longer liable for
any obligations of the Consolidated Plan.
Medical and Life
- ----------------
Pursuant to the Plan of Reorganization, the Company assumed the contractual
obligation to Simplicity Manufacturing, Inc. (SMI) to reimburse SMI for 50% of
the actual cost of medical and life insurance claims for a select group of
retirees (SMI Retirees) of the prior Simplicity Manufacturing Division of
Allis-Chalmers. The actuarial present value of the expected retiree benefit
obligation is determined by an actuary and is the amount that results from
applying actuarial assumptions to (1) historical claims-cost data, (2) estimates
for the time value of money (through discounts for interest) and (3) the
probability of payment (including decrements for death, disability, withdrawal,
or retirement) between today and expected date of benefit payments. As of
December 31, 2002 and 2001, the Company has recorded post-retirement benefit
obligations of $670,000 and $824,000, respectively, associated with this
transaction.
NOTE 4 - ACQUISITIONS
On February 6, 2001, Mountain Air acquired the business and certain assets of
MADSCO, 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
$3,661,000 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
400,000 shares of Allis-Chalmers' common stock plus 9,600,000 shares of
Allis-Chalmers' common stock issued on October 15, 2001. The acquisition was
accounted for using the purchase method of accounting as a reverse acquisition.
Goodwill of $290,000 and other identifiable intangible assets of $719,000 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.
44
<PAGE>
The Company completed two acquisitions and related financing on February 6,
2002.
The Company purchased 81% of the outstanding stock of 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. 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) $1,234,560 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. The actual working capital adjustment
was approximately $983,000. In addition, in connection with the Strata
acquisition, Energy Spectrum Partners, LP was issued warrants to purchase
437,500 shares of Company common stock at an exercise price of $0.15 per share.
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, a real
estate term loan in the amount of $532,000 and a subordinated loan in the amount
of $3,000,000.
The acquisitions were accounted for using the purchase method of accounting.
Goodwill of $4,168,000 and other identifiable intangible assets of $2,035,000
were recorded with the acquisitions.
The following unaudited pro forma consolidated summary financial information
illustrates the effects of the acquisitions of Jens', Strata and Mountain Air
and the merger with OilQuip on the Company's results of operations, based on the
historical statements of operations, as if the transactions had occurred as of
the beginning of the periods presented. The discontinued HDS operations are not
included in the pro forma information
(in thousands, except
per share) YEAR ENDED DECEMBER 31,
-----------------------
(UNAUDITED)
2002 2001 2000
---- ---- ----
Revenues $ 19,142 $ 28,224 $24,653
Operating income (loss) $ (401) $ 4,089 $2,678
Net income (loss) $ (4,431) $ (71) $ 269
(Loss) per common share $ (0.24) $ (0.02) $ 0.67
NOTE 5 - DISCONTINUED OPERATIONS
As discussed in Note 1, on December 12, 2001, the Company consummated the sale
of its wholly owned subsidiary, HDS, to the general manager of HDS (the
"Buyer"), in a management buy-out with an effective date of November 30, 2001.
Under the terms of the sale, the Company received a promissory note from the
Buyer in the amount of $790,500 due on November 30, 2007, secured by certain HDS
equipment. The note was to accrue interest at a rate of 7% through the payment
date. On September 30, 2002, the Company received cash in the amount of $600,000
and recorded $191,000 in factoring costs related to the early termination of the
promissory note from the buyer of HDS. A loss on the sale of approximately $2.0
million has been recorded in the year ended December 31, 2001.
45
<PAGE>
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.
The operating results of the business sold have been reported separately as
discontinued operations in the accompanying statement of operations and consists
of the following:
Period May 9, 2001 through
November 30, 2001
(in thousands)
Revenues $1,925
Cost of sales 1,486
--------
Gross profit 439
Operating expenses 594
Depreciation and amortization 124
--------
(Loss) from operations (279)
Other (expense) income
Interest expense (12)
--------
(Loss) from discontinued operations $ (291)
========
Loss on sale of discontinued operations $(2,013)
========
NOTE 6 - PROPERTY AND OTHER INTANGIBLES ASSETS
Property and equipment is comprised of the following at December 31:
<TABLE>
<CAPTION>
Depreciation
Period 2002 2001
------------- ---- ----
(in thousands)
<S> <C> <C> <C>
Land $ 25 $ -
Building and improvements 706 -
Machinery and equipment 3 - 15 years 14,674 4,559
Tools, furniture, fixtures and leasehold
improvements 3 - 7 years 4,059 351
-------- --------
Total 19,464 4,910
Less: accumulated depreciation (2,340) (664)
-------- --------
Property and equipment, net $17,124 $ 4,246
======== ========
</TABLE>
46
<PAGE>
Other intangible assets are as follows at December 31:
Amortization
Period 2002 2001
------------- ---- ----
(in thousands)
Intellectual Property 20 years 1,009 719
Non-compete agreements 3 - 5 years 1,535 -
Other intangible assets 3 - 20 years 1,000 800
-------- --------
Total 3,254 1,519
Less: accumulated amortization (894) (403)
-------- --------
Other intangible assets, net $ 2,360 $ 1,116
======== ========
NOTE 7 - INCOME TAXES
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. A valuation allowance is established for
deferred tax assets when management, based upon available information, considers
it more likely than not that a benefit from such assets will not be realized.
The Company has recorded a valuation allowance equal to the excess of deferred
tax assets over deferred tax liabilities as the Company was unable to determine
that it is more likely than not that the deferred tax asset will be realized.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carry forwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit the Company's utilization of its net operating
loss and tax credit carry forwards, and could be triggered by an initial public
offering or by subsequent sales of securities by the Company or its
stockholders.
Deferred income tax assts and the related allowance as of December 31, 2002 and
2001 are as follows:
2002 2001
---- ----
(in thousands)
Deferred non-current income tax assets:
Net future tax deductible items $ 500 $ 498
Net operating loss carry forwards 2,030 1,170
A-C Reorganization Trust claims 35,000 35,000
--------- ---------
Total deferred non-current income tax assets 37,530 36,668
Valuation allowance (37,530) (36,668)
--------- ---------
Net deferred non-current income taxes $ - $ -
========= =========
48
<PAGE>
Net operating loss carry forwards for tax purposes at December 31, 2002 and 2001
are estimated to be $5.9 million and $3 million, respectively, expiring through
2022.
Net future tax-deductible items relate primarily to differences in book and tax
depreciation and amortization and to compensation expense related to the
issuance of stock options. Gross deferred tax liabilities at December 31, 2002
and 2001 are not material.
The Plan of Reorganization established the A-C Reorganization Trust to settle
claims and to make distributions to creditors and certain shareholders. The
Company transferred cash and certain other property to the A-C Reorganization
Trust on December 2, 1988. Payments made by the Company to the A-C
Reorganization Trust did not generate tax deductions for the Company upon the
transfer but generate deductions for the Company as the A-C Reorganization Trust
makes payments to holders of claims.
The Plan of Reorganization also created a trust to process and liquidate product
liability claims. Payments made by the A-C Reorganization Trust to the product
liability trust did not generate current tax deductions for the Company. Future
deductions will be available to the Company as the product liability trust makes
payments to liquidate claims.
The Company believes the above-named trusts are grantor trusts and therefore
includes the income or loss of these trusts in the Company's income or loss for
tax purposes, resulting in an adjustment of the tax basis of net operating and
capital loss carry forwards. The income or loss of these trusts is not included
in the Company's results of operations for financial reporting purposes.
NOTE 8 - DEBT
Debt is as follows at December 31:
<TABLE>
<CAPTION>
2002 2001
--------- ---------
(in thousands)
<S> <C> <C>
Notes payable to certain former Directors - Allis-Chalmers $ 370 $ 354
Note payable to Wells Fargo - Subordinated Debt - Allis-Chalmers, net 2,375 -
Line of Credit with Wells Fargo - Mountain Air 330 375
Note payable to Wells Fargo - Term Note-Mountain Air 2,392 3,062
Note payable to Wells Fargo - Subordinated Debt - Mountain Air, net 1,783 1,583
Note payable to Wells Fargo -Equipment Term Loan-Mountain Air 160 282
Note payable to Seller of Mountain Air Assets - Mountain Air 2,200 2,200
Note payable to Wells Fargo -Term Note - Strata 1,041 -
Line of Credit with Wells Fargo - Strata 1,275 -
Vendor financing - Strata 455 -
Note payable to former shareholder - Strata 12 -
Note payable to Wells Fargo -Term Note - Jens' 3,369 -
Note payable to Wells Fargo -Real Estate Note - Jens' 384 -
Line of Credit with Wells Fargo - Jens' 67 -
Note payable to Seller of Jens - Jens' 4,000 -
Note payable to Seller of Jens' for non-compete agreement - Jens' 1,008 -
--------- ---------
Total Debt 21,221 7,856
Less short-term debt and current maturities 13,890 1,023
--------- ---------
Long-term debt obligations $ 7,331 $ 6,833
========= =========
</TABLE>
48
<PAGE>
The debt above is stated as of December 31, 2002 and 2001, net of the remaining
put obligations totaling approximately $842,000 and $417,000 respectively that
are disclosed further in "REDEEMABLE WARRANTS" below. As of December 31, 2002
and 2001, the gross debt is equal to approximately $22,063,000 and $8,273,000,
respectively.
Substantially all of the Company's assets are pledged as collateral to the
outstanding debt agreements. As of December 31, 2002, the Company's weighted
average interest rate for all of its outstanding debt is approximately 8.5%.
Maturities of debt obligations at December 31, 2002 are as follows: 2003 -
$13,890,000; 2004 - $2,447,000; 2005 - $617,000; 2006 - $4,247,000; 2007 -
$20,000.
The debt agreements are as follows:
MOUNTAIN AIR
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Mountain Air had a
$500,000 line of credit at Wells Fargo bank, of which $330,000 is outstanding.
The committed line of credit is due on June 30, 2003. Interest accrues at a rate
equal to the Prime rate plus 0.5% to 1.25% (4.75% at December 31, 2002) for the
committed portion. Additionally, the Company pays a 0.5% fee for the uncommitted
portion.
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the original amount of
$3,550,000 at variable interest rates related to the Prime or LIBOR rates (5.25%
at December 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 June 30, 2003 and the balance at December 31,
2002 is $2,392,000.
NOTE PAYABLE TO WELLS FARGO - SUBORDINATED DEBT AND AMORTIZATION OF REDEEMABLE
WARRANT - Subordinated debt in the amount of $2,000,000 with 12% interest
payable quarterly commencing on April 1, 2001. The principal will be due on June
30, 2003. In connection with incurring the debt, the Company issued redeemable
warrants valued at $600,000, which have been recorded as a discount to the
subordinated debt and as a liability (see REEDEMABLE WARRANTS below and Note
12). The discount is amortizable over three years as additional interest expense
of which $200,000 and $183,000 has been amortized for 2002 and 2001,
respectively.
NOTE PAYABLE TO WELLS FARGO - EQUIPMENT TERM LOAN - 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 4.75% at December 31, 2002). The
principal will be due on June 30, 2003. The balance as of December 31, 2002 is
$160,000.
NOTE PAYABLE TO SELLER OF MADSCO - A note to the seller of MADSCO assets in the
amount of $2,200,000 at 5.75% simple interest. The principal and interest are
due on February 6, 2006.
49
<PAGE>
JENS'
NOTE PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the amount of
$4,042,396 at a floating interest rate (8.75% at December 31, 2002) with monthly
principal payments of $67,373. The maturity date of the loan is February 1,
2007. The balance at December 31, 2002 was $3,369,000. The debt is classified as
current on the accompanying consolidated balance sheet due to the defaults on
certain loan covenants as described in Note 1.
NOTE PAYABLE TO WELLS FARGO - REAL ESTATE NOTE - A real estate loan in the
amount of $532,000 at floating interest rate (8.75% at December 31, 2002) with
monthly principal payments of $14,778. The principal will be due on February 1,
2005. The balance at December 31, 2002 was $384,000. The debt is classified as
current on the accompanying consolidated balance sheet due to the defaults on
certain loan covenants as described in Note 1.
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Jens had a $1,000,000
line of credit at Wells Fargo bank, of which $67,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating rate plus 3% (8.75% at December 31, 2002) for the committed portion.
Additionally, the Company pays a 0.5% fee for the uncommitted portion. The debt
is classified as current on the accompanying consolidated balance sheet due to
the defaults on certain loan covenants as described in Note 1.
SUBORDINATED NOTE PAYABLE TO SELLER OF JENS' -A subordinated seller's note in
the amount of $4,000,000 at 7.5% simple interest. At December 31, 2002, $275,000
of interest was accrued and was included in accrued interest. The principal and
interest are due on January 31, 2006. The note is subordinated to the rights of
Wells Fargo.
NOTE PAYABLE TO SELLER OF JENS' FOR NON-COMPETE AGREEMENT - In conjunction with
the purchase of Jens' (Note 4), the Company agreed to pay a total of $1,234,560
to the Seller of Jens' in exchange for a non-compete agreement signed
simultaneously. The Company is to make monthly payments of $20,576 through the
period ended January 31, 2007. As of December 31, 2002, the balance was
approximately $1,008,000 including $247,000 classified as short-term.
STRATA
NOTES PAYABLE TO WELLS FARGO - TERM NOTE - A term loan in the amount of
$1,654,000 at a floating interest rate (9.25% at December 31, 2002) with monthly
principal payments of $27,567. The maturity date of the loan is February 1,
2005. In addition to the monthly principal payments, in June 2002, the Company
entered into a direct financing lease with a third party whereby a portion of
assets were sold by Strata. The payments from that third party, which are
expected to exceed $15,000 a month, are to be directly applied to the principal
of this note. See Note 13 for further information on the terms of the direct
financing lease. The note payable balance at December 31, 2002 was $1,041,000.
The debt is classified as current on the accompanying balance sheet due to the
circumstances surrounding defaults on certain loan covenants as described in
Note 1.
50
<PAGE>
VENDOR FINANCING - In 1996 and as amended in 2000 and 2002, Strata entered into
a short-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, provides for repayment of all amounts due no later than
September 30, 2003. Payment of the interest on the note is due monthly; however,
the Company may make payments with respect to principal and interest at any time
without bonus or penalty. The vendor financing incurs interest at a rate of
8.0%. As of December 31, 2002, the outstanding balance, including accrued
interest, was approximately $455,000.
LINE OF CREDIT WITH WELLS FARGO - At December 31, 2002, Strata has a $2,500,000
line of credit at Wells Fargo bank, of which $1,275,000 was outstanding. The
committed line of credit is due on January 31, 2005. Interest accrues at a
floating interest rate plus 3% (9.25% at December 31, 2002) for the committed
portion. Additionally, the Company pays a 0.5% fee for the uncommitted portion.
The debt is classified as current on the accompanying balance sheet due to the
circumstances surrounding defaults on certain loan covenants as described in
Note 1.
NOTE PAYABLE WITH FORMER SHAREHOLDER - A note payable dated June 30, 1998, to a
former shareholder of Strata Directional Technology, Inc., bearing interest at
8% and payable in 60 equal monthly installments of $2,030 each. The note matures
and will be paid in full prior to June 30, 2003. The balance at December 31,
2002 is approximately $12,000.
ALLIS-CHALMERS
NOTES PAYABLE TO WELLS FARGO - SUBORDINATED DEBT AND AMORTIZATION OF REDEEMABLE
WARRANT - Subordinated debt secured to partially finance the acquisitions of
Jens' and Strata in the amount of $3,000,000 at 12% interest payable monthly.
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 a discount to the subordinated debt and as a liability (see
REEDEMABLE WARRANTS below and Note 12). The discount is amortizable over three
years beginning February 6, 2002 as additional interest expense of which
$275,000 has been recognized for the year ended December 31, 2002. The debt is
classified as current on the accompanying balance sheet due to the defaults on
certain loan covenants as described in Note 1.
NOTES PAYABLE TO CERTAIN FORMER DIRECTORS - The Allis-Chalmers Board established
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%, compounded quarterly, and are due March 28, 2005. At December 31, 2002, the
notes are recorded at $370,000, including accrued interest.
REDEEMABLE WARRANTS - Associated with the issuance of the $2 million
Subordinated debt recorded by Mountain Air and the $3 million Subordinated debt
recorded by Allis-Chalmers (collectively, the "subordinated debt"), the Company
has issued redeemable warrants that are exercisable into a maximum of 1,165,000
shares of the Company's common stock at an exercise price of $0.15 per share
("Warrants A and B") and non-redeemable warrants that are exercisable into a
maximum of 335,000 shares of the Company's common stock at $1.00 per share
("Warrant C"). Warrants A and B are subject to cash redemption provisions
("puts") of $600,000 and $900,000, respectively, at the discretion of the
warrant holders beginning at the earlier of the final maturity date of the
subordinated debt or three years from the closing of the subordinated debt
(January 31, 2004 and January 31, 2005, respectively). Warrant C does not
contain any such puts or provisions. In addition, previously issued warrants to
purchase common stock of Mountain Air were cancelled. The Company has recorded a
liability of $600,000 at Mountain Air and $900,000 at Allis-Chalmers for a total
of $1,500,000 and is amortizing the effects of the puts to interest expense over
the life of the related subordinated debt instruments.
51
<PAGE>
FORBEARANCE AGREEMENTS
On July 16, 2002, the Company's lenders declared the Company and it's
subsidiaries to be in default under numerous credit agreements with Wells Fargo
Bank and its affiliates (the "Bank Lenders"). The defaults resulted primarily
from failures to meet financial covenants as a result of decreased revenues. As
a result of these defaults the Bank Lenders imposed default interest rates
retroactive to April 1, 2002, resulting in an increase of approximately $15,000
in monthly interest payments. Additionally the Bank Lenders suspended interest
payments (aggregating $275,000 through December 31, 2002) on a $4.0 million
subordinated seller note issued to the Bank Lenders in connection with the Jens'
acquisition, which resulted in Jens' default under the terms of the subordinated
seller note, and suspended interest payments (aggregating $150,000 through
December 31, 2002) on a $3.0 million subordinated bank note issued in connection
with the Jens' acquisition, which resulted in Jens' default under the terms of
such note. Pursuant to the terms of inter-creditor agreements between the
lenders, the holders of such obligations are precluded from taking action to
enforce such obligations without the consent of the Bank Lenders.
Effective January 1, 2003 the Company entered into Amendment and Forbearance
Agreements (the "Forbearance Agreements"), which amended certain operating
covenants. In addition the Bank Lenders agreed to forbear from taking action
(but did not waive the underlying defaults) with respect to the alleged defaults
for a period of six months ending June 30, 2003 (the "Forbearance Period").
Pursuant to the Forbearance Agreements:
Mountain Air's obligations have been modified as follows:
o Principal payments on its senior debt or term note
with Wells Fargo have been reduced during the
Forbearance Period from $57,000 to $45,000 per month.
o Interest payments on its subordinated debt agreement
with Wells Fargo have been reduced during the
Forbearance Period from 12% to 6% (with the balance
being accrued).
o Mountain Air was allowed to apply a security deposit
to offset payments due on its equipment lease,
lowering additional payments from $58,574 to $35,000
per month during the Forbearance Period, after which
lease payments will return to $58,574 per month
through February 15, 2006, on which date a final
payment of $58,574 will be due. (Note 9)
o All of Mountain Air's senior and subordinated debt of
approximately $4,882,000 will be due and payable on
June 30, 2003.
Jens' obligations have been amended as follows:
o During the Forbearance Period, Jens' has been allowed
to resume payments of $30,000 per month on its
subordinated debts to Wells Fargo Energy Capital.
o The interest rate on Jens' senior debt has been
increased to prime plus 3%.
o Jens' has been allowed to distribute $300,000 to
Allis-Chalmers Corporation to allow Allis-Chalmers
Corporation to pay legal, accounting and other
expenses in connection with the preparation of its
financial statements for the year ended December 31,
2002, its Securities and Exchange Commission filing,
and shareholder communications.
Strata's obligations have been amended as follows:
o The interest rate on Strata's term debt and revolving
debt has been increased to prime plus 3-1/2%.
52
<PAGE>
The Company has made all outstanding principal and interest payments on all
senior debt to the Bank Lenders. On June 30, 2003, $4,882,000 of debt owed by
Mountain Air will become due and the forbearance with respect to Jens' and
Strata's debts to the Bank Lenders will expire. If the Company is unable to
renegotiate or refinance the Company debt, the Bank Lenders will have the right
to accelerate all amounts due them (which totaled $14,264,000, at March 31
2003), and to foreclose on the assets securing their loans, which constitute
substantially all of the assets of the Company. Accordingly, the bank debt and
the subordinated seller note are recorded as current liabilities on the
Company's financial statements.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On February 6, 2001, in conjunction with Mountain Air's purchase of certain
assets including rental equipment from MADSCO, a portion of the purchased
equipment was sold to a leasing company and leased back. The equipment lease is
being accounted for as an operating lease. Lease payments totaling $3,480,000
will be made over a period of six years. The lease expense for the years ended
December 31, 2002 and 2001 was $703,000 and $586,000, respectively. In January
2003, the Company entered into a forbearance agreement with the leasing company
and Mountain Air will apply a $525,000 security deposit to offset payments on
its equipment lease, lowering additional payments from $58,574 to $35,000 per
month during the Forbearance Period, after which lease payments will return to
$58,574 per month though February 15, 2006. The $525,000 security deposit has
been recorded as a current asset on the accompanying consolidated balance sheet.
The Company rents office space on a five-year lease, which expires February 5,
2006. The Company and its subsidiaries also rent certain other facilities and
shop yards for equipment storage and maintenance. Facility rent expense for the
years ended December 31, 2002 and 2001 was $303,000 and $90,000, respectively.
The Company has no further lease obligations.
At December 31, 2002, future minimum rental commitments for all operating leases
are as follows:
Operating Leases
-----------------
(in thousands)
Year ended:
December 31, 2003 $ 1,232
December 31, 2004 804
December 31, 2005 785
December 31, 2006 142
December 31, 2007 and thereafter 27
-----------------
Total $ 2,990
=================
53
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY
During the period from February 4, 2000 (Inception) through December 31, 2000,
OilQuip entered into several equity transactions. Various investors subscribed
to 4,250 shares of common stock for $400,000 ($94 per share), 307 shares of
common stock for $100,000 ($326 per share), 3,068 shares of common stock for
$1,000,000 ($326 per share) and 1,250 shares of common stock for $437,500 ($350
per share). As of December 31, 2000, $1,837,500 in subscriptions receivable was
outstanding. The entire amount was received from the investors in cash in
January and February 2001. During 2000, OilQuip also issued 1,000 shares of
common stock for $250,000 ($250 per share). OilQuip also recorded $250,000 in
compensation expense for services contributed by the Company's Chief Executive
Officer and majority stockholder. The Chief Executive Officer and majority
stockholder also advanced an aggregate of $537,000 to the Company by paying
corporate expenses on the Company's behalf. These contributed amounts have been
recorded as a contribution to the Company's capital.
The equity and per share data on the financial statements for 2000 have been
presented so as to give effect to the recapitalization of the Company, which
occurred in the reverse acquisition of Allis-Chalmers on May 9, 2001. Under the
recapitalization, the original number of shares outstanding of the formerly
private OilQuip is considered to have been exchanged for the 400,000 shares of
Allis-Chalmers that were issued on the date of the reverse acquisition to the
owners of OilQuip. As a result, 390,125 shares are presented as if issued in
2000 to increase the outstanding shares of OilQuip at December 31, 2000 to
400,000.
On October 15, 2001, an additional 9,600,000 shares of Allis-Chalmers were
issued to the former owners of OilQuip after shareholder approval of the
increase in the maximum authorized number of shares of Allis-Chalmers. For legal
purposes, Allis-Chalmers acquired OilQuip, the parent company of Mountain Air.
However, for accounting purposes OilQuip was treated as the acquiring company in
a reverse acquisition of Allis-Chalmers. The business combination was accounted
for as a purchase. As a result, $2,779,000, the value of the Allis-Chalmers
common stock outstanding at the date of acquisition, was added to shareholders'
equity, which reflects the recapitalization of Allis-Chalmers and the
reorganization of the combined company.
On February 6, 2002, in connection with the acquisition of 81% of the
outstanding stock of Jens' (Note 4), the Company issued 1,397,849 shares of
common stock to the seller of Jens', an individual presently employed as the
President of the Company. The business combination was accounted for as a
purchase. As a result, $630,000, the fair value of the Company's common stock
issued at the date of the acquisition, was added to shareholders' equity.
On February 6, 2002, in connection with the acquisition of 95% of the
outstanding stock of Strata (Note 4), the Company issued 6,559,863 shares of
common stock to the seller of Strata, Energy Spectrum. The business combination
was accounted for as a purchase. As a result, $2,952,000, the fair value of the
Company's common stock issued at the date of the acquisition, was added to
shareholders' equity.
On May 31, 2002, the Company acquired the remaining 5% of the outstanding stock
of Strata and issued 87,500 shares of common stock to the seller, Energy
Spectrum. As a result, $153,000, the fair value of the Company's common stock
issued at the date of the purchase, was added to shareholders' equity.
In connection with the Strata purchase, the Company authorized the creation of
Series A Preferred Stock. The Series A Preferred Stock has cumulative dividends
at ten percent per annum payable in additional shares of Series A Preferred
Stock or if elected and declared by the Company, in cash. 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 proceeds 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 plus accrued dividend
rights.
54
<PAGE>
For the year ended December 31, 2002, the Company has accrued $321,000 of
dividends payable to the Series A Preferred Stock holders. No dividends have
been declared or paid to date.
NOTE 11 - STOCK OPTIONS
In 2000, in conjunction with the promissory notes issued to certain current and
former Directors (Note 8), Allis-Chalmers' Board of Directors also granted stock
options to these same individuals. Options to purchase 24,000 shares of common
stock were granted with an exercise price of $2.75. These options vested
immediately and may be exercised any time prior to March 28, 2010. During 2000
or 2001, none of the stock options were exercised. No compensation expense has
been recorded for these options that were issued with an exercise price
approximately equal to the fair value of the common stock at the date of grant.
On May 31, 2001, the Board granted to Leonard Toboroff, a former director of
Allis-Chalmers an option to purchase 500,000 shares of common stock at $0.50 per
share, exercisable for 10 years from October 15, 2001. The option was granted
for services provided by Mr. Toboroff to OilQuip prior to the merger, including
providing financial advisory services, assisting in OilQuip's capital structure
and assisting OilQuip in finding strategic acquisition opportunities. The
Company recorded compensation expense of $500,000 for the issuance of the option
for the year ended December 31, 2001.
A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
December 31, 2002 December 31, 2001 December 31, 2000
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Under Exercise Shares Under Exercise Shares Under Exercise
Option Price Option Price Option Price
---------------- -------------- --------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance 524,000 $ 0.60 24,000 $ 2.75 24,000 $ 2.75
Granted - - 500,000 0.50 - -
Canceled - - - - - -
Exercised - - - - - -
---------------- -------------- --------------- ---------------- ----------------- --------------
Ending balance 524,000 $ 0.60 524,000 $ 0.60 24,000 $ 2.75
================ ============== =============== ================ ================= ==============
</TABLE>
The following table summarizes additional information about the Company's stock
options outstanding as of December 31, 2002:
<TABLE>
<CAPTION>
Weighted Average Remaining Weighted Average Fair Value
Exercise Price Shares Under Option Contractual Life
- ---------------- -------------------- -------------------------- ---------------------------
<C> <C> <C> <C>
$0.50 500,000 8.75 years $1.28
$2.75 24,000 7.25 years $1.97
- ----- ------ ---------- -----
$0.60 524,000 8.68 years $1.31
===== ======= ========== =====
</TABLE>
Had compensation expense for options granted during 2000 been determined based
on option fair value at the grant date, as prescribed by SFAS No. 123,
"Accounting for Stock Based Compensation", the effect on Allis-Chalmers' net
loss during 2000 would not have been material.
There were no stock options issued to employees or directors in either of the
years ended December 31, 2002 and 2001 other than those granted on May 31, 2001
to Leonard Toboroff.
55
<PAGE>
NOTE 12 - STOCK PURCHASE WARRANTS
In conjunction with the Mountain Air purchase by OilQuip in February of 2001,
the Company issued a common stock warrant for 620,000 shares to a third-party
investment firm that assisted the Company in its initial identification and
purchase of the Mountain Air assets. The warrant entitles the holder to acquire
up to 620,000 shares of common stock of Mountain Air at an exercise price of
$.01 per share over a nine-year period commencing on February 7, 2001. The stock
purchase warrant has been recorded at a fair value of $200,000 for the year
ended December 31, 2001.
As more fully described in Note 8, Mountain Air and Allis-Chalmers issued two
warrants ("Warrants A and B") for the purchase of 1,165,000 total shares of the
Company's common stock at an exercise price of $0.15 per share and one warrant
for the purchase of 335,000 shares of the Company's common stock at an exercise
price of $1.00 per share ("Warrant C") in connection with their subordinated
debt financing. The holders may redeem Warrants A and B for a total of
$1,500,000 as of January 31, 2004 and January 31, 2005, respectively. The fair
value of Warrant C was established in accordance with the Black-Scholes
valuation model and as a result, $47,000 was added to shareholders' equity. The
following assumptions were utilized to determine fair value: no dividend yield;
expected volatility of 67.24%; risk free interest rate of 5%; and expected lives
of four years.
On February 6, 2002, in connection with the acquisition of substantially all of
the outstanding stock of Strata (Note 4), the Company issued a warrant for the
purchase of 437,500 shares of the Company's common stock at an exercise price of
$1.00 per share over the term of four years. The fair value of the warrant was
established in accordance with the Black-Scholes valuation model and as a
result, $267,000 was added to shareholders' equity. The following assumptions
were utilized to determine fair value: no dividend yield; expected volatility of
67.24%; risk free interest rate of 5%; and expected lives of four years.
NOTE 13 - LEASE RECEIVABLE
In June 2002, the Company's subsidiary, Strata, sold its measurement while
drilling (MWD) assets to a third party. Under the terms of the sale, the Company
will receive at least $15,000 per month for thirty-six months. The payments are
directly applied against the Term Note for Strata (Note 8) as a reduction of
principal obligations. After thirty-six months, the purchaser has the option to
pay the remaining balance or continue paying a minimum of $15,000 per month for
twenty-four additional months. After the expiration of the additional
twenty-four months, the purchaser must repay any remaining balance. This
transaction has been accounted for as a direct financing lease with the nominal
residual gain from the asset sale deferred into income over the life of the
lease. During the year ended December 31, 2002, the Company received a total of
$106,000 in payments from the third party related to this lease.
NOTE 14 - RELATED PARTY TRANSACTIONS
At December 31, 2002, the Company owed the Chief Executive Officer and majority
stockholder of the Company $78,000 related to deferred compensation and for
advances to the Company totaling $49,000. Also the Company owed a former
Executive Vice President and shareholder of the Company $42,000 related to
deferred compensation and advances totaling $50,000.
At December 31, 2001, the Company owed the Chief Executive Officer and majority
stockholder of the Company $318,000 related to deferred compensation. At the
same time, this same individual owed the Company $61,000. These amounts were
settled in the first quarter of 2002 and as of December 31, 2002, there are no
loan amounts or other obligations due from Company officers or members of
management.
The President of the Company is the former owner of Jens' and currently holds a
19% minority interest in Jens'. This same individual is the holder of a
$4,000,000 subordinated note payable held by the Company and is also owed
$275,000 in accrued interest (Note 8).
The President of the Company and formerly the sole proprietor of Jens' owns a
shop yard, which he leases to the Company on a monthly basis. The total lease
payments to the President under the terms of the lease were $28,800 for the year
ended December 31, 2002.
In addition, the President of the Company and members of his family own 100% of
Tex-Mex Rental & supply Co., a Texas corporation, that sold approximately
$290,000 of equipment and other supplies to the Company in 2002. Management of
the Company believes these transactions were on terms at least as favorable to
the Company as could have been obtained from unrelated third parties
56
<PAGE>
NOTE 15 - SEGMENT INFORMATION
The Company has three operating segments including Casing Services (Jens'),
Directional Drilling Services (Strata) and Compressed Air Drilling Services
(Mountain Air). All of the segments provide services to the petroleum industry.
The Company only operated in one reporting segment for the year ended December
31, 2001 and in no operating segments for the period from February 4, 2000
(Inception) through December 31, 2000. The revenues, operating income (loss),
depreciation and amortization, interest, capital expenditures and assets of each
of the reporting segments plus the Corporate function are reported below for the
year ended December 31, 2002:
(in thousands) Year ended December 31, 2002
REVENUES:
Casing services $ 7,796
Directional drilling services 6,529
Compressed air drilling services 3,665
------------------------------
Total revenues $ 17,790
==============================
OPERATING INCOME (LOSS):
Casing services $ 2,225
Directional drilling services (576)
Compressed air drilling services (945)
General corporate (2,174)
------------------------------
Total (loss) from operations $ (1,440)
==============================
DEPRECIATION AND AMORTIZATION EXPENSE:
Casing services $ 1,265
Directional drilling services 295
Compressed air drilling services 955
General corporate 65
------------------------------
Total depreciation and amortization expense $ 2,580
==============================
INTEREST EXPENSE:
Casing services $ 643
Directional drilling services 215
Compressed air drilling services 761
General corporate 637
------------------------------
Total interest expense $ 2,256
==============================
CAPITAL EXPENDITURES:
Casing services $ 137
Directional drilling services 83
Compressed air drilling services 288
General corporate 10
------------------------------
Total capital expenditures $ 518
==============================
ASSETS:
Casing services $ 15,681
Directional drilling services 8,888
Compressed air drilling services 9,138
General corporate 1,071
------------------------------
Total assets $ 37,778
==============================
57
<PAGE>
The following table contains the customers that represent more than 10% of the
revenues for each o f the three operating segments at December 31, 2002:
Casing Services El Paso Production Oil & Gas
Materiales Y Equipos Petroleros
Directional drilling services Anadarko Petroleum Corporation
Santos USA Corporation
El Paso Production Oil & Gas
Compressed air drilling services Burlington Reserves Oil & Gas Co., L.P.
Devon Energy Production Co.
Texaco Exploration and Production
<TABLE>
NOTE 16 - SUPPLEMENTAL CASH FLOWS INFORMATION
<CAPTION>
February 4, 2000
(Inception) through
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ -----------
(in thousands)
<S> <C> <C> <C>
Non-cash investing and financing transactions in connection
with the acquisition of Mountain Air assets:
Fair value of net assets acquired $ - $ (7,183) $ -
Goodwill and other intangibles - (4,551) -
Notes payable to Seller of Mountain Air - 2,200 -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ - $ (9,534) $ -
============ ============ ===========
Non-cash investing transactions in connection with the reverse
merger of Allis-Chalmers and OilQuip:
Fair value of common stock exchanged $ - $ (2,799) $ -
Fair value of net assets, net of cash received - 872 -
Goodwill and other intangibles - 1,819 -
------------ ------------ -----------
Net cash paid to consummate merger $ - $ (88) $ -
============ ============ ===========
Non-cash investing and financing transactions in connection
with the acquisition of Jens':
Fair value of net assets acquired $ (11,562) $ - $ -
Goodwill and other intangibles (1,235) - -
Note payable to Seller of Jens' Oilfield Service 4,000 - -
Value of common stock issued 630 - -
Fair value of warrants issued 47 - -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ (8,120) $ - $ -
============ ============ ===========
Non-cash investing and financing transactions in connection
with the acquisition of Strata:
Fair value of net assets acquired $ (2,383) $ - $ -
Goodwill and other intangibles (4,668) - -
Issuance of preferred stock 3,500 - -
Value of common stock issued 3,105 - -
Fair value of warrants issued 267 - -
------------ ------------ -----------
Net cash paid to acquire subsidiary $ (179) $ - $ -
============ ============ ===========
Other non-cash investing and financing transactions:
Sale of property & equipment in connection with
the direct financing lease (Note $ 1,193 $ - $ -
</TABLE>
58
<PAGE>
NOTE 17 - QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except
per share amounts)
YEAR 2002
Revenues $ 3,253 $ 4,238 $ 4,775 $ 5,724
Operating income (loss) (201) (796) (608) 165
Net income (loss)
Continuing operations (640) (869) (1,505) (955)
Discontinued operations - - - -
-------- -------- -------- --------
Net income (loss) (640) (869) (1,505) (954)
Preferred stock dividend (58) (87) (87) (89)
-------- -------- -------- --------
Net income (loss) attributed to
common shares $ (698) $ (956) $(1,592) $(1,044)
======== ======== ======== ========
Income (loss) per common share
(Basic and diluted)
Continuing operations $ (0.04) $ (0.05) $ (0.08) $ (0.06)
Discontinued operations - - - -
-------- -------- -------- --------
Income (loss) per common share $ (0.04) $ (0.05) $ (0.08) $ (0.06)
======== ======== ======== ========
YEAR 2001
Revenues $ 606 $ 1,341 $ 1,521 $ 1,328
Operating income (loss) (150) (549) 35 (769)
Net income (loss)
Continuing operations (270) (775) (80) (1,148)
Discontinued operations - 4 (108) (2,200)
-------- -------- -------- --------
Net income (loss) from continuing
operations (270) (771) (188) (3,348)
Preferred stock dividend - - - -
-------- -------- -------- --------
Net income (loss) attributed to
common shares $ (270) $ (771) $ (188) $(3,348)
======== ======== ======== ========
Income (loss) per common share
(Basic and diluted)
Continuing operations $ (0.06) $ (0.19) $ (0.02) $ (0.30)
Discontinued operations - - (0.03) (0.55)
-------- -------- -------- --------
Income (loss) per common share $ (0.06) $ (0.19) $ (0.05) $ (0.85)
======== ======== ======== ========
59
<PAGE>
NOTE 18 - 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. Special
trusts established in connection with the Company's reorganization (See Note 2 -
Emergence From Chapter 11) counsel are 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 19 - SUBSEQUENT EVENTS
As disclosed in detail in Note 8, the Company and its Bank Lenders entered into
a series of Forbearance Agreements that became effective January 1, 2003. The
Forbearance Agreements expire on June 30, 2003. The financial effect on the
Company will be the acceleration of the amortization of debt issuance costs and
debt discount amounts from approximately the remaining one year periods to the
first six months of 2003.
On February 19, 2003, the Company entered into an agreement with the
shareholders of its Series A Preferred Stock establishing a new price for any
conversions of Series A Preferred Stock shares into common stock of the Company.
As agreed upon by all parties, the conversion price has been established at
$0.50 per share. This agreement reduces the number of shares of common stock
into which the Series A Preferred Stock is convertible from 18,421,053 to
7,000,000 shares.
Additionally, the Company issued a stock purchase warrant to Energy Spectrum
Partners, LP. This is in addition to the stock purchase warrant issued to Energy
Spectrum Partners, LP at the time of the acquisition of Strata in February 2002
(Notes 4 and 12). The additional warrant provides Energy Spectrum Partners, LP
with the option to purchase 875,000 shares of common stock at an exercise price
of $0.15 per share.
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
---------------------------------------------------------------------
NONE.
60
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by Item 10 is incorporated by reference
from the section entitled "Election of Directors" and "Executive Compensation
and Other Matters" and other relevant portions of the Information Statement (the
"Information Statement") on Schedule 14C to be filed by the registrant not later
than 120 days following December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information required by Item 11 is incorporated by reference
from the section entitled "Executive Compensation and Other Matters" and other
relevant portions of the Information Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" and other relevant portions of the Information Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Relationships and Related Transactions" and other
relevant portions of the Information Statement.
ITEM 14. CONTROLS AND PROCEDURES.
------------------------
(a). EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our chief
executive officer and our chief accounting officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation
Date") within 90 days prior to the filing date of this annual report, have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate to ensure that material information relating to the
registrant and its consolidated subsidiaries would be made known to them by
others within those entities.
(b). CHANGES IN INTERNAL CONTROLS. To our knowledge, there are no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the Evaluation Date.
61
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) List of Documents Filed
-----------------------
The Index to Financial Statements is included on page 30 of this report.
Financial statements Schedules not included in this report have been omitted
because they are not applicable or the required information is included in the
Financial Statements or Notes thereto.
(b) REPORTS ON FORM 8-K
-------------------
None.
(c) EXHIBITS
--------
The exhibits listed on the Exhibit Index located at Page 66 of this
Annual Report are filed as part of this Form 10K.
62
<PAGE>
CERTIFICATIONS
I, Munawar H. Hidayatallah, Chief Executive Officer of the Company, certify
that:
(1) I have reviewed this annual report on Form 10-K of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 11, 2003 By: /S/ MUNAWAR H. HIDAYATALLAH
---------------------------
Munawar H. Hidayatallah
Chief Executive Officer
63
<PAGE>
I, Todd C. Seward, Chief Accounting Officer of the Company, certify that:
(1) I have reviewed this annual report on Form 10-K of Allis-Chalmers
Corporation;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 11, 2003 By: /s/ Todd C. Seward
-----------------------------
Todd C. Seward
Chief Accounting Officer
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on April 11, 2002.
/S/ MUNAWAR H. HIDAYATALLAH
-----------------------------------------------
Munawar H. Hidayatallah
President, Chief Executive Officer and Chairman
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, this report has been signed on the date indicated by
the following persons on behalf of the registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------- ------------------------------------ ------------------
<S> <C> <C>
/S/ MUNAWAR H. HIDAYATALLAH Chairman and Chief Executive Officer April 11, 2003
- -------------------------------- (Principal Financial Officer and
Munawar H. Hidayatallah Principle Executive Officer)
/S/ JENS H. MORTENSEN President, Chief Operating Officer April 11, 2003
- -------------------------------- and Director
Jens H. Mortensen
/S/ TODD SEWARD Chief Accounting Officer April 11, 2003
- -------------------------------- (Principal Accounting Officer)
Todd Seward
/S/ DAVID A. GROSHOFF Director April 7, 2003
- --------------------------------
David A. Groshoff
/S/ SAEED SHEIKH Director April 8, 2003
- --------------------------------
Saeed Sheikh
/S/ LEONARD TOBOROFF Director April 8, 2003
- --------------------------------
Leonard Toboroff
/S/ JAMES W. SPANN Director April 7, 2003
- --------------------------------
James W. Spann
/S/ MICHAEL D. TAPP Director April 7, 2003
- --------------------------------
Michael D. Tapp
/S/ ROBERT E. NEDERLANDER Director April 9, 2003
- --------------------------------
Robert E. Nederlander
/S/ THOMAS O. WHITENER, JR. Director April 8, 2003
- --------------------------------
Thomas O Whitener, Jr.
</TABLE>
65
<PAGE>
EXHIBIT INDEX
2.1 First Amended Disclosure Statement pursuant to Section 1125 of the
Bankruptcy Code, which includes the First Amended and Restated
Joint Plan of Reorganization dated September 14, 1988
(incorporated by reference to the Company's Report on Form 8-K
dated December 1, 1988).
2.2 Agreement and Plan of Merger by and among Allis-Chalmers
Corporation, Allis-Chalmers Acquisition Corp. and OilQuip Rentals,
Inc. dated as of May 9, 2001(incorporated by reference to the
Company's Report on Form 8-K filed May 15, 2001).
2.3. Stock Purchase Agreement dated November 30, 2001 by and between
Clayton Lau and Mountain Compressed Air, Inc. (incorporated by
reference to the Company's Report on Form 8-K dated December 27,
2001).
2.4. Promissory Note executed by Clayton Lau dated November 30, 2001
(incorporated by reference to the Company's Report on Form 8-K
dated December 27, 2001).
2.5. Security Agreement dated November 30, 2001 by and between Clayton
Lau and Mountain Compressed Air, Inc., (incorporated by reference
to the Company's Report on Form 8-K dated December 27, 2001).
2.6. Stock Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation, a Delaware corporation ("Buyer") and
Jens H. Mortensen, Jr. (incorporated by reference to the Company's
Report on Form 8-K filed February 21, 2002).
2.7. Shareholder's Agreement among Jens' Oilfield Services, Inc., a
Texas corporation, Jens H. Mortensen, Jr., and Allis-Chalmers
Corporation (incorporated by reference to the Company's Report on
Form 10-K for the year ended December 31, 2001).
2.8. Stock Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation, Energy Spectrum Partners, LP, and
Strata Directional Technology, Inc. (incorporated by reference to
the Company's Report on Form 10-K for the year ended December 31,
2001).
2.9 Registration Rights Agreement dated by and among Allis-Chalmers
Corporation and Energy Spectrum Partners, LP (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 2001).
2.10 Shareholders' Agreement among Allis-Chalmers Corporation and the
Shareholders and Warrant holder signatories thereto dated February
1, 2002 (incorporated by reference to the Company's Report on Form
10-K for the year ended December 31, 2001).
3.1 Amended and Restated Certificate of Incorporation of
Allis-Chalmers Corporation (incorporated by reference to the
Company's Report on Form 10-K for the year ended December 31,
2001).
66
<PAGE>
3.2 Certificate of Designation, Preferences and Rights of the SERIES A
10% CUMULATIVE CONVERTIBLE PREFERRED STOCK ($.01 Par Value) of
Allis Chalmers Corporation (incorporated by reference to the
Company's Report on Form 8-K filed February 21, 2002)
3.3 Amended and Restated By-laws of Allis-Chalmers Corporation
(incorporated by reference to the Company's Report on Form 10-K
for the year ended December 31, 2001).
*10.1 Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Wells Fargo Bank (incorporated by
reference to Exhibit C-1 of the First Amended and Restated Joint
Plan of Reorganization dated September 14, 1988 included in the
Company's Report on Form 8-K dated December 1, 1988).
*10.2 Amended and Restated Retiree Health Trust Agreement between
Allis-Chalmers Corporation and Firstar Trust Company (incorporated
by reference to Exhibit C-2 of the First Amended and Restated
Joint Plan of Reorganization dated September 14, 1988 included in
the Company's Report on Form 8-K dated December 1, 1988).
10.3 Reorganization Trust Agreement between Allis-Chalmers Corporation
and John T. Grigsby, Jr., Trustee (incorporated by reference to
Exhibit D of the First Amended and Restated Joint Plan of
Reorganization dated September 14, 1988 included in the Company's
Report on Form 8-K dated December 1, 1988).
10.4. Product Liability Trust Agreement between Allis-Chalmers
Corporation and Bruce W. Strausberg, Trustee (incorporated by
reference to Exhibit E of the First Amended and Restated Joint
Plan of Reorganization dated September 14, 1988 included in the
Company's Report on Form 8-K dated December 1, 1988).
*10.5 Allis-Chalmers Savings Plan (incorporated by reference to the
Company's Report on Form 10-K for the year ended December 31,
1988).
*10.6 Allis-Chalmers Consolidated Pension Plan (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 1988).
10.7 Agreement dated as of March 31, 1999, by and between
Allis-Chalmers Corporation and the Pension Benefit Guaranty
Corporation (incorporated by reference to the Company's Report on
Form 10-Q for the quarter ended June 30, 1999).
10.8 Registration Rights Agreement dated as of March 31, 1999, by and
between Allis-Chalmers Corporation and the Pension Benefit
Guaranty Corporation (incorporated by reference to the Company's
Report on Form 10-Q for the quarter ended June 30, 1999).
10.9 Letter Agreement between Allis-Chalmers Corporation and the
Pension Benefit Guarantee Corporation dated as of May 9, 2001
(incorporated by reference to the Company's Report on Form 8-K
filed on May 15, 2002).
67
<PAGE>
10.10 Termination Agreement between Allis-Chalmers Corporation, the
Pension Benefit Guarantee Corporation and others, dated as of May
9, 2001(incorporated by reference to the Company's Report on Form
8-K filed on May 15, 2002).
*10.11 Employment Agreement dated February 7, 2001 by and between Oil
Quip Rentals, Inc. and Munawar H. Hidayatallah (incorporated by
reference to the Company's Report on Form 10-K for the year ended
December 31, 2001).
10.12 Asset Purchase Agreement entered into as of February 6, 2001 by
and among Mountain Compressed Air, Inc., Mountain Drilling Service
Co., Inc. and Rod and Linda Huskey with related Promissory Note.
*10.13 Option Agreement dated October 15, 2001 between Allis-Chalmers
Corporation and Leonard Toboroff (incorporated by reference to the
Company's Report on Form 10-Q for the quarter ended September 30,
2001).
10.14 Credit and Security Agreement dated February 1, 2002 by and
between Jens' Oil Field Service, Inc. and Wells Fargo Credit, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002).
10.15 Amended and Restated Credit and Security Agreement dated February
1, 2002 by and between Strata Directional Technology, Inc. and
Wells Fargo Credit, Inc. (incorporated by reference to the
Company's Report on Form 8-K filed February 21, 2002).
10.16 Credit Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Wells Fargo Energy Capital, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002)
10.17 Warrant Purchase Agreement dated February 1, 2002 by and between
Allis-Chalmers Corporation and Wells Fargo Energy Capital, Inc.
(incorporated by reference to the Company's Report on Form 8-K
filed February 21, 2002).
*10.18 Employment Agreement dated February 1, 2002, by Jens' Oil Field
Service, Inc. and Jens H. Mortensen, Jr. (incorporated by
reference to the Company's Report on Form 8-K filed February 21,
2002).
10.19 Credit Agreement between Mountain Compressed Air, Inc., and Wells
Fargo Bank Texas NA, including Renewal Term Note, Renewed and
Extended Revolving Line of Credit Note, and Renewal Delayed Draw
Term Note, each dated February 6, 2001.
10.20 First Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated August 9, 2001.
10.21 Second Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated November 30, 2001.
68
<PAGE>
10.22 Third Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated January 31, 2002.
10.23 Fourth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated April 30, 2002.
10.24 Fifth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated August 6, 2002.
10.25 Sixth Amendment to Credit Agreement between Mountain Compressed
Air, Inc., and Wells Fargo Bank Texas NA, including Renewal Term
Note, Renewed and Extended Revolving Line of Credit Note, and
Renewal Delayed Draw Term Note, each dated January 1, 2003.
10.26 Forbearance Agreement and Second Amendment to Amended and Restated
Credit Agreement dated March 21, 2003, by and between Strata
Directional Technology, Inc., and Wells Fargo Credit, Inc.
10.27 Forbearance Agreement and First Amendment to Credit Agreement
between Jens' Oilfield Services, Inc., and Wells Fargo Credit,
Inc., dated March 21, 2003.
10.28 Forbearance Agreement between Mountain Compressed Air, Inc., and
Wells Fargo Equipment Finance, Inc., dated January 17, 2003.
10.29 Ratification of Previously Executed Security Agreement dated
August 9, 2001, by and between Mountain Compressed Air, Inc. and
Wells Fargo Energy Capital, Inc.
10.30 Subordination and Intercreditor Agreement by and among Mountain
Compressed Air, Inc., Wells Fargo Energy Capital, Inc. and Wells
Fargo Equipment Finance, Inc.
10.31 Credit Agreement dated as of February 6, 2001, by and between
Mountain Compressed Air, Inc. and Wells Fargo Energy Capital,
Inc., with related Term Note, Warrant Purchase Agreement and
Warrant.
10.32 First Amendment to Credit Agreement dated as of February 1, 2002,
by and between Mountain Compressed Air, Inc. and Wells Fargo
Energy Capital Inc.
10.33 Second Amendment to Credit Agreement dated as of February 1, 2003,
by and between Mountain Compressed Air, Inc. and Wells Fargo
Energy Capital Inc.
21.1 Subsidiaries of Allis-Chalmers Corporation.
69
<PAGE>
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Compensation Plan or Agreement
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>3
<FILENAME>allis_10kex10-12.txt
<TEXT>
<PAGE>
EXHIBIT 10.12
PROMISSORY NOTE
U. S. $ 2,200,000.00 Grand Junction, Colorado
February 6, 2001
FOR VALUE RECEIVED, MOUNTAIN COMPRESSED AIR, INC., ("Maker") promises
to pay to the order of MOUNTAIN AIR DRILLING SERVICE CO., INC., at 578 Rio Hondo
Road, Grand Junction, CO 81503, or such other place as any holder may from time
to time designate in writing to Maker, the principal sum of Two Million Two
Hundred thousand United States Dollars ($2,200,000.00), together with interest
from the date of this Note on the unpaid principal balance at the rate of five
and three-quarter percent (5.75%) per annum, simple interest. Principal and
interest shall be payable in one lump sum of $2,832,500 on February 6, 2006.
All payments on this Note shall be applied first to interest accrued
to the date of payment, and the balance shall be applied to principal reduction.
Prepayment may be made at any time by Maker, or from time to time, in whole or
in part, without penalty or premium. Any prepayment shall be applied first to
unpaid late payment penalties, second to interest accrued to the date of the
prepayment, and the balance shall be applied to principal.
Any holder of this Note shall have the right, at the holder's sole
option, following 10 days written notice of the default to Maker and any
guarantors, unless Maker ahs cured the default specified within such 10 day
period, to declare all remaining balances of principal and interest immediately
due and payable or to add unpaid interest to principal upon: (1) insolvency of
the Maker or any guarantor, or the commencement of any bankruptcy or insolvency
proceedings by or against Maker or any guarantor: (2) failure to provide the
holder with a copy of Maker's unaudited financial statements (including balance
sheet, profit and loss statement, and statement of cash flows) within 30 days
after the close of each calendar quarter, and a copy of any audited financial
statements of Maker within 15 days after preparation: or, (3) removal of any of
the equipment purchased from a holder from the contiguous 48 States of the
United States. If a holder declares the unpaid balances of this Note due and
payable, as provided above, the entire unpaid principal balance and interest
accrued to the date of the declaration shall bear interest at the rate of
fifteen percent (15%) per annum, compounded annually, until paid. Forbearance or
delay, however long such delay may be, by a holder to exercise holder's option
with respect to any events giving rise to that option shall not constitute a
waiver of holder's rights as to any subsequent event. Exercise of this option
after notice of default may be without further notice to Maker or guarantors,
notice of exercise being expressly waived. Upon exercise of the option to
accelerate Maker's obligations to pay, a holder may accept any payments on this
Note without waiving acceleration.
This Note shall be governed by and construed in accordance with the
laws of the State of Colorado. Maker and any guarantor expressly agree that
venue and jurisdiction for any action or proceeding concerning this Note shall
be proper in the courts of Mesa County, Colorado, as well as in the county and
State where Maker maintains its principal office.
All persons and entities now or at any time liable for the payment of
this Note, including any guarantor, for themselves, their heirs, legal
representatives, successors, and assigns, (1) expressly waive presentment,
demand, notice, protest, notice of dishonor, the right of subrogation, and
diligence in the collection of the sums due under this Note; (2) consent that
the time for all payments, or any part of any payment, may be extended,
rearranged, renewed, or postponed by any holder, in holder's sole discretion
(any number of times and for any duration) without modifying, altering,
releasing, affecting, or limiting the liability of any party: (3) agree that a
holder shall not be required first to institute any suit, or to exhaust any
remedies against Maker or any other person or entity liable under this Note or
against any collateral securing this Note in order to enforce payment of this
Note; and (4) consent to any holder's impairment of recourse against other
parties to this Note or any collateral securing this Note.
The right to receive any payments hereon, including prepayments, is
subject to the terms of that certain Subordination Agreement dated as of
February 6, 2001, by and among the Maker, the Payee of this Note, Wells Fargo
Bank Texas, National Association, Wells Fargo Energy Capital, and Wells Fargo.
<PAGE>
Equipment Finance, Inc., reference to which instrument is here made
and which instrument is here incorporated by reference for all purposes. This is
not a negotiable note. Any holders' rights in the Note are subject to the
provisions of the Subordination Agreement.
The provisions of this Note are severable and if any provision of this
Note is determined to be illegal or unenforceable, the remaining terms of this
Note shall remain enforceable to the maximum extent allowed by law in accordance
with the intent of the parties as stated in this Note.
MOUNTAIN COMPRESSED AIR, INC.
By: /s/ Munawar H. Hidayatallah
----------------------------------
Munawar H. Hidayatallah, President
Payment of this Note is unconditionally guaranteed.
/s/ Munawar H. Hidayatallah /s/ Jayne Munawar
- --------------------------- ------------------
MUNAWAR H. HIDAYATALLAH, PERSONALLY (Spouse of Munawar H. Hidayatallah)
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is entered into as of
February 6, 2001, by and among MOUNTAIN COMPRESSED AIR, INC., a Texas
corporation ("BUYER"); MOUNTAIN AIR DRILLING SERVICE CO., INC., a Colorado
corporation ("SELLER") and ROD HUSKEY AND LINDA HUSKEY, residents of Grand
Junction, Colorado (collectively referred to as the "HUSKEYS").
RECITALS
The Huskeys, as shareholders, own 100% of the issued and outstanding
shares of capital stock of Seller. Seller desires to sell, and Buyer desires to
purchase, the Assets of Seller for the consideration and on the terms set forth
in this Agreement.
AGREEMENT
The parties, intending to be legally bound, agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the capitalized terms and variations
thereof have the meanings specified or referred to in Schedule 1.
2. SALE AND TRANSFER OF ASSETS; CLOSING
2.1 ASSETS TO BE SOLD
Upon the terms and subject to the conditions set forth in this
Agreement, at the Closing Seller shall sell, convey, assign, transfer and
deliver to Buyer, free and clear of any Encumbrances other than Permitted
Encumbrances, and Buyer shall purchase and acquire from Seller, all of Seller's
right, title and interest in and to the following property and assets (but
excluding the Excluded Assets):
(a) all Tangible Personal Property, including those items
described in Schedule 2.1(a);
(b) Cash in the amount of $350,000.00 from Seller;
(c) all Seller's rights in, to and under all Seller Contracts,
including those listed in Schedule 2.1(c), and all outstanding
offers or solicitations made by or to Seller to enter into any
Contract;
1
<PAGE>
(d) all Governmental Authorizations and all pending applications
therefor or renewals thereof, in each case to the extent
transferable to Buyer, including those listed in Schedule
2.1(d);
(e) all data and Records related to the operations of Seller,
including client and customer lists and Records, referral
sources, research and development reports and Records,
production reports and Records, service and warranty Records,
equipment logs, operating guides and manuals, financial and
accounting Records, creative materials, advertising materials,
promotional materials, studies, reports, correspondence and
other similar documents and Records; and
(f) all of the intangible rights and property of Seller, including
Seller's name, assumed fictional business names, trading
names, going concern value, good-will, telephone, telecopy and
e-mail addresses, websites and listings listed in Schedule 2.1
(f).
Notwithstanding the foregoing, the transfer of the Assets pursuant to
this Agreement shall not include the assumption of any Liability in respect
thereof unless the Buyer expressly assumes such Liability pursuant to Section
2.4(a).
2.2 EXCLUDED ASSETS
Notwithstanding anything to the contrary contained in Section 2.1 or
elsewhere in this Agreement, the following items (collectively, the "Excluded
Assets") are not part of the sale and purchase contemplated hereunder, are
excluded from the Assets, and shall remain the property of Seller after the
Closing:
(a) the minute books, stock Records and corporate seal of Seller;
(b) the shares of capital stock of Seller held in treasury;
(c) all records concerning the case styled Mountain Air Drilling
Service Company vs. Muscle Products Corporation, pending in
the Mesa County, Colorado, District Court, Case No. 99-CV-323
(the "Muscle Products Litigation"), and other Records that
Seller is required by law to retain in its possession,
provided that Seller will provide Buyer with all personnel
records for those employees which Buyer employs following
Closing; Buyer may, at its expense, make and retain copies of
any other Records retained by Seller under this Section
2.2(c);
(d) all rights in connection with and assets of employee plans and
health insurance, if any;
(e) all rights of Seller under this Agreement, the Bill of Sale,
and the Assignment and Assumption Agreement;
(f) property and assets expressly designated in Schedule 2.2(f);
(g) any proceeds and/or rights to the Muscle Products Litigation
or other Proceedings; and
2
<PAGE>
(h) all cash, Accounts Receivable and investment assets (including
prepaid expenses, deposits and retainers) except the
$350,000.00 paid to Buyer pursuant to Section 2.1(b).
2.3 PURCHASE PRICE
The purchase price for the Assets (the "Purchase Price") will be (i)
$9,800,000.00 in cash (the "Cash"), (ii) a promissory note in the aggregate
principal amount of $2,200,000.00 with interest at five and three-quarters
percent (5-3/4%) per annum payable to Seller ("Note") in the form attached
hereto as Exhibit 2.3 hereof, (iii) the assumption of the Assumed Liabilities,
and (iv) $200,000.00 paid in advance to Seller by Buyer as a nonrefundable
deposit ("Deposit") toward the purchase of the Assets pursuant to a prior Asset
Purchase Agreement between the parties that is released to Seller prior to the
execution of this Agreement and is nonrefundable.
2.4 LIABILITIES
(a) Assumed Liabilities. On the Closing Date, Buyer shall assume
and agree to discharge only the following specifically
enumerated obligations and Liabilities of Seller (the "Assumed
Liabilities"):
(i) any Liability to Seller's customers incurred by
Seller in the Ordinary Course of Business for
non-delinquent orders outstanding as of the Closing
Date reflected on Seller's books; and
(ii) any Liability to Seller's customers under written
warranty agreements given by Seller to its customers
in the Ordinary Course of Business prior to the
Closing Date.
All account payables shall remain the responsibility of Seller.
(b) Retained Liabilities. "Retained Liabilities" shall mean every
Liability of Seller other than the Assumed Liabilities. All of
the Retained Liabilities shall remain the sole responsibility
of and shall be retained, paid, performed and discharged
solely by Seller. Retained Liabilities shall include:
(i) any Liability arising out of or relating to services
provided by Seller to the extent services were
provided prior to the Closing Date, other than to the
extent assumed under Section 2.4(a);
(ii) any Liability under any Contract assumed by Buyer
pursuant to Section 2.4(a) which arises after the
Closing Date but which arises out of or relates to
any Breach that occurred prior to the Closing Date;
(iii) any Liability for Taxes including (A) any Taxes
arising as a result of Seller's operation of its
business or ownership of the Assets prior to the
Closing Date, and (b) any deferred Taxes of any
nature;
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(iv) any Liability arising out of or relating to Seller's
credit facilities, or any security interest related
thereto;
(v) any Environmental, Health and Safety Liabilities
arising out of or relating to the operation of
Seller's business or Seller's leasing, ownership or
operation of any real property;
(vi) any Liability under employee plans, if any, or
relating to payroll, vacation, sick leave, pension
benefits, employee stock option or profit-sharing
plans, health care plans or benefits, or any other
employee plans or benefits of any kind for Seller's
employees or former employees, or both;
(vii) any Liability under any employment, severance,
retention or termination agreement with any employee
of Seller or any of its Related Persons;
(viii) any Liability arising out of or relating to any
employee grievance whether or not the affected
employees are hired by Buyer;
(ix) any Liability of Seller to the Huskeys, any other
shareholder or Related Person;
(x) any Liability to indemnify, reimburse or advance
amounts to any officer, director, employee or agent
of Seller to which Buyer has not agreed;
(xi) any Liability to distribute to any of Seller's, the
Huskeys or otherwise apply all or any part of the
consideration received hereunder;
(xii) any Liability arising out of any Proceeding pending
as of the Closing Date, whether or not set forth in
any Schedule, or any Proceeding commenced after the
Closing Date and arising out of, or relating to, any
occurrence or event happening prior to the Closing
Date;
(xiii) any Liability arising out of or resulting from
Seller's non-compliance with any Legal Requirement or
Order of any Governmental Body prior to the Closing
Date;
(xiv) any Liability of Seller under this Agreement or any
other document executed in connection with the
Contemplated Transactions;
(xv) any Liability of Seller based upon Seller's acts or
omissions occurring after the Closing Date; and
(xvii) any Liability of Seller for accounts payable of
Seller.
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2.5 ALLOCATION
The Purchase Price shall be allocated in accordance with Schedule 2.5.
After the Closing, the parties shall make consistent use of the allocation, fair
market value and useful lives specified in Schedule 2.5 for all Tax purposes and
in any and all filings, declarations and reports with the IRS in respect
thereof, including the reports required to be filed under Section 1060 of the
Code, if applicable, it being understood that Buyer shall prepare and deliver
IRS Form 8594 to Seller within forty-five (45) days after the Closing Date if
such form is required to be filed with the IRS. In any Proceeding related to the
determination of any Tax, neither Buyer nor Seller or the Huskeys shall contend
or represent that such allocation is not a correct allocation.
2.6 CLOSING
The consummation of the purchase and sale provided for in this
Agreement (the "Closing") will take place at the offices of Wilson, Cribbs,
Goren & Flaum, P.C., 440 Louisiana, Suite 2200, Houston, TX 77002, at 10:00 a.m.
(local time) on or before February 6, 2001. Subject to the provisions of Article
9, failure to consummate the purchase and sale provided for in this Agreement on
the date and time and at the place determined pursuant to this Section 2.6 will
not result in the termination of this Agreement and will not relieve any party
of any obligation under this Agreement.
2.7 CLOSING OBLIGATIONS
In addition to any other documents to be delivered under other
provisions of this Agreement, at the Closing:
(a) Seller and the Huskeys, as the case may be, shall deliver to
Buyer:
(i) a bill of sale for all of the Assets which are
Tangible Personal Property in the form of Exhibit
2.7(a)(i) (the "General Conveyance, Transfer and
Assignment"), executed by Seller;
(ii) an assignment of all of the Assets which are
intangible personal property in the form of Exhibit
2.7(a)(ii) which assignment shall also contain
Buyer's undertaking and assumption of the Assumed
Liabilities (the "Assignment and Assumption
Agreement"), executed by Seller;
(iii) such other deeds, bills of sale, assignments,
certificates of title, documents and other
instruments of transfer and conveyance as may
reasonably be requested by Buyer, each in form and
substance satisfactory to Seller, Buyer and their
respective legal counsel and executed by Seller;
(iv) an employment agreement in the form of Exhibit
2.7(a)(iv) executed by each of Rod Huskey and Linda
Huskey (the "Employment Agreements");
(v) a lease agreement in the form of Exhibit 2.7(a)(v)
executed by Seller and the Huskeys (the "Lease
Agreement") covering the Leased Property;
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(vi) a certificate in the form of Exhibit 2.7(a)(vi)
executed by Seller and the Huskeys as to the accuracy
of their representations and warranties as of the
date of this Agreement and as of the Closing Date in
accordance with Section 7.1 and as to their
compliance with and performance of their covenants
and obligations to be performed or complied with at
or before the Closing in accordance with Section 7.2;
(vii) a certificate of the Secretary of Seller in the form
of Exhibit 2.7(a)(vii) certifying, certifying all
requisite resolutions or actions of Seller's board of
directors and the Huskeys approving the execution and
delivery of this Agreement and the consummation of
the Contemplated Transactions and the change of name
contemplated by Section 5.9;
(viii) cash in the amount of $350,000.00; and
(ix) that certain Subordination Agreement between Seller,
Huskeys, Buyer and Wells Fargo Bank Texas, N.A.
(b) Buyer shall deliver to Seller and the Huskeys, as the case may
be:
(i) the Assignment and Assumption Agreement executed by
Buyer;
(ii) the Employment Agreements for the Huskeys executed by
Buyer;
(iii) a certificate in the form of Exhibit 2.7(b)(iii)
executed by Buyer as to the accuracy of its
representations and warranties as of the date of this
Agreement and as of the Closing Date in accordance
with Section 8.1 and as to its compliance with and
performance of its covenants and obligations to be
performed or complied with at or before the Closing
in accordance with Section 8.2; and
(iv) a certificate of the Secretary of Buyer in the form
of Exhibit 2.7(b)(iv) certifying all requisite
resolutions or actions of Buyer's Board of Directors
approving the execution and delivery of this
Agreement and the consummation of the transactions
contemplated herein and the authority of the Buyer
executing this Agreement and any other document
relating to the Contemplated Transactions.
(v) the Lease Agreement executed by the Buyer;
(vi) the Cash (by wire transfer as directed by Seller) and
the Note required by Section 2.3.
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3. REPRESENTATIONS AND WARRANTIES OF SELLER AND THE HUSKEYS
Seller and the Huskeys represent and warrant, jointly and severally, to
Buyer as follows:
3.1 ORGANIZATION AND GOOD STANDING
(a) Schedule 3.1(a) contains a complete and accurate list of
Seller's jurisdiction of incorporation and any other
jurisdictions in which it is qualified to do business as a
foreign corporation. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and
authority to conduct its business as it is now being
conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations
under Seller Contracts. Seller is duly qualified to do
business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by
it, or the nature of the activities conducted by it, requires
such qualification.
(b) Seller has no Subsidiary and does not own any shares of
capital stock or other securities of any other Person.
3.2 ENFORCEABILITY; AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Seller and the Huskeys, enforceable against each
of them in accordance with its terms. Upon the execution and
delivery by Seller and the Huskeys of the Employment
Agreements, Lease Agreement, and other agreements to be
executed or delivered by any or all of the Seller and the
Huskeys at Closing (collectively, the "Seller's Closing
Documents"), each of Seller's Closing Documents will
constitute the legal, valid, and binding obligation of each of
Seller and the Huskeys a party thereto, enforceable against
each of them in accordance with its terms. Seller has the
absolute and unrestricted right, power and authority to
execute and deliver this Agreement and the Seller's Closing
Documents to which it is a party and to perform its
obligations under this Agreement and the Seller's Closing
Documents, and such action has been duly authorized by all
necessary action by Seller's, the Huskeys and board of
directors. The Huskeys have all necessary legal capacity to
enter into this Agreement and the Seller's Closing Documents
to which such Huskeys are a party and to perform his or her
obligations hereunder and thereunder.
(b) Neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated
Transactions will, directly or indirectly (with or without
notice or lapse of time):
(i) Breach any provision of any of the Governing
Documents of Seller or any resolution adopted by the
board of directors of Seller or the Huskeys;
(ii) Breach or give any Governmental Body or other Person
the right to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any
relief under, any Legal Requirement or any Order to
which Seller or the Huskeys, or any of the Assets,
may be subject;
(iii) contravene, conflict with, or result in a violation
or Breach of any of the terms or requirements of, or
give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by Seller or
that otherwise relates to the Assets or to the
business of Seller;
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(iv) cause Buyer to become subject to, or to become liable
for the payment of, any Tax, except sales and use
taxes which may become due as a result of the sale of
the assets;
(v) Breach any provision of, or give any Person the right
to declare a default or exercise any remedy under, or
to accelerate the maturity or performance of, or
payment under, or to cancel, terminate, or modify,
any Seller Contract;
(vi) result in the imposition or creation of any
Encumbrance upon or with respect to any of the
Assets; or
(vii) result in any shareholder of the Seller having the
right to exercise dissenters' appraisal rights.
Neither Seller nor the Huskeys are required to give any notice to or
obtain any Consent from any Person in connection with the execution and delivery
of this Agreement or the consummation or performance of any of the Contemplated
Transactions.
3.3 CAPITALIZATION
The Huskeys own 100% of the issued and outstanding shares of capital
stock of Seller. The Huskeys are and will be on the Closing Date the record and
beneficial owners and holders of all the shares owned by each of them, free and
clear of all Encumbrances. There are no Contracts for the issuance, sale, or
transfer of any equity securities or other securities of Seller. None of the
outstanding equity securities of Seller were issued in violation of the
Securities Act of 1933, as amended (the "Securities Act") or any other Legal
Requirement.
3.4 FINANCIAL STATEMENTS
Seller has delivered to Buyer:
(a) unaudited balance sheets of Seller as of December in each of
the years 1996 through 1999, and the related unaudited
statements of income, changes in shareholders' equity, and
cash flows for each of the fiscal years then ended, including
in each case the notes thereto;
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(b) an unaudited balance sheet of Seller as of December 31, 2000,
(the "Interim Balance Sheet") and the related unaudited
statements of income, changes in shareholder's equity and cash
flows for the fiscal year then ended, including in each case
the notes thereto certified by Seller. Such financial
statements fairly present (and the financial statements
delivered pursuant to Section 5.8 will fairly present) the
financial condition and the results of operations, changes in
shareholders' equity, and cash flows of Seller as of the
respective dates of and for the periods referred to in such
financial statements, all in accordance with GAAP, subject, in
the case of interim financial statements, to normal recurring
year-end adjustments (the effect of which will not,
individually or in the aggregate, be materially adverse) and
the absence of notes (that, if presented, would not differ
materially from those included in the Balance Sheet). The
financial statements referred to in this Section 3.4,
delivered pursuant to Section 5.8 and the Audited Financial
Statements when delivered pursuant to Section 2.9 of this
Agreement reflect and will reflect the consistent application
of such accounting principles throughout the periods involved,
except as disclosed in the notes to such financial statements.
The financial statements have been and will be prepared from
and are in accordance with the books and Records of Seller,
which have been prepared in accordance with Section 3.5; and
(c) the audited financial statements of Seller for fiscal years
ended December 31, 1997 through 1999 as prepared by Gordon,
Hughes & Banks, LLP.
3.5 BOOKS AND RECORDS
The books of account and other financial Records of Seller, all of
which have been made available to Buyer, are complete and correct and represent
actual, bona fide transactions.
3.6 TITLE TO ASSETS
Seller owns good and transferable title to all of the other Assets free
and clear of any Encumbrances other than those described in Schedule 3.6
("Permitted Encumbrances").
3.7 CONDITION OF TANGIBLE PERSONAL PROPERTY
No warranties, express or implied, are made as to the condition,
merchantability, or fitness for any purpose of any item of Tangible Personal
Property. The sale of the Tangible Personal Property is made AS IS and WHERE IS.
Prior to Closing, Seller shall maintain all of the Tangible Personal Property
through routine maintenance in the Ordinary Course of Business. All Tangible
Personal Property used in Seller's business is in the possession of Seller. At
least 90% of the fair market value of the Tangible Personal Property, as
described and detailed in that certain appraisal dated May 10, 2000, by Superior
Auctions Appraisals & Brokerage, is currently and has been for at least the last
year located in the State of New Mexico and will be located in New Mexico at the
Closing.
3.8 [INTENTIONALLY LEFT BLANK]
3.9 NO UNDISCLOSED LIABILITIES
Seller has no Liability except for Liabilities reflected or reserved
against in the Balance Sheet or the Interim Balance Sheet and current
Liabilities incurred in the Ordinary Course of Business of Seller since the date
of the Interim Balance Sheet.
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3.10 TAXES
(a) Tax Returns Filed and Taxes Paid. Except as described in
Schedule 3.10(a) Seller and its Subsidiaries have filed or
caused to be filed on a timely basis all Tax Returns
(including where appropriate consolidated Tax Returns) and all
reports with respect to Taxes that are or were required to be
filed pursuant to applicable Legal Requirement. All such Tax
Returns and reports filed by Seller and its Subsidiaries are
true, correct and complete in all respects. Seller has paid,
or made provision for the payment of, all Taxes that have or
may have become due for all periods covered by the Tax Returns
or otherwise, or pursuant to any assessment received by
Seller, except said Taxes, if any, as are listed in Schedule
3.10(a) and are being contested in good faith and as to which
adequate reserves (determined in accordance with GAAP) have
been provided in the Balance Sheet and Interim Balance Sheet.
Seller currently is not the beneficiary of any extension of
time within which to file any Tax Return except an extension
to file all state and federal income tax returns for the year
1999. No claim has ever been made or is expected to be made be
made by an authority in a jurisdiction where the Seller does
not file Tax Returns that it is or may be subject to taxation
by that jurisdiction. There are no Encumbrances on any of the
assets of Seller that arose in connection with any failure (or
alleged failure) to pay any Tax, and Seller has no Knowledge
of any basis for assertion of any claims attributable to Taxes
which, if adversely determined would result in any such
Encumbrance;
(b) Delivery of Tax Returns and Information Regarding Audits and
Potential Tax Liabilities. Seller has delivered to Buyer
copies of, and Schedule 3.10(b) contains a complete and
accurate list of all Tax Returns specified in Section 3.10(a)
that were filed since December 31, 1997. Schedule 3.10(b)
indicates such Tax Returns that have been audited or are
currently under audit and accurately describes any
deficiencies, or other amounts that were paid or are currently
being contested. To the Knowledge of the Huskeys, any
director, or officer (or employee responsible for Tax matters)
of Seller (a "Responsible Tax Person"), no undisclosed
deficiencies are expected to be asserted with respect so any
such audit. All deficiencies proposed as a result of such
audits have been paid, reserved against, settled, or, as
described in Schedule 3.10(b), are being contested in good
faith by appropriate Proceedings. Seller has delivered copies
of any examination reports, statements of deficiencies, or
similar items with respect to such audits;
(c) Proper Accrual. The charges, accruals, and reserves with
respect to Taxes on the books of Seller are adequate
(determined in accordance with GAAP) and are at least equal to
Seller's Liability for Taxes. There exists no proposed tax
assessment or deficiency against Seller, except as disclosed
in the Interim Balance Sheet or in Schedule 3.10(c); and
(d) Specific Potential Tax Liabilities and Tax Situations.
(i) Withholding. All Taxes that Seller is or were
required by Legal Requirements to withhold, deduct or
collect have been duly withheld, deducted and
collected and, to the extent required, have been paid
to the proper Governmental Body or other Person.
(ii) S Corporation. Seller is an S corporation as defined
in Code Section 1361.
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3.11 NO MATERIAL ADVERSE CHANGE
Since the date of the Interim Balance Sheet, there has not been any
material adverse change in the business, operations, prospects, assets, results
of operations or condition (financial or other) of Seller, and no event has
occurred or circumstance exists that may result in such a material adverse
change.
3.12 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) Seller is, and at all times since January 1, 1999 has been, in
full compliance with each material Legal Requirement that is
or was applicable to it or to the conduct or operation of its
business or the ownership or use of any of its assets;
(b) No event has occurred or circumstance exists that (with or
without notice or lapse of time) (i) may constitute or result
in a violation by Seller of, or a failure on the part of
Seller to comply with, any material Legal Requirement, or (ii)
may give rise to any obligation on the part of Seller to
undertake, or to bear all or any portion of the cost of, any
Remedial Action of any nature;
(c) Seller has not received, at any time since January 1, 1999 any
notice or other communication (whether oral or written) from
any Governmental Body or any other Person regarding (i) any
actual, alleged, possible, or potential violation of, or
failure to comply with, any material Legal Requirement, or
(ii) any actual, alleged, possible, or potential obligation on
the part of Seller to undertake, or to bear all or any portion
of the cost of, any Remedial Action of any nature; and
(d) The Governmental Authorizations listed in Schedule 3.12(d)
collectively constitute all of the Governmental Authorizations
necessary to permit Seller to lawfully conduct and operate its
business in the manner it currently conducts and operates such
business and to permit Seller to own and use its assets in the
manner in which it currently owns and uses such assets.
3.13 LEGAL PROCEEDINGS; ORDERS
Except as set forth in Schedule 3.13 attached hereto and made a part
hereof for all purposes, there is no pending or, to Seller's Knowledge,
threatened Proceeding:
(a) by or against Seller or that otherwise relates to or may
affect the business of, or any of the assets owned or used by,
Seller; or
(b) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any
of the Contemplated Transactions.
To the Knowledge of Seller, no event has occurred or circumstance
exists that is reasonably likely to give rise to or serve as a basis for the
commencement of any such Proceeding. There are no Proceedings listed or required
to be listed in Schedule 3.13 that may have a material adverse effect on the
business, operations, assets, condition, or prospects of Seller, or upon the
Assets.
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3.14 ENVIRONMENTAL MATTERS
Except as disclosed in Schedule 3.14:
(a) Seller is, and at all times has been, in full compliance with,
and has not been and is not in violation of or liable under,
any Environmental Law. Neither Seller nor any the Huskeys has
any basis to expect, nor has any of them or any other Person
for whose conduct they are or may be held to be responsible
received, any actual or threatened Order, notice, or other
communication from any Governmental Body or private citizen
acting in the public interest, or of any actual or potential
violation or failure to comply with any Environmental Law, or
of any actual or threatened obligation to undertake or bear
the cost of any Environmental, Health, and Safety Liabilities
with respect to the Leased Property or any other properties or
assets (whether real, personal, or mixed) in which Seller has
had an interest, or with respect to any property to which
Hazardous Materials were generated, manufactured, refined,
transferred, imported, used, or processed by Seller or any
other Person for whose conduct it is or may be held
responsible, or from which Hazardous Materials have been
transported, treated, stored, handled, transferred, disposed,
recycled, or received;
(b) There are no pending or, to the Knowledge of Seller,
threatened claims, Encumbrances, or other restrictions of any
nature, resulting from any Environmental, Health, and Safety
Liabilities or arising under or pursuant to any Environmental
Law, with respect to or affecting the Leased Property or any
of the Assets being purchased by Buyer;
(c) Neither Seller, nor any other Person for whose conduct it is
or may be held responsible, has any Environmental, Health, and
Safety Liabilities with respect to the Leased Property or, to
the Knowledge of Seller , with respect to any other properties
and assets (whether real, personal, or mixed) in which Seller
(or any predecessor) has or had an interest, or at any
property geologically or hydrologically adjoining the Leased
Property or any such other property or assets;
(d) There are no Hazardous Materials present on or in the
Environment at the Leased Property or at any geologically or
hydrologically adjoining property, including any Hazardous
Materials contained in barrels, above or underground storage
tanks, landfills, land deposits, dumps, equipment (whether
movable or fixed) or other containers, either temporary or
permanent, and deposited or located in land, water, sumps, or
any other part of the Leased Property or such adjoining
property, or incorporated into any structure therein or
thereon. Neither Seller nor any Person for whose conduct it is
or may be held responsible, or to the Knowledge of Seller, any
other Person, has permitted or conducted, or is aware of, any
Hazardous Activity conducted with respect to the Leased
Property or any other properties or assets (whether real,
personal, or mixed) in which Seller has or had an interest;
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(e) There has been no Release or, to the Knowledge of Seller,
Threat of Release, of any Hazardous Materials at or from the
Leased Property or at any other locations where any Hazardous
Materials were generated, manufactured, refined, transferred,
produced, imported, used, or processed from or by the Leased
Property, or from any other properties and assets (whether
real, personal, or mixed) in which Seller has or had an
interest, or to the Knowledge of Seller any geologically or
hydrologically adjoining property, whether by Sellers or any
other Person; and
(f) Seller has delivered to Buyer true and complete copies and
results of any reports, studies, analyses, tests, or
monitoring possessed or initiated by Seller pertaining to
Hazardous Materials or Hazardous Activities in, on, or under
the Leased Property, or concerning compliance by Seller or any
other Person for whose conduct it is or may be held
responsible, with Environmental Laws.
3.15 BROKERS OR FINDERS
Neither Seller nor any of its officers, directors, employees or agents
have incurred any obligation or Liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with the sale of Seller's business or the Assets or the Contemplated
Transactions other than commissions to The Dillard Anderson Group which are
being paid by Seller.
3.16 EMPLOYMENT MATTERS
(a) Schedule 3.16 (a) contains a complete and accurate list of the
following information for each employee as of May 1, 2000, of
Seller, including each employee on leave of absence or layoff
status: employee name; job title; date of hiring; dates of
commencement of employment; compensation paid or payable, and
sick and vacation leave that is accrued but unused;
(b) To the Knowledge of Buyer, no officer, director, agent,
employee, consultant, or contractor of Seller is bound by any
Contract that purports to limit the ability of such officer,
director, agent, employee, consultant, or contractor (i) to
engage in or continue or perform any conduct, activity, duties
or practice relating to the business of Seller or (ii) assign
to Seller or to any other Person any rights to any invention,
improvement, or discovery. No former or current employee of
Seller is a party to, or is otherwise bound by, any Contract
that in any way adversely affected, affects, or will affect
the ability of Seller or Buyer to conduct the business as
heretofore carried on by Seller;
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(c) Seller (i) has not been, and is not now, a party to any
collective bargaining agreement or other labor contract; (ii)
since January 1, 1999, there has not been, there is not
presently pending or existing, and to Seller's Knowledge there
is not threatened, any strike, slowdown, picketing, work
stoppage or employee grievance process involving Seller; (iii)
no event has occurred or circumstance exists that could
provide the basis for any work stoppage or other labor
dispute; (iv) there is not pending or, threatened against or
affecting Seller any Proceeding relating to the alleged
violation of any Legal Requirement pertaining to labor
relations or employment matters, including any charge or
complaint filed with the National Labor Relations Board or any
comparable Governmental Body, and there is no organizational
activity or other labor dispute against or affecting Seller or
the Facilities; (v) no application or petition for an election
of or for certification of a collective bargaining agent is
pending; (vi) no grievance or arbitration Proceeding exists
which might have an adverse effect upon Seller or the conduct
of its business; (vii) there is no lockout of any employees by
Seller, and no such action is contemplated by Seller; (viii)
there has been no charge of discrimination filed against or
threatened against Seller with the Equal Employment
Opportunity Commission or any Governmental Body; and
(d) Seller has maintained workers' compensation coverage as
required by applicable state law through purchase of insurance
and not by self-insurance or otherwise.
3.17 DISCLOSURE
To the best of Seller's and the Huskeys' knowledge, no representation
or warranty or other statement made by Seller or the Huskeys in this Agreement
or in connection with the Contemplated Transactions omits to state a material
fact necessary to make any of them, in light of the circumstances in which it
was made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
4.1 ORGANIZATION AND GOOD STANDING
Buyer is a Texas corporation duly organized, validly existing, and in
good standing under the laws of the State of Texas, with full power and
authority to conduct its business as it is now being conducted.
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4.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance
with its terms. Upon the execution and delivery by Buyer of
the Assignment and Assumption Agreement, the Employment
Agreements, Lease Agreement, Note, and other agreements to be
executed or delivered by Buyer at Closing (collectively, the
"Buyer's Closing Documents"), each of the Buyer's Closing
Documents will constitute the legal, valid, and binding
obligation of Buyer, enforceable against Buyer in accordance
with its respective terms. Buyer has the absolute and
unrestricted right, power, and authority to execute and
deliver this Agreement and the Buyer's Closing Documents and
to perform its obligations under this Agreement and the
Buyer's Closing Documents, and such action has been duly
authorized by all necessary corporate action;
(b) Neither the execution and delivery of this Agreement by Buyer
nor the consummation or performance of any of the Contemplated
Transactions by Buyer will give any Person the right to
prevent, delay, or otherwise interfere with any of the
Contemplated Transactions pursuant to:
(i) any provision of Buyer's Governing Documents;
(ii) any resolution adopted by the board of directors or
the stockholders of Buyer;
(iii) any Legal Requirement or Order to which Buyer may be
subject; or
(iv) any Contract to which Buyer is a party or by which
Buyer may be bound. Buyer is not and will not be
required to obtain any Consent from any Person in
connection with the execution and delivery of this
Agreement or the consummation or performance of any
of the Contemplated Transactions.
4.3 BROKERS OR FINDERS
Neither Buyer nor any of its officers, directors, employees or agents
have incurred any obligation or Liability, contingent or otherwise, for
brokerage or finders' fees or agents' commissions or other similar payment in
connection with the Contemplated Transactions.
4.4 CAPITALIZATION
The authorized equity securities of Buyer consist of 15,000,000 shares
of common stock, par value $.01 per share. All of the equity securities of Buyer
have been duly authorized and validly issued and are fully paid and
non-assessable. None of the outstanding equity securities of Buyer were issued
in violation of the Securities Act or other legal requirement.
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5. COVENANTS OF SELLER PRIOR TO CLOSING
5.1 ACCESS, INVESTIGATION AND AUDIT
Seller and the Huskeys shall cause Seller to:
(a) afford Buyer and its Representatives and prospective lenders
and their Representatives (collectively, "Buyer's Advisors")
full and free access to Seller's personnel, properties
(including subsurface testing), Contracts, Governmental
Authorizations, books and Records, and other documents and
data;
(b) furnish Buyer and Buyer's Advisors with copies of all such
Contracts, Governmental Authorizations, books and Records, and
other existing documents and data as Buyer may reasonably
request;
(c) furnish Buyer and Buyer's Advisors with such additional
financial, operating, and other relevant data and information
as Buyer may reasonably request;
(d) otherwise cooperate and assist, to the extent reasonably
requested by Buyer, with Buyer's investigation of the
properties, assets and financial condition related to Seller.
In addition, Buyer shall have the right to have the Leased
Real Property and Tangible Personal Property inspected by
Buyer's representatives, at Buyer's sole cost and expense, for
purposes of determining the physical condition and legal
characteristics of the Leased Real Property and Tangible
Personal Property.
5.2 OPERATION OF THE BUSINESS OF SELLER
(a) During the period from the date of this Agreement to the
earlier of Closing or a termination event as classified in
Article 9 hereof, Seller shall (and the Huskeys shall cause
Seller to):
(i) conduct its business only in the Ordinary Course of
Business;
(ii) except as otherwise directed by Buyer in writing, and
without making any commitment on Buyer's behalf, use
its Best Efforts to preserve intact its current
business organization, keep available the services of
its officers, employees, and agents, and maintain its
relations and good will with suppliers, customers,
landlords, Creditors, employees, agents, and others
having business relationships with it;
(iii) confer with Buyer prior to implementing operational
decisions of a material nature;
(iv) otherwise report periodically to Buyer concerning the
status of its business, operations and finances;
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(v) make no material changes in management personnel or
enter into any employment agreements without prior
consultation with Buyer;
(vi) maintain the Assets in a state of repair and
condition which complies with Legal Requirements and
is consistent with the requirements and normal
conduct of Seller's business;
(vii) keep in full force and effect, without amendment, all
material rights relating to Seller's business;
(viii) comply with all Legal Requirements and contractual
obligations applicable to the operations of Seller's
business;
(ix) continue in full force and effect the insurance
coverage under the policies set forth in the
Schedules or substantially equivalent policies;
(xi) use its Best Efforts to cooperate with Buyer and
assist Buyer in identifying the Governmental
Authorizations required by Buyer to operate the
business from and after the Closing Date and either
transferring existing Governmental Authorizations of
Seller to Buyer, where permissible, or obtaining new
Governmental Authorizations for Buyer;
(xii) upon request from time to time, execute and deliver
all documents, make all truthful oaths, testify in
any Proceedings and do all other acts that may be
reasonably necessary or desirable, in the opinion of
Buyer, to consummate the Contemplated Transactions,
all without further consideration; and
(xiii) maintain all books and Records of Seller relating to
Seller's business in the Ordinary Course of Business.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted herein, Seller shall not, and
the Huskeys shall not permit Seller to, without the prior written Consent of
Buyer:
(a) take any affirmative action, or fail to take any reasonable
action within its control, the a result of which would
negatively impact the business of Seller or the relationship
with its customers;
(b) make any modification to any material Contract or Governmental
Authorization;
(c) allow the levels of supplies or other materials included in
the inventories, if any, to vary materially from the levels
customarily maintained;
(d) enter into any compromise or settlement of any litigation,
Proceeding or governmental investigation relating to the
Assets, the business of Seller or the Assumed Liabilities,
except Seller may settle the Muscle Products litigation
without Buyer's written consent; or
(e) allow the Tangible Personal Property to materially deteriorate
from its operating condition.
It is specifically agreed and understood that Seller may settle any
litigation involving the Seller without Buyer approval.
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5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Seller
shall make all filings required by Legal Requirements (other than Federal Legal
Requirements) to be made by it in order to consummate the Contemplated
Transactions. Seller and the Huskeys also shall use their Best Efforts to
cooperate with Buyer and its Representatives with respect to all filings that
Buyer elects to make, or pursuant to Legal Requirements shall be required to
make, in connection with the Contemplated Transactions. Seller and the Huskeys
also shall use their Best Efforts to cooperate with Buyer and its
Representatives in obtaining all Material Consents.
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, Seller and the
Huskeys shall promptly notify Buyer in writing if any of them becomes aware of:
(a) any fact or condition that causes or constitutes a Breach of
any of Seller's representations and warranties made as of the
date of this Agreement; or
(b) the occurrence after the date of this Agreement of any fact or
condition that would or be reasonably likely to (except as
expressly contemplated by this Agreement) cause or constitute
a Breach of any such representation or warranty had that
representation or warranty been made as of the time of the
occurrence of, or Seller's or the Huskeys' discovery of, such
fact or condition.
Should any such fact or condition require any change to the Schedules,
Seller shall promptly deliver to Buyer a supplement to the Schedules specifying
such change. Such delivery shall not affect any rights of Buyer under Section
9.2 and Article 11. During the same period, Seller and the Huskeys also shall
promptly notify Buyer of the occurrence of any Breach of any covenant of Seller
in this Article 5 or of the occurrence of any event that may make the
satisfaction of the conditions in Article 7 impossible or unlikely.
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5.6 NO NEGOTIATION
Until such time as this Agreement shall be terminated pursuant to
Section 9.1, neither Seller nor the Huskeys shall directly or indirectly
solicit, initiate, encourage or entertain any inquiries or proposals from,
discuss or negotiate with, provide any non-public information to, or consider
the merits of any inquiries or proposals from, any Person (other than Buyer)
relating to any business combination transaction involving Seller, including the
sale by the Huskeys of Seller's stock, the merger or consolidation of Seller, or
the sale of Seller's business or any of the Assets (other than in the Ordinary
Course of Business). Seller and the Huskeys shall notify Buyer of any such
inquiry or proposal within twenty four hours of receipt or awareness of the same
by Seller or any the Huskeys.
5.7 BEST EFFORTS
Seller and the Huskeys shall use their Best Efforts to cause the
conditions in Article 7 to be satisfied.
5.8 INTERIM FINANCIAL STATEMENTS
Until the Closing Date, Seller shall deliver to Buyer within ten (10)
days after the end of each calendar month a copy of the interim financial
statements for such month prepared in a manner and containing information
reasonably required by Buyer and certified by Seller as to compliance with
Section 3.4.
6. COVENANTS OF BUYER PRIOR TO CLOSING
6.1 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Buyer
shall make, or cause to be made, all filings required by Legal Requirements
(including any federal Legal Requirements imposed upon Buyer) to be made by it
to consummate the Contemplated Transactions. Buyer also shall fully cooperate,
and cause any Related Person to cooperate, with Seller (i) with respect to all
filings Seller shall be required by Legal Requirements to make, and (ii) in
obtaining all Consents identified in Schedule 7.3, provided, however, that Buyer
shall not be required to dispose of or make any change to its business, expend
any material funds or Incur any other burden in order to comply with this
Section 6.1.
6.2 BEST EFFORTS
Buyer shall use its Best Efforts to cause the conditions in Article 8
and Section 7.3 to be satisfied
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7. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Assets and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Buyer, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of Seller's and the Huskeys' representations and
warranties in this Agreement (considered collectively), and
each of these representations and warranties (considered
individually), must have been accurate in all material
respects as of the date of this Agreement, and must be
accurate in all material respects as of the time of the
Closing as if then made, without giving effect to any
supplement to the Schedules.
(b) All Seller's and the Huskey's conditions and covenants in this
Agreement are satisfied in all material respects.
7.2 SELLER'S PERFORMANCE
(a) All of the covenants and obligations that Seller and the
Huskeys are required to perform or to comply with pursuant to
this Agreement at or prior to the Closing (considered
collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and
complied with in all material respects.
(b) Seller and the Huskeys must have delivered each of the
documents required to be delivered by them pursuant to Section
2.7(a), and each of the other covenants and obligations in
Sections 5.4, 5.7, 10.2 and 10.3, must have been performed.
7.3 CONSENTS
Each of the Consents identified in Schedule 7.3 (the "Material
Consents") must have been obtained and must be in full force and effect.
7.4 ADDITIONAL DOCUMENTS
Seller and the Huskeys shall have caused the documents and instruments
required by Section 2.7(a) and the following documents to be delivered (or
tendered subject only to Closing) to Buyer:
(a) an opinion of Dufford, Waldeck, Milburn & Krohn, L.L.P., dated
the Closing Date, in the form satisfactory to counsel for the
Buyer;
(b) If requested by Buyer, any Consents or other instruments that
may be required to permit Buyer's qualification in each
jurisdiction in which Seller is licensed or qualified to do
business as a foreign corporation under the name, "Mountain
Air", or any derivative thereof;
(c) To the extent required by Buyer, releases of all Encumbrances
on the Assets, other than Permitted Encumbrances; and
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(d) Certificates of good standing of Seller certifying payment of
all applicable state taxes by Seller and existence, executed
by the appropriate officials fo the State of Colorado and each
jurisdiction in which Seller is qualified to do business as a
foreign corporation, dated within ten (10) days of Closing.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there shall not have been commenced
or threatened against Buyer, or against any Related Person of Buyer, any
Proceeding (i) involving any challenge to, or seeking Damages or other relief in
connection with, any of the Contemplated Transactions, or (ii) that may have the
effect of preventing, delaying, making illegal, imposing limitations or
conditions on, or otherwise interfering with any of the Contemplated
Transactions.
7.6 NO CONFLICT
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), contravene, or conflict with, or result in a violation of, or cause Buyer
or any Related Person of Buyer to suffer any adverse consequence under, (i) any
applicable Legal Requirement or Order, or (ii) any Legal Requirement or Order
that has been published, introduced, or otherwise proposed by or before any
Governmental Body, excluding Bulk Sales Laws.
7.7 LICENSES AND PERMITS
Buyer shall have received such Governmental Authorizations as are
necessary or desirable to allow Buyer to operate the Assets from and after the
Closing.
7.8 GOVERNMENTAL APPROVALS
Buyer shall have obtained assurances from all of the necessary
Governmental Bodies, in form and substance reasonably satisfactory to Buyer,
that Buyer will be granted all Governmental Authorizations necessary or
appropriate for the operation of the Assets as previously operated following the
Closing Date.
7.9 TERMINATION OF EMPLOYEES
Seller shall have effectuated the termination of every employee prior
to the close of business on the Closing Date.
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8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to sell the Assets and to take the other actions
required to be taken by Seller at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which may
be waived by Seller, in whole or in part).
8.1 ACCURACY OF REPRESENTATIONS
All of Buyer's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 BUYER'S PERFORMANCE
(a) All of the covenants and obligations that Buyer is required to
perform or to comply with pursuant to this Agreement at or
prior to the Closing (considered collectively), and each of
these covenants and obligations (considered individually),
must have been performed and complied with in all material
respects.
(b) Buyer must have delivered each of the documents required to be
delivered, and made each of the payments required to be made
by Buyer pursuant to Section 2.7(b).
8.3 ADDITIONAL DOCUMENTS
Buyer shall have caused the documents and instruments required by
Section 2.7(b) and the following documents to be delivered (or tendered subject
only to Closing) to Seller and the Huskeys and such other documents as Seller
may reasonably request for the purpose of (i) evidencing the accuracy of any
representation or warranty of Buyer, (ii) evidencing the performance by Buyer
of, or the compliance by Buyer with, any covenant or obligation required to be
performed or complied with by Buyer, or (iii) evidencing the satisfaction of any
condition referred to in this Article 8.
8.4 NO INJUNCTION
There shall not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the consummation of the Contemplated
Transactions, and (b) has been adopted or issued, or has otherwise become
effective, since the date of this Agreement.
8.5 EMPLOYEES
Buyer shall have interviewed all of Seller's employees, and shall have
hired at least 90% of such employees effective following the Closing Date.
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8.6 OPINION LETTER
Buyer shall have delivered to Seller and Huskeys an opinion of Wilson,
Cribbs, Goren & Flaum, P.C., dated the Closing Date, in the form satisfactory to
counsel for the Seller.
9. TERMINATION
9.1 TERMINATION EVENTS
The obligation of the parties to effect the Contemplated Transactions
pursuant to this Agreement may, by notice given prior to or at the Closing, be
terminated:
(a) by either Buyer or Seller if a material Breach of any
provision of this Agreement has been committed by the other
party and such Breach has not been waived;
(b) (i) by Buyer if any of the conditions in Article 7 has
not been satisfied as of the date specified for
Closing in the first sentence of Section 2.6 or if
satisfaction of such a condition by such date is or
becomes impossible (other than through the failure of
Buyer to comply with its obligations under this
Agreement) and Buyer has not waived such condition on
or before such date; or
(ii) by Seller, if any of the conditions in Article 8 has
not been satisfied as of the date specified for
Closing in the first sentence of Section 2.6 or if
satisfaction of such a condition by such date is or
becomes impossible (other than through the failure of
Seller and the Huskeys to comply with their
obligations under this Agreement) and Seller and the
Huskeys have not waived such condition on or before
such date;
(c) by mutual Consent of Buyer and Seller; or
(d) by Buyer or Seller if the Closing has not occurred (other than
through the failure of Buyer or Seller to comply fully with
their obligations under this Agreement) on or before the date
specified in the first sentence of Section 2.6 of this
Agreement.
9.2 EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in addition to
any other rights it may have under this Agreement or otherwise, and the exercise
of such right of termination will not be an election of remedies. If the
obligations of the parties to effect the Contemplated Transactions pursuant to
this Agreement are terminated pursuant to Section 9.1, all further obligations
of the parties under this Agreement will terminate; provided, however, that if
obligations under this Agreement are terminated by a party because of the Breach
of the Agreement by the other party or because one or more of the conditions to
the terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired. If this Agreement is terminated for any
reason, the Deposit shall be retained in full satisfaction of all claims under
this Agreement. Seller's retention of the Deposit shall constitute a waiver of
the right to pursue all other legal remedies for such termination and an
agreement to accept such Deposit in full satisfaction of all claims under this
Agreement.
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10. POST CLOSING OBLIGATIONS OF THE PARTIES
10.1 PAYMENT OF ALL TAXES RESULTING FROM SALE OF ASSETS
Seller shall pay in a timely manner all Taxes resulting from or payable
in connection with the sale of the Assets pursuant to this Agreement, regardless
of the Person on whom imposed by Legal Requirements except that Buyer shall
agree to pay any sales, use, transfer, registration or title transfer taxes and
fees imposed by the States of Colorado, New Mexico and Utah upon the transfer of
the Assets.
10.2 PAYMENT OF OTHER RETAINED LIABILITIES
In addition to payment of Taxes pursuant to Section 10.1, Seller shall
pay, or make adequate provision for the payment, in full of all of the Retained
Liabilities and other Liabilities of Seller under this Agreement to the extent
the failure to pay such liabilities could result in a claim against Buyer or
lien upon the Assets. If any such Liabilities are not so paid or provided for,
and if Buyer reasonably determines that failure to make any payments will impair
Buyer's use or enjoyment of the Assets, Buyer may at any time after Closing Date
elect to make all such payments directly (but shall have no obligation to do so)
and set off and deduct the full amount of all such payments from the payments
under the Note to Seller.
10.3 REPORTS AND RETURNS
After Closing, Seller shall prepare and file all reports and returns
required by applicable law relating to the business of Seller as conducted using
the Assets, to and including the Closing, on or before the due date of such
reports and returns, taking into account all allowable extensions.
10.4 ASSISTANCE IN PROCEEDINGS
Seller will cooperate with Buyer and its counsel in the contest or
defense of, and make available its personnel and provide any testimony and
access to its books and Records in connection with, any Proceeding involving or
relating to (a) any Contemplated Transaction, or (b) any action, activity,
circumstance, condition, conduct, event, fact, failure to act, incident,
occurrence, plan, practice, situation, status, or transaction on or before the
Closing Date involving Seller or its business or the Huskeys.
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10.5 COVENANT NOT TO COMPETE
For a period of five years after the Closing Date, neither Seller nor
the Huskeys shall directly or indirectly, do any of the following:
(a) own, manage, operate, control, be or remain employed or
retained at, act as consultant or advisor to, render any
services for, have any financial interest in, or otherwise be
connected in any manner with the ownership, management,
operation, or control of any Person, firm, partnership,
corporation, or other entity that is engaged in any business
similar to the business of Seller as carried on prior to the
Closing Date.
(b) Solicit the business of any Person who to Seller's or the
Huskeys' Knowledge is a customer of Buyer or any Person who
was a customer or account of Seller at the time of the Closing
or within the preceding year.
All of the foregoing provisions are reasonable and are necessary to
protect and preserve the value of the Assets and to prevent any unfair advantage
being conferred on Seller or the Huskeys.
10.6 CUSTOMER AND OTHER BUSINESS RELATIONSHIPS
For one year after Closing, Seller will use its Best Efforts to
cooperate with Buyer in its efforts to continue and maintain for the benefit of
Buyer those business relationships of Seller existing prior to the Closing and
relating to the business to be operated by Buyer after the Closing, including
relationships with lessors, employees, regulatory authorities, licensors,
customers, suppliers, and others, and Seller will satisfy the Retained
Liabilities in a manner which is not detrimental to any of such relationships.
Seller will refer to Buyer all inquiries relating to said business. Neither
Seller nor any of its officers, employees, agents, or the Huskeys, shall take
any action which would tend to diminish the value of the Assets after the
Closing or which would interfere with the business of Buyer to be engaged in
after the Closing, including, without limitation, disparaging the name or
business of Buyer.
10.7 RETENTION OF AND ACCESS TO RECORDS
After the Closing Date, Buyer shall retain for a period consistent with
Buyer's record retention policies and practices (but in no event for less than
three years after Closing) those Records of Seller delivered to Buyer. Prior to
the end of three years after Closing, Buyer will provide Seller with copies of
all records that Seller may request. Buyer also shall provide Seller and the
Huskeys and their Representatives reasonable access thereto, during normal
business hours and on at least three days' prior written notice, to enable them
to prepare financial statements or Tax Returns or deal with tax audits. After
the Closing Date, Seller shall provide Buyer and its Representatives reasonable
access to Records that are Excluded Assets, during normal business hours and on
at least three days' prior written notice, for any reasonable business purpose
specified by Buyer in such notice.
10.8 CONSENTS
If there are any Material Consents which have not yet been obtained (or
otherwise are not in full force and effect) as of the time of the Closing and
Buyer elects to waive the closing conditions as to such Material Consents, then,
if the Closing occurs, and notwithstanding Sections 2.1 and 2.4 hereof, neither
this Agreement nor the Assignment and Assumption Agreement nor any other
document related to the consummation of the Contemplated Transactions shall
constitute a sale, assignment, assumption, transfer, conveyance or delivery, or
an attempted sale, assignment, assumption, transfer, conveyance or delivery, of
the Contracts as to which such Material Consents were not obtained (or otherwise
are not in full force and effect) (the "Restricted Material Contracts").
Following the Closing, the parties shall use reasonable efforts, and cooperate
with each other, to obtain the Material Consents relating to each Restricted
Material Contract as quickly as practicable. Pending the obtaining of such
Material Consents relating to any Restricted Material Contract, the parties
shall cooperate with each other in any reasonable and lawful arrangements
designed to provide to Buyer the benefits of use of the Restricted Material
Contract for its term (or any right or benefit arising thereunder, including the
enforcement for the benefit of Buyer of any and all rights of Seller against a
third party thereunder). Once a Material Consent for the sale, assignment,
assumption, transfer, conveyance and delivery of a Restricted Material Contract
is obtained, Seller shall promptly assign, transfer, convey and deliver such
Restricted Material Contract to Buyer, and Buyer shall assume the obligations
under such Restricted Material Contract assigned to Buyer from and after the
date of assignment to Buyer pursuant to a special-purpose assignment and
assumption agreement substantially similar in terms to those of the Assignment
and Assumption Agreement (which special-purpose agreement the parties shall
prepare, execute and deliver in good faith at the time of such transfer).
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10.9 FURTHER ASSURANCES
Subject to the provision in Section 6. 1, the parties shall cooperate
reasonably with each other with their respective Representatives in connection
with any steps required to be taken as part of their respective obligations
under this Agreement, and the parties agree (i) to furnish upon request to each
other such further information, (ii) to execute and deliver to each other such
other documents, (iii) to do such other acts and things, all as the other party
may reasonably request for the purpose of carrying out the intent of this
Agreement and the Contemplated Transactions.
10.10 REIMBURSEMENT OF NET INCOME.
Within thirty (30) days after the date of Closing, Gordon, Hughes &
Bank, LLP shall determine the net profits of the Seller for the period ("Stub
Period") running from January 1, 2001 through the date of Closing. The net
profits of Seller shall be determined by accruing all unpaid billings (for
equipment rentals, operators, chemicals, lubricants, etc.) and invoices (for
sales of inventory and supplies in the ordinary course of business) for goods
and services provided during the Stub Period, adding all cash received during
the Stub Period for billings and invoices for goods and services provided during
the Stub Period, subtracting all expenses incurred during the Stub Period in the
ordinary course of business (including a prorata share of any expenses prepaid
prior to the Stub Period) and subtracting the estimated income tax which will be
due by the shareholders of Seller (at the shareholders' highest marginal rates)
as a result of such profits. The net profits shall be calculated without
including any payments received for goods and services provided by Seller prior
to January 1, 2001, any amounts received from the sale, settlement or
disposition of assets which are Excluded Assets, any interest income, or any
income tax which might be due as a result of the receipt of payments as
described in this sentence or the deduction of any commissions paid by Seller
pursuant to this transaction. The profits shall not be reduced by any expenses
(including insurance premiums) which are prepaid during the Stub Period to the
extent such expenses are refundable to Seller after Closing. The determination
of net profits under this paragraph by Gordon Hughes & Banks, LLP, shall be
final, conclusive and binding upon the parties. The amount of net profits as
determined by Gordon Hughes & Banks, LLP shall be paid to Buyer by Seller, in
cash, within five (5) days of the determination of net profits by Gordon, Hughes
& Banks, LLP. If the amount determined is a loss, no payment shall be made to
Buyer and Buyer shall not owe any amount to Seller as a result of such loss.
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10.11 CHANGE OF NAME
Within thirty (30) days after the Closing Date, Seller shall:
(a) amend its Governing Documents and take all other actions
necessary to change its name to one sufficiently dissimilar to
Seller's present name, in Buyer's judgment, to avoid
confusion; and
(b) take all actions reasonably requested by Buyer to enable Buyer
to change its name or file Assumed Name Declarations to a name
similar to Seller's present name.
11. INDEMNIFICATION; REMEDIES
11.1 SURVIVAL
All representations, warranties, covenants, and obligations in this
Agreement, the Schedules, the supplements to the Schedules, the certificates
delivered pursuant to Section 2.7, and any other certificate or document
delivered pursuant to this Agreement shall survive the Closing for a period of
two years except the representations and warranties regarding Taxes and title to
the Assets shall survive indefinitely. The right to indemnification,
reimbursement, or other remedy based on such representations, warranties,
covenants and obligations shall not be affected by any investigation conducted
with respect to, or any knowledge acquired (or capable of being acquired) about
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant or obligation, except that if Buyer or its executive officers
acquires actual knowledge of a Breach of a representation or warranty prior to
Closing, Buyer will disclose such Breach to Seller and grant Seller five (5)
days to cure such Breach prior to exercising Buyer's remedies under this
Agreement. The waiver of any condition based on the accuracy of any
representation or warranty, or on the performance of or compliance with any
covenant or obligation, will not affect the right to indemnification,
reimbursement, or other remedy based on such representations, warranties,
covenants, and obligations.
11.2 INDEMNIFICATION AND REIMBURSEMENT BY SELLER AND THE HUSKEYS
Seller and the Huskeys, jointly and severally, will indemnify and hold
harmless Buyer, and its Representatives, employees, Subsidiaries, and Related
Persons (collectively, the "Indemnified Persons"), and will reimburse the
Indemnified Persons, for any loss, Liability, claim, damage, expense (including
costs of investigation and defense and reasonable attorneys' fees and expenses)
or diminution of value, whether or not involving a third-party claim
(collectively, "Damages"), arising from or in connection with:
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(a) any Breach of any representation or warranty made by Seller or
the Huskeys in this Agreement (without giving effect to any
supplement to the Schedules), the Schedules, the supplements
to the Schedules, the certificates delivered pursuant to
Section 2.7 (for this purpose, each such certificate will be
deemed to have stated that Seller's and the Huskeys'
representations and warranties in this Agreement fulfill the
requirements of Section 7.1 as of the Closing Date as if made
on the Closing Date without giving effect to any supplement to
the Schedules, unless the certificate expressly states that
the matters disclosed in a supplement have caused a condition
specified in Section 7.1 not to be satisfied), any transfer
instrument or any other certificate or document delivered by
Seller or the Huskeys pursuant to this Agreement;
(b) any Breach of any covenant or obligation of Seller or the
Huskeys in this Agreement or in any other document, writing or
instrument delivered by Seller or any the Huskeys pursuant to
this Agreement;
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or
understanding alleged to have been made by any such Person
with Seller or the Huskeys (or any Person acting on their
behalf) in connection with any of the Contemplated
Transactions;
(d) any product or component thereof manufactured by or shipped,
or any services provided by, Seller, in whole or in part,
prior to the Closing Date;
(e) any matter disclosed in the Schedules;
(f) any Retained Liabilities;
(g) any state or local law Liability that may result from an
Employment Loss, as defined by 29 U.S.C. ss. 2101(a)(6),
caused by any action of Seller prior to the Closing or by
Buyer's decision not to hire previous employees of Seller;
(h) any employee benefit plans, practices, programs or
arrangements (including the establishment, operation or
terminations thereof) established or maintained by Seller; or
(i) any other debts, Liabilities or obligations of Seller, whether
accrued, absolute, contingent, known, unknown, or otherwise,
but excluding any Assumed Liabilities.
11.3 INDEMNIFICATION AND REIMBURSEMENT BY SELLER -- ENVIRONMENTAL MATTERS
In addition to the indemnification under Section 11.2, Seller and
Huskeys, jointly severally, will indemnify and hold harmless Buyer and the other
Indemnified Persons, and will reimburse Buyer and the other Indemnified Persons,
for any Damages (including costs of cleanup, containment, or other remediation)
arising from or in connection with:
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(a) any Environmental, Health and Safety Liabilities arising out
of or relating to: (i) the ownership or operation by any
Person at any time on or prior to the Closing Date of any of
the Assets or the business of the Seller, or (ii) any
Hazardous Materials or other contaminants that were present on
the Leased Property at any time on or prior to the Closing
Date; or
(b) any bodily injury (including illness, disability and death,
and regardless of when any such bodily injury occurred, was
incurred, or manifested itself), personal injury, property
damage (including trespass, nuisance, wrongful eviction, and
deprivation of the use of the Leased Property), or other
damage of or to any Person or any Assets in any way arising
from or allegedly arising from any Hazardous Activity
conducted by any Person with respect to the business of Seller
or the Assets prior to the Closing Date, or from any Hazardous
Material that was (i) present or suspected to be present on or
before the Closing Date on or at the Leased Property (or
present or suspected to be present on any other property, if
such Hazardous Material emanated or allegedly emanated from
any of the Leased Property and was present or suspected to be
present on any of the Leased Property on or prior to the
Closing Date) or Released or allegedly Released by any Person
on or at any Assets at any time on or prior to the Closing
Date.
Buyer will be entitled to control any Remedial Action, any Proceeding
relating to an Environmental Claim, and, except as provided in the following
sentence, any other Proceeding with respect to which indemnity may be sought
under this Section 11.3. The procedure described in Section 11.9 will apply to
any claim solely for monetary damages relating to a matter covered by this
Section 11.3.
11.4 INDEMNIFICATION AND REIMBURSEMENT BY BUYER
Buyer will indemnify and hold harmless Seller, and will reimburse
Seller, for any Damages arising from or in connection with:
(a) any Breach of any representation or warranty made by Buyer in
this Agreement or in any transfer instrument, certificate or
document delivered by Buyer pursuant to this Agreement;
(b) any Breach of any covenant or obligation of Buyer in this
Agreement or in any other document, writing or instrument
delivered by Buyer pursuant to this Agreement;
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or
understanding alleged to have been made by such Person with
Buyer (or any Person acting on Buyer's behalf) in connection
with any of the Contemplated Transactions;
(d) any Assumed Liabilities;
(e) any Environmental, Health and Safety Liabilities arising out
of or relating to: (i) the ownership or operation by Buyer at
any time after the Closing Date of any of the Assets or the
business of the Buyer, or (ii) any Hazardous Materials or
other contaminants that were present on the real property
subject to the Lease Agreement at any time after the Closing
Date; or,
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(f) any bodily injury (including illness, disability and death,
and regardless of when any such bodily injury occurred, was
incurred, or manifested itself), personal injury, property
damage (including trespass, nuisance, wrongful eviction, and
deprivation of the use of real property), or other damage of
or to any Person or any Assets in any way arising from or
allegedly arising from any Hazardous Activity conducted by any
Person with respect to the business of Buyer or the Assets
after the Closing Date, or from any Hazardous Material that
was (i) present or suspected to be present after the Closing
Date on or at the Leased Property (or present or suspected to
be present on any other property, if such Hazardous Material
emanated or allegedly emanated from any of the Leased Property
and was present or suspected to be present on any of the
Leased Property after the Closing Date) or Released or
allegedly Released by any Person on or at any Assets at any
time after the Closing Date.
11.5 LIMITATIONS ON AMOUNT
(a) Sellers and the Huskeys will have no liability (for
indemnification or otherwise) with respect to the matters
described in Section 11.2 and Section 11.3 until the total of
all Damages with respect to such matters exceeds $25,000.00,
but then for the total amount of such Damages.
(b) Buyer will have no liability (for indemnification or
otherwise) with respect to the matters described in Section
11.4 until the total of all Damages with respect to such
matters exceeds $25,000.00, but then for the total amount of
such Damages. This limitation shall not include claims related
to failure to pay any of the Assumed Liabilities or any
default under the Note.
(c) In no event shall the aggregate indemnification to be provided
by any party pursuant to this Article 11 exceed $5,000,000.00.
Any Damages for failure to pay the Assumed Liabilities or for
any default under the Note shall not be subject to or included
in the limitations provided by this section.
11.6 PROCEDURE FOR INDEMNIFICATION - THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party ("Indemnitee")
under Section 11.2, 11.4, or 11.3 (to the extent provided in
the last sentence of Section 11.3) of notice of the
commencement of any Proceeding against it, such Indemnitee
will, if a claim is to be made against an indemnifying party
("Indemnitor") under such Section, give notice to the
Indemnitor of the commencement of such Proceeding, but the
failure to notify the Indemnitor will not relieve the
Indemnitor of any Liability that it may have to any
Indemnitee, except to the extent that the Indemnitor
demonstrates that the defense of such action is prejudiced by
the Indemnitor's failure to give such notice.
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(b) If any Proceeding referred to in Section 11.6(a) is brought
against an Indemnitee and it gives notice to the Indemnitor of
the commencement of such Proceeding, the Indemnitor will be
entitled to participate in such Proceeding and, to the extent
that it wishes (unless (i) the Indemnitor is also a party to
such Proceeding and the Indemnitee determines in good faith
that joint representation would be inappropriate, or (ii) the
Indemnitor fails to provide reasonable assurance to the
Indemnitee of its financial capacity to defend such Proceeding
and provide indemnification with respect to such Proceeding),
to assume the defense of such Proceeding with counsel
satisfactory to the Indemnitee and, after notice from the
Indemnitor to the Indemnitee of its election to assume the
defense of such Proceeding, the Indemnitor will not, as long
as it diligently conducts such defense, be liable to the
Indemnitee under this Section 11.6 for any fees of other
counsel or any other expenses with respect to the defense of
such Proceeding, in each case subsequently incurred by the
Indemnitee in connection with the defense of such Proceeding,
other than reasonable costs of investigation. If the
Indemnitor assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that
the claims made in that Proceeding are within the scope of and
subject to indemnification; (ii) no compromise or settlement
of such claims may be effected by the Indemnitor without the
Indemnitee's Consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any
violation of the rights of any Person and no effect on any
other claims that may be made against the Indemnitee, and (B)
the sole relief provided is monetary damages that are paid in
full by the Indemnitor; and (iii) the Indemnitor will have no
Liability with respect to any compromise or settlement of such
claims effected without its Consent. If notice is given to an
Indemnitor of the commencement of any Proceeding and the
Indemnitor does not, within ten days after the Indemnitee's
notice is given, give notice to the Indemnitee of its election
to assume the defense of such Proceeding, the Indemnitor will
be bound by any determination made in such Proceeding or any
compromise or settlement effected by the Indemnitee.
(c) Notwithstanding the foregoing, if an Indemnitee determines in
good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its Related Persons
other than as a result of monetary damages for which it would
be entitled to indemnification under this Agreement, the
Indemnitee may, by notice to the Indemnitor, assume the
exclusive right to defend, compromise, or settle such
Proceeding, but the Indemnitor will not be bound by any
determination of a Proceeding so defended for the purposes of
this Agreement or any compromise or settlement effected
without its Consent (which may not be unreasonably withheld).
(d) Seller and the Huskeys hereby consent to the non-exclusive
jurisdiction of any court in which a Proceeding is brought
against any Indemnified Person for purposes of any claim that
an Indemnified Person may have under this Agreement with
respect to such Proceeding or the matters alleged therein, and
agree that process may be served on Buyer, Seller and the
Huskeys with respect to such a claim anywhere in the world.
(e) With respect to any Proceeding subject to indemnification
under this Section 11.6: (i) both the Indemnitee and the
Indemnitor, as the case may be, shall keep the other party
fully informed of the Proceeding at all stages thereof where
such party is not represented by its own counsel, and (ii) the
parties agree (each at its own expense) to render to each
other such assistance as they may reasonably require of each
other and to cooperate in good faith with each other in order
to ensure the proper and adequate defense of any Proceeding
brought by any third party.
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(f) With respect to any Proceeding subject to indemnification
under this Section 11.6, the parties agree to cooperate in
such a manner as to preserve in full (to the extent possible)
the confidentiality of all confidential business Records and
the attorney-client and work-product privileges. In connection
therewith, each party agrees that: (i) it will use its Best
Efforts, in any Proceeding in which it has assumed or
participated in the defense, to avoid production of
confidential business Records (consistent with applicable law
and rules of procedure), and (ii) all communications between
any party hereto and counsel responsible for or participating
in the defense of any Proceeding shall, to the extent
possible, be made so as to preserve any applicable
attorney-client or work-product privilege.
11.7 PROCEDURE FOR INDEMNIFICATION -- OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11.8 INDEMNIFICATION IF NEGLIGENCE OF INDEMNITEE
THE INDEMNIFICATION PROVIDED IN THIS SECTION 11 SHALL BE APPLICABLE
WHETHER OR NOT THE SOLE OR CONCURRENT NEGLIGENCE OR GROSS NEGLIGENCE OF THE
INDEMNITEE, OR THE SOLE OR CONCURRENT STRICT LIABILITY IMPOSED ON THE
INDEMNITEE, OR THE SOLE OR CONCURRENT LIABILITY IMPOSED VICARIOUSLY ON THE
INDEMNITEE, IS ALLEGED OR PROVEN.
11.9 SETOFF
Buyer shall have no right to set off any claims for indemnification
under Sections 11.2 and 11.3 hereof against payments due to Seller under the
Note.
12. GENERAL PROVISIONS
12.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance f this Agreement and the Contemplated
Transactions, including all fees and expenses of its Representatives. In the
event of termination of this Agreement, the obligation of each party to pay its
own expenses will be subject to any rights of such party arising from a Breach
of this Agreement by another party.
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12.2 PUBLIC ANNOUNCEMENTS
Any public announcement, press release or similar publicity with
respect to this Agreement or the Contemplated Transactions will be issued, if at
all, at such time and in such manner as Buyer and Seller jointly determine.
Except with the prior written Consent of Buyer or as expressly permitted by this
Agreement, neither Seller, the Huskeys nor their Representatives will disclose
to any Person:
(a) the fact that Seller Confidential Information has been
disclosed to Buyer or Buyer's Representatives, that Buyer or
Buyer's Representatives have inspected any portion of the
Seller Confidential information, that the Buyer Confidential
Information has been disclosed to Seller or Seller's
Representatives, or that Seller or Seller's Representatives
have inspected any portion of the Buyer Confidential
Information; or
(b) any information about the Contemplated Transactions, including
the status of such discussions or negotiations, the execution
of any documents (including this agreement), or any of the
terms of the Contemplated Transactions or the related
documents including this Agreement). Seller and Buyer will
consult with each other concerning the means by which Seller's
employees, customers, suppliers and others having dealings
with Seller will be informed of the Contemplated Transactions,
and Buyer will have the right to be present for any such
communication.
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12.3 NOTICES
All notices, Consents, waivers, and other communications required or
permitted by this Agreement shall be in writing and shall be deemed given to a
party when (i) delivered to the appropriate address by hand or by nationally
recognized overnight courier service (costs prepaid), or (ii) received by the
addressee, if sent by certified mail, return receipt requested, in each case to
the following addresses and marked to the attention of the person (by name or
title) designated below (or to such other address, or person as a party may
designate by notice to the other parties):
SELLER (BEFORE THE CLOSING):
Mountain Air Drilling Service Co., Inc.
P.O. Box 55367
Grand Junction, Colorado 81505
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with a copy to:
William H. T. Frey
Dufford, Waldeck, Milburn & Krohn, L.L.P.
744 Horizon Court, Suite 300
Grand Junction, Colorado 81506
SELLER (AFTER THE CLOSING):
Mountain Air Drilling Service Co., Inc.
578 Rio Hondo Road
Grand Junction, CO 81503
with a copy to:
William H. T. Frey
Dufford, Waldeck, Milburn & Krohn, L.L.P.
744 Horizon Court, Suite 300
Grand Junction, Colorado 81506
THE HUSKEYS:
Rod Huskey and Linda Huskey
578 Rio Hondo Road
Grand Junction, CO 81503
with a copy to:
William H. T. Frey
Dufford, Waldeck, Milburn & Krohn, L.L.P.
744 Horizon Court, Suite 300
Grand Junction, Colorado 81506
BUYER:
Mountain Compressed Air, Inc.
1875 Century Park East
Suite 600, Century City
Los Angeles, California 90067
Attn: Munawar H. Hidayatallah
with a copy to:
Wilson, Cribbs, Goren & Flaum, P.C.
440 Louisiana, Suite 2200
Houston, TX 77002
Attn: Theodore F. Pound III
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12.4 ENFORCEMENT OF AGREEMENT
Seller and the Huskeys acknowledge and agree that Buyer would be
damaged irreparably in the event any of the provisions of this Agreement are not
performed in accordance with their specific terms and that any Breach of this
Agreement by Seller or the Huskeys could not be adequately compensated by
monetary damages. Accordingly, Seller and the Huskeys agree that, in addition to
any other right or remedy to which Buyer may be entitled, at law or in equity,
it shall be entitled to enforce any provision of this Agreement by a decree of
specific performance and to temporary, preliminary and permanent injunctive
relief to prevent Breaches or threatened Breaches of the provisions of this
Agreement, without posting any bond or other undertaking.
12.5 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements, whether written or
oral, between the parties with respect to its subject matter and constitutes
(along with the Schedules, Exhibits and documents delivered pursuant to this
Agreement) a complete and exclusive statement of the terms of the agreement
between the parties with respect to its subject matter. This Agreement may not
be amended except by a written agreement executed by the party to be charged
with the amendment.
12.6 SCHEDULES
(a) The statements in the Schedules, and those in any supplement
thereto, relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate
and not to any other representation or warranty in this
Agreement.
(b) In the event of any inconsistency between the statements in
this Agreement and the Exhibits hereto and those in the
Schedules (other than an exception expressly set forth as such
in the Schedules with respect to a specifically identified
representation or warranty), the statements in this Agreement
and the Exhibits hereto will control.
12.7 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
No party may assign any of its rights or delegate any of its
obligations under this Agreement without the prior written Consent of the other
parties, except that Buyer may collaterally assign its rights hereunder to any
financial institution providing financing in connection with the Contemplated
Transactions. Subject to the preceding sentence, this Agreement will apply to,
be binding in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement, except such rights as
shall inure to a successor or permitted assignee pursuant to this Section 12.7.
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12.8 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
12.9 SECTION HEADINGS, CONSTRUCTION
The headings of Articles and Sections in this Agreement are provided
for convenience only and will not affect its construction or interpretation. All
references to "Articles", "Sections" and "Schedules" refer to the corresponding
Articles, Sections and Schedules of this Agreement and the schedules,
respectively. All words used in this Agreement will be construed to be of such
gender or number as the context requires. Unless otherwise expressly provided,
the word "including" or "includes" does not limit the preceding words or terms
and the word "or" is used in the inclusive sense. All references to documents,
instruments or agreements shall be deemed to refer as well to I addenda,
exhibits, schedules or amendments thereto.
12.10 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in
this Agreement, time is of the essence.
12.11 GOVERNING LAW AND JURISDICTION
This Agreement will be governed by and construed under the laws of the
State of Colorado without regard to conflicts of laws principles that would
require the application of any other law. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the State of
Colorado, or, if it has or can acquire jurisdiction, in the United States
District Courts of the State of Colorado, and each of the parties consents to
the jurisdiction of such courts (and of its appropriate appellate courts), in
any such action or proceeding and waiver any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.
12.12 EXECUTION OF AGREEMENT
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
The exchange of copies of this Agreement and of signature pages by facsimile
transmission shall constitute effective execution and delivery of this Agreement
to the parties and may be used in lieu of the original Agreement for all
purposes. Signatures of the parties transmitted by facsimile shall be deemed to
be their original signatures for any purpose whatsoever.
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12.13 THE HUSKEYS GUARANTEE
The Huskeys have joined in this Agreement for the purpose of
guaranteeing, and by their respective signatures below, do hereby
unconditionally guarantee each and every, all and singular, the obligations of
Seller hereunder and under the deeds, bills of sale, assignments, and other
documents, writings, and instruments executed and delivered by Seller or on its
behalf pursuant to Section 2.7(a) and other provisions of this Agreement. The
Liability of the Huskeys hereunder shall be joint and several with Seller.
Wherein this Agreement provision is made for any action to be taken or performed
by Seller, the Huskeys jointly and severally undertake to use their Best Efforts
to cause Seller to take such action or to perform such action. Without limiting
the generality of the foregoing, the Huskeys shall be jointly and severally
liable with Seller for the indemnities set forth in Article 11 hereof.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
Buyer: MOUNTAIN COMPRESSED AIR, INC.
By: /S/ MUNAWAR H. HIDAYATALLAH
------------------------------------
Munawar H. Hidayatallah,
Chairman and Chief Executive Officer
Seller: MOUNTAIN AIR DRILLING SERVICE CO.,
INC., a Colorado corporation
By /S/ ROD HUSKEY
------------------------------------
Rod Huskey, President
/S/ ROD HUSKEY
------------------------------------
ROD HUSKEY
/S/ LINDA HUSKEY
------------------------------------
LINDA HUSKEY
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SCHEDULE 1
"ACCOUNTS RECEIVABLE" is defined as (i) all Accounts Receivable and other rights
to payment from customers of Seller and the full benefit of all security for
such accounts or debts, including all Accounts Receivable representing amounts
receivable in respect of goods shipped or products sold or services rendered to
customers, and (ii) all other accounts or notes receivable and the full benefit
of all security for such accounts or notes, and (iii) any claims, remedies and
other rights related to any of the foregoing.
"AGREEMENT" is defined as this Asset Purchase Agreement.
"ASSETS" is defined in Section 2.1, excluding the Excluded Assets which are
defined in Section 2.2.
"ASSIGNMENT AND ASSUMPTION AGREEMENT" is defined in Section 2.7(a)(ii).
"ASSUMED LIABILITIES" is defined in Section 2.4(a).
"BALANCE SHEET" is defined in Section 3.4.
"BEST EFFORTS" is defined as the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible, provided, however, that a Person
required to use his Best Efforts under this Agreement will not be thereby
required to take actions that would result in a materially adverse change in the
benefits to such Person of this Agreement and the Contemplated Transactions, or
to dispose of or make any change to its business, expend any material funds or
incur any other material burden.
"BREACH" is defined as any violation or breach of, any misrepresentation or
inaccuracy in, default under, or any failure to perform or comply with any
representation, warranty, covenant, obligation, or other provision of any
Contract, or any event which with the passing of time or the giving of notice,
or both, would constitute such a violation, breach, misrepresentation,
inaccuracy, default or failure. When used with respect to this Agreement or any
Contract delivered pursuant to this Agreement, a "Breach" will also be deemed to
include any claim (by any Person) or other occurrence or circumstance that is or
was inconsistent with any representation, warranty, covenant, promise,
obligation, duty under, or other provision of, this Agreement or any Contract
delivered pursuant to this Agreement.
"BUYER" is defined in the first paragraph of this Agreement.
"BUYER'S ADVISORS" is defined in Section 5. 1.
"BUYER'S CLOSING DOCUMENTS" is defined in Section 4.2.
"CLOSING" is defined in Section 2.7.
"CLOSING DATE" is defined as the date as of which the Closing actually takes
place.
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"CODE" is defined as the Internal Revenue Code of 1986, as amended, or any
successor law, and regulations issued by the IRS pursuant to the Code or any
successor law. "Competing Business" is defined in Section 3.25.
"CONSENT" is defined as any approval, consent, ratification, waiver, or other
authorization. "Contemplated Transactions' is defined as all of the transactions
contemplated by this Agreement.
"CONTRACT" is defined as any agreement, contract, Lease, consensual obligation,
promise, or Undertaking (whether written or oral and whether express or implied)
that is legally binding.
"DAMAGES" is defined in Section 11.2.
"DEPOSIT" is defined in Section 2.3
"EMPLOYMENT AGREEMENT" is defined in Section 2.7(a)(iv).
"ENCUMBRANCE" is defined as any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest,
mortgage, right of way, easement, Encroachment, servitude, right of first
option, right of first refusal or restriction of any kind, any restriction on
use, voting (in the case of any security), transfer, receipt of income, or
exercise of any other attribute of ownership.
"ENVIRONMENT" is defined as soil, land surface or subsurface strata, surface
waters (including navigable waters and ocean waters), groundwaters, drinking
water supply, stream sediments, ambient air (including indoor air), plant and
animal life, and any other environmental medium or natural resource.
"ENVIRONMENTAL, HEALTH AND SAFETY LIABILITIES" is defined as any cost, damages,
expense, Liability, obligation, or other responsibility arising from or under
any Environmental Law or Occupational Safety and Health Law, including those
consisting of or relating to:
(a) any environmental, health, or safety matter or condition (including
on-site or off-site contamination, occupational safety and health, and
regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and
response, remedial, or inspection costs and expenses arising under any
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under any Environmental Law or
Occupational Safety and Health Law for cleanup costs or corrective
action, including any cleanup, removal, containment, or other
remediation or response actions ("Cleanup") required by any
Environmental Law or Occupational Safety and Health Law (whether or not
such Cleanup has been required or requested by any Governmental Body or
any other Person) and for any natural resource damages; or
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(d) any other compliance, corrective, or remedial measures required
under any Environmental Law or Occupational Safety and Health Law.
The terms "removal," "remedial," and "response action" include the types of
activities covered by the United States Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. ss. 9601 ET SEQ., as amended
("CERCLA").
"ENVIRONMENTAL LAW" is defined as any Legal Requirement that requires or relates
to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and
the commencements of activities, such as resource extraction or
construction, that could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing the
hazardous characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and used
so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other
potentially harmful substances;
(g) cleaning up pollutants that have been released, preventing the
Threat of Release, or paying the costs of such clean up or prevention;
or
(h) making responsible parties pay private parties, or groups of them,
for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for
injuries done to public assets.
"EXCLUDED ASSETS" is defined in Section 2.2.
"EXHIBIT" is defined as an exhibit to this Agreement.
"GAAP" is defined as generally accepted accounting principles for financial
reporting in the United States, applied on a basis consistent with the basis on
which the Balance Sheet and the other financial statements referred to in
Section 3.4 were prepared.
"GENERAL CONVEYANCE, TRANSFER AND ASSIGNMENT" is defined in Section 2.7(a)(i).
41
<PAGE>
"GOVERNING DOCUMENTS" is defined, with respect to any particular entity, as (a)
if a corporation, the articles or certificate of incorporation and the bylaws;
(b) if a general partnership, the limited
partnership agreement and any statement of partnership; (c) if a limited
partnership, the limited partnership agreement and the certificate of limited
partnership; (d) if a limited liability company, the articles of organization
and operating agreement; (e) any other charter or similar document adopted or
filed in connection with the creation, formation or organization of a Person;
(f) all equityholders' agreements, voting agreements, voting trust agreements,
joint venture agreements, registration rights agreements or other agreements or
documents relating to the organization, management or operation of any Person,
or relating to the rights, duties and obligations of the equityholders of any
Person; and (g) any amendment or supplement to any of the foregoing.
"GOVERNMENTAL AUTHORIZATION" is defined as any Consent, license, or permit
issued, granted, or otherwise made available by or under the authority of any
Governmental Body or pursuant to any Legal Requirement.
"GOVERNMENTAL BODY" is defined as any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any agency, branch, department, board, commission, court,
tribunal or other entity exercising governmental or quasi-governmental
powers);
(d) multi-national organization or body;
(e) body exercising, or entitled or purporting to exercise, any
administrative, executive, judicial, legislative, police, regulatory,
or taxing authority or power; or
(f) official of any of the foregoing.
"HAZARDOUS ACTIVITY" is defined as the distribution, generation, handling,
importing, management, manufacturing, processing, production, refinement,
Release, storage, transfer, transportation, treatment, or use (including any
withdrawal or other use of groundwater) of Hazardous Materials in, on, under,
about, or from the Facilities or any part thereof into the Environment, and any
other act, business, operation, or thing that increases the danger, or risk of
danger, or poses an unreasonable risk of harm to persons or property on or off
the Facilities.
"HAZARDOUS MATERIAL" is defined as any substance, material or waste which is or
will foreseeably be regulated by any Governmental Body, including any material,
substance or waste which is defined as a "hazardous waste," "hazardous
material," "hazardous substance" "extremely hazardous waste," "restricted
hazardous waste," "containment," "toxic waste" or "toxic substance" under any
provision of Environmental Law, and including petroleum, petroleum products,
asbestos, presumed asbestos-containing material or asbestos-containing material,
urea formaldehyde and polychlorinated biphenyls.
42
<PAGE>
"INDEMNIFIED PERSONS" is defined in Section 11.2.
"INDEMNITEE" is defined in Section 11.6(a).
"INDEMNITOR" is defined in Section 11.6(a).
"INTERIM BALANCE SHEET" is defined in Section 3.4.
"IRS" is defined as the United States Internal Revenue Service or any successor
agency, and, the extent relevant, the United States Department of the Treasury.
"KNOWLEDGE" of a particular fact or matter by an individual exists if
(a) such individual is actually aware of such fact or other matter; or
(b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation regarding the accuracy of any
representations or warranties contained in this Agreement.
A Person (other than an individual) will be deemed to have "Knowledge" of a
particular fact or other matter if any individual who is serving, or who has at
any time served, as a director, officer, partner, executor, or trustee of such
Person (or in any similar capacity) has, or at any time had, Knowledge of such
fact or other matter (as set forth in (a) and (b) above), and any such
individual (and any individual party to this Agreement) will be deemed to have
conducted a reasonably comprehensive investigation regarding the accuracy of any
representations and warranties made herein by such Person or individual.
"LEASE AGREEMENT" is defined in Section 2.7(a)(v).
"LEASED PROPERTY" is defined as the real property and buildings leased by Seller
to Buyer and located in Grand Junction, Colorado and utilized by Seller in the
business of Seller.
"LEGAL REQUIREMENT" is defined as any federal, state, local, municipal, foreign,
international, multinational, or other constitution, law, ordinance, principle
of common law, regulation, statute, or treaty.
"LIABILITY" is defined, with respect to any Person, as any Liability or
obligation of such person of any kind, character or description, whether known
or unknown, absolute or contingent, accrued or unaccrued, liquidated or
unliquidated, secured or unsecured, joint or several, due or to become due,
vested or unvested, executory, determined, determinable or otherwise and whether
or the same is required to be accrued on the financial statements of such
Person.
"MATERIAL CONSENTS" is defined in Section 7.3.
"NOTE" is defined in Section 2.3
43
<PAGE>
"OCCUPATIONAL SAFETY AND HEALTH LAW" is defined as any Legal Requirement
designed to provide safe and healthful working conditions and to reduce
occupational safety and health hazards, including the Occupational Safety and
Health Act, 29 U.S.C.ss.651 ET. SEQ., and any program, whether governmental or
private (such as those promulgated or sponsored by industry associations
insurance companies), designed to provide safe and healthful working conditions.
"ORDER" is defined as any order, injunction, judgment, decree, ruling,
assessment or arbitration award of any Governmental Body or arbitrator.
"ORDINARY COURSE OF BUSINESS" is defined, with respect to an action taken by a
Person, as:
(a) an action which is consistent in nature, scope and magnitude with
the past practices of such Person and is taken in the ordinary course
of the normal day-to-day operations of such Person;
(b) an action which does not require authorization by the board of
directors or shareholders of such Person (or by any Person or group of
Persons exercising similar authority) and does not require any other
separate or special authorization of any nature; and
(c) an action which is similar in nature, scope and magnitude to
actions customarily taken, without any separate or special
authorization, in the ordinary course of the normal day- to-day
operations of other Persons that are in the same line of business as
such Person.
"PERMITTED ENCUMBRANCES" is defined in Section 3.6.
"PERSON" is defined as an individual, partnership, corporation, business trust,
limited liability, limited liability partnership, joint stock company, trust,
unincorporated association, joint venture or other entity, or a Governmental
Body.
"PROCEEDING" is defined as any action, arbitration, audit, hearing,
investigation, litigation, or suit (whether civil, criminal, administrative,
judicial or investigative, whether formal or informal, whether public or
private) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"PURCHASE PRICE" is defined in Section 2.3.
"RECORD" is defined as information that is inscribed on a tangible medium or
that is stored in an electronic or other medium and is retrievable in
perceivable form.
"RELATED PERSON" is defined, with respect to a particular individual, as:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by any one or
more members of such individual's Family;
(c) any Person in which members of such individual's Family hold
(individually or in the aggregate) a Material Interest; and
44
<PAGE>
(d) any Person with respect to which one or more members of such
individual's Family serves as a director, officer, partner, executor,
or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common
control with such specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, executor,
or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest; and
(e) any Person with respect to which such specified Person serves as a
general partner or a trustee (or in a similar capacity).
For purposes of this definition, (a) "control" (including "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise, and shall be construed as such term is used in the rules
promulgated under the Securities Act, (b) the "Family" of an individual includes
(i) the individual, (ii) the individual's spouse, (iii) any other natural person
who is related to the individual or the individual's spouse within the second
degree, and (iv) any other natural person who resides with such individual, and
(c) "Material Interest" means direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of voting
securities or other voting interests representing at least 5% of the outstanding
voting power of a Person or equity securities or other equity interests
representing at least 5% of the outstanding equity securities or equity
interests in a Person.
"RELEASE" is defined as any release, spill, emission, leaking, pumping, pouring,
dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching,
or migration on or into the or into or out of any property.
"REMEDIAL ACTION" is defined as all actions, including any capital expenditures,
required or voluntarily undertaken to (i) clean up, remove, treat, or in any
other way address any Hazardous al or other substance; (ii) prevent the Release
or Threat of Release, or minimize the further Release of any Hazardous Material
or other substance so it does not migrate or endanger or threaten to endanger
public health or welfare or the Environment; (iii) perform pre-remedial studies
and investigations or post-remedial monitoring and care; or (iv) bring any
Leased Real Property and the Facilities located and operations conducted thereon
into compliance with all Environmental Laws and Environmental Permits.
45
<PAGE>
"REPRESENTATIVE" is defined, with respect to a particular Person, as any
director, officer, employee, agent, consultant, advisor, or other representative
of such Person, including legal counsel, accountants, and financial advisors.
"RESPONSIBLE TAX PERSON" is defined in Section 3.14(b).
"RETAINED LIABILITIES" is defined in Section 2.4(b).
"SCHEDULE" or "SCHEDULES" is defined as a schedule or schedules to this
Agreement.
"SECURITIES ACT" is defined in Section 3.3.
"SELLER" is defined in the first paragraph of this Agreement.
"SELLER CONTRACT" is defined as any Contract (a) under which Seller has or may
acquire any lights or benefits, (b) under which Seller has or may become subject
to any obligation or Liability, or (c) by which Seller or any of the assets
owned or used by Seller is or may become bound.
"SELLER'S CLOSING DOCUMENTS" is defined in Section 3.2(a).
"TANGIBLE PERSONAL PROPERTY" is defined as all machinery, equipment, tools,
furniture, office equipment, computer hardware, supplies, materials, vehicles
and other items of tangible personal property (other than Inventories) of every
kind owned or leased by Seller (wherever located and whether or not carried on
Seller's books), together with any express or implied warranty by the
manufacturers or sellers or lessors of any item or component part thereof, and
all maintenance Records and other documents relating thereto.
"TAX" is defined as any income, gross receipts, license, payroll, employment,
excise, severance, stamp, occupation, premium, property, environmental, windfall
profit, customs, vehicle, lane, boat, vessel or other title or registration,
capital stock, franchise, employees' income withholding, foreign or domestic
withholding, social security, unemployment, disability, real property, personal
property, sales, use, transfer, value added, alternative, add-on minimum, and
other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever,
and any interest, penalties, additional or additional amounts thereon, imposed,
assessed, collected by or under the authority of any Governmental Body or
payable under any tax-sharing agreement or any other Contract.
"TAX RETURN" is defined as any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE" is defined as a reasonable likelihood of a Release that may
require in order to prevent or mitigate damage to the Environment that may
result from such Release.
"WARN ACT" is defined in Section 3.23 (d).
"WORKING CAPITAL" is the cash and Accounts Receivable less trade payables of
Seller.
46
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>4
<FILENAME>allis_10kex10-19.txt
<TEXT>
<PAGE>
EXHIBIT 10.19
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of February 6, 2001, by and between
MOUNTAIN COMPRESSED AIR, INC., a Texas corporation ("Borrower"), and WELLS FARGO
BANK TEXAS, NATIONAL ASSOCIATION ("Bank").
RECITALS
--------
Borrower has requested that Bank extend or continue credit to Borrower
as described below, and Bank has agreed to provide such credit to Borrower on
the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
CREDIT TERMS
------------
SECTION 1.1 LINE OF CREDIT.
(a) LINE OF CREDIT. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including January 31, 2002, not to exceed at any time the aggregate
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
("Line of Credit"), the proceeds of which shall be used to support working
capital, issue letters of credit (with a $100,000.00 sublimit), and general
corporate purposes. Borrower's obligation to repay advances under the Line of
Credit shall be evidenced by a promissory note substantially in the form of
EXHIBIT A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) LIMITATION ON BORROWINGS. Outstanding borrowings under the Line of
Credit, to a maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of $500,000.00 when combined with the undrawn Letters
of Credit (as hereinafter defined). All borrowings under the Line of Credit
shall be in amounts of at least $10,000. There will be no minimum amount
required on borrowings under the Line of Credit if borrowed through Bank's
credit sweep product.
(c) LIMITATION ON BORROWINGS. OUTSTANDING BORROWINGS UNDER THE LINE OF
CREDIT, TO A maximum of the principal amount set forth above, shall not at any
time exceed an aggregate of seventy-five percent (75%) of Borrower's eligible
accounts receivable. All of the foregoing shall be determined by Bank upon
receipt and review of all collateral reports required hereunder and such other
documents and collateral information as Bank may from time to time require.
Borrower acknowledges that said borrowing base was established by Bank with the
understanding that, among other items, the aggregate of all returns, rebates,
discounts, credits and allowances for the immediately preceding three (3) months
at all times shall be less than five percent (5%) of Borrower's gross sales for
said period. If such dilution of Borrower's accounts for the immediately
preceding three (3) months at any time exceeds five percent (5%) of Borrower's
gross sales for said period, or if there at any time exists any other matters,
events, conditions or contingencies which Bank reasonably believes may affect
payment of any portion of Borrower's accounts, Bank, in its sole discretion, may
reduce the foregoing advance rate against eligible accounts receivable to a
percentage appropriate to reflect such additional dilution and/or establish
additional reserves against Borrower's eligible accounts receivable.
<PAGE>
As used herein, "eligible accounts receivable" shall consist solely of
trade accounts created in the ordinary course of Borrower's business, upon which
Borrower's right to receive payment is absolute and not contingent upon the
fulfillment of any condition whatsoever, and in which Bank has a perfected
security interest of first priority, and shall not include:
(i) any account which is more than sixty (60) days past due or
ninety (90) days from the invoice date;
(ii) that portion of any account for which there exists any
right of setoff, defense or discount (except regular discounts allowed
in the ordinary course of business to promote prompt payment) or for
which any defense or counterclaim has been asserted;
(iii) any account which represents an obligation of any state
or municipal government or of the United States government or any
political subdivision thereof (except accounts which represent
obligations of the United States government and for which the
assignment provisions of the Federal Assignment of Claims Act, as
amended or recodified from time to time, have been complied with to
Bank's satisfaction);
(iv) any account which represents an obligation of an account
debtor located in a foreign country, except to the extent any such
account, in Bank's determination, is supported by a letter of credit or
insured under a policy of foreign credit insurance, in each case in
form, substance and issued by a party acceptable to Bank;
(v) any account which arises from the sale or lease to or
performance of services for, or represents an obligation of, an
employee, affiliate, partner, member, parent or subsidiary of Borrower;
(vi) that portion of any account, which represents interim or
progress billings or retention rights on the part of the account
debtor;
(vii) any account which represents an obligation of any
account debtor when twenty percent (20%) or more of Borrower's accounts
from such account debtor are not eligible pursuant to (i) above;
(viii) that portion of any account from an account debtor
which represents the amount by which Borrower's total accounts from
said account debtor exceeds twenty-five percent (25%) of Borrower's
total accounts;
(ix) any account in which services have not been rendered or
goods have not been shipped;
(x) any account deemed ineligible by Bank when Bank, in its
sole discretion, deems the creditworthiness or financial condition of
the account debtor, or the industry in which the account debtor is
engaged, to be unsatisfactory.
2
<PAGE>
(d) LETTER OF CREDIT SUBFEATURE. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue or cause
an affiliate to issue standby letters of credit for the account of Borrower for
bonding or security deposit purposes (each, a "Letter of Credit" and
collectively, "Letters of Credit"); provided however, that the aggregate undrawn
amount of all outstanding Letters of Credit shall not at any time exceed One
Hundred Thousand and 00/100 Dollars ($100,000.00). The form and substance of
each Letter of Credit shall be subject to approval by Bank, in its sole
discretion. Each Letter of Credit shall be issued for a term not to exceed three
hundred sixty-five (365) days, as designated by Borrower; provided however, that
no Letter of Credit shall have an expiration date subsequent to the maturity
date of the Line of Credit. The undrawn amount of all Letters of Credit shall be
reserved under the Line of Credit and shall not be available for borrowings
thereunder. Each Letter of Credit shall be subject to the additional terms and
conditions of the Letter of Credit agreements, applications and any related
documents required by Bank in connection with the issuance thereof. Each draft
paid under a Letter of Credit shall be deemed an advance under the Line of
Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such advances; provided however, that
if advances under the Line of Credit are not available, for any reason, at the
time any draft is paid, then Borrower shall immediately pay to Bank the full
amount of such draft, together with interest thereon from the date such draft is
paid to the date such amount is fully repaid by Borrower, at the rate of
interest applicable to advances under the Line of Credit. In such event Borrower
agrees that Bank, in its sole discretion, may debit any account maintained by
Borrower with Bank for the amount of any such draft. If Borrower does not pay to
Bank the sums due for such draft, the unpaid amount thereof shall bear interest
equal to the Base Rate (as defined in the Line of Credit Note) plus two percent
(2%) for each day from and including the date such draft was paid by Bank to the
date of repayment by Borrower. Upon any Event of Default and upon the request of
Bank, the Borrower shall deposit in the Cash Collateral Account an amount in
cash equal to the aggregate undrawn amount of all outstanding Letters of Credit
as of such date.
(e) BORROWING, REPAYMENT AND PREPAYMENT. Borrower may from time to time
during the term of the Line of Credit borrow, partially or wholly repay its
outstanding borrowings, and reborrow, subject to all of the limitations, terms
and conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above. Borrower may prepay principal on the Line of Credit without penalty on
one (1) business day's advance notice. Prepayments of the Line of Credit will be
at least $100,000. There will be no minimum amount required on prepayments of
the Line of Credit if paid through Bank's credit sweep product. Notwithstanding
any other provision contained herein, if the Line of Credit should be refinanced
in such a manner whereby Bank is no longer the lender hereunder, any prepayment
shall include a prepayment fee in an amount equal to one percent (1%) of the
outstanding principal balance on the Line of Credit plus all interest accrued to
the prepayment date plus all other fees and expenses due hereunder. On the due
date, all payments of principal, interest, expenses, or other fees due and
payable by the Borrower to the Bank will be automatically debited from an
established checking account of the Borrower maintained at the Bank. Any
overdraft created in such checking account as a result of such payments will be
considered to be a failure to make payments when due and an Event of Default.
(f) CASH COLLATERAL ACCOUNT. Borrower shall maintain with Bank, and
Borrower hereby grants to Bank a security interest in, a non-interest bearing
deposit account over which Borrower shall have no control ("Cash Collateral
Account") and into which the proceeds of all Borrower's accounts and other
rights to payment in which Bank has a security interest shall be deposited
immediately upon their receipt by Borrower in the Event of Default. Bank shall,
and Borrower hereby authorizes Bank to, apply all such proceeds immediately upon
their receipt by Bank as a principal reduction on the Line of Credit, and the
balance, if any, as an interest reduction on the Line of Credit.
3
<PAGE>
SECTION 1.2 TERM LOAN.
(a) TERM LOAN. Subject to the terms and conditions of this Agreement,
Bank hereby agrees to make a loan to Borrower in the principal amount of Three
Million Five Hundred Fifty Thousand and 00/100 Dollars ($3,550,000.00) ("Term
Loan"), the proceeds of which shall be used to finance the initial purchase of
fixed assets of Mountain Air Drilling Service Co., Inc., a Colorado corporation
(the "Seller"). Advances on the combined face value of the Term Loan and the
Delayed Draw Term Loan will not exceed seventy-five percent (75%) of the "as
improved" orderly liquidation value ("OLV") of the existing fixed assets being
purchased from the Seller plus the planned upgrades as determined by an
independent qualified appraiser engaged and approved by Bank and paid for by
Borrower. Borrower's obligation to repay the Term Loan shall be evidenced by a
promissory note substantially in the form of EXHIBIT B attached hereto ("Term
Note"), all terms of which are incorporated herein by this reference.
(b) REPAYMENT. Principal and interest on the Term Loan shall be repaid
in accordance with the provisions of the Term Note.
(c) OPTIONAL PREPAYMENT. If the Term Loan bears interest at the Base
Rate (as defined in the Term Note), then Borrower may prepay the Term Loan
without penalty on one (1) business day's advance notice. Such prepayments of
the Term Loan will be at least $100,000. If the Term Loan bears interest at
LIBOR (as defined in the Term Note), then Borrower may prepay the Term Loan
without penalty (except as provided in the Term Note) on three (3) business
days' advance notice. Such prepayments of the Term Loan will be at least
$500,000 and a multiple of $100,000. All prepayments will include interest
accrued to the prepayment date and all other fees and expenses due. All
prepayments will be applied in the inverse order of payments due on the Term
Loan. Notwithstanding any other provision contained herein, if the Term Loan
should be refinanced in such a manner whereby Bank is no longer the lender
hereunder, any prepayment shall include a prepayment fee in an amount equal to
one percent (1%) of the outstanding principal balance on the Term Loan plus all
interest accrued to the prepayment date plus all other fees and expenses due
hereunder.
(d) MANDATORY PREPAYMENT. Beginning May 31, 2002, Borrower will make an
annual principal payment on June 30th of each year (in addition to any scheduled
quarterly principal payment as provided in the Term Note) equal to fifty percent
(50%) of Borrower's prior fiscal year Free Cash Flow. "Free Cash Flow" is
defined herein as EBITDA (hereafter defined) less the sum of (i) interest
payments, (ii) scheduled quarterly principal payments (as provided in the Term
Note and Delayed Draw Term Note, as hereinafter defined), (iii) taxes, (iv) the
Change in Adjusted Working Capital, and (v) unfinanced capital expenditures.
"Change in Adjusting Working Capital" is defined herein as the Adjusted Working
Capital at the most recent fiscal year end less the Adjusted Working Capital of
the previous fiscal year end. "Adjusted Working Capital" is defined herein as
current assets less cash and marketable securities less current liabilities less
interest-bearing debt or obligations that are classified as current liabilities
(as all such terms are defined under generally accepted accounting principles).
All prepayments will be applied in the inverse order of payments due on the Term
Loan.
4
<PAGE>
SECTION 1.3 DELAYED DRAW TERM LOAN.
(a) DELAYED DRAW. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including the last day of May, 2001, not to exceed the aggregate
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
("Delayed Draw Term Loan"), the proceeds of which shall be used to finance the
planned upgrade of currently owned equipment, and which shall be converted on
the last day of May, 2001, to a term loan, as described more fully below and in
the Delayed Draw Term Note. Advances on the Delayed Draw Term Loan are not to
exceed one hundred percent (100%) on invoices on the planned purchases of
Gardener Denver Model MDY Boosters, with CAT D353 diesel engines and
miscellaneous parts and labors. In addition, advances on the combined face value
of the Term Loan and the Delayed Draw Term Loan shall not exceed seventy-five
percent (75%) of the "as improved" OLV of the existing fixed assets being
purchased from the Seller plus the planned upgrades as determined by an
independent qualified appraiser engaged and approved by Bank at the expense of
Borrower, whether or not the Delayed Draw Term Loan actually closes or any
future advances are actually made. Borrower's obligation to repay advances under
the Delayed Draw Term Loan shall be evidenced by a promissory note substantially
in the form of EXHIBIT C attached hereto ("Delayed Draw Term Note"), all terms
of which are incorporated herein by this reference.
(b) LIMITATION ON BORROWINGS. Notwithstanding any other provision of
this Agreement, the aggregate amount of all outstanding borrowings under the
Delayed Draw Term Loan shall not at any time exceed a maximum of Five Hundred
Thousand and 00/100 Dollars ($500,000.00). If the Delayed Draw Term Loan bears
interest at the Base Rate (as defined in the Delayed Draw Term Note), then
borrowings under the Delayed Draw Term Loan shall be in amounts of at least
$10,000. If the Delayed Draw Term Loan bears interest at LIBOR (as defined in
the Delayed Draw Term Note), then borrowings under the Delayed Draw Term Loan
shall be in amounts and multiples of at least $100,000.
(c) BORROWING AND REPAYMENT. Borrower may from time to time during the
period in which Bank will make advances under the Delayed Draw Term Loan borrow
and partially or wholly repay (subject to prepayment provisions contained herein
and in the Delayed Draw Term Note) its outstanding borrowings, provided that
amounts repaid may not be reborrowed, subject to all the limitations, terms and
conditions contained herein; provided however, that the total outstanding
borrowings under the Delayed Draw Term Loan shall not at any time exceed the
maximum principal amount available thereunder, as set forth above. All unpaid
interest on the Delayed Draw Term Note as of the last day of May shall be paid
on such date. The outstanding principal balance and interest of the Delayed Draw
Term Loan shall be due and payable in full on January 31, 2004; provided,
however, that so long as Borrower is in compliance on said date with all terms
and conditions contained herein and in any other documents evidencing the
Delayed Draw Term Loan, Bank agrees to restructure repayment of said outstanding
principal balance so that principal and interest shall be due and payable in
eleven (11) installments of principal plus interest each, the first ten (10) of
which shall be in the principal amount equal to five percent (5%) of the
outstanding principal balance on the Delayed Draw Term Note at the end of the
business day on May 31, 2001, plus interest each, with the first such
installment being due and payable on the last day of August, 2001, the next nine
such installments being paid on the last day of November, February, May, and
August thereafter, and the eleventh (11th) and final installment, if not sooner
paid, shall be due and payable on January 31, 2004, in amount equal to the
entire balance of principal and interest then due and owing on said Delayed Draw
Term Note.
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(d) PREPAYMENT. If the Delayed Draw Term Loan bears interest at the
Base Rate (as defined in the Delayed Draw Term Note), then Borrower may prepay
the Delayed Draw Term Loan without penalty on one (1) business day's advance
notice. Such prepayments of the Delayed Draw Term Loan will be at least
$100,000. If the Delayed Draw Term Loan bears interest at LIBOR (as defined in
the Delayed Draw Term Note), then Borrower may prepay the Delayed Draw Term Loan
without penalty (except as provided in the Delayed Draw Term Note) on three (3)
business days' notice. Such prepayments of the Delayed Draw Term Loan will be at
least $500,000 and a multiple of $100,000. All prepayments will include interest
accrued to the prepayment date and all other fees and expenses due. All
prepayments will be applied in the inverse order of payments due on the Delayed
Draw Term Loan. Notwithstanding any other provision contained herein, if the
Delayed Draw Term Loan should be refinanced in such a manner whereby Bank is no
longer the lender hereunder, any prepayment shall include a prepayment fee in an
amount equal to one percent (1%) of the outstanding principal balance on the
Delayed Draw Term Loan plus all interest accrued to the prepayment date plus all
other fees and expenses due hereunder.
SECTION 1.4 INTEREST/FEES.
(a) INTEREST. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note. The outstanding principal balance of the Term Loan shall bear interest at
the rate of interest set forth in the Term Note. The outstanding principal
balance of the Delayed Draw Term Loan shall bear interest at the rate of
interest set forth in the Delayed Draw Term Note.
(b) COMPUTATION AND PAYMENT. Interest shall be computed on the basis of
a 360-day year, actual days elapsed, unless such calculation would result in a
usurious rate, in which case interest shall be computed on the basis of a
365/366-day year, as the case may be, actual days elapsed. Interest shall be
payable at the times and place set forth in each promissory note or other
instrument required hereby.
(c) COMMITMENT FEE. Borrower shall pay to Bank a non-refundable
commitment fee equal to $45,500, which fee shall be due and payable in full
contemporaneously herewith.
(d) UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to
one-half of one percent (1/2%) per annum (computed on the basis of a 360-day
year, actual days elapsed) on the average daily unused amount of the Line of
Credit and shall be due and payable by Borrower in arrears within ten (10) days
after each billing is sent by Bank.
(e) LETTER OF CREDIT FEES. Borrower shall pay to Bank (i) fees upon the
issuance of each Letter of Credit and on each anniversary date thereafter equal
to the same percent as the then existing LIBOR margin of the face amount
thereof, (ii) fees upon the payment or negotiation of each draft under any
Letter of Credit equal to the greater of one-fourth percent (1/4%) of the amount
of such draft or $250.00, and (iii) fees upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity, including, without limitation, amendment fees of $130 per amendment,
and courier fees of $25.00 each.
SECTION 1.5 COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all principal, interest, and fees due under each credit subject hereto by
charging Borrower's deposit account number 4496857319 with Bank, or any other
deposit account maintained by Borrower with Bank, for the full amount thereof.
Should there be insufficient funds in any such deposit account to pay all such
sums when due, the full amount of such deficiency shall be immediately due and
payable by Borrower.
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SECTION 1.6 COLLATERAL.
As security for all indebtedness of Borrower to Bank subject hereto and
all of Borrower's obligation hereunder and all other Loan Documents executed
herewith, as same may be amended, modified, restated, extended and/or rearranged
from time to time (collectively the "Indebtedness"), Borrower hereby grants to
Bank security interests of first priority in all Borrower's assets. All of the
foregoing shall be evidenced by and subject to the terms of such security
agreements, financing statements, deeds of trust and other documents as Bank
shall require, all in form and substance satisfactory to Bank. Borrower shall
reimburse Bank immediately upon demand for all reasonable costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits,
title insurance, and attorneys' fees.
SECTION 1.7 GUARANTIES. All Indebtedness of Borrower to Bank hereunder
shall be guaranteed jointly and severally by OilQuip Rentals, Inc., a Delaware
corporation ("OilQuip"), Munawar Hidayatallah and Jayne Hidayatallah, as
evidenced by and subject to the terms of guaranties in form and substance
satisfactory to Bank.
SECTION 1.8 SUBORDINATION OF DEBT. All obligations of Borrower to
Seller, including, without limitation, that certain $2,200,000 unsecured
promissory note dated as of even date herewith (the "Seller Note"), shall be
subordinated in right of repayment to all obligations of Borrower to Bank
including, without limitation, the Indebtedness, as evidenced by and subject to
the terms of subordination agreements in form and substance satisfactory to
Bank. All obligations of Borrower to Wells Fargo Energy Capital, Inc.,
including, without limitation, that certain $2,000,000 secured promissory note
dated as of even date herewith (the "Energy Capital Note") shall be subordinated
in right of payment to all obligations of Borrower to Bank including, without
limitation, the Indebtedness, as evidenced by and subject to the terms of
subordination agreements in form and substance satisfactory to Bank.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.
SECTION 2.1 LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the State of Texas, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in New Mexico, Utah, Colorado, and all other
jurisdictions in which such qualification or licensing is required or in which
the failure to so qualify or to be so licensed could have a material adverse
effect on Borrower.
SECTION 2.2 AUTHORIZATION AND VALIDITY. This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.
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SECTION 2.3 NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4 LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5 CORRECTNESS OF FINANCIAL STATEMENT. The pro forma financial
statement of Borrower has been prepared by the chief financial officer of
Borrower after doing the required due diligence for Borrower to represent and
warrant herein that such statement is complete and correct and presents fairly
the financial condition and projections of Borrower for the period therein
stated. The balance sheet of Borrower dated February 6, 2001, a true copy of
which has been delivered by Borrower to Bank prior to the date hereof, (a) is
complete and correct and presents fairly the financial condition of Borrower,
(b) discloses all liabilities of Borrower that are required to be reflected or
reserved against under generally accepted accounting principles, whether
liquidated or unliquidated, fixed or contingent, and (c) has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of such balance sheet there has been no material adverse change
in the financial condition of Borrower, nor has Borrower mortgaged, pledged,
granted a security interest in or otherwise encumbered any of its assets or
properties except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6 INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to any
year.
SECTION 2.7 NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8 PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9 ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.
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SECTION 2.10 OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11 ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance, which
compliance could not reasonably be expected to have a material adverse effect
(as such term is used in Section 3.1(c) hereof), with all applicable federal or
state environmental, hazardous waste, health and safety statutes, and any rules
or regulations adopted pursuant thereto, which govern or affect any of
Borrower's operations and/or properties, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource
Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control
Act, as any of the same may be amended, modified or supplemented from time to
time. None of the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste or
substance into the environment. Borrower has no material contingent liability in
connection with any release of any toxic or hazardous waste or substance into
the environment.
SECTION 2.12 REAL PROPERTY. The Borrower has no real property.
SECTION 2.13 NO CONSENT. The Borrower's execution, delivery and
performance of each of the Loan Documents, including this Agreement, to which
the Borrower is a party do not require the consent or approval of any other
person or entity which has not been obtained, including, without limitation, any
regulatory authority or governmental body of the United States of America or any
state thereof or any political subdivision of the United States of America or
any state thereof.
SECTION 2.14 QUALIFIED COMMERCIAL LOAN. This loan is a Qualified
Commercial Loan as defined in Chapter 306 of the Texas Finance Code. This loan
is not secured by real property and is not a loan for the purpose of financing a
business licensed by the Motor Vehicle Board of the Texas Department of
Transportation under Section 4.01(a), Texas Motor Vehicle Commission (Article
4413(36), Vernon's Texas Civil Statutes). Borrower has been advised by Lender to
seek advice of an attorney and an accountant in connection with this Qualified
Commercial Loan and Borrower has had the opportunity to seek the advice of an
attorney and accountant of Borrower's choice in connection with this Qualified
Commercial Loan.
ARTICLE III
CONDITIONS
----------
SECTION 3.1 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation
of Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:
(a) APPROVAL OF BANK COUNSEL. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.
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(b) DOCUMENTATION. Bank shall have received, in form and substance
satisfactory to Bank, such documents as Bank may require including, without
limitation, each of the documents described on EXHIBIT D attached hereto.
(c) FINANCIAL CONDITION. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower or any guarantor hereunder, nor any material decline, as determined by
Bank, in the market value of any collateral required hereunder or a substantial
or material portion of the assets of Borrower or any such guarantor.
(d) INSURANCE. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank, and where required
by Bank, with loss payable endorsements in favor of Bank, including without
limitation, policies of fire and extended coverage insurance covering all real
property collateral required hereby, with replacement cost and mortgagee loss
payable endorsements, and such policies of insurance against specific hazards
affecting any such real property as may be required by governmental regulation
or Bank, and all containing provisions that such policies cannot be cancelled
without thirty (30) days' prior written notice to Bank.
(e) APPRAISALS. Bank shall have obtained, at Borrower's cost, an
appraisal of all collateral required hereby, and all improvements thereon,
issued by an appraiser acceptable to Bank and in form, substance and reflecting
values satisfactory to Bank, in its discretion.
SECTION 3.2 CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) COMPLIANCE. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist. No
material adverse change (as such term is used in Section 3.1(c) hereto) shall
have occurred since February 6, 2001.
(b) DOCUMENTATION. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
---------------------
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
SECTION 4.1 PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein, and immediately upon demand by Bank,
the amount by which the outstanding principal balance of any credit subject
hereto at any time exceeds any limitation on borrowings applicable thereto.
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SECTION 4.2 ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3 FINANCIAL STATEMENTS. Provide or cause to be provided to
Bank all of the following, in form and detail satisfactory to Bank:
(a) not later than 90 days after and as of the end of each fiscal year,
an audited financial statement of Borrower, prepared by a recognized independent
accounting firm acceptable to Bank, to include consolidated balance sheets and
consolidated statements of income, retained earnings and cash flow, in
accordance with generally accepted accounting principles, together with an
unqualified opinion and such firm's covenant compliance calculations, certified
by a senior financial officer;
(b) not later than 45 days after and as of the end of each calendar
quarter, a financial statement of Borrower, prepared by Borrower, to include
consolidated balance sheets and consolidated statements of income, retained
earnings and cash flow, in accordance with generally accepted accounting
principles, together with covenant compliance calculations, certified by a
senior financial officer;
(c) not later than 25 days after and as of the end of each calendar
month, a borrowing base certificate attached hereto as Schedule I, an aged
listing of accounts receivable and accounts payable, and a reconciliation of
accounts, and not later than 25 days after and as of each calendar month, a list
of the names and addresses of all Borrower's account debtors; all of which
Borrower shall deliver to Wells Fargo Wholesale Services, 1740 Broadway St., 3rd
Floor, MAC C7300-031, Denver, CO 80274;
(d) not later than 45 days after and as of the end of each calendar
quarter, a financial statement of OilQuip, prepared by and certified by a senior
financial officer of OilQuip, to include consolidated balance sheets and
consolidated statements of income, retained earnings and cash flow, in
accordance with generally accepted accounting principles;
(e) not later than 90 days after each calendar year, the financial
statements of Munawar Hidayatallah and Jayne Hidayatallah, signed and certified
to the Bank on Bank's form and such individuals' income tax returns for such
year;
(f) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of a senior financial
officer of Borrower that said financial statements are accurate, showing the
calculations confirming Borrower's compliance with all financial covenants and
that there exists no Event of Default nor any condition, act or event which with
the giving of notice or the passage of time or both would constitute an Event of
Default;
(g) not later than ninety (90) days after and as of the end of each
fiscal year, a reviewed financial statement of OilQuip, prepared by a recognized
independent accounting firm acceptable to Bank, to include consolidated balance
sheets and consolidated statements of income, retained earnings and cash flow,
in accordance with generally accepted accounting principles; and
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(h) from time to time such other information as Bank may reasonably
request.
SECTION 4.4 COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all laws, rules, regulations and orders
of any governmental authority applicable to Borrower and/or its business.
SECTION 4.5 INSURANCE. Maintain and keep in force insurance of the
types and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request Schedules setting forth all
insurance then in effect.
SECTION 4.6 FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7 TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8 LITIGATION. Promptly give notice in writing to Bank of all
litigation pending or threatened against Borrower with claims in excess of
$25,000.00 in the aggregate.
SECTION 4.9 FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles consistently
applied and used consistently with prior practices (except to the extent
modified by the definitions herein):
(a) Tangible Net Worth not at any time less than eighty-five percent
(85%) of Tangible Net Worth as of the date hereof (plus seventy-five percent
(75%) of cumulative net income after the date hereof, excluding any fiscal
quarters in which net income is negative), plus one hundred percent (100%) of
equity offerings after the date hereof, with "Tangible Net Worth" defined herein
as the aggregate of total stockholders' equity plus the Seller Note less any
intangible assets.
(b) Fixed Charge Coverage Ratio not less than 1.1 to 1.0 for the twelve
(12) month period ending on the last day of each fiscal quarter, beginning with
the fiscal quarter ending March 31, 2001, with "EBITDA" defined herein as net
income plus interest charges, plus taxes, plus depreciation, amortization and
non-cash charges on a trailing twelve (12) month basis and with "Fixed Charge
Coverage Ratio" defined herein as (i) EBITDA plus applicable operating lease
payments less unfinanced capital expenditures divided by (ii) the aggregate of
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total interest charges (excluding any applicable paid-in-kind ("PIK") charges),
scheduled principal payments, operating lease payments, cash dividends paid, and
paid taxes for the same period. Through the September 30, 2001, compliance date,
EBITDA and these charges, excluding unfinanced capital expenditures, will be
annualized.
(c) Total Funded Debt to EBITDA Ratio not more than 3.25 to 1.0 through
December 31, 2001; 2.50 to 1.0 through December 31, 2002; and 2.0 to 1.0
thereafter, with "Total Funded Debt to EBITDA Ratio" defined as Total Funded
Debt divided by the twelve (12) trailing months EBITDA. "Total Funded Debt" is
defined herein as all interest-bearing obligations of Borrower, whether secured
or unsecured, senior or subordinated, excluding the Seller Note. Through the
September 30, 2001, compliance date, EBITDA will be annualized to calculate the
Total Funded Debt to EBITDA Ratio.
SECTION 4.10 NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower; (c) the occurrence and nature of any
Reportable Event or Prohibited Transaction, each as defined in ERISA, or any
funding deficiency with respect to any Plan; or (d) any termination or
cancellation of any insurance policy which Borrower is required to maintain, or
any uninsured or partially uninsured loss through liability or property damage,
or through fire, theft or any other cause affecting Borrower's property in
excess of an aggregate of $250,000.00.
ARTICLE V
NEGATIVE COVENANTS
------------------
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1 USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2 CAPITAL EXPENDITURES. Make any additional investment in
fixed assets in any fiscal year in excess of an aggregate of $500,000.00.
SECTION 5.3 LEASE EXPENDITURES. Incur with respect to any personal
property operating lease expense in any fiscal year in excess of an aggregate of
$750,000, including operating lease payments related to that certain
sale/leaseback transaction of even date herewith between Borrower and Wells
Fargo Equipment Finance, Inc.
SECTION 5.4 OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
and (b) any other liabilities of Borrower existing as of, and disclosed to Bank
on SCHEDULE 5.4 attached hereto.
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SECTION 5.5 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity; make any substantial change in the nature of
Borrower's business as conducted as of the date hereof; acquire all or
substantially all of the assets of any other entity; nor sell, lease, transfer
or otherwise dispose of all or a substantial or material portion of Borrower's
assets except in the ordinary course of its business.
SECTION 5.6 GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except any of the
foregoing in favor of Bank.
SECTION 5.7 LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to
or investments in any person or entity, except any of the foregoing existing as
of, and disclosed to Bank prior to, the date hereof.
SECTION 5.8 DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
SECTION 5.9 PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except any of the foregoing in favor of
Bank, Wells Fargo Energy Capital, Inc. (which shall only be a second lien behind
Bank's lien) or Wells Fargo Equipment Finance, Inc. (which shall only be a third
lien behind Bank's lien) or which is existing as of, and disclosed to Bank in
writing prior to, the date hereof.
SECTION 5.10 SALES AND LEASEBACKS. Enter into any arrangement, directly
or indirectly, with any person whereby Borrower shall sell or transfer any of
its property, whether now owned or hereafter acquired, and whereby Borrower
shall then or thereafter rent or lease as lessee such property or any part
thereof or other property which Borrower intends to use for substantially the
same purpose or purposes as the property is sold or transferred (except for that
certain sale/leaseback transaction of even date herewith between Borrower and
Wells Fargo Equipment Finance, Inc.
SECTION 5.11 NATURE OF BUSINESS. Allow any material change to be made
in the character of Borrower's business as an oilfield service provider.
SECTION 5.12 LIMITATION ON LEASES. Create, incur, assume or permit to
exist any obligation for the payment of rent or hire of property of any kind
whatsoever under leases or lease agreements which would cause the aggregate
amount of all payments made by Borrower pursuant to all such leases or lease
agreements to exceed $50,000.00 in any twelve (12) month period.
SECTION 5.13 TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including without limitation, any purchase, sale, lease or exchange of property
or the rendering of any service, with any affiliate of Borrower unless such
transactions are in the ordinary course of its business and are upon fair and
reasonable terms no less favorable to it to Borrower than Borrower would obtain
in a comparable arm's-length transaction with a person not an affiliate.
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ARTICLE VI
EVENTS OF DEFAULT
-----------------
SECTION 6.1 The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any other
party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in subsections (a) and (b) above), and
with respect to any such default which by its nature can be cured, such default
shall continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or any guarantor
hereunder has incurred any debt or other liability to any person or entity,
including Bank.
(e) The filing of a notice of judgment lien against Borrower or any
guarantor hereunder; or the recording of any abstract of judgment against
Borrower or any guarantor hereunder in any county in which Borrower or such
guarantor has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower or any guarantor hereunder; or the entry of a judgment
against Borrower or any guarantor hereunder. Notwithstanding the foregoing,
there shall not be an Event of Default upon the filing of notices of judgment
lien, the recording of abstracts of judgment, or the entries of judgment against
Borrower or any guarantor hereunder if the aggregate amount of all such
judgments is less than $50,000 and such judgments are released within sixty (60)
days of the filing, recording or entry of such judgment.
(f) Borrower or any guarantor hereunder shall become insolvent, or
shall suffer or consent to or apply for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property, or shall generally
fail to pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any guarantor hereunder shall file a
voluntary petition in bankruptcy, or seeking reorganization, in order to effect
a plan or other arrangement with creditors or any other relief under the
Bankruptcy Reform Act, Title 11 of the United States Code, as amended or
recodified from time to time ("Bankruptcy Code"), or under any state or federal
law granting relief to debtors, whether now or hereafter in effect; or any
involuntary petition or proceeding pursuant to the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors is filed or commenced against Borrower or any guarantor
hereunder, or Borrower or any such guarantor shall file an answer admitting the
jurisdiction of the court and the material allegations of any involuntary
petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or
an order for relief shall be entered against Borrower or any such guarantor by
any court of competent jurisdiction under the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors.
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(g) There shall exist or occur any event or condition which Bank in
good faith believes impairs, or is substantially likely to impair, the prospect
of payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The death or incapacity of Borrower or any guarantor hereunder. The
dissolution or liquidation of Borrower or any guarantor hereunder; or Borrower
or any such guarantor, or any of its their directors, stockholders or members,
shall take action seeking to effect the dissolution or liquidation of Borrower
or such guarantor.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of the common stock of
stockholders' equity in Borrower.
(j) The sale, transfer, hypothecation, assignment or encumbrance,
whether voluntary, involuntary or by operation of law, without Bank's prior
written consent, of all or any part of or interest in any real property
collateral required hereby.
(k) An event which is a material adverse change (as such term is used
in Section 3.1(c) hereof) shall have occurred and is continuing.
(l) The determination by any court that any provision of any Loan
Document is invalid.
SECTION 6.2 REMEDIES. Upon (a) the occurrence of any Event of Default
under subsection 6.1(f) above, all Indebtedness including all principal and
accrued and unpaid interest outstanding under each of the Loan Documents shall
become automatically due and payable and the obligation, if any, of Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; (b) the occurrence of any other Event of Default, all
Indebtedness including all principal and accrued interest outstanding under each
of the Loan Documents, any term thereof to the contrary notwithstanding, shall
at Bank's option and without notice become immediately due and payable without
presentment, demand, or any notices of any kind, including without limitation
notice of nonperformance, notice of protest, protest, notice of dishonor, notice
of intention to accelerate or notice of acceleration, all of which are hereby
expressly waived by each Borrower, and the obligation, if any, of Bank to extend
any further credit under any of the Loan Documents shall immediately cease and
terminate. Upon acceleration of the Indebtedness, Bank shall have all rights,
powers and remedies available under each of the Loan Documents, or accorded by
law, including without limitation the right to resort to any or all security for
any credit subject hereto and to exercise any or all of the rights of a
beneficiary or secured party pursuant to applicable law. All rights, powers and
remedies of Bank may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.
ARTICLE VII
MISCELLANEOUS
-------------
SECTION 7.1 NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
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SECTION 7.2 NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: MOUNTAIN COMPRESSED AIR, INC.
2466 Commerce Blvd.
Grand Junction, CO 81505
BANK: WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION
1000 Louisiana, 3rd Floor
Houston, Texas 77002
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3 COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and the other Loan Documents,
Bank's continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents, (c) the prosecution or defense of any action in any way related
to any of the Loan Documents, including without limitation, any action for
declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity, (d) the
performance, prior to the date hereof and after an Event of Default, of an asset
appraisal by an independent qualified appraiser approved by Bank; and (e) up to
two (2) collateral audits performed by Bank per fiscal year with respect to the
collateral or any other matters relating to the loans provided for in this
Agreement and/or Borrower's compliance with the terms and provisions of this
Agreement; PROVIDED, HOWEVER, Borrower's out-of-pocket cost and expense under
this subsection (e) shall be limited to $3,500 per collateral audit.
SECTION 7.4 SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any credit subject hereto, Borrower or its business, any
guarantor hereunder or the business of such guarantor, or any collateral
required hereunder.
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SECTION 7.5 AMENDMENT. This Agreement may be amended or modified only
in writing signed by each party hereto.
SECTION 7.6 NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action-
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7 TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8 SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.
SECTION 7.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
SECTION 7.11 SAVINGS CLAUSE. It is the intention of the parties to
comply strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in the Loan Documents, in no event shall any Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If any
such excess interest is called for, contracted for, charged, taken, reserved or
received in connection with any Loan Documents, or in any communication by or
any other person to Borrower or any other person, or in the event that all or
part of the principal or interest hereof or thereof shall be prepaid or
accelerated, so that under any of such circumstances or under any other
circumstance whatsoever the amount of interest contracted for, charged, taken,
reserved or received on the amount of principal actually outstanding from time
to time under the Loan Documents shall exceed the Maximum Rate, then in such
event it is agreed that: (i) the provisions of this Paragraph shall govern and
control; (ii) neither Borrower nor any other person or entity now or hereafter
liable for the payment of any Loan Documents shall be obligated to pay the
amount of such interest to the extent it is in excess of the Maximum Rate; (iii)
any such excess interest which is or has been received by Bank, notwithstanding
this paragraph, shall be credited against the then unpaid principal balance
hereof or thereof, or if any of the Loan Documents has been or would be paid in
full by such credit, refunded to Borrower; and (iv) the provisions of each of
the Loan Documents, and any other communication to Borrower, shall immediately
be deemed reformed and such excess interest reduced, without the necessity of
executing any other document, to the Maximum Rate. The right to accelerate the
maturity of the Loan Documents does not include the right to accelerate, collect
or charge unearned interest, but only such interest that has otherwise accrued
as of the date of acceleration. Without limiting the foregoing, all calculations
of the rate of interest contracted for, charged, taken, reserved or received in
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connection with any of the Loan Documents which are made for the purpose of
determining whether such rate exceeds the Maximum Rate shall be made to the
extent permitted by applicable laws by amortizing, prorating, allocating and
spreading during the period of the full term of such Loan Documents, including
all prior and subsequent renewals and extensions hereof or thereof, all interest
at any time contracted for, charged, taken, reserved or received by Bank. The
terms of this Paragraph shall be deemed to be incorporated into each of the
other Loan Documents.
To the extent that either Chapter 303 or 306, or both, of the Texas
Finance Code apply in determining the Maximum Rate, Bank hereby elects to
determine the applicable rate ceiling by using the weekly ceiling from time to
time in effect, subject to Bank's right subsequently to change such method in
accordance with applicable law, as the same may be amended or modified from time
to time.
SECTION 7.12 RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the
occurrence of an Event of Default, (a) Borrower hereby authorizes Bank, at any
time and from time to time, without notice, which is hereby expressly waived by
each Borrower, and whether or not Bank shall have declared any credit subject
hereto to be due and payable in accordance with the terms hereof, to set off
against, and to appropriate and apply to the payment of, Borrower's obligations
and liabilities under the Loan Documents (whether matured or unmatured, fixed or
contingent, liquidated or unliquidated), any and all amounts owing by Bank to
Borrower (whether payable in U.S. dollars or any other currency, whether matured
or unmatured, and in the case of deposits, whether general or special (except
trust and escrow accounts), time or demand and however evidenced), and (b)
pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn against any
deposits so held as Bank, in its sole discretion, may elect. Borrower hereby
grants to Bank a security interest in all deposits and accounts maintained with
Bank and with any other financial institution to secure the payment of all
obligations and liabilities of Borrower to Bank under the Loan Documents.
SECTION 7.13 BUSINESS PURPOSE. Borrower represents and warrants that
each credit subject hereto is for a business, commercial, investment,
agricultural or other similar purpose and not primarily for a personal, family
or household use.
SECTION 7.14 ARBITRATION.
(a) ARBITRATION. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan Documents which are the subject of
this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.
(b) GOVERNING RULES. Any arbitration proceeding will (i) proceed in a
location in Texas selected by the American Arbitration Association ("AAA"); (ii)
be governed by the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the documents
between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
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is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any
similar applicable state law.
(c) NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in Sections (i), (ii) and (iii) of this paragraph.
(d) ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in
which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of Texas with a minimum of ten years experience
in the substantive law applicable to the subject matter of the dispute to be
arbitrated. The arbitrator will determine whether or not an issue is
arbitratable and will give effect to the statutes of limitation in determining
any claim. In any arbitration proceeding the arbitrator will decide (by
documents only or with a hearing at the arbitrator's discretion) any pre-hearing
motions which are similar to motions to dismiss for failure to state a claim or
motions for summary adjudication. The arbitrator shall resolve all disputes in
accordance with the substantive law of Texas and may grant any remedy or relief
that a court of such state could order or grant within the scope hereof and such
ancillary relief as is necessary to make effective any award. The arbitrator
shall also have the power to award recovery of all costs and fees, to impose
sanctions and to take such other action as the arbitrator deems necessary to the
same extent a judge could pursuant to the Federal Rules of Civil Procedure, the
Texas Rules of Civil Procedure or other applicable law. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or pursuit of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.
(e) DISCOVERY. In any arbitration proceeding discovery will be
permitted in accordance with the Rules. All discovery shall be expressly limited
to matters directly relevant to the dispute being arbitrated and must be
completed no later than 20 days before the hearing date and within 180 days of
the filing of the dispute with the AAA. Any requests for an extension of the
discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery is
essential for the party's presentation and that no alternative means for
obtaining information is available.
(f) CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute
arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.
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(g) PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award
all costs and expenses of the arbitration proceeding.
(h) MISCELLANEOUS. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.
SECTION 7.15 ASSIGNMENTS AND PARTICIPATIONS.
(a) Borrower may not assign its rights or obligations hereunder or
under the Notes or any Letters of Credit without the prior consent of Bank.
Should Borrower attempt to assign its rights hereunder, Bank's obligations
hereunder will immediately cease and Bank shall be entitled to all commitment
fees, up-front fees, documentation fees, appraisal fees, audit fees, and due
diligence fees referred to herein.
(b) Bank may, upon the written consent of Borrower, if no Event of
Default has occurred and is continuing (which consent will not be unreasonably
withheld), assign to one or more assignees all or a portion of its rights and
obligations under this Agreement. Borrower's consent will not be required if the
assignment is to an affiliate of Bank. Any such assignment will become effective
upon the execution and delivery to Bank of an Assignment Agreement (the
"Assignment") and the consent of Borrower, if required. Promptly after receipt
of an executed Assignment, Bank shall send to Borrower a copy of such executed
Assignment. Upon receipt of such executed Assignment, Borrower, will, at its own
expense, execute and deliver new notes to the assignor and/or assignee, as
appropriate, in accordance with their respective interests as they appear. Upon
the effectiveness of any assignment pursuant to this Section, the assignee will
have all the rights and interests of Bank under this Agreement and the other
Loan Documents. The assignor shall be relieved of its obligations hereunder to
the extent of such assignment.
(c) Bank may transfer, grant or assign participations in all or any
part of Bank's interests hereunder pursuant to this Section to any person,
PROVIDED that: (i) Bank shall remain "Bank" for all purposes of this Agreement;
and (ii) no participant under any such participation shall have rights to
approve any amendment to or waiver of any of the Loan Documents except to the
extent such amendment or waiver would (x) forgive any principal owing on any
obligations or extend the final maturity of the commitments or loans, (y) reduce
the interest rate (other than as a result of waiving the applicability of any
post-default increases in interest rates) or fees applicable to any of the
commitments or loans or Letters of Credit in which such participant is
participating, or postpone the payment of any thereof, or (z) release any
guarantor of the obligations or release all or substantially all of the
collateral (except as provided in the Loan Documents) supporting any of the
commitments or loans or Letters of Credit in which such participant is
participating. In the case of any such participation, the participant shall not
have any rights under this Agreement or any of the Loan Documents (the
participant's rights against Bank in respect of such participation to be those
set forth in the agreement with Bank creating such participation), and all
amounts payable by Borrower hereunder shall be determined as if Bank had not
sold such participation, PROVIDED that such participant shall be entitled to be
indemnified under Section 7.16 hereof.
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(d) Bank may furnish any information concerning Borrower in the
possession of Bank from time to time to assignees and participants (including
prospective assignees and participants).
SECTION 7.16 INDEMNIFICATION. Borrower agrees:
(a) to indemnify Bank, each assignee or participant hereunder, each of
their Affiliates and each of their officers, directors, employees,
representatives, agents, attorneys, accountants and experts ("INDEMNIFIED
PARTIES") from, hold each of them harmless against and promptly upon demand pay
or reimburse each of them for, the Indemnity Matters (hereafter defined) which
may be incurred by or asserted against or involve any of them (whether or not
any of them is designated a party thereto) as a result of, arising out of or in
any way related to (i) any actual or proposed use by Borrower of the proceeds of
any of the Loans or Letters of Credit, (ii) the execution, delivery and
performance of the Loan Documents, (iii) the operations of the business of
Borrower, (iv) the failure of Borrower to comply with the terms of any Loan
Document or this Agreement, or with any applicable law, (v) any inaccuracy of
any representation or any breach of any warranty of Borrower or any Guarantor
set forth in any of the Loan Documents, (vi) the issuance, execution and
delivery or transfer of or payment or failure to pay under any Letter of Credit,
or (vii) the payment of a drawing under any Letter of Credit notwithstanding the
non-compliance, non-delivery or other improper presentation of the manually
executed draft(s) and certification(s), (viii) any assertion that any
Indemnified Party was not entitled to receive the proceeds received pursuant to
the Loan Documents or (ix) any other aspect of the Loan Documents, including,
without limitation, the reasonable fees and disbursements of counsel and all
other expenses incurred in connection with investigating, defending or preparing
to defend any such action, suit, proceeding (including any investigations,
litigation or inquiries) or claim and including all Indemnity Matters arising by
reason of the ordinary negligence of any Indemnified Party, but excluding all
Indemnity Matters arising solely by reason of claims between the Bank or any
assignee or participant, or any such party's shareholders against Bank or any
assignee or participant or by reason of the gross negligence or willful
misconduct on the part of the Indemnified Party. "Indemnity Matters" shall mean
any and all actions, suits, proceedings (including any investigations,
litigation or inquiries), claims, demands and causes of action made or
threatened against a person and, in connection therewith, all losses,
liabilities, damages (including, without limitation, consequential damages) or
reasonable costs and expenses of any kind or nature whatsoever incurred by such
person whether caused by the sole or concurrent negligence of such person
seeking indemnification.
SECTION 7.17 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON
CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF
BANK IN THE NEGOTIATION, ADMINISTRATION OR ENFORCEMENT THEREOF.
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NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
MOUNTAIN COMPRESSED AIR, INC. WELLS FARGO BANK TEXAS,
NATIONAL ASSOCIATION
By: /s/ MUNAWAR H. HIDAYATALLAH By: /s/ BRET C. WEST
---------------------------- ------------------
Name: Munawar H. Hidayatallah Name: Bret C. West
Title: Chairman and Chief Executive Officer Title: Vice President
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EXHIBIT "A"
EXHIBIT A
LINE OF CREDIT
REVOLVING LINE OF CREDIT NOTE
$500,000.00 Houston, Texas
February 6, 2001
FOR VALUE RECEIVED, the undersigned MOUNTAIN COMPRESSED AIR, INC., a
Texas corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK
TEXAS, NATIONAL ASSOCIATION ("Bank") at its office at 1000 Louisiana, 3rd Floor,
Houston, Texas, or at such other place as the holder hereof may designate, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Five Hundred Thousand and No/100 Dollars ($500,000.00), or
so much thereof as may be advanced and be outstanding, with interest thereon, to
be computed on each advance from the date of its disbursement as set forth
herein.
INTEREST:
(a) INTEREST. The Borrower agrees to pay interest at the Bank's address
listed above on the unpaid principal note hereof and, to the extent permitted by
law, the accrued interest in respect hereof from time to time from the date
hereof until payment in full of the principal amount hereof and accrued interest
hereon, at the rates and on the dates set forth on the Addendum attached hereto
and incorporated herein for all purposes.
(b) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable
on the last day of each April, July, October, and January of each year,
commencing on the first such day after the date of this Note and on maturity
hereof.
(c) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed, unless such calculation would
result in a usurious rate, in which case interest shall be computed on the basis
of a 365/366-day year, as the case may be, actual days elapsed) equal to two
percent (2%) above the rate of interest from time to time applicable to this
Note, but in no event at a rate greater than the Maximum Rate.
BORROWING AND REPAYMENT:
(a) BORROWING AND REPAYMENT. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
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hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on January 31, 2002.
(b) ADVANCES. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) _____________________ or ___________________, any one acting alone, who are
authorized to request advances and direct the disposition of any advances until
written notice of the revocation of such authority is received by the holder at
the office designated above, or (ii) any person, with respect to advances
deposited to the credit of any deposit account of any Borrower, which advances,
when so deposited, shall be conclusively presumed to have been made to or for
the benefit of each Borrower regardless of the fact that persons other than
those authorized to request advances may have authority to draw against such
account. The holder shall have no obligation to determine whether any person
requesting an advance is or has been authorized by any Borrower. The amount and
date of each advance requested hereunder shall be designated by an authorized
representative's execution of a Borrowing Request to be received by the Bank at
least one (1) Business Day prior to the date of such loan, which date shall be a
Business Day. Each advance requested hereunder shall be made at the office of
the Bank, and shall be funded prior to 2:00 p.m. Houston time on the day so
requested in immediately available funds in the amount so requested.
(c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof.
EVENTS OF DEFAULT:
The occurrence of any of the following shall constitute an "Event of
Default" under this Note:
(a) The failure to pay any principal, interest, fees or other charges
when due hereunder or under any contract, instrument or document executed in
connection with this Note.
(b) The filing of a petition by or against any Borrower, any guarantor
of this Note or any general partner or joint venturer in any Borrower which is a
partnership or a joint venture (with each such guarantor, general partner and/or
joint venturer referred to herein as a "Third Party Obligor") under any
provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as
amended or recodified from time to time, or under any similar or other law
relating to bankruptcy, insolvency, reorganization or other relief for debtors;
the appointment of a receiver, trustee, custodian or liquidator of or for any
part of the assets or property of any Borrower or Third Party Obligor; any
Borrower or Third Party Obligor becomes insolvent, makes a general assignment
for the benefit of creditors or is generally not paying its debts as they become
due; or any attachment or like levy on any property of any Borrower or Third
Party Obligor.
(c) The death or incapacity of any individual Borrower or Third Party
Obligor, or the dissolution or liquidation of any Borrower or Third Party
Obligor which is a corporation, partnership, joint venture or other type of
entity.
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(d) Any default in the payment or performance of any obligation, or any
defined event of default, under any provisions of any contract, instrument or
document pursuant to which any Borrower or Third Party Obligor has incurred any
obligation for borrowed money, any purchase obligation, or any other liability
of any kind to any person or entity, including the holder.
(e) Any financial statement provided by any Borrower or Third Party
Obligor to Bank proves to be incorrect, false or misleading in any material
respect.
(f) Any sale or transfer of all or a substantial or material part of
the assets of any Borrower or Third Party Obligor other than in the ordinary
course of its business.
(g) Any violation or breach of any provision of, or any defined event
of default under, any addendum to this Note or any other promissory note or any
credit agreement (including without limitation that certain Credit Agreement
dated as of even date herewith between Borrower and the Bank), guaranty,
security agreement, deed of trust, mortgage, pledge agreement, subordination
agreement, or other document executed in connection with or securing this Note.
MISCELLANEOUS:
(a) REMEDIES. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
accrued and unpaid interest outstanding hereunder to be immediately due and
payable without presentment, demand, or any notices of any kind, including
without limitation notice of nonperformance, notice of protest, protest, notice
of dishonor, notice of intention to accelerate or notice of acceleration, all of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's rights
and/or the collection of any amounts which become due to the holder under this
Note, and the prosecution or defense of any action in any way related to this
Note, including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower shall
be joint and several.
(c) GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. THIS NOTE IS PERFORMABLE IN
HARRIS COUNTY, TEXAS. ANY ACTION OR PROCEEDING UNDER OR IN CONNECTION WITH THIS
NOTE AGAINST THE BORROWER OR ANY THIRD PARTY OBLIGOR MAY BE BROUGHT IN ANY STATE
OR FEDERAL COURT IN HARRIS COUNTY, TEXAS. BORROWER AND EACH THIRD PARTY OBLIGOR
HEREBY IRREVOCABLY (I) SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS,
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AND (II) WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF
ANY SUCH ACTION OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE BANK TO BRING
ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ANY THIRD PARTY OBLIGOR OR WITH
RESPECT TO ANY COLLATERAL IN ANY STATE OR FEDERAL COURT IN ANY OTHER
JURISDICTION. ANY ACTION OR PROCEEDING BY THE BORROWER OR ANY THIRD PARTY
OBLIGOR AGAINST LENDER SHALL BE BROUGHT ONLY IN A COURT LOCATED IN HARRIS
COUNTY, TEXAS.
(d) SAVINGS CLAUSE. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any provision
to the contrary in this Note, or in any contract, instrument or document
evidencing or securing the payment hereof or otherwise relating hereto (each, a
"Related Document"), in no event shall this Note or any Related Document require
the payment or permit the payment, taking, reserving, receiving, collection or
charging of any sums constituting interest under applicable laws that exceed the
maximum amount permitted by such laws, as the same may be amended or modified
from time to time (the "Maximum Rate"). If any such excess interest is called
for, contracted for, charged, taken, reserved or received in connection with
this Note or any Related Document, or in any communication by Bank or any other
person to Borrower or any other person, or in the event that all or part of the
principal or interest hereof or thereof shall be prepaid or accelerated, so that
under any of such circumstances or under any other circumstance whatsoever the
amount of interest contracted for, charged, taken, reserved or received on the
amount of principal actually outstanding from time to time under this Note shall
exceed the Maximum Rate, then in such event it is agreed that: (i) the
provisions of this paragraph shall govern and control; (ii) neither Borrower nor
any other person or entity now or hereafter liable for the payment of this Note
or any Related Document shall be obligated to pay the amount of such interest to
the extent it is in excess of the Maximum Rate; (iii) any such excess interest
which is or has been received by Bank, notwithstanding this paragraph, shall be
credited against the then unpaid principal balance hereof or thereof, or if this
Note or any Related Document has been or would be paid in full by such credit,
refunded to Borrower; and (iv) the provisions of this Note and each Related
Document, and any other communication to Borrower, shall immediately be deemed
reformed and such excess interest reduced, without the necessity of executing
any other document, to the Maximum Rate. The right to accelerate the maturity of
this Note or any Related Document does not include the right to accelerate,
collect or charge unearned interest, but only such interest that has otherwise
accrued as of the date of acceleration. Without limiting the foregoing, all
calculations of the rate of interest contracted for, charged, taken, reserved or
received in connection with this Note and any Related Document which are made
for the purpose of determining whether such rate exceeds the Maximum Rate shall
be made to the extent permitted by applicable laws by amortizing, prorating,
allocating and spreading during the period of the full term of this Note or such
Related Document, including all prior and subsequent renewals and extensions
hereof or thereof, all interest at any time contracted for, charged, taken,
reserved or received by Bank. The terms of this paragraph shall be deemed to be
incorporated into each Related Document.
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To the extent that either Chapter 303 or 306, or both, of the Texas
Finance Code apply in determining the Maximum Rate, Bank hereby elects to
determine the applicable rate ceiling by using the weekly ceiling from time to
time in effect, subject to Bank's right subsequently to change such method in
accordance with applicable law, as the same may be amended or modified from time
to time.
(e) RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon and after the occurrence of
an Event of Default, (i) Borrower hereby authorizes Bank, at any time and from
time to time, without notice, which is hereby expressly waived by Borrower, and
whether or not Bank shall have declared this Note to be due and payable in
accordance with the terms hereof, to set off against, and to appropriate and
apply to the payment of, Borrower's obligations and liabilities under this Note
(whether matured or unmatured, fixed or contingent, liquidated or unliquidated),
any and all amounts owing by Bank to Borrower (whether payable in U.S. dollars
or any other currency, whether matured or unmatured, and in the case of
deposits, whether general or special (except trust and escrow accounts), time or
demand and however evidenced), and (ii) pending any such action, to the extent
necessary, to hold such amounts as collateral to secure such obligations and
liabilities and to return as unpaid for insufficient funds any and all checks
and other items drawn against any deposits so held as Bank, in its sole
discretion, may elect. Borrower hereby grants to Bank a security interest in all
deposits and accounts maintained with Bank and with any other financial
institution to secure the payment of all obligations and liabilities of Borrower
to Bank under this Note.
(f) CERTAIN TRI-PARTY ACCOUNTS. Borrower and Bank agree that Chapter
346 of the Texas Finance Code (which regulates certain revolving credit accounts
and revolving triparty accounts) shall not apply to any revolving loan accounts
created under this Note or maintained in connection herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS EVIDENCED
HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE
INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
MOUNTAIN COMPRESSED AIR, INC.
By: /S/ MUNAWAR H. HIDAYATALLAH
-------------------------------
Munawar H. Hidayatallah
Chairman and CEO
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EXHIBIT "B"
EXHIBIT B
TERM NOTE
TERM NOTE
$3,550,000.00 Houston, Texas
February 6, 2001
FOR VALUE RECEIVED, the undersigned MOUNTAIN COMPRESSED AIR, INC., a
Texas corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK
TEXAS, NATIONAL ASSOCIATION ("Bank") at its office at 1000 Louisiana, 3rd Floor,
Houston, Texas, or at such other place as the holder hereof may designate, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Three Million Five Hundred Fifty Thousand and No/100
Dollars ($3,550,000.00), with interest thereon as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) " Base Rate" means the higher of (a) Prime Rate per annum in effect
on that day, and (b) Federal Fund Rate in effect on that day as announced by the
Federal Reserve Bank of New York, plus 0.5% per annum
(b) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in Texas are authorized or required by law to
close.
(c) "Credit Agreement" means that certain Credit Agreement between Bank
and Borrower of even date herewith.
(d) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one, two, three or six months, as designated by Borrower, during
which all or a portion of the outstanding principal balance of this Note bears
interest determined in relation to LIBOR; provided however, that no Fixed Rate
Term may be selected for a principal amount less than Five Hundred Thousand and
No/100 Dollars ($500,000.00) and in multiples of One Hundred Thousand and No/100
Dollars ($100,000.00) thereafter; and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.
(e) "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
----------------------------------------------
100% - LIBOR Reserve Percentage
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(i) "Base LIBOR" means the rate per annum for United States
dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate,
with the understanding that such rate is quoted by Bank for the purpose
of calculating effective rates of interest for loans making reference
thereto, on the first day of a Fixed Rate Term for delivery of funds on
said date for a period of time approximately equal to the number of
days in such Fixed Rate Term and in an amount approximately equal to
the principal amount to which such Fixed Rate Term applies. Borrower
understands and agrees that Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as Bank in its discretion deems
appropriate including, but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or
any successor) for "Eurocurrency Liabilities" (as defined in Regulation
D of the Federal Reserve Board, as amended), adjusted by Bank for
expected changes in such reserve percentage during the applicable Fixed
Rate Term.
(f) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
(g) "Total Funded Debt" shall have the meaning ascribed to it in the
Credit Agreement.
INTEREST:
(a) INTEREST. The Borrower agrees to pay interest at the Bank's address
listed above on the unpaid principal note hereof and, to the extent permitted by
law, the accrued interest in respect hereof from time to time from the date
hereof until payment in full of the principal amount hereof and accrued interest
hereon, at the rates and on the dates set forth on the Addendum attached hereto
and incorporated herein for all purposes.
(b) SELECTION OF INTEREST RATE OPTIONS. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At the time this
Note is disbursed or Borrower wishes to select a LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each
Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest
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rate option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term.
Any such notice may be given by telephone (or such other electronic method as
Bank may permit) so long as, with respect to each LIBOR selection, (A) if
requested by Bank, Borrower provides to Bank written confirmation thereof not
later than three (3) Business Days after such notice is given, and (B) such
notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate
Term, or at a later time during any Business Day if Bank, at it's sole option
but without obligation to do so, accepts Borrower's notice and quotes a fixed
rate to Borrower. If Borrower does not immediately accept a fixed rate when
quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request
from Borrower shall be subject to a redetermination by Bank of the applicable
fixed rate. If no specific designation of interest is made at the time this Note
is disbursed or at the end of any Fixed Rate Term, Borrower shall be deemed to
have made a Prime Rate interest selection for this Note or the principal amount
to which such Fixed Rate Term applied.
(c) TAXES AND REGULATORY COSTS. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (i) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any domestic or foreign
governmental authority and related in any manner to LIBOR, and (ii) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental
authority or resulting from compliance by Bank with any request or directive
(whether or not having the force of law) from any central bank or other
governmental authority and related in any manner to LIBOR to the extent they are
not included in the calculation of LIBOR. In determining which of the foregoing
are attributable to any LIBOR option available to Borrower hereunder, any
reasonable allocation made by Bank among its operations shall be conclusive and
binding upon Borrower.
(d) DEFAULT INTEREST. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed, unless such calculation would
result in a usurious rate, in which case interest shall be computed on the basis
of a 365/366-day year, as the case may be, actual days elapsed) equal to two
percent (2%) above the rate of interest from time to time applicable to this
Note, but in no event at a rate greater than the Maximum Rate.
BORROWINGS:
(a) Borrower may from time to time from the date of this Note up to and
including January 31, 2004, borrow and partially or wholly repay its outstanding
borrowings, subject to all of the limitations, terms and conditions of this Note
and of any document executed in connection with or governing this Note; provided
however, that amounts repaid may not be reborrowed; and provided further, that
the total borrowi